Chapter 4 Flashcards
Planning Your Tax Strategy
Common tax-related goals
- Knowing how current tax laws and regulations affect me
- Maintaining complete and appropriate records
- Making purchase and investment decisions that can reduce tax liability
Principle purpose of taxes
finance government activities
Four major categories of taxes
- Purchases
- Property
- Wealth
- Earnings
state and local tax added to the purchase price of products
sales tax
A tax imposed on specific goods and services, such as gasoline, cigarettes, alcoholic beverages, tires, and air travel
excise tax
Tax based on the value of land and buildings
Real estate tax
State and local governments may tax the value of automobiles, boats, furniture, and farm equipment
Personal property tax
A tax imposed on the value of a person’s property at the time of his or her death
estate tax
A tax levied on the value of property bequeathed by a deceased person
inheritance tax
non-taxed money and items transferred between individuals under $15,000
Gifts
Major financial planning factor for most; tax on earnings (wages and salary)
income tax
the starting point of preparing taxes
Proper documentation
The net amount of income, after allowable deductions, on which income tax is computed
taxable income
Money received for personal effort, such as wages, salary, commission, fees, tips, or bonuses
earned income
Money received in the form of dividends, interest, or rent from investments. Also called portfolio income.
investment income
Income resulting from business activities in which you do not actively participate.
passive income
An amount not included in gross income.
exclusion
Income that is not subject to tax
tax-exempt income
Income that will be taxed at a later date
tax-deferred income
Gross income reduced by certain adjustments (reductions), such as contributions to an individual retirement account (IRA) and alimony payments
adjusted gross income (AGI)
An investment that provides immediate tax benefits and a reasonable expectation of a future financial return
tax shelter
An amount subtracted from adjusted gross income to arrive at taxable income
tax deduction
A set amount on which no taxes are paid
standard deduction
Expenses that can be deducted from adjusted gross income, such as medical expenses, real estate property taxes, home mortgage interest, charitable contributions, casualty losses, and certain work-related expenses
itemized deductions
A deduction from adjusted gross income for yourself, your spouse, and qualified dependents that is no longer allowed.
exemption
The rate used to calculate tax on the last (and next) dollar of taxable income
marginal tax rate
Total tax due divided by taxable income
average tax rate
An amount subtracted directly from the amount of taxes owed
tax credit
A federal tax regulation which benefits low-income workers
earned income credit (EIC)
