09 Taxes and Personal Finance Free Online FlashCards

How do progressive federal income tax brackets work?

Only the portion of taxable income within a higher bracket is taxed at that rate; moving into a higher bracket does not apply that rate to all income.

What is the difference between marginal and effective tax rates?

The marginal rate applies to the next taxable dollar. The effective rate is the overall income tax divided by income, using a clearly specified measure.

What is Form W-4 used for?

Form W-4 gives an employer information used to calculate federal income tax withholding from an employee’s paychecks.

How does paycheck withholding relate to your final tax bill?

Withholding is a prepayment, not the final calculation of annual tax. The tax return compares total payments with final tax to determine whether tax is owed or a refund is due.

Who may need to make estimated tax payments?

A self-employed person or someone receiving income without withholding may need to make estimated tax payments during the year.

What information does Form W-2 report?

A W-2 reports wages and amounts withheld by an employer.

Why keep tax records for transactions without tax forms?

A tax form may not show every item you need to report. Keep records of income and deductible expenses, including transactions for which no form was issued.

How does a tax credit differ from a deduction?

A deduction reduces income subject to tax. A credit reduces tax directly; a refundable credit may exceed tax owed and contribute to a refund if the rules allow.

Does a tax filing extension also extend the time to pay?

An extension generally gives more time to file, not more time to pay. Tax owed is generally still due by the original deadline.

What determines whether an individual must file a federal return?

Whether you must file depends on factors including income, filing status, age, and special circumstances. Even if filing is not required, filing may allow you to claim a withholding refund or refundable credits.

When can selling an investment create a taxable gain?

Selling an investment for more than its tax basis can create a taxable gain. Tax treatment may depend on the investment type and how long it was held.

How do traditional and Roth retirement accounts differ tax-wise?

Traditional contributions may be deductible or made before income tax, depending on the plan and circumstances; withdrawals are generally taxable. Roth contributions are generally after-tax, while qualified withdrawals may be tax-free.