FIN 220 Exam 1

What strategies can you use to support your tax return in the event of an IRS audit?

-Keep accurate records -retain all your receipts and canceled checks -avoid common filing errors

Intermediate goal time frame

2-5 years

a regular savings account usually does NOT have

a high rate of interest, a high balance requirement, overdraft protection

trust

a legal agreement that provides for the management and control of assets by one party for the benefit of another

long-term liabilities

debts you do not have to pay in full until more than a year from now (auto loans, educational loans, and mortgages)

Deflation is a decline in prices, which often results in consumers ______ their spending as they expect the prices to go even lower

decreasing (Deflation)

Taxpayers pay income taxes through payroll _____________ and through estimated tax ______________.

deductions, payments

budget variance

determine the difference between the actual amount spent or received and the amount budgeted

How would a decrease in the interest rate effect the present value of a lump sum, single amount problem (all other variables remain the same)?

increase the present value

What is the amount of money or the value of property that can be gifted each year without being subject to federal gift taxes?

$14,000 per person per year

the dollar limit for FDIC insurance is currently

$250,000

balance sheet

(aka net worth statement or statement of financial position) reports what you own and what you owe

take home pay

(net pay) a person's earning after deductions for taxes and other items

payday loans are usually used by people who:

-are trapped by debts -are driven into debt due to poor financial decisions -run up debt by free spending

A premature withdrawal from a traditional IRA will result in taxable income and a penalty of _____% of the withdrawn amount

10

If you want to amend a previous tax return, you need to file a ________ form.

1040X

What form is used to report your mortgage interest to you by the mortgage lender?

1098

A global economy and foreign competition

American consumers spend dollars on goods and services, which are manufactured or offered by American companies and companies from other countries. (This is an example of)

What is the simplest type of audit done by the IRS?

Correspondence audit

How would a decrease in the interest rate effect the future value of a lump sum, single amount problem (all other variables remain the same)?

Decrease the future value

How would an increase in the interest rate effect the present value of an annuity problem (all other variables remain the same)?

Decrease the present value

T/F: A deduction for moving expenses is allowed if you move for any reason at least 100 miles away from your current residence

False (the reason must be job related and it must be at least 50 miles)

This is NOT an influence on personal financial planning (shown in the 4th step of the financial planning process)

Gold prices

What are some examples of tax-deferred investments

Keogh, Tax-deferred annuities, health savings plans, IRA

insolvency

NOT having adequate liquid assets to pay off all debts of a person

What is the purpose of a W-2P form?

Pension income

When is the due date for the third installment for estimated tax?

September 15

T/F: Anyone can use Form 1040, you must use it if you itemize your deductions.

True

You should keep your tax records for at least three years after filing your return. However, you may be held responsible for providing back documentation for how long?

Up to 6 years

cash surplus

When the cash inflow is greater than the outflow

What qualifies someone as a dependent?

You must provide more than 50% of their support and they must be a full time student if they are over 19 years old

Discounting

another name for calculating the present value

liquidity

attribute of a savings account that allows you to withdraw money on short notice without a loss of principal or fees

liquid assets

cash and items that can easily be converted into cash

time deposits do NOT include

credit card and cash loans, checking accounts

Financial services are now offered by

credit card companies, investment brokers, insurance companies

What deposit type institutions serve as financial intermediaries

credit unions, commercial banks, savings and loans

what types of financial institutions have federal deposit insurance

credit unions, commercial banks, savings and loans

three types of income

earned income, investment income, passive income

itemized deductions

expenses a taxpayer is allowed to deduct from adjusted gross income

Common sources of income for most people

gifts and grants, wages, salaries and commissions, government payments, and amounts received from pensions.

commercial banks offer services to:

government agencies, businesses, and individuals

benefits of US savings bonds include

government guarantee, exemption from state and local taxes, low minimum deposit

Adjusted Gross Income (AGI)

gross income after certain reductions have been made

indexed CD

has earnings based on the performance of the stock market

Easy to replace documents should be placed here

home filing system, personal computer system

earned income

is usually in the form of wages, salary, commission, fees, tops, or bonuses

mutual savings bank

owned by depositors and specialized in savings and mortgages

certified check

personal check with guaranteed payment

passive income

results from business activities in which you do not actively participate (limited partnership)

What is the purpose of a W-2 form?

salary, wages, and taxes withheld

certificate of deposit

savings plan that requires a certain amount of money to be left for a specified amount of time

What are the two main taxes on wages and salaries?

social security and incomes taxes

Federal Reserve System

the central bank of the US and has significant economic responsibility

what is the main purpose for life insurance

to provide financial security for dependents

what are the main types of services that finance companies typically do not offer

to provide frequent access to cash machines, to provide savings accounts with high interest rates, to provide checking accounts with unlimited withdrawls

what is an endorsement

your signature on the back of the check

investment income

(sometimes referred to as portfolio income) is money received in the form of dividends, interest, or rent from investments.

tax credit

amount subtracted directly from the amount of taxes owed, reduces tax liability dollar for dollar

What are examples of demand deposits?

checking accounts and payment accounts

what services do savings and loans offer?

checking accounts, savings accounts, lending

when interest rates are rising you should

choose short term savings vehicles, use long term loans

signature card

document that records the official signatures of the person or persons authorized to write checks on the account

a typical customer of an activity account:

does not maintain a minimum balance, writes a few checks each month

Flexible spending accounts (FSAs) allow you to reduce your taxable ____________ when paying for medical and _________ care expenses.

income, child

What is the purpose of a 1099 form?

interest, dividends, capital gains and losses, self employment income, lump sum payments

The primary goal of the Users in the Financial System is:

to obtain funds at the lowest cost

Money management

day-to-day financial activities necessary to manage current personal economic resources while working toward long-term financial security

common payment choices

debit cards, credit cards, cash, checks

What might trigger alternative minimum tax?

