Chapter 3 Taxes in your Financial Plan

52. (p. 82) How long should you generally keep tax records? A. Until you file your returns B. 3 years C. 5 years D. 10 years E. 15 years

B. 3 years

57. (p. 84) The taxes based on the total tax due divided by taxable income is called A. AMT B. Average tax rate C. Income tax rate D. Marginal tax rate E. Total tax rate

B. Average tax rate

18. (p. 85) Federal income tax returns must be filed by April 1 of each year. True or False?

FALSE Forms must be filed by April 15.

35. (p. 78) The tax that is a major source of revenue for local governments is called a(n) A. Estate tax B. Excise tax C. Income tax D. Real estate tax E. Sales tax

D. Real estate tax

86. (p. 99) The maximum that an individual can contribute to an education IRA each year is A. $1,000 B. $2,000 C. $3,000 D. $5,000 E. $15,500

B. $2,000

45. (p. 79) Fees, tips, and bonuses are forms of A. Adjusted gross income B. Earned income C. Exclusions from income D. Tax-deferred income E. Tax-exempt income

B. Earned income

25. (p. 94) A common filing error is signing the return. True or False?

FALSE A common error is NOT signing the return.

7. (p. 80) The Adjusted Gross Income is increased by the itemized or standard deduction. True or False?

FALSE AGI is reduced by these.

5. (p. 79) Determining Adjusted Gross Income is the final step in calculating federal income tax. True or False?

FALSE Adjusted Gross Income (AGI) is a step in the tax calculation, but it is not the final step to calculate income taxes.

2. (p. 78) An example of an excise tax is Social Security. True or False?

FALSE Social Security is a tax on earnings.

22. (p. 91) Tax software can save taxpayers 25 hours or more when preparing Form 1040. True or False?

FALSE Tax software can save 10 or more hours.

11. (p. 80) Tax tables list average tax rates. True or False?

FALSE Tax tables show marginal tax rates.

13. (p. 84) All individuals with taxable income need to complete the AMT calculation. True or False?

FALSE The AMT is an alternative tax calculation designed to ensure that those who receive tax breaks also pay their fair share of taxes.

29. (p. 98) Contributions to a Keogh or 401(k) are tax-exempt. True or False?

FALSE These are tax-deferred contributions.

6. (p. 79) Cash and prizes won on television game shows are usually subject to both federal and state taxes. True or False?

TRUE

1. (p. 76) Tax Freedom Day represents the day that the average person works until to pay their taxes each year. True or False?

TRUE

10. (p. 82) When Marissa completes her taxes, she can include her children, her husband, and herself as exemptions. True or False?

TRUE

14. (p. 84) A tax credit has a full dollar effect in lowering taxes. True or False?

TRUE

33. (p. 78) 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 tax E. Sales tax

A. Estate tax

37. (p. 78) The amount owed on property received from a deceased person is A. Estate tax B. Excise tax C. Social Security tax D. Real estate tax E. Sales tax

A. Estate tax

91. (p. 79) Sam and Diane are completing their federal income taxes for the year and have identified the amounts listed below. How much can they rightfully deduct? • AGI: $90,000 • Medical and dental expenses: $10,000 • State income taxes: $4,500 • Mortgage interest: $10,500 • Charitable contributions: $2,000 A. $13,750 B. $20,250 C. $22,500 D. $25,000 E. $27,000

B. $20,250 Deductions include: Medical & dental in excess of 7.5% of AGI + State income tax + Mortgage interest + Charitable contributions = ($10,000 - {$90,000 * .075}) + $4,500 + $10,500 + $2,000 = $20,250.

95. (p. 84) George Franklin paid taxes of $4,400 on a taxable income of $42,000. What was his average tax rate? A. 10% B. 10.5% C. 15% D. 28% E. 85.5%

B. 10.5% Average taxes = Taxes paid/Taxable income = $4,400/$42,000 = .1048 = 10.48% or 10.5%

65. (p. 85) At the end of the year, Yvonne received a form from her bank that reports income from her savings. That form is called _____ A. 1040 B. 1099 C. W-2 D. W-4 E. Schedule A

B. 1099

66. (p. 85) At the end of the year, Walter received a form that showed his payments from independent contracting. That form is called _____ A. 1040 B. 1099 C. W-2 D. W-4 E. Schedule A

B. 1099

47. (p. 81) 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. Subtract his itemized deductions C. Add his tax credits D. Subtract his tax-exempt income E. Add his tax exemptions

B. Subtract his itemized deductions

82. (p. 97) 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. D. Depositing money into a Flexible Spending Account (FSA). E. Investing in municipal bonds.

