Personal Finance Ch. 3

The overriding objective of tax planning is:

to maximize the amount of money that you can keep legally by minimizing the amount of taxes you pay.

liquid asset: "___" Used for ___term needs and ___expenditures

"close to cash" short unplanned

Amended U.S. individual tax return

1040X

Amended return is called form ___

1040X

a taxpayer with $10,000 in capital gains can write off up to $___in capital losses. After that, he or she can write off a maximum of $___in additional capital losses against other (active, earned) income

$10,000 3,000

Standard tax return form, used with itemized deductions

1040

The declaration of estimated taxes (Form ___) is normally filed with the tax return

1040-ES

Short-form tax return

1040A

Short-form tax return for single persons with no dependents

1040EZ

A typical American family currently pays more than ___ of its gross income in taxes

1/3

To use Form 1040A, a two-page form, your income must be less than $___and be derived only from specified sources. Using this form, you may deduct certain IRA contributions and claim certain tax ___, but you cannot ___ your deductions.

100,000 credits itemize

If your income is over $___or you ___deductions, you must use the standard Form 1040 along with appropriate ___

100,000 itemize schedules

The part-year method results in substantially ___withholding

lower

This income limitation is waived for dependent children under the age of ___(at the end of the calendar year) who are full-time students

24

Under current law, single taxpayers can exclude from income the first $___ of gain on the sale of a principal residence. Married taxpayers can exclude the first $___. To get this favorable tax treatment, the taxpayer must own and occupy the residence as a principal residence for at least ___of the five years prior to the sale

250,000 500,000 two

Estimated taxes must be paid in four installments on ___, ___, ___, & ___. Failure to estimate and pay these taxes in accordance with IRS guidelines can result in a penalty levied by the IRS.

April 15, June 15, and September 15 of the current year, and January 15 of the following year

Schedule A: Schedule B: Schedule C: Schedule D: Schedule E:

Itemized deductions Interest and ordinary dividends Profit or loss from business Capital gains and losses Supplemental income and loss

The tax year corresponds to the calendar year and covers the period___ through___. Taxpayers may file their returns any time after the end of the tax year and must file no later than ___ of the year immediately following the tax year (or by the first business day after that date if it falls on a weekend or federal holiday).

January 1, December 31 April 15

It's possible to receive an extension of time for filing your federal tax return. You can apply for an automatic six-month filing extension, which makes the due date ___, simply by submitting Form ___

October 15 4868

A person whose spouse died within two years of the tax year and who supports a dependent child may use joint return tax rates and is eligible for the highest standard deduction.

Qualifying widow or widower with dependent child

US treasury bill aka: ___-term US Savings bond aka: ___-term

T bill short (3+ mo) T bond long (5-10 yrs)

A(n) ___ of up to $12,360 is available for the qualifying costs of adopting a child under age 18. Only taxpayers with AGI under $225,210 are eligible

adoption tax credit

The ___ is designed to ensure that high-income taxpayers with many deductions and tax shelter investments that provide attractive tax write-offs are paying their fair share of taxes. It includes in taxable income certain types of deductions otherwise allowed, such as state and local income and property taxes, miscellaneous itemized deductions, unreimbursed medical expenses, and depreciation. Therefore, taxpayers with moderate levels of taxable income, including those living in states with high tax rates and self-employed persons with depreciation deductions, may be subject to this calculation and additional tax.

alternative minimum tax

A taxpayer's tax liability is the higher of the ___or the ___

alternative minimum tax (AMT), regular tax

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

amended return

To avoid having to file a(n) ___ because you used the wrong deduction technique, estimate your deductions using both the standard and itemized deduction amounts and then choose the one that results in lower taxes

amended return

tax-deferred investment vehicles allow you to ___tax-free earnings. This results in much higher savings than would occur in a taxed account. A good example of tax-deferred income would be income earned in a(n) ___

accumulate traditional IRA

Income earned on the job, such as wages and salaries, bonuses and tips; most other forms of noninvestment income, including pension income and alimony

active income

After subtracting the total of all allowable adjustments to income from your gross income, you're left with ___

adjusted gross income (AGI)

Finding taxable income looks simple enough—just subtract certain ___ from your gross income to get your ___; then subtract either the ___deduction or your ___deductions and your total ___ to get taxable income; and finally, calculate your taxes, subtract any tax ___from that amount, and add any other taxes to it to get your___

adjustments adjusted gross income standard, itemized personal exemptions credits total tax liability

