M8: Tax Implications of Financial Decisions Flashcards
Earned income from salaries and wages, and, generally, any income that you actively do something to earn and on which you pay Social Security taxes.
Active income
The owner’s original basis in a capital asset, plus improvements or minus certain items, such as depreciation.
Adjusted basis
Important to income tax calculations. blank is gross income minus deductions, such as alimony paid (if pursuant to a pre-2019 divorce decree) and deductible contributions to individual retirement accounts (IRAs).
Adjusted gross income (AGI)
When calculating income tax, these are the deductions used to arrive at adjusted gross income. They include deductible contributions to IRAs, alimony paid (if pursuant to a pre-2019 divorce decree0, and interest forfeitures.
Adjustments to income
The return on investments after applicable income taxes are subtracted. An investment with a before-tax return of 8% would have an blank of 6.1% for an individual in the 24% bracket. This is calculated by multiplying .08 minus the tax bracket of .24: (.08 [1-.24]).
After-tax return
A tax that may be imposed on taxpayers who would otherwise have significantly reduced taxation through the use of “tax preference items.” If the calculated blank is higher than the regular tax as calculated, the blank is payable.
Alternative minimum tax (AMT)
Converting an annuity into a stream of equal, periodic payments, such as monthly payments for life.
Annuitization
The amount a person has invested in an asset; the tax cost of the asset.
Basis
An excess of the sale price of a capital asset—such as a stock, a bond, a personal automobile, or a home—over its basis (generally its purchase price).
Capital gain
An excess of the basis in a capital asset over its sale price. Some blanks are tax deductible, but personal losses are typically not deductible (such as a loss on the sale of a personal automobile).
Capital loss
A tax credit available to working parents to recoup a portion of day care expenses.
Child and dependent care credit
The amount paid to purchase a capital asset, i.e., its cost.
Cost basis
An education savings account for minors, with a limited contribution amount of $2,000 a year per beneficiary. It can be used for K-12 as well as college costs.
Coverdell education savings account
a tax credit created to assist low-income working families.
Earned income credit
Total tax divided by total income. This is how much a taxpayer has paid on a percentage basis of their total income to taxes.
Effective tax rate
An item of income that is not included as taxable income (e.g., interest from public purpose municipal bonds).
Exclusion (tax)
A calculation when there is both a return of principal and earnings, such as with annuities. This ratio determines how much to “exclude” from taxable income (and the balance would then be taxable).
Exclusion ratio
The price at which property will change hands between a willing buyer and a willing seller, both with knowledge of the relevant facts, when neither is compelled to buy or sell.
Fair market value
Pertains to tax returns. Each taxpayer has a blank: married filing jointly, married filing separately, single, head of household, or qualifying widow(er) with a dependent. Estates and trusts are another filing status. Standard deduction amounts and taxes assessed vary based upon blank.
Filing status
