The strategy of dividing investments among different asset classes, such as stocks, bonds, and cash, to balance risk and reward according to your goals and time horizon.
Why it matters: Getting asset allocation right is one of the biggest drivers of long-term investment performance. It determines how much risk you’re taking and how your portfolio behaves in different market conditions.
Your total gross income minus specific deductions allowed by the IRS (such as student loan interest or retirement contributions). AGI is calculated before standard or itemized deductions.
Why it matters: AGI determines eligibility for many tax credits and deductions. A lower AGI can unlock access to Roth IRA contributions, education credits, and other tax benefits.
The gradual repayment of a loan through scheduled payments that cover both principal and interest, or the accounting process of spreading the cost of an intangible asset over its useful life.
Why it matters: Understanding amortization helps you see how much of each loan payment goes toward interest versus paying down principal; critical for evaluating mortgages and business loans.
A person or entity designated to receive assets from a will, trust, retirement account, or life insurance policy upon the account holder’s death.
Why it matters: Keeping beneficiary designations updated ensures your assets go to the right people. Beneficiary designations override your will, so they must be reviewed regularly, especially after major life events.
A legally binding contract between business co-owners that outlines what happens to an owner’s share if they die, become disabled, retire, or want to exit the business.
Why it matters: Without a buy-sell agreement, the death or departure of a partner can put the entire business at risk. It ensures continuity and provides a fair valuation mechanism for all parties.
The profit earned when you sell an asset (such as stocks or real estate) for more than you paid for it. Short-term gains (assets held under a year) are taxed as ordinary income; long-term gains receive preferential tax rates.
Why it matters: Strategic timing of asset sales can significantly reduce your tax liability. Understanding the difference between short- and long-term treatment is essential for tax-efficient investing.
The movement of money in and out of your business or personal finances. Positive cash flow means more money is coming in than going out.
Why it matters: Cash flow, not profit, is what keeps a business alive. Many profitable businesses fail because they run out of cash. Monitoring cash flow is critical to financial health.
A legal business structure where the company is taxed separately from its owners. C-Corps can have unlimited shareholders and are subject to corporate income tax.
Why it matters: C-Corps offer strong liability protection and are preferred for businesses seeking outside investment, but they face potential double taxation on dividends.
A tax deduction that allows businesses to recover the cost of tangible assets (equipment, vehicles, buildings) over their useful life through annual deductions.
Why it matters: Accelerated depreciation strategies like Section 179 and bonus depreciation can dramatically reduce taxable income in the year of purchase, a powerful tool for small business owners.
The practice of spreading investments across different asset classes, sectors, and geographies to reduce the risk that any single investment can significantly harm your portfolio.
Why it matters: Diversification is one of the few ‘free lunches’ in investing; it reduces risk without necessarily sacrificing expected returns.
A federal (and sometimes state) tax on the transfer of a deceased person’s assets to heirs. As of 2024, the federal exemption is over $13 million per individual.
Why it matters: High-net-worth individuals should plan proactively. Strategies like gifting, trusts, and life insurance can minimize estate tax exposure for your heirs.
The legal form a business takes, such as sole proprietorship, LLC, S-Corp, C-Corp, or partnership, each with different implications for taxes, liability, and operations.
Why it matters: Choosing the wrong entity structure can cost thousands in unnecessary taxes or expose you to personal liability. This decision should be revisited as your business grows.
A financial advisor or institution legally obligated to act in the best interest of their client, not just recommend suitable products.
Why it matters: Working with a fiduciary advisor ensures your interests come first. Not all financial advisors are fiduciaries. It’s one of the most important questions to ask when choosing an advisor.
A tax-advantaged savings account designed to help families save for future education expenses. Contributions grow tax-free when used for qualified education costs.
Why it matters: Starting early and contributing consistently can significantly offset the cost of higher education. Many states offer additional deductions for contributions to their plans.
All income earned before any deductions or taxes are applied, including wages, business income, rental income, dividends, and capital gains.
Why it matters: Gross income is the starting point for all tax calculations. Understanding what counts as income helps you plan around taxable events throughout the year.
A tax-advantaged account available to individuals enrolled in a high-deductible health plan. Contributions, growth, and withdrawals for qualified medical expenses are all tax-free.
Why it matters: HSAs offer a rare triple tax advantage. When fully funded and invested long-term, they can serve as a powerful retirement healthcare savings vehicle.
A type of trust that cannot be modified or terminated once established without the consent of the beneficiary. Assets transferred into an irrevocable trust are generally removed from your taxable estate.
Why it matters: Irrevocable trusts are a core estate planning tool for reducing estate taxes and protecting assets from creditors, though they require giving up control of those assets.
A personal retirement savings account offering tax advantages. Traditional IRAs offer tax-deductible contributions; Roth IRAs offer tax-free withdrawals in retirement.
Why it matters: IRAs are essential retirement building blocks. The right type depends on your current tax bracket versus your expected tax bracket in retirement.
A tax form issued to partners, S-Corp shareholders, or trust beneficiaries reporting their share of income, deductions, and credits from a pass-through entity.
Why it matters: If you own a business partnership or S-Corp, K-1s pass income directly to your personal tax return. Understanding K-1 timing and content is critical for accurate quarterly estimated taxes.