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

adjustments to (gross) income

When you relate the tax liability to the level of taxable income earned, the tax rate, called the___ drops considerably

average tax rate,

if you had any income tax withheld during the year, you must file a tax return—even if your income falls ___minimum filing amounts—to receive a refund of the income tax withheld.

below

occurs whenever an asset (such as a stock, a bond, or real estate) is sold for more than its original cost

capital gain

An often-used tax credit is for ____. This credit is based on the amount spent for dependent care while a taxpayer (and spouse, if married) works or goes to school. The qualifying dependent must be less than 13 years old, except in the case of a disabled dependent or spouse

child and dependent care expenses

Taxpayers with dependent children under age 17 are entitled to a(n) ___

child tax credit

The personal exemption amount is tied to the ___ and changes annually based on the prevailing rate of ___

cost of living inflation

Most states have their own income taxes, which differ from state to state. Some cities assess income taxes as well. These state and local income taxes will also be withheld from earnings. They are ___ on federal returns, but deductibility of federal taxes on the state or local return depends on state and local ___.

deductible laws

In addition to taxes, you may have other tax ___ for items such as life and health insurance, savings plans, retirement programs, professional or union dues, or charitable contributions---all of which lower your take home pay

deductions

The fundamentals of tax planning include making sure that you take all the ___to which you're entitled and also take full advantage of the various tax provisions that will minimize your tax ___

deductions liability

The idea behind ___taxes is to reduce or eliminate your taxes today by postponing them to some time in the future, when you may be in a lower tax bracket

deferring

___taxes gives you use of the money that would otherwise go to taxes—thereby allowing you to invest it to make even more money. Usually done through various types of retirement plans, such as IRAs, or by investing in certain types of annuities, variable life insurance policies, or even Series EE bonds (U.S. savings bonds)

deferring

In filing for an extension, however, the taxpayer must estimate the taxes due and remit that amount with the application. The extension ___ give taxpayers more time to pay their taxes.

doesn't

For deduction purposes, you cannot combine portfolio and passive income with ___ or with ___.

each other active income

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

estimated taxes

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

exemptions

your employer normally withholds funds not only for federal income taxes, but also for ____(___, or ___) taxes and, if applicable, state and local income taxes.

federal insurance contributions act (FICA, Social security)

taxes-based on the level of earnings and the number of withholding allowances claimed- that an employer deducts from the employee's gross earnings each pay period. Depend on what you filled out on what form?

federal withholding taxes W-4

Certificate of Deposit: requires a(n) ___ period of saving. ___-term not ___ withdraw ___

fixed short checkable penalty

Although there are no limits on the amount of capital ___ taxpayers can generate, the IRS imposes some restrictions on the amount of capital ___taxpayers can take in a given year. Specifically, a taxpayer can write off capital losses, dollar for dollar, against any capital gains

gains losses

The total of all of a taxpayer's income (before any adjustments, deductions, or exemptions) subject to federal taxes; it includes what three types of income?

gross income active, portfolio, and passive income

A taxpayer who is unmarried or considered unmarried and pays more than half of the cost of keeping up a home for himself or herself and an eligible dependent child or relative.

head of household

After the two-year period, a qualifying widow/widower with dependent child may file under the ___ status if he or she qualifies.

head of household

Additional withholding allowances can be claimed by 1.___ ___ ___, 2.those with at least $___of child or dependent care expenses for which they plan to claim a credit, and 3.those with an unusually large amount of ___(for example, mortgage interest, charitable contributions, real estate taxes, or state income taxes).

heads of households 1,900 deductions

capital gains are taxed at different rates, depending on the ___period. As a rule, taxpayers include most capital gains as part of ___income

holding portfolio

the amount of allowable, deductible expenses associated with portfolio and passive income is limited to the amount of ___derived from these two sources

income

Typically, audits question: 1.whether all ___received has been properly reported and 2.if the ___claimed are legitimate and the correct amount.

income deductions

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

income shifting

the major source of revenue for the federal government and are scaled on progressive rates

income taxes

To qualify as a deductible item, the capital loss must result from the sale of some __ asset, such as stocks and bonds.

income-producing

if you had a total of $380 in portfolio income for the year, you could write off no more than $380 in portfolio-related ___expense. However, if you have more portfolio expenses than income, you can "___" the difference and write it off in later years (when you have sufficient portfolio income) or when you finally ___the investment.

