Finance Chapter 4

A tax credit of $50 for a person in a 28 percent tax bracket would reduce a person's taxes by:

$50

An example of an adjustment that is subtracted from gross income to compute "adjusted gross income" or "AGI" is:

IRA contributions

Earned income

Money received for personal effort, such as wages, salary, commission, fees, tips, or bonuses

Investment income

Money received in the form of dividends, interest, or rent from investments (AKA portfolio income)

_______________ is (are) fully deductible as an itemized deduction on Schedule A.

Mortgage interest on a primary residence

An IRA, Keogh plan, and 401(k) plan are examples of:

Tax-deferred retirement plans

A personal exemption refers to:

A reduction from adjusted gross income for the taxpayer(s) and each dependent listed on the tax return

Standard deduction

A set amount on which no taxes are paid

Excise tax

A tax imposed on specific goods and services, such as gasoline, cigarettes, alcohol, tires, and air travel

Exclusion

An amount not included in gross income

Tax credit

An amount subtracted directly from the amount of taxes owed

Tax deduction

An amount subtracted from AGI to arrive at taxable income

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

Avoidance

With respect to the taxability of corporate dividends paid to individuals and capital gains on stocks and bonds:

Both dividends from corporations and capital gains are taxable to individuals

Itemized deduction

Expenses that can be deducted from AGI, such as medical expenses, real estate property taxes, home mortgage interest, charitable contributions, casualty losses, and certain work-related expenses

Money received in the form of dividends or interest is commonly called "earned income."

False

Passive income

Income resulting from business activities in which you do not actively participate

Tax-deferred income

Income that will be taxed at a later date

_____________ are the next group of expenses that a taxpayer is allowed to deduct once adjusted gross income is calculated.

Itemized deductions

Capital gains

Profits from the sale of a capital asset such as stocks, bonds, or real estate

Taxable income

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

Marginal tax rate

The rate used to calculate tax on the last (and next) dollar of taxable income

Tax evasion

The use of illegal actions to reduce one's taxes

Tax avoidance

The use of legitimate methods to reduce one's taxes

A couple (both age 35) is qualified to take a $12,600 standard deduction. They have adjusted gross income of $100,000 and the following items: Qualifying medical expenses = $11,000 Home mortgage interest = $10,000 Property taxes = $2,000 Gifts to charity = $1,000 With respect to their deductions on Form 1040 page 2:

Their itemized deductions are $14,000, thus they should use Schedule A. (11,000+2,000+1,000)

Average tax rate

Total tax due divided by taxable income

A tax credit is an amount subtracted directly from the amount of taxes owed.

True

A $1,000 tax deduction is more valuable than a $100 tax credit (assuming the taxpayer is in a 15% tax bracket).

True (1,000*.15)=150 tax deduction

An example of tax-exempt income is:

Interest or mutual fund dividends derived from municipal bonds or municipal bond mutual funds.

Adjusted gross income

Gross income reduced by certain adjustments, such as contributions to an individual retirement account (IRA) and alimony payments

Tax shelter

An investment that provides immediate tax benefits and a reasonable expectation of a future financial return

A taxpayer has $10,000 in charitable contributions and will be using Schedule A with no limitations. The taxpayer is in the 15% marginal tax bracket. The charitable contribution reduced taxable income and his/her taxes by:

Taxable income is $10,000 lower; taxes reduced by $1,500. (10,000*.15)

An amount not included in gross income is:

An exclusion

Tax-exempt income

Income that is not subject to tax

A UCF graduate under 65 years old has $110,000 of adjusted gross income and $11,500 of qualifying medical expenses. This individual's itemized deductions for medical expenses on Schedule A would be:

$500 (110,000*.10)=11,000 (11,500-11,000)

Exemption

A deduction from AGI for yourself, your spouse, and qualified dependents

Tax audit

A detailed examination of your tax return by the Internal Revenue Service (IRS)

Estate tax

A tax imposed on the value of a person's property at the time of their death

Inheritance tax

A tax levied on the value of property bequeathed by a deceased person

Interest earnings of $1,600 from a taxable investment for a person in a 28 percent tax bracket would result in after-tax earnings of:

$1,152 (1,600*(1-.28))

Randal is 36 years old. He has adjusted gross income of $32,000. He has medical expenses for the year of $6,000. How much of these expenses can he deduct from adjusted gross income?

$2,800 (32,000*.10)=3,200 (6,000-3,200)

Jim had earnings from his salary of $34,000, interest on savings of $800, a contribution to a traditional individual retirement account of $1,500, and dividends from mutual funds of $600. George's adjusted income (AGI) would be:

$33,900 (34,000+800-1,500+600)

Using a UCF graduate's current year tax data below, what is the adjusted gross income: Wages = $55,000 Ordinary dividends = $1,000 Interest on municipal bonds = $2,000 Traditional IRA contribution = $3,000 Short term capital gain = $ 7,000 Alimony paid = $20,000

$40,000