Resource Management Chapter 3 Study Guide

What is the date you can legally file your income taxes without penalty?

April 15th is the date.

Explain deficit spending and why it is a problem.

A deficit occurs when the government spends more money that it collects in a given year. Deficits are a big problem because they make the nation become in a large amount of debt that runs over decades, causing a slow-growing economy and increasing the risk of a fiscal crisis.

What is a W-2?

A W-2 form is a wage and tax statement received on January 31 for the previous year. It includes information, like the total amount you were paid last year, federal taxes, state taxes, and social security taxes withheld. You must enclose a copy of this when filing your taxes.

What is a W-4? What type of information do you need in order to fill out this form.

A W-4 is a form you fill out when you first begin a job and when life circumstances change. A W-4 tells your employer how much tax to withhold from your paychecks. A W-4 needs you name, address, employer identification number, first date of employment, filing status, social security number, number of dependents, and number of jobs.

How does someone qualify as a dependent for tax purposes?

A dependent is someone you support financially and cannot be claimed by another person. A dependent is 18 years and younger or 24 years and younger a student who attends school full time during at least 5 months of the year. You can claim unrelated people but they cannot have a yearly gross income over $4,050 and must have lived with you as a member of the household for a year.

How does a person qualify to be "head of household" for tax purposes?

A person qualifies to be "head of household" if the person files a separate individual tax return, is considered unmarried, is entitled to an exemption for a qualifying person, and must pay for more than half of the qualifying person's support and housing costs.

What is the difference between standard deductions and itemized deductions? Give 2 examples of each.

A standard deduction is the amount you may subtract from your adjusted gross income before determining tax. Two examples include claiming children or charitable giving (when you get nothing back). Itemized deductions are listed with specific amounts, receipts, or proof, which are available to show actual expenses. Two examples include medical expenses and tuition.

What is a tax audit and how long should you keep past tax returns to be prepared for one?

A tax audit is a detailed examination of your tax return by the IRS. If your return is audited by the IRS, you will need to prove the accuracy of the reported income, deductions, adjustments, credits, etc. You should always keep your past tax returns for 7 years.

What is the difference between a tax exemption and a tax deduction? What is the most common tax exemption?

A tax exemption reduces your taxable income, therefore, reducing your rates, They refer to the people you claim to reduce tax liability. The most common type is having a dependent. Tax deductions are items you claim to reduce tax liability.

Explain the difference between a tax refund and a tax return.

A tax refund is money that the IRS sends to you after accepting and reviewing your tax return. It occurs when the taxpayer pays more tax than they owe. A tax return is a form where the taxpayer makes an annual statement of income for the authorities to assess.

What is an assessed value of a home and how does it affect real estate taxes ?

An assessed value of the home is an estimation of your home's price. A local tax assessor will assess the value of your land and buildings owned by you. The value generated by the tax assessor is put forth in real estate taxes, which pay for local services, including recreation areas, public schools, libraries, community colleges, sewers, airports, etc.

How does an Estate tax work & what is portability?

An estate tax is a tax imposed by the federal government on assets left by an individual to their heirs at the time of his or her death (spouses are not included). The taxes are paid out before the estate(s) is distributed. There are federal and state rates. For the federal rate, the first $5.6 million is exempt and anything over is taxed at a 40% rate. For Illinois, the first $4 million is exempt and anything over is taxed at a graduated rate up to 16%. Portability is when couples can combine their estates up to $11.2 million without owing tax at the federal level.

Why should children have a social security number very early in life?

Children should have a social security number very early in life, so that parents can claim them as dependents, open bank accounts for them, obtain medical coverage, etc.

Why do employers withhold taxes from every paycheck rather than all at once at the end of the year?

Employers withhold taxes from every paycheck rather than all at once at the end of the year, so you are not faced with a huge bill at the end of the year and you are more likely to pay your taxes.

How do entitlements affect the federal budget?

Entitlements comprise a bulk of mandatory spending. Entitlements, which are benefits promised by law to eligible citizens by government, include social security and medicare. These mandatory expenses are commitments made by the government that cannot change, even if there is not enough revenue to support the program.

What does FICA stand for and what government program(s) are associated with it?

FICA stands for Federal Insurance Contributions ACT. It includes Social Security (6.2%) and Medicare (1.45%).

Explain Gift Taxes. Also, explain ways that people try to avoid them. What is the Rate in which they are taxed and the amount. Use the PowerPoint for the Textbook is Outdated.

