Tax Concepts & Terminology

Understanding key tax terms and concepts to make the most of your tax calculations

Filing Status

Your tax filing category that determines tax rates and standard deduction amounts. Options include Single, Married Filing Jointly, Married Filing Separately, and Head of Household.

Example: A married couple typically saves money by filing jointly rather than separately.
Gross Income

Total income from all sources before any deductions or exclusions. This includes wages, tips, overtime, business income, interest, and dividends.

Example: $50,000 wages + $10,000 tips + $5,000 overtime = $65,000 gross income
Adjusted Gross Income (AGI)

Your gross income minus specific adjustments. Under the Big Beautiful Bill, tips and overtime are excluded from AGI.

Example: $65,000 gross income - $15,000 excluded (tips + overtime) = $50,000 AGI
Effective Tax Rate

Your actual tax rate calculated as total tax divided by total gross income. This shows what percentage of your income goes to taxes.

Example: $5,000 tax ÷ $65,000 income = 7.69% effective rate
Marginal Tax Rate

The tax rate applied to your last dollar of income. The U.S. uses progressive tax brackets where higher income is taxed at higher rates.

Example: If you're in the 22% bracket, each additional dollar is taxed at 22%.
Tip Income

100% Excluded All gratuities received for services. Under the Big Beautiful Bill, 100% of tip income is excluded from federal income tax.

Includes: Cash tips, credit card tips, tip pooling, service charges distributed as tips
Overtime Income

100% Excluded Compensation for hours worked beyond standard schedule. All overtime pay is excluded from federal income tax.

Includes: Time-and-a-half pay, double-time pay, weekend/holiday premium pay
Business Income

Net profit from self-employment or pass-through entities. Eligible for Qualified Business Income (QBI) deduction.

Sources: Schedule C profit, K-1 income from partnerships/S-Corps, rental income
Wages and Salaries

Regular compensation from employment, not including tips or overtime. This is your base pay before any premium rates.

Example: $25/hour × 40 hours/week × 52 weeks = $52,000 annual wages
Standard Deduction

A fixed amount you can subtract from income based on filing status. Most taxpayers use this instead of itemizing.

2024 Amounts: Single: $14,600 | MFJ: $29,200 | HOH: $21,900
Enhanced Standard Deduction

New Additional standard deduction under Big Beautiful Bill (2025-2028).

Enhancement: Single: +$2,300 | MFJ: +$2,000 | HOH: +$3,500
Senior Deduction

Additional $1,650 standard deduction for taxpayers age 65 or older.

Example: 67-year-old single filer gets $14,600 + $2,300 + $1,650 = $18,550 total
SALT Deduction

State and Local Tax deduction. Limited to $30,000 under Big Beautiful Bill (increased from $10,000).

Includes: State income tax, local income tax, property tax, sales tax (if elected)
QBI Deduction

Qualified Business Income deduction of 23% for pass-through entities (enhanced from 20%).

Example: $100,000 business income × 23% = $23,000 deduction
Child Tax Credit

A credit for each qualifying child under 17. Credits directly reduce tax owed dollar-for-dollar.

Amount: $2,000 per child (standard) | $2,500 per child (2025-2028 enhanced)
Credit vs. Deduction

Credits reduce tax owed directly, while deductions reduce taxable income. Credits are more valuable.

$1,000 credit = $1,000 less tax
$1,000 deduction = $220 less tax (if in 22% bracket)
Phase-out Thresholds

Income levels where credits begin to reduce. Higher earners may receive reduced or no credits.

Child Tax Credit Phase-out: Begins at $200,000 (single) or $400,000 (MFJ)
The One Big Beautiful Bill Act

Comprehensive tax reform legislation (H.R.1) that simplifies the tax code while providing significant relief to working families.

Key Goals: Simplify taxes, reward work, support families, boost economy
Tip & Overtime Exclusion

Revolutionary Complete exclusion of tip and overtime income from federal taxation - a first in U.S. tax history.

Impact: Service workers and overtime earners keep 100% of premium pay
Temporary Enhancements (2025-2028)

Special provisions that provide extra benefits for the first four years of implementation.

Includes: Enhanced standard deduction, $2,500 child credit, increased SALT cap
Who Benefits Most

While all taxpayers benefit, certain groups see the largest savings under the new law.

Big Winners: Service workers, overtime earners, families with children, small business owners, seniors

Quick Reference

Key Formulas
  • AGI = Gross Income - Exclusions
  • Taxable Income = AGI - Deductions
  • Tax Owed = Tax - Credits
  • Effective Rate = Tax ÷ Gross Income
Important Numbers
  • Tip Exclusion: 100%
  • Overtime Exclusion: 100%
  • QBI Deduction: 23%
  • SALT Cap: $30,000
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