Ch 3 & 4 Vocab & Important Terms
Tuesday, February 24, 2026 5:52 PM
Ch 3
Successful money management
- Money Management
○ Refers to day-to-day financial activities necessary to manage current personal economic resources while working
toward long-term financial security
Opportunity cost & money management
- Money management means you give up or trade something a.k.a. trade-off, these are known as opportunity costs
and include:
Components of Money Management
1. Financial Documents
2. Financial Statements
3. Budgeting
A personal Financial Records System
• An organized financial system provides
• Measuring Financial Progress
• Completing Tax Forms
• Making Investment decisions
• Determining resources for spending money
Financial records are usually stored:
- In a home file
- Safe deposit box
- Online
How long should I keep it?
- Certain documents such as a birth certificate, a will & SSC card should be kept forever
- Investments should be kept only for as long as you own them
- Federal Taxes for 3-6 yrs
- Keep audit from the IRS for 7yrs, they may request more info
- Always keep all documents related to purchases/sale of real estate forever
Personal Finance Statements
- Your personal balance sheet & your cash flow statement
- The main purposes of these are:
○ Report your current financial position based on the value of items you own & amount you owe
○ Progress towards financial goals
○ Maintaining records of your financial activities
○ Providing data for tax form and/or applying for credit
The Personal Balance Sheet
- A Balance sheet (aka net worth statement of financial position)
○ Reports what you owe vs what you own
Step 1: List your items of value
- Your assets
○ Cash, tangible property w/ monetary value
○ There are 4 categories to assets
1. Liquid assets
2. Real Estate
3. Personal Possessions
4. Investment Assets
Step 2: Determine amounts owed
- Liabilities
1. Current liabilities
• Medical bills, tax payments, cash loans & charge amounts
2. Long Term Liabilities
- Debts you don’t have to pay in full until a year later
• Cars, school loans & mortgages
Step 3: Compute Net Worth
- Net Worth
• The difference between your total assets vs total liabilities
- Assets - Liabilities = Net worth
Vs
- Assets = Liabilities + Net worth
- Insolvency
• The inability to pay back debts when they are due, bankruptcy maybe an alternative
- Actions needed to increase your networth are
1. Increase your savings
2. Reduce spending
3. Increase the value of your investments & possessions
4. Reducing amounts owed
The Cash Flow statement: Where did your money go?
- Cash Flow
○ The actual inflow & outflow of cash during a period of time
- Cash flow statement
○ Aka personal income & expenditure statement (a budget track sheet)
- Step 1: Record income
- Step 2: Record Cash outflows
- Step 3: Determine Net Cash Flow
® Emergency funds can be used for:
1. Short term account
2. Long term financial security/retirement account
Budgeting for Skilled Money Management
- An Achiever
○ Someone w/ strong financial base
- An Explorer
○ Someone looking for the next level of financial success
- A Striver
○ Someone who has very limited resources who plans carefully
Step 1: Set your Financial goals
- Remember to be S.M.A.R.T (Specific, Measurable, Action orientated, Realistic & Time based)
Step 2: Estimate your income
- A common budgeting period is about a month to track payments like rent/mortgage, utilities & credit card payments
that occur at the end of the month
- Try to keep spending on the low side if you have an income that is not very stable
Step 3: Budget an Emergency fund & Savings
- Set aside money for unexpected expenses & future financial security
Step 4: Budget Fixed Expenses
1. Set a Financial goal
2. Estimate expected income from all sources
3. Budget for an emergency fund
4. Budget for set amounts you MUST pay
5. Budget estimated amounts for home/living expenses
6. A record showing actual in & outflow of cash that is compared to budgeted amounts
7. Evaluation
Step 5: Budget variable expenses
- Have an estimate of what is going to be spent for various household & living expense
• Keep in mind your health & economic conditions
• Have 60% of your income budgeted for variable living costs
Step 6: Record Spending Amounts
- Budget Variance
• The difference between the amount budgeted & the actual
- Deficit
• When actual spending has exceeded the planned spending
- Surplus
• When actual spending is less than planned for
Step 7: Review Spending & Savings Patterns
- Review your financial progress
- Revise your goals & budgets based on wants vs needs
Characteristics of Successful budgeting
- Well planned
• Take time & effort to prepare your budget
- Realistic
• Goals will seam more attainable over time
- Flexible
• Have space for emergencies & unexpected expenses
- Clearly Communicated
• All involved in the budget need to be aware of any changes either written or online
Types of Budgeting System
1. Mental
- All planned and stored in your head but can be unreliable if you forget something
2. Physical
- Envelops, folders, containers or Reciepts that all help you track ins & out of income & spending that can help you
visualize your budget
3. Written
- Can provide details written in a notebook
4. Digital
- Can be used in the form of a spread sheet, w/ a software program such as excel or spreadsheet or on an app or
website
Money Management Financial Goals
- Identifying Savings Goals
• Your personal financial statements/budgets are to help you:
1. Balance a report sheet of your current situation
2. A cash flow statement detailing income & spending for the month
3. A budget recording plans for spending & savings for financial goals
- Balance sheets can be on a period/timeline basis i.e. 3 or 6 mo’s
Identifying Savings Goals
- Reasons for savings include
○ An emergency fund, replace appliances, car issue’s and/or down payment for a home
○ To pay for expensive sport equipment or a vacation, education and/or retirement
○ To earn income from interest on savings to pay current living expenses
Selecting a savings technique
1. U.S. payroll deductions or an app that auto deposits funds into a separate savings account
2. A regular savings account where you send 5-10% of your income - ALWAYS PAY YOURSELF FIRST
3. Employer matching retirement fund contributions
Calculating Savings Amounts
Ch 4
Taxes & Financial Planning
- Common goals related to tax planning include:
○ Knowing the current tax laws & regulations that affect you
○ Maintaining complete tax records
○ Making purchase & investment decisions that can reduce tax liability
- Taxes are paid for in four major categories:
