Basic Tax Concepts
Income tax glossary
| Term | Definition | Example |
|---|---|---|
| W-2 | Employer wage and tax statement | Shows $75,000 wages and $11,000 withheld |
| 1099-NEC | Non-employee compensation (freelance) | Client paid you $15,000 as a contractor |
| AGI | Adjusted Gross Income — income after above-the-line deductions | $100K income - $23,500 401k = $76,500 AGI |
| Taxable Income | AGI minus standard or itemized deduction | $76,500 AGI - $15,000 standard = $61,500 taxable |
| Marginal Rate | Rate on your highest dollar of income | 22% if taxable income is $85,000 (single) |
| Effective Rate | Total tax / total income | $13,000 tax / $100,000 income = 13% effective |
| Withholding | Taxes deducted from each paycheck | $1,200 withheld monthly; reconciled at filing |
Common Filing Questions
Q: When are taxes due? Federal: April 15 (or next business day if weekend/holiday). Extension to October 15 available via Form 4868 (pay estimated tax by April 15 regardless). Quarterly estimates: April 15, June 15, September 15, January 15.
Q: Do I have to file if I had no income? Generally no. But file if you had federal taxes withheld (to get refund), qualify for refundable credits (EITC, Additional Child Tax Credit), received a 1099 with backup withholding, or are self-employed with net income over $400.
Q: What if I can’t pay what I owe? File on time (avoid failure-to-file penalty) and pay as much as possible. Set up an IRS installment agreement at irs.gov. Interest accrues (~8%) but late-payment penalties are lower than late-filing penalties.
Investment and Capital Gains Questions
Investment and capital gains tax quick reference
| Question | Answer |
|---|---|
| What is the capital gains tax rate? | Long-term (held 1+ year): 0%, 15%, or 20% depending on income. Short-term: ordinary income rates. |
| When is 0% capital gains rate available? | Under $47,025 (single) or $94,050 (MFJ) in taxable income in 2025 |
| Do I pay taxes on 401k growth? | No — 401k growth is tax-deferred. Traditional: taxed at withdrawal. Roth: never taxed. |
| How are dividends taxed? | Qualified dividends: 0%, 15%, or 20% (same as long-term capital gains). Non-qualified: ordinary income rates. |
| What is the Net Investment Income Tax? | 3.8% surcharge on investment income for high earners (above $200K single / $250K MFJ) |
If your taxable income is under $47,025 (single) or $94,050 (MFJ), long-term capital gains are taxed at 0%. This creates a powerful planning opportunity: in a low-income year (sabbatical, early retirement, part-time), realize large appreciated positions at zero federal capital gains tax. Known as 'tax-gain harvesting' — the mirror image of tax-loss harvesting.
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