Chapter 4 Notes
Compounding
Earning interest ON interest over time
Lump Sum (Compound Interest)
Compounding as it applies to a lump sum or single dollar amount
• Work forward- PV to FV- table C-1
• Work backward- FV to PV- table C-2 (also called discounting)
Annuity (Compound Interest)
Compounding as it applies to periodic deposits (ordinary annuity)
• Work forward- PV to FV- table C-3
• Work backward- FV to PV- table C-4 (discounting)
Annuity
Stream of equal cash flow payments made at equal intervals or periods in
time
• Ordinary Annuity
• Annuity Due
Ordinary Annuity
Cash flow payments made at the end of each period
Annuity Due
Cash flow payments made at the beginning of each period
Everything said about compounding and gaining benefits of earning
interest-on-interest over time works equally to your disadvantage on
________ ______
credit cards (interest compounds and you get charged interest-on-interest)
Federal Taxes
Administered by IRS
• Income taxes
• Payroll taxes (SS & Medicare)
• Corporate taxes
• Excise taxes (paid by corporations)
State & Local Taxes
Varies by state, county city
• Income taxes
• Sales taxes
• Personal Property taxes
• Real Estate taxes
• Special taxes (e.g. alcohol, tobacco, gasoline)
Gross Income
"All income from whatever source derived, unless excluded by law"
Income
The gain derived from capital, labor, or both combined, and includes profit
gained through a sale or conversions of capital assets
• Includes income realized in any form, whether money, property, or
services
Gross Income includes:
• Salary, wages, tips, fees from services
• Gross profit from sale of inventory
• Gains on disposition of other property (e.g. stocks)
• Rents and royalties
• Alimony/separate maintenance received
• Pensions
• Gambling and game winnings
Capital Gains
• Short-term (held for less than a year)
• Taxed as normal income
• Long-term (held for more than a year)
• No tax for individuals in 10% & 15% bracket
• Taxed at 15% for individuals in 25% bracket or higher
•Usually requires schedule D
Dividends
• Taxed like Long-term capital gains
• Usually requires Schedule B
NOT Gross Income
• Gifts (but donor may be taxed)
• Inheritances
• Proceeds from life insurance