○ Purchases, Property, Wealth & Earnings
Taxes on purchases
- Sales Tax
○ Added to the price of purchased products
- Excise Tax
○ Imposed by the sate & federal govt on specific goods & services
§ Gasoline, cigarettes, alcohol, tires, air travel & phone services
Taxes on property
- Real Estate Property Tax
○ A major source of revenue for local govts, is based on the value of the land & buildings
- Personal Property Tax
○ When state & local govts assess taxes on other the things like cars , boats, furniture & farm equipment
Taxes on Wealth
- Estate Tax
○ Enforces the value of a persons property at time of death, based on fair market value of the deceased persons
investments, property & bank accounts
- Inheritance Tax
○ The value of the property left by the deceased person
§ Gift amounts greater than 15,000 or less in a year are not subject to federal tax, if higher than 15,000 you
are then required to pay federal taxes unless used for school or medical expenses
○ Some states force a gift tax before death to another person as well in the event that they attempt to avoid
estate & inheritance tax
Taxes on Earnings
- The main sources taxed are wages & Social Security
○ (FICA) The Federal Insurance Contributions Act was created by Social Security to fund elders, survivors & the
insurance of disability portion of the social security system along w/ hospital insurance (Medicare)
- Some workers are subject to federal, state & local income taxes, only 9 states are not required to pay income tax
Income Tax Fundamentals
- The Tax Cuts & Jobs Act (TCJA) Law
○ Reductions in tax rates for individuals, standard deductions for all tax payers & limited other commonly used
deductions
§ I.E. Mortgages, interest rates, state & local taxes
Step 1: Determining Adjusted Gross Income
- Taxable income
- Types of income
○ Earned income
○ Investment Income
○ Passive Income
○ Exclusions
○ Tax - Exempt income
○ Tax-deferred income
Adjustment Income
- Adjusted Gross Income
• Gross income after certain additions & reductions have been made
- Reductions
• AKA Adjustment to income, including contributions to the IRA (retirement plan) - penalties for early withdrawal
of savings are considered alimony payments if applicable
- Tax Shelters
• Investments that provide immediate tax benefits & reasonable expectations of future financial returns
Step 2: Computing Tax Deductions
- Tax Deductions
• An amount subtracted from adjusted gross income
- Standard Deduction
• A set amount where taxes are paid
- Itemized Deductions
• Expenses a taxpayer is allowed to deduct from income such as:
§ Medical & Dental expenses
§ Taxes
§ Interest
§ Casualty & Theft Losses
§ Moving expenses
□ Only available to active duty military who have a permanent change in duty for the year 2018 &
beyond
§ Job related & MISC expenses
- Exemptions
• A deduction from adjusted gross income for yourself, your spouse & qualified dependents that are no longer
allowed
- Qualified Business Income
• To provide business to small business owners, a provision called section 199A gives them sole proprietorship
§ Partnerships of up to 20% of income is earned by the businesses from their individual return from taxable
income
Step 3: Calculating Taxes owed
- Tax Rates
• Marginal Tax Rate
§ The rate used to calculate tax on the last & next dollar of taxable income
• Calculating your tax
§ Each tax rate represents a range of income levels referred to as brackets
Calculating your Tax
- The Average Tax
• Is based on the total tax due divided by taxable income
- The Alternative Tax Minimum (ATM)
• Designed to ensure those who receive a tax break pay their share in taxes
Certain Tax breaks that can Include paying a high ATM rate are:
- High level deductions of state & local interest
- Interest on a 2nd mortgage
- Incentive Stock options
- Long term capital gains
- Tax exempt interest
- The taxpayer must start w/ gross income but may exclude many of the tax breaks
Tax Credits
- An amount subtracted from the amount of taxes owed
• One example of a tax credit is given for child care & dependent care expenses
- Tax Credit
• Has a full dollar effect in lowering taxes
- Deductions
• Reduce taxable incomes where liability is calculated
- Earned Income Credit (EIC)
• A federal tax regulation for working parents w/ taxable income under a certain amount
• Families who do not earn enough to owe federal taxes are also eligible for EIC
- Other Tax Credits Include
• Foreign tax credit to avoid double taxation on income paid to other countries
• Child/dependent care expense credit to cover qualifying expenses for someone else to care for your dependent
child aged 13 or other dependents who can’t care for themselves
§ Disabled child, spouse and/or parent who can’t care for themselves
• Savers tax credit to encourage investment contributions to individual & employer sponsored retirement plans by
low & middle income taxpayers
• Adoption tax to cover qualifying expenses when adopting a child
• American Opportunity & Lifetime Learning Tax credits to help offset college expenses
• Residential energy-savings tax credit when purchasing energy efficient products or renewable home systems
• Elderly & disabled tax credit to assist low income people ages 65 & up and/or 65 & under retired w/ a
permanent disability & taxable disability income
• Premium Tax credit for low to moderate households that bought health insurance through health insurance
market place
• Alternative Motor Vehicles & qualified plug in electric drive tax credit for qualified fuel cell & plug in cars
Making Tax Payments
- You will make payment of income tax to the federal govt in one of two forms:
• Payroll withholding
§ The withheld amount is based on your filling status & other optional adjustments claimed to the W-4
Form
• Estimated Tax Payments
§ These payments are based on the persons estimate of taxes due at the end of the year
§ Failure to make these payments leads to penalties & interest charges
Deadlines & Penalties
- Most people are required to complete their taxes by April 15th, if not a Form 4868 is required to be given a 6mo
extension
• This extension doesn’t delay payment liability, you pay taxes owed plus Form 4868 by April 15th, failure to do so
can lead to a penalty of 5%
- People who make quarterly deposits must submit their payments by April 15th, June 15th & Sept 15th of the current
year
- If you don’t pay the whole amount of your due’s you will be taxed with interest fee’s
• If your underpayment of taxes continue due to negligence or fraud this can lead to a penalty of 50-75%
Filing your Federal Income Tax Return
- Who must File?