B. Taking out a consumer loan. Interest on home equity loans are deductible, not on consumer loans.

79. (p. 96) If Brenda wants to pay her fair share of taxes, no more and no less, she should practice A. Tax evasion B. Tax avoidance C. Tax elimination D. Tax maximization E. Tax acceleration

B. Tax avoidance

38. (p. 78) The maximum amount (in 2009) that an individual can give another in a year without being subject to federal taxes is: A. All gifts are taxable B. $10,000 C. $13,000 D. $15,000 E. No gifts are taxable

C. $13,000 NOTE: This question can be updated using current tax data.

55. (p. 82) In 2008, taxable income was reduced by ______ for each exemption claimed. A. $1,000 B. $2,500 C. $3,500 D. $5,000 E. $10,000

C. $3,500 Note: This question can be updated with annual changes to the exemptions.

89. (p. 99) 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 $5,000 per year C. Possibility of receiving an employer match on your contributions D. Ability to pay taxes on distributions E. Ability to roll IRA contributions into a 401(k)

C. Possibility of receiving an employer match on your contributions

36. (p. 78) Payroll deductions for federal government retirement benefits (such as old-age, survivor, and disability) are called A. Estate taxes B. Excise taxes C. Social Security taxes D. Real estate taxes E. Sales taxes

C. Social Security taxes

76. (p. 93) Who is ultimately responsible for supplying accurate and complete information for the completing of a tax return? A. Professional tax preparer B. IRS enrolled agent C. Taxpayer D. Taxpayer's dependents E. Taxpayer's attorney

C. Taxpayer

63. (p. 84) At the end of the year, employees receive a ____ form that reports annual earnings and the amounts deducted for taxes from their employer. A. 1040 B. 1099 C. W-2 D. W-4 E. Schedule A

C. W-2

64. (p. 84) At the end of the year, Xavier received a form from his employer that reports annual earnings and the amounts deducted for taxes. That form is called a _____ A. 1040 B. 1099 C. W-2 D. W-4 E. Schedule A

C. W-2

69. (p. 86) Bob was married to Sandy and they have a 12 year old son. Sandy passed away last year. Bob needs to complete his federal income taxes for the year. What filing status could he use because of his marital status? A. Single B. Married, filing joint return C. Head of household D. Qualifying widow or widower E. Married, but filing individually

D. Qualifying widow or widower

48. (p. 80) Adjustments to income include all except A. Alimony payments B. Contributions to a Keogh retirement plan C. Traditional IRA contributions D. Roth IRA contributions E. Penalties for early withdrawal of savings

D. Roth IRA contributions

43. (p. 79) Income that is taxed at a later date is A. Adjusted gross income B. Earned income C. Exclusions from income D. Tax-deferred income E. Tax-exempt income

D. Tax-deferred income

94. (p. 84) If Diane was in a 28% tax bracket and received a $2,000 tax credit, how much would her taxes be reduced? A. $28 B. $56 C. $560 D. $1,440 E. $2,000

E. $2,000 Taxes would be reduced by the full amount of the tax credit, $2,000.

70. (p. 86) Which of the following is NOT a valid form for filing federal income taxes? A. 1040 EZ B. 1040A C. 1040 D. 1040X E. 1040Z

E. 1040Z

87. (p. 99) The maximum than an individual can contribute to a Keogh Plan each year is A. $2,000 B. 10% of annual income C. $5,000 D. $15,500 E. 25% of annual income, up to a maximum of $30,000

E. 25% of annual income, up to a maximum of $30,000

75. (p. 93) Tax resources include all except A. IRS publications B. Enrolled agents C. Accountants D. Attorneys E. All of the above are tax resources.

E. All of the above are tax resources

58. (p. 84) 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. AMT

44. (p. 80) Gross income after certain reductions have been made is A. Adjusted gross income B. Earned income C. Exclusions from income D. Tax-deferred income E. Tax-exempt income

A. Adjusted gross income

78. (p. 94) Annie was required to clarify or document minor questions of her tax form by mail. She participated in a(n) A. Correspondence audit B. Office audit C. Home audit D. Field audit E. Detailed audit

A. Correspondence audit

61. (p. 84) Which of the following is NOT a tax credit? A. Adoption tax credit B. Domestic tax credit C. Earned-income credit D. Foreign tax credit E. Hope Scholarship tax credit

B. Domestic tax credit

60. (p. 84) 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 D. Student deduction E. Withholding credit

B. Earned-income credit

88. (p. 99) Lauren owns her own 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 E. Traditional IRA

C. Keogh plan

51. (p. 81) 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 7.5% of AGI D. Miscellaneous expenses in excess of 2% of AGI E. Moving expenses for a new job that is at least 25 miles from her old home

D. Miscellaneous expenses in excess of 2% of AGI

20. (p. 86) All citizens of the United States are required to file a federal income tax return if their income falls below a certain level. True or False?

FALSE Citizens whose income is above a certain level are required to file.

