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Family Financial Analysis exam 1 > chapter 3 > Flashcards

chapter 3 Flashcards

1
Q

components of federal income

federal outlays

A 
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%
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2
Q

two taxation philosophies

A
  1. benefits- received philosophy: those who receive the benefit of an expenditure should pay for it (tolls)
  2. ability to pay: those with higher incomes should pay proportionally more taxes
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3
Q

Vertical equity
progressive tax
regressive tax
flat tax

A

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)

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4
Q

Taxes range between ___ and ____ % of average American’s income

A

20-40%

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5
Q

The average American family pays about __ % of its income in taxes

A

32%

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6
Q

tax avoidance

tax evasion

A

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

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7
Q

marginal tax rate

average tax rate

A

marginal: tax rate applied to last dollar earned
- the bracket someone falls into
average: taxes paid/ income

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8
Q

4 main types of taxes

A

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

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9
Q

homestead exemption

average property tax

A

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

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10
Q

gift tax

amount exemption

A

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

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11
Q

Who pays federal income tax?

A

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

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12
Q

4 different filing statuses:

A
  1. married filing jointly: combo of couple’s income
  2. married filing separately: may be beneficial in certain circumstances
  3. individual returns: never married, is divorced, legally separated with no dependents
  4. head of household: unmarried individual or widow paying for more than 1/2 of costs for child or dependent relative
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13
Q

3 basic tax forms that most people use

A

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

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14
Q

tax deduction

standard deduction

A

tax deduction: amount a person or business can reduce from their taxable income
standard deduction: easier method, uses taxpayers main filing status

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15
Q

When are taxes due?

If not submitted by due date?

A

Postmarked by April 15th

should file Form 4868: application for automatic extension of time: give taxpayer up to 4 months

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16
Q

how are child support and alimony claimed in taxes?

A

child support usually has no tax consequences (neither deductible by payer nor included in recipient’s income)
alimony: deductible by payer

17
Q

non-deductible categories from federal income tax

deductible categories

A

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

18
Q

withholding

A

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.

19
Q

when is a refund due?

A

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

20
Q

3 categories of people most likely to be audited

A
  1. people in cash businesses (hairdresser, waitress, bartender etc.)
  2. certain professionals (doctors, lawyers, accountants)
  3. people taking unusually large deductions
21
Q

3 kinds of audits

A
  1. correspondence audits: minor mistakes, mail inquiry
  2. office audits: require that you visit the IRS office
  3. field audits: more complex. auditor visits you at home/business
22
Q

how many people pay others to do their taxes?

A

over 40 million US taxpayers

23
Q

why is OWNING a home or property a tax-sheltered investment

A

because interest on mortgage and real estate payments of a primary residence is tax-deductible and reduces taxable income

24
Q

what are some beneficial financial decisions that affect taxes?

A

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

25
Q

Hope credit

Lifetime learning credit

A

Hope credit: for tuition and related expenses in elligible institutions
- 100% of first $1000 of tuition expenses for 1st two years
- 50% for next $1000 after that
Lifetime learning credit: tuition and fees for undergraduate, job aquisition skills, and graduate courses
- max 20% of qualified expenses
- max of $10,000

26
Q

how investments affects taxes?

A

tax exempt: if you are in a higher tax bracket you may be interested in tax exempt investments
tax-deferred: put off the payment of taxes until a later date. beneficial to pull back out and pay taxes later when you are in a lower tax bracket

27
Q

capital gains

custodial account

A

capital gains: profits form the sale of a capital asset
- tax deferred: do not have to pay tax on gains until you sell the asset
custodial account: parents making investments on their child’s behalf

28
Q

most common mistakes in filing taxes:

A
  1. not signing
  2. doing math wrong
  3. wrongly claimed child support, alimony, dependents
29
Q

Fewer than ___ of all individual income tax returns are audited each year

A

1%

30
Q

average cost of hiring is __ for someone to do taxes

A

$80

31
Q

when can a child begin to file their own taxes?

A

14 years old

32
Q

Typical property tax for $625-675K home

how is value determined?

A

$8-10K
more crowded areas are more expensive taxes
based on CURRENT MARKET VALUE not what you bought it for

33
Q

taxable income

A

everything earned (including dividends from investments) that can be taxed

Family Financial Analysis exam 1 (5 decks)

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