Chapter 4 Flashcards
What is the federal income tax structure?
- Progressive or graduated tax
- Tax rates & tax brackets
- Itemized or standard deductions
- Taxable income
AGI
Taxable income from all sources minus specific adjustments but before deducting standard or itemized deductions
___________ is a function of adjusted gross income (AGI) & the standard or itemized deductions
Taxable income
Average tax rate
The average amount of your total income taken away in taxes
Marginal tax rate
The percentage of the last dollar earned that goes to pay taxes
Tax-deferred
Income on which the payment of taxes is postponed
Capital assets
An assets you own
Capital gain
What you make if you sell a capital assets for a profit
Capital loss
What you lose when you sell a capital assets for a loss
Capital gain tax
Tax you pay on your capital gains
Lower tax rate is imposed on both long -term __________ & dividends
Capital gains
_____________ are not claimed or taxed until the assets is sold
Capital gains
Capital gain taxes for most homeowners on sale of their ________
Home (must be occupied for 2 of the 5 years prior sale)
What the different filling status when filing taxes
- Single
-Married filling jointly & surviving spouses
-Married filling separately
-Head of household
__________ change annually to reflect changes in the cost of living (inflation)
Tax brackets
____________ is also adjusted annually to reflect inflation
Standard deduction
Bracket creep
Tax increase caused by inflation increasing wages
What are the different ways to paying your income taxes?
- Pay as you go basis
-Withholding from wages
-Quarterly estimated taxes sent to the IRS
-Payments with tax return
-Withholding from stock dividends, retirement funds, and prize winnings
Withholdings are determine by income level & information on _________ form
W-4
Income based taxes
- Social security o r FICA
- State & local income taxes
Non income based taxes
- Excise taxes
-Property taxes
-Gift & estate taxes
Generaly you are not eequired to file a tax return unless your income exceeds the ___________
Standard deduction
How do you determine your gross or total income?
- Sum of all taxable income from all sources
- Active income- income from wages or a business
- Portfolio or investment income- Securities
- Passive income- activities in which the taxpayer does not actively participate
Calculating adjusted gross income
Adjusted gross income (AGI) is gross income less allowable adjustments (ex. retirement contribution, student loan interest paid, etc)
How do you subtract deduction?
- Take greater deductions between standard & itemized deductions
Itemize deductions
List of deductible expenses, such as medical expenses, tax expenses, mortgage interest payments, gifts to charity, etc
Standard deduction
Government’s best estimate of what the average person would deduct if itemizing
Taxable income
Subtract deduction from AGI
Base income tax
Intersection of filling status & taxable income in the federal income tax tables
Alternative minimum tax (AMT)
Ensures that wealthy pay enough taxes
________ reduced actual taxes paid
Tax credits
_______ phase out as AGI increase
Tax credit
What are the different types of credits to reduce tax?
- Child credit
- Education credits
-Child dependent care credit
-Earned icnome credit - Health care premium credit
- Adoption credit
Tax returns start with form _______
1040 (can be filed mail or e-file (online)
Benefits to doing e-file?
-Faste refunds
-More accurate returns
-Quick electronic confirmation
- Delete paperwork
-federale/state e-filing
File late
Form 4868- request an extension if unable to file by april 15th & include estimated tax payment
Amended return
For 1040X- file with 3 years of original tax date (amend state & local forms as well)
An _________ is an examination of tax return by the IRS
Audit (selection is higher if been audited in the past)
What are the ways to help in preparing taxes?
- Handle taxes by yourself
- Use IRS publication, IRS hotlines, & self help resources
- Hire a tax specialist
What are some strategies to lower taxes?
- Maximize deduction
-Look to capital gains & dividend income - Shift income to family member in lower tax brackets
- Receive tax-exempt income
-Defer taxes to the future
What are ways to maximize deduction?
-Use tax-deffered retirement programs
- Use you home as tax shelter
- Shift & bunch deductions
Long term _______ rate is lower than ordinary income
Capital gain (no tax for lower income earner of AGI 40k or lesss, 15% for most taxpayer earning 40k+, 20% for wealthy)
Don’t have to claim capital gains until assets is ___
Sold
Qualified dividnds from corporations are taxed at same ________ as long- term capital gains
Low rates
What is one simple way to shift income to family members in lower tax brackets?
Make gifts, recipients don’t pay taxes on gifts (allowed to give 15k tax free per yr)
Interest from state & local government debt, such as bonds, is ___________
Tax exempt
The higher your marginal tax bracket the more ___________ tax free income is
Beneficial
Equivalent taxable yield equation (used to determine which is the better investment)
= tax - free yield on the municipal bond/ (1- investor’s marginal tax bracket)
____________ retirement plans allow you to defer tax payments to the future
Tax0deferred retirement plans
__________ allows taxes to be paid on contributions & never again
Roth IRAs
Capital gains taxes are postponed until you sell the _______
Asset
