Financial Literacy Ch.4 Study Guide

Taxes

Financial obligations imposed by governments, its purpose to pay for services provided by government (ex: military, police, street lights… etc)

Income tax, sales tax, sin tax, and tarrifs

4 types of taxes

Tax base

Amount to be taxed (price of item)

Tax Rate

Amount of the tax itself (differs place-to-place)

IRS

Internal revenue service that collects taxes and enforces tax laws, impose fines and other penalties for fraudulent tax returns

Gross income

Total income before taxes and other deductions

Adjusted gross income

Income amount reported on form 1040 after applying allowed deductions

Taxable income (base)

Amount remaining after the standard deduction or itemized deductions

Filing status

Personal info on your tax return that is determined by your marital status and the presence of dependents

Dependents

Younger than 19, family or adopted, lived in your home

Standard Deductions

Set by congress accounts for inflation

Itemized Deductions

Set by congress, accounts for inflation

Tax brackets

Predefined range to taxable income where a single tax rate applies

Marginal tax rate

Rate of change in tax due to change in income or change in your deductions

Effective tax rate

Average tax an individual pays on their entire income (politicians use against opponents)

Tax credits

Dedutctions, governments owes you money, some refundable and could reduce tax to 0 (Ex: Child-based, health insurance, retirement savings…)

W-4 Form

Provided by employer early on, determining the amount of federal income tax withheld from their paychecks.

W-2 Form

Provided annually by employer for employees to file taxes (IRS), with wages and amount of taxes withheld from their paychecks. (Keep for 7yrs)

Kiddie tax

Tax imposed by congress on net unearned income of dependent children in a household

Tax avoidance

Legal means of minimizing taxes

Tax loopholes

To reduce the amount of taxes due

Tax evasion

Falsely reporting income and financial transactions

Realized income

Convert one asset into another for gain

Recognized income

Realized income that's reported to the IRS on your tax return (gross income)

Tax exempt

Income not subject to federal income tax

Roth IRA

Retirement savings account where you use your contributions to purchase investment

Tax-deferred growth

Keep your assets and let value appreciate over long periods of time

Single, married filing jointly, married filing separately, head of household, and qualifying widow(er).

What are the 5 filing statuses