Taxes Terms

A 529 plan is a state-sponsored investment account for education savings where money grows tax-deferred and comes out federally tax-free for qualified education expenses, from college tuition to K-12 costs and, as of recent law changes, professional credentials.

A backdoor Roth IRA is a two-step strategy for high earners who make too much to contribute to a Roth IRA directly. You make a nondeductible contribution to a traditional IRA, then convert it to a Roth IRA. Done cleanly, little or no tax is due, but the pro-rata rule can change that.

Capital gains tax is the tax on profit from selling an asset for more than you paid. Assets held over one year get preferential long-term rates of 0%, 15%, or 20%; assets held a year or less are taxed as ordinary income.

A Certified Public Accountant (CPA) is an accounting professional licensed by a state board after meeting education and experience requirements and passing the Uniform CPA Examination. CPAs handle tax, audit, and accounting work, and hold unlimited rights to represent taxpayers before the IRS.

An employee stock purchase plan (ESPP) lets employees buy company stock through payroll deductions at a discount, often 15% off the lower of two prices, making a well-run ESPP one of the few near-guaranteed returns in personal finance.

An enrolled agent (EA) is a tax professional licensed directly by the U.S. Treasury with unlimited rights to represent taxpayers before the IRS. EAs earn the credential by passing a three-part IRS exam or through qualifying IRS work experience, and they specialize purely in taxation.

Gross income is your total income before any taxes or deductions — the full amount you earn from work, business, investments, and other sources, and the starting point of every tax calculation.

A health savings account (HSA) is a tax-advantaged account for people with high-deductible health plans that offers a triple tax break--deductible contributions, tax-free growth, and tax-free withdrawals for qualified medical expenses.

Your marginal tax rate is the rate you pay on your next dollar of taxable income--the bracket your last dollars land in--not the rate you pay on everything you earn.

Net income is what remains of your earnings after taxes and other deductions come out — your take-home pay. For a business, it means profit: revenue minus all expenses and taxes.

A qualified charitable distribution (QCD) is a direct transfer from an IRA to charity, available starting at age 70 1/2, that counts toward your required minimum distribution and never shows up in your adjusted gross income at all.

A required minimum distribution (RMD) is the amount the IRS makes you withdraw from pre-tax retirement accounts each year once you reach a set age, currently 73, rising to 75 for people born in 1960 or later. The withdrawal is taxed as ordinary income, and skipping it triggers an excise tax.

Restricted stock units (RSUs) are a promise from an employer to deliver company shares on a vesting schedule; their full value is taxed as ordinary income the moment they vest, exactly like a cash bonus paid in stock.

A Roth conversion moves money from a pre-tax retirement account, such as a traditional IRA or 401(k), into a Roth account. You pay ordinary income tax on the converted amount now in exchange for tax-free growth, tax-free qualified withdrawals, and no lifetime required minimum distributions later.

A Roth IRA is an individual retirement account funded with money you've already paid tax on. Investments grow tax-free, qualified withdrawals in retirement are tax-free, and the account never requires minimum distributions during your lifetime. The 2026 contribution limit is $7,500, plus a $1,100 catch-up at age 50.

The standard deduction is a flat amount every filer can subtract from income before tax is calculated--$16,100 for single filers and $32,200 for married couples filing jointly in 2026--taken instead of itemizing individual deductions.

Step-up in basis resets the cost basis of inherited assets to their fair market value on the owner's date of death. Decades of unrealized capital gains simply disappear for income tax purposes, making it one of the most powerful features in the tax code for families passing down appreciated assets.

Tax-loss harvesting (TLH) is selling an investment in a taxable account for less than you paid to capture the loss for tax purposes, then reinvesting in a similar (but not substantially identical) holding so you stay invested.

A traditional IRA is an individual retirement account you open on your own, where contributions may be tax-deductible, investments grow tax-deferred, and withdrawals in retirement are taxed as ordinary income. The 2026 contribution limit is $7,500, plus a $1,100 catch-up at age 50.