FIN 300- Ch. 3

____ income results from business activities in which you do not actively participate, such as limited partnership

Passive

Form ___ is used to *amend* a previously filed tax return if you discover income that was not reported or if you find additional deductions

1040X

Use form ____ if: -You have *less* than $100,000 in taxable income from wages, salaries, tips, unemployment compensation, interest, or dividends and use the *standard* deduction -With this form you can also take deductions and a tax credit for child care and dependent care expenses

1040A

You should keep tax records for ___ years from the date you file your return, however, you may be held responsible for providing back documentation up to 6 years

3

____ tax rate is based on the total tax due divided by taxable income

Average

The part of the tax code called ____ authorizes a *tax-deferred* retirement plan sponsored by an employer; this plan allows you to contribute a greater tax-differed amount than you can contribute to an IRA

401(k)

____ income is usually in the form of wages, salary, commission, fees, tips or bonuses

Earned

When taxes are added to a product for each stage in the manufacturing process, this is called: A. excise tax B. flat tax C. tax credit D. VAT

VAT

A tax ____ is a detailed examination of your tax return by the IRS, so be sure to keep accurate records; receipts, canceled checks, and other evidence can verify amounts that you claim

audit

Your gross or total income consists of 3 types of income:

earned, investment, passive

A ____ tax proposal has been around for many years; this would require that all taxpayers, regardless of income level and type, pay the *same* percentage

flat

Medical costs, taxes, and interest are all examples of _____ deductions that are subtracted from adjusted gross income

itemized

Your taxable income is the basis for computing the amount of tax ____

owed

Tax planning starts with knowing current tax laws, maintaining complete and appropriate tax ____, then making purchase and investment decisions that can ____ your tax liability

records; reduce

Filing status: Married, filing ____ returns--each spouse is responsible for his or her own tax; under certain conditions, a married couple can benefit from this filing status

separate

Tax ____ are investments that provide immediate tax benefits and a reasonable expectation of a future financial return

shelters

A ____ deduction is an amount subtracted from adjusted gross income to arrive at taxable income

tax

Most, but nit all, income is subject to ____

taxation

Many taxpayers view an annual tax refund as a ____, extra money they can count on each year

windfall

Every taxpayer receives at least the ____ deduction which is a set amount on which no taxes are paid

standard

Income items that can trigger the AMT are incentive ___ options, long-term capital ____, and tax-exempt interest

stock; gains

Adoption tax credit to cover ____ when adopting a child under age 18

expenses

You pay ____ income taxes through either payroll withholding or estimated tax payments

federal

Your primary ____ should be to pay your fair share of taxes while taking advantage of appropriate tax benefits

goal

Canceled checks and receipts serve as proof of ____ for deductions such as charitable contributions, medical expenses, and business related expenses

payment

Adjusted gross income reductions include contributions to an IRA, ____ for early withdrawal of savings, and alimony payments

penalties

Adjusted Gross Income (AGI) is gross income after certain ____ have been made; this is used as the basis for computing various income tax deductions, such as medical expenses

reductions

The *alternative minimum tax (AMT)* is designed to ensure that those who receive tax ____ also pay their fair share of taxes

breaks

Education credits to help offset ____ education expenses

college

Owning a home is one of the best tax shelters; both real estate property taxes and interest on the mortgage is ____ and thus reduces your taxable income

deductible

A tax ____ reduces taxes *indirectly* by the amount of the tax rate

deduction

___ tax is paid during the year through withholding from paychecks and/or estimated payments

Income

Tax-____ investments are less beneficial than tax-exempt investments, but they give you the advantage of paying taxes in the *future* rather than now

deferred

A ____ must not earn more than a set amount unless they are under age 19 or is a full time student under age 24; you must provide half of their support, and the dependent must reside in your home or be a specified relative and must meet certain citizenship requirements

dependent

An ____ tax is imposed on the value of a persons property at the time of death

estate

The tax owed may be reduced by a tax ____, an amount subtracted directly from the amount of taxes owed; example would be the credit given for child care and dependent care taxes

credit

An example of tax evasion is if you take cash for work done and do NOT ____ it as income

declare

Tax ____ is the use of *legitimate* methods to reduce ones taxes and for people to pair their fair share of taxes (no more, no less)

avoidance

The simplest and most frequent type of audit is the _____ audit which is a mail inquiry that requires you to clarify or document minor questions

correspondence

A tax ____ results in a direct dollar-for-dollar reduction

credit

-Form ____ is an expanded version of 1040A that includes sections for *all* types of income -You are required to use this from if your income is *over* $100,000 -Or if you can be claimed as a dependent on your parents return AND you had interest or dividends over a set limit

1040

Use form _____ if: -You are single or married filing a joint return, under 65, and claim no dependents -Your income consisted only of wages, salaries, and tips and not more than $1500 of taxable interest -Your taxable income is *less* than $100,000 -You do NOT itemize deductions or claim any adjustments to income or any tax credits

1040EZ

____ usually do NOT complete tax returns; however, you can use their services when you are involved in a tax-related transactions or when you have a difference of opinion with the IRS

Attorneys

____ tax credit up to $1000 for each dependent under the age of 17

Child

_____ agents--government approved tax experts--prepare returns and provide tax advice

Enrolled

____ tax credit to avoid double taxation on income taxes paid to another country

Foreign

What filing status is this? An unmarried individual or a surviving spouse who maintains a household (paying for more than half of the costs) for a child or dependent relative

