100% CORRECT QUESTION AND ANSWER FOR TAX FUNDAMENTALS TEST

100% CORRECT QUESTION AND ANSWER FOR TAX FUNDAMENTALS TEST Taxes - CORRECT ANSWER-Everyday expense of life that allow your local, state, and federal governments to provide important services What are some things taxes pay the bills for? - CORRECT ANSWER-Medicare, Medicaid, the military, the national debt, police and fire protection, public schools, road maintenance, parks, libraries, and safety inspection of foods, drugs, and other products What are some times you pay some type of tax? - CORRECT ANSWER-Every time you get a paycheck, buy a new CD or pair of shoes, or fill up your car's gas tank The Tax Foundation - CORRECT ANSWER-An independent public policy research group that determines how much of the year the average person works to pay taxes Tax Freedom Day - CORRECT ANSWER-- Early April - From Jan 1st to early April, all the money you earn goes toward paying taxes What can effective tax planning help you with? - CORRECT ANSWER-Having money left after paying taxes and living expenses What are several strategies you can use to plan for taxes? - CORRECT ANSWER-1. Find out how the current tax laws and regulations affect you 2. Maintain complete and accurate tax records 3. Learn how to make decisions that can reduce your tax liability Tax liability - CORRECT ANSWER-The total amount of taxes owed What will happen if you follow those strategies? - CORRECT ANSWER-You will pay a fair share of taxes while taking advantage of tax benefits that allow you to owe less money What are the four major categories of taxes? - CORRECT ANSWER-1. Purchases 2. Property 3. Wealth 4. Earnings Taxes on Purchases - CORRECT ANSWER-- Pay sales tax each time you buy a product - Added to prices of most products you purchase - Collected by state and local governments - Many states do not charge sales tax on food and medicine Excise tax - CORRECT ANSWER-- A type of sales tax (tax on purchases) - A tax on specific goods and services - Gasoline, air travel, telephone service - Collected by federal and state governments Taxes on Property - CORRECT ANSWER-- Real estate property tax: major source of income for local governments - Based on the value of land and building - As the value of real estate goes up, the amount of property tax pay increases as well - State and local governments may assess taxes on property such as boats and farm equipment Taxes on Wealth - CORRECT ANSWER-1. Estate tax 2. Inheritance tax 3. Gift tax Estate tax - CORRECT ANSWER-Federal tax collected on the value of a person's property at the time of his or her death - might not always be the end of tax liability Inheritance tax - CORRECT ANSWER-State tax collected on the property left by a person to his or her heir(s) in a will - Heirs must pay inheritance tax before claiming inheritance Gift tax - CORRECT ANSWER-Federal tax collected on money or property valued at more than $11,000 given by one person to another in a single year - Gifts designated for educational or medical expenses are not subject to gift taxes Income tax - CORRECT ANSWER-Tax on wages, salaries, and self-employed earnings Wages - CORRECT ANSWER-Payments received for hourly work Salaries - CORRECT ANSWER-Payments received for weekly or monthly work, regardless of the number of hours worked Personal income tax - CORRECT ANSWER-- Tax you pay on the income you receive - Federal government's main source of revenue Social Security funds - CORRECT ANSWER-- Collected as a tax - Finance retirement, disability, and life insurance benefits of the federal government's Social Security program Does your income tax fund social security? - CORRECT ANSWER-No, payroll tax does (payed partly by employer) IRS - CORRECT ANSWER-- Internal Revenue Service - Federal agency, part of the Department of Treasury - Collects taxes or tax revenues - Primary mission: collect federal income taxes and to enforce the nation's tax laws What basis are taxes on earnings collected as? - CORRECT ANSWER-- Pay as you earn basis - Employer must withhold Social Security and income tax payments from your paycheck and send money to the IRS What happens if you are self-employed, own your own business, or are retired> - CORRECT ANSWER-- Make your own estimated tax payments - Determine if you have paid too much or too little income tax when done - Either pay more tax or receive a fund A Form W-2 - CORRECT ANSWER-- Document that employers are required to prepare and distribute to each employee and the IRS by the end of January - Details the wages earned by the worker as well as all taxes withheld for the year - Provides much of the information that you need to file your yearly federal income tax return - Contains the following information: 1. Employer's name and address 2. Employee's name, address, and Social Security number 3. Wages the employee earned 4. Taxes withheld from earnings Income tax returns - CORRECT ANSWER-- A from such as 1040 or 1040EZ on which a taxpayer reports how much money he or she received from work and other sources and the exact taxes that are owed Gross income - CORRECT ANSWER-Total income Main components of gross income - CORRECT ANSWER-1. Earned income 2. Interest income 3. Dividend income Earned income - CORRECT ANSWER-The money you receive for work, such as wages, salary, commissions, tips, bonuses, and self-employ earnings Interest income - CORRECT ANSWER-The interest that you receive from banks, credit unions, and savings and loan associations