Chapter 3 Study Guide- Personal Finance
Multiple choice: A tax imposed on the value of a person's property at the time of death is called a(n) (a) estate tax (b) excise tax (c) income tax (d) real estate property tax (e) sales tax
A
Multiple choice: At the end of the year, Walter received a form that showed his payments from independent contracting. That form is called a (a) 1099 (b) 1040 (c) W 4 (d) W 2
A
Multiple choice: A tax due on the purchase of gasoline is called a(n) (a) estate tax (b) income tax (c) real estate property tax (d) excise tax (e) inheritance tax
D
Multiple choice: All of the following can reduce your taxes today except investing in (a) municipal bonds (b) a tax deferred annuity (c) A section 529 savings plan (d) A 401(K) plan (e) A Roth IRA-
E
T/F: One of the most frequent filing errors is signing the return
False (A common error is NOT signing the return)
T/F: All citizens of the United States are required to file a federal income tax return if their income falls below a certain level
False (Citizens whose income is above a certain level are required to file)
T/F: Tax rate schedules show marginal tax rates
True
Multiple choice: Using the following table, calculate the taxes for an individual with taxable income of $20,800. (a) $850 (b) $2,695 (c) $5,175 (d) $6,025
B
T/F: Tax rate schedules list average tax rates
False (Tax rate schedules show marginal tax rates)
T/F: Contributions to a Keogh or 401(k) are tax exempt
False (These are tax-deferred contributions)
Multiple choice: Using the following table, calculate the taxes for an individual with taxable income of $45,000. (a) $6,025 (b) $7,375 (c) $8,625 (d) $20,900 (e) $45,000
B
T/F: When Tom calculates his taxable income, he should subtract his tax credits
False (He should subtract his tax deductions, not his tax credits. Tax credits are subtracted directly from the amount of taxes owed.
T/F: Interest paid on a home equity loan is not deductible
False (Home equity interest on loans up to $100,000 is deductible)
T/F: "Tax Freedom Day" represents how long the average person work to pay his or her taxes each year
True
Multiple choice: Taxes on earnings that fund old age, survivor, and disability insurance benefits are called (a) estate taxes (b) excise taxes (c) Social Security taxes (d) real estate property taxes (e) sales taxes
C
Multiple choice: Annie was required to clarify or document minor questions about her tax form by a mail inquiry. She participated in a(n) (a) correspondence audit (b) office audit (c) home audit (d) field audit (e) detailed audit
A
Multiple choice: At the end of the year, Yvonne received a form from her bank that reported income from her savings. That form is called a (a) 1040 (b) 1099 (c) W 2 (d) W 4
B
Multiple choice: Fees, tips and bonuses are forms of (a) passive income (b) earned income (c) exclusions from income
B
Multiple choice: An IRS agent visited Henry's home to verify some information on his tax return. This visit was called a(n) (a) correspondence audit (b) office audit (c) home audit (d) field audit (e) detailed audit
D
Multiple choice: At the end of the year, Xavier received a form from his employer that reported annual earnings and the amounts deducted for taxes. That form is called a (a) 1040 (b) 1099 (c) W 4 (d) W 2
D
Multiple choice: Athena wants to determine if she should itemize her deductions. She has identified several possible deductions. Which of the following is NOT a proper itemized deduction? (a) contributions to charitable organizations (b) mortgage interest (c) Medical and dental expenses that exceed 10% of AGI (d) miscellaneous expenses less than 2% of AGI
D
Multiple choice: Connie thinks that her salary and tax rate for next year will be lower than for this year. What step should she take to minimize her taxes in the current year? (a) Accelerate receipt of income (b) delay deductions (c) practice tax evasion (d) accelerate deductions (e) none of these will allow her to minimize her taxes
D
Multiple choice: Adjustments to income include all of the following except (a) alimony payments (b) contributions to a Keogh retirement plan (c) traditional IRA contributions (d) penalties for early withdrawal of savings (e) charity contributions
E
T/F: Adjusted gross income is increased by the itemized or standard deduction
