Translating Tax Jargon: An Illustrated Guide

So don’t be embarrassed if “stepped-up basis” is new to you. This field guide will help demystify a few of the most essential tax concepts.

Marginal tax rates

The federal income tax for individuals is progressive; in general, the greater your income, the higher the tax rate. But those higher rates are often misunderstood to apply to the entire income.

Tax credits vs. deductions

What is the difference between a tax credit and a deduction? Basically, they work at opposite ends of the equation.

Payroll taxes

In addition to income tax, workers pay taxes earmarked for funding Medicare and Social Security. Along with other social insurance taxes, like unemployment, these are commonly referred to as payroll taxes.

Taxes on investments

The government treats money earned from investments differently than wages. Goods that appreciate in value, like stocks or houses, are considered capital assets. Typically, long-term investments held for more than a year are taxed at a lower rate than income such as wages, and short-term gains are taxed equivalently.

Stepped-up basis

Some tax-overhaul plans have proposed eliminating something called “stepped-up basis” on inherited property.

—Additional design and illustration by Jess Kuronen.