Cengage Personal Finance Chapter 3

tax

a payment imposed on a taxpayer by a governmental unit

revenue

incoming funds to the government collected from individuals and businesses in the form of taxes

progressive tax

a tax that takes a larger share of one's income as the amount of income grows

regressive tax

a tax that takes a smaller share of one's income as the amount of income grows

proportional tax

a tax for which the rate stays the same regardless of one's income

tax bracket

an income range that a tax rate is applied to

voluntary compliance

a system in which all citizens prepare and file tax returns on their own

tax evasion

willful failure to pay taxes

audit

an examination of income tax returns by the IRS

filing status

your tax-filing group based on your marital status as of the last day of the tax year

exemption

an amount you may subtract from your income for each person who depends on your income to live

gross income

all of the taxable income you receive during the year

adjusted gross income

gross income minus adjustments

itemized deductions

expenses you can subtract from adjusted gross income to determine your taxable income

tax liability

the amount of total tax you owe on a year's income

taxable income

the income on which you will pay tax

tax credit

a reduction of taxes owed

exempt status

available only to those who know they will not earn enough in one year to owe income tax

estimated tax

the amount of tax you estimate you will owe on income received without withholdings

Formulas

Adjusted Gross Income

Gross Income - Adjustments = Adjusted Gross Income

Taxable Income

Adjusted Gross Income - Standard/Itemized Deductions - Exemptions = Taxable Income

Tax Owed/Refund Due

Tax Liability - Tax Credits - Payments (taxes withheld and estimated tax payments) = Tax Owed or Refund Due

Review

1. The income tax is an example of a progressive tax.

True

2. Unemployment compensation benefits received are taxable to the person who receives them.

True

3. The power to levy federal income taxes rests with the U.S. Congress.

True

4. You may not use short Form 1040EZ for a joint return if your total taxable income is $20,000 or more.

False

5. Only a married person is considered a head of household.

False

6. Child support is taxable to the person receiving it and is deductible to the one paying it.

False

7. Money received in the form of wages, tips, salaries, or interest is taxable income.

True

8. A taxpayer's filing status is unrelated to his or her marital status.

False

9. The Internal Revenue Service is an agency of the Department of the Treasury.

True

10. You can file an amended tax return (1040X) if you discover you made an error.

True

11. To compute your tax liability, turn to the tax tables and look up the amount called

taxable income

12. Which of these is a form of flat tax?

property tax

13. Tax returns must be filed by ___ of the following year.

April 15

14. As an alternative to itemizing deductions, taxpayers may

claim the standard deduction

15. A sales tax on specific products and services is a(n) ___ tax.

16. What type of IRS audit requires a taxpayer to appear in person and bring records?

office

17. For people who use Form 1040EZ or 1040A, the IRS allows

both of these choices are correct

18. Student loan interest and tuition can be listed as _________ on Form 1040A.

adjustments to gross income

1. Federal income taxes are regressive.

False

2. Consumption taxes are taxes on goods and services.

True

3. On a local level, taxes pay for services such as education, parks, roads, and police, fire, and health departments.

True

4. In the United States, both businesses and individuals pay income taxes and must file income tax returns each year.

True

5. Revenue bills must pass a vote in the Senate and then be signed by the President before they become law.

False

6. When government spends more than it receives in revenue, it has a surplus.

False

7. In the United States, all citizens are expected to prepare and file tax returns on their own without being forced to do so by the government.

True

8. If you file a joint tax return, you can take an exemption for your spouse.

True

9. Only married taxpayers qualify for the head of household filing status.

False

10. All forms of income are taxable and must be reported to the IRS for tax purposes.

False

11. Gross income is the income on which you will pay tax.

False

12. You do not need to file a tax return if you are over the age of 65.

False

13. Most people will probably use either Form 1040EZ or Form 1040A to file their first tax return.

True

14. Even if you hire a professional tax preparer, you are responsible for supplying accurate and complete tax information.

True

15. By law, only professional tax preparers may use tax preparation software.

False