False (AGI is reduced by these)
T/F: A person with taxable income of $40,000 and a total tax bill of $4,200 would have an average tax rate of 15%
False (Average tax rate = tax due/taxable income; thus $4,200/$40,000 = 10.5%)
T/F: Determining adjusted gross income is the final step in calculating federal income tax
False (Determining adjusted gross income (AGI) is the first in calculating income taxes)
T/F: Federal income tax returns must be filed by April 1 or each year
False (Federal income tax returns must be filed by April 15th)
Multiple choice: Gross income less Adjustments to Income equals (a) adjusted gross income (b) earned income (c) exclusions from income (d) tax exempt income (e) tax-deferred income-
A
Multiple choice: The amount levied on the value of property bequeathed by a deceased person is (a) inheritance tax (b) excise tax (c) social security tax (d) real estate property tax (e) sales tax
A
Multiple choice: In 2017, the U.S. federal tax tables included tax rates of (a) 0%, 10%, 20%,30%, 40% and 50% (b) 10%,15%, 25%, 28%, 33%, 35%, and 39.6% (c) 0%, 25%, 50%, and 75%
B
Multiple choice: Sam and Diane are completing their federal income taxes for the year and have identified the amounts listed here. How much can they rightfully deduct?AGI: $80,000; Medical and dental expenses: $9,000; State income taxes: $3,500; Mortgage interest: $9,500; Charitable contributions: $1,000 (a) $14,000 (b) $15,000 (c) $20,000 (d) $23,000 (e) $57,000
B
Multiple choice: Tanya is a single low income working parent, and Fred is a single high-income working parent. Because of her status, Tanya, but not Fred, may be eligible for the (a) alternative minimum tax (b) earned income credit (c) itemized deduction credit-
B
Multiple choice: The maximum that an individual can contribute to a Coverdell Education Savings Account each year is (a) $1,000 (b) $2,000 (c) $3,000 (d) $5,500 (e) $10,000
B
Multiple choice: Up to how many years could you be held responsible for providing back documentation? (a) until you file your returns (b) 6 years (c) 5 years (d) 10 years
B
Multiple choice: Which of the following is NOT . a tax that most people pay? (a) Federal taxes on earnings (b) Federal taxes on possessions (c) Local taxes on property (d) State taxes on purchases
B
Multiple choice: A worker's primary goal should be to (a) pay his or her taxes using estimates for income and deductions (b) pay no income taxes (c) pay his or her fair share of taxes while taking advantage of appropriate tax benefits (d) pay no taxes of any type
C
Multiple choice: Amanda and Jack are working on their taxes and need to determine which form to file. They had wages, interest, and dividends. In addition, they bought a house this past year and are thinking of itemizing their deductions. Which form should they use? (a) 1040EZ (b) 1040A (c) 1040
C
Multiple choice: At the end of the year, employees receive a ____ form that reports annual earnings and the amounts deducted for taxes from their employers. (a) 1040 (b) 1099 (c) W 2 (d) W 4
C
Multiple choice: David thinks that his salary and tax rate for next year will be higher than for this year. What step should he take minimize taxes over the period this year and next year? (a) Delay receipt of income (b) dela filing taxes (c) accelerate receipt of income (d) accelerate deductions (e) none of these will allow him to minimize his taxes
C
Multiple choice: If Jack was in a 25% tax bracket and received a $1,000 tax deduction, by how much would his taxes be reduced? (a) $25 (b) $50 (c) $250 (d) $500 (e) $1,000
C
Multiple choice: In 2017, taxable income was reduced by _____ for each exemption claimed (a) $1,000 (b) $2,500 (c) $4,050 (d) $5,000 (e) $10,000
C
Multiple choice: Income that is not subject to tax is called (a) earned income (b) passive income (c) tax exempt income (d) tax-deferred income
C
Multiple choice: Lauren owns her business and is thinking about saving for retirement. She wants to invest up to 25% of her annual income. Which plan should she use? (a) Roth IRA (b) 401(k) (c) Keogh plan (d) FSA
C
Multiple choice: Penny knows that she needs to file her federal income taxes, but she is unable to do so by April 15. What form does she need to complete to obtain an automatic six month extension? (a) 1040 (b) 1099 (c) 4868-
