Chapter 8 & 9/10 Review

Chapter 8 & 9/10 Review

Taxes, Stocks & Bonds

Chapter 8

Taxes

Multiple Choice

What is the 2020 standard deduction?

• $10,400

• $11,400

• $12,400

• $13,400

Income Taxes

• Income tax is the tax on wages, salaries, and self-employed earnings.

• You determine the amount of tax you owe when filling out the 1040.

• You pay income tax on your adjusted gross income, not on your gross income. Your adjusted gross income is your gross income after calculating certain reductions. These reductions are called adjustments to income.

• Your taxable income is your adjusted gross income minus any allowable tax deductions and exemptions.  Your income tax is calculated based on the amount of your taxable income.

  
  

Multiple Choice

What is a tax credit?

• A dollar-for-dollar reduction in tax liability.

• An amount of money set by the IRS that is not taxed.

• The right to exclude all or some income from taxation.

Tax Credit, Deduction, and Exemption

• A tax credit is an amount of money that can be subtracted directly from taxes you owe.

• A tax deduction is an expense that you can subtract from your adjusted gross income to figure your taxable income. Every taxpayer receives at least the standard deduction, an amount of money set by the IRS that is not taxed.

• An exemption is a deduction from adjusted gross income for the taxpayer, the spouse, and qualified dependents.

Multiple Choice

If your taxable income is $21,150 and you are filing as single, how much would you owe in taxes?

• $2,326

• $2,388

• $2,344

Tax Tables

Taxable Income = $21,150

Taxes Due = $2,344

Chapter 9/10

Stocks & Bonds

Multiple Choice

How much of your take-home pay do you think you should put towards investments each year?

• 5-10%

• 10-15%

• 15-20%

• 20-30%

Common & Preferred Stock

• Common stock is a unit of ownership of a company, and it entitles the owner, or stockholder, to voting privileges.  Common stock can sometimes provide a source of income if the company pays dividends or if the dollar value of the stock increases.  Most large corporations generate money they need by selling common stock.

• Preferred stock is a type of stock that gives the owner the advantage of receiving cash dividends before common stockholders.  If a company fails, preferred stockholders receive dividends first and any assets that are left before common stockholders receive anything.

Bonds

• There are two types of bonds an investor can consider: a corporate bond and a government bond.  A corporate bond is a corporation's written pledge to repay a specific amount of money, along with interest. A government bond is the written pledge of a government or a municipality, such as a city, to repay a specific sum of money with interest.  When you buy a bond, you are lending money to a corporation or government entity for a period of time.

• Maturity dates range from 1 to 30 years, and interest on bonds is usually paid every 6 months.  You can keep a bond until maturity and then redeem it, or you can sell it to another investor.

Multiple Choice

Of the following, which is considered the safest investment?

• Preferred Stock

• Common Stock

• Government Bonds

• Corporate Bonds

Investing & Risk

• Inflation: Investing your money can help you stay ahead of inflation.  However, during periods of rapid inflation, the return from your investments might not keep up with the inflation rate.

• Interest Rate: If you put money in an investment that gives you a fixed rate of return, such as government or corporate bonds, the value of your investment will go down if interest rates go up.  If you have to sell your bonds, you will get less than you originally paid.

• Business Failure: When you buy stocks or corporate bonds, you are investing in a particular company.  You are betting that the company will succeed.  However, it could fail, especially if the company is managed poorly.

Investing & Risk

• Financial Markets: Sometimes the prices of stocks, bonds, mutual funds, and other investments go up or down because of the overall state of financial markets. Factors that affect financial markets include social and political conditions.

• Global Investment: Be aware that because of different accounting standards in other countries, it may be hard to discover the true financial condition of foreign companies. The currency exchange rate may may affect the return on your investment. Also, keep in mind that the economic and political stability of a country can affect the value of your investment.

Multiple Choice

What is one of the best ways to minimize risk while still earning good returns?

• Investing only in bonds

• Diversification

• Never investing

Diversification

• Diversification is the process of spreading your assets among several different types of investments to reduce risk. This strategy provides both financial growth and protection.

• You should avoid putting all of your eggs in one basket.