Chapter 3: Taxes

Question 1

What is meant by Progressive Taxes?

Answer 1

The more you make, the more you pay, but only on the amount in that tax bracket

Question 2

What is tax avoidance?

Answer 2

A good thing; taking legal and legitimate means to avoid paying taxes such as IRA 401k funds

Question 3

What is tax evasion?

Answer 3

BAD; illegally not paying all the taxes you owe; not reporting all income

Question 4

What is a marginal tax rate?

Answer 4

If you owe one more dollar, what tax rate would you pay on that next dollar.

Question 5

What are capital gains?

Answer 5

Profits from the sale of stocks

Question 6

What are short term capital gains?

Answer 6

For less than a year and counted as regular income

Question 7

What is a long term capital gain?

Answer 7

Treated differently than a short term, substantially better because the tax rate is a lot better

Question 8

How do you calculate average tax rate?

Answer 8

Total amount due to the government/taxable income

Question 9

What is a tax deduction?

Answer 9

“Write-offs”, the amount of taxes that are reduced; based on tax bracket

Question 10

What is a tax credit?

Answer 10

Amount subtracted directly from the amount of taxes owed

Question 11

What is gross income?

Answer 11

Everything you earn

Question 12

What are the main components of gross income?

Answer 12

1. Earned income
2. Investment income
3. Passive income
4. Other income

Question 13

What is earned income?

Answer 13

Usually includes wages, salary, commissions, fees, tips, and bonuses

Question 14

What is investment income?

Answer 14

Money received in the form of dividends, interest, or rent from investments

Question 15

What is passive income?

Answer 15

Results from business activities in which you do not directly participate, such as a limited partnership

Question 16

What is meant by “other” income?

Answer 16

Alimony, child support, awards, lottery winnings and prizes

Question 17

What is AGI?

Answer 17

Adjusted gross income

Question 18

How do we calculate taxable income and AGI?

Answer 18

1. Look at gross income
2. Subtract adjustments from gross (paying alimony, traditional IRA, student loans) this is the AGI
3. Subtract deductions
4. Subtract exemptions

Question 19

What is a standard deduction?

Answer 19

What the government gives you, $6,300 for a single person, $12,600 for a couple

Question 20

What is an itemized deduction?

Answer 20

For most people this is mortgages, donating to nonprofit charities, and property taxes

Question 21

What is an exemption?

Answer 21

$4,000 x number of dependents

Question 22

What are the 3 categories of personal income?

Answer 22

1. Active (earned)
2. Passive
3. Portfolio (investment)

Question 23

What are the types of taxes?

Answer 23

1. Taxes on purchases
2. Taxes on property
3. Taxes on wealth
4. Taxes on earnings

Question 24

What are taxes on purchases?

Answer 24

Sales tax and excise tax

Question 25

What is taxes on property?

Answer 25

Real estate tax and personal property tax

Question 26

What are taxes on wealth?

Answer 26

Federal estate tax and state inheritance tax

Question 27

What is taxes on earning?

Answer 27

Income tax