• Every citizen of the US & Puerto Rico if there gross income exceeded $12,400
• Single people over 65 if there gross income exceeded $14,050
• Payments can also vary based on marital status
§ Single - never married, divorced or legally separated w/ no dependents
§ Married, filing jointly - Combines the income of the couple
§ Married, filing separate - Each spouse files separately, a married couple may find other benefits after
filling together
§ Head of Household - An unmarried individual or a surviving spouse who maintains the home by paying for
more than half of the costs and/or a child/dependent relative
§ Qualifying Window or Widower - An individual whose spouse has died within the past two years & has a
dependent
§ The Marriage Penalty
Which Tax Forms & Schedules should you use?
- The Tax Cuts & Jobs Act (TCJA) simplifies the basic forms used when filing your taxes
• Form 1040 - Used to report your income
§ Form 1040-SR is for senior citizens and in large print
Completing the Federal Income Tax Return
- The major sections of form 1040
• Filing Status
• Income
• Adjusted Income
• Taxable income
• Other Taxes
• Tax Credits
• Payments
• Refund amount or amount you owe
• Your signature
Correcting The Federal Return
- Sometimes you’ll find that your income or additional deductions that you are entitled to were correctly reported
• You’ll need to file a Form 1040X to either additional tax or receive a refund
§ This form will correct the previously filed tax forms
Filing State Income Tax Returns
- All U.S. states except for nine have income tax, they range from 1-10% & some are based on your federal income tax
return
• I.E. Adjusted income or Taxable Income
Tax Assistance & The Audit Process
- Tax information Sources
• Through the IRS
§ Publications
□ The IRS offers free info via
® booklets & pamphlets
® By mail or phone call
◊ calling 1-800-TAX-FORM
® Online at www.irs.gov
® By fax 703-368-9694
§ Phone Hotline
□ 1-800-829-0140
§ Walk in service
§ Interactive Tax Assistance (ITA)
§ IRS2GO App
Tax Publications
- Every year several guides are offered for sale to purchase online or in store
Online Resources
- Sites you can visit for more information are
• The International Revenue Services www.irs.gov
• Kiplinger’s Personal Finance
• CNBC cnbc.com/personal-finance CNBC Personal Finance
Tax Prep Software
- Some services include H&R Block & Turbo Tax that allow you to complete needed tax forms via mail or online
• Using these services can save you hours, but be sure to consider the following:
1. Your personal Situation - Are you employed or operate a business?
2. Special Tax situations w/ regards to diff types of incomes, unusual deductions & various tax credits
3. Features in softwares like “audit check”, future tax planning, filing federal & state tax forms online
4. Technical aspects like hardware & operating system requirements & online support that is provided
Tax Preparation Services
• Types Of Tax Services
§ Local one person operations
§ National Firms (I.E. H&R Block)
§ Enrolled Agents
□ Govt approved experts that prepare returns & tax advice
§ A CPA (Certified Public Accountant)
§ Attorneys usually help when there is a tax related transaction or your opinions differ w/ payment to the IRS
Evaluating Tax Services
- Consider the following factors:
• What training & experience does the professional have?
• How will the fee be determined? (Avoid someone who earns a percentage of your return)
• Does your preparer suggest various deductions that could be questioned?
• Will they represent you if your return is being audited?
• Is tax prep the main business activity? Or do they also sell financial products & services?
Tax Service Warnings
- As a tax preparer your responsible for supplying accurate & complete information
• Be weary of tax preparers that offer you a return in advance, they tend to have very high interest rates
What if your return is audited?
- A tax audit is a detailed examination of your tax return by the IRS
- Most audits done by the IRS require additional info
- Keep accurate records for your tax returns & avoid common filing mistakes
Who gets Audited?
