Chapter 3: Taxes in Your Financial Plan
Workers under age 50 can contribute up to _____ in their 401k (as of 2017)
$18,000
the normal contribution limit for an IRA for workers under age 50 (as of 2017) is
$5,500
Types of Audits
Correspondence Audit Office Audit (requires visiting the IRS) Field Audit (more complex, requires home visits)
Which best describes how taxpayers pay their taxes to the IRS?
It is a pay-as-you-go system utilizing withholding of tax from paychecks and estimated quarterly payments
tax advantages of being self-employed
deductions on costs of certain health and life insurance as a business expense
a recent tax strategy employed by the government is to provide a tax credit for premiums paid for health care, when purchased through the health care
exchanges
What are tax deductible expenses related to home ownership?
mortgage interest and real estate taxes
adjustments to income
used as the basis for computing various deductions; includes contributions to IRAs, retirement plans, penalties for early savings withdrawal, and alimony payments
Reasons why it's beneficial to contribute as much as possible to a Keogh or 401k plan
1) the increased value of the investment accumulates on a tax-free basis until the funds are withdrawn 2) contributions reduce your adjusted gross income for computing current tax liability
Keogh Plan
retirement plan that allows self-employed individuals to save a maximum of 15 percent of their income up to a specified amount each year, and to deduct that amount from their yearly taxable income
what are the most frequently overlooked tax deductions?
state sales tax, reinvested dividends, out-of-pocket charitable contributions, student loan interest paid by parents, moving expenses to take a first job, military reservists' travel expenses, child care credit, estate tax on income in respect of a decendent, state tax paid the previous year, refinancing points, jury pay paid to employer
which of the following are tax-deferred investments?
tax-deferred annuities, Keogh, IRA, health savings plans
dependent requirements
1) must not earn more than a set amount unless under the age of 19 or a full-time student under age 24 2) you must provide more than half of the dependent's support 3) the dependent must reside in your home or be a specified relative 4) must meet citizenship requirements
types of income
1. earned income : salary bonuses, tips 2. Investment income: dividends, rent, interest 3. passive income: business activities that you are not active in, such as limited partnerships
Premature withdrawals from an Individual Retirement Account (IRA) are subject to a penalty of
10% of the withdrawn amount
value added tax (VAT)
A tax on increased value of the product at each stage of production and distribution rather than just at the point of sale.
if Mary owes the IRS $5,000 for her income taxes and is in the 15% marginal tax bracket, what would be her average tax rate if she had taxable income of $41,667?
About 12%
As "tax freedom day" came in mid-April, it means that the portion of the year people work to pay their taxes is represented by January 1 to
Mid-April
Flexible Spending Account (FSA)
allow you to reduce taxable income when paying for medical & dependent care expenses
tax credit
an amount subtracted directly from the tax owed
tax deduction
an amount subtracted from adjusted gross income to arrive at taxable income
tax exemption
an amount you can exclude from income
John owed $10,000 in taxes on taxable income of $40,000. If John earns an additional $1,000, he will pay an additional $280. Therefore
his average tax rate is about 25%
estate tax
imposed on the value of a person's property at the time of death
what payments are reported on Form 1099?
income from savings, investments, independent contracting, royalties, pension payments
taxable income
income on which tax must be paid; total income minus exemptions and deductions
taxes on earnings
income tax and social security
You calculate taxable income by reducing gross income by adjustments, exemptions, and standard or _______ deductions
itemized
tax planning and strategy
knowing current tax laws, maintaining complete/appropriate tax records, making purchase and investment decisions that can reduce your tax liability
common itemized deductions
taxes, interest, contributions under 20% of AGI, casualty/theft losses, moving expenses, job-related/misc. expenses that exceed 2% of AGI
marginal tax rate
the rate used to calculate tax on the last (and next) dollar of taxable income
tax evasion
the use of illegal actions to reduce one's taxes
tax avoidance
the use of legitimate methods to reduce one's taxes (ex: delay receipt of income, accelerate deductions to save taxes)
how long should you keep tax records?
three years from the date you file your return; however, you may be responsible for back docs up to six years. Other records (like past returns & housing docs) should be kept indefinitely
how do you pay federal income taxes?
through payroll withholding or estimated tax payments
Which best describes the purpose of the alternative minimum tax?
to assure that people who receive tax breaks pay a fair share of taxes
Adjusted Gross Income (AGI)
total income before subtracting any deductions or expenses
average tax rate
total taxes paid divided by total income
