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 in income tax calculations. Is gross income minus deductions, such as alimony paid and deductible contributions to individual retirement accounts (IRAs)
Adjusted Gross Income (AGI)
When calculating income tax, these are the deductions used to arrive at AGI. They include deductible contributions to IRAs, alimony paid, and interest forfeitures.
Adjustments to Income
The return on investments after applicable income taxes are subtracted.
After tax return
A tax that may be imposed on taxpayers who would otherwise have significantly reduced taxation through use of “tax preference items”
Alternative Minimum tax
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 capital losses are tax deductible, but personal losses area typically not deductible (such as a loss on the sale of a personal automobile)
Capital Losses
The amount paid to purchase a capital asset, i.e., its cost
Cost Basis
An amount deducted from adjusted gross income for each dependent claimed by a taxpayer
Dependency Exemption
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 (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
Pertains to tax returns. Each filer has a filing status. Standard deduction amounts and taxes assessed vary based on filing status
Filing Status
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.
Fixed Annuity
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
Gift tax exclusion
Pertains to income taxation. Is the starting point for calculating income taxes. It includes all income from all sources.
Gross Income
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
Holding period
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.
Itemized Deduction
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.
Kiddie tax
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.
Limited Partnership
The tax rate at which the last dollar of taxable income is taxed
Marginal Tax Bracket
Pertains to income taxation. It represents the total tax due for the year
Net Tax Liability
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.
Nonrecognition Provisions
Initialism for “old age, survivors, and disability insurance.” namely Social Security. The “HI” is an initialism for “health insurance”, namely Medicare.
OASDI-HI
An association of two or more owners to carry on a business for profit.
Partnership
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.
Passive Activity
Income and gains from capital assets that generate interest, dividends, royalties, and capital gains.
Portfolio Income
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
Postponing Taxation
Also known as realty. Land and items attached to the land
Real Property
A payment to an owner for use of property, such as royalties from an oil and gas lease
Royalties
An education savings account for postsecondary education. It has very high contribution limits, and there are no contribution phaseouts based on income.
Section 529 Plan
A tax imposed on self-employed individuals for OASDI-HI (i.e., Social Security and Medicare
Self-Employment tax
A tax reduction strategy that involves shifting assets from individuals in high tax brackets to those in low tax brackets
Shifting the tax burden to others
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.
Sole Proprietorship
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.
Standard Deduction
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.
Tax Credit
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.
Tax Elimination or reduction
An exemption or deduction that is considered in calculating the alternative minimum tax
Tax Preference Item
The amount upon which the appropriate income tax is calculated. It consists of income after subtracting adjustments, deductions and personal exemptions.
Taxable Income
Any tax imposed on the privilege of shifting property ownership from one person to another.
Transfer Tax
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.
Variable Annuity
