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Exam 2 Study guide

by: Jennifer Cartwright
Jennifer Cartwright
Virginia Tech

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Chapter 4,5, and 6
Personal Financial Planning
Dr. White
Study Guide
finance, Study Guide
50 ?




Popular in Personal Financial Planning

Popular in Agricultural & Resource Econ

This 8 page Study Guide was uploaded by Jennifer Cartwright on Thursday March 24, 2016. The Study Guide belongs to AAEC 2104 at Virginia Polytechnic Institute and State University taught by Dr. White in Spring 2016. Since its upload, it has received 34 views. For similar materials see Personal Financial Planning in Agricultural & Resource Econ at Virginia Polytechnic Institute and State University.

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Popular in Agricultural & Resource Econ


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Date Created: 03/24/16
Chapter 4: Federal Income Taxes  Why do we pay income taxes? o Help fund national, state, and local efforts  Running the government and government programs  Roads, bridges, schools, libraries  National defense  Police/fire departments o Want to maximize your after tax income  Marginal vs Average Tax rates o US uses a progressive tax system  Tax rate goes up as income goes up o Everyone starts out paying the same rate o Marginal tax rate = taxes owed on the next dollar earned o Average tax rate = total taxes/ taxable income  Take-home pay o Gross income minus  Federal income taxes withheld  State income taxes withheld  FICA:7.65% o Filling out a W-4 form  More exemptions you list, less income tax withheld  General Info o Determine if you have to file:  Single, not dependent (gross income is over 10,300)  Dependent (unearned income greater than 1,00 or earned income greater than 6.300) o Determine which file to use  1040EZ, 1040A, 1040  The “Theory” of Income taxes o Look at IRS Form 1040  Address and personal info  Filing status  Exemptions  Income  Adjustments to income  Taxes and tax credits  Other taxes  Payments  Refunds/ amount owed  Address and Personal Info o Use IRS labels if possible o Name and Address o SSN o State income tax forms  Filing Status o Single o Married, filing jointly o Married, filing separately o Head of household with dependents o Qualifying widower with dependent children  Exemptions o An allowance for you and your dependents  4,000 per exemption o Claim yourself  Unless you’re a dependent under your parents o Claim your spouse and dependents  Dependents are qualifying child or relative  Under 19; under 24 AND full time student  Any age if permanently disabled  Didn’t pay more than ½ of own support for the year  Lived with you for at least ½ the year (time at college counts)  Income o List your gross income for the year by source  Support with w-2 o Wages, salaries, tips o Interest earned- taxable and tax- exempt  Schedule b o Dividends- ordinary, qualified  Schedule b o Business or farm income  Schedule c or f o Capital gain/loss from sale of assets  Schedule d o IRA distributions, pensions, unemployment o Other income  Adjustments o Reduce total income  Total Income – Adjustments = Adjusted Gross Income  AGI o Main adjustments for students/ graduates  Moving expenses (job-related)  Self – employment items  ½ SE tax, retirement contributions, health ins premiums  Traditional IRA contributions  Student loan interest payments (up to 2500)  Tuition and fees deductions (up to 4000)  Tax and credits o Standard deduction vs itemized deduction  Reduces taxable income  Use larger of the two o Standard deduction = 6,300 for singles  12,600 for married/joint o Itemized deductions  Use Schedule A o Itemizable Expenses  Medical and dental expenses (only amount over 10% AGI)  State and Local income taxes or sales tax  Real estate and personal property taxes  Interest paid  Gifts to charity  Casualty and theft losses  Unreimbursed job expenses o Deductions for exemptions  4,000 per exemption o Taxable income o Tax o Alternative Minimum Tax o Tax Credits  Directly reduce your tax liability o Child/elder care o Education credits  American Opportunity Credit  Up to 2500 per students  Only for the first 4 years of higher education  Lifetime up to 2,00 per return  Can’t use if you claim tuition/fee adjustment  Can’t use if you’re a dependent  Other taxes o Primarily self-employment taxes  Schedule SE o Add to your income taxes to get Total Tax  Payments o All tax payments made during the year o Income tax withheld (w-2) o Estimated tax payments  Primarily for businesses o Earned income credit  For low-income family o Add to get total payments  Refund/Amount Owed o If Total Payments > Total Tax means Refund  Otherwise you owe more income taxes o Can receive refund directly into bank account  Legally Reducing Your Taxes o Reduce your taxable income  Make retirement contributions o Increase your adjustments  Make traditional IRA contributions  Roth for students  Student loan interest, moving expenses, etc. o Standard vs Itemized deductions  Take the larger of the two  For most students use standards o Increase itemized deductions  House-related deductions  Mortgage interest, property taxes  Incure medical expenses in the same year  All elective surgeries in the same year  Increase charitable