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

estate tax

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

Reductions (adjustments to income)

include contributions to an individual retirement account (IRA) or a Keogh retirement plan, penalties for early withdrawal of savings, and alimony payments

The Paralysis of Analysis

individual or group is unable to move forward with a decision as a result of over-analyzing

share draft account

interest-bearing checking account at a credit union

tax deductions

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

average tax rate

is based on the total tax due divided by the taxable income

How do 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

Risk Premium factors

length of time, interest rates, expected inflation, uncertainty of getting money back

What events might cause a taxpayer to make estimated tax payments?

lump sum payments from pensions, royalties, significant earnings from savings or investments, earnings from independent contracting

discretionary income

money left over after paying for housing, food, and other neccessities

interest (itemized deduction)

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

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 gain rates

safe deposit box

private storage area at a financial institution with maximum security and difficult to replace documents

Financial goals suited for 18-35 year olds

purchasing disability insurance, establishing financial independence, considering purchasing a home for financial benefit

selection of savings plan is influenced by what factors?

rate of return, restrictions and fees, liquidity, safety

Steps to writing a check

record the date, write the name of the person receiving the funds, record the amount of the check in figures or numbers, write the amount of the check in words, sign the check, note the reason for payment

Budgeting steps (in order 1-6)

set financial goals, estimate expected income, allocate an emergency fund and savings, budget known expenses, budget estimated expenses, record spending amounts and evaluate revisions

taxes (itemized deduction)

state and local income tax, real estate property tax, and state or local personal property tax (taxes if purchases, life insurance proceeds, wealth, property, and earnings)

Three major money management activities (which are interrelated)

storing and maintaining personal finance records and documents, creating personal financial statements (balance sheets and cash flow statements of income and outflows)

common itemized deductions

taxes, interest, contributions, casualty and theft losses, moving expenses, job-related and other miscellaneous expenses

What is the biggest difference between a traditional IRA and a Roth IRA?

the Roth IRA contribution is not tax deductible, but after 5 years, its earnings are tax free

interest rates represent:

the cost of borrowing money

taxable income

the next amount of income after allowable deductions on which income tax is computed

rate of return

the percentage increase in the value of savings as a result of interest earned

Identify the stage of the adult life cycle that influence the financial activities and decisions

the portion of the life cycle of a person's life that begins the adult portion of the life cycle

Adult life cycle

the stages in the family situation and financial needs of an adult

What is the purpose of the alternative minimum tax?

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

stop payment order

used to avoid the payment of a specific check

marginal tax rates

used to calculate the tax on the last and next dollar of taxable income ("tax bracket" this is given)

What is included in the calculation of gross income?

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

cash flow statements

(personal income or expenditure statement) is a summary of cash receipts and payments for a given period

What are the benefits of using tax software?

- a spreadsheet program can help you keep track of income and expenses as the year plays out -software packages such as H&R Block At Home and TurboTax help users prepare and file returns -you can save time while preparing Form 1040 and its accompanying schedules

What are some examples of tax avoidance strategies?

-delay the receipt of income because you want to delay the payment of taxes until next year -accelerate deductions to save taxes this year

What are the conditions for using a 1040EZ form when filing taxes?

-income can only consist of wages, salaries, and tips and not more than $1500 of taxable interest -taxable income must be less than $100,000 -the filer must be under the age of 65 -the filer must be single or married filing joint return and claim no dependents

When taxes are added for a product for each stage in the manufacturing process, this is called:

VAT

exemption

a deduction from adjusted gross income for yourself, your spouse, and qualified dependents

Two key planning activities of December are deciding whether to make payments that would be to your ____________________ for this year while deferring ________________ into the next year.

advantage, income

current liabilities

are debts you must pay within a short time, usually less than a year (medical bills, tax payments, insurance premiums, cash loans, and charge accounts)

financial ratios

are guidelines for measuring changes in your financial situation

commercial banks

are organized as corporations, with investors contributing the capital for operations

contributions (itemized deduction)

cash or property donated to qualified charitable organizations (contributions greater than 20% of adjusted income are subject to limitations)

to achieve long-term financial goals, many people trade off ___________ for a __________ return.

liquidity, higher

Two main reasons Americans have financial problems

poor planning, weak management of money, advertising efforts and availability of good encourages overspending

when interest rates are falling you should

prefer short-term loans over long term loans, lock in current rates by choosing long-term savings options

job-related and other miscellaneous expenses (itemized deduction)

reimbursed job travel, union dues, required continuing education, work clothes or uniform, investment expenses, tax preparation fees, safe deposit box rental (for storing investment paperwork), etc.

net worth

the difference between total assets and total liabilities

Consumer Price Index

the measure of the average change in the prices urban consumers pay for goods and services

some tax advantages of EE bonds are

there is no federal income tax until redeemed, interest is exempt from state and local taxes