C
Multiple choice: Taxpayers over 65 can only deduct expenses that are greater than 7.5% of adjusted gross income for (a) contributions to charitable organizations (b) mortgage interest (c) medical and dental expenses (d) taxes
C
Multiple choice: The maximum amount that an individual can give another in a year without being subject to estate taxes is (a) all gifts are taxable (b) $10,000 (c) $14,000 (d) $15,000 (e) no gifts are taxable
C
Multiple choice: The maximum that an individual can contribute to a Keogh plan for the 2017 year is (a) $2,000 (b) 10% of annual income (c) 25% of annual income, up to a maximum of $54,000
C
Multiple choice: The maximum that an individual can contribute to a Roth IRA for the 2017 year is (a) $1,000 (b) $3,000 (c) $5,500 (d) $10,000
C
Multiple choice: The tax based on the total tax due divided by taxable income is called the (a) AMT (b) income tax rate (c) average tax rate
C
Multiple choice: This tax is a major financial planning factor for most people ecause it is sometimes imposed at the federal, state, and local levels (a) estate tax (b) excise tax (c) income tax (d) real estate property tax (e) sales tax
C
Multiple choice: Using the following table, calculate the taxes for an individual with taxable income of $30,000. (a) $850 (b) $2,125 (c) $4,075 (d) $4,500 (e) $6,025
C
Multiple choice: Janet is completing her federal income taxes for the year and has identified the amounts listed here. How much can she rightfully deduct? AGI: $42,000; Medical and dental expenses: $1,100; State income taxes: $1,000; Mortgage interest: $7,000; Charitable contributions: $1,250 (a) $3,350 (b) $7,000 (c) $8,250 (d) $9,250
D
Multiple choice: Joseph needs to complete his income taxes for the year. He has already calculated his adjusted gross income. What does he need to do next? (a) add his tax exempt income (b) add his tax credits (c) subtract his tax-exempt income (d) subtract his itemized deductions (e) add his tax exemptions-
D
Multiple choice: Nancy is married to Jerry and needs to complete her tax form. They both earn about the same amount of money each year. What filing status would be best for them? (a) single (b) head of household (c) married, filing individually (d) married, filing a joint return
D
Multiple choice: Peter filed his federal income taxes, but he needs to make a correction to his income. Which form should he use? (a) 1040EZ (b) 1040A (c) 1040 (d) 1040X
D
Multiple choice: Recent tax credits include all of the following except (a) earned income credit (b) foreign tax credit (c) adoption tax credit (d) AMT tax credit
D
Multiple choice: The rate used to calculate the tax due on the next dollar of income is referred to as the (a) AMT (b) Average tax rate (c) income tax rate (d) marginal tax rate
D
Multiple choice: The tax that is a major source of revenue for local governments is called a(n) (a) estate tax (b) gift tax (c) income tax (d) real estate property tax (e) sales tax
D
Multiple choice: When Paul completes his taxes, he can include all of the following as exemptions except (a) his 12 year old son (b) himself (c) His 22 year old daughter who is a full time student (d) His 20 year old son who is working full time and living in an apartment (e) his wife
D
Multiple choice: When calculating federal income taxes, "gross income" includes all of the following except (a) earned income (b) alimony (c) investment income (d) earned income credit (e) passive income
D
Multiple choice: When calculating federal income taxes, what increases "gross income"? (a) exclusions (b) tax exempt income (c) tax-deferred income (d) alimony received (e) tax deductions
D
Multiple choice: You may be required to make estimated tax payments if (a) you receive . paycheck with taxes withheld (b) you don't have interest income from savings (c) you have no pension payments (d) you are an independent contractor (e) you have no royalties
D
Multiple choice: An advantage of investing in a 401(k) plan is the (a) Ability to invest up to 25% of your annual income. (b) Opportunity to save $25,000 per year. (c) Ability to pay taxes on distributions. (d) Ability to withdraw contributions before age 55 without penalty. (e) Possibility of receiving an employer match on your contributions.
