Intro to Personal Finance Test 2
What is another name for property taxes?
"ad valorem taxes" which means "according to value"
Above what amount of income is social security no longer taxed?
$128,400
How do you calculate Marginal Tax rate?
(New tax liability - old tax liability)/(new income- old income)
The first 20% of all household had an average effective federal tax rate of?
-9.2%
How much interest can you save by having automated payments for your loans instead of standard payments?
.25%
What are the 3 main sources of information on your credit report?
1) Current Creditors 2) Credit Applications 3) Public Records
Calculate APR on Alternative Loans (Ex. Payday loan)
1) calculate the rate charged for the loan (fee charged to borrow loan/principal loan amount) 2) divide 365 by the loan term ( 365/# of days to pay back loan) 3)multiply answer from step 1 by step 2 answer 4) Multiply step 3 answer by 100 to show number as percentage
What are the three ways to build housing equity?
1) make a large down payment (which minimizes the loan) 2) paying down the mortgage loan ( by making extra payments on the principle) 3) Housing prices generally increase over time (wait)
What is the APR on a deposit advance?
100%
What is the self-employment tax rate if your income is greater than $400 but less than $128,400?
15.3%
Susan borrowed money from her credit union using her car as collateral. The monthly interest rate on the loan is 0.2%. There were no other fees associated with the loan. What is the APR of her car loan? Assume 12 equal months.
2.4 % (0.2% x 12)
What is the range of a FICO credit score?
300-850
What should your Housing Payments-to-Income Ratio be?
31% or less, although some mortgage lenders require less than 28% of household income (this is front-end mortgage qualification ratio)
How many Americans are underbanked or unbanked?
34 million
About what percent of American households did not owe any federal income taxes?
40%
What is the tax rate for social security?
6.2% for employees and 6.2% for employers for a total tax rate of 12.4%
What percent of US population does not have enough cash to cover a $500-$1000 emergency?
63%
What is the total social security tax rate>
7.65%
Federal Grants
A cash award paid to the school on behalf of the student. These do no have to be paid back. If the money awarded is more than what is needed then the student can keep the excess money.
Secured Credit Card
A credit card that requires you to promise collateral to receive credit. This collateral is usually a deposit of the full amount of the line of credit at the bank as collateral before the credit card is issued.
Deposit Advance
A deposit advance is a short-term loan that is automatically repaid when the next qualifying electronic deposit is made (such as the next paycheck). Borrower has to pay back loan in 35 days!!!!!
How is leasing a car different from paying a loan for it?
A lease is when you basically rent a car for around 3 years, but at the end of the agreement you have to give the car back. The payments are lower than loan payments but you don't have any equity in the car.
Credit Card
A loan that can be used at the borrower's discretion and convenience and has flexible repayment options
Direct Consolidation Loans
A loan that combines two or more federal education loans into a single loan.
Direct PLUS Loan
A loan that graduate students, professional degree students, and the parents of undergraduate students may take out to pay for college education expenses. It is available through the federal Direct Loan Program.
Peer-to-peer lending
A method of debt financing that enables individuals to borrow and lend money - without the use of an official financial institution as an intermediary. This is a way for an individual to obtain a lower-cost loan and is usually done on an online platform. The borrower has a "lending score" based on their credit score
Form 1040A
A more complicated form than form 1040EZ that allows other types of income to be reported such as interest, dividends and scholarships and allows the taxpayers to claim more deductions and tax credits
mortgage
A mortgage is a special type of loan that is secured by land and all improvements on a piece of land, including a personal residence.
Personal lines of credit
A personal line of credit looks similar to credit cards; allowing the borrower to maintain a revolving balance month to month. These are usually unsecured and the bank can give you a debit card to use and they keep track of how much you borrow.
Personal Loan
A personal loan is typically a small-dollar debt that can be used to pay bills or make purchases. A loan that is not backed by collateral. Also known as an unsecured loan, it is based solely upon the borrower's credit rating.
