Chapter 4 Flashcards
tax planning:
Seeking legal ways to reduce, eliminate, or defer income taxes.
taxable income
This amount is determined by subtracting various exclusions, adjustments, and deductions from total income, with the result being the income upon which the income tax is actually figured.
Taxes
Compulsory government-imposed charges levied on citizens and their property.
progressive tax
A tax that progressively increases as a taxpayer’s taxable income increases. –requires a higher tax rate as income increases.
Regressive Tax
demands a decreasing proportion of one’s income as income increases.
marginal tax bracket (MTB) or marginal tax rate
One of seven income-range segments at which income is taxed at increasing rates. Also known as marginal tax rate.
chained consumer price index (CPI)
A measure of the general level of price increases used to adjust tax brackets. Prices increases are lower with this measure as consumer substitutions are considered in the calculations.
tax-rate schedules: Tables used to calculate the income tax on any amount of taxable income.
Average tax rate
Proportion of total income paid in income taxes. The average amount of one’s total gross income that is paid in taxes, which is always less than the marginal tax rate.
Tax-deferred
investments on which applicable taxes are paid at a future date instead of in the period in which they are incurred.
total income:
compensation from all sources
Earned income
compensation for performing personal services
capital gain
Increase in the value of an initial investment (less costs) realized upon the sale of the investment.
An asset is property owned by a taxpayer for personal use or as an investment that has monetary value.
Examples of assets
a vintage car, a boat, jewelry, stocks, bonds, mutual funds, land, art, gems, stamps, coins, and homes. The net income, if any, received from the sale of an asset above the costs incurred to purchase and sell it is a capital gain.
capital loss
results when the sale of an asset brings less income than the costs of purchasing and selling the asset. Capital gains and losses on investments must be reported on our tax return. Capital gains from the sale or exchange of property held for personal use, such as on a vehicle or vacation home, must be reported as income, but losses on such property are not deductible.
short-term gain (or loss)
occurs when we sell an asset that we have owned for one year or less; it is taxed at the same rates as ordinary income, which is all income other than capital gains
