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Finance 3300 > Chapter 4 > Flashcards

Chapter 4 Flashcards

1
Q

Why do we have taxes?

A

to finance government activities

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2
Q

What fraction of each dollar earned goes toward taxes?

A

1/3 of each dollar earned goes to pay taxes

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3
Q

What are three general things to do when it comes to taxes?

A

know current tax laws as they affect you; maintain complete tax records; plan purchases and investments to reduce tax liability

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4
Q

What is tax planning?

A

taking advantage of tax benefits while paying the fair share of taxes

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5
Q

The top 1% of taxpayers pay what percentage of all taxes?

A

38.1%

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6
Q

The top 5% of taxpayers pay what percentage of all taxes?

A

next 20.9%

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7
Q

The top 10% of taxpayers pay what percentage of all taxes?

A

next 11.2%

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8
Q

The top 25% of taxpayers pay what percentage of all taxes?

A

next 16.2%

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9
Q

Overall, the top 25% of taxpayers pay what percentage of taxes?

A

86%

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10
Q

Define sales tax

A

added to purchase price of product

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11
Q

Define excise tax

A

imposed on select G&S (e.g. gas, cigarettes, alcohol, tires, airfare, etc.)

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12
Q

Define ad valorem.

A

tax based on the assessed value of an item such as real estate or personal property

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13
Q

Define real estate property tax.

A

ad valorem

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14
Q

Define personal property tax.

A

imposed on personal property (e.g. cars, boats, furniture)

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15
Q

What are the four main types of taxes?

A

taxes on purchases, taxes on property, taxes on wealth, taxes on earnings

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16
Q

What is the federal estate tax?

A

paid by decedent and imposed on value of decedent’s property as of date of death or alt. valuation date, if estate > $11,180,000

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17
Q

What is the gift tax?

A

paid by donor on gifts > $18,000

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18
Q

What is the state inheritance tax?

A

paid by donee and levied on value of decedent’s property bequeathed to donee

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19
Q

What is the income tax?

A

tax on income levied at both the state and federal levels

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20
Q

Which 9 states do not levy income tax?

A

TX, WA, FL, NV, AK, SD, TN, NH and WY

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21
Q

What is the Social Security tax?

A

on wages of $128,400 (2018) to finance OASDHI benefits of SS program

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22
Q

What is taxable income?

A

net income, after deductions, on which income tax is computed

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23
Q

What is step 1 in computing your tax liability?

A

Determining adjusted gross income (AGI)

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24
Q

What are four types of taxable income?

A

earned income, investment income, passive income, other income

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25
Q

What is earned income?

A

includes wages, salary, commissions, fees, tips or bonuses

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26
Q

What is investment income?

A

(a.k.a., portfolio income) money from dividends, interest, or rent from investments

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27
Q

What is passive income?

A

from business activities -you do not directly participate -limited partnership

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28
Q

What is other income?

A

includes alimony, awards, lottery winnings, and prizes

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29
Q

Total income is affected by

A

exclusions

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30
Q

(T/F) Exclusions are included in gross income.

A

False, they are NOT included in gross income.

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31
Q

Give three examples of exclusions.

A

Gifts (less than or equal to $15,000 for 2018); employer-paid health premiums; earned foreign income (less than or equal to $104,100 for 2018)

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32
Q

What is tax-exempt income?

A

income not subject to federal income tax (e.g. interest on most municipal bonds)

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33
Q

What is tax-deferred income?

A

income that will be taxed at a later date

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34
Q

Give an example of tax-deferred income?

A

earnings from a traditional IRA

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35
Q

What is adjusted gross income?

A

gross income after certain “adjustments to income” have been made

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36
Q

Give four examples of adjustments to gross income.

A

contributions to a traditional IRA; alimony payments; student loan interest/tuition/fee deductions; tax-deferred retirement plan contributions such as a 401(k) or a 403(b)(7) tax shelter

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37
Q

What is step 2 in computing your tax liability?