Credit Score
A tally that summarizes a person's credit risk
progressive tax
A tax for which the percentage of income paid in taxes increases as income increases
sales tax
A tax on a sale of merchandise or services
regressive tax
A tax whereby people with lower incomes pay a higher fraction of their income than people with higher incomes.
For AGI deductions are used to calculate ________, From AGI deductions calculate ____________
AGI; taxable income
How do you calculate Housing Payments-to-income ratio?
Add together all monthly housing payment and divide by gross income
automated clearing house (ACH)
An electronic network for financial transactions in the U.S. The network processes batches of debits and credits to various financial institutions allowing for fast, safe and efficient transfer of funds.
What is the APR on most payday loans?
Anywhere from 200 to 400%
Alternative financial service providers
Auto title loans, payday loans, tax refund loans, pawn shops, or rent-to-own stores
Mainstream financial service providers
Banks, Credit unions, deposit institutions
What type of loan is a student loan?
Basically secured because government is the collecter (if you default on your student loan the government can seize your tax refund)
refundable tax credits
Can reduce a taxpayer's tax liability to below zero, resulting in a refund. Child Tax Credit, Earned Income Credit, the American Opportunity Credit, and Premium Credit are refundable tax credits. All other tax credits are nonrefundable (can reduce liability to at most - $0).
What do pawn shops and title loan companies base their loans on?
Collateral- something they can sell in case you default on your loan. Usually the value of collateral is higher than the amount of the loan. There are usually finance fees and interest charges as well.
Annual Percentage Rate (APR)
Cost of borrowing money on an annual basis; takes into account the interest rate and other related fees on a loan. It is required to be disclosed by the federal government
What are some things that can damage your credit score?
Declaring Bankruptcy, Losing a home to Foreclosure, Someone sued you and you lost, Incurred court-related jugments, liens, and unpaid financial obligations such as child support
What are the 4 types of Federal Student Loans?
Direct subsidized loans Direct unsubsidized loans Direct PLUS loans Direct consolidation loans
True or False: you must have a job to qualify for a Payday loan
False
Net pay
Gross pay - withholdings
Employee
IF YOU ARE AN EMPLOYEE , YOUR PAYCHECK SHOWS WITHHOLDINGS FOR FICA( PAYROLL TAXES) you also receive a W-2 statement
What is your loss liability with a debit card?
If card is reported loss before any unauthorized withdrawals, your loss liability is $0, if loss reported within 2 business days after card is lost, you loss liability is $50, if loss is reported between 2 and 60 days, your loss liability is $500, after 60 days it is unlimited
What is a Good Faith Estimate (GFE) from a mortgage lender?
It consists of the loan type, loan amount, interest rate, expected monthly principal and interest payment, closing costs
Fixed Installment loan
Lending contracts where the borrower agrees to repay money via fixed monthly payments for the life of the loan (ex. auto loans, mortgages)
calculating interest charges
Loan interest rate/ 12 months x (loan balance) = interest charged on loan for one month
Installment Loan
Loan with equal number of payments of the same amount over a fixed period of time.With an installment loan, the borrower receives the full amount of the loan upfront in a single lump sum.
Direct Subsidized Loans
Low-interest Direct Loans where the government pays the interest on the loans while the student is enrolled in school. These are for students who demonstrate a high financial need.
Direct Unsubsidized Loans
Low-interest Direct Loans where the student pays the interest on the loans while the student is enrolled in school. These are for students who do not demonstrate a high financial need.
What does "Head of Household" tax filing status mean?
Not married but you support at least one dependent
Which group of individuals must prove credit worthiness when applying to a PLUS loan through the federal government?
PArents
What kind of things can make up your credit score?
Payment History (35%) Amount of Credit (30%) Length of Credit (15%) New Credit (10%) Types of Credit (10%)
what are 2 hybrid transaction methods?
Peer-to-peer payments (P2P) and Automated Clearing House (ACH)
What does the Fair Credit Reporting Act (FRCA) do?
Requires the 3 main credit bureaus to provide you with a free copy of your credit report every 12 months
What type of loan is a mortgage loan?
