Chapter 4

Gross Income examples

- wages and salaries - profits from business - commissions - employee awards - interest - gains or losses on sale investments - alimony - royalties - unemployment compensation - dividends - property rental - pensions - tips, bonuses - prizes, gambling winnings

Passive Income

Results from business activities in which you do not actively participate, such as limited partnership

Two main taxes on wages and salaries

Social Security and income taxes

The Federal Insurance Contributions Act (FICA)

created social security tax that provides retirement, disability, and medical benefits

tax credits to reduce the amount of taxes owed

credit for higher education expenses, credit for foreign taxes paid, child care and dependent care expenses

itemized deductions

expenses a taxpayer is allowed to deduct from adjusted gross income

Casualty and Theft Losses

financial losses resulting from natural disasters, accidents, or unlawful acts.

Adjusted Gross Income (AGI)

gross income after certain reductions have been made

If you have a large tax refund...

have an amount from each paycheck deposited in a savings, use the funds to reduce high interest credit card debt, make contributions to retirement and college savings plan

might trigger AMT

high tax deductions for state taxes, high tax deduction for local taxes, significant amount of second mortgage interest.

estate tax

imposed on the value of a person's property at the time of death

tax-exempt income

income that is not taxed

tax deferred income

income that is taxed at a later date

Purpose of the Alternative minimum tax

it is to assure that people who receive tax breaks pay a fair share of taxes

inheritance tax

levied on the value of property bequeathed by a deceased person

earned income

money received for personal effort, such as wages, salary, commission, fees, tips, or bonuses

investment income

money received in the form of dividends, interest, or rent from investments; also called portfolio income

interest

mortgage interest, home equity loan interest, and investment interest expense up to an amount equal to investment income.

Personal Property Tax

state and local governments may assess taxes on the value of automobiles, boats, furniture, and farm equipment

taxable income

the net amount of income, after allowable deductions, on which income tax is computed.

marginal tax rates

the rate used to calculate tax on the last (and next) dollar of taxable income

job-related and other miscellaneous expenses

unreimbursed job travel, union dues, required continuing education, work clothes or uniforms, investment expenses, tax preparation fees, and safe deposit box rental.

Moving Expenses

when a change in residence is associated with a new job that is at least 50 miles farther from your former home than your old main job location.

W-2

which reports your annual earnings and the amounts that have been deducted for federal income tax, Social Security, and, if applicable, state income tax.

Mortgage interest is reported to you by your mortgage lender on form _____.

1098

IRS can impose a penalty of ____ of the tax liability for failure to file a tax return.

25%

tax credit

An amount subtracted directly from the tax owed

exemption

a deduction from adjusted gross income for the taxpayer, the spouse, and qualified dependents

Real estate property tax

a major source of revenue for local governments based on the value of land and buildings.

tax deduction

an amount subtracted from adjusted gross income to arrive at taxable income

average tax rate

based on the total tax due divided by taxable income for example: a person with taxable income of $40,000 and a total tax bill of $4,200 would have an average tax rate of 10.5 percent ($4,200 ÷ $40,000)

social security tax

based on wages and salaries