Chapter 3 Preparing Your Taxes

Question 1

Adjusted Gross Income (AGI)

Answer 1

The amount of income remaining after subtracting all allowable adjustments to income from gross income.

Question 2

Adjustments to (gross) Income

Answer 2

Allowable deductions from gross income, including certain employee, personal retirement, insurance and support expenses.

Question 3

Amended Return

Answer 3

A tax return filed to adjust for information received after the filing date of the taxpayer’s original return or to correct errors.

Question 4

Average tax rate

Answer 4

The Rate at which each dollar of taxable income is taxed on average; calculated by dividing the tax liability by taxable income.

Question 5

Estimated taxes

Answer 5

Tax payments required on income not subject to withholding that are paid in four installments.

Question 6

Exemptions

Answer 6

Deductions from AGI based on the number of persons supported by the taxpayer’s income.

Question 7

Federal Insurance Contributions Act (FICA)

Answer 7

The law establishing the combined old-age, survivors, disability, and hospital insurance tax levied on both employee and employee.

Question 8

Federal withholding taxes

Answer 8

Taxes based on the level of earnings and the number of withholding allowances claimed, which an employee deducts from the employees gross earnings each pay period.

Question 9

Filing extension

Answer 9

An extension of time beyond the usual April 15 deadline during which taxpayers with the approval of the IRS, can file their returns with our incurring penalties.

Question 10

Gross Income

Answer 10

The total of all of a taxpayer’s income (before any adjustments, deductions or exemptions) subject to federal taxes; it includes active, portfolio and passive income.

Question 11

Income Shifting

Answer 11

A technique used to reduce taxes in which a taxpayer shifts a portion of income to relatives in lower tax brackets.

Question 12

Income Taxes

Answer 12

A type of tax levied on taxable income by the federal government and by many state and local governments.

Question 13

Itemized deductions

Answer 13

Personal Expenditures that can be deducted from AGI when determining taxable income.

Question 14

Marginal Tax Rate

Answer 14

The tax rate you pay on the next dollar of taxable income.

Question 15

Progressive Tax Structure

Answer 15

A tax structure in which the larger the amount of taxable income, the higher the rate at which it is taxed.

Question 16

Social Security Tax

Answer 16

the law establishing the combined old-age, survivors, disability, and hospital insurance tax levied on both employer and employee.

Question 17

Standard Deduction

Answer 17

A blanket deduction that depends on the tax payer’s filing status, age and vision and that can be taken by a taxpayer whose total itemized deductions are small.

Question 18

Tax audit

Answer 18

An examination by the IRS to validate the accuracy of a given tax return

Question 19

Tax avoidance

Answer 19

the act of reducing taxes in ways that are legal and compatible with the intent of congress.

Question 20

Tax Credits

Answer 20

Deductions from a taxpayer’s tax liability that directly reduce his or her taxes due (rather than reducing taxable income)

Question 21

Tax deferred

Answer 21

income that is not subject to taxes immediately but that will later be subject to taxes.

Question 22

Tax Evasion

Answer 22

The illegal act of failing to accurately report income or deductions and in extreme cases, failing to pay taxes altogether.

Question 23

Taxable Income

Answer 23

The amount of income subject to taxes; it is calculated by subtracting adjustments, the larger of itemized or standard deductions, and exemptions from gross income.

Question 24

Taxes

Answer 24

The dues paid for membership in our society; the cost of living in this country.