chapter 3 Flashcards
components of federal income
federal outlays
federal income: greatest to least - individual income taxes 48.1% - social insurance/retirement: 33.5% - corporate income tax: 10.1% outlays - social security/medicare/retirement: 37% - national defense, veterans, foreign affairs: 18% - social programs: 17% - net interest on debt: 14%
two taxation philosophies
- benefits- received philosophy: those who receive the benefit of an expenditure should pay for it (tolls)
- ability to pay: those with higher incomes should pay proportionally more taxes
Vertical equity
progressive tax
regressive tax
flat tax
vertical equity: people in different income groups pay different amounts of taxes
progressive tax: more you make, more you pay (% of income) state and federal income taxes
regressive tax: smaller percentage taken as income rises. (established dollar amount is smaller percentage for someone with a higher income- sales tax)
Flat tax: same % of tax regardless of income. SIMPLIFIED (less paperwork, few loopholes)
Taxes range between ___ and ____ % of average American’s income
20-40%
The average American family pays about __ % of its income in taxes
32%
tax avoidance
tax evasion
tax avoidance: legitimate methods of reducing taxes
- buying tax free municipal bonds, investing in tax-deferred IRA, shifting assets to children, make charitable contributions- generate tax deductions
tax evasion: illegal methods to reduce taxes
- penalties: payment of back taxes with interest, criminal and civil penalities
marginal tax rate
average tax rate
marginal: tax rate applied to last dollar earned
- the bracket someone falls into
average: taxes paid/ income
4 main types of taxes
income tax: taxes on earnings (income and interest)
excise tax: imposed on specific goods and services. taxes on purchases
Taxes on property: homes, cars, boats, etc.
taxes on wealth:
- estate tax: tax on value of deceased person’s net worth
- inheritance tax: money and property passed down to successor is subject to taxation
homestead exemption
average property tax
homestead exemption: some states apply this to those 65 and older, disabled, blind, etc.
property tax for $150,000 home ranges from 1,000-5,000/ yr
gift tax
amount exemption
gift tax: federal tax a giver of a sizable gift may have to pay
- estate and gift tax exemption: beneficiaries can receive up to $5 million tax free
Who pays federal income tax?
3/4 of Americans pay income taxes
Single, under 65: gross income of at least $7050
married filing jointly, both under 65: at least $12,700
married filing separately, any age: at least $2750
4 different filing statuses:
- married filing jointly: combo of couple’s income
- married filing separately: may be beneficial in certain circumstances
- individual returns: never married, is divorced, legally separated with no dependents
- head of household: unmarried individual or widow paying for more than 1/2 of costs for child or dependent relative
3 basic tax forms that most people use
Form 1040: most used. if income is over $50,000 or if you can be claimed as a dependent and had dividends
Form 1040A: less than $50,000 and no itemized deductions besides IRA’s
Form 1040EZ: easiest to file. most commonly used by college students. single/ married without dependents, making less than $50,000 and less than $500 in interest income
tax deduction
standard deduction
tax deduction: amount a person or business can reduce from their taxable income
standard deduction: easier method, uses taxpayers main filing status
When are taxes due?
If not submitted by due date?
Postmarked by April 15th
should file Form 4868: application for automatic extension of time: give taxpayer up to 4 months
how are child support and alimony claimed in taxes?
child support usually has no tax consequences (neither deductible by payer nor included in recipient’s income)
alimony: deductible by payer
non-deductible categories from federal income tax
deductible categories
non-deductible: cosmetic surgery (for appearance), traffic violations, attorney’s fees for will, life insurance premiums and death benefits, workers comp.
deductible: home offices, income tax preparation fees, mileage for driving to volunteer work, up to $1500 in student loan interest
withholding
withholding: requires employers to deduct federal income tax from your pay and send to govt. based on expected deductions and number of exemptions that employee has claimed on W-4 form. employer sends W-2 to employee reporting annual earnings and amount deducted.
when is a refund due?
when your employer has deducted too much from your paycheck and govt owes you money
- if you file complete and accurate tax return your refund will be issued within 21 days
3 categories of people most likely to be audited
- people in cash businesses (hairdresser, waitress, bartender etc.)
- certain professionals (doctors, lawyers, accountants)
- people taking unusually large deductions
3 kinds of audits
- correspondence audits: minor mistakes, mail inquiry
- office audits: require that you visit the IRS office
- field audits: more complex. auditor visits you at home/business
how many people pay others to do their taxes?
over 40 million US taxpayers
why is OWNING a home or property a tax-sheltered investment
because interest on mortgage and real estate payments of a primary residence is tax-deductible and reduces taxable income
what are some beneficial financial decisions that affect taxes?
owning vs renting
job-related expenses: tuition, books, equipment, subscriptions, computers, cars, telephones, memberships)
moving expenses: more than 50 miles
home office
travel and entertainment expenses: as long as it is directly related to business
- unreimbursed business travel expenses for self-employed are fully deductible