interest accumulate sell

Administering and enforcing federal tax laws is the responsibility of the ___, a part of the U.S. Department of Treasury.

internal revenue service (IRS)

Tax planning is closely interrelated with many financial planning activities, including ___, ___, and ___planning

investment retirement estate

AGI is an important value, because it's used to calculate limits for certain ___ deductions.

itemized

Personal expenditures that can be deducted from AGI when determining taxable income.

itemized deductions

Accelerating or bunching deductions into a single year may permit ___deductions. ___income from one year to another is one way to cut your tax liability. If you expect to be in the same or a higher income tax bracket this year than you will be next year, ___income until next year and shift expenses to this year so you can accelerate your deductions and reduce taxes this year

itemizing shifting defer

What two factors determine the amount of federal withholding taxes that will be deducted from gross earnings each pay period?

level of earnings number of withholding allowances

It is the ___, taxable income figure that determines how much tax an individual must pay.

lower

The tax rate for each bracket—10 percent, 15 percent, 25 percent, 28 percent, 33 percent, and 35 percent—is called the ____, or the rate applied to the next dollar of taxable income

marginal tax rate

Married couples who combine their income and allowable deductions and file one tax return.

married filing jointly

Each spouse files his or her own return, reporting only his or her income, deductions, and exemptions.

married filing separately

Common errors include ___information and ___errors. So check and recheck your forms before submitting them to the ___.

missing arithmetic IRS

Although there aren't many forms of tax-free investments left today, probably the best example would be the interest income earned on ___. Such income is free from federal income tax and possibly state income taxes

municipal bonds

A personal exemption can be claimed only ___. If a child is ____to be claimed as an exemption by her parents, then she doesn't have the choice of using a personal exemption on her own tax return, regardless of whether the parents use her exemption

once eligible

If you know you'll work less than eight months during a year then you can ask your employer to calculate withholding using the ___ method. This method calculates withholding on what you actually earn in the tax year, rather than on your annual salary.

part-year

A special category that includes income derived from real estate, limited partnerships, and other forms of tax shelters

passive income

Under the ___ system, your employer withholds (deducts) a portion of your income every pay period and sends it to the IRS to be credited to your own tax account

pay-as-you-go

Investment-related expenses can be used only with ___ income, and with a few exceptions, passive investment expenses can be used only to offset the ___ from passive investments

portfolio income

Earnings (interest, dividends, and capital gains [profits on the sale of investments]) generated from most types of investment holdings; includes savings accounts, stocks, bonds, mutual funds, options, and futures

portfolio income

Self-employed persons must also prepay their taxes by forwarding part of their income to the IRS at four dates each year (referred to as ___). The amounts withheld are based on a taxpayer's estimated ___

quarterly estimated tax payments tax liability

Now, to calculate the amount of income tax due. To do this, we need to address several key aspects of measuring taxable income and taxes: 1.the tax ___applicable to various types of personal income, 2.tax ___, 3.the basic tax ___and ___, and 4.the procedures for determining tax ___.

rates credits forms, schedules liability

It's particularly important to keep good, complete tax records because some day you may be audited by the IRS. Keep track of the source or use of all cash ___and cash ___, and record the ___of each expense. You'll also need proof that you actually had the expenses for which you have claimed deduction

receipts, payments, purpose

You can ___ taxes by using techniques that create tax deductions or credits, or that receive preferential tax treatment—such as investments that produce depreciation (such as real estate) or that generate tax-free income (such as municipal bonds)

reduce

withholding allowances ___ the amount of taxes withheld from your income

reduce

Tax planning basically involves the use of various investment vehicles, retirement programs, and estate distribution procedures to 1.___, 2.___, and 3.___taxes

reduce shift defer

To receive one of these credits, the taxpayer must file a ___along with a separate ___ in support of the tax credit claimed

return schedule

___ is taxed now, then placed in account and not taxed when withdrawn

roth IRA

Sending money on an overseas round trip to avoid taxes. Funnel money into foreign account in tax haven countries (like the Cayman islands) then use that money to buy stocks and bonds in US companies. Hard to quantify

roundtripping

The use of these ___, which provide detailed guidelines for calculating certain entries on the first two pages of Form 1040, varies among taxpayers depending on the relevance of these entries to their situations

schedules

You can ___taxes by using gifts or trusts to transfer some of your income to other family members who are in lower tax brackets and to whom you intend to provide some level of support anyway, such as a retired, elderly parent

shift

In addition, you qualify for a special allowance if: 1.you're ____ and have only one job; 2.you're ___, have only one job, and have a(n) ___spouse; or 3.your wages from a second job or your spouse's wages (or the total of both) are $___or less.