- Less than 1% of tax filers
• 1 out of every 220 people
- People who claim large or unusual deductions increase their chances of an audit
- Tax advisor suggest keeping reciepts for deductions that may be questioned
Types of Audits
- Correspondence Audit
• A mail inquiry that requires you to clarify/document questions about your taxes
- Office Audit
• Requires you visit the IRS office to clarify your tax return
- Field Audit
• An IRS agent will visit you at home, business and/or office of your accountant, to verify if your home office has
been claimed
- Detailed Audits
• Also known as Taxpayer Compliance Measurement Program (TCMP) can range from requesting documents of
various tax returns to line by line paper work review by an IRS employee
Your Audit Rights
- You have the right to request time to prepare
- Ask for clarification on what items are being audited
- It’s also suggested that you:
• Decide if you need a tax preparer, accountant or lawyer
• Be on time for your appointment & bring relevant paperwork
• Present tax records & receipts in a logical, calm & confident manner
• Be sure the information that you have is consistent w/ the law
• Keep answers aimed for auditors Q’s & be brief
- Tax avoidance
• The use of legitimate methods to reduce one’s taxes
- Tax Evasion
• Use of illegal actions to reduce one’s taxes
• If you expect to have the same/lower tax rate for this yr & the following, make your payments before the end of
the year & charitable donations by Dec 31st
• If you expect a higher tax rate, consider delaying deductions; the percentage will lower your rate in dollar
amounts i.e. 24%=240
• If you expect a higher tax rate, accelerate the receipt of income to have it taxed at a lower rate
Consumer Purchasing
- Place of Residence
• Both real estate property taxes & interest on a mortgage are deductible
Consumer Debt
- Current laws allow homeowners to borrow for consumer purchases, make deductions up to $100,000 secured by your
primary or secondary home as high as the actual dollar amount you have
Health Care Expenses
- (FSA) Flexible Spending Account
• A type of health savings account that allows you to reduce your taxable income when paying for medical
expenses or child care costs
• You are allowed to put pre-taxed dollars into these employee-sponsored programs, these “deposits” lead to
lower income tax
• A potential draw back of the FSA is the amount can be left in the account each year is limited, exceeding
amounts will be forfeited
- (HSA) Health Savings Accounts
• Allows you to reduce your taxable income when paying for medical expenses
• No limits to the amount that can be carried over each year
• Amounts can be taken out tax free for any reason after the age of 65
Investment Decisions
- Tax Exempt Investments
• Interest investment from municipal bonds (debt securities issued by the state & local govts)
• While municipal bond has lower rates the after tax maybe higher
Tax Deferred Investments
- Income to be taxed at a later date, are less beneficial than tax-exempt investments
- Paying a dollar in the future instead of today gives you the opportunity to invest(spend) it now
- Examples include:
• Tax deferred annuities issued by insurance companies
• Section 529 savings plans that are ran by the state, tax plans set aside money for children’s education, similar to
a child’s education to cover future educational costs
• Retirement Plans (IRA’S)
- Capitol Gains
• Profits from sale of a capital asset like stocks, bonds or real estate
• Long Term capital gains will be taxed at the rate that is lower than ordinary income based on taxable income
amounts
Self Employment
- Self employed persons have to deduct expenses like health & life insurance as business costs
Children’s Investments
- Parents who make investments on their children’s behalf w/ the child listed as the owner, this is known as Income
shifting
• Income shifting is the attempt to reduce taxable income to parents by shifting the ownership of investments to
children in a lower tax bracket
Retirement & Education Plans
- Traditional IRA
• Contributions to these accounts are not taxed until they are withdrawn
• Deductions are available only to people who don’t participate in employer-sponsored retirement plans or have a
adjusted income under a certain amount
• A 10% penalty is added if withdrawing form your retirement before age 59 1/2, unless the funds were used for a
medical or higher education expense
- Variations IRA
• The Simplified Employee Pension (SEP)
• Savings Incentive Match Plan for Employees (SIMPLE)
§ Both plans are for people who are either self employed and/or business owners
Roth IRA
- As of 2021, this account allows for a $6,000 annual contribution that is not tax deductible, the earning on this type of
account are free after 5yrs
- Funds may be withdrawn by age 59 1/2 if the owner is disabled or for the purchase of a first home valued over
$10,000
- Deductibles provide tax relief up front as contributions reduce from current taxes, however they must be paid back
when withdrawals are made from the IRA deductible
• Roth IRA’s are the opposite, they are exempt from federal & state taxes
Coverdell Education Savings Account
- An educational savings account designed to assist parents to save for their children’s future education
- Annual contributions limited to $2,000 is not tax deductible as a Roth IRA however the earnings accumulate tax free
529 Plan
- Another type of educational saving account for future college education
- There is no federal tax deduction & earnings grow tax free
• There are no withdrawal fees or taxes when money is used for qualified educational expenses
- You don’t have to invest in this plan in your home state, but there are advantages to doing so
• Some states allow deduction contribution to their plan at a specific maxed amount
Keogh Plan
- A retirement plan known as a HR10 may combine profit sharing pensions & other investments purchased by the
employee
• 25% of your annual income is contributed at the max of $58,000
401K plan
- Authorizes a tax deferred retirement plan sponsored by an employer
- Most companies contribute 15% of your salary
- Most financial advisers suggest the following
• The increased value of your investments accumulate on a tax free basis until withdrawn (leave them alone)
• Contributions reduce your adjusted gross income for current tax liabilities
Tuesday, February 24, 2026 5:52 PM
Ch 3
Successful money management
- Money Management
○ Refers to day-to-day financial activities necessary to manage current personal economic resources while working
toward long-term financial security
Opportunity cost & money management
- Money management means you give up or trade something a.k.a. trade-off, these are known as opportunity costs
and include:
Components of Money Management
1. Financial Documents
2. Financial Statements
3. Budgeting
A personal Financial Records System
• An organized financial system provides
• Measuring Financial Progress
• Completing Tax Forms
• Making Investment decisions
• Determining resources for spending money
Financial records are usually stored:
- In a home file
- Safe deposit box
- Online
How long should I keep it?
