Bus 160 Chapter 3 Terms

federal withholding taxes

taxes based on the level of earnings and the number of withholding allowances claimed, which an employer deducts from the employee's

In what ways does your filing status affect preparation of your federal income tax return?

A person's filing status, which is determined by marital status and dependents, will affect the amount of the standard deduction and the tax schedules that are used.

How does a tax credit affect the amount owed for federal income tax?

A tax credit is a direct (dollar-for-dollar) reduction in the amount owed in taxes. One example of a tax credit is child and dependent care expenses.

c. IRA contributions.

An example of an adjustment to income is

d. interest from municipal bonds.

An example of tax-exempt income is

c. a reduction from adjusted gross income.

An exemption refers to

What actions can help a person reduce the chances of an IRS audit?

By correctly reporting all income and properly taking advantage of deductions and tax credits, a person can reduce the chances of an audit. When unusual income or expense occurs, you may want to include an explanation of the item with the tax return.

What common tax-saving efforts are available to most individuals and households?

Common tax-savings efforts include owning a home with a mortgage (property taxes and mortgage interest are deductible), making purchases that may be deducted as job-related expenses, selecting tax-deferred and tax-exempt investments, owning your own business, and participating in a tax-deferred retirement plan.

What appeal process do taxpayers have if they disagree with an audit decision of the Internal Revenue Service?

If you disagree with the results of the audit, you may request a conference at the Regional Appeals Office. After this, a person may go to a U.S. tax court, the U.S. claims court, the U.S. district court, and even as far as the U.S. Supreme Court.

estimated taxes

tax payments required on income not subject to withholding that are paid in four installments

How does tax avoidance differ from tax evasion?

Tax avoidance refers to the use of legitimate methods to reduce one's taxes. Tax evasion is the use of illegal actions to reduce taxes.

How should you consider taxes for your financial planning?

Tax planning should include knowing current tax laws, maintaining complete tax records, and making financial decisions that reduce your tax liability.

How does tax-exempt income differ from tax-deferred income?

Tax-exempt income is not subject to taxation. Tax-deferred income is income that will be taxed at a later date.

What information is needed to compute taxable income?

Taxable income is the result of subtracting adjustments to income, deductions, and exemptions from gross income.

What are the main types of sources available to help people do their taxes?

The main sources of tax assistance are IRS publications and services, other tax publications, the Internet, computer software, and tax preparers.

What is the difference between your marginal tax rate and your average tax rate?

The marginal tax rate refers to the rate used to calculate the last (and next) dollar of taxable income. The average tax rate is based on the total tax due divided by taxable income.

When would a person use the standard deduction instead of itemized deductions?

The standard deduction would be used when a person does not have at least that amount in itemized deductions. A taxpayer with no or few itemized deductions still receives the standard deduction-an amount on which no taxes are paid.

b. field audit.

When an IRS agent visits your home or office to verify tax records, this is referred to as a(n)

What factors affect a taxpayer's choice of a 1040 form?

Whether a taxpayer will use the 1040, the 1040A, or 1040EZ will depend on type of income, amount of income, number of deductions, and complexity of tax situation.

What types of taxes do individuals frequently overlook when making financial decisions?

While most people are aware of the impact of federal income taxes on their financial situation, a wide variety of other taxes also affect financial planning. These include sales, excise, property, estate, inheritance, gift, and state and local income taxes.

a. Mortgage interest

__________ is deductible as an itemized deduction.

standard deduction

a blanket deduction that depends on the taxpayer's filing status, age, and vision and that can be taken by a taxpayer whose total itemized deductions are small

amended return

a tax return filed to adjust for information received after the filing date of the taxpayer's original return or to correct errors

Progressive tax structure

a tax structure in which the larger the amount of taxable income, the higher the rate at which is taxed

income shifting

a technique used to reduce taxes in which a taxpayer shifts a portion of income to relatives in lower tax brackets

Income taxes

a type of tax levied on taxable income by the federal government and by many state and local governments

adjustments to (gross) income

allowable deductions from gross income, including certain employee, personal retirement, insurance, and support expenses

tax audit

an examination by the IRS to validate the accuracy of a given tax return

filing extension

an extension of time beyond the usual April 15 deadline during which taxpayers, with the approval of the IRS, can file their returns without incurring penalties

exemptions

deductions from AGI based on the number of persons supported by the taxpayer's income

tax credits

deductions from a taxpayer's tax liability that directly reduce his or her taxes due (rather than reducing taxable income)

tax deferred

income that is not subject to taxes immediately but that will later be subject to taxes

itemized deductions

personal expenditures that can be deducted from AGI when determining taxable income

tax avoidance

the act of reducing taxes in ways that are legal and compatible with the intent of Congress

adjusted gross income (AGI)

the amount of income remaining after subtracting all allowable adjustments to income from gross income

taxable income

the amount of income subject to taxes; it is calculated by subjecting adjustments, the larger of itemized or standard deductions, and exemptions from gross income

taxes

the dues paid for membership in our society; the cost of living in this country

tax evasion

the illegal act of failing to accurately report income or deductions and, in extreme cases, failing to pay taxes altogether

Federal Insurance Contributions Act (FICA) or social security tax

the law establishing the combined old-age, survivor's, disability, and hospital insurance tax levied on both employer and employee

average tax rate

the rate at which each dollar of taxable income is taxed on average; calculated by dividing the tax liability by taxable income

Marginal tax rate

the tax rate you pay on the next dollar of taxable income

gross income

the total of all fo a taxpayer's income (before any adjustments, deductions, or exemptions) subject to federal taxes; it includes active, portfolio, and passive income