Key Tax Terms You Need to Know 

by | Feb 21, 2024 | Finance

If you’ve looked at a paystub or filed taxes before, you’ve likely encountered a number of financial terms that you may only see around the tax-paying process. Some of these may be words, acronyms, or even a combination of letters and numbers. What do the words mean, and what do those acronyms and numbers represent? 

As you head into tax filing season or explore strategies to minimize your tax burden, we’ve compiled a list of common tax terms and their definitions as they pertain to paying taxes. Brush up so you can proceed, freshly informed as you tackle your financial to-do list!  

Image of the corner of the Internal Revenue Service building with a blue sky with a graphic of a calculator.


A 1099 form is one in a series of documents used to report various types of income other than salaries, wages, and tips. Businesses, insurance companies, and financial institutions issue them to the recipients of the income they paid out, such as independent contractors, freelancers, account holders, or investors. 

Here are some common types of 1099 forms: 

  1. 1099-MISC: For miscellaneous income, including non-employee compensation, rent, royalties, and other types of income. 
  1. 1099-INT: For interest income earned on investments, such as savings accounts, certificates of deposit, or bonds. Banks (such as Milli) issue these!  
  1. 1099-DIV: For dividends and distributions from investments in stocks and mutual funds. 
  1. 1099-B: For proceeds from broker and barter exchange transactions, often related to the sale of stocks or other securities. 
  1. 1099-R: For distributions from pensions, annuities, retirement plans, or IRAs. 

If you receive income reported on a 1099 form, you are required to include that income on your tax return. The payer sends a copy of the 1099 form to both the recipient and the Internal Revenue Service (IRS), ensuring that the income is properly documented for tax purposes. A mismatch between what you report (or fail to report) and what the IRS received will result in a delay in the processing of your return. 


An audit is when the Internal Revenue Service examines an individual’s or business’s financial information and tax return to ensure accuracy and compliance with tax laws. It is a thorough review of the taxpayer’s financial records and supporting documentation to verify that the person or business reported income, deductions, and credits are in accordance with the tax laws. 

There are different types of audits, including: 

  1. Correspondence Audit: This is the least severe type of audit and involves the IRS requesting additional information or clarification through written correspondence. It is often related to specific items on the tax return. 
  1. Office Audit: In an office audit, the taxpayer is required to bring specific documents to an IRS office for examination. It is more comprehensive than a correspondence audit but less extensive than a field audit. 
  1. Field Audit: This is the most thorough type of audit, where an IRS agent conducts an in-person examination at the taxpayer’s home, place of business, or accountant’s office. Field audits are usually reserved for more complex or high-risk cases. 

Common reasons for an audit include discrepancies in reported income, large deductions, business expenses, or other items that may raise red flags. However, audits can also be randomly selected as part of the IRS’s efforts to maintain tax compliance. 

Does an audit mean you have done something wrong? Not necessarily! Sometimes, it’s a routine check, and the taxpayer’s records support the information on their tax return. Being prepared with accurate and well-documented records is crucial in case of an audit. If the IRS finds discrepancies, it may adjust the tax return, which could lead to additional taxes, penalties, or interest. 

Capital Gains

Capital gains refer to the profits earned from the sale or exchange of capital assets, which include real estate, stocks, bonds, and other investments. When someone sells a capital asset for more than its original purchase price, the difference between the selling price and the purchase price is considered a capital gain. The IRS taxes these capital gains. 

Capital gains are categorized into two main types: 

  1. Short-Term Capital Gains: These are gains from the sale of assets held for one year or less. Short-term capital gains are typically taxed at ordinary income tax rates, which are often higher than rates for long-term capital gains. 
  1. Long-Term Capital Gains: These are gains from the sale of assets held for more than one year. Long-term capital gains are generally subject to lower tax rates than short-term gains. The specific tax rates for long-term capital gains depend on the taxpayer’s income level, and can be 0%, 15%, or 20%. Most individuals fall in the 15% capital gains bracket. 

You can check out more details about capital gains and taxes on the relevant section of the IRS website


An Employer Identification Number is a unique nine-digit number assigned by the Internal Revenue Service to businesses and other entities for identification purposes, similar to how individuals are identified by their Social Security Number (SSN). It’s important for businesses and entities to have an EIN to fulfill their tax obligations and legal requirements.  


The Federal Insurance Contributions Act (FICA) is a federal law that mandates the collection of taxes to fund Social Security and Medicare programs, and it is done through payroll taxes. The first component is the Social Security tax, which is levied on both employees and employers. For earnings paid in 2024, the tax rate is 6.2% each for both employees and employers, whereas self-employed individuals pay the entire 12.4%. The maximum earnings subject to this tax is $168,800 in 2024, and this cap typically increases every year. The second component of the FICA tax is the Medicare tax. Employees contribute 1.45% of their wages to Medicare, and employers contribute an equal amount; the self-employed pay the entire 2.9%. Unlike the Social Security tax, there is no cap on wages subject to the Medicare tax. High-income earners may be subject to an Additional Medicare Tax of 0.9% on compensation that exceeds a specific amount, depending on their tax filing status. 