Secured
What type of loan is a title loan and pawn shop loan?
Secured
What type of loan is an auto loan?
Secured Loan
Payday Loans
Short-term loans designed to be repaid within a few weeks when the borrower receives a paycheck. Typically a high interest rate.
What are the requirements to be a qualifying child?
Support- the child did not provide more than half of their own support during the tax year Age- the child is younger than 19 and younger than the taxpayer OR a full-time student, younger than 24 and younger than the taxpayer Relationship-Taxpayer's child, adopted child, stepchild, foster child, or descendent OR taxpayer's sibling, half-sibling, step-sibling, or descendant of any of them Abode- the child must live with the taxpayer for more than half of the year
What is the grace period?
The 6-month period after you complete college where you don't have to pay back your loans until 6 months have passed. The interest on student loans can also be a tax write-off
Fair Isaac Corporation (FICO)
The credit score that is calculated by: Debt history, debt levels, duration of debt, type of debt, new debt
Housing equity
The difference between the what a house could sell for and the amount still owed on the mortgage
Is the income you make on the sale of your house tax exempt?
The first $250k profit you make when selling your house if youre single, and $500k you make when selling your house if you are married is tax exempt
flat tax system
The same tax rate is applied to all income.
Form 1040
The standard Internal Revenue Service (IRS) form that individuals use to file their annual income tax returns.
Credit Usage Ratio
Total Credit Used/Total Credit Available < 30%
True or False: On a standardized repayment plan, one's monthly payment can be calculated by multiplying 1% by the loan balance
True
What type of loan is a credit card?
Unsecured
What type of loan is a payday loan?
Unsecured
Federal Insurance Contributions Act (FICA)
Used to pay for two government programs -- social security and Medicare
what is an example of ACH credit transfers?
Wages, salaries, Social Security benefits, and tax refunds
Is a credit union considered a mainstream lender?
Yes
How to calculate interest based Repayment (IBR) plan payment
Your income - expenses (150% of your state's poverty guidelines based on family size and income) = discretionary income x .10 or .15 (depending on your loan) / 12 =monthly payment `
Earned Income Tax Credit
a "negative income tax" that provides income to very poor individuals in lieu of charging them federal income taxes
Which is more valuable: a $1,000 tax credit or a $1,000 deduction?
a $1000 tax credit saves you $1000, a $1000 deduction is equal to $1000 x marginal tax rate
Retirement Savings Contribution Credit
a non-refundable tax credit of up to $1000 if you have income below a certain amount and contribute to an IRA or voluntary contributions to an employer-sponsored retirement plan
Child Tax Credit
a nonrefundable tax credit allowed for each child in a household
Lifetime Learning Credit
a nonrefundable tax credit that may be claimed every year for tuition and related expenses paid for all years of postsecondary education undertaken to acquire or improve job skills
Co-signer
a person who promises to pay the note if the maker fails to pay
credit bureau
a private firm that maintains consumer credit data files and provides credit information to authorized users for a fee
Premium Tax Credit
a refundable credit for those who don't have employer health insurance and buy via state or federal health insurance exchanges
Credit Report
a report on a person's creditworthiness that includes identifying information, credit cards, late payments, bankruptcies, and savings balances
Nonrefundable tax Credit
a tax credit that can reduce one's tax liability only to zero; however, if the credit is more than the tax liability, the excess is not refunded
Federal Work-Study
a type of financial aid in which part-time jobs for students are arranged to help them pay for school
check
a written order to a bank to pay a third party
What do bank routing numbers and account numbers do?