- Certain documents such as a birth certificate, a will & SSC card should be kept forever
- Investments should be kept only for as long as you own them
- Federal Taxes for 3-6 yrs
- Keep audit from the IRS for 7yrs, they may request more info
- Always keep all documents related to purchases/sale of real estate forever
Personal Finance Statements
- Your personal balance sheet & your cash flow statement
- The main purposes of these are:
○ Report your current financial position based on the value of items you own & amount you owe
○ Progress towards financial goals
○ Maintaining records of your financial activities
○ Providing data for tax form and/or applying for credit
The Personal Balance Sheet
- A Balance sheet (aka net worth statement of financial position)
○ Reports what you owe vs what you own
Step 1: List your items of value
- Your assets
○ Cash, tangible property w/ monetary value
○ There are 4 categories to assets
1. Liquid assets
2. Real Estate
3. Personal Possessions
4. Investment Assets
Step 2: Determine amounts owed
- Liabilities
1. Current liabilities
• Medical bills, tax payments, cash loans & charge amounts
2. Long Term Liabilities
- Debts you don’t have to pay in full until a year later
• Cars, school loans & mortgages
Step 3: Compute Net Worth
- Net Worth
• The difference between your total assets vs total liabilities
- Assets - Liabilities = Net worth
Vs
- Assets = Liabilities + Net worth
- Insolvency
• The inability to pay back debts when they are due, bankruptcy maybe an alternative
- Actions needed to increase your networth are
1. Increase your savings
2. Reduce spending
3. Increase the value of your investments & possessions
4. Reducing amounts owed
The Cash Flow statement: Where did your money go?
- Cash Flow
○ The actual inflow & outflow of cash during a period of time
- Cash flow statement
○ Aka personal income & expenditure statement (a budget track sheet)
- Step 1: Record income
- Step 2: Record Cash outflows
- Step 3: Determine Net Cash Flow
® Emergency funds can be used for:
1. Short term account
2. Long term financial security/retirement account
Budgeting for Skilled Money Management
- An Achiever
○ Someone w/ strong financial base
- An Explorer
○ Someone looking for the next level of financial success
- A Striver
○ Someone who has very limited resources who plans carefully
Step 1: Set your Financial goals
- Remember to be S.M.A.R.T (Specific, Measurable, Action orientated, Realistic & Time based)
Step 2: Estimate your income
- A common budgeting period is about a month to track payments like rent/mortgage, utilities & credit card payments
that occur at the end of the month
- Try to keep spending on the low side if you have an income that is not very stable
Step 3: Budget an Emergency fund & Savings
- Set aside money for unexpected expenses & future financial security
Step 4: Budget Fixed Expenses
1. Set a Financial goal
2. Estimate expected income from all sources
3. Budget for an emergency fund
4. Budget for set amounts you MUST pay
5. Budget estimated amounts for home/living expenses
6. A record showing actual in & outflow of cash that is compared to budgeted amounts
7. Evaluation
Step 5: Budget variable expenses
- Have an estimate of what is going to be spent for various household & living expense
• Keep in mind your health & economic conditions
• Have 60% of your income budgeted for variable living costs
Step 6: Record Spending Amounts
- Budget Variance
• The difference between the amount budgeted & the actual
- Deficit
• When actual spending has exceeded the planned spending
- Surplus
• When actual spending is less than planned for
Step 7: Review Spending & Savings Patterns
- Review your financial progress
- Revise your goals & budgets based on wants vs needs
Characteristics of Successful budgeting
- Well planned
• Take time & effort to prepare your budget
- Realistic
• Goals will seam more attainable over time
- Flexible
• Have space for emergencies & unexpected expenses
- Clearly Communicated
• All involved in the budget need to be aware of any changes either written or online
Types of Budgeting System
1. Mental
- All planned and stored in your head but can be unreliable if you forget something
2. Physical
- Envelops, folders, containers or Reciepts that all help you track ins & out of income & spending that can help you
visualize your budget
3. Written
- Can provide details written in a notebook
4. Digital
- Can be used in the form of a spread sheet, w/ a software program such as excel or spreadsheet or on an app or
website
Money Management Financial Goals
- Identifying Savings Goals
• Your personal financial statements/budgets are to help you:
1. Balance a report sheet of your current situation
2. A cash flow statement detailing income & spending for the month
3. A budget recording plans for spending & savings for financial goals
- Balance sheets can be on a period/timeline basis i.e. 3 or 6 mo’s
Identifying Savings Goals
- Reasons for savings include
○ An emergency fund, replace appliances, car issue’s and/or down payment for a home
○ To pay for expensive sport equipment or a vacation, education and/or retirement
○ To earn income from interest on savings to pay current living expenses
Selecting a savings technique
1. U.S. payroll deductions or an app that auto deposits funds into a separate savings account
2. A regular savings account where you send 5-10% of your income - ALWAYS PAY YOURSELF FIRST
3. Employer matching retirement fund contributions
Calculating Savings Amounts
Ch 4
Taxes & Financial Planning
- Common goals related to tax planning include:
○ Knowing the current tax laws & regulations that affect you
○ Maintaining complete tax records
○ Making purchase & investment decisions that can reduce tax liability
- Taxes are paid for in four major categories:
○ Purchases, Property, Wealth & Earnings
Taxes on purchases
- Sales Tax
○ Added to the price of purchased products
- Excise Tax
○ Imposed by the sate & federal govt on specific goods & services
§ Gasoline, cigarettes, alcohol, tires, air travel & phone services
Taxes on property
- Real Estate Property Tax
○ A major source of revenue for local govts, is based on the value of the land & buildings