The ease with which an asset can be converted into cash without significantly affecting its price. Cash is the most liquid asset; real estate and private equity are among the least liquid.
Why it matters: Maintaining adequate liquidity, typically 3–6 months of expenses in accessible accounts, protects you from being forced to sell long-term investments at a bad time.
A business structure that combines the liability protection of a corporation with the tax flexibility and simplicity of a partnership or sole proprietorship.
Why it matters: LLCs are one of the most popular structures for small business owners because they protect personal assets while allowing flexible tax treatment options.
Your AGI with certain deductions added back in. MAGI is used to determine eligibility for specific tax benefits, including Roth IRA contributions and the premium tax credit.
Why it matters: Exceeding MAGI thresholds can eliminate access to valuable tax breaks. Strategic income management (like retirement contributions) can help keep MAGI in optimal ranges.
The total value of everything you own (assets) minus everything you owe (liabilities). It is the most comprehensive snapshot of your financial position.
Why it matters: Tracking net worth over time is the best single measure of financial progress. It keeps you focused on building assets and managing debt simultaneously.
A legal document for an LLC that outlines ownership percentages, member roles, profit distribution, voting rights, and what happens if a member leaves.
Why it matters: Without an operating agreement, disputes among LLC members are governed by default state rules, which may not reflect your intentions. Every multi-member LLC needs one.
A tax treatment where business income is not taxed at the entity level but instead ‘passes through’ to owners’ personal tax returns. Common with LLCs, S-Corps, and partnerships.
Why it matters: Pass-through taxation avoids the double taxation faced by C-Corps, but owners must plan for self-employment taxes and quarterly estimated payments.
The process of realigning portfolio weights by buying or selling assets to maintain your original target asset allocation as market movements shift the balance over time.
Why it matters: Without rebalancing, your portfolio can drift to a risk level you didn’t intend. Regular rebalancing enforces a buy-low, sell-high discipline.
A federal tax deduction allowing eligible self-employed individuals and small business owners to deduct up to 20% of their qualified business income from their taxable income.
Why it matters: The QBI deduction can be one of the most valuable deductions available to small business owners but it comes with income thresholds and business-type restrictions that require careful planning.
The minimum amount the IRS requires you to withdraw annually from tax-deferred retirement accounts (like Traditional IRAs and 401(k)s) starting at age 73.
Why it matters: Failing to take RMDs results in a 25% excise tax on the amount not withdrawn. Planning ahead can minimize the tax impact of forced distributions.
The process of moving money from a Traditional IRA or 401(k) into a Roth IRA, paying income taxes on the converted amount now in exchange for tax-free growth and withdrawals later.
Why it matters: Roth conversions are most valuable during low-income years. They are a strategic tool for long-term tax minimization, especially before RMDs begin.
A business structure that allows income, losses, and deductions to pass through to shareholders’ personal tax returns while potentially reducing self-employment taxes on owner compensation.
Why it matters: S-Corp election can save business owners thousands in self-employment taxes annually but it requires reasonable salary documentation and additional compliance requirements.
A Simplified Employee Pension IRA that allows self-employed individuals and small business owners to contribute up to 25% of net self-employment income (up to $69,000 in 2024).
Why it matters: The SEP-IRA offers one of the highest contribution limits of any retirement plan, making it ideal for self-employed high earners who want to reduce taxes while building retirement wealth.
When an inherited asset’s cost basis is ‘stepped up’ to its fair market value at the time of the original owner’s death, reducing the capital gains tax owed by the heir when they sell.
Why it matters: Step-up in basis is one of the most powerful estate planning tools available. Appreciated assets held until death can pass to heirs virtually capital-gains-free.
The strategy of selling investments at a loss to offset capital gains or, if losses exceed gains, up to $3,000 of ordinary income per year.
Why it matters: Tax-loss harvesting turns portfolio losses into tax savings. Harvested losses can offset gains from other sales, reducing your overall tax bill.
A legal arrangement in which a trustee holds and manages assets on behalf of beneficiaries according to the terms set by the grantor. Trusts can be revocable or irrevocable.
Why it matters: Trusts allow you to control how and when your assets are distributed, avoid probate, minimize estate taxes, and protect assets from creditors.
A type of liability insurance that provides coverage beyond the limits of your existing home, auto, or business policies.
Why it matters: High-net-worth individuals and business owners are prime targets for large lawsuits. Umbrella policies offer substantial liability protection at a relatively low cost.
A timeline that determines when an employee or founder fully owns employer-granted benefits, stock options, or retirement contributions.
Why it matters: Understanding vesting schedules is critical for evaluating job offers, business partnerships, and equity compensation. Leaving before full vesting can mean leaving significant value on the table.
The difference between a business’s current assets (cash, receivables, inventory) and current liabilities (accounts payable, short-term debt). It measures short-term financial health.
Why it matters: Adequate working capital ensures a business can meet its short-term obligations and fund day-to-day operations without relying on external financing.
This glossary is provided for informational and educational purposes only and does not constitute financial, tax, or legal advice. The definitions provided are general in nature and may not apply to every individual situation. Scout Wealth Advisors, LLC is a registered investment advisor. Please consult with a qualified financial professional before making any financial decisions.
