HDF 322 Exam 2
How much (dollar amount or %) is withheld for FICA? (what does FICA include?)
7.65% of your income, social security and medicare
What does it mean to refinance a home?
A new mortgage is obtained to pay off and replace an existing mortgage, can be done to lower the interest rate
What does it mean that "your lifestyle 'materializes in consumer purchases?'"
Every buying decision is a statement about your lifestyle
What are the primary filing statuses? (esp. when is head of household used?)
Married filing jointly, head of household (single with a qualifying dependent), single, married filing separate, qualifying widow(er)
What is a FICO score?
Measures "creditworthiness", estimates the agency's level of confidence that you will be able to make full, on-time payments for the duration of the loan
How has consumer credit spending been changing in America? (general trend)
General trend is up?
When you agree to cosigning a loan, you should be prepared to do what?
Guarantee the debt if the borrower defaults, you may have to pay up to the full amount and also any late or collection fees
Is it recommended that tax payers overpay or underpay on income taxes?
Recommended scenario: you don't want a big refund, so pay just the right amount
Does it make sense for some to rent instead of buy? What are some reasons why renting would make more sense?
Yes, consider the market, amount of time you expect to live in the location, your lifestyle
Can you withhold payments on credit cards for damaged products and poor services?
Yes, if you make a sincere attempt to resolve the problem with your creditor
Is 20% down required? If one doesn't have 20% down what will they end up paying?
You will have to pay additional insurance to the lender (private mortgage insurance)
What are the advantages and disadvantages of a 15-year loan? a 30-year loan? What are other methods to reduce interest costs on a loan and build equity more quickly?
-15: higher monthly payments, lower interest -30: lower monthly payments, higher interest -Other methods: larger down payment, shorter repayment period, bi-weekly rather than monthly payment, pay off loan early
What is a home equity loan?
-Allows homeowners to borrow on their home equity -Maximum is 80% of the market value of your home
What is the pay as you go system? How is it accomplished?
-As you earn income, the IRS expects you to pay taxes owed (1943 law) -Accomplished through withholding and estimation
In what ways do you consider both your balance statement and cash flow/budget statements when making a large purchase?
-Be sure that your budget can manage and feel comfortable with the increased payment and liability (based on your ratios given last time from cash flow and balance sheet) -Budget costs to use, keep, maintain, and repair the item
Who appears to win on "cash flow?" who appears to win after taxes and appreciation?
-Cash flow: renters/short-term often win -After taxes and appreciation: owners/longer-term often win
What is chapter 7 bankruptcy? And what is chapter 13 bankruptcy? (know the basic rules of each)
-Chapter 7: submit a petition to the court that lists assets and liabilities, pay a filing fee, most (but not all) debts are forgiven, assets are sold to pay creditors, can keep some assets, fresh start, most bankruptcies filed are this type -Chapter 13: voluntary plan proposed to the bankruptcy court for those who want to pay a portion of debt up to five years, must have a regular income, can't have more than $250,000 unsecured debt/$750,000 secured debt, payments are made to a trustee, trustee distributes money to your creditors, court may allow you to keep property and pay less than full amount of debts
What are the 5 c's creditors look for in a borrower? (know what they mean)
-Character: do you pay bills on time? -Capacity: can you repay the loan? -Capital: what are your assets and net worth? -Collateral: what property do you have to pledge that the lender can repossess if you default on the loan? -Conditions: what economic conditions could affect your ability to repay the loan?
Determine the amount of a scholarship that would be considered taxable income after considering eligible tax deductible expenses.
-Considered taxable income, "earned income" available for the standard deduction -Exclude tuition, books & supplies, fees, equipment. Cannot exclude room & board or travel.
What are the differences between the 1040EZ, 1040A, 1040, and 1040X tax forms? Who should use which ones?
-EZ: least complicated, single or married filing jointly, under 65 with no dependents, income consisted of wages, salaries, and tips, no more that $1500 of taxable interest, taxable income less than $100,000, not itemizing deductions or claiming any adjustments to income or tax credits -A: taxable income less than $100,000, adjustments are allowed, tax credits for child care and dependent care are allowed -1040: income over $50,000 (?), use if you itemize deductions -X: used to amend a previously filed return
Know how to estimate savings for medical expenses when using the tax forms itemized deduction, or a FSA? Or a HSA?
-Expenses in excess of 7.5% of AGI are deductible -Eligible expenses: health insurance premiums, medical treatments and prescriptions, glasses/contacts, wheelchairs and other equipment, dentures/dental work -Ineligible: disability income premiums, life insurance premiums, trips to warmer climates, elective cosmetic surgery, illegal operations, funeral expenses, maternity clothes, nonprescription medicines -FSA & HSA: savings are typically at the MTR -FSA: use it or lose it (some rollover now allowed) -HSA: requires a high deductible insurance plan
What are the 3 credit reporting agencies? What are their functions?
