Review Questions: 1, 2, 3, 4, 7, 8, 9, 12, 13, 16 1. How is adjusted gross income different from taxable income?

AGI: Your taxable income from all sources minus specific adjustments (for example, IRA deduction, student loans interest payments, and alimony paid by you), but before deducting your standard or itemized deductions. Taxable Income: Income subject to taxes 2. If someone is in the 28 percent marginal tax bracket, it that persons entire income taxed at 28 percent? Why or why not? No 3. It can be said that capital gains income is better because of taxes and timing. Why? Is the same true for dividend income? Because its the amount by which the selling price of a capital asset differs from its purchase price. No. 4. Briefly explain each filing status. How does filing status affect who must file income taxes? How does filing status affect the standard deduction amount? Single: You are single at the end of the year and do not have any dependent children Married Filing Jointly and Surviving Spouses: You file a joint return with your spouse, combining incomes and deductions into a single return. If your spouse dies, you can still qualify for this status for up to 2 years after the year in which your spouse died if you have a dependent child living with you, you pay more than half the cost of keeping up your home, and you are not remarried. Of course, if you remarry, you can file a joint return with your new spouse. Married Filing Separately: Married couples also have the choice of filing separately. As Consumer Reports noted in 2010, if you are married, it is hard to say ahead of time whether you will do better filing jointly or separatelythe best ideas is to figure your taxes both ways and, of course, go with the low number. This status is often used when a couple is separated or in the process of getting a divorce. Head of Household: Head of household status applies to someone who is unmarried and has at least one child or relative living with him or her. The advantage of this status is that your tax rate will be lower and your standard deduction higher, than if you have filed with single status. To qualify for head of household status, you must be unmarried on the last day of the tax year, have paid more than half the cost of keeping up your home, and had a child or dependent live with you for at least half of the year.

7. In addition to federal income taxes, what other income-based taxes does the federal government collect? Are these taxes progressive or regressive and how are the taxes calculated? Social Security taxes are regressive, and you dont get anything back from it on your tax return. Medicare taxes are regressive and it is deducted from your salary. 8. List and describe four non-income-based taxes. Be sure to categorize, each tax as either progressive or regressive. Excise Taxes: Progressive Sales Taxes: Progressive Property Taxes: Regressive Gift and Estate Taxes: Progressive

9. What are the three primaries of taxable income, as defined by the IRS? Adjusted gross income, or AGI; deductions; and exemptions. 12. List the six most common itemized deductions and describe the limits set on each. Medical and Dental Expenses: Must exceed 7.5 percent of your AGI Tax Expenses: NA Home Mortgage and Investment Interest Payments: $100,000 Gifts to Charity: Must show a receipt and you get 25% back on your returns. Casualty and Theft Loss: the first $100 is excluded and you can deduct losses only to the extent that the remaining losses exceed 10 percent of your AGI Miscellaneous: Must exceed 2 percent of your AGI 13. What tests must be met to qualify as a dependency exemption? As a personal exemption? Dependency: Must pass a relationship of household member test. The individual cannot earn more that the exemption amount. You must provide more than half of the dependents support. The dependent must be a U.S. citizen, resident, or national, or a resident of either Mexico or Canada. Personal: Is received regardless or your filing status, or yourself and your spouse if filing a joint return.

16. Electronic filing of tax returns offers distinct advantages. What are they? What precautions must be taken when using Free File? Faster refunds, more accurate returns, quick electronic confirmation, delete the paperwork with electronic signatures, and federal/state e-filing. You must be cautious of fees.