- Personal Property Tax
○ When state & local govts assess taxes on other the things like cars , boats, furniture & farm equipment
Taxes on Wealth
- Estate Tax
○ Enforces the value of a persons property at time of death, based on fair market value of the deceased persons
investments, property & bank accounts
- Inheritance Tax
○ The value of the property left by the deceased person
§ Gift amounts greater than 15,000 or less in a year are not subject to federal tax, if higher than 15,000 you
are then required to pay federal taxes unless used for school or medical expenses
○ Some states force a gift tax before death to another person as well in the event that they attempt to avoid
estate & inheritance tax
Taxes on Earnings
- The main sources taxed are wages & Social Security
○ (FICA) The Federal Insurance Contributions Act was created by Social Security to fund elders, survivors & the
insurance of disability portion of the social security system along w/ hospital insurance (Medicare)
- Some workers are subject to federal, state & local income taxes, only 9 states are not required to pay income tax
Income Tax Fundamentals
- The Tax Cuts & Jobs Act (TCJA) Law
○ Reductions in tax rates for individuals, standard deductions for all tax payers & limited other commonly used
deductions
§ I.E. Mortgages, interest rates, state & local taxes
Step 1: Determining Adjusted Gross Income
- Taxable income
- Types of income
○ Earned income
○ Investment Income
○ Passive Income
○ Exclusions
○ Tax - Exempt income
○ Tax-deferred income
Adjustment Income
- Adjusted Gross Income
• Gross income after certain additions & reductions have been made
- Reductions
• AKA Adjustment to income, including contributions to the IRA (retirement plan) - penalties for early withdrawal
of savings are considered alimony payments if applicable
- Tax Shelters
• Investments that provide immediate tax benefits & reasonable expectations of future financial returns
Step 2: Computing Tax Deductions
- Tax Deductions
• An amount subtracted from adjusted gross income
- Standard Deduction
• A set amount where taxes are paid
- Itemized Deductions
• Expenses a taxpayer is allowed to deduct from income such as:
§ Medical & Dental expenses
§ Taxes
§ Interest
§ Casualty & Theft Losses
§ Moving expenses
□ Only available to active duty military who have a permanent change in duty for the year 2018 &
beyond
§ Job related & MISC expenses
- Exemptions
• A deduction from adjusted gross income for yourself, your spouse & qualified dependents that are no longer
allowed
- Qualified Business Income
• To provide business to small business owners, a provision called section 199A gives them sole proprietorship
§ Partnerships of up to 20% of income is earned by the businesses from their individual return from taxable
income
Step 3: Calculating Taxes owed
- Tax Rates
• Marginal Tax Rate
§ The rate used to calculate tax on the last & next dollar of taxable income
• Calculating your tax
§ Each tax rate represents a range of income levels referred to as brackets
Calculating your Tax
- The Average Tax
• Is based on the total tax due divided by taxable income
- The Alternative Tax Minimum (ATM)
• Designed to ensure those who receive a tax break pay their share in taxes
Certain Tax breaks that can Include paying a high ATM rate are:
- High level deductions of state & local interest
- Interest on a 2nd mortgage
- Incentive Stock options
- Long term capital gains
- Tax exempt interest
- The taxpayer must start w/ gross income but may exclude many of the tax breaks
Tax Credits
- An amount subtracted from the amount of taxes owed
• One example of a tax credit is given for child care & dependent care expenses
- Tax Credit
• Has a full dollar effect in lowering taxes
- Deductions
• Reduce taxable incomes where liability is calculated
- Earned Income Credit (EIC)
• A federal tax regulation for working parents w/ taxable income under a certain amount
• Families who do not earn enough to owe federal taxes are also eligible for EIC
- Other Tax Credits Include
• Foreign tax credit to avoid double taxation on income paid to other countries
• Child/dependent care expense credit to cover qualifying expenses for someone else to care for your dependent
child aged 13 or other dependents who can’t care for themselves
§ Disabled child, spouse and/or parent who can’t care for themselves
• Savers tax credit to encourage investment contributions to individual & employer sponsored retirement plans by
low & middle income taxpayers
• Adoption tax to cover qualifying expenses when adopting a child
• American Opportunity & Lifetime Learning Tax credits to help offset college expenses
• Residential energy-savings tax credit when purchasing energy efficient products or renewable home systems
• Elderly & disabled tax credit to assist low income people ages 65 & up and/or 65 & under retired w/ a
permanent disability & taxable disability income
• Premium Tax credit for low to moderate households that bought health insurance through health insurance
market place
• Alternative Motor Vehicles & qualified plug in electric drive tax credit for qualified fuel cell & plug in cars
Making Tax Payments
- You will make payment of income tax to the federal govt in one of two forms:
• Payroll withholding
§ The withheld amount is based on your filling status & other optional adjustments claimed to the W-4
Form
• Estimated Tax Payments
§ These payments are based on the persons estimate of taxes due at the end of the year
§ Failure to make these payments leads to penalties & interest charges
Deadlines & Penalties
- Most people are required to complete their taxes by April 15th, if not a Form 4868 is required to be given a 6mo
extension
• This extension doesn’t delay payment liability, you pay taxes owed plus Form 4868 by April 15th, failure to do so
can lead to a penalty of 5%
- People who make quarterly deposits must submit their payments by April 15th, June 15th & Sept 15th of the current
year
- If you don’t pay the whole amount of your due’s you will be taxed with interest fee’s
• If your underpayment of taxes continue due to negligence or fraud this can lead to a penalty of 50-75%
Filing your Federal Income Tax Return
- Who must File?
