Chapter 3: Taxes Flashcards

1
Q

What is meant by Progressive Taxes?

A

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

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2
Q

What is tax avoidance?

A

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

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3
Q

What is tax evasion?

A

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

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4
Q

What is a marginal tax rate?

A

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

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5
Q

What are capital gains?

A

Profits from the sale of stocks

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6
Q

What are short term capital gains?

A

For less than a year and counted as regular income

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7
Q

What is a long term capital gain?

A

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

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8
Q

How do you calculate average tax rate?

A

Total amount due to the government/taxable income

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9
Q

What is a tax deduction?

A

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

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10
Q

What is a tax credit?

A

Amount subtracted directly from the amount of taxes owed

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11
Q

What is gross income?

A

Everything you earn

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12
Q

What are the main components of gross income?

A
  1. Earned income
  2. Investment income
  3. Passive income
  4. Other income
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13
Q

What is earned income?

A

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

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14
Q

What is investment income?

A

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

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15
Q

What is passive income?

A

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

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16
Q

What is meant by “other” income?

A

Alimony, child support, awards, lottery winnings and prizes

17
Q

What is AGI?

A

Adjusted gross income

18
Q

How do we calculate taxable income and AGI?

A
  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
19
Q

What is a standard deduction?

A

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

20
Q

What is an itemized deduction?

A

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

21
Q

What is an exemption?

A

$4,000 x number of dependents

22
Q

What are the 3 categories of personal income?

A
  1. Active (earned)
  2. Passive
  3. Portfolio (investment)
23
Q

What are the types of taxes?

A
  1. Taxes on purchases
  2. Taxes on property
  3. Taxes on wealth
  4. Taxes on earnings
24
Q

What are taxes on purchases?

A

Sales tax and excise tax

25
What is taxes on property?
Real estate tax and personal property tax
26
What are taxes on wealth?
Federal estate tax and state inheritance tax
27
What is taxes on earning?
Income tax