Taxes Flashcards Preview

Vocabulary > Taxes > Flashcards

Flashcards in Taxes Deck (7)
Loading flashcards...
1
Q

And I’m not even kidding. If you live in Vietnam, chances are you don’t need to care about taxes. But, if you live in Western countries like the US, UK or Canada. You can stay away from them. In fact, you even wish you know about taxes because you can get some money from the government.
Taxes are financial charges levied (352) or imposed upon a taxpayer (353) or a legal entity (354) to fund public expenditures or to create social welfare.
There are many different types of taxes.

  1. Income tax (355) is tax on income. Let’s say you earn $50,000 a year through employment. You will have to pay taxes on that, which means you will take home less than $50,000. Income tax is the BIGGEST source of tax revenue (356) for the government. We will discuss income tax in more details later on.
  2. Property tax (357) is tax on property like real estate. If you own a house, you have to pay property tax every year. The higher the value of your house, the more you have to pay in property tax. Property tax is collected by the municipal government (358). If you live in Toronto and own a house, you have to pay property tax to the City of Toronto. Think of it as a rent expense. Property tax is no difference than a rent to stay in a particular city.
  3. Inheritance tax (359) is tax on inheritance. Let’s say you inherit $1,000,000 from your dad. Can you put it to your bank account the whole $1,000,000? No, you can’t. You have to pay inheritance tax.
  4. Sales tax (360) is tax on an exchange. It’s like VAT in Vietnam. The customers will bear the tax burden (361). If you happen to travel to Canada and notice a beautiful coat priced at $100. Cool. But that’s not it. You’ll have to pay an extra 13% sales tax, which is another $13 on top of $100.
  5. Excise tax (361) is tax on bad products like tobacco, alcohol, etc. A government may wish use charge excise tax to limit the activity of companies producing these kinds of products. Makes sense, right? One other type of excise tax is carbon tax, which is tax on the consumption of fuels that are harmful to the environment. Companies that emit CO2 a lot have to pay carbon tax.
  6. Tariff (362) is tax on import and export. Tariffs discourage international trade. If you want to export rice to let’s say China, you will have to pay for tariff imposed by the Chinese government. Why? Why? Why? Tariff helps protect domestic corporations from outsiders who can compete at cheaper prices.
  7. Payroll tax (363) is tax imposed on employers and employees. Payroll tax is usually used to fund social security and unemployment insurance.
A

7 big categories of taxes

  1. Income tax - tax on income
  2. Property tax - tax on property
  3. Inheritance tax - tax on inheritance
  4. Sales tax - tax on sales
  5. Excise tax - tax on bad products
  6. Tariff - tax on international trade
  7. Payroll tax - tax on salary
2
Q

Tax policies are used by the government to manipulate the our behavior. Taxes can equalize the rich and poor. Because people with higher income have higher tax rate than people with less. Tax is a great incentive tool. If you donate money to charity, you can get a tax credit (364), which reduces your tax payable (365). In other words, tax can make donation cheaper. As discussed on excise tax and carbon tax, similarly, tax can make bad activities more expensive to perform.

A
3
Q

As mentioned, income tax is the biggest source of tax revenue collected by the government. To simplify, It’s calculated as

(Total income - deductions) x tax rate - tax credits.

Let’s say I earned $50,000 last year. But I also spent on some expenses that are qualified for claiming deductions of $20,000. This means that my taxable income (366) is now $30,000. My tax rate in this case is 15%. So my tax payable is $30,000 x 15% = $4,500.

But’s that’s not the end of it. I donated some money to the charity and I have some dependants (367), which therefore gives me tax credit amounted to $1,000. So basically, the amount of tax that I have to pay to the government is now $4,500 - 1000 = $3,500. So sad, right? Don’t be. Because I don’t wait until the end of the year to pay taxes. My employers have already paid taxes on behalf of me to the government. That’s the law. Every time I receive a paycheck (368), the payroll staff have already taken away part of my salary and remit (369) it to the tax agency (370).

