AGI, MAGI, Marginal Rate, AMT: The Tax Terms You Need Before Any Tax Conversation Makes Sense

Half the confusion in tax conversations comes from vocabulary. You can't follow a planning strategy — or evaluate whether your preparer knows what they're doing — if the basic terms are fog. Here's the working glossary from my desk, current to today's law.

Filing status

Married at year-end? Your options are married filing jointly, married filing separately, or — in narrow cases — head of household. Unmarried? You file single unless you qualify for the more favorable head of household.

Head of household is the most misclaimed status in the code. Generally you must be unmarried AND pay more than half the cost of maintaining a home that was the principal residence of a qualifying child or dependent relative for more than half the year (or a separate household that was a dependent parent's main home all year). A married taxpayer separated for the last six months of the year, maintaining a home for a dependent child, can be treated as unmarried for this purpose.

Surviving spouse (qualifying widow/widower) lets a taxpayer whose spouse died in one of the two prior years, with a dependent child at home, keep using joint rates.

AGI and MAGI

Adjusted gross income (AGI) is total income minus specific "adjustments" — things like deductible traditional IRA or self-employed retirement contributions — computed before the standard or itemized deduction. AGI is the gatekeeper number: dozens of credits, deductions, and phase-outs key off it.

Modified AGI (MAGI) is AGI with certain items added back. Annoyingly, the definition changes depending on which benefit is being limited — there is no single MAGI.

Taxable income and your marginal rate

Taxable income = AGI minus your standard or itemized deductions. That's the number the rate schedule applies to.

Marginal tax rate (your "bracket") is the rate on your next dollar, not on every dollar. Income fills the brackets stepwise — the current permanent rates run 10%, 12%, 22%, 24%, 32%, 35%, and 37% — so a $1,000 deductible retirement contribution at a 24% marginal rate saves $240 of federal tax. Knowing your marginal rate is the starting point of every planning move. (Bracket dollar thresholds adjust for inflation each year; look up the current year's before doing math.)

Deductions

You take the standard deduction — a flat, inflation-adjusted amount by filing status, with extra amounts for taxpayers 65+ or blind — or you itemize, whichever is larger. The standard deduction was permanently enlarged by recent law, so most taxpayers no longer itemize.

Itemized deductions today generally include:

Medical expenses above 7.5% of AGI (that floor is now permanent).
State and local taxes (SALT) — capped at $40,000 for 2025, with the cap scheduled to inch up annually through 2029 and phase back down for incomes above $500,000 MAGI, then revert to $10,000.
Home mortgage and investment interest, each within their own limits.
Charitable contributions, generally limited to a percentage of AGI (60% for cash gifts), with a small floor now applying to itemizers' gifts under current law.
Gambling losses to the extent of gambling winnings — and under current law only 90% of losses are deductible starting in 2026, a trap for heavy players.

Personal and dependent exemptions are permanently gone — set to zero under current law. Dependents still matter enormously, though, because credits key off them.

Dependents and the qualified child

A dependent is either your qualifying child — same principal home for over half the year, your child/sibling/descendant thereof, younger than you, didn't provide over half their own support, under 19 (or under 24 as a full-time student, or any age if permanently disabled) — or a qualifying relative who passes the relationship/member-of-household, gross income, joint return, citizenship, and support tests.

Credits vs. deductions

A deduction reduces the income being taxed; its value equals your marginal rate. A credit reduces the tax itself, dollar for dollar — which makes credits more valuable per dollar. Refundable credits can even push your tax below zero and generate a refund.

Alternative minimum tax (AMT)

The AMT is a parallel tax computation with its own rules — no standard deduction, different treatment of several itemized deductions — and you pay whichever result is higher. It was originally aimed at the wealthy with large write-offs; today's permanently higher AMT exemptions mean far fewer people hit it, but exercised incentive stock options and certain deduction patterns still trigger it.

Underpayment penalty

Federal tax is pay-as-you-earn. Fall short of the safe harbor prepayment rules through withholding and estimated payments, and the IRS charges a quarterly, nondeductible interest penalty — avoidable with basic planning.

Fluent now? Good — the strategies make far more sense with the vocabulary in place. The free sample chapter of my Guide at /book goes much deeper. And if your own return raises questions this glossary can't settle, attach it with the paperclip in the chat — we scope and quote the work in writing after intake.