FIN 220 Exam 1
What strategies can you use to support your tax return in the event of an IRS audit?
-Keep accurate records -retain all your receipts and canceled checks -avoid common filing errors
Intermediate goal time frame
2-5 years
a regular savings account usually does NOT have
a high rate of interest, a high balance requirement, overdraft protection
trust
a legal agreement that provides for the management and control of assets by one party for the benefit of another
long-term liabilities
debts you do not have to pay in full until more than a year from now (auto loans, educational loans, and mortgages)
Deflation is a decline in prices, which often results in consumers ______ their spending as they expect the prices to go even lower
decreasing (Deflation)
Taxpayers pay income taxes through payroll _____________ and through estimated tax ______________.
deductions, payments
budget variance
determine the difference between the actual amount spent or received and the amount budgeted
How would a decrease in the interest rate effect the present value of a lump sum, single amount problem (all other variables remain the same)?
increase the present value
What is the amount of money or the value of property that can be gifted each year without being subject to federal gift taxes?
$14,000 per person per year
the dollar limit for FDIC insurance is currently
$250,000
balance sheet
(aka net worth statement or statement of financial position) reports what you own and what you owe
take home pay
(net pay) a person's earning after deductions for taxes and other items
payday loans are usually used by people who:
-are trapped by debts -are driven into debt due to poor financial decisions -run up debt by free spending
A premature withdrawal from a traditional IRA will result in taxable income and a penalty of _____% of the withdrawn amount
10
If you want to amend a previous tax return, you need to file a ________ form.
1040X
What form is used to report your mortgage interest to you by the mortgage lender?
1098
A global economy and foreign competition
American consumers spend dollars on goods and services, which are manufactured or offered by American companies and companies from other countries. (This is an example of)
What is the simplest type of audit done by the IRS?
Correspondence audit
How would a decrease in the interest rate effect the future value of a lump sum, single amount problem (all other variables remain the same)?
Decrease the future value
How would an increase in the interest rate effect the present value of an annuity problem (all other variables remain the same)?
Decrease the present value
T/F: A deduction for moving expenses is allowed if you move for any reason at least 100 miles away from your current residence
False (the reason must be job related and it must be at least 50 miles)
This is NOT an influence on personal financial planning (shown in the 4th step of the financial planning process)
Gold prices
What are some examples of tax-deferred investments
Keogh, Tax-deferred annuities, health savings plans, IRA
insolvency
NOT having adequate liquid assets to pay off all debts of a person
What is the purpose of a W-2P form?
Pension income
When is the due date for the third installment for estimated tax?
September 15
T/F: Anyone can use Form 1040, you must use it if you itemize your deductions.
True
You should keep your tax records for at least three years after filing your return. However, you may be held responsible for providing back documentation for how long?
Up to 6 years
cash surplus
When the cash inflow is greater than the outflow
What qualifies someone as a dependent?
You must provide more than 50% of their support and they must be a full time student if they are over 19 years old
Discounting
another name for calculating the present value
liquidity
attribute of a savings account that allows you to withdraw money on short notice without a loss of principal or fees
liquid assets
cash and items that can easily be converted into cash
time deposits do NOT include
credit card and cash loans, checking accounts
Financial services are now offered by
credit card companies, investment brokers, insurance companies
What deposit type institutions serve as financial intermediaries
credit unions, commercial banks, savings and loans
what types of financial institutions have federal deposit insurance
credit unions, commercial banks, savings and loans
three types of income
earned income, investment income, passive income
itemized deductions
expenses a taxpayer is allowed to deduct from adjusted gross income
Common sources of income for most people
gifts and grants, wages, salaries and commissions, government payments, and amounts received from pensions.
commercial banks offer services to:
government agencies, businesses, and individuals
benefits of US savings bonds include
government guarantee, exemption from state and local taxes, low minimum deposit
Adjusted Gross Income (AGI)
gross income after certain reductions have been made
indexed CD
has earnings based on the performance of the stock market
Easy to replace documents should be placed here
home filing system, personal computer system
earned income
is usually in the form of wages, salary, commission, fees, tops, or bonuses
mutual savings bank
owned by depositors and specialized in savings and mortgages
certified check
personal check with guaranteed payment
passive income
results from business activities in which you do not actively participate (limited partnership)
What is the purpose of a W-2 form?
salary, wages, and taxes withheld
certificate of deposit
savings plan that requires a certain amount of money to be left for a specified amount of time
What are the two main taxes on wages and salaries?
social security and incomes taxes
Federal Reserve System
the central bank of the US and has significant economic responsibility
what is the main purpose for life insurance
to provide financial security for dependents
what are the main types of services that finance companies typically do not offer
to provide frequent access to cash machines, to provide savings accounts with high interest rates, to provide checking accounts with unlimited withdrawls
what is an endorsement
your signature on the back of the check
investment income
(sometimes referred to as portfolio income) is money received in the form of dividends, interest, or rent from investments.
tax credit
amount subtracted directly from the amount of taxes owed, reduces tax liability dollar for dollar
What are examples of demand deposits?
checking accounts and payment accounts
what services do savings and loans offer?
checking accounts, savings accounts, lending
when interest rates are rising you should
choose short term savings vehicles, use long term loans
signature card
document that records the official signatures of the person or persons authorized to write checks on the account
a typical customer of an activity account:
does not maintain a minimum balance, writes a few checks each month
Flexible spending accounts (FSAs) allow you to reduce your taxable ____________ when paying for medical and _________ care expenses.
income, child
What is the purpose of a 1099 form?
interest, dividends, capital gains and losses, self employment income, lump sum payments
The primary goal of the Users in the Financial System is:
to obtain funds at the lowest cost
Money management
day-to-day financial activities necessary to manage current personal economic resources while working toward long-term financial security
common payment choices
debit cards, credit cards, cash, checks
What might trigger alternative minimum tax?
