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6e Personal Finance Chapter 7
Federal Income Tax
Terms in this set (30)
Incoming funds to the government
Take a larger share of income as the amount of income grows
Take a smaller share of income as the amount of income grows
Also called flat taxes, are taxes for which the rate stays the same regardless of income
Internal Revenue Service
An agency of the Department of the Treasury; headquartered in Washington, DC; collects income taxes and enforces tax laws
Power to Levy Taxes
Rests with Congress; the US Constitution provides "all bills for raising revenue shall originate in the House of Representatives"
Tax rates apply to income ranges; in 2010 there exist 6 ranges from 10% on the low end and 35% on the high end
Or shortage, occurs when the government spends more than it receives in revenue
All citizens are expected to prepare and file tax returns of their own accord without force; responsibility for filing rests with the individual; failure to do so can result in a penalty -- interest charges on the taxes owed plus a possible fine
Willful failure to pay taxes; punishable by a fine, imprisonment, or both
An examination of tax returns
taxpayer sits down with the auditor to answer questions and produce records
IRS sends a letter, asking the taxpayer to respond to specific questions or produce evidence of deductions or other entries on the tax return
Similar to an office audit, except an IRS agent or local representative visits the taxpayer's home or business to examine records or assets, verify information, and ask specific questions.
Describes your tax-filing group, based on your marital status as of the last day of the tax year -- single, married filing joint return, married filing separately, head of household, or qualifying widow(er)
An amount you may subtract from your income for each person who depends on your income to live
A person who lives with your and for whom you pay more than half his or her living expenses -- children, spouse, elderly parents, disabled relatives living with and depending on the taxpayer
All the taxable income you receive
Money you earned from working -- wages, salaries, tips, income from self-employment
Money you received from passive activity (other than working) -- interest, dividends, alimony, unemployment compensation, worker's compensation benefits, scholarships and grants, employer-paid tuition, winnings from lottery, bartering income, social security benefits, rental income, royalties, estate and trust income, and income from sale of property
Money you receive that is not taxable and are not reported for tax purposes -- child support, gifts, inheritances, life insurance benefits, veteran's benefits
Adjusted gross income (AGI)
Gross income after subtraction of certain items including contributions to individual retirement accounts (IRAs), student loan interest, and tuition and fees -- adjustments are NOT available on Form 1040EZ
Expenses you can subtract from adjusted gross income to determine your taxable income -- use Schedule A and Form 1040; common expenses you may deduct are medical and dental expenses beyond a specified percentage of your income, state and local income taxes, property taxes, home mortgage interest, gifts to charity, losses from theft or property damage, and moving expenses
A stated amount that you may subtract from adjusted gross income instead of itemizing your deductions -- amount changes each year -- helpful if you do not have many deductions
Income on which you will pay tax -- Can look this amount up in the tax table
Amount subtracted directly from the tax owed; different from a deduction which is subtracted from income; -- allowed for items like certain education expenses, child-care expenses, and other items from time to time
Who must file Income Tax Returns?
Any one that earned enough to owe taxes, in a recent year a single person under age 65 whose income exceeded $8,750 had to file a return -- even if you didn't earn enough to have to file if taxes were withheld from your paycheck you may want to file to claim a refund
When must you file Income Tax Returns?
You must file no later than April 15 of the year after you earn the income -- if you file late you will have to pay penalties and interest charges
Which form must you use to file Income Tax Returns?
All taxpayers must use one of 3 basic forms (1040, 1040A, or 1040EZ) when filing their return.
Where do you begin to file Income Tax Returns?
During the year, save all receipts and proofs of payment for your itemized deductions; save all employee withholding records such as pay stubs; by January 31 you should receive a Form W-2 from each of your employers; gather all these records and instruction booklets for preparing this year's returns -- you may file yourself or hire a professional; your taxes may be completed online (free if you make under $54,000) or on paper forms but you are responsible for your taxes being filed correctly on time