The good thing is that, they usually remit more than they should have. Why? Because at the end of the year, after I claim tax deductions and credits, the amount of tax owing is reduced. So I will have a tax refund. A majority of people in the US and Canada will receive a tax refund. It’s like free money. Every year, each person has to file the tax return (371). A tax return is just a form in which we declare our income, deductions and credits to calculate the tax. I have to file my tax return, too. Why? I want my “free money” as well.

We have already learned that tax is calculated based on income, deductions, and credits. However, each category contains a whole host of items.

A
4
Q

INCOME
There are many types of income. The most common type is employment income or salary or wages. This is the type of income I currently have.

Some people run their own business or they work for themselves. Your mother, for example, sell Pho every morning. We call you mom self-employed (372). The amount of money she earns is called self-employment income (373) or business income. Another type of self-employment income is professional income (374), which is the income you earn from professional activities like consulting, accounting, legal or medical services rather than just selling material things.
Others rent their real estates and collect rents every month. This is call rental income (375).
My mom invests money in stocks and bonds and earns what it’s called investment income (376). Investment income comprises dividends (377) and interests (378). Dividends are paid to stockholders by companies. Interests are paid to bondholders.
Don’t confuse investment income with capital gains. Capital gains (379) is the gain of property after you sell your it. Let’s say you bought a stock for $3 and sold it for $5. Your capital gain is then $2. Capital gains are attractive because they are taxed at the smallest rate among all.

If you are old, you may have some pension income (380) as well. Pension income is the money you receive from the government when you get old enough.

In general, all of the above constitute total income.

A
5
Q

DEDUCTIONS

Deductions are used to reduce your income. Why are deductions so important? Because you want to reduce your income on the tax return to pay as less tax as possible. What can be a deduction?

If you pay union or professional dues (381), you can claim a deduction for that. Let’s say you have a CFA designation requiring you to pay $1,000 professional due every year. You can claim $1,000 as a deduction to reduce your income.

If you move from town to town, you can claim moving expenses as a deduction. If you carry some expenses for your investing activities, you can claim a deduction, too. In general, expenses that are paid for the purposes of earning income can be eligible for claiming a deduction. I would like to emphasize this again. Our goal is to reduce the income to reduce our taxes by claiming as much deduction as possible.

A
6
Q

CREDITS
While deductions are used to help reduce your taxable income, tax credits help reduce your tax obligation. Tax credits are used to encourage good bahaviors of the society. How? If you make a donation of $1000, for example, you will receive a tax credit of 15% of $1,000, which is $150. At the end of the year, you can claim your credit to reduce the tax by $150. As I said before, tax credit makes donation cheaper.

Same things apply for children’s fitness amount and children’s art amount. What are they? If you have children and pay for their fitness club or art activities, you can claim 15% of the expenses as a tax credit. Why so? Because the government wants to encourage its citizens to spend on these healthful and beneficial activities.

Likewise, tuition fees are eligible for claiming a tax credit, too. You get the idea.

A

Tax = (income - deductions) x tax rate - tax credits

7
Q

Most people dare not lie on their tax returns because it’s very easy to get caught by the tax agencies. Most people tell the truth to avoid paying high penalties and even jail time. There are two distinct concepts here.

  1. Tax avoidance (382)
  2. Tax evasion (383)

Tax avoidance is completely legal. Tax avoidance means that you are smartly planning to minimize or delay the tax liabilities using legal ways. One way to tax avoidance is to maximize the amount of tax deductions and tax credits. Tax avoidance is used by accountants and tax professionals to reduce taxes for their clients.

Tax evasion is illegal, occurring when a person intentionally avoids paying taxes owed. Let’s say you earn $100,000 last year but only report $50,000. You have committed the tax evasion crime.

Places to evade taxes are called tax havens (384). Tax havens are jurisdictions (385) that levy no or only small amount taxes and offer themselves as a vehicle for nonresidents to escape taxation in their country of residence. Tax havens refuse to share information about the foreign tax payers to protect them

A

Tax avoidance: legal

Tax evasion: A crime