Glossary: Tax Planning Terms
Introduction
This glossary defines 30 essential tax planning terms for investors. Each term includes a one-sentence definition focused on practical application.
Terms
Above-the-Line Deduction: Deductions subtracted from gross income to calculate Adjusted Gross Income (AGI), available regardless of whether you itemize, including IRA contributions, HSA contributions, and student loan interest.
Adjusted Gross Income (AGI): Total income minus above-the-line deductions, serving as the threshold for many tax benefits and phaseouts.
Alternative Minimum Tax (AMT): Parallel tax system requiring recalculation of tax liability with fewer deductions, applying when AMT liability exceeds regular tax, with 2024 exemption amounts of $85,700 (single) and $133,300 (MFJ).
Asset Location: Strategy of placing tax-inefficient investments (bonds, REITs) in tax-advantaged accounts while holding tax-efficient investments (stock index funds) in taxable accounts.
Backdoor Roth IRA: Strategy for high-income taxpayers to contribute to a Roth IRA by making a non-deductible Traditional IRA contribution and immediately converting to Roth.
Basis: Your tax cost in an investment, used to calculate gain or loss on sale; equals original purchase price plus reinvested distributions minus return of capital.
Capital Gain: Profit from selling an investment for more than your basis, taxed at preferential rates (0%, 15%, or 20%) if held over one year (long-term) or at ordinary rates if held one year or less (short-term).
Carryforward: Unused tax benefit (such as capital losses or charitable deductions) that can be applied to future tax years when current-year limits prevent full utilization.
Constructive Receipt: Tax doctrine stating income is taxable when you have unrestricted access to it, regardless of whether you actually take possession.
Donor-Advised Fund (DAF): Charitable giving account allowing immediate tax deduction upon contribution, with grants to qualified charities recommended over time.
Estimated Tax Payments: Quarterly payments (April 15, June 15, September 15, January 15) required when withholding is insufficient to cover tax liability, avoiding underpayment penalties.
Form 1099-DIV: Tax form reporting dividend income, including ordinary dividends, qualified dividends (taxed at preferential rates), and capital gain distributions from mutual funds.
Form K-1: Tax form issued to partners (Form 1065) or S corporation shareholders (Form 1120-S) reporting their share of entity income, deductions, and credits.
Grantor Trust: Trust where the grantor retains certain powers causing all trust income to be taxed on the grantor's personal return rather than to the trust.
Itemized Deductions: Specific deductions (mortgage interest, state and local taxes capped at $10,000, charitable contributions, medical expenses over 7.5% of AGI) claimed instead of the standard deduction when total exceeds standard deduction amount.
Marginal Tax Rate: Tax rate applied to the next dollar of income, determined by tax bracket; for 2024, rates are 10%, 12%, 22%, 24%, 32%, 35%, and 37%.
Modified Adjusted Gross Income (MAGI): AGI with certain deductions added back, used to determine eligibility for Roth IRA contributions, education credits, and other tax benefits.
Net Investment Income Tax (NIIT): Additional 3.8% tax on investment income (interest, dividends, capital gains, rental income) for taxpayers with MAGI exceeding $200,000 (single) or $250,000 (MFJ).
Passive Activity Loss: Loss from business activity in which you do not materially participate, deductible only against passive income unless at-risk and basis limitations are met.
Pro-Rata Rule: IRS rule requiring Roth conversions to include a proportional share of pre-tax and after-tax IRA balances, complicating Backdoor Roth strategies for those with existing Traditional IRA balances.
Qualified Charitable Distribution (QCD): Direct transfer from IRA to charity (up to $105,000 for 2024) by individuals age 70.5 or older, excluded from income and counted toward Required Minimum Distribution.
Qualified Dividend: Dividend from U.S. corporation or qualified foreign corporation meeting holding period requirements, taxed at preferential long-term capital gains rates rather than ordinary income rates.
Required Minimum Distribution (RMD): Mandatory annual withdrawal from Traditional IRA, 401(k), or other tax-deferred accounts beginning at age 73, calculated using IRS life expectancy tables.
Roth Conversion: Transfer of funds from Traditional IRA or 401(k) to Roth account, with converted amount included in current-year income but future growth and withdrawals tax-free.
Safe Harbor: Method of calculating estimated tax payments (100% of prior-year tax, or 110% if prior-year AGI exceeded $150,000) that avoids underpayment penalties regardless of actual current-year liability.
Standard Deduction: Fixed deduction amount ($14,600 single, $29,200 MFJ for 2024) available to taxpayers who do not itemize, reducing taxable income without itemizing specific expenses.
Tax-Loss Harvesting: Selling investments at a loss to offset capital gains and up to $3,000 of ordinary income, with excess losses carrying forward to future years.
Taxable Income: Income remaining after subtracting either standard or itemized deductions from AGI, the amount to which tax brackets are applied.
Wash Sale Rule: IRS rule disallowing capital loss deduction if substantially identical security is purchased within 30 days before or after the sale, including purchases in retirement accounts.
Withholding: Taxes deducted from wages or other income before you receive it, applied to tax liability and treated as paid evenly throughout the year regardless of when actually withheld.
Cross-References
For detailed strategies using these concepts, see:
- Asset Location Across Tax Buckets
- Tax-Efficient Withdrawal Sequencing
- Tax-Loss Harvesting with ETFs
- Backdoor Roth IRA Strategy
- Checklist Before Year-End Tax Moves
Updates
This glossary is updated annually to reflect current tax law changes and contribution limits. Tax rates and thresholds shown are for 2024 unless otherwise noted.