Article Highlights Filing status. Adjusted gross income (AGI). Taxable income. Marginal tax rate. Alternative minimum tax (AMT). Tax Credits. Underpayment of estimated tax penalty. When discussing taxes, reading tax related articles or instructions one needs to understand the basic lingo and acronyms used by tax professionals and authors to be able to grasp what they are saying. It can be difficult to understand tax strategies if you are not familiar with the basic terminologies used in taxation. The following provides you with the basic details associated with the most frequently encountered tax terms. Inflation Adjustments – The standard deductions, tax rates, amounts that can be contributed to retirement plans, virtually all amounts claimed as deductions and credits are annually adjusted for cost-of-living changes from the prior year or other base year as required by the tax code. Thus, when determining an amount, care should be taken to determine the year-specific amount. The numbers used in this article are for the year 2021. Filing Status - Generally, if you are married at the end of the tax year, you have three possible filing status options: married filing jointly, married filing separately, or, if you qualify, head of household. If you were unmarried at the end of the year, you would file as single, unless you qualify for the more beneficial head of household status. A special status applies for some widows and widowers. Head of household is the most complicated filing status to qualify for and is frequently overlooked as well as incorrectly claimed. Generally, the taxpayer must be unmarried AND: o pay more than one half of the cost of maintaining his or her home, a household that was the principal place of abode for more than one half of the year of a qualifying child or certain dependent relatives, or o pay more than half the cost of maintaining a separate household that was the main home for a dependent parent for the entire year. A married taxpayer may be considered unmarried for the purpose of qualifying for head of household status if the spouses were separated for at least the last six months of the year, provided the taxpayer wanting to qualify for the head of household status maintained a home for a dependent child for over half the year. Surviving spouse (also referred to as qualifying widow or widower) is a rarely used status for a taxpayer whose spouse died in one of the prior two years and who has a dependent child at home. The main benefit of this status is that the widow(er) can use the more favorable married joint tax rates rather than the head of household or single rates. In the year the spouse passed away, the surviving spouse may file jointly with the deceased spouse if not remarried by the end of the year. In rare circumstances, for the year of a spouse’s death, the executor of the decedent’s estate may determine that it is better to use the married separate status on the decedent’s final return, which would then also require the surviving spouse to use the married separate status for that year. If a taxpayer is married to a non-resident alien, the taxpayer has two options: file as married separate reporting only their income, deductions and credits or elect to file a joint return with the spouse including the world-wide income of both of them on a joint return. Adjusted Gross Income (AGI) - AGI is the acronym for adjusted gross income. AGI is generally the sum of a taxpayer’s income less specific subtractions called adjustments (but before certain below-the-line deductions and the standard or itemized deductions). The most common adjustments are penalties paid for early withdrawal from a savings account, and deductions for contributing to a traditional IRA or self-employment retirement plan. Many tax benefits and allowances, such as credits, certain adjustments, and some deductions are limited by the amount of a taxpayer’s AGI. Modified AGI (MAGI) - Modified AGI is AGI (described above) adjusted (generally up) by tax-exempt and tax-excludable income. MAGI is a significant term when income thresholds apply to limit various deductions, adjustments, and credits. The definition of MAGI will vary depending on the item that is being limited. Taxable Income - Taxable income is AGI less deductions (either standard or itemized). Your taxable income is what your regular tax is based upon using a tax rate schedule specific to your filing status. The IRS publishes tax tables that are based on the tax rate schedules and that simplify the tax calculation, but the tables can only be used to look up the tax on taxable income up to $99,999. The tables for 2021 have not been released yet, but those for 2020 can be found in the 1040 instructions beginning on page 66. Marginal Tax Rate (Tax Bracket) - Not all of your income is taxed at the same rate. The amount equal to your standard or itemized deductions is not taxed at all. The next increment is taxed at 10%, then 12%, 22%, etc., until you reach the maximum tax rate, which is currently 37%. When you hear people discussing tax brackets, they are referring to the marginal tax rate. Knowing your marginal rate is important because any increase or decrease in your taxable income will affect your tax at the marginal rate. For example, suppose your marginal rate is 24% and you are able to reduce your income $1,000 by contributing to a deductible retirement plan. You would save $240 in federal tax ($1,000 x 24%). Your marginal tax bracket depends upon your filing status and taxable income. You can find your marginal tax rate for 2021 by using the table below. TABLE #1 - Married Individuals Filing Joint Returns and Surviving Spouses If Taxable Income Is: Tax Is: Not Over $19,900 10% of T.I. Over $19,900 but not over $81,050 $1,990 Plus 12% of excess over $19,990 Over $81,050 but not over 172,750 $9,328 Plus 22% of excess over $81,050 Over $172,750 but not over $329,850 $29,502 Plus 24% of excess over $172,750 Over $329,850 but not over $418,850 $67,206 Plus 32% of excess over $329,850 Over $418,850 but not over $628,300 $95,686 Plus 35% of excess over $418,850 Over $628,300 $168,993.50 Plus 37% of excess over $628,300 TABLE #2 – Heads of Household If Taxable Income Is: Tax Is: Not Over $14,200 Over $14,200 but not over $54,200 $1,420 Plus 12% of excess over $14,200 Over $54,200 but not over $86,350 $6,220 Plus 22% of excess over $54,200 Over $86,350 but not over $164,900 $13,293 Plus 24% of excess over $86,350 Over $164,900 but not over $209,400 $32,145 Plus 32% of excess over $164,900 Over $209,400 but not over $523,600 $46,385 Plus 35% of excess over $209,400 Over $523,600 $156,355.00 Plus 37% of excess over $523,600 TABLE #3 – Single If Taxable Income Is: Tax Is: Not Over $9,950 Over $9,950 but not over $40,525 $995 Plus 12% of excess over $9,950 Over $40,525 but not over $86,375 $4,664 Plus 22% of excess over $40,525 Over $86,375 but not over $164,925 $14,751 Plus 24% of excess over $86,375 Over $164,925 but not over $209,425 $33,603 Plus 32% of excess over 164,925 Over $209,425 but not over $523,600 $47,843 Plus 35% of excess over $209,425 Over $523,600 $157,804.25 Plus 37% of excess over $523,600 TABLE #4 – Married Individual Filing Separate If Taxable Income Is: Tax Is: Not Over $9,950 Over $9,950 but not over $40,525 $995 Plus 12% of excess over $9,950 Over $40,525 but not over $86,375 $4,664 Plus 22% of excess over $40,525 Over $86,37 but not over $164,925 $14,751 Plus 24% of excess over 86,375 Over $164,925 but not over $209,425 $33,603 Plus 32% of excess over 164,925 Over $209,425 but not over $314,150 $47,843 Plus 35% of excess over $209,425 Over $314,150 $84,496.75 Plus 37% of excess over $314,150