donations o Use any tax credits that might help  Education credits, child/elder care, etc o Qualified dividends  Hold stocks at least 60 days o Tax-exepmt ncome  Municipal bonds Chapter 5: Cash Management  Liquidity vs Savings o Liquidity: rapid cash needs o Savings: emergency needs  Cash Management o Build checking account o Build emergency funds o Use cash to pay debts  Where to keep cash o Checking accounts o Savings accounts o Money market deposit accounts o Certificates of Deposits o Money Market Mutual Funds o Asset management accounts o US Series EE bonds  Comparing Different Accounts o Rate of return  Annual percentage yield  Always compare after tax apy  After tax apy= pre tax apy * (1-mtb) o Safety  FDIS or FSLIC  MMMFs not insured, fairly safe o Look at convenience, fees, customer service  Institutions o Commercial banks  Full service  Online banking o Savings and loans and savings banks  Primarily loans o Credit unions  Member owned  Lower interest rates  Usually higher rates of return o Online deposit accounts  Primarily savings o Brokerage firms  Asset management accounts  What to look for in an institution o Services and product  Checking, savings, debit/credit card, atms o Safety  Track record o Fees and charges o Convenience and customer service  Checking account o Opening account  Look at: fees, operating hours and locations, atm, customer service o Using  Deposit paycheck and other funds  Write checks as needed  Record in check register  Online banking o Balance check book  Mark off all deposits and checks that have cleared  Take the ending balance from monthly statement  Add any deposits that haven’t cleared from register  Subtract any checks that haven’t  Adjusted balance = checkbook balance o Types of Checks  Cashier’s check  Write a check to bank plus fee o They pay check out of their funds funds  Certified check  Personal check guaranteed by bank  Money order  Travelers check  Cash management o Electronic fund transfers o Smart cards and stored value card Chapter 6: Credit Cards and Open Credit  What is Credit? o Credit is buying something today with the obligation to pay later o Consumer credit  Non-mortgage credit purchases  Auto loan, credit card, vacation loans o Open or Revolving credit  Borrow up to credit limit  Variable payback  Minimum payment to full amount  Interest charges build on the outstanding balance  Open or Revolving Credit o EX:  Credit cards  Open accounts at stores  Operating lines of credit  Home equity line of credit  Main Factors o Interest Rate (apr)  Measure by annual percentage rate  APR is the estimate of actual annual cost of the account  Allows comparison of different accounts  Different rates  Purchases rate  Balance transfer rate  Chas advances rate  Default rate  May be fixed or variable  Fixed rates on credit cards can change over time o 45 days notice from company  Variable rate o Variable rates usually tied to an index o Variable rate may change each month  Teaser rates  Short term low rates  After stated term, rate increases o Calculating the balance owed  Average daily balance method  Add up each day’s balance, divide by number of days  Previous balance method  Uses the previous statements ending balance  Higher interest charges  Adjusted balance method  Subtracts any payments from previous balance  Lower interest charges than PBM o Cash Advance  Borrow cash against your credit limit  Pay advance fee  High apr on advances  Starts accruing immediately o Grace period  Time from initial purchase to first interest charges  No grace period if there is an outstanding balance o Annual Fee  Fee charge just to have card o Other Fees  Minimum interest charge  Balance transfer fee  Cash advance fee  Late fee  Over the limit fee  Types of open credit o Bank credit cards  Issued by banks o Variations of bank credit cards  Premium or platinum cards  Affinity cards  Secured credit cards  Collateral o Travel and Entertainment cards  Not revolving- entire balance each month  Probably an annual fee o Single purpose cards  Used for only one store  Good way to limit spending o Charge accounts  Use product/service today, pay at the end of the month  Advantages of Credit Cards o Convenience o Safer o Great for emergences o Helps with record keeping o Internet shopping o Helps build credit history o Extra warranties and consumer protection  Disadvantages o Typically spend more with credit card vs cash o Easy to lose track of purchases o Fees and interest charges o Live above your means now but pay for it later o Destroy your credit history if used unwisely  Getting a credit card o 5 c’s of credit  Character: measure by credit score/history  Capacity: current income  Capital: value of investment assets  Collateral: only for secured credit cards  Conditions: overall economy  Troubleshooting credit card situation o Determne how long it will take to pay balance in full o Switch to lowest apr card possible o Use savings to reduce credit card balances o Pay credit card balances with home equity line o Work with creditor  Credit history o Creditors report to credit bureaus  Credit limits  Outstanding balance  Payment history  Date opened  Judgement, collections o Used to calculate credit score Chapter 7 hasn’t been finished.


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