Personal Finance Chapter 4

Progressive of 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 Exemption an IRS-allowed reduction in your income before you compute your taxes. You are given one exemption for yourself, your spouse, and one for each dependent
Deductions expenses that reduce taxable income
Standard Deduction a set deduction allowed by the IRS, regardless of what a taxpayer’s expenses actually were
Taxable Income income subject to taxes
Adjusted Gross Income (AGI) your taxable income from all sources minus specific adjustments, but before deducting your standard or itemized deductions
Marginal Tax Rate / 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, and real estate
Capital Gain / Capital Loss the amount by which the selling price of a capital asset differs from its purchase price
Capital Gains Tax the tax you pay on your realized capital gains
Bracket Creep the movement into a higher tax bracket when wages are increased as a result of inflation
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 Income / Gross Income the sum of all your taxable income from all sources
Active Income income that comes from wages or a business
Portfolio / Investment Income income that comes from securities
Passive Income income that comes from activities in which the taxpayer does not actively participate
Individual Retirement Account (IRA) a tax-deferred retirement savings arrangement allowed by the government
Home Equity Loan a loan that uses your home as collateral–that is, a loan 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
American Opportunity Credit a tax credit of up to $2,500 per year per student
Lifetime Learning Credit a tax credit of up to $2,000 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 that effectively serves as a negative income tax
Health Care Premium Credit a tax credit available to low-income taxpayers who purchased coverage through the Health Insurance Marketplace
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 regarding income and expenses
Audit an examination of your tax return by the IRS
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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