• Every citizen of the US & Puerto Rico if there gross income exceeded $12,400
• Single people over 65 if there gross income exceeded $14,050
• Payments can also vary based on marital status
§ Single - never married, divorced or legally separated w/ no dependents
§ Married, filing jointly - Combines the income of the couple
§ Married, filing separate - Each spouse files separately, a married couple may find other benefits after
filling together
§ Head of Household - An unmarried individual or a surviving spouse who maintains the home by paying for
more than half of the costs and/or a child/dependent relative
§ Qualifying Window or Widower - An individual whose spouse has died within the past two years & has a
dependent
§ The Marriage Penalty
Which Tax Forms & Schedules should you use?
- The Tax Cuts & Jobs Act (TCJA) simplifies the basic forms used when filing your taxes
• Form 1040 - Used to report your income
§ Form 1040-SR is for senior citizens and in large print
Completing the Federal Income Tax Return
- The major sections of form 1040
• Filing Status
• Income
• Adjusted Income
• Taxable income
• Other Taxes
• Tax Credits
• Payments
• Refund amount or amount you owe
• Your signature
Correcting The Federal Return
- Sometimes you’ll find that your income or additional deductions that you are entitled to were correctly reported
• You’ll need to file a Form 1040X to either additional tax or receive a refund
§ This form will correct the previously filed tax forms
Filing State Income Tax Returns
- All U.S. states except for nine have income tax, they range from 1-10% & some are based on your federal income tax
return
• I.E. Adjusted income or Taxable Income
Tax Assistance & The Audit Process
- Tax information Sources
• Through the IRS
§ Publications
□ The IRS offers free info via
® booklets & pamphlets
® By mail or phone call
◊ calling 1-800-TAX-FORM
® Online at www.irs.gov
® By fax 703-368-9694
§ Phone Hotline
□ 1-800-829-0140
§ Walk in service
§ Interactive Tax Assistance (ITA)
§ IRS2GO App
Tax Publications
- Every year several guides are offered for sale to purchase online or in store
Online Resources
- Sites you can visit for more information are
• The International Revenue Services www.irs.gov
• Kiplinger’s Personal Finance
• CNBC cnbc.com/personal-finance CNBC Personal Finance
Tax Prep Software
- Some services include H&R Block & Turbo Tax that allow you to complete needed tax forms via mail or online
• Using these services can save you hours, but be sure to consider the following:
1. Your personal Situation - Are you employed or operate a business?
2. Special Tax situations w/ regards to diff types of incomes, unusual deductions & various tax credits
3. Features in softwares like “audit check”, future tax planning, filing federal & state tax forms online
4. Technical aspects like hardware & operating system requirements & online support that is provided
Tax Preparation Services
• Types Of Tax Services
§ Local one person operations
§ National Firms (I.E. H&R Block)
§ Enrolled Agents
□ Govt approved experts that prepare returns & tax advice
§ A CPA (Certified Public Accountant)
§ Attorneys usually help when there is a tax related transaction or your opinions differ w/ payment to the IRS
Evaluating Tax Services
- Consider the following factors:
• What training & experience does the professional have?
• How will the fee be determined? (Avoid someone who earns a percentage of your return)
• Does your preparer suggest various deductions that could be questioned?
• Will they represent you if your return is being audited?
• Is tax prep the main business activity? Or do they also sell financial products & services?
Tax Service Warnings
- As a tax preparer your responsible for supplying accurate & complete information
• Be weary of tax preparers that offer you a return in advance, they tend to have very high interest rates
What if your return is audited?
- A tax audit is a detailed examination of your tax return by the IRS
- Most audits done by the IRS require additional info
- Keep accurate records for your tax returns & avoid common filing mistakes
Who gets Audited?
