Chapter 4

Question 1

Common tax-related goals

Answer 1

• Knowing how current tax laws and regulations affect me
• Maintaining complete and appropriate records
• Making purchase and investment decisions that can reduce tax liability

Question 2

Principle purpose of taxes

Answer 2

finance government activities

Question 3

Four major categories of taxes

Answer 3

• Purchases
• Property
• Wealth
• Earnings

Question 4

state and local tax added to the purchase price of products

Answer 4

sales tax

Question 5

A tax imposed on specific goods and services, such as gasoline, cigarettes, alcoholic beverages, tires, and air travel

Answer 5

excise tax

Question 6

Tax based on the value of land and buildings

Answer 6

Real estate tax

Question 7

State and local governments may tax the value of automobiles, boats, furniture, and farm equipment

Answer 7

Personal property tax

Question 8

A tax imposed on the value of a person’s property at the time of his or her death

Answer 8

estate tax

Question 9

A tax levied on the value of property bequeathed by a deceased person

Answer 9

inheritance tax

Question 10

non-taxed money and items transferred between individuals under $15,000

Answer 10

Gifts

Question 11

Major financial planning factor for most; tax on earnings (wages and salary)

Answer 11

income tax

Question 12

the starting point of preparing taxes

Answer 12

Proper documentation

Question 13

The net amount of income, after allowable deductions, on which income tax is computed

Answer 13

taxable income

Question 14

Money received for personal effort, such as wages, salary, commission, fees, tips, or bonuses

Answer 14

earned income

Question 15

Money received in the form of dividends, interest, or rent from investments. Also called portfolio income.

Answer 15

investment income

Question 16

Income resulting from business activities in which you do not actively participate.

Answer 16

passive income

Question 17

An amount not included in gross income.

Answer 17

exclusion

Question 18

Income that is not subject to tax

Answer 18

tax-exempt income

Question 19

Income that will be taxed at a later date

Answer 19

tax-deferred income

Question 20

Gross income reduced by certain adjustments (reductions), such as contributions to an individual retirement account (IRA) and alimony payments

Answer 20

adjusted gross income (AGI)

Question 21

An investment that provides immediate tax benefits and a reasonable expectation of a future financial return

Answer 21

tax shelter

Question 22

An amount subtracted from adjusted gross income to arrive at taxable income

Answer 22

tax deduction

Question 23

A set amount on which no taxes are paid

Answer 23

standard deduction

Question 24

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

Answer 24

itemized deductions

Question 25

A deduction from adjusted gross income for yourself, your spouse, and qualified dependents that is no longer allowed.

Answer 25

exemption

Question 26

The rate used to calculate tax on the last (and next) dollar of taxable income

Answer 26

marginal tax rate

Question 27

Total tax due divided by taxable income

Answer 27

average tax rate

Question 28

An amount subtracted directly from the amount of taxes owed

Answer 28

tax credit

Question 29

A federal tax regulation which benefits low-income workers

Answer 29

earned income credit (EIC)