Personal Finance – Chapter 4

Progressive or Graduated Tax A tax system in which tax rates increase for higher incomes.
Tax Brackets Income ranges in which the same marginal tax rates apply. For example, an individual might fall into the 15 percent or 28 percent marginal tax bracket.
Personal Exemptions An IRS-allowed reduction in your income before you compute your taxes. You are given one exemption for yourself, one for your spouse, and one for each dependent.
Deductions Expenses that reduce taxable income.
Itemized Deductions Deductions calculated using Schedule A. the allowable deductions are added up and then subtracted from taxable income
Standard Deductions A set deduction allowed by the IRS regardless of what taxpayers’ expenses actually were.
Taxable Income Income subject to taxes.
Adjusted Gross Income or AGI Your taxable income from all sources minus specific deductions (for example, IRA deduction, student load interest deduction, and alimony paid by you), but before deducting your standard or itemized deductions.
Marginal Tax Rate or Marginal Tax Bracket The percentage of the last dollar you earn that goes toward taxes.
Tax-Deferred Income on which the payment of taxes is postponed until some future date.
Capital Asset An asset you own, except for certain business assets, including stocks, bonds, real estate, or collectibles.
Capital Gain/Capital Loss The amount by which the selling price of a capital asset differs from its purchase price. If the selling price is higher than the purchase price, a capital gain results; if the selling price is lower than the purchase price, a capital loss results.
Capital Gains Tax The tax you pay on your capital gains.
Bracket Creep The movement into higher tax brackets as a result of inflation increasing wages.
Social Security A federal program that provides disability and retirement benefits based on years worked, amount paid into the plan, and retirement age.
Medicare The federal government’s insurance program to provide medical benefits to those over 65.
Dependent Person you support financially.
Total or Gross Income The sum of all your taxable income from all sources.
Active Income Income that comes from wages or a business.
Portfolio or Investment Income Income that comes from securities.
Passive Income Income that comes from activities in which the taxpayer does not actively participate.
Adjusted Gross Income or AGI Your taxable income from all sources minus specific deductions (for example, IRA deduction, student load interest deduction, and alimony paid by you), but before deducting your standard or itemized deductions.
IRA An individual retirement arrangement which is a tax-deferred retirement savings account allowed by the government.
Home Equity Loan A loan that uses your home as collateral, that is, a loan that is secured by your home. If you default, the lender can take possession of your home to recapture money lost on the loan.
Exemption A deduction you can take on your return for each person supported by the income listed on your tax return.
Child Tax Credit A tax credit given for each qualifying child under 17.
Hope Scholarship Tax Credit A tax credit of up to $1,650 per year for the first two years of college.
Lifetime Learning Tax Credit A tax credit for all years of college or graduate school. It also applies to working adults taking classes to improve their work skills.
Child and Dependent Care Credit A tax credit that offsets your taxes in a direct dollar-for-dollar manner for child and dependent care expenses.
Earned Income Credit A tax credit available to low-income taxpayers, which effectively serves as a negative income tax.
Adoption Credit A tax credit of up to $11,390 available for qualifying costs of adopting a child.
Schedules Attachments to Form 1040 on which you provide additional information.
Audit An examination of your tax return by the IRS.
Keogh Plan A tax-deferred retirement plan for the self-employed.
Trust A fiduciary agreement in which one individual holds property for the benefit of another person.
401(k) Plan A tax-deferred retirement plan.

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