US Tax Terms Explained for US Connected Individuals – A Quick-Reference Guide

In this glossary, we explain the most common US tax acronyms affecting individuals and trusts with US tax obligations.

AGI – What is Adjusted Gross Income?

This is your gross income reduced by certain specific deductions, often referred to as “above-the-line” deductions. The allowable deductions that can be subtracted from gross income arrive at your AGI.

AMT – What is Alternative Minimum Tax?

This calculation is to ensure that higher-income taxpayers pay the minimum tax even if deductions and credits reduce their liability.

EITC – What is Earned Income Tax Credit?

This is a Federal income tax credit aimed at low- to moderate-income workers and families. If you qualify, you can use the credit to reduce the taxes you owe.

ECI – What is Effectively Connected Income?

When a non-US person engages in a trade or business in the US, all income from sources within the US connected with the conduct of that trade or business is considered to be Effectively Connected Income (ECI). A US trade or business generally exists when activities are considerable, continuous, and regular, where the services are performed physically in the United States.

FATCA – What is the Foreign Account Tax Compliance Act?

A US law designed to prevent tax evasion by US taxpayers holding financial assets outside the US. FATCA requires foreign financial institutions (FFIs) to report information about accounts held by US persons or face withholding on certain US-source payments. This has led to American citizens being turned away from some banks. 

Find out more about FATCA here.

HSA – What is a Health Savings Account?

A tax-advantaged savings account used for medical expenses, available to those covered by a high-deductible health plan.

IRA – What is an Individual Retirement Account?

This retirement account offers tax benefits such as tax-deductible contributions (for traditional IRAs) or tax-free withdrawals in retirement (for Roth IRAs).

ITIN – What is an Individual Tax Identification Number?

This tax number is issued by the IRS to certain non-resident and resident aliens, their spouses, and dependents who are not eligible for a Social Security Number (SSN) to process tax returns and potential obligations.

MAGI – What is Modified Adjusted Gross Income?

AGI (above) plus various deductions and exclusions; this figure is often used to determine eligibility for certain tax benefits, like contributing to a Roth IRA or deducting traditional IRA contributions. (verbatim from Google, so please alter)

PFIC – What is a Passive Foreign Investment Company?

You may have investments with a non-US entity where more than half of its gross income for the year is passive (e.g., interest, dividends) or if more than 50% of its assets consist of assets that produce or could produce passive income (e.g. cash). US investors with a direct or indirect interest in a PFIC face complex tax rules and reporting (via Form 8621). 

For more information regarding PFICs, see here.

SSN – What is a Social Security Number?

The primary nine-digit number used to identify US citizens and permanent residents for tax purposes.

If you have any questions regarding these or any US tax terms or best practices, please do not hesitate to contact a member of our team.

For US tax terms more specifically related to international funds, investors and corporations, please refer to our corporate tax terms list here.