-Experian, Equifax, TransUnion -Each one gives you your credit report annually for free
What are fixed rate mortgages? What are Adjustable rate mortgages? Given all the different creative mortgages, which is typically recommended?
-Fixed: compounding, fixed payment every month that has principal and interest until the loan is paid off -Adjustable: interest rate varies over time with market conditions -Fixed is typically recommended
What are the tax benefits of home ownership? What cannot be deducted?
-Home loan interest is deductible, property tax is deductible, mortgage insurance premiums, capital gains may be tax-free -Cannot deduct payment on principle of loan, or payment of homeowner property insurance premiums
If your credit card is lost or stolen and then used, what is your liability?
-If you do not report it, you are liable for the entire amount owed -Limited to $50 per card if used before issuer is notified (many cards have $0 liability if you report it) -Not liable for charges after you report it -May be covered by homeowner's or renter's insurance
Why is it important to save receipts for large purchases? (how long should you save them?)
-In case something goes wrong and you need to warranty, know what your warranties cover -Extended warranties usually aren't worth it
Why is it often not wise to include your home equity as part of your assets that you can use during retirement or needs assessments for a surviving spouse?
-It comprises a significant portion of wealth for most families -A home is a place to live, not an investment vehicle -It is not included in needs assessments unless the residence would no longer be required
Review the slide on the 3 topics from the book on car buying...
-Leasing vs buying: more about lifestyle than money, buying is usually financially better -Extended warranties: read the fine print, excludes coverage for certain things, price might be greater than the expected costs of covered repairs -Be as knowledgeable about the car as you can and be willing to negotiate
What is the marginal tax rate? How is this useful in tax planning?
-MTR: a tax rate imposed on the taxpayer's next dollar of income -Consider the MTR of the expected last dollar earned for the year, this will have the highest MTR -MTR is based on taxable income and not gross or adjusted income
What is the snowball strategy for paying off multiple debts? What are the advantages of sort by APR? What is the advantage of sorting by dollar amount (lowest to highest)?
-Make payment to all balances + accelerated amount on the first one. Once the one is payed off, use accelerated amount + previous account payment to accelerate the next payoff -Not sure about advantages for both :(
What factors contribute to a FICO score? (which two factors contribute the most to FICO score?)
-Most: payment history and amounts owed -Others: length of credit history, types of credit used, new credit
Why is it important to negotiate at places where negotiation is part of the sales process?
-Negotiation room is already built into the price, so if you don't negotiate you'll be paying more -Never hurts to ask, you never know how much you will be able to get off
What is APR? and how is this useful when comparing loans/credit card interest rates?
-Percentage cost of credit on a yearly basis, includes interest and mandatory fees -It is the true rate of interest, so it helps you compare rates with other sources of credit
What are capital gains? What distinguishes a long-term capital gain from a one that is not?
-Profit received from sale (after costs to buy and sell) of property owned for personal use or as an investment -Long-term: held over 1 year
What are the rules of whether a person is claimed as a dependent or not?
-Qualifying child: Relationship test, age test, household member, 50% support test, entitled to claim -Qualifying relative: Can't be a qualifying child, They must be related or live in household, Their gross income must be less than PE, 50% support test
What are the pros and cons of renting vs. buying?
-Renting pros: easier to move, fewer maintenance and repair responsibilities, lower initial costs -Renting cons: limitations regarding remodeling, restrictions regarding pets and other activities, legal concerns of a lease, costs including security deposit, renter's insurance, utilities, no tax benefits, no accrual of equity, management hassles -Buying pros: pride of ownership, financial benefits, lifestyle flexibility -Buying cons: financial investment and uncertainty, limited mobility, higher living costs
What is the average tax rate? How is this estimated?
-Shows your total tax as a percentage of your taxable income (total tax/income) -Is lower than your marginal tax rate because your lower segments of income are taxed at lower rates
What % do employees pay in social security and Medicare? Who pays the balance?
-Social security (6.20%) and Medicare (1.45%), total 7.65% of your income gets withheld. Your employer pays the other 7.65% for a total of 15.30%
What is the social security limit? Does Medicare have an income limit?
-Social security tax limit: income up to $128,400, you will not be taxed for social security after this -Affordable Care Act removed the limit for Medicare
What is the standard deduction? What are itemized deductions?
-Standard: the dollar amount based on filing status that is subtracted from adjusted gross income in calculating taxable income -Itemized: must exceed the standard deduction, individuals who itemize cannot claim the standard deduction
What is the difference between a tax credit and a tax deduction? Which is worth more to the tax payer? a 100$ credit or 100$ deduction?
