Planning glossary
Financial planning terms, in plain English.
Short definitions of the words that show up in tax returns, trust documents and sale agreements, with why each one matters and where to run the numbers.
A
- Alternative minimum taxAMT
A parallel federal tax calculation with its own exemption and fewer deductions. You pay whichever result is higher: regular tax or AMT.
Why it matters: Exercising incentive stock options is the most common way people with otherwise ordinary returns end up owing AMT.
- Annual gift tax exclusion
The amount you can give each recipient per year without filing a gift tax return or using lifetime exemption. It is $19,000 per recipient in 2026.
Why it matters: Repeated annual gifts to several family members can move meaningful wealth over time without touching the lifetime exemption.
- Asset sale
A business sale in which the buyer purchases the company’s assets rather than the owner’s shares. The purchase price is allocated across asset classes, and each class can be taxed differently.
Why it matters: Two offers with the same price can leave the seller with different after-tax cash depending on structure and allocation.
B
- Bucket strategy
A way of organizing retirement savings by when the money will be spent: near-term cash, medium-term bonds, and long-term growth assets.
Why it matters: Holding several years of spending outside stocks can reduce the need to sell investments after a market decline.
C
- Capital gains tax
Tax on the profit from selling an asset for more than its cost basis. Assets held longer than one year usually qualify for lower long-term rates of 0%, 15% or 20%.
Why it matters: The holding period, the size of the gain and your other income together decide which rate applies.
- Charitable lead trustCLT
A trust that pays a charity first, for a term of years, and then passes what remains to family or other beneficiaries.
Why it matters: When the Section 7520 rate is low, more of the remainder can pass to heirs with little or no gift tax.
- Charitable remainder trustCRT
A trust that pays you (or other people) income for life or a term of years, with the remainder going to charity at the end.
Why it matters: Contributing appreciated property before a sale can spread the capital gain over time while creating an income stream and a partial deduction.
- Cost basis
What you paid for an asset, adjusted for items such as improvements or depreciation. Gain or loss is measured from this number.
Why it matters: Many assets receive a new basis equal to their value at the owner’s death, which can erase the built-in gain for heirs.
D
- Donor-advised fundDAF
An account at a sponsoring charity. You take the deduction when you contribute, then recommend grants to charities over time.
Why it matters: Grouping several years of gifts into one year can push itemized deductions above the standard deduction.
E
- Earnout
Part of a business purchase price that is paid only if the company hits agreed targets after closing, such as revenue or profit levels.
Why it matters: Earnout dollars are contingent. A retirement plan that depends on them should also be tested without them.
- Enterprise value
The value of a company’s operations before subtracting debt and adding excess cash. Buyers often quote offers this way.
Why it matters: The owner’s proceeds start from equity value, after debt, fees and adjustments, not from the headline enterprise value.
- Estate tax exemptionBasic exclusion amount
The amount a person can pass at death, combined with taxable lifetime gifts, before federal estate tax applies. It is $15 million per person in 2026.
Why it matters: Some states, including New York, have their own estate tax with a much lower threshold.
G
- Generation-skipping transfer taxGST tax
A separate federal tax on transfers to grandchildren or others two or more generations below you, with its own exemption.
Why it matters: Allocating GST exemption to a long-term trust can keep later generations from paying another layer of transfer tax.
- Grantor retained annuity trustGRAT
A trust that pays you a fixed annuity for a set term. Growth above the IRS Section 7520 rate passes to beneficiaries at the end of the term.
Why it matters: A GRAT can move appreciation on a fast-growing asset to family with little gift tax, but if you die during the term the assets generally return to your estate.
I
- Inherited IRA
An IRA received from someone who has died. Most non-spouse beneficiaries must empty it within ten years.
Why it matters: Spreading withdrawals across the ten years, rather than taking it all at once, can keep more of each year’s income in lower brackets.
- IRMAAIncome-related monthly adjustment amount
A surcharge added to Medicare Part B and Part D premiums when income from two years earlier exceeds set thresholds.
