Chapter 3

Investments held for less than one year will be taxed at ___________________________, whereas investments that have been held for over one year are taxed at ____________________________.

Ordinary income rates; capital gains rates

long term rate

greater than one year (capital gains year)

short term rates

less than one year (ordinary income rates).

Jacob contributed $2,200 to charity within this past year, which qualifies for a tax deduction. Tucker saved $2,200 with a tax credit within this past year. Assume both Jacob and Tucker are in a 20% tax bracket. What is the difference between Tucker's tax credit and Jacob's tax deduction?

$1,760

Preston is currently self-employed and owns Financial Planning by Preston. He currently can contribute 20% of his business income into his retirement account. Which of the following retirement plans does he most likely have?

Keogh Plan

Taxes on earnings that fund old age, survivor, and disability insurance benefits are called

Social Security taxes.

what is the biggest advantage for the Coverdell over the 529 plans when examining education plans?

The education expenses that the Coverdell can cover range from K - 12 through college or post secondary education.

Grace saved $3,000 by using a tax credit. Assume Grace is in a 25% tax bracket. What is the amount of her tax credit?

$3,000

Retirees also have varying amounts of social security that is taxed based upon the amount of their income. In some cases, the difference can vary between _____ and _____ being taxed.

50%; 85%

What is a tax deduction?

An expense that results in a reduction taxable income on which your taxes are calculated.

which of the following is not an example of tax credits?

Large Family Credits

What is (are) the main goal(s) of tax planning relating to retirement and education planning?

To provide essential resources for specific events in the future and To lower income during high tax bracket times and shift some income to low tax bracket times

Fees, tips, and bonuses are forms of

earned income

Capital Gains Rate

the rate at which the value of the investment grows

David thinks that his salary and tax rate for next year will be higher than for this year. What step should he take minimize taxes over the period this year and next year?

Accelerate receipt of income.

________________________ is the use of illegal actions to reduce your taxes, where as ________________________ is the use of legitimate methods to reduce one's taxes.

Tax evasion; tax avoidance

ordinary income

Wages salaries, earned income, and comes from operation of a business or profession , not from portfolio income.

Mark is divorced from his wife Sharon. Mark pays alimony to Sharon and ____________ this amount on his tax return. If Mark paid child support, he could ___________ this amount on his tax return.

can deduct; not deduct

What is a tax credit?

direct offset to the amount of tax paid (best financial outcome).