11 Basic Tax Management Flashcards
What is Adjusted Gross Income (AGI)?
Gross income less any exclusions and adjustments
AGI is used to determine how much of your income is taxable.
What are adjustments to income?
Allowable subtractions from gross income
Adjustments can include student loan interest and retirement plan contributions.
What is the American Opportunity Tax Credit?
A partially refundable tax credit to help defray college expenses for the first four years of postsecondary education
This credit is designed to assist students and their families with education costs.
What is the Child and Dependent Care Tax Credit?
A nonrefundable tax credit for workers paying employment-related care expenses for a child or dependent
This credit is available if the care allows the employee to work or attend school full time.
Define a defined contribution retirement plan.
An IRS-approved retirement plan sponsored by employers, allowing pretax contributions that lower tax liability
Examples include 401(k) plans.
What is a dependent?
A relative or household member being financially supported by the taxpayer
Dependents can include children or elderly relatives.
What is the Earned Income Tax Credit (EITC)?
A refundable tax credit for workers with a qualifying child, and in certain cases by childless workers
EITC is aimed at low to moderate-income working individuals and families.
What are exclusions in tax terms?
Income not subject to federal tax
Common exclusions include certain gifts and inheritances.
What is filing status?
Description of a taxpayer’s marital status as of the last day of the tax year
Filing statuses include Single, Married Filing Jointly, Married Filing Separately, and Head of Household.
Define gross income.
All income received in the form of money, goods, services, and/or property
Gross income includes wages, dividends, alimony, and rental income.
What is an Individual Retirement Account (IRA)?
An investment account that reduces current-year income, allowing funds to accumulate tax-free
IRAs can be traditional or Roth, with different tax implications.
What is an itemized deduction?
A tax-deductible expense
Common itemized deductions include mortgage interest and medical expenses.
What is the Lifetime Learning Credit?
A nonrefundable tax credit for tuition and related expenses for postsecondary education to improve job skills
Unlike the American Opportunity Credit, it is available for all years of education.
What are matching contributions?
Employer programs that match employees’ 401(k) contributions up to a particular percentage
This incentivizes employees to save for retirement.
Define nonrefundable tax credits.
A tax credit that can reduce tax liability only to zero, with no possibility of a refund
Examples include certain education credits.
What are refundable tax credits?
Tax credits that can reduce income tax liability to below zero, with the excess refunded to the taxpayer
The Earned Income Tax Credit is an example.
What is a Roth IRA?
An individual retirement account of investments made with after-tax money
Qualified withdrawals from a Roth IRA are tax-free.
Define standard deduction.
Fixed amount that all taxpayers may subtract from their adjusted gross income if they do not itemize their deductions
The standard deduction amount varies based on filing status.
What is tax avoidance?
Reducing tax liability through legal techniques
This includes using deductions and credits effectively.
What are tax credits?
Dollar-for-dollar decrease in tax liability
Tax credits can significantly reduce the amount owed to the IRS.
Define tax evasion.
Deliberately hiding income from the IRS or falsely claiming deductions
Tax evasion is illegal and can lead to severe penalties.
What is a tax refund?
Amount the IRS sends back to a taxpayer if withholding and estimated payments exceed the tax liability
Tax refunds are common for individuals who overpay their taxes throughout the year.
What is taxable income?
Income upon which income taxes are levied
Taxable income is calculated after deductions and exemptions.
What are taxes?
Compulsory government-imposed charges levied on citizens and their property
Taxes fund government services and infrastructure.