allows a check written in one city at one bank be cashed in another city at another bank
Variable Installment Loans
also structured so that the loan will be paid off within a certain time period, but payments may fluctuate. If the interest rate changes then the payments due and interest charged will change each month (ex. adjustable rate mortgages)
standard deduction
an amount of money set by the IRS that is not taxed
Federal deficit
annual expenditures exceed annual revenue (adds to U.S. debt)
Federal Surplus
annual federal tax revenue exceeds annual federal expenditures (decreases U.S. debt)
Medicare
applies to all earned income (1.45% of gross pay) half paid by employer and half paid by employee
Social Security
applies to earned income up to $132,900 (6.2% of gross pay) half is paid by employer the other half is paid by the employee
property tax
assessed based on the value of property you own and vary by state and are most often assessed by the city or county
tax credit
dollar-for-dollar reduction in an assessed tax liability
itemized deductions
expenses you can subtract from adjusted gross income to determine your taxable income instead of using standard deduction
identity theft
happens when someone else uses your personal informations, like your name and SSN to obtain credit. This can damage your credit.
Debit cards
have FDIC or NCUA insurance, fraud protections, and no to low fees
reletting fee
if you move out before the lease termination to cover the cost of renting the apartment again
When do you file a tax return?
if your income is above a certain level, even if you're not required to, it's still a good idea because you can get a refund
Capital Gain Income
income from stocks, mutual funds, coin collections, other investments, personal belongings, car, real estate this is the difference between what you paid and sold these items for
taxable income
income on which tax must be paid; total income minus exemptions and deductions
Marginal Tax Rate (MTR)
is the change in tax resulting from a change in income or deduction (the tax rate applied on the last dollar earned)
Secured loans
loans backed by collateral that the bank can claim if the borrowers do not repay them
Unsecured Loans
loans that require a good credit rating but no collateral. Aka "signature loans" Sometimes have a higher interest rate because they don't require collateral
The ________ the APR, the ______ the true cost of credit
lower: higher
advanced premium tax credit
lowers the cost of monthly premiums of these state/federal insurance plans
security deposit
money a renter lets an owner hold in case the rent is not paid or an apartment is damaged
U.S. debt
money the U.S. has borrowed and must repay ($20 trillion)
Is the social security portion of FICA taxes applied on all levels of income?
no
self-employed
no FICA is withheld and you will receive a 1099 statement
American Opportunity Tax Credit
partly refundable tax credit available to those who claim a student as a dependent on their tax return
ACH debit transfers
payments for mortgages, utility bills, and credit card payment
negative effective tax rates
result when refundable tax credits exceed an individual's total tax
Collateral
something pledged as security for repayment of a loan, to be forfeited in the event of a default.
Federal Student Loan
sum of money borrowed from the federal government to pay for college; typically have lower interest rates and more flexibility than private loans
Withholdings
taken out of an employee's paycheck by the employee and are either: 1) Mandated by law (federal, state taxes, FICA) 2) Elected by Employees (Retirement, Health and Life Insurance, Disability Insurance
Adjusted Gross Income (AGI)
the amount of income remaining after subtracting all allowable adjustments to income from gross income
Effective/Average Tax rate
the average tax an individual pays on his or her entire income
tax return
the information that the taxpayer compiles and reports to the IRS on a standardized form
checking accounting reconciliation
the process of comparing your check or debit card register with your monthly bank statement
Form 1040EZ
the short tax return form designed for single and joint filers with no dependents or itemized deductions
Finance Charge
the total dollar amount of all interest and fees you pay for the use of credit
What is the Total Fixed Payments-to-Income Ratio? What is recommended ratio? How is it calculated?
this is the back end mortgage qualification. should be less than 43% though some require less than 36%. it is the sum of the monthly housing payments+ all other monthly debt payments divided by total monthly income
how do you calculate the effective/Average tax rate?
total federal taxes/ taxpayer's total income
Use assets
wealth that has practical uses, e.g. cars, washing machines etc. that depreciate in value
inquiry
when a lender requests your credit report to determine creditworthiness
Recognized income
when realized income is reported and taxed which might exclude: scholarship income is exempt from taxes
Realized income
when you convert one asset into a different one for a gain such as: converting your human capital into a paycheck selling your home that has increased in value
FROM AGI deductions
you can either claim the standard deduction ($12,000 for single) or itemize items such as state and local taxes, out-of-pocket medical expenses, interest paid on mortgage debt, donations to charities