24. (p. 93) Tom needs to complete his taxes. He should be able to find a tax preparation service to complete his tax forms for as little as $15. True or False?

FALSE Fees typically range from $40 for a tax preparation service.

17. (p. 85) Individuals who have high income reported on Form 1099 may be required to pay estimated tax payments. True or False?

TRUE

23. (p. 91) The IRS has made online filing free for millions of taxpayers through the Free File Alliance. True or False?

TRUE

26. (p. 95) Some tax disputes have been escalated to the U.S. Supreme Court. True or False?

TRUE

4. (p. 78) Amounts given for tuition payments or medical expenses are not subject to gift taxes. True or False?

TRUE

32. (p. 78) A tax due on the purchase of gasoline is called a(n) A. Estate tax B. Excise tax C. Income tax D. Real estate tax E. Inheritance tax

B. Excise tax

31. (p. 77) Which of the following is NOT a tax that most people pay? A. Federal taxes on earnings B. Federal taxes on possessions C. Federal taxes on wealth D. Local taxes on property E. State taxes on purchases

B. Federal taxes on possessions

68. (p. 86) 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 Nancy? A. Single B. Married, filing joint return C. Head of household D. Qualifying widow or widower E. Married, but filing individually

B. Married, filing joint return

85. (p. 98-99) The maximum than an individual can contribute to a Roth IRA each year is A. $1,000 B. $3,000 C. $5,000 D. $10,000 E. $15,500

C. $5,000 NOTE: The Text shows a $3,000 annual contribution - will this be updated to the current $5,000? If not, then the answer needs to be changed to B.

93. (p. 84) If Jack was in a 28% tax bracket and received a $2,000 tax deduction, how much would his taxes be reduced? A. $28 B. $56 C. $560 D. $1,440 E. $2,000

C. $560 Taxes would be reduced by (Tax deduction) * (Tax rate) = $2,000 * 28% = $560.

72. (p. 86) 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 he use? A. 1040 EZ B. 1040A C. 1040 D. 1040X E. 1040Z

C. 1040

67. (p. 85) Penny knows that she needs to file her taxes, but 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 D. W-2 E. W-4

C. 4868

53. (p. 82) Fred has been completing his own tax returns for years. 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. Until he files his returns B. 3 years C. 6 years D. 10 years E. 15 years

C. 6 years

81. (p. 96) David thinks that his salary and tax rate for next year will be higher than for this year. What step should he take to minimize his taxes? A. Delay receipt of income. B. Delay filing taxes. C. Accelerate receipt of income. D. Accelerate deductions. E. None of the above will allow him to minimize his taxes.

C. Accelerate receipt of income.

34. (p. 78) This tax is a major financial planning factor for most people because it is sometimes imposed at the federal, state, and local levels. A. Estate tax B. Excise tax C. Income tax D. Real estate tax E. Sales tax

C. Income tax

49. (p. 81) Individuals can deduct expenses only in excess of 7.5 percent of adjusted gross income for A. Contributions to charitable organizations B. Mortgage interest C. Medical and dental expenses D. Miscellaneous expenses E. Taxes

C. Medical and dental expenses

92. (p. 82) Jason's household consists of himself, his wife, and their 2-year old daughter. How much can Jason claim for his exemptions? A. $1,000 B. $3,500 C. $7,000 D. $10,500 E. $15,000

D. $10,500 Three exemptions can be claimed: Jason, his spouse, his dependent. Each exemption was worth $3,500 in 2008. Therefore, total exemptions claimed = $3,500 * 3 = $10,500. Note: This question can be updated with annual changes to the exemptions.

90. (p. 79) Janet is completing her federal income taxes for the year and has identified the amounts listed below. How much can she rightfully deduct? • AGI: $40,000 • Medical and dental expenses: $600 • State income taxes: $500 • Mortgage interest: $6,500 • Charitable contributions: $750 A. $1,850 B. $6,500 C. $7,250 D. $7,750 E. $8,350

D. $7,750 Deductions include: State income tax + Mortgage interest + Charitable contributions = $500 + $6,500 + $750 = $7,750. Medical and dental expenses are not deductible because they are less than 7.5% of her AGI.

56. (p. 83) In 2008, federal tax tables included tax rates of: A. 0%, 10%, 20%, 30%, 40%, 50% B. 7%, 15%, 30%, 33%, 38%, 52% C. 0%, 25%, 50%, 75% D. 10%, 15%, 25%, 28%, 33%, 35% E. 0%, 5%, 20%, 30%, 50%

D. 10%, 15%, 25%, 28%, 33%, 35%

71. (p. 86) Peter filed his federal income taxes, but needs to make a correction to his income. Which form should he use? A. 1040 EZ B. 1040A C. 1040 D. 1040X E. 1040Z

D. 1040X

80. (p. 96) 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 the above will allow her to minimize her taxes.

