Personal and Family Finance- Chapter 3

Flat Tax:

-(Short tax) A tax system with a constant marginal rate, usually applied to individual or corporate income.

Value-Added Tax (VAT Tax):

-A consumption tax added to a product's sales price. It represents a tax on the "value added" to the product throughout its production process.

Exemption:

-A deduction from adjusted gross income for yourself, your spouse, and qualified dependents.

Standard Deduction:

-A set amount on which no taxes are paid.

Excise Tax:

-A tax imposed on specific goods and services, such as gasoline, cigarettes, alcoholic beverages, tires, and air travel.

Inheritance Tax:

-A tax levied on the value of property bequeathed by a deceased person.

Recent Tax Changes:

-Advanced (premium) tax credit was initiated. -Penalties will be assessed for those who do not have health insurance. -Teachers will no longer be able to deduct up to $250 for unreimbursed educational expenses. -Employers can now allow employees with health care flexible spending accounts to carry over up to $500 of unused funds. -Streamlined options are available for the home office deduction for small businesses.

Roth IRA:

-Allows a $5,500 annual contribution, which is not tax-deductible; however the earnings on the account are tax-free after five years.

Exclusion:

-An amount not included in gross income.

Tax Credit:

-An amount subtracted directly from the amount of taxes owed.

Tax Deduction:

-An amount subtracted from adjusted gross income to arrive at taxable income.

529 Plan:

-An education savings plan that helps parents save for the college education of their children.

Tax Shelter:

-An investment that provides immediate tax benefits and a reasonable expectation of a future financial return.

Traditional IRA:

-Available only to people who do not participate in employer-sponsored retirement plans or who have an adjusted gross income under a certain amount.

What are the different types of Income?:

-Earned Income -Investment Income -Passive Income

Itemized Deductions:

-Expenses that can be deducted from adjusted gross income, such as medical expenses, real estate property taxes, home mortgage interest, charitable contributions, casualty losses, and certain work-related expenses.

The major sections of the Form 1040:

-Filing status and exemptions -Income -Adjustments to income -Tax computation -Tax credits -Other taxes -Payments -Refund or amount you owe -Your signaure

Recent tax credits also included:

-Foreign tax credit to avoid double taxation on income taxes paid to another country. -Savers credit (formerly the retirement tax credit) to encourage investment contributions to individual and employer-sponsored retirement plans by low- and middle-income taxpayers. -Adoption tax credit to cover expenses when adopting a child under age 18. -Education credits to help offset college education expenses.

Adjusted Gross Income (AGI):

-Gross income reduced by certain adjustments, such as contributions to an individual retirement account (IRA) and alimony payments.

You can minimize taxes owed by following these steps:

-If you expect to have the "same" or a "lower" tax rate next year, "accelerate deductions" into the current year. by December 31st. -"Delay the receipt of income" until next year so the funds will be taxed at a lower rate or at a later date. -If you expect to have a higher tax rate next year, consider "delaying deductions," since they will have a greater benefit. -If you expect to have a "higher" tax rate next year, "accelerate the receipt of income" to have it taxed at the current lower rate.

Passive Income:

-Income resulting from business activities in which you do not actively participate.

Tax-Deferred Investments:

-Income taxes at a later date, are less beneficial than tax-exempt investments, they give you the advantage of paying taxes in the future rather than now.

Tax-exempt Income:

-Income that is not subject to tax.

Tax-deferred Income:

-Income that will be taxed at a later date.

What are some examples of itemized deductions?:

-Medical and dental expenses -Taxes -Interest -Contributions -Casualty and theft losses -Moving Expenses -Job-related and other miscellaneous expenses

Earned Income:

-Money received for personal effort, such as wages, salary, commission, fees, tips, or bonuses.

Investment Income:

-Money received in the form of dividends, interest, or rent from investments; also called "portfolio income."

Capital Gains:

-Profits from the sale of a capital asset such as stock, bonds, or real estate.

IRS Services:

-Publications -Recorded Messages -Phone hotline -Walk-in service -Interactive tax assistant -DVD -IRS2GP app

The buying decisions most directly affected by taxes are the....:

-Purchase of a residence -The use of credit -Job-related expenses

Keogh Plan:

-Self-employed and own you own business -This retirement plan (HR10) may combine a profit-sharing plan and a pension plan of other investments purchased by the employee.

What are the five filing status categories:

-Single -Married, filing joint return -Married, filing separate returns -Head of household -Qualifying widow, or widower

Tax-Deferred Investments Include:

-Tax-deferred annuities -Section 529 Savings plan -Retirement Plans

Taxable Income:

-The net amount of income, after allowable deductions, on which income tax is computed.

401 (K) Plan:

-The part of the tax code authorizes a tax-deferred retirement plan sponsored by an employer. -Allows you to contribute a greater tax-deferred amount ($17,500) than you can contribute to an IRA.

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.

Average Tax Rate:

-Total tax due divided by taxable income.