The MicroTax glossary
Tax-and-wealth terms used across the MicroTax site, defined in plain language. Most of these are specific IRS code sections, retirement-plan structures, or industry acronyms that show up in the deep articles and calculators. Cross-referenced where useful.
§7702
Section 7702 of the Internal Revenue Code. Defines what qualifies as a life insurance contract for federal tax purposes, including the corridor test that distinguishes legitimate life insurance from tax-shelter contracts disguised as insurance. The basis for the Tax-Free Retirement Account (TFRA) structure.
§199A
The Qualified Business Income (QBI) deduction. Allows pass-through business owners (S-Corps, partnerships, sole proprietorships) to deduct up to 20% of qualifying business income on their personal tax return. Subject to phase-outs at higher income levels.
§1202 / QSBS
Qualified Small Business Stock under IRC §1202. Allows founders and early employees of qualifying corporations to exclude up to $10 million of federal capital gains tax on the sale of qualifying stock, provided the 5-year holding period and qualification requirements are met.
§1031 exchange
A like-kind exchange for real property under IRC §1031. Allows the deferral of capital gains tax when proceeds from the sale of investment real estate are reinvested into another qualifying investment property within strict timing requirements.
AMT
Alternative Minimum Tax. A parallel tax computation that ensures high-income taxpayers pay a minimum amount of federal tax. Most commonly triggered by Incentive Stock Option (ISO) exercises, large state-and-local-tax deductions, or specific high-income situations.
AUM
Assets Under Management. The pricing model used by most traditional wealth advisors, where the advisor charges a percentage of the client's investable assets (typically 0.7%-1.5% annually). Creates a structural disincentive against strategies that reduce AUM (such as funding §7702 policies or qualified plans).
Backdoor Roth
A technique used by high earners (above the Roth IRA income eligibility cap) to make Roth contributions: a non-deductible contribution to a Traditional IRA is converted to a Roth IRA, typically with minimal tax consequences if there are no other pre-tax IRA balances. Subject to the pro-rata rule.
Cash Balance Plan
A type of defined benefit retirement plan that resembles a defined contribution plan in some ways. Allows substantially higher annual contributions than 401(k) plans, age-weighted in favor of older plan participants. Common in physician partnerships and other high-income practice structures.
COI
Cost of Insurance. The mortality-based charge inside a permanent life insurance policy. For a properly designed §7702 TFRA structured at the corridor minimum, COI represents a small percentage of premium; for poorly designed policies with excessive death benefit, COI can absorb 30-40% of long-run accumulated value.
Cost segregation
An engineering-based analysis that reclassifies real estate building components into shorter depreciation categories (5-, 7-, and 15-year property), accelerating depreciation deductions into the early years of ownership.
DB plan
Defined Benefit Plan. A retirement plan that promises a specific benefit at retirement based on age, compensation, and tenure. Allows substantially higher contributions than 401(k) plans, particularly for older high-income business owners. Requires annual actuarial certification and IRS permanency commitment.
ESPP
Employee Stock Purchase Plan. A qualified plan under IRC §423 that allows employees of public companies to purchase company stock at a discount (typically 5-15%). Qualified dispositions receive favorable tax treatment converting much of the gain to long-term capital gains.
F.A.S.T. Method™
The MicroTax methodology for sequencing advisory strategies: Foundational, Advanced, Strategic, Tactical. Strategies in each stage build on the output of the previous stage; no stage skips ahead.
Fractional CFO
A part-time or scope-based Chief Financial Officer engagement for businesses that need strategic financial leadership but don't justify the cost of a full-time CFO. Typical client profile: $1M-$10M revenue businesses.
GST exemption
Generation-Skipping Transfer tax exemption. The federal allowance for transfers to grandchildren or more remote descendants free of generation-skipping transfer tax. Parallel to (but separate from) the estate and gift tax exemption.
HSA
Health Savings Account. A tax-advantaged savings vehicle paired with a high-deductible health plan. Contributions are pre-tax, growth is tax-deferred, and qualified medical withdrawals are tax-free, the only U.S. account with triple-tax-advantaged treatment.
