Personal Finance Test #2

how much of PI accounts for insurances, property taxes, maintenance, and upkeep

30%

how much of American's national income percentagewise goes to taxes?

33%

FICO score

340-850; measures credit worthiness; estimates agencies level of confidence that you can make on time, full payments; determined by payment history, amount owed, type of credit used, length of credit history, new credit

__________ taxes are used to finance Social Security and Medicare.

FICA

amortization schedule

a table outlining each monthly payment, the portion of each that will go towards interest and principal, and debt remaining after each payment is made

home equity loan

a type of loan in which the borrower uses the equity of his or her home as collateral; loan amount is determined by the value of the property

chapter 13 bankruptcy

a voluntary plan proposed to bankruptcy court for those who want to pay portion up debt up to five years; if you execute your plan well, you can keep all your assets, however many people end up having to file chapter 7 anyway

how do you factor in scholarships to income?

add to income; may deduct tuition, books and supplies, fees, and equipment (not laptops); cannot deduct room and board or travel

itemized deductions

an alternative to the standard deduction in which the taxpayer reports and deducts actual expenses in certain allowed categories to arrive at taxable income; involves filing schedule A

pay as you go system

as you earn income, the IRS expects you to pay taxes owed; accomplished through withholding and estimation

marginal tax rate

based on taxable income (not adjusted); when using for tax planning, consider MTR of the expected last $ of the year (this is the highest MTR); this is useful in estimating withholdings

medical expenses through FSA and HSA

can deduct based on MTR

medical expenses through itemized deductions

cannot itemize unless they are greater than 7.5% AGI

Which of the following tax credits best applies to a low-income family with two children?

child tax credit

tax freedom day

day when the nation as a whole has earned enough money to pay its total tax

standard deduction

deduction you get from filing status; flat amount the IRS allows you to deduct from your adjusted gross income in place of itemized deductions

home equity

down payment + monthly principal payments + home appreciation; equity = current market value - current mortgage liability

married filing separately filing status

each spouse files an individual tax return

pros of renting

easier to move; fewer maintenance/repair responsibilities; lower initial rates

W-2

a form that an employer must send to an employee and the IRS at the end of the year; reports employee's income and amount of taxes withheld

refinancing a home

a new mortgage is obtained to pay off and replace an existing mortgage; can be done to lower the interest rate on a loan

adjustable rate mortgage

has an interest rate that changes over time with market conditions; type of mortgage that lender can increase the interest rate according to an index

tax benefits for home ownership

home loan interest is deductible; property tax is deductible; mortgage insurance premiums; capital gains may be tax free ($250,000 for single, $500,000 for married)

capital

household's net worth

tax evasion

illegally not paying all the taxes that you owe; deliberate nonpayment of taxes legally owed

alternative minimum tax

income tax recalculation designed to ensure that people who receive certain tax breaks pay fair share of federal taxes (large number of exemptions, long term capital gains, unusually large itemized deductions)

general trend of consumer credit in America

increasing in America

underpayment penalty tests

pay at least 90% of your tax liability for the current year; pay 100% of what tax you paid the previous year (actual penalty is 20% of shortfall)

different sources of loans/financing for homes

pay in cash; assume an existing mortgage; get a new mortgage from lender or seller

2 factors that contribute most to FICO

payment history and amount owed

what cannot be deducted from taxes in terms of housing

payment on principal of the loan; payment on homeowner property insurance premiums

APR

percentage cost of credit on a yearly basis, includes interest and mandatory fees; true rate of interest so you can compare rates with other sources of credit

qualifying widower with dependent child

person whose spouse died within 2 years of tax year and who lives with and pays more than 1/2 of support

Tom has calculated his itemized deductions versus the standard deduction and decided to report itemized deductions when he files his tax return. Which form will Tom need to include with his return?

schedule A

can you withhold payment on damaged/shoddy goods or poor services on credit card

yes, if you make sincere attempt to resolve with creditor

what does being upside down on a loan mean?

you are going to sell a loan, but you owe more than you can sell it for; avoid this by not getting an auto loan that is >5 years

freeze credit reports

you can freeze inquiries into your credit; this can be temporarily lifted or removed but you might have to pay; these are free in cases of identity theft

your lifestyle materializes in consumer purchases...

every buying decision is a statement about your lifestyle

three credit report agencies

experian, trans union, equifax

Both tax evasion and tax avoidance are against the law and are subject to criminal penalties. (true/false)

false

Marginal tax rates today are high by historical standards (true/false)

false

buying house cons

financial investment and uncertainty; limited mobility; high living/maintenance costs

fixed rate mortgage

fixed interest rate, fixed term, fixed payment loan with monthly payments; these rates are fixed for the life of the loan (recommended for first time buyers)

Reimbursement accounts for qualified medical and child care expenses are known as __________.

flexible spending accounts (FSA)

social security limit for FICA

$128,400

traditional finance guidelines suggest you spend how much percentagewise on housing?

25-33%

Medical expenses that add up to more than ____ percent of adjusted gross income can be deducted.

10% (or 7.5%)

how much do people spend on average more using credit than cash?

10-20%

If you made a mistake on last year's tax return, you would file a ______________.