D. Accelerate deductions.

40. (p. 79) When calculating federal income taxes, "income" includes all of the following categories except A. Earned income B. Alimony C. Investment income D. Active income E. Passive income

D. Active income

41. (p. 79) When calculating federal income taxes, what increases "income"? A. Exclusions B. Tax-exempt income C. Tax-deferred income D. Alimony E. Tax deductions

D. Alimony

77. (p. 95) 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. Field audit

62. (p. 84) Recent tax credit include all except A. Earned-income credit B. Foreign tax credit C. Lifetime Learning tax credit D. Graduate learning tax credit E. Retirement tax credit

D. Graduate learning tax credit

59. (p. 84) 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 E. Total tax rate

D. Marginal tax rate

50. (p. 81) Athena wants to determine if she should itemize her deductions. She has identified several possible deductions. Which of the following is NOT a proper deduction? A. Contributions to charitable organizations B. Mortgage interest C. Medical and dental expenses in excess of 7.5% of AGI D. Miscellaneous expenses less than 2% of AGI E. State income taxes

D. Miscellaneous expenses less than 2% of AGI

46. (p. 79) Total income (gross) includes A. Exclusions from income B. Tax deductions C. Tax-deferred income D. Passive income E. Tax-exempt income

D. Passive income

30. (p. 76) 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 the average tax rate for people working in his or her industry D. Pay his or her fair share of taxes while taking advantage of appropriate tax benefits E. Pay no taxes of any type

D. Pay his or her fair share of taxes while taking advantage of appropriate tax benefits

39. (p. 78) You may be required to make estimated tax payments if: A. You receive a paycheck with taxes withheld B. You do not have interest income C. You are married D. You own your own business E. None of the above are correct

D. You own your own business

73. (p. 88-89) The major sections of Form 1040 include all except A. Filing status and exemptions B. Adjustments to income (AGI) C. Tax credits D. Signature E. All are sections of Form 1040

E. All are sections of Form 1040

74. (p. 90) Individuals can file their federal taxes using A. Tax software B. E-file C. Electronic filing D. Telephone E. All of the above

E. All of the above

54. (p. 82) 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 wife E. His 20 year old son who is working full-time and living in an apartment

E. His 20 year old son who is working full-time and living in an apartment Children must be under 19 or full-time students under the age of 24.

84. (p. 98-99) Evan wants to minimize his future taxes. Which of these would be the best for him to invest in today? A. Municipal bonds B. Tax-deferred annuity C. Section 529 savings plan D. 401(k) plan E. Roth IRA

E. Roth IRA

83. (p. 98-99) All of the following can reduce your taxes today except investing in A. Municipal bonds B. Tax-deferred annuity C. Section 529 savings plan D. 401(k) plan E. Roth IRA

E. Roth IRA Roth IRA deductions are not deductible.

42. (p. 79) Income that is never subject to tax is called A. Adjusted gross income B. Earned income C. Foreign income D. Tax-deferred income E. Tax-exempt income

E. Tax-exempt income

8. (p. 81) When Tom calculates his taxable income, he should subtract his tax credits from adjusted gross income. True or False?

FALSE He should subtract his tax deductions, not his tax credits. Tax credits are subtracted directly from the amount of taxes owed.

28. (p. 97) Interest paid on a home equity loan is not deductible. True or False?

FALSE Home equity interest (on loans up to $100,000) are deductible.

16. (p. 84) If your taxes due are greater than the amount you had withheld for the year, then you should expect a refund after you complete your federal income taxes. True or False?

FALSE If taxes withheld are greater than the amount due, then you will receive a refund.

27. (p. 97) One of the best tax shelters is owning a car. True or False?

FALSE One of the best shelters is owning a home.

21. (p. 89) Most states do not require state income taxes. True or False ?

FALSE Only seven states do not have a state income tax.

15. (p. 84) A tax credit reduces the taxable income on which the tax liability is computed. True or False?

FALSE The definition is for a tax deduction. A tax credit reduces the amount of taxes owed dollar for dollar.

19. (p. 85) Form 4868 allows a taxpayer to obtain a six-month extension on filing and paying federal taxes without penalty. True or False?

FALSE The extension does not delay the payment liability.

12. (p. 84) The average tax rate is the taxes paid on the next dollar of income. True or False?

FALSE The marginal tax rate fits this definition. The average tax rate is calculated by dividing the total tax due by taxable income.

3. (p. 78) Individuals are allowed to give money or items of any value to a person without being subject to taxes. True or False?

FALSE The maximum amount that can be gifted without tax implications in 2009 is $13,000. NOTE: This question can be updated using current tax data.

9. (p. 81) The itemized deduction allowed for an individual 65 and older is higher than the itemized deduction for a younger taxpayer. True or False?

FALSE This would be true IF the statement said standard deduction instead of itemized deduction.