high tax deductions for state taxes, significant amount of second mortgage interest, high tax deduction for local taxes
estate tax
imposed on the value of a person's property at the time of death
Reductions (adjustments to income)
include contributions to an individual retirement account (IRA) or a Keogh retirement plan, penalties for early withdrawal of savings, and alimony payments
The Paralysis of Analysis
individual or group is unable to move forward with a decision as a result of over-analyzing
share draft account
interest-bearing checking account at a credit union
tax deductions
is an amount subtracted from adjusted gross income to arrive at taxable income
average tax rate
is based on the total tax due divided by the taxable income
How do taxpayers pay their taxes to the IRS?
it is a pay as you go system utilizing withholding of tax from paychecks and estimated quarterly payments
Risk Premium factors
length of time, interest rates, expected inflation, uncertainty of getting money back
What events might cause a taxpayer to make estimated tax payments?
lump sum payments from pensions, royalties, significant earnings from savings or investments, earnings from independent contracting
discretionary income
money left over after paying for housing, food, and other neccessities
interest (itemized deduction)
mortgage interest, home equity loan interest, and investment interest expense up to an amount equal to investment income
Investments held for less than one year will be taxed at ___________________________, whereas investments that have been held for over one year are taxed at ____________________________.
ordinary income rates, capital gain rates
safe deposit box
private storage area at a financial institution with maximum security and difficult to replace documents
Financial goals suited for 18-35 year olds
purchasing disability insurance, establishing financial independence, considering purchasing a home for financial benefit
selection of savings plan is influenced by what factors?
rate of return, restrictions and fees, liquidity, safety
Steps to writing a check
record the date, write the name of the person receiving the funds, record the amount of the check in figures or numbers, write the amount of the check in words, sign the check, note the reason for payment
Budgeting steps (in order 1-6)
set financial goals, estimate expected income, allocate an emergency fund and savings, budget known expenses, budget estimated expenses, record spending amounts and evaluate revisions
taxes (itemized deduction)
state and local income tax, real estate property tax, and state or local personal property tax (taxes if purchases, life insurance proceeds, wealth, property, and earnings)
Three major money management activities (which are interrelated)
storing and maintaining personal finance records and documents, creating personal financial statements (balance sheets and cash flow statements of income and outflows)
common itemized deductions
taxes, interest, contributions, casualty and theft losses, moving expenses, job-related and other miscellaneous expenses
What is the biggest difference between a traditional IRA and a Roth IRA?
the Roth IRA contribution is not tax deductible, but after 5 years, its earnings are tax free
interest rates represent:
the cost of borrowing money
taxable income
the next amount of income after allowable deductions on which income tax is computed
rate of return
the percentage increase in the value of savings as a result of interest earned
Identify the stage of the adult life cycle that influence the financial activities and decisions
the portion of the life cycle of a person's life that begins the adult portion of the life cycle
Adult life cycle
the stages in the family situation and financial needs of an adult
What is the purpose of the alternative minimum tax?
to assure that people who receive tax breaks pay a fair share of taxes
stop payment order
used to avoid the payment of a specific check
marginal tax rates
used to calculate the tax on the last and next dollar of taxable income ("tax bracket" this is given)
What is included in the calculation of gross income?
wages and salaries, profits from business or profession, commissions and fees, employee awards, interest, gains or losses on sale of investments, alimony, royalties, unemployment compensation, dividends, property rental, pensions, tips and bonuses, prizes and gambling winnings
cash flow statements
(personal income or expenditure statement) is a summary of cash receipts and payments for a given period
What are the benefits of using tax software?
- a spreadsheet program can help you keep track of income and expenses as the year plays out -software packages such as H&R Block At Home and TurboTax help users prepare and file returns -you can save time while preparing Form 1040 and its accompanying schedules
What are some examples of tax avoidance strategies?
-delay the receipt of income because you want to delay the payment of taxes until next year -accelerate deductions to save taxes this year
What are the conditions for using a 1040EZ form when filing taxes?
-income can only consist of wages, salaries, and tips and not more than $1500 of taxable interest -taxable income must be less than $100,000 -the filer must be under the age of 65 -the filer must be single or married filing joint return and claim no dependents
When taxes are added for a product for each stage in the manufacturing process, this is called:
VAT
exemption
a deduction from adjusted gross income for yourself, your spouse, and qualified dependents
Two key planning activities of December are deciding whether to make payments that would be to your ____________________ for this year while deferring ________________ into the next year.
advantage, income
current liabilities
are debts you must pay within a short time, usually less than a year (medical bills, tax payments, insurance premiums, cash loans, and charge accounts)
financial ratios
are guidelines for measuring changes in your financial situation
commercial banks
are organized as corporations, with investors contributing the capital for operations
contributions (itemized deduction)
cash or property donated to qualified charitable organizations (contributions greater than 20% of adjusted income are subject to limitations)
to achieve long-term financial goals, many people trade off ___________ for a __________ return.
liquidity, higher
Two main reasons Americans have financial problems
poor planning, weak management of money, advertising efforts and availability of good encourages overspending
when interest rates are falling you should
prefer short-term loans over long term loans, lock in current rates by choosing long-term savings options
job-related and other miscellaneous expenses (itemized deduction)
reimbursed job travel, union dues, required continuing education, work clothes or uniform, investment expenses, tax preparation fees, safe deposit box rental (for storing investment paperwork), etc.
net worth
the difference between total assets and total liabilities
Consumer Price Index
the measure of the average change in the prices urban consumers pay for goods and services
some tax advantages of EE bonds are
there is no federal income tax until redeemed, interest is exempt from state and local taxes
