MATH Exam III
How is adjustable gross income calculated?
Adjusted gross income is a person's gross income minus any contributions for individual retirement accounts or any other tax-deferred savings plans.
What kind of income is subject to FICA taxes?
All wages, tips, and self-employment business profits.
What is an installment loan? Explain the meaning and use of the loan payment formula
An installment loan is a loan that is paid off with equal regular payments.
What are deductions?
Any interest paid on home mortgages, contributions to charity, and taxes paid to other agencies (such as state income taxes or local property taxes) made throughout the year.
What are FICA taxes?
FICA taxes are collected to pay Social Security and Medicare benefits.
Briefly summarize the makeup of federal receipts and federal outlays.
Federal receipts come from a combination of individual income taxes and FICA taxes, and federal outlays come from a combination of mandatory and discretionary outlays.
How should you choose between taking the standard deduction and itemizing deductions?
Find the sum of your deductible expenditures. If the sum is greater than your standard deduction, you should choose itemized deduction
How is gross income calculated?
Gross income is the sum of all income a person receives during the year, including wages, tips, profits from a business, interest or dividends from investments.
To calculate income taxes, first determine a person's gross income then subtract any adjustments to income to find their adjusted gross income. Then, subtract any deductions and exemptions to find their taxable income. Finally, use the table to find the tax bracket they fall within and calculate their refund/amount owed.
Income Taxes
Explain, in general terms, how the portions of loan payments going to principal and interest change over the life of the loan.
Installment loans gradually pay down the loan principal while the payments remain the same. Therefore, the interest due each month gradually decreases and the amount paid toward the principal gradually increases
Distinguish between mandatory outlays and discretionary outlays.
Mandatory outlays are expenses that are paid automatically unless Congress acts to change them. Discretionary outlays are the expenses that Congress must vote on each year and that the President must sign into the law.
Suppose you pay only the interest on a loan. Will the loan ever be paid off? Why or why not?
No. If only the interest is paid, the principal never decreases.
Define receipts, outlays, net income, surplus, and deficit as they apply to annual budgets.
Receipts represent money that has been collected and outlays represent money that has been spent. The net income for a year is equal to the receipts minus the outlays. If net income is positive, the budget has a surplus and, if negative, the budget has a deficit.
Next year, you expect to get a 44% raise. You think you can keep your expenses unchanged, with one exception: You plan to spend $73007300 on a car. Explain the effect of this purchase on your budget.
The purchase reduces your surplus
Does this sentence make sense? "We're both single with no children and we both have the same total (gross) income, so we must both pay the same amount in taxes."
The statement does not make sense because the two people may not have the same adjusted gross income or taxable income.
I make only the minimum required payments on my credit card balance each month, because that way I'll have more of my own money to keep.
The statement does not make sense. It takes a very long time to pay off a credit card loan if only the minimum payments are made. This results in much more interest being paid.
Decide whether the following statement makes sense (or is clearly true) or does not make sense (or is clearly false)
The statement makes sense. The portions of installment loan payments going towards principal and toward interest vary as the loan is paid down
Suppose your after-tax annual income is $35 comma 00035,000. Your annual expenses are $ 12 comma 000$12,000 for rent, $50005000 for food and household expenses, $17001700 for interest on credit cards, and $ 9300$9300 for entertainment, travel, and other.
There is a surplus because the sum of the expenses is less than the income.
Explain why years of running deficits makes it increasingly difficult to get a budget into balance.
Years of running deficit increases total debt owed each year, which causes the interest payments to increase. Each year it becomes more difficult to get the budget into balance.
What is a tax credit?
any amount of money which gets subtracted from a person's tax bill.
What is a tax deduction?
any amount of money which gets subtracted from a person's taxable income
Briefly describe the social security trust fund. What's in it? What problems may this cause in the future?
The Social Security trust fund is the money collected through Social Security taxes that is supposed to be paid out to future retirees. The trust fund contains Treasury bills that represent a promise to return the money borrowed, with interest. Promises made to trust funds cause more gross debt, which is debt that must actually be repaid in the future.
What are exemptions?
The fixed amount ($3900) found in the table. This can be claimed for the person filing taxes and each of their dependents
Explain the meaning and use of the loan payment formula.
The loan payment formula is used to calculate equal monthly payments as the interest paid decreases and principal decreases
Why is a tax credit more valuable than a tax deduction?
Since a tax credit gets subtracted from a person's tax bill, it reduces their bill by that amount of money, where a tax deduction gets subtracted from their taxable income, so their bill is only reduced by a fraction of that amount. So, a tax credit saves them money.
How is taxable income calculated?
Taxable income is a person's adjusted gross income minus their exemptions and deductions.