IDGT
Intentionally Defective Grantor Trust. An estate planning structure that is "defective" for income tax purposes (treated as owned by the grantor for income tax) but effective for estate tax purposes (assets excluded from the grantor's estate). Used for sophisticated wealth-transfer strategies.
IUL
Indexed Universal Life. A type of permanent life insurance where the cash-value crediting is linked to the performance of a market index (typically the S&P 500), subject to caps, participation rates, and floors. One of the common policy structures used for §7702 TFRAs.
MEC
Modified Endowment Contract. A §7702 contract that has failed the 7-pay test through excessive premium funding relative to death benefit in the first 7 years. MEC status changes the tax treatment of policy loans (taxed as ordinary income) and triggers pre-59½ penalties. MEC status is permanent.
Mega-Backdoor Roth
A retirement strategy that uses after-tax (non-Roth) 401(k) contributions, then converts those contributions to Roth (either via an in-plan Roth rollover or an out-of-plan rollover to a Roth IRA). Available only when the workplace 401(k) plan permits after-tax contributions and the necessary conversion mechanisms.
NIIT
Net Investment Income Tax. A 3.8% additional tax on net investment income (interest, dividends, capital gains, rental income) for taxpayers above income thresholds ($200K single, $250K joint). Adds meaningfully to the effective tax rate on investment income for high earners.
Opportunity Engine™
The MicroTax discovery framework: a systematic checklist of 200+ tax and advisory strategies applied to each client's situation to surface dormant planning opportunities. Not generative AI, a structured human-judgment process supported by a tooling layer.
Pulse
The proprietary metering unit used by MicroTax to bill agent-delivered outcomes. Each completed advisory outcome (a tax recovery, an entity restructuring, a §7702 policy in-force, etc.) is priced in Pulses rather than hours or asset percentages.
QBI
See §199A.
Reasonable compensation
The W-2 wage that an S-Corporation owner-operator must pay themselves before taking distributions. Must reflect the actual value of services provided to the corporation. Setting reasonable compensation too low triggers IRS audit exposure; setting it too high eliminates the S-Corp tax benefit.
REPS
Real Estate Professional Status. An IRS designation that allows qualifying taxpayers (those spending 750+ hours and more than half their working time in real estate trades or businesses) to deduct real estate losses against ordinary income, unlocking the full economic value of cost segregation and other real-estate-specific strategies.
RMD
Required Minimum Distribution. The IRS-mandated minimum annual withdrawal from traditional retirement accounts beginning at age 73 (under current law). §7702 TFRAs have no RMD requirement at any age, which is one of their structural advantages over qualified-plan retirement vehicles.
Roth IRA
An individual retirement account funded with post-tax dollars. Growth is tax-deferred and qualified withdrawals are tax-free. Subject to a $7,000 annual contribution cap (2026) and income-based eligibility phase-outs that exclude high earners from direct contributions.
RSU
Restricted Stock Unit. A form of equity compensation where the employer grants the right to shares that vest over time (typically 4-year vesting with cliffs). RSU value at vest is treated as ordinary income, with mandatory 22% federal supplemental withholding, typically below the actual marginal rate for senior tech professionals.
S-Corp election
An election to be taxed as an S-Corporation under IRC §1362. For pass-through business owners, S-Corp election can reduce self-employment tax exposure by separating income into reasonable compensation (subject to FICA) and distributions (not subject to FICA). The savings depend critically on reasonable-compensation defensibility.
SECURE Act
A series of federal retirement-policy reforms (SECURE Act of 2019, SECURE 2.0 in 2022) that revised retirement plan rules including required minimum distribution ages, inherited IRA rules, and retirement plan contribution mechanics.
TFRA
Tax-Free Retirement Account. MicroTax's name for a properly designed §7702-compliant permanent life insurance contract optimized for cash accumulation and tax-free retirement distribution via policy loans. Not a defined term in the IRS code.
VFO
Virtual Family Office. A coordinated tax, retirement, wealth, and estate planning model delivered through a curated specialist network rather than an in-house full-service team. Allows family-office-style coordination at the $300K-$1M income tier rather than the $50M+ net-worth tier.
If we left out a term you came across
If a term used elsewhere on the site isn't defined here, let us know. We'll either add it to this glossary or point you to the article that explains it in full.