Tax Implications of Financial Decisions

Question 1

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

Answer 1

Active Income

Question 2

The owner’s original basis in a capital asset, plus improvements or minus certain items, such as depreciation.

Answer 2

Adjusted Basis

Question 3

Important in income tax calculations. Is gross income minus deductions, such as alimony paid and deductible contributions to individual retirement accounts (IRAs)

Answer 3

Adjusted Gross Income (AGI)

Question 4

When calculating income tax, these are the deductions used to arrive at AGI. They include deductible contributions to IRAs, alimony paid, and interest forfeitures.

Answer 4

Adjustments to Income

Question 5

The return on investments after applicable income taxes are subtracted.

Answer 5

After tax return

Question 6

A tax that may be imposed on taxpayers who would otherwise have significantly reduced taxation through use of “tax preference items”

Answer 6

Alternative Minimum tax

Question 7

Converting an annuity into a stream of equal, periodic payments, such as monthly payments for life

Answer 7

Annuitization

Question 8

The amount a person has invested in an asset; the tax cost of the asset.

Answer 8

Basis

Question 9

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).

Answer 9

Capital Gain

Question 10

An excess of the basis in a capital asset over its sale price. Some capital losses are tax deductible, but personal losses area typically not deductible (such as a loss on the sale of a personal automobile)

Answer 10

Capital Losses

Question 11

The amount paid to purchase a capital asset, i.e., its cost

Answer 11

Cost Basis

Question 12

An amount deducted from adjusted gross income for each dependent claimed by a taxpayer

Answer 12

Dependency Exemption

Question 13

A tax credit created to assist low income working families

Answer 13

Earned Income Credit

Question 14

Total tax divided by total income. This is how much a taxpayer has paid on a percentage basis of their total income to taxes.

Answer 14

Effective Tax Rate

Question 15

An item of income that is not included as taxable income (interest, from public purpose municipal bonds)

Answer 15

Exclusion (Tax)

Question 16

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)

Answer 16

Exclusion Ratio

Question 17

Pertains to tax returns. Each filer has a filing status. Standard deduction amounts and taxes assessed vary based on filing status

Answer 17

Filing Status

Question 18

Annuity issued by insurance companies that grows, tax-deferred, and pays a guaranteed rate of interest. When annuitized it will pay a periodic payment, typically for life.

Answer 18

Fixed Annuity

Question 19

Enables an individual to gift up to $15,000 per year of present interest gifts to each of a many recipients they choose with out incurring a federal gift tax

Answer 19

Gift tax exclusion

Question 20

Pertains to income taxation. Is the starting point for calculating income taxes. It includes all income from all sources.

Answer 20

Gross Income

Question 21

The length of time an asset is owned (held). For tax purposes, a holding period is short term if it is one year or less; it is long term if it is more than one year

Answer 21

Holding period

Question 22

Pertains to the calculations of income tax. Are specialized expenses that are totaled and then subtracted from adjusted gross income in the tax calculation process.

Answer 22

Itemized Deduction

Question 23

Pertains to unearned income of children under the age of 19, or under age 24 if fulltime student. Unearned income above a certain amount is taxed at the parents top marginal tax rate. (2019 unearned income in excess of $2,100 is subject to taxation at the fiduciary tax rate.

Answer 23

Kiddie tax

Question 24

A partnership in which there are two classes of investors: Limited partners and general partners. The general partners promote, build, develop, or manage the partnership, while the limited partners are primarily investors.

Answer 24

Limited Partnership

Question 25

The tax rate at which the last dollar of taxable income is taxed

Answer 25

Marginal Tax Bracket

Question 26

Pertains to income taxation. It represents the total tax due for the year

Answer 26

Net Tax Liability

Question 27

Exceptions in the tax code where a gain is realized but not recognized for tax purposes, such as the gain on the sale of a principal residence when certain conditions are met.

Answer 27

Nonrecognition Provisions

Question 28

Initialism for “old age, survivors, and disability insurance.” namely Social Security. The “HI” is an initialism for “health insurance”, namely Medicare.

Answer 28

OASDI-HI

Question 29

An association of two or more owners to carry on a business for profit.

Answer 29

Partnership

Question 30

A trade or business in which the taxpayer does not materially participate on a regular, continuous, and substantial basis; or generally, an activity involving the of property, whether the investor materially participates or not. It is a distinction made for tax purposes.

Answer 30

Passive Activity

Question 31

Income and gains from capital assets that generate interest, dividends, royalties, and capital gains.

Answer 31

Portfolio Income

Question 32

A technique of reducing taxation that involves delaying taxation until some point in the future. While the delay may postpone taxation until the individual is in a lower tax bracket, it is frequently takes advantage of time value of money concepts: money that is not paid out now in taxes can instead be put to use to earn dollars over time

Answer 32

Postponing Taxation

Question 33

Also known as realty. Land and items attached to the land

Answer 33

Real Property

Question 34

A payment to an owner for use of property, such as royalties from an oil and gas lease

Answer 34

Royalties

Question 35

An education savings account for postsecondary education. It has very high contribution limits, and there are no contribution phaseouts based on income.

Answer 35

Section 529 Plan

Question 36

A tax imposed on self-employed individuals for OASDI-HI (i.e., Social Security and Medicare

Answer 36

Self-Employment tax

Question 37

A tax reduction strategy that involves shifting assets from individuals in high tax brackets to those in low tax brackets

Answer 37

Shifting the tax burden to others

Question 38

A closely held business in which there is a single owner. The business is not considered a separate entity from the person for tax, liability, or other purposes.

Answer 38

Sole Proprietorship

Question 39

A deduction that any taxpayer may take from AGI, with the amount available being determined by the taxpayer’s filing status. It is used in place of itemized deductions if it exceeds the itemized deduction amount available.

Answer 39

Standard Deduction

Question 40

A deduction that offsets the calculated tax dollar for dollar. Credits are allowed for the elderly and the permanently and totally disabled, child and dependent care expenses, foreign taxes paid, expense for the construction and rehabilitation of qualified low-income housing, etc.

Answer 40

Tax Credit

Question 41

A tax-saving technique that uses tax deductions, exemptions, and credits to reduce otherwise taxable income or the tax itself, or a technique that results in nontaxable income or in economic benefit that is not taxable.

Answer 41

Tax Elimination or reduction

Question 42

An exemption or deduction that is considered in calculating the alternative minimum tax

Answer 42

Tax Preference Item

Question 43

The amount upon which the appropriate income tax is calculated. It consists of income after subtracting adjustments, deductions and personal exemptions.

Answer 43

Taxable Income

Question 44

Any tax imposed on the privilege of shifting property ownership from one person to another.

Answer 44

Transfer Tax

Question 45

Annuity issued by insurance companies that grows tax- deferred and earns a varying rate of return depending upon how the investments in the annuity perform. When annuitized, it will pay a varying periodic payment, typically for life.

Answer 45

Variable Annuity