A

computing taxable income

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38
Q

What is a tax deduction?

A

an amount subtracted from AGI to arrive at taxable income

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39
Q

How do you compute the tax deduction?

A

Either subtract the “standard deduction” from AGI on

Form 1040 or “itemize” your deductions on Sch. A

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40
Q

What is a standard deduction?

A

set amount on which no tax is paid

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41
Q

What are the standard deductions for 2018?

A

$12,000 if filing as single or married separately; $24,000 if filing as qualifying widow or married jointly; $18,000 if filing as head of household

42
Q

What are itemized deductions?

A

expenses the taxpayer can deduct from the AGI

43
Q

Give 5 examples of itemized deductions.

A

medical, dental expenses (7.5% of AGI); state/local taxes along with mortgage interest, contributions, and charitable deductions; certain job and misc. expenses ( > 2% of AGI); certain casualty and theft losses ( > 10% of AGI); certain moving expenses, if moving > 50 miles

44
Q

What is the next step, after determining your tax deductions? (2)

A

subtract your exemptions from the AGI; a deduction for yourself, your spouse, and your qualified dependents

45
Q

How much are the exemptions for 2017?

A

$4,050 per person in 2017

46
Q

After determining the tax deductions and exemptions, what’s the next step?

A

determining tax rates and tax credits

47
Q

What is the basis for the amount of your income tax?

A

taxable income

48
Q

In the chart, which four scenarios have taxable income?

A

lottery winnings; bartering income; mileage for driving to volunteer work; income tax preparation fee

49
Q

What is step 3 in computing your tax liability?

A

calculating taxes owed

50
Q

What is the marginal tax rate?

A

rate used to calculate tax on the last dollar of taxable income

51
Q

What are the 7 marginal tax rates for 2018?

A

10, 12, 22, 24, 32, 35, and 37%

52
Q

What is the average tax rate?

A

based on the total tax due and taxable income

53
Q

How do we calculate the average tax rate?

A

tax liability / taxable income

54
Q

What is true about the ATR and the MTR?

A

ATR < MTR

55
Q

Define tax credit.

A

an amount subtracted directly from the amount of taxes owed (e.g., the earned income, child, and dependent care credits)

56
Q

What’s the difference between a tax credit and a tax deduction?

A

tax credit is a flat amount, whereas tax deduction is a percentage; tax credit is much better than a tax deduction

57
Q

Give 8 examples of recent tax credits.

A

foreign tax; child and dependent care; adoption expenses; American Opportunity/Lifetime Learning (college expenses); earned income tax credit; energy savings; elderly and disabled; Obamacare premium credit

58
Q

(T/F) All taxes are paid by April 15.

A

False, not all of them are paid by April 15.

59
Q

How do the self-employed pay taxes?

A

pay quarterly estimated taxes, on the 15th of April, June, September, and January

60
Q

Which form tells employers how much to withhold for taxes?

A

Form W-4

61
Q

Low-income workers may

A

file for an exemption from withholding if no tax liability is expected

62
Q

What is the tax filing date for individuals?

A

April 15

63
Q

What is Form 4868?

A

used as an extension to file, but not to pay taxes

64
Q

What is Form W-2?

A

reports your annual earnings and deductions for taxes and social security

65
Q

How many filing status categories are there?

A

5

66
Q

What are the five filing status categories?

A

single/legally separated; married, filing jointly; married, filing separately; head of household; qualifying widow/widower (2 years)

67
Q

What is the head of household status?

A

unmarried individual who maintains a household for a child or dependent relative

68
Q

If single, under 65 with an income under $12,000, do you have to file?

A

no

69
Q

Which is the least complicated tax form?