- Less than 1% of tax filers
• 1 out of every 220 people
- People who claim large or unusual deductions increase their chances of an audit
- Tax advisor suggest keeping reciepts for deductions that may be questioned
Types of Audits
- Correspondence Audit
• A mail inquiry that requires you to clarify/document questions about your taxes
- Office Audit
• Requires you visit the IRS office to clarify your tax return
- Field Audit
• An IRS agent will visit you at home, business and/or office of your accountant, to verify if your home office has
been claimed
- Detailed Audits
• Also known as Taxpayer Compliance Measurement Program (TCMP) can range from requesting documents of
various tax returns to line by line paper work review by an IRS employee
Your Audit Rights
- You have the right to request time to prepare
- Ask for clarification on what items are being audited
- It’s also suggested that you:
• Decide if you need a tax preparer, accountant or lawyer
• Be on time for your appointment & bring relevant paperwork
• Present tax records & receipts in a logical, calm & confident manner
• Be sure the information that you have is consistent w/ the law
• Keep answers aimed for auditors Q’s & be brief
- Tax avoidance
• The use of legitimate methods to reduce one’s taxes
- Tax Evasion
• Use of illegal actions to reduce one’s taxes
• If you expect to have the same/lower tax rate for this yr & the following, make your payments before the end of
the year & charitable donations by Dec 31st
• If you expect a higher tax rate, consider delaying deductions; the percentage will lower your rate in dollar
amounts i.e. 24%=240
• If you expect a higher tax rate, accelerate the receipt of income to have it taxed at a lower rate
Consumer Purchasing
- Place of Residence
• Both real estate property taxes & interest on a mortgage are deductible
Consumer Debt
- Current laws allow homeowners to borrow for consumer purchases, make deductions up to $100,000 secured by your
primary or secondary home as high as the actual dollar amount you have
Health Care Expenses
- (FSA) Flexible Spending Account
• A type of health savings account that allows you to reduce your taxable income when paying for medical
expenses or child care costs
• You are allowed to put pre-taxed dollars into these employee-sponsored programs, these “deposits” lead to
lower income tax
• A potential draw back of the FSA is the amount can be left in the account each year is limited, exceeding
amounts will be forfeited
- (HSA) Health Savings Accounts
• Allows you to reduce your taxable income when paying for medical expenses
• No limits to the amount that can be carried over each year
• Amounts can be taken out tax free for any reason after the age of 65
Investment Decisions
- Tax Exempt Investments
• Interest investment from municipal bonds (debt securities issued by the state & local govts)
• While municipal bond has lower rates the after tax maybe higher
Tax Deferred Investments
- Income to be taxed at a later date, are less beneficial than tax-exempt investments
- Paying a dollar in the future instead of today gives you the opportunity to invest(spend) it now
- Examples include:
• Tax deferred annuities issued by insurance companies
• Section 529 savings plans that are ran by the state, tax plans set aside money for children’s education, similar to
a child’s education to cover future educational costs
• Retirement Plans (IRA’S)
- Capitol Gains
• Profits from sale of a capital asset like stocks, bonds or real estate
• Long Term capital gains will be taxed at the rate that is lower than ordinary income based on taxable income
amounts
Self Employment
- Self employed persons have to deduct expenses like health & life insurance as business costs
Children’s Investments
- Parents who make investments on their children’s behalf w/ the child listed as the owner, this is known as Income
shifting
• Income shifting is the attempt to reduce taxable income to parents by shifting the ownership of investments to
children in a lower tax bracket
Retirement & Education Plans
- Traditional IRA
• Contributions to these accounts are not taxed until they are withdrawn
• Deductions are available only to people who don’t participate in employer-sponsored retirement plans or have a
adjusted income under a certain amount
• A 10% penalty is added if withdrawing form your retirement before age 59 1/2, unless the funds were used for a
medical or higher education expense
- Variations IRA
• The Simplified Employee Pension (SEP)
• Savings Incentive Match Plan for Employees (SIMPLE)
§ Both plans are for people who are either self employed and/or business owners
Roth IRA
- As of 2021, this account allows for a $6,000 annual contribution that is not tax deductible, the earning on this type of
account are free after 5yrs
- Funds may be withdrawn by age 59 1/2 if the owner is disabled or for the purchase of a first home valued over
$10,000
- Deductibles provide tax relief up front as contributions reduce from current taxes, however they must be paid back
when withdrawals are made from the IRA deductible
• Roth IRA’s are the opposite, they are exempt from federal & state taxes
Coverdell Education Savings Account
- An educational savings account designed to assist parents to save for their children’s future education
- Annual contributions limited to $2,000 is not tax deductible as a Roth IRA however the earnings accumulate tax free
529 Plan
- Another type of educational saving account for future college education
- There is no federal tax deduction & earnings grow tax free
• There are no withdrawal fees or taxes when money is used for qualified educational expenses
- You don’t have to invest in this plan in your home state, but there are advantages to doing so
• Some states allow deduction contribution to their plan at a specific maxed amount
Keogh Plan
- A retirement plan known as a HR10 may combine profit sharing pensions & other investments purchased by the
employee
• 25% of your annual income is contributed at the max of $58,000
401K plan
- Authorizes a tax deferred retirement plan sponsored by an employer
- Most companies contribute 15% of your salary
- Most financial advisers suggest the following
• The increased value of your investments accumulate on a tax free basis until withdrawn (leave them alone)
• Contributions reduce your adjusted gross income for current tax liabilities
