personal finance chapter 4

estate tax a tax imposed on the value of a person’s property at the time of his or her death
excise tax a tax imposed on specific goods and services such as gasoline cigarettes alcohol tires and air travel
inheritance tax a tax levied on the value of property bequeathed by a deceased person
taxable income the net amount of income, after allowable deductions, on which income tax is computed
earned income money received for personal effort, such as wages, salary, commission, fees, tips or bonuses
investment income money received in the form of dividends, interest, or rent from investments. Aka portfolio income
passive income income resulting from business activities in which you do not actively participate
exclusion an amount not included in gross income
tax-exempt income income that is not subject to tax
tax-deferred income income that will be taxed at a later date
adjusted gross income (AGI) gross income reduced by certain adjustments, such as contributions to an individual retirement account (IRA) and alimony payments
tax shelter an investment that provides immediate tax benefits and a reasonable expectation of a future financial return
tax deduction an amount subtracted from adjusted gross income to arrive at taxable income
standard deduction a set amount on which no taxes are paid
itemized deductions expenses that can be deducted from adjusted gross income, such as medical expenses, real estate property taxes, home mortgage interest, charitable contributions, casualty losses, and certain work-related expenses
exemption a deduction from adjusted gross income for yourself, your spouse, and qualified dependents
marginal tax rate the rate used to calculate tax on the last (and next) dollar of taxable income
average tax rate total tax due divided by taxable income
tax credit an amount subtracted directly from the amount of taxes owed
tax audit a detailed examination of your tax return by the Internal Revenue Service
tax avoidance the use of legitimate methods to reduce one’s taxes
tax evasion the use of illegal actions to reduce one’s taxes
capital gains profits from the sale of a capital asset such as stocks, bonds or real estate

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