1040X

how much do self-employed pay of their income to FICA?

15.30%

Which of the following retirement accounts allows tax-free withdrawals at retirement?

Roth IRAs

other ways to build equity/reduce cost of house

larger down payment; shorter repayment period; bi-weekly rather than monthly payments; pay off loan early (accelerated payments)

collateral

lender will take pledged collateral if you don't make payments; more valuable the collateral the better

capacity

lender's assessment of your capacity to pay back; based on cash flow

cons of renting

limitation for remodeling; restrictions for pets/other activities; legal concerns for lease; costs- security deposit, utilities, etc.; no tax benefits; no accruing of equity

credit card stolen and used, your liability on its expenses is

limited to $50 per card; not liable for charges after you report your card missing

tax deductions

lower your taxable income and are equal to % of marginal tax bracket

conditions

other external factors, such as economic conditions (high unemployment)

snowball strategy

make payment to all balances and accelerated amount on the first one; once the one is paid off, use the accelerated amount and previous account payment to accelerate the next payoff; sort by APR, save the most money on compounding interest; sort by dollar amount, easier to handle mentally

married filing jointly

married couple filing a single tax return, even if only one spouse has an income

Which of the following filing status categories receives the largest standard deduction?

married filed jointly

leasing vs. buying

more about lifestyle than money; lower lease cost often offset by conditions listed in fine print and lower cost of long term ownership; owning is usually better financially than leasing

according to Dr. P you should ________ the minimum balance on your credit card

never never never pay

should you include home equity as an asset in balance sheets?

not recommended; homes are meant to be lived in, not sold (always consider resale value though)

consumer credit

presonal, nonmortgage, credit and debts; credit used to buy consumer goods

character

previous credit, employment, and education history

buying house pros

pride of ownership; deduct taxes; potential home value increasing; build equity in home; lifestyle flexibility

what is PITI

principal, interest, taxes, insurance

The U.S. income tax is considered _________________.

progressive

is federal income tax progressive or regressive

progressive; demands increasing proportion of a person's income as income increases

dependent status for qualifying child

relationship test; age test (<19 years or <24 years as a student); household member; 50% support test; entitled to claim

capital gains

selling personal property/asset for more than you bought it for; long term capital gains are held more than one year, short term capital gains are held less than one year (taxed at MTR)

extended warranties

should read fine print of such warranties carefully because many warranties exclude coverage for problems you will most likely experience; also warranty price>cost of repairs

average tax rate

shows your tax liability (total tax) as a percentage of your taxable income; is lower than your marginal rate because your lower segments of income are taxed at lower rates

head of household

single person who lives with and pays more than half of the support for a dependent child/relative

FICA taxes

social security and medicare; 7.65% income withheld up to $128,400; employees pay this balance

tax credit

specific qualifications (i.e. child tax credit, earned income credit) that directly reduce the amount of taxes that you owe

three pillars of tax planning

start with knowing current tax laws; maintaining complete and appropriate tax records; making purchase and investment decisions to reduce tax liability

tax avoidance

strategic use of knowledge of tax rules to avoid overpayment of taxes; legitimate reasons to reduce tax obligation to fair share but no more

chapter 7 bankruptcy

submit a petition to the court that lists assets and liabilities, and pay a filing fee; many debts are forgiven; most people file this; requires liquidation of most of your assets

W-4

tax form used by employers to withhold the proper amount of federal income tax from your paycheck; having false information on this form charges you a penalty

quarterly payments

tax payments that are made 4 times throughout the year; used by those who are self-employed

four types of taxes

taxes on purchases (sales tax and excise tax); taxes on property (real estate property and personal property tax); taxes on wealth (federal estate tax); taxes on earnings (income, SS taxes)

exemptions

the dollar amount per household member that is subtracted from adjusted gross income in calculating taxable income; phased out at very high incomes

benefits of 30 year loan

the longer the maturity of the mortgage the lower the monthly payment

amortization

the process of gradually paying off a loan through a series of periodic payments; each payment contains interest for the month and payment towards the principal owed

who pays the commission for real estate agents/brokers?

the seller

benefits of 15 year loan

the shorter the maturity of the mortgage, the lower the total amount of interest that will be paid over time

debt service ratio

the total amount of all monthly debt payments with gross monthly income

Which of the following must be included in total income on federal income tax returns?

tips and bonuses

mortgage debt service ratio

total annual amount of expenditures for housing with the loan applicant's gross annual income

A $1,000 tax credit would be more beneficial than a $1,000 tax deduction. (true/false)

true

Capital gains taxes vary depending on how long you owned the investment. (true/false)

true

If your earned income does not exceed the total of your exemptions and standard or itemized deductions, then your taxable income is zero, and you are not required to file a tax return. (true/false)

true

underpay or overpay?

underpay; the worst thing that you can do as a tax payer is to receive a big refund at the end of the year

medicare limit for FICA

unlimited

single filing status

unmarried or legally separated from spouse

when do you need to purchase private mortgage insurance?

when you pay less than 20% of your mortgage as a down payment

universal exclusions

will not be taxed on house capital gains if amount earned is not greater than $250,000 for single or $500,000 for married

federally endorsed URL for free credit report

www.annualcreditreport.com