Chapter 3: Taxes Flashcards
What is meant by Progressive Taxes?
The more you make, the more you pay, but only on the amount in that tax bracket
What is tax avoidance?
A good thing; taking legal and legitimate means to avoid paying taxes such as IRA 401k funds
What is tax evasion?
BAD; illegally not paying all the taxes you owe; not reporting all income
What is a marginal tax rate?
If you owe one more dollar, what tax rate would you pay on that next dollar.
What are capital gains?
Profits from the sale of stocks
What are short term capital gains?
For less than a year and counted as regular income
What is a long term capital gain?
Treated differently than a short term, substantially better because the tax rate is a lot better
How do you calculate average tax rate?
Total amount due to the government/taxable income
What is a tax deduction?
“Write-offs”, the amount of taxes that are reduced; based on tax bracket
What is a tax credit?
Amount subtracted directly from the amount of taxes owed
What is gross income?
Everything you earn
What are the main components of gross income?
- Earned income
- Investment income
- Passive income
- Other income
What is earned income?
Usually includes wages, salary, commissions, fees, tips, and bonuses
What is investment income?
Money received in the form of dividends, interest, or rent from investments
What is passive income?
Results from business activities in which you do not directly participate, such as a limited partnership
What is meant by “other” income?
Alimony, child support, awards, lottery winnings and prizes
What is AGI?
Adjusted gross income
How do we calculate taxable income and AGI?
- Look at gross income
- Subtract adjustments from gross (paying alimony, traditional IRA, student loans) this is the AGI
- Subtract deductions
- Subtract exemptions
What is a standard deduction?
What the government gives you, $6,300 for a single person, $12,600 for a couple
What is an itemized deduction?
For most people this is mortgages, donating to nonprofit charities, and property taxes
What is an exemption?
$4,000 x number of dependents
What are the 3 categories of personal income?
- Active (earned)
- Passive
- Portfolio (investment)
What are the types of taxes?
- Taxes on purchases
- Taxes on property
- Taxes on wealth
- Taxes on earnings
What are taxes on purchases?
Sales tax and excise tax
What is taxes on property?
Real estate tax and personal property tax
What are taxes on wealth?
Federal estate tax and state inheritance tax
What is taxes on earning?
Income tax