A

1040EZ

70
Q

What are the stipulations for using Form 1040EZ? (6)

A

single or married filing jointly; under age 65; no dependents; no more than $1,500 of taxable interest; taxable income less than $100,000; no itemized deductions, adjustments, or tax credits

71
Q

What are the stipulations for using Form 1040A? (4)

A

taxable income less than $100,000; adjustments allowed; tax credits for child/dependent care allowed; IRA deduction allowed

72
Q

What are the stipulations for Form 1040? (2)

A

required to use 1040 if income is over $100,000; useful for itemizing deductions

73
Q

What are the stipulations for Form 1040X?

A

used to amend a previously filed return

74
Q

What is the overall, 9-step process for calculating taxes?

A

filing status and exemptions; income; adjustments to income; tax computation; tax credits; other taxes; payments; determine if you’re due for a refund or owe taxes; sign your return

75
Q

How do you file taxes by phone?

A

using Telefile (only if using Form 1040EZ)

76
Q

What is Free File Alliance?

A

offers free tax prep and e-filing for some taxpayers

77
Q

(T/F) If a professional tax preparer makes a mistake, you’re not responsible.

A

False, you’re still responsible for paying the correct amount

78
Q

What percent of tax returns is audited?

A

1.3%

79
Q

What are the four types of audits?

A

correspondence audit; office audit; field audit; research audit

80
Q

What is a correspondence audit?

A

for minor questions

81
Q

What is an office audit?

A

takes place at an IRS office

82
Q

What is a field audit?

A

complex, with an IRS agent visiting your home, business or accountant’s office

83
Q

What is a research audit?

A

line-by-line investigation of everything (not in text)

84
Q

What is tax avoidance?

A

Legitimate methods to reduce your tax obligation to your fair share, but no more

85
Q

What is tax evasion?

A

Illegally not paying all the taxes you owe, such as not reporting all income

86
Q

What are four strategies to minimize taxes owed?

A

accelerate deductions (if you expect to have a lower tax rate next year); delay receipt of income (if lower tax rate next year); delay deductions (if higher tax rate next year); accelerate receipt of income (if higher tax rate next year)

87
Q

What is a tax strategy for homeowners?

A

mortgage interest and property taxes are deductible when you itemize

88
Q

What is a HELOC?

A

home equity line of credit; use it to buy a car or consolidate debt - the interest can be deductible when you itemize

89
Q

Job-related non-reimbursed expenses

A

may be allowed as itemized deductions over 2% of AGI

90
Q

Estate planning

A

gifts of up to $15,000 are not taxable to the donor or the donee

91
Q

Tax-exempt investments

A

interest income from municipal bonds is not subject to federal income taxes

92
Q

Tax-deferred investments (3)

A

Series EE US Treasury bonds interest is exempt, if used for tuition; tax-deferred annuities; tax-deferred retirement plans

93
Q

Long-term capital gains

A

on the sale of a home are excluded from taxes up to $500,000 if filing married-jointly; otherwise $250,000

94
Q

If held for more than one year, long-term capital gains are taxed at

A

15%

95
Q

What are some self-employment tax strategies?

A

can deduct health/life insurance costs, but have to pay a self-employment tax

96
Q

Children’s investments

A

and income shifting (< $2,100 and child under age 18)

97
Q

Education IRA savings

A

earnings for college are tax-free, but deposits are not tax deductible

98
Q

What is a traditional IRA?

A

tax-deferred contributions that can be withdrawn after age 59 ½ without 10% penalty

99
Q

What is a Roth IRA?

A

after-tax contributions, but withdrawals tax-free after 5 years

100
Q

What are qualified plans?

A

employer plans whereby employer deducts a portion of pre-tax wages from employees and contributions and earnings grow tax-deferred

101
Q

What are non-qualified plans?

A

retirement plans not eligible for tax-deferred benefits, so deducted contributions are taxable

102
Q

What are self-employed plans?

A

contribute into a tax-deferred retirement plan if IRS rules are followed (e.g., SEP)

Finance 3300 (15 decks)

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