Module 3: Taxes

Credit:

A dollar-for-dollar reduction in the tax. Can be deducted directly from taxes owed

Form W-4, employee's withholding allowance certificate:

Completed by the employee and used by the employer to determine the amount of income tax to withhold

What status should you use when filing your taxes?

I would use the single

Earned income:

Includes wages, salaries, tips, includible in gross income, and net earnings from self-employment earnings

T or F: Generally speaking, people with higher incomes will benefit more from using itemized deductions when filing their taxes.

True

One of the most important tax documents that you will receive each year that lists your total income and tax withholdings is the:

W-2 Form

What are potential sources of taxed income you might have other than from your job?

interest dividends, gains from investment; self-employment; property rental; royalties; "other" income

What items does the government typically not tax in most circumstances?

referred to as "adjustments to income;" specific expenses that the IRS allows you to use to effectively reduce your total income

What are the different types of filing status?

single, married filing jointly, married filing separately, head of household, qualifying widow(er) with dependent child

The United States uses a progressive tax system with different tax brackets. If the amount of your taxable income falls into the 22% tax bracket, then:

you would pay 22% in taxes only on the portion of your income that falls into that tax bracket

What is AGI? How is it determined?

Adjusted gross income. Deducting adjustments from your income. can be further adjusted by subtracting the standard deduction or itemizing your deductions.

Compare and contrast how tax exemptions, deductions, and credits reduce the amount of taxes a filer owes.

All can reduce the amount of taxes that person owes. Exemptions and deductions indirectly reduce the amount of taxes a filer owes by reducing their "taxable income;" credits directly reduce a filer's tax liability

Deduction:

An amount (often a personal or business expense) that reduces income subject to tax

Gross income:

Money, goods, services, and property a person receives that must be reported on a tax return. Includes unemployment compensation and certain scholarships. It does not include welfare benefits and nontaxable Social Security benefits

What various tax statements may you receive in January? What is their purpose?

documents that are used to complete a 1040 tax form; includes W-2 form and form 1099

Capital gain:

A net gain realized from the sale of property or assets including real estate, stocks, bonds, and mutual fund shares. A gain is classified as a short-term capital gain if the property or assets that produced it have been held for less than one year and as a long-term capital gain if they have been held for more than twelve months

Capital loss:

A net loss realized from the sale of property or assets including real estate, stocks, bonds, and mutual fund shares. A loss is classified as a short-term capital loss if the property or assets that produced it have been held for less than one year and as a long-term capital loss if they have been held for more than twelve months

Tax exemption:

A part of a person's income on which no tax is imposed

Audit:

A process used by the IRS to verify the accuracy of a tax return by confirming specific items on the return. Two items commonly verified in an audit include the reporting of income and the use of deductions

Dependent:

A qualifying child or qualifying relative, other than the taxpayer or spouse, who entitles the taxpayer to claim a dependency exemption

Earned income credit:

A tax credit for certain people who work, meet certain requirements, and have earned income under a specified limit

Direct tax:

A tax that cannot be shifted to others, such as the federal income tax

Filing status:

Determines the rate at which income is taxed. The five filing statuses are: single, married filing a joint return, married filing a separate return, head of household, and qualifying widow(er) with dependent child

Exemptions, deductions, and credits are things that can help a person reduce the amount of taxes they owe. Briefly describe the difference between these and select the one that is most beneficial to tax payers and explain why it is most beneficial.

Exemptions are transactions or income that are free from tax from the federal, state or local government. Deductions are an amount of money that reduces income subject to tax. Credit is a "dollar-for-dollar" tax reduction that can be deducted directly from taxes owned. Credits can be the most beneficial because they directly reduce a filer's tax liability, meanwhile exemptions and deductions reduce a filer's taxable income.

T or F: If you have a full time job, but also are self-employed as a pet-sitter and earn approximately $1,000 over the course of the year, you don't have to pay taxes on the pet-sitter income.

False

Adjusted gross income:

Gross income reduced by certain amounts, such as a deductible IRA contribution or student loan interest

Withholding ("pay-as-you-earn" taxation):

Money, for example, that employers withhold from employees paychecks. This money is deposited for the government. (It will be credited against the employees' tax liability when they file their returns.) Employers withhold money for federal income taxes, Social Security taxes and state and local income taxes in some states and localities

What is taxable income? How is it determined?

Portion of gross income that is used to pay taxes. The AGI can be further adjusted by subtracting the standard deduction or itemizing your deductions, resulting in your taxable income

How does the government determine how much money you will pay in federal taxes each year?

Progressive tax- the higher the income (or more to be taxed), the greater the tax rate

Standard deduction:

Reduces the income subject to tax and varies depending on filing status, age, blindness, and dependency

Income taxes:

Taxes on income, both earned (salaries, wages, tips, commissions) and unearned (interest, dividends). Income taxes can be levied on both individuals (personal income taxes) and businesses (business and corporate income taxes)

Tax liability (or total tax bill):

The amount of tax that must be paid. Taxpayers meet (or pay) their federal income tax liability through withholding, estimated tax payments, and payments made with the tax forms they file with the government.

Internal Revenue Service (IRS):

The federal agency that collects income taxes in the United States

Federal income tax:

he federal government levies a tax on personal income. The federal income tax provides for national programs such as defense, foreign affairs, law enforcement, and interest on the national debt

If you are single and do not have any kids, most experts recommend that you claim ____________ allowance(s) on your W-4 form. If you decide that you would rather have a larger tax refund, you could instead claim ______________ allowance(s).

one; zero

What is the difference between taking a standard deduction and itemizing your deductions?

standard deduction lowers your income by one fixed amount; itemized deductions are made up of a list of eligible expenses

How does claiming more or less allowances on your W-4 form effect the amount of federal taxes deducted from your paycheck?

the more allowances you claim on your W-4 form, the less taxes are taken out of your paycheck