-Tax credit: reduction applied directly to taxes owed -Deduction: reduction applied to income subject to taxes -Credit is worth more
What are the 4 types of taxes?
-Taxes on purchases: sales tax and excise tax -Taxes on property: real estate property tax, personal property tax -Taxes on wealth: federal estate tax, state inheritance tax -Taxes on earnings: income (Texas doesn't have state income tax), social security taxes
Determine if a person owes an under withholding tax penalty.
-Test #1: pay at least 90% of your tax liability for the current year -Test #2: pay 100% of what tax you paid the previous year -Underpayment penalty is 20% of the shortfall (underpayment)
How do you determine if there is an under withholding penalty?
-Test #1: pay at least 90% of your tax liability for the current year -Test #2: pay 100% of what tax you paid the previous year -Underpayment penalty is 20% of the shortfall (underpayment)
What is amortization? What is an amortization schedule?
-The process of gradually paying off a loan through a series of periodic payments; each payment contains interest for the month and payment towards the principal owed -Schedule: table outlining each monthly payment, the portion of each that will go towards interest and principal, the debt remaining after each payment is made
Why is it important to determine what features are "essential," "important," and "nice" before you go car shopping?
-Transportation needs vs. wants and expectations -Buy the car you can afford that delivers the essentials, you can always upgrade later
What does it mean to be "upside down" on a loan, and how can you avoid doing it with a car loan?
-Upside down: when you're going to sell the car but you owe more than it's worth -Think twice on loans on high mileage cars -Increase down payments -Be careful about car loans longer than 5 years (3 year loans is the recommended ideal)
What is a W-4 & and a W-2?
-W-4: you count allowances -W-2: wage and tax statement given to you by your employer
What goes into "home equity?" And how can you easily calculate home equity?
-Your ownership of the home -Equity = down payment + monthly principal payments + home appreciation -Equity = current market value - current mortgage liability
What are the 3 pillars of tax planning?
-knowing current tax laws -Maintaining complete and appropriate tax records -Making purchase and investment decisions to reduce your tax liability
Approximately what % of Americans incomes goes to taxes?
1/3
On average how much more do people tend spend when using credit vs. cash?
10-20% more
How much in addition to PI should a home owner estimate for insurances, property taxes, maintenance, and upkeep?
Add an additional 25-33%, we often use 30% in class
What is the federally endorsed URL for getting a free credit report?
Annualcreditreport.com
When are Taxes due?
April 17, 2018
If the large purchase will reoccur again in the future, what should you start planning on doing after making your purchase? (or if not then, when you finally pay off the item if you borrowed money to purchase it.)
Begin planning and saving for the next purchase
If you are not knowledge about cars are not good at negotiation, what might you consider doing when you go car shopping?
Consider bringing along someone with you who has these expertise
Why, dollar for dollar, are credits better than deductions or adjustments?
Credits save you more because they are a reduction applied directly to taxes owed rather than a reduction applied to income subject to taxes
What is the child tax credit? What amount can be claimed per child? Until what age?
Currently $1000 (but will increase to $2000) per child until they are 17
According to Dr. Pope you should __________ the minimum balance on your credit card.
Never pay just the minimum balance, always pay at least a dollar more
Who pays the alternative minimum tax?
Often middle and high income families. Those with large numbers of exemptions or credits, exercise of incentive stock options, long-term capital gains, unusually large itemized deductions
How often can you check your credit report at each of the credit reporting agencies for free?
Once a year
What is considered to be consumer credit?
Personal, non-mortgage, credits and debts
What is PITI?
Principal, interest, taxes, insurance
Is the federal income taxes progressive or regressive?
Progressive
What are quarterly payments and who usually pays them?
Self-employed, used to pay tax on income that is not subject to withholding, you make estimated tax payments 4 times a year
What is the universal exclusion for capital gains when selling a house?
Singles: $250,00 Married: $500,000
What are FICA taxes? (what is included in these)
Social security and medicare
What are the traditional financial guidelines for amount you spend on housing?
Spend no more than 25-33% of take-home pay on housing
What are the differences between tax evasion and tax avoidance?
Tax Avoidance (legal): -Strategic knowledge of tax rules to avoid overpayment of taxes -Legitimate methods to reduce your tax obligation to your fair share but no more -Financial decisions related to purchasing investing, and retirement planning are the most heavily affected by taxes Tax Evasion (illegal): -Illegally not paying all the taxes you owe, such as not reporting full income
What is Tax Freedom Day?
The day when taxpayers in the state have collectively earned enough money to pay their federal, state, and local tax bill for the year
What are exemptions?
The dollar amount per household member that is subtracted from adjusted gross income in calculating taxable income.
What % do self-employed pay in social security and Medicare?
The whole 15.30%
How to estimate the average tax rate, and what numbers are used to estimate this?
Total tax/income
