Personal Finance - Ch 3

Front 1

Types of Taxes

Back 1

1. Taxes on Purchases
- sales & excise tax
2. Taxes on Property
- real estate property tax & personal property tax
3. Taxes on Wealth
- federal estate tax, state inheritance tax
4. Taxes on Earnings
- Social Security, income tax

Front 2

Types on Income

Back 2

1. Earned Income - usually in the form on wages, salaries, tips or bonuses

2. Investment income - money received in the form of dividends or interest

3. Passive Income - results from business activities in which you don't actively participate (limited partnership)

Front 3

exclusion

Back 3

amount not included in gross income

Front 4

tax-exempt income

Back 4

income that is not subject to tax

ex - bonds are exempt from tax

Front 5

tax-deferred income

Back 5

income that will be taxed at a later date

Front 6

Basics of Federal Income Tax

Back 6

step 1: determining adjusted gross income

step 2: computing taxable income

step 3: calculating taxed owed

step 4: making tax payments

step 5: watching deadlines and avoiding penalties

Front 7

Adjustments to Income

Back 7

Adjusted Gross Income (AGI) - gross income reduced by certain adjustments

ex) contributions to individual's retirement account or alimony payments

Front 8

tax deduction

Back 8

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

Front 9

standard deduction

Back 9

a set amount on which no taxes are paid

Front 10

itemized deductions

Back 10

expenses that can be deducted from adjusted gross income

ex) medical expenses, real estate property, home mortgage, charitable contributions, theft losses, interest, moving, job-related

Front 11

exemptions

Back 11

a deduction from adjusted gross income for yourself, spouse and qualified dependents

Front 12

marginal tax vs average tax

Back 12

marginal tax - the rate used to calculate tax on the next dollar earned

average tax - total tax due divided by taxable income

Front 13

tax credit

Back 13

an amount subtracted directly from the amount of taxes owed

ex) child care, EIC, foreign tax credit, retirement tax credit, adoption tax credit, scholarship tax credit

Front 14

You can pay federal taxes 2 ways:

Back 14

1.) Payroll Withholding - pay as you go system

2.) Estimated Payments

Front 15

5 status categories for filing a federal income tax return

Back 15

1.) single 2.) married, filing joint returns 3.)married filing separate returns 4.) head of household 5.) qualifying widow or widower

Front 16

What tax records to keep

Back 16

- current tax forms
- social security numbers
- copy of previous year's returns
- W-2 forms from employers
- 1099 forms (interest, self employment)
- 1098 (mortgage, interest paid)
- receipts and documentation for expenses
- investment & business expense documents

Front 17

1040EZ

Back 17

- use for least complicated situations
- single or married filing jointly, under age 65 w/ no dependents
- taxable income less than $50,000
- you do not itemize deductions

Front 18

1040A

Back 18

- taxable income less than $50,000
- adjustments to income allowed
- tax credits for child care allowed

Front 19

Most frequent tax filing errors

Back 19

forgetting to sign a tax return

Front 20

3 types of tax return audits

Back 20

1.) correspondence audit - for minor questions
2.) office audit - takes place at IRS office
3.) field audit - most complex; IRS agent visiting your home