Gift taxes can include property transfers or assets fro, one living person to another. You can gift up tp $15,000 a year without paying tax. The gifter is the one who pays the tax. People avoid gift taxes by spreading out the gift between years and spending the maximum about of $15,000 each year.

What is considered income? Be specific

Income is more than just the wages you earn. Income includes tips, interest, commisions, bonuses, and any other money you earn.

Why is it a bad decision to claim too few allowances during the year so you can have a large refund at the end of the year?

It is a bad decision to claim too few allowances during the year and have a large refund at the end because the refund money is just sitting with the government when it could be earning interest in a savings account, CD, or be invested in the market.

What is the form 1040?.

It is an individual income tax return. This form calculates the total taxable income of the taxpayer and calculates how much is to be refunded by the government and how much you owe.

What are the differences of the forms 1040(s)? Use the IRS.gov website to find your answers.

Now, there is only one 1040 form. There used to be two forms, the 1040A and 1040EZ, but it recently changed to the 1040.

Explain the difference between tax evasion and tax avoidance.

Tax avoidance is reducing your taxes by claiming legitimate adjustments, deductions, and credits. It is a legal way to avoid paying unnecessary taxes. Tax evasion is failing to declare all income and falsifying deductions, adjustments, and credits. This is a criminal offense.

What is the name of the form that tells the IRS how much interest you earned? Dividends?

The 1099 INT tells the IRS how much money you earned, while the 1099 DIV tells you about dividends.

Match the levels of government (Federal, State, and Local) with the type of taxes they receive the most revenue from.

The federal government's main sources of revenue are the Federal Income Tax and FICA. The state government's main sources of revenue are the state income tax and sales tax. The local government's main sources of revenue are property tax and sales tax.

How does the government use taxes to influence consumers' decisions?

The government places excise taxes/sin taxes for goods deemed as unsafe or sinful to society. These goods include alcohol, cigarettes/tobacco, firearms, air-travel, gasoline, cell phones, gambling, tanning, and energy drinks.

What is the largest deduction from one's paycheck? (Be Specific)

The largest deduction from one's paycheck is the Federal Income Tax. It is a progressive tax, so the more you earn, the greater percentage you pay/the higher bracket you fall in. If your pay in different from paycheck to paycheck, the amount withheld will be different.

The number of allowances you claim cannot change the amount of tax you owe but changes the amount of money withheld - Why? What do allowances represent?

The more allowances you claim, the less income tax is withheld from your pay. The amount of tax you owe does not change since if you claim too many allowances, you will owe the IRS money anyway. If you claim too little, the IRS will refund you at the end of the year. Allowances are important to be accurate since claiming the right amount ensures you have the right amount of money in hand.

How do you know how many allowances you should claim on your W-4?

The number of allowances you should claim varies based on factors like marital status, job status, filing status, and child/dependent expenses.

Describe progressive and regressive and proportional taxes and give an example of each (also draw the diagram shown in class)

The progressive tax takes a higher percentage from the rich than from the poor through tax brackets (Ex. Federal Income tac). Regressive tax takes a larger percentage of income from low-income earners, and the tax is not income-based (Ex. sales tax). Proportional taxes or flat taxes assess the same tax rate regardless of income, so people pay the same percentage (Ex. Illinois state income tax)

How many "brackets" are in our income tax system?

There are 6 brackets.

What are three factors affecting the amount of income tax you owe (tax liability)?

Three factors affecting the amount of income you owe include the number of dependents, filing status (single, married-jointly, married-separately), and your gross income.

Why is it important to understand the tax system even if you plan to hire professional tax help?

Understanding the tax system even if you hire professional help is important, so you can budget properly, avoid difficulties from ignorance, and avoid missing tax deductions you may qualify for.

Name at least 4 times in life when someone could collect social security benefits? Due to Divorce - what are the requirements to get social security?

You can claim social security benefits from the death of a parent or spouse, retirement, disability, and divorce under specific circumstances, To receive benefits after divorce, your marriage must have lasted at least 10 years, you are unmarried, you are 62 years or older, your ex-spouse is entitled to social security retirement or disability benefits, and the benefit you are entitled to receive based on your own work is less than the benefit you would receive based on your ex-spouse's work.

When do you alter or Change your W-4?

You fill out a W-4 when you first begin a job and when life circumstances changes.

What are the 2 items of information you need to help you complete a 1040? What other information might you need to be successful for filing your tax return.

You will need the W-2 and 1099 to show statements of wages earned. You will need the social security numbers for you, your spouse, and other dependents. You might need a copy of a past tax return, will need statements of interest or dividends from banks, and will need proof of tax credits or tax deductions.