Chapter 16

filing status

based on taxpayer's marital status on last day of year & other factors. determine the rate at which income is taxed. five filing statuses: single, married filing jointly, married filing separately, head of household, qualifying widower w/ dependent child.

social security benefits

based on the best 40 quarters of earnings (earned income) on which social security tax has been paid.

withholding allowance

claimed by an employee on Form W-4. employer uses # of allowances claimed + income earned & marital status, to determine how much income tax to withhold from wages.

social security tax

more than 1/4 of all federal revenue collected is placed in funds for retirement pensions & survivor benefits - managed by the social security administration.

3 choices for filing a tax return

Form 1040EZ, Form 1040A (the "short" form), Form 1040 (the "long form). the form an individual uses depends on the complexity of his return.

Form W-2

Wage & Tax Statement. Employer must give this form to each employee by Jan. 31 of the following year. A copy of each received must be attached to the tax return when filed.

Internal Revenue Service (IRS)

Agency of the Federal government, who is responsible for collecting and enforcing the tax laws. Relies on all taxpayers to know their tax responsibilities.

Form W-4

Employee's Withholding Allowance Certificate. Employee is required to fill this out by the employer who uses the info provided to calculate the correct amount of federal tax to withhold based on claimed allowances & marital status.

Conditions for exemption from withholding

Had a right to a refund of all fed. income tax withheld b/c of no tax liability last year. this year, expecting a refund of all federal income tax withheld b/c expecting to have no tax liability. if an individual can be claimed as a dependent, he must have no more than $800 in unearned income.

Dependency Test, Joint Return

If the person is married and files a joint return with his or her spouse, an exemption cannot be taken for that person. Exception - if neither that person or the spouse is required to file but file a joint return and get a refund of all tax withheld. the person may be claimed if all other 4 are satisfied.

Form 1099-INT

Interest Income. Issued by each institution or individual paying interest income during the taxable year. Also submitted to the IRS. Interest income is unearned (i.e. received on checking/saving accounts, bonds, seller finance agreements-of-sale, second mortgages). Copies don't need to be attached to the tax return when filing.

Dependency Test, Income

Person's gross income must be < $3,100 which does not include non-taxable income (i.e. social security benefits, welfare, municipal bond interest) Exception - doesn't apply to 19 yrs or younger @ end of tax year. doesn't apply to full-time student (5 months in school) under 24 yrs old @ end of tax year.

Voluntary compliance

Places responsibility for filing a tax return on the taxpayer. It must be completed on time w/out prompting from the government or else you will receive penalties & interest on unpaid taxes. Even a jail sentence, if compliance is refused.

Dependency Test, Relationships

The person must be a relative, related by blood, or adopted. A non-relative who lives in the home as a family member during the entire year can be considered a dependent, provided the relationship doesn't violate local law.

tax liability

Total # of tax dollars an individual pays in federal income taxes. includes all fed. taxes withheld by his employer during the year, plus any amount due (or less refund owed to the taxpayer) upon filing his tax return.

audit

When your return is selected for examination. It doesn't necessarily mean you'll be required to pay additional taxes. You could get a refund if you have paid too much in taxes.

Special Withholding Allowance

allowed for individuals who are single w/ only one job. Allowed for individuals who are married w/only one job & spouse doesn't work. Only decreases the amount of tax being withheld during each pay period. Individual's tax liability will remain unchanged by this special allowance. Taxpayer claiming this allowance will more likely owe additional tax when filing his return.

standard deduction

amount given a taxpayer in lieu of itemizing each specific deduction. amount varies depending on the taxpayer's filing status and dependency status. being age 65 or older, or blind will also increase the standard deduction.

exemptions

amount, allowed to each individual, which reduces his taxable income. personal exemptions may be claimed by a taxpayer and taxpayer's spouse only. dependency exemptions may be claimed for qualified dependents.

tax credit

direct reduction of the tax owed. Tax credits are applied dollar for dollar against tax liability (unlike deductions which reduce AGI). i.e. credit for child & dependent care, credit for elderly/disabled, foreign tax credit, excess social security paid, earned income credit

estimated taxes

for the self-employed or those w/large amounts of "unearned income" (interest, dividends, rents, capital gains) not subject to withholding that must be paid in installments throughout the year. He approximates his annual income and pays quarterly payments equaling 1/4 his total presumed tax liability.

tax bracket

highest percentage at which some portion of an individual's income is taxed.

taxable income

income on which tax liability is determined

unearned income

income received from savings, investment,s rentals, capital gains, etc. where no personal services were provided (such as income for which the taxpayer didn't work)

gross income

income received in the form of money, goods, property, and services that is not exempt by law from taxation.

earned income

income such as wages, salaries, tips, net earnings from self-employment, employee compensation, or anything of value (money, goods or services) received for personal services.

itemized deductions

items which may be deducted from AGI thereby reducing an individual's taxable income. includes medical expenses, taxes, interest, charitable contributions, employee business expenses, and miscellaneous deductions. taxpayer must use the Form-1040 (long form) to itemize

factors of whether or not an individual must file a tax return

marital status, amount of self-employment income, amount of gross income, whether or not he can be claimed as a dependent by another taxpayer (if yes, amount of unearned income), whether or not taxpayer is 65 or older, being legally blind

tax withholding

money that an employer withholds from an employees wages and that the employee applies against tax liability.

Dependency Test, Citizen or Resident

person must be a US citizen, resident alien, or resident of Canada or Mexico

dependent

person who relies on someone else for financial support. may not be the taxpayer of his or her spouse. may claim an exemption for a dependent if all five dependency tests are met.

Pay-as-you-earn

system of taxation functions is on a __ basis. Federal income tax is due when the income is earned or received - not just at the end of the year.

Dependency test, Support

tax payer must provide more than half a person's support during the year (food, place to live, clothing, medical & dental care, education). includes items such as car & furniture if it is for person's own use and benefit. Non-taxable income must be included in total support

FICA

taxes are kept separate from income taxes. a.k.a. social security tax. to receive benefits, individual must have an account identified by social security number.

filing a federal tax return

throughout the year, the employer will have withheld the taxpayer's federal taxes from his earnings, or the taxpayer will have paid estimates. the return allows an exact calculation of his tax liability, and annually reconciles any difference between this amount and the amount actually paid. Overpayment is refunded, underpayment must be submitted w/ returns.

statute of limitations

time period (typically 3 years) that records supporting an item of income or a deduction on a tax return must be retained.

adjusted gross income (AGI)

total gross income reduced by certain adjustments such as IRA contributions and alimony paid.