Taxation Basics
86 flashcards by MentisLibrary
How the US federal income tax system actually works: filing statuses, brackets, marginal versus effective rates, deductions versus credits, capital gains, and payroll taxes. Educational overview only, not tax advice.
- What kind of system is US federal income tax?
- A progressive, self-assessed system: taxpayers report their own income and compute their own tax, and higher slices of income are taxed at higher rates.
- What is gross income for tax purposes?
- All income from whatever source derived, unless a specific provision excludes it.
- What are some common exclusions from gross income?
- Amounts the law specifically leaves out of income, such as most gifts and inheritances received, employer-paid health premiums, and municipal bond interest.
- What is earned versus unearned income?
- Earned income comes from work, such as wages and self-employment profit; unearned income comes from capital, such as interest, dividends, and capital gains.
- What is adjusted gross income?
- Total income less specific adjustments listed in the law, and the figure many other tax rules key off.
- What are above-the-line deductions?
- Adjustments subtracted before AGI, available whether or not you itemize.
- What is modified adjusted gross income?
- AGI with certain deductions and excluded items added back, used as the income test for various benefits and phaseouts.
- What is the standard deduction?
- A flat amount most filers may subtract from AGI instead of listing individual deductions.
- What are itemized deductions?
- Specific allowable expenses listed individually instead of taking the standard deduction.
- What is the SALT deduction?
- The itemized deduction for state and local taxes paid, which includes income or sales tax plus property tax.
- How does the medical expense deduction work?
- Only unreimbursed medical expenses above a percentage-of-AGI floor are deductible, and only for itemizers.
- What is taxable income?
- AGI minus the standard or itemized deduction and any qualified business income deduction. It is the amount the rate brackets apply to.
- What is a tax bracket?
- A range of taxable income taxed at a particular rate.
- How do progressive brackets actually work?
- Each bracket rate applies only to the income falling inside that bracket, not to all your income.
- Does earning one more dollar into a higher bracket reduce take-home pay?
- No. Only the dollars inside the higher bracket are taxed at the higher rate, so an extra dollar always leaves you with more after tax.
- Marginal versus effective tax rate
- The marginal rate applies to your next dollar of income; the effective rate is total tax divided by total income.
- What is the Single filing status?
- For unmarried taxpayers who do not qualify for a more favorable status.
- What is Married Filing Jointly?
- Married couples combine income and deductions on one return and are jointly responsible for the tax.
- What is Married Filing Separately?
- Each spouse files a separate return reporting only their own income and deductions.
- What is Head of Household status?
- A more favorable status for an unmarried taxpayer who pays more than half the cost of keeping up a home for a qualifying person.
- What is the Qualifying Surviving Spouse status?
- A status letting a widowed taxpayer with a dependent child use joint-return rates for a limited number of years after the spouse's death.
- Deduction versus credit
- A deduction reduces taxable income, so its value equals the amount times your marginal rate; a credit reduces tax dollar for dollar.
- Refundable versus nonrefundable credit
- A nonrefundable credit can reduce tax only to zero; a refundable credit can produce a refund beyond the tax owed.
- What is the Child Tax Credit?
- A credit for each qualifying child under a specified age, phased out above certain income levels, with a partially refundable portion.
- What is the Earned Income Tax Credit?
- A refundable credit for lower-income working taxpayers that increases with earned income, plateaus, and then phases out.
- What is the American Opportunity Tax Credit?
- An education credit for qualified expenses during the first four years of postsecondary education, partially refundable.
- What is the Lifetime Learning Credit?
- A nonrefundable credit for qualified tuition and related expenses, with no limit on the number of years claimed.
- What is the Child and Dependent Care Credit?
- A credit for a portion of care expenses paid so the taxpayer can work or look for work.
- What is the Saver's Credit?
- A credit for lower-income taxpayers who contribute to a retirement account, on top of any deduction for the contribution.
- What is the Premium Tax Credit?
- A refundable credit that subsidizes health insurance premiums bought through the Marketplace, based on household income.