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Personal Finance: Chapter 4 Notes

by: Lindsay Fialli

Personal Finance: Chapter 4 Notes FIN 100

Marketplace > Salem State University > Finance > FIN 100 > Personal Finance Chapter 4 Notes
Lindsay Fialli

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About this Document

These are my notes for Chapter 4 of Personal Finance by Jeff Madura.
Personal Finance
Terrance Doyle
Class Notes
Using, tax, concepts, for, Planning
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This 4 page Class Notes was uploaded by Lindsay Fialli on Tuesday October 4, 2016. The Class Notes belongs to FIN 100 at Salem State University taught by Terrance Doyle in Fall 2016. Since its upload, it has received 5 views. For similar materials see Personal Finance in Finance at Salem State University.


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Date Created: 10/04/16
Chapter 4: Using T ax Concepts for Planning  Taxes are paid on earned income , consumer purchases, wealth transfers, and capital assets o Special taxes on certain consumer items (cigarettes, alcohol, & gasoline)  Corporations pay corporate income taxes on corporate profits  Homeowners pay property taxes on the values of their homes and land  Taxes are a significant source of funding for government services and programs  Individuals pay taxes at federal, state, and local levels  The IRS enforces the federal tax laws and prepare the forms and publications that taxpayers use to calculate their income taxes  The tax years ends on December 31st  Individual income taxes must be filed and paid by April 15th the following year  Before you prepare your own tax returns, you should familiarize yourself with the latest changes in the tax laws and IRS instructions  Sales tax is paid at the time of transaction  Income taxes are withheld as income is earned throughout the year  There is sometimes tax relief for natural disaster or tax-related economic stimulus provisions  Economic Growth and Tax Relief Reconciliation Act of 2001: tax cut package designed to provide short-term economic stimulus through tax relief for taxpayers  Jobs and Growth Tax Relief Reconciliation Act of 2003: an act that accelerated much of the tax relief resulting from the 2001 Tax Relief Act o The individual tax rate decreased by 2%-3% o The child tax credit increased to $1,000 per child o The standard deduction for married couples doubled  American Taxpayers Relief Act of 2012: this law permanently set in place many existing features of the tax law that had previously been extended from time to time and faced a return of pre-2001 tax codes unless permanently fixed into law o Tax Relief o Unemployment Insurance Reauthorization o Job Creation Act of 2010 o Signed by President Obama o Child Tax Credit o Student loan interest deductions o Benefits o Dependent Care Credit  Same sex couples will be treated as married by the government for tax purposes by Supreme Court in 2013  Affordable Care Act of 2010 (Obamacare): legislation that introduced the Individual Mandate to acquire health care coverage or face a penalty for not having coverage o Intent of the law is to improve the health care market  Earned Income: earned income represents salary or wages  Federal Insurance Contributions Act (FICA): taxes paid to fund Social Security System and Medicare o Taken out of paychecks o Social Security: 6.20% of salary o Medicare: 1.45% of salary (employer pays the same amount)  Medicare: a government health insurance program that covers people mostly over the age of 65 and provides payments to health care providers in the case of illness  Personal Income Taxes: taxes imposed on income earned  Your tax return will show whether or not a sufficient amount of taxes was already withheld from your paycheck, whether you still owe some taxes, or whether the government owes you a refund  Form 1040EZ: simplest tax form o Requirements:  Filing as single or married filing jointly  No dependents  Income less than $100,000  Filing Status o Single o Married filing jointly o Married filing separately o Head of Household ( have at least one dependent) o Qualifying widow(er) with dependent child(ren)  Gross Income: all reportable income from any source, including salary, net business income, interest income, dividend income, and capital gains during the tax year  Contributions to your employer-sponsored retirement account is not taxed until withdrawn from the account  Interest Income: interest earned from investments in various types of savings accounts at financial institutions, from investments in debt securities such as Treasury bonds, or from providing loans to other individuals  Dividend Income: income received in the form of dividends paid on shares of stock or mutual funds  Capital Gain: income earned when an asset is sold at a higher price than was paid for the asset  Short-Term Capital Gain: a gain on assets held less than 12 months  Long-Term Capital Gain: a gain on assets held for 12 months or longer  Capital Gains Tax: the tax that is paid on gain earned as a result of selling an asset for more than the purchase price  Holding an investment for more than a year can yield significant tax benefits, assuming you have a gain  Individuals are taxed at different rates based on which tax bracket they fall under  Adjusted Gross Income: adjusts gross income for contributions to IRAs, alimony payments, interest paid on student loans, and other special circumstances o If you don't have special adjustments, than it is the same as your gross income  Standard Deduction: a fixed amount that can be deducted from adjusted gross income to determine taxable income o Varies according to filing status and whether you are over 65 o Adjusted each year in order to keep pace with inflation  Itemized Deductions: specific expenses that can be deducted to reduce taxable income o Approved to encourage certain behavior  Interest expense  State and local taxes  Real estate taxes  Medical expenses  Charitable gifts  Other (casualty or theft)  State Income Tax: an income tax imposed by some states on people who receive income from employers in that state  Real Estate Tax: a tax imposed on a home or other real estate in the county where the property is located  Medical expenses can be deducted if greater than 10% of adjusted gross income o Can't be used if being reimbursed  If a taxpayer's itemized deductions exceed his or her standard deduction, the taxpayer should take the itemized deduction in lieu of it  Personal Exemption: an allowable amount by which taxable income is reduced for each person supported by income reported on a tax return o Adjusted for inflation  Taxable income is equal to adjusted gross income minus deductions and exemptions  The greater an individual's income, the greater the % of income paid in taxes  Tax Brackets o 10% o 15% o 25% o 28% o 33% o 35% o 39.6%  Marginal Tax Bracket: the tax rate imposed on any additional (marginal) income earned  Tax Liability= Tax on Base + [% on Excess over the Base*(Taxable Income-Base)]  Tax Credits: specific amounts used to directly reduce tax liability o Child credit o College expense credits o Coverdell Savings Accounts o Section 529 College Savings Plan o Earned income credit o Other (child care, adoption, dependent care)  Progressive Tax: a tax system where a positive relationship exists between an individual's income level and tax rate  Child Tax Credit: a tax credit allowed for each child in a household o Child must be less than 17 years old o Child must be a US resident or resident alien o $1,000 per child  College Expense Credits: a tax credit allowed to those who contribute toward their own or their dependent's college expenses o Max credit is $2,500 per student  Coverdell Savings Account: taw-free accounts that can be used for a variety of school expenses o Up to $2,000 per year  Section 529 College Savings Plan o State and private universities can offer prepaid tuition programs with tax benefits o Funds need to be used for college expenses o All parents are eligible, regardless of income o Can contribute up to $300,000 o Penalties if withdrawn for reasons other than college expenses  Earned Income Credit: a credit used to reduce tax liability for low- income taxpayers o Must work and have earned income to qualify o Must have investments less than $3,400 o Limits depending on the number of children  Tax planning is more effective when done in advance of the tax year and throughout the tax year


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