Chapter 3 PF
What is FICA?
" Federal Insurance Contributions Act," is a combined, old-age, survivor's disability, and hospital insurance tax. (aka Social Security)
What is active income?
Income EARNED from personal services and other noninvestment income
What is passive income?
Income derived from real estate, limited partnerships, and other forms of tax shelters. Income from property not related to personal services of taxpayer.
What percent of tax returns are audited?
Less than 1%
What are common errors in tax form?
Missing information and arithmetic errors
How much does the typical American family pay in taxes?
More than 1/3 of its gross income
What is the single filing status?
Unmarried taxpayers
Should you choose standard or itemized deductions?
Whichever results in larger allowable deductions
What are tax credits?
a dollar-for-dollar reduction in the tax
What is tax avoidance?
legal means of decreasing your tax bill
What are dividends taxed at?
long-term capital gain rate.
What is the minimum income required to file a tax return?
$12,000
How much are capital losses deductible up to each year?
$3,000
What is the punishment for failure to estimate and pay taxes in accordance with the IRS guidelines?
A penalty levied by the IRS
What is the equation for taxable income?
AGI- deductions
How long should one retain all receipts and records used in preparing returns?
About 7 years
What is the married filing separate status?
Each spouse files their own return and they are only liable for their tax.
What tax is the largest tax you'll pay (generally)?
Federal income tax
What happens if you are unable to meet the April 15th filing deadline?
-The IRS either deducts Fed. Income Taxes from your employment income or in certain circumstances (business owner, lawyers, consultants, investors) they may have to pay an "estimated tax." -The "Declaration of Estimated Taxes," estimates taxes (FORM 1040-ES) and are paid in 4 installments - 4/15; 6/15; 9/15; 1/15 (following year). Failure to pay estimated taxes can result in a penalty levied by the IRS.
What are short-term capital gains?
-gain from sale of property held less than 12 months -short-term gains tax same as ordinary income, income other than capital gain income.
What do audits typically question?
1. whether all income received has been properly reported and 2. whether the deductions claimed are legitimate and for the correct amount.
What percent of taxpayers pay social and medicare tax?
100%
How is FICA withheld?
12.4% of the first $128,400 for SS (6.2% for employee and the employer) 5.8% of all earnings (2.9% for employee and the employer) In 2018 - self-employed people paidthe full 15.3% taxes but could deduct 50% of it on their own tax returns.
How many years from the filing date can the IRS take to audit your return?
3-6 years
How many filing statuses are there?
5
What percent of taxpayers pay NO income tax?
50%
To our federal government, what are income taxes?
A major source of revenue
What is the average tax rate formula?
Average tax rate = Total tax / taxable income
Why is AGI an important value?
Because it is used to calculate limits for certain itemized deductions
What are tax credits?
Child-Tax Credit - currently $2000 per child under 17 (with limitations) Adoption Tax Credit - up to $13,840 in 2018 for qualifying costs of adopting a child under 18. Care of elderly or disabled Education Credit Residential Energy Credit Earned Income Credit.
Type of people who can do your taxes:
Commercial tax return preparers, such as H&R Block CPAs Tax Attorneys - Lawyers who specializes in tax Enrolled Agents - federally licensed individual tax practitioner; passed a difficult, 2-day IRS exam. ALL MUST BE REGISTERED WITH THE IRS
What do employers do with federal income taxes every pay period?
Deduct them and send to the IRS to be credited to your own tax account
What are exemptions?
Deductions from AGI based upon the NUMBER OF PERSONS SUPPORTED BY THE TAXPAYERS INCOME.
What is portfolio income?
Earnings from investments (gains, dividends, interest); amount will limit deduction for investment interest. Investment expenses are miscellaneous deductions which are not deductible for 2018-2025.
Adjustment types:
Educator expenses (limited) Higher education tuition costs including: tuition, fees, books, and related expenses. Room & board and personal expenses do not qualify. IRA Contributions (limited, discussed in Ch. 14) Self-employment taxes PAID (limited to 50% of the amt. paid) Self-employed health insurance payments.
What is a W-4 form?
Employee's Withholding Allowance Certificate
What is withholding tax?
Employer is required to withhold income tax from employee salary before paying the employee. Increases compliance.
Who can file Form 1040?
Everyone
What is reducing taxes?
Investments that produce depreciation (real estate) or generate tax-free income (municipal bonds).
Who is usually required to pay estimated taxes?
Investors, lawyers, consultants, business owners
What is take-home pay?
It is earnings after deductions for taxes and other items; AKA disposable income. Ex) of deductions: SS, fed, and state taxes. Ex) Lin makes $4,350 a month, her taxes are $1250, Her take home pay is $3196
What is the average tax rate used for?
Long range planning
Types of capital gains?
Long-term and short-term
Itemized deductions:
Medical & Dental Expenses - if more than 7.5% of AGI (previously 10%). State taxes but only Property and either income or sales tax - and limited to $10,000 for 2018-2025 [$5,000 for married filing separately] Interest on mortgage - up to two personal residences with total principal of $750,000; interest on Home Equity Loan not deductible for 2018-2025 Charitable Contributions to a 501(c)(3) organization: Cannot deduction contributions to a person Single contribution over $250, MUST have a letter from organization stating amount and that received no services Limited to 60% of Adjusted Gross Income Miscellaneous includes: employee business expenses over 2% of AGI are not deductible for 2018-2025
Do tax extensions defer the date the tax must be paid?