single married, nonworking $1,500

Unmarried or legally separated from their spouses by either a separation or final divorce decree.

single taxpayer

Filing status categories: (5)

single taxpayer married filing jointly married filing separately head of household Qualifying widow or widower with dependent child

You qualify to use the 1040EZ form if you are ___ or married filing a ___return; under age ___(both if filing jointly); not blind; do not claim any ___; have taxable income of less than $___from only wages, salaries, tips, or taxable scholarships or grants; have interest income of less than $1,500; and do not claim any ___ to income, itemize deductions, or claim any tax credits

single, joint 65 dependents 100,000 adjustments

In addition to income tax withholding on earnings, all employed workers (except certain federal employees) have to pay a combined old-age, survivor's, disability, and hospital insurance tax under provisions of the FICA. Known more commonly as the ___tax, it is paid equally by employer and employee.

social security

Most taxpayers use the ___ deduction, but homeowners who pay home mortgage interest and property taxes generally ___ because those expenses alone typically exceed the allowable standard deduction.

standard itemize

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

standard dedcution

the next step in calculating your taxes is to subtract allowable deductions from your AGI. You have two options: take the ___, a fixed amount that depends on your filing status, or list your ___ (specified tax-deductible personal expenses). Obviously, you should use the method that results in ___ allowable deductions

standard deduction itemized deductions larger

what you're left with after subtracting amount withheld from your gross earnings

take home pay

In addition to returns that stand out in some way and warrant further investigation, the IRS also randomly selects some returns for a(n)___—an examination to validate the return's accuracy

tax audit

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

tax avoidance

After determining your taxable income and calculating the tax liability, or amount of taxes you owe, you have one final step to determine the amount of taxes due. Some taxpayers are allowed to take certain deductions, known as ___, directly from their tax liability

tax credits

Income that is not subject to taxes immediately but that will be subject to taxes later.

tax deffered

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

tax evasion

In addition to common sources of income, there are others that are considered ___ and as such are excluded—totally or partially—from gross income

tax exempt

at the end of each tax year, taxpayers required to file a return must determine the amount of their ___—the amount of taxes they owe due to the past year's activities

tax liability

average tax rate formula:

tax liability/taxable income

The overriding objective of effective ___ is to maximize total after-tax income by reducing, shifting, and deferring taxes to as low a level as legally possible

tax planning

Once you know the amount of your taxable income, you can refer to ___ to find the amount of taxes you owe

tax rate tables

After the close of the taxable year, you calculate the actual taxes you owe and file your ___.

tax return

It's ___ income that matters

taxable

Subtracting the amount claimed for itemized deductions (or the standard deduction) and exemptions from AGI results in the amount of ___, which is the basis on which taxes are calculated

taxable income

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

taxable income

Pages 1 and 2 of Form 1040, which summarize all items of income and deductions detailed on the accompanying schedules, are used to determine and report the ___ and associated___

taxable income tax liability

dues that we pay for membership in our society; they're the cost of living in this country

taxes

A tax credit is much more valuable than a deduction or an exemption because it directly reduces, dollar for dollar, the amount of ___, whereas a deduction or an exemption merely reduces the amount of ___

taxes due taxable income

What happens when CD interest rates are lower than inflation rates?

the money you get back with interest is worth less than what you originally put in

A taxpayer can claim an exemption for ___, their ___, and any ___—children or other relatives earning less than a stipulated level of income—for whom the taxpayer provides more than ___of their total support

themselves spouse dependents half

You generally have ___ from the date you file your original return or ___ from the date you paid the taxes, whichever is later, to file an amended return

three years two years

The IRS can take as many as ___years—and in some cases, ___years—from the date of filing to audit your return, so you should retain records and receipts used in preparing returns for about ___years. Severe financial penalties, even prison sentences, can result from violating tax laws.

three, six seven

This homeowner exclusion is available on only one sale every ___ years. A loss on the sale of a principal residence ___ deductible.

two is not

When you file, you receive full credit for the amount of taxes ___(including estimated tax payments) from your income during the year and either 1- receive a(n) ___ from the IRS (if too much tax was withheld from your paycheck and/or prepaid in estimated taxes) or 2- have to pay ___ (if the amount withheld/prepaid didn't cover your tax liability).

withheld refund additional taxes