Personal finance chapter 4

Who gets audited?

About 1 percent of tax filers are audited each year.

Who can do your taxes for you?

1) range from local one-person operations to national firms with thousands of offices. 2) enrolled agents 3) accountants 4) Attorneys (usually used when you are in disagreement with the IRS)

Types of audits

1. Correspondence audit (most common) 2. Office audit 3. Field audit

Excise tax

Imposed by the federal and state governments on specific goods and services, such as gas, cigarettes, alcohol, tires, air travel and telephone service

Estate tax

Imposed on the value of a person's property at the time of his or her death.

Inheritance tax

Levied on the value of property bequeathed by a deceased person. This tax is payed for the right to acquire inheritance property

529 Plan

Another type of education savings plan that helps parents save for the college education of their children.

What created Social Security?

Federal insurance contributions act (FICA)

Capital gains

Profits from the sale of a capital asset such as stocks, bonds, real estate etc. are tax deferred.

What are some tax-deferred retirement and education plans?

1. IRA's 2. Keogh plans 3. 401k plans 4. Education savings accounts

Traditional IRA

Deductions for people who people who do not participate in employer-sponsored retirement plans or who have an adjusted gross income below a certain amount. limit is $5500

Coverdell Education Savings Account

Designed to assist parents in saving for the education of their children. Limited to $2000

Who must file for taxes?

Every citizen or resident of the United States and every United States citizen of Puerto Rico.

What tax is the major source of revenue for local governments?

Real estate tax.

What are the two main taxes on wages and salaries?

Social Security and income taxes.

Personal property taxes

State and local governments may assess taxes on automobiles, boats, furniture and farm equipment

What to do once your receive an audit notice

1. Decide wether you will bring your tax preparer, accountant, or lawyer. 2. Be on time to your appointment 3. Present tax records and receipts in a logical and calm way 4. Make sure the information you present is consistent with the tax law. 5. Answer questions clearly and completely. Don't say more then you need to.

What are the methods in which the IRS assists you?

1. Publications (booklets and pamphlets) 2. Recorded Messages (telephone tax tips) 3. Phone hotline. 4. Walk in service. 5. Interactive tax assistance 6. DVD

Tax audit

A detailed examination of your tax return by the IRS.

401k plan

Allows you to contribute a greater tax-deferred amount then you can contribute to the IRA.

Roth IRA

Also allows a $5500 annual contribution which is not tax deductible.

What are the income tax fundamentals?

Step 1: determining adjusted gross income 1) taxable income: the net amount of income, after allowable deductions, on which income tax is computed. 2) types of income: earned income (money received for personal effort) Investment income (money received in the form of dividends, interest, or rent investments) passive income: results from business activities in which you do not actively participate. 3) exclusion: an amount not included in gross income. 4) tax exempt income: income that is not subject to tax 5) tax deferred income: income that will be taxed at a later date. 6) adjusted gross income (AGI): the gross income after certain deductions have been made. 7) tax shelters: investments that provide immediate tax benefits and reasonable expectation of a future financial return. Step 2: computing taxable income 1) tax deduction: an amount subtracted from adjusted gross income to arrive at taxable income 2) Standard deduction: a set amount on which no taxes are paid. 3) itemized deductions: expenses a taxpayer is allowed to deduct from adjusted gross income (medical and dental expenses, taxes, interest, casualty and theft loss) 4) Exemptions: a deduction from adjusted gross income for yourself, spouse, and qualified dependents. Step 3: calculating taxes owed 1) marginal tax rates: used to calculate tax on the last and next dollar of taxable income. 2) average tax rate: based on the total tax due divided by taxable income. 3) tax credit: an amount subtracted directly from the amount of taxes owed. 4) withholding

What are the four major categories that people pay taxes on?

Taxes on purchases, on property, wealth, and on earnings

Tax evasion

The use of illegal actions to reduce one's tax.

Tax avoidance

The use of legitimate methods to reduce one's taxes.

KEOGH Plan

Use for self-employers. This retirement plan also called HR10 plan.