Head of Household

An example of *tax-deferred* income is earnings on an ___, which is a retirement plan

IRA

____ income (sometimes referred to as portfolio income) is money received in the form of dividends, interest, or rent from investments

Investment

_____ deductions are expenses a taxpayer is allowed to deduct from adjusted gross income; these include: medical and dental expenses, taxes, interest, contributions, casualty and theft losses, moving expenses, job-related and other misc expenses

Itemized

The due dates for *quarterly* estimated payments are April 15, June 15, and September 15 of the current year and _____ 15 of the following year

January

____ related and other misc expenses include unreimbursed job travel, union dues, required continuing education, work clothes or uniforms, investment expenses, tax preparation fees, safe deposit box rental, etc

Job

Which of the following is NOT a recent tax strategy change? A. Carry over $500 of flexible spending account funds B. Mortgage interest deduction C. Penalties for not having health insurance D. Streamlined options for home office deduction

Mortgage interest deduction

____ property tax is imposed on the value of automobiles, boats, furniture, farm equipment, and even livestock

Personal

_____ property tax is a major source of revenue for local governments based on the value of land and buildings

Real estate

____ credit (formerly the retirement tax credit) to encourage investment contributions to individual and employer sponsored retirement plans by low and middle income taxpayers

Savers

What filing status is this? Never-married, divorced, or legally separated individuals with *no* dependents

Single

What are the 2 main tase on wages and salaries?

Social Security and income taxes

____ income is the net amount of income, after allowable deductions, on which income tax is computed

Taxable

____ expenses can be documented in a daily log with records of mileage, tolls, parking fees, and away from home costs

Travel

Which of the following accurately describes the contribution limits of a 401(k) plan? A. Up to $18,000 in 2017 B. Up to $30,000 in 2017 C. Up to $5000 in 2017, the same as a traditional IRA D. Up to $10,000 in 2017, double the amount allowed by a traditional IRA

Up to $18,000 in 2017

After the end of the year, you will receive a ___ form which reports your annual earnings and the amounts deducted for taxes

W-2

Many ___ offer tax assistance along with other business services; a CPA with special training in taxes can help with tax planning and the preparation of your annual tax return

accountants

You can file Form 4868 to obtain an ____ 6-month extension on filing an income tax return by filing the proper forms with the IRS before the April 15 filing deadline

automatic

You must file form 1040 if you: A. have income over $100,000 B. have no dividend income C. have income less than $50,000 D. do not want to be claimed as a dependent on your parents return

have income over $100,000

Some of the tax situations that can result in a person paying the AMT include ___ levels of deductions for state and local taxes, interest on second ____, medical expenses, and other deductions

high; mortgages

While municipal bonds pay a lower rate of interest than other types of bonds, the after-tax income may be ____ than other types of bonds

higher

A disadvantage of a *flat* tax rate is that it would be an ____ in overall tax for quite a few people

increase

Records such as past tax returns and home ownership documents should be kept ____

indefinitely

An ____ tax is levied on the value of property bequeathed by a deceased person; this tax is paid for the right to acquire the inherited property

inheritance

Filing status: Married, filing ____ return--combines the spouses' incomes

joint

____ tax rats are used to calculate tax on the last (and next) dollar of taxable income

marginal

In recent years, "Tax Freedom Day" came in mid-April, this means that the portion of the year people work to pay their taxes is represented by January 1 to:

mid-April

Real estate taxes and _____ are tax deductible by the homeowner A.all fees B. mortgage interest C. mortgage payments D. home improvements

mortgage interest

An example of *tax-exempt* income is the interest from most ____ bonds, which are issued by state and local governments

municipal

The ____ audit requires you to visit and IRS office to clarify some aspect of your tax return

office

Components of income include earned, investment, and ____ income

passive

Tax planners advise people to contribute as much as possible to a Keogh or 401(k) plan since: -the increase value of the investment accumulates on a ____ basis until the funds are withdrawn -contributions ___ your adjusted gross income for computing your current tax liability

tax-free; reduce

A ____ tax would add a tax to a product for each stage in the manufacturing process; it is believed that higher-income individuals would pay higher taxes since they are typically the larger consumers of goods

value-added (VAT)

Filing status: Qualifying ____--An individual whose spouse died within the past 2 years and who has a dependent; this status is limited to 2 years *after* the death of the spouse

widow(er)

Taxpayers pay income taxes through payroll ____ and through estimated tax ____

withholding; payments

Another tax credit for *low-income* workers is the _____ income credit for working parents with taxable income under a certain amount; families that do not earn enough to owe federal income taxes are also eligible for this and receive a check for the amount of their credit

earned

Tax ____ is the use of *illegal* actions to reduce ones taxes

evasion

An ____ tax is imposed by the federal and state governments on specific goods and services, such as gasoline, cigarettes, alcoholic beverages, tires, air travel, hotels, and phone service

excise

Tax-___ investments are NOT subject to federal income tax

exempt

An ____ is a deduction from adjusted gross income for yourself, your spouse, and qualified dependents

exemption

An ____ is a reduction in taxable income for you, your spouse, and dependents while an ____ deduction is allowed for specific expenses and contributions you make

exemption; itemized

The ____ audit is more complex--an IRS agent visits you at your home, business, or the office of your accountant to have access to your records; this may be done to verify whether an individual has a home office if this is claimed

field