1. Tax terminology and filing status What are the Economics of Income Taxes?
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H Total tax liability owed What steps should you take when completing a tax return? A. Gross income [ all income subject to income taxes], Total tax liability owed, or Adjusted gross When preparing a tax return, it is important to complete each step in the order prescribed. income (AGI] B. Adjustments to (gross) income Identify each step in completing a tax return by choosing the step from the drop-down fields below. C. Adjusted gross income (AGI), Total tax liability owed, or Itemized deductions D. Total personal exemptions E. Adjusted gross income (AGI), Other taxes, or Taxable income Step A: Determine Adjusted Gross Income A F. Other taxes, Total personal exemptions, or Tax credits Less G. Other taxes H. Total tax liability owed Equals C Less Step B: Calculate Taxable Income Larger of itemized deductions or standard deduction Less D Equals E Step C: Calculate Tax Liability Calculate tax using tax tables or tax rate schedules Less F Plus G Equals H A Gross income [all income subject to income taxes B Adjustments to (gross) income Adjusted gross income (AGD D Total personal exemptions F Taxable income Tax credits G Other taxes

4. Vocabulary - Terminology for components of taxable income Components to Taxable Income Terminology Term Answer Description Adjustments A. This term refers to the result after deducting expenses like alimony paid and self-employment taxes, to name a few. Adjusted gross B. This is a claim made by the taxpayer for each person income G supported by the taxpayer's income. Deductions C. Deductions such as employee, personal retirement, H higher education, and support expenses are included in this category. Standard F D. These are charitable contributions. deduction Itemized E. This is a blanket deduction that includes various deduction D deductible expenses normally incurred by taxpayers. Exemption F. Examples of this term include charitable deductions, state and local taxes, and moving expenses. Itemized G. This term equals gross income less adjustments. deduction example D Capital gains tax J H. This can be either standard or itemized. categories Steps to AGI I. Reduce AGI by the standard deduction and allowable exemptions. Steps to taxable I J. This is taxed as ordinary income if held less than 12 income months.

3. Match the terms relating to the basic terminology and concepts of personal finance on the left with the descriptions of the terms on the right. Read each description carefully and type the letter of the description in the Answer column next to the correct term. (Note: These are not necessarily complete definitions, but there is only one possible answer for each term.) Term Answer Description Gross income A. During this transaction, you can exclude the first B $250,000 ($500,000 for married taxpayers) of gain on sale. Active income B. This term includes wages, salaries, F bonuses/commissions, and interest/dividends/alimony. Portfolio income C. Using taxable income, it is based on tax tables or tax rate schedules. Passive income D. This term includes expenses that can only offset I portfolio income. Investment expenses E. This term refers to passive income offset. D Real estate or limited F. This term includes income from self-employment. partnership expenses E Capital gains G. This item is taxed at different rates depending on the G holding period. Sale of a home H. This is used to determine tax liability. A Taxable income I. This term includes income gained from real estate and H limited partnerships. Tax liability J. This term refers to earnings and capital gains C generated from investment holdings.

2. Calculating Taxable Income Taxable income Rate $1 - $9,075 10.0% $9,076 - $36,900 15.0% $36,901 - $89,350 25.0% $89,351 - $186,350 28.0% $186,351 - $405,100 33.0% $405,101 - $406,750 35.0% Over $406,751 39.6% Using the previous tax table, compute the tax liability for each individual in the scenarios presented, rounding the liability to the nearest dollar. In addition, use the dropdown lists to identify the marginal tax rate and average tax rate for both Chloe and Clark. Chloe's Tax Scenario Chloe is a young professional who lives in downtown San Francisco. She has taxable income of $94,235 as an advertising account executive for Charles Underwood Agency Inc. What is Chloe's tax liability? What is Chloe's top marginal tax rate? (28.00%, 19.50%, or 25.00%) What is Chloe's average tax rate? (19.50%, 20.76%, or 29.20%) Clark's Tax Scenario Clark is a young professional who lives in downtown Seattle. He has taxable income of $62,000 as a medical sales rep for Frasier-dool Inc. What is Clark's tax liability? What is Clark's top marginal tax rate? (15.00%, 25.00%, or 16.67%) What is Clark's average tax rate? (16.67%, 18.32%, 29.20%)

1. Tax terminology and filing status What are the Economics of Income Taxes? Income taxes are taxes collected by federal, state, and local governments. Within the United States, we have a defined tax structure. Answer the following questions regarding the U.S. tax structure. A tax structure in which additional taxable income is taxed at a higher rate is referred to as a (step tax structure, progressive tax structure, U.S. tax code structure, or average tax structure). The tax paid on the next dollar of taxable income is referred to as the (marginal, average, or progressive) tax rate. The overall rate at which income is taxed, determined by dividing the tax liability by the taxable income, is referred to as the (progressive, marginal, or average) tax rate. In addition to understanding how the tax system is structured, knowing your individual filing status is important because it determines deductions and other considerations that should be taken into account when preparing your tax return. Indicate the correct filing status for each of the definitions provided. A person whose spouse died within two years of the tax year and who supports a dependent child: (Qualifying widow or widower with dependent children, Head of Household, Married filing separately, Single taxpayer, or Married filing jointly.) A person who is unmarried or legally separated from a spouse by either a separation or final divorce decree: (Qualifying widow or widower with dependent children, Head of Household, Married filing separately, Single taxpayer, or Married filing jointly) A person who is unmarried or considered unmarried and pays more than half of the cost of keeping up a home for himself/herself and an eligible dependent child or relative (Qualifying widow or widower with dependent children, Head of Household, Married filing separately, Single taxpayer, or Married filing jointly) A couple in which each spouse files his or her own return (Qualifying widow or widower with dependent children, Head of Household, Married filing separately, Single taxpayer, or Married filing jointly) Spouses who combine their income and allowable deductions (Qualifying widow or widower with dependent children, Head of Household, Married filing separately, Single taxpayer, or Married filing jointly)

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