Incentives, Benefits & Taxes Study Guide

A comprehensive study guide covering various types of taxes, their purposes, and related tax terms and forms.

Purpose of Taxes

To pay federal, state, and local governments to provide public goods and services, regulate the economy, and redistribute income.

Sales Tax

Tax used by states and local governments to raise revenue; not used by states like Alaska and Oregon.

Sin Tax

Tax on luxury goods and vice items that are harmful to health, aimed at discouraging consumption of such products.

Travel Tax

Tax levied on travelers to fund the Federal Aviation Administration; airlines charge a tax on base airfare.

Capital Gains Tax

Tax imposed on profits made from investments and real estate sales, with varying rates for long and short-term gains.

Inheritance/Estate Tax

Tax paid on the transfer of property from deceased individuals to their heirs.

Income Tax

Tax on all workers, regardless of employment status; it is the largest source of revenue for the government.

Value-Added Tax

Tax imposed on the added value of goods from production to sale, only utilized in Michigan.

Payroll Tax

Percentage of an employee’s salary remitted to the government for programs like Medicare, Social Security, and unemployment.

Property Tax

Tax applied to real estate and tangible personal property, including vehicles and business equipment.

Progressive Tax

Tax rate that increases as income increases (e.g., Virginia Income Tax).

Regressive Tax

Tax that applies the same rate for everyone, such as a flat sales tax.

Proportional Tax

Tax that applies the same rate to all taxpayers, regardless of income level.

Gross Income vs. Net Income

Gross Income is total earnings, while Net Income is total earnings minus tax deductions.

Incentive vs. Benefit

Incentives are temporary rewards, while benefits are permanent rewards.

Tax Deduction vs. Tax Credit

Tax Deduction reduces taxable income; Tax Credit reduces tax liability directly, making it the better option.

Standardized Deduction vs. Itemized Deduction

Standardized Deduction is a fixed amount by IRS based on filing status; Itemized Deduction varies based on eligible expenses.

Estate Tax

Federal tax on deceased person’s assets, paid by inheritors, can result in high taxes.

Excise Tax

Tax on specific goods such as tobacco, alcohol, gasoline, and various services.

Tariff

Taxes on imported products like steel and sugar.

Tax Audit

Official review of an individual's tax returns by the IRS to verify accuracy.

Form 1099-MISC

Tax form to report interest, dividend, or miscellaneous income.

Form W-2

Tax form employers send to employees showing gross income, taxes paid, and deductions.

Form W-4

Tax form filled by new employees indicating their tax situation to employers.

Form 1040

Tax form used to file federal income tax returns for the year.