Head of Household

Head of Household is a filing status that can result in a lower tax liability compared to filing as Single because the standard deduction is higher. To qualify as Head of Household, the taxpayer must: 

  • be unmarried, legally separated, or considered unmarried on the last day of the tax year 
  • have a qualifying person who lived with them for more than half of the tax year. A qualifying person can be a child, stepchild, foster child, or certain other relatives 
  • have paid more than half the cost of maintaining their home during the tax year.  

Internal Revenue Service

The Internal Revenue Service is the United States government agency responsible for collecting taxes and administering and enforcing the internal revenue laws. The IRS operates under the Department of the Treasury and plays a crucial role in the country’s tax system. The IRS as we know it was formed on July 9, 1953 after President Harry S. Truman called for a reorganization of the Bureau of Internal Revenue. 

Schedule C

Schedule C is a tax form used by sole proprietors and single-member LLCs (Limited Liability Companies) to report their business income and expenses. These business structures do not have a separate legal identity from the owner, so business income and expenses are reported on the owner’s personal tax return. The full name of the form is “Schedule C, Profit or Loss from Business.” Individuals file it with Form 1040. Schedule C income is subject to self-employment tax, which covers Social Security and Medicare taxes for self-employed individuals. Even if you don’t operate a fully-fledged business, if you take on self-employed side hustle type work or contract work, you may be classified as an independent contractor- so you’ll likely want to be aware of this form!  

Standard Deduction

The Standard Deduction is a fixed amount that taxpayers can subtract from their adjusted gross income (AGI) to reduce their taxable income. The standard deduction is an alternative to itemizing deductions, and taxpayers can choose to take the standard deduction if it results in a larger deduction than itemizing individual deductions.  

For the 2023 tax year, these are the standard deduction amounts: 

  • Married filing jointly – $27,700, an increase of $1,800 from the 2022 tax year 
  • For single people or married people filing individually – $13,850, increased $900 from the prior year 
  • Heads of households – $20,800, an increase of $1,400 from 2022  

Most taxpayers take the standard deduction – about 87%.   

The Tax Cuts and Jobs Act (TCJA) 

The TCJA is U.S. tax reform law that was enacted in December 2017. It was the most significant overhaul of the U.S. tax code in several decades, and impacts taxes for both people and businesses. Some of the key aspects of the TCJA for individuals were changing individual income tax brackets, increasing the Standard Deduction, changing, and eliminating some itemized deductions (such as state and local taxes, or SALT), and expanding the Child Tax Credit. Some key provisions for businesses include reducing the corporate tax rate and changing how businesses can expense investments. Most of the TCJA provisions in the law are set to expire at the end of 2025, representing how tax codes change over time. 

Tax Refund

A tax refund refers to the amount that a taxpayer overpaid for tax they truly owe in a tax year, which the IRS reimburses after the taxpayer files their tax return. This happens because tax is withheld from paychecks throughout the year and taxpayers later claim credits or deductions that can reduce their tax liability, or their income may drop, and the amount they already paid is more than what they owe for the whole year’s income. According to CNBC, about three-quarters of Americans get a tax refund each year, while the remaining quarter must pay additional money to the IRS to fulfill their tax obligation. 

Tax Return

Not to be confused with a tax refund, a tax return refers to all the forms and paperwork taxpayers compile and submit to the IRS to calculate the annual income and tax liability for a tax year. It shows the government how much money you earned across income sources, any tax deductions, or credits for which you qualify, how much tax you already paid, and reconciles it all to calculate if you overpaid and are due a refund, or how much money you need to pay to the IRS. Most taxpayers file their tax return online with the IRS directly or a tax preparation service, but the IRS still accepts paper tax returns by mail. 


A W-2 form is a document, also called a Wage and Tax Statement, that employers use to report each employees’ wages and taxes. Taxpayers use this document to file their income tax returns, with a W-2 for each employer (if they had multiple jobs throughout the year). It shows how much money the individual has earned and how much money in federal and state taxes the employer has already taken out of the employee’s paycheck and paid to the IRS. For tax year 2023, employers must provide W-2s by January 31, 2024.  


A W-4 form is a document employees use and give to their employer so the employer can withhold the correct amount of federal income tax for their filing status. On it, employees can account for credits like dependents, or opt to have additional income tax withheld to account for taxes from other sources of income, such as interest. Employees can adjust their W-4 with their employer to account for changes.  

Here is a link to the W-4 document from the IRS website: 

Image of a W-4 Form for tax year 2024


We hope this breakdown of tax terminology was helpful! We commend you for taking the time to get informed or brush up your tax knowledge. Having a basic understanding of some of the key elements of taxes is a great way to build your financial literacy and boost your confidence when Tax Day rolls around each year!

If you’re looking for a mobile bank to help you spend and save effectively, check out Milli. With our app, you’ll get helpful spending insights, automated savings features, a highly competitive annual percentage yield, and customizable Jars – all designed to help you save more for the things that matter most. Download Milli from the App Store or Google Play and sign up today. 

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