No
Do you have to file Schedule B (for interest and dividend income) if the interest is less than $1,500?
No
Does tax advice for a specific year apply to the following year?
No
Are child-support payments taxed?
No, they are tax exempt
What must all employed workers pay for under the provisions of FICA?
Old-age, survivor's disability, and hospital insurance tax
How long does it take to receive a refund in the mail after a tax return has been filed?
One to two months
What must self-employed or taxpayers having income that is not subject to withholding do?
Pay estimated tax on a quarterly basis
What must self-employed people do?
Prepay their taxes by paying quarterly estimated tax payments; after which you calc. the actual taxes owed and is compared with what they paid in; overpayment=refund; underpayment = paying more!
What type of taxes are income taxes?
Progressive taxes
What is income deferring?
Reduce or eliminate your taxes today by postponing them to the future when you may be in a lower income bracket. How? Invest in an IRA, certain annuities, variable life insurance policies, Series EE Bonds.
What do withholding allowances do?
Reduce the amount of taxes withheld
What type of tax rate is sales tax?
Regressive
Do most sales taxes have a flat tax rate (ex: 5%)?
Yes
Do state income tax rates vary by state?
Yes
Do taxpayers have to change their withholding allowances during the tax year if their employment or marital status changes?
Yes
Does standard deduction vary depending on vision (blind or not)?
Yes
What is income tax withholding based upon?
Your income and number of withholding allowances
What is filing status based upon?
Your marital status and family situation on the last day of your tax year (usually Dec 31st)
What is alternative minimum tax?
Tax invented in 1960s to prevent the super rich from having so many deductions they dont have to pay taxes at all. You dont know if you have to owe the AMT until you finish your tax returns.
What is the formula for tax?
Tax= Tax Rate x Tax Base
What is the married filing jointly status?
Taxpayers are married on the last day of the year and elect to file joint return. When a joint return is filed, both taxpayers are liable for the tax. Most married couples file joint returns.
Who must accept primary responsibility for the accuracy of their returns?
Taxpayers themselves
Who is tax preparation software must helpful for?
Taxpayers who don't need tax advice
What are income taxes based upon?
The "ability to pay" principle
What doubled the standard deduction previously in place?
The Tax Cuts and Jobs Act of 2017
What department is the IRS part of?
The US Department of Treasury
What is the amount of allowable, deductible expenses associated with portfolio and passive income limited to?
The amount of income derived from these two sources
What does the 12.4% Social Security apply to?
The first $128,400 of an employee's earnings
What does progressive taxes mean?
The more you make, the more you pay
What is the tax year?
The prior calendar year's income and expenses... Jan. 1 - Dec. 31st.
What determines the amount of income subject to federal income taxes?
The reported taxable income
What is the average tax rate?
The total amount of tax divided by total income.
Why are the minimums for income required to file a tax return adjusted annually?
They are based on the annual rate of inflation
What is form 1040X used for?
To amend your tax return in the event that you overlooked some income, a major deduction, or made a mistake. You have 2-3 years to amend your tax returns.
What is the overriding objective of tax planning?
To maximize the amount of money you can keep by legally minimizing the amount of taxes you pay
What is tax evasion?
failure to pay legally due taxes
What are capital gains?
occurs when a capital assets (stock, a bond, or real estate) is sold for more than its original cost).
When must taxpayers file by?
Anywhere from 2/1-4/15 (or next business day)
What should you always do before you sign your completed tax return?
Check it
What are long-term capital gains?
- gain from sale of property held more than 12 months -long-term gains have alternative reduced rates
T OR F: Every individual or married couple is required to file a federal income tax return regardless of the amount of income earned
F
T OR F: Federal income taxes are levied against the total amount of money earned.
F
T OR F: Tax credits, deductions and exemptions reduce your taxable income by comparable amounts.
F
What is Form 4868 for?
Filing for an extension (6 months- makes taxes due Oct. 15)
What is surviving spouse status?
For two years after the death of a spouse, the surviving spouse may use the joint rates if they have a dependent child living with them
What do federal, state and local taxes fund?
Government activities (ironically-the IRS) and public services such as national defense, local libraries and schools, state and county courts, etc.
What is income shifting?
Shift income to later years; deductions to current year Shift income to a taxpayer with lower income, by gifting, such as a child - who is in a lower tax bracket.
Why is sales tax regressive?
Since the higher income taxpayer spends less of their income on items subject to the sales tax, the sales tax paid as a percent of income actually decreases as the income increases.
What is the Head of Household status?
Single taxpayers who provide a household for a qualifying person (a dependent or a relative other than cousins)
What are the three steps to calculating taxable income and tax liability?
Step A: Determine Adjusted Gross Income Step B: Calculate Taxable Income Step C: Calculate Tax Liability
T OR F: An easy way to earn tax-deferred income is to invest in Series EE savings bonds.
T
T OR F: Gains on the sale of investments such as stocks, bonds, and real estate are taxed at the lower capital gains tax rate.
T
T OR F: The amount of federal income tax withheld depends on both your level of earnings and the number of withholding allowances claimed.
T
What does the higher rate of tax apply to?
THE ADDITIONAL TAXABLE INCOME IN THAT BRACKET, not the entire taxable income.
What is the marginal tax rate?
the tax rate for each bracket; the tax rate applied to the next dollar of taxable income (the rate from the tax bracket that applies to the taxpayer)
