Taxation in Finance

Question 1

What is income tax?

Answer 1

A tax levied on income earned by individuals, corporations, and other legal entities.

Question 2

How does progressive tax brackets affect income tax?

Answer 2

Higher levels of income are taxed at higher rates.

Question 3

What is capital gains tax?

Answer 3

A tax on the profit made from selling an asset for more than its purchase price.

Question 4

What is the difference between short-term and long-term capital gains?

Answer 4

Short-term gains (held <1 year) are taxed higher than long-term gains (held >1 year).

Question 5

What is dividend tax?

Answer 5

A tax on dividend income received by shareholders.

Question 6

What is the difference between qualified and non-qualified dividends?

Answer 6

Qualified dividends are taxed at lower capital gains rates; non-qualified dividends are taxed at ordinary rates.

Question 7

What are payroll taxes?

Answer 7

Taxes on wages that fund social security, healthcare, and unemployment programs.

Question 8

What is Value-Added Tax (VAT)?

Answer 8

A consumption tax levied on the added value at each production stage.

Question 9

What is sales tax?

Answer 9

A tax applied at the point of sale, paid by the consumer on goods and services.

Question 10

What is estate tax?

Answer 10

A tax on the transfer of wealth upon death, based on the estate’s total value.

Question 11

What is gift tax?

Answer 11

A tax on wealth transferred between individuals during their lifetimes.

Question 12

What is excise tax?

Answer 12

A tax imposed on specific goods, like tobacco, alcohol, and gasoline.

Question 13

What is international taxation?

Answer 13

Taxation that applies to individuals or corporations with tax obligations in multiple countries.

Question 14

What is taxable income?

Answer 14

The portion of income subject to tax after deductions, credits, and exemptions.

Question 15

What is the difference between marginal and effective tax rates?

Answer 15

Marginal tax rate applies to the last dollar earned; effective tax rate is the average rate.

Question 16

What is the purpose of tax deductions?

Answer 16

Deductions reduce taxable income, e.g., business expenses, mortgage interest.

Question 17

What is the purpose of tax credits?

Answer 17

Credits reduce tax owed directly, e.g., child tax credit, renewable energy credits.

Question 18

What is depreciation?

Answer 18

A tax-deductible expense that reflects wear and tear on tangible assets over time.

Question 19

What is amortization?

Answer 19

A deduction that applies to intangible assets like patents, reducing taxable income.

Question 20

What is tax-loss harvesting?

Answer 20

Selling securities at a loss to offset capital gains, reducing tax liability.

Question 21

What is the purpose of income deferral?

Answer 21

Delaying income recognition to a future year with a lower tax rate.

Question 22

What are tax-advantaged accounts?

Answer 22

Accounts like IRAs and 401(k)s that allow tax-free or tax-deferred investment growth.

Question 23

Why do some prefer capital gains over income?

Answer 23

Capital gains are often taxed at lower rates than regular income.

Question 24

What is international tax planning?

Answer 24

Structuring global operations to minimize tax liabilities using tax treaties and lower-tax jurisdictions.

Question 25

What is transfer pricing?

Answer 25

Setting prices for transactions between subsidiaries to manage where profits are taxed.

Question 26

What is a tax inversion?

Answer 26

Relocating headquarters to a low-tax country to reduce corporate tax burden.

Question 27

What is double taxation on corporate profits?

Answer 27

Profits are taxed at corporate level and again when distributed as dividends.

Question 28

What are withholding taxes?

Answer 28

Taxes on income earned by non-residents, like dividends and royalties.