E
Multiple choice: Evan is not concerned about immediate tax benefits but instead wants his investment to grow in value on a tax free basis. Which of these would be the best for him to invest in today? (a) municipal bonds (b) a tax-deferred annuity (c) A section 529 savings plan (d) A 401(K) plan (e) A Roth IRA-
E
Multiple choice: Fred has been completing his own tax returns for ears. The IRS has recently contacted him with questions about some of his prior returns. How many years back is he responsible for providing documentation? (a) 10 years (b) 3 years (c) until he files his returns (d) 15 years (e) 6 years-
E
Multiple choice: If Diane was in a 25% tax bracket and received a $1,000 tax credit, by how much would her taxes be reduced? (a) $25 (b) $50 (c) $250 (d) $500 (e) $1,000
E
Multiple choice: Income that is taxed at a later date is (a) adjusted gross income (b) earned income (c) exclusions from income (d) tax exempt income (e) tax-deferred income-
E
Multiple choice: Shannon is working on her federal income tax form and wants to determine if she should itemize her deductions. She has identified several possible deductions. Which of the following is an acceptable deduction? (a) $10,000 gift to her cousin (b) credit card interest (c) medical and dental expenses less than 10% of AGI (d) moving expenses for a new job that is 25 miles from her old home (e) miscellaneous expenses that exceed 2% of AGI
E
Multiple choice: Which of the following is NOT a tax credit? (a) adoption tax credit (b) earned income credit (c) foreign tax credit (d) savers credit (e) domestic tax credit
E
Multiple choice: Which of the following is NOT a valid form for filing federal income taxes? (a) 1040EZ (b) 1040A (c) 1040 (d) 1040X (e) 1040Z
E
T/F: Tom needs to complete his taxes. He should be able to find a tax preparation service to complete his simple tax return for as little as $15
False (Fees typically range from $40 at a tax preparation service for a simple return)
T/F: If your tax payments are less than the amount of income tax you owe, you are entitled to a refund
False (If your tax payments are greater than the amount of income tax you owe, then you are entitled to a refund.)
T/F: Individuals are allowed to give money or items of any value to a person without being subject to estate
False (Individuals are allowed to give money or items valued at $14,000 or less in a year to a person without being subject to estate taxes.)
T/F: One of the best tax shelters is owning a car
False (One of the best tax shelters is owning a home. Interest on automobile loans is not tax deductible but the interest on a mortgage is tax deductible)
T/F: Most states do not require state income taxes
False (Only seven states don't have a state income tax and additionally,another two states only tax dividends and interest)
T/F: An example of an excise tax is Social Security
False (Social Security is an example of a tax on earnings)
T/F: All individuals with taxable income are subject to the AMT calculation
False (The AMT is an additional tax calculation designed to ensure that those who receive tax breaks also pay their fair share of taxes
T/F: A tax credit reduces the taxable income on which the tax liability is computed
False (The definition describes a tax deduction. A tax credit reduces the amount of tax owed dollar for dollar)
T/F: Form 4868 allows a taxpayer to obtain a six month automatic extension on filing and paying federal taxes without penalty-
False (The extension doesn't delay the payment of your federal tax liability)
T/F: A tax credit has a full dollar effect in lowering taxes
True
T/F: A taxpayer less than 65 years old can only deduct medical and dental expenses greater than 10% of AGI for 2017
True
T/F: Adjusted gross income is reduced by the itemized or standard deduction
True
T/F: Amounts given for tuition payments or medical expenses are not subject to gift taxes
True
T/F: Every taxpayer receives at least the standard deduction, a set amount on which no taxes are paid
True
T/F: Individuals who have high income reported on Form 1099 may be required to pay estimated tax payments
True
T/F: The IRS has made online filing free for million of taxpayers through the Free File Alliance
True
T/F: When Marissa completes her taxes, she can include her qualified dependent children, her husband, and herself as exemptions
True
Multiple choice: The tax designed to ensure that those who receive tax breaks also pay their fair share of taxes is called (a) AMT (b) average tax rate (c) income tax rate (d) marginal tax rate (e) total tax rate
A
Multiple choice: Which of the following is NOT an action that can reduce your taxes? (a) owning a home (b) taking out a consumer loan (c) paying certain work expenses such as union dues (d) depositing money into a flexible spending account {FSA}
B
Multiple choice: Gross (or total) income includes (a) exclusions (b) tax deductions (c) passive income
C
Multiple choice: Individuals can file their federal taxes using all of the following except (a) Use tax preparation software to file online (b) Use tax preparation software to print and mail (c) electronic filing using Free File Alliance (d) deliver in person (e) all of these can be used
D
T/F: The average tax rate is the tax paid on the next dollar of taxable income
False (The marginal tax rate fits this definition. The average tax rate is calculated by dividing the total tax due by the taxable income)
T/F: Using tax software will not save a taxpayer any time when preparing form 1040
False (Using tax software will save a taxpayer time when preparing Form 1040)
T/F: Individuals are allowed to give money or items valued at $14,000 or less in a year to a person without being subject to estate taxes
True
T/F: Social Security is an example of a tax on earnings
True
T/F: Some tax disputes have gone to the U.S. Supreme Court
True