Why it matters: A Roth conversion, business sale or large capital gain can raise Medicare premiums two years later.
- Irrevocable life insurance trustILIT
A trust that owns a life insurance policy so the death benefit is kept outside the insured person’s taxable estate.
Why it matters: The death benefit can supply cash for estate taxes or to equalize inheritances without increasing the estate itself.
K
- Kiddie tax
A rule that taxes a child’s unearned income above a small threshold at the parents’ tax rate.
Why it matters: Moving investments into a child’s name often saves less tax than expected.
M
- Marginal tax rate
The rate applied to your next dollar of taxable income. It differs from your effective rate, which is total tax divided by income.
Why it matters: Decisions like Roth conversions turn on the marginal rate the extra income will face, not on the average.
N
- Net Investment Income TaxNIIT
A 3.8% federal tax on investment income such as gains, dividends and rents once modified adjusted gross income passes $200,000 single or $250,000 joint.
Why it matters: Its thresholds are not indexed for inflation, so more households cross them each year.
- Net unrealized appreciationNUA
The growth in value of employer stock while it sat inside a 401(k). With a qualifying lump-sum distribution, that growth can be taxed later as long-term capital gain instead of ordinary income.
Why it matters: Rolling highly appreciated company stock into an IRA gives up this treatment permanently.
Q
- Qualified opportunity zone fundQOF
An investment vehicle for designated low-income areas that offers capital gains deferral and, after a long hold, possible exclusion of new appreciation.
Why it matters: Deferred gains under the original program are recognized on December 31, 2026, which creates a 2026 tax bill for many investors.
- Qualified personal residence trustQPRT
A trust that holds a home. You keep living there for a set term, and the home then passes to beneficiaries at a reduced gift tax value.
Why it matters: It works only if you outlive the term, and you must pay fair rent to stay afterward.
- Qualified small business stockQSBS, Section 1202
Stock in a qualifying C corporation that, if held long enough and acquired the right way, can exclude part or all of the gain from federal tax.
Why it matters: The exclusion can be worth millions in a sale, but eligibility rests on documents and company facts that should be checked early.
R
- Required minimum distributionRMD
The amount that must be withdrawn each year from most tax-deferred retirement accounts, starting at age 73 (75 for people born in 1960 or later).
Why it matters: Large RMDs can raise tax brackets and Medicare premiums later in retirement, which is why some people convert earlier.
- Roth conversion
Moving money from a traditional IRA or 401(k) to a Roth account. The amount converted is taxed as ordinary income that year; later qualified withdrawals are tax-free.
Why it matters: Converting in lower-income years, often between retirement and RMD age, can reduce lifetime taxes.
S
- Section 7520 rate
A monthly interest rate published by the IRS and used to value annuities, remainder interests and lead interests in trusts.
Why it matters: It decides how much of a GRAT, CLT or CRT counts as a gift or deduction, so the month you fund a trust can matter.
- Seller noteSeller financing
Part of a business purchase price that the seller lends to the buyer and receives over time with interest.
Why it matters: The amount is fixed, unlike an earnout, but repayment still depends on the buyer and the business.
- Step-up in basis
The reset of an inherited asset’s cost basis to its value on the date of death.
Why it matters: Selling an appreciated asset during life can cost tax that heirs would never owe, which affects whether to give, sell or hold.
- Stock sale
A business sale in which the buyer purchases the owner’s shares. The gain is usually long-term capital gain for the seller.
Why it matters: Sellers often prefer stock sales and buyers often prefer asset sales, so structure becomes part of the price negotiation.
T
- Tax-loss carryforward
Capital losses you could not use in the year they occurred. They carry forward indefinitely to offset future gains and up to $3,000 of ordinary income each year.
Why it matters: Unused losses can soften the tax on a later business sale or concentrated stock sale.
W
- Working capital adjustment
A purchase-price change based on whether the business delivers more or less working capital at closing than the agreed target.
Why it matters: It can move a seller’s cash at closing by a meaningful amount and is often settled months after the sale.