Federal Income Tax Ch. 1

Roger purchased a new suit for $350. The sales tax rate was 6%. What is the total cost of the suit to Roger?

$371

Andy has two nephews and three nieces. He wants to give each of them the maximum gift he can disburse without having to file a gift tax return. What is the total aggregate amount that Andy can give his two nephews and three nieces in 2021?

$75,000

Which of the following statements are correct regarding a flat tax?

*A flat tax is a single tax rate applied to an entire tax base. *The term proportional tax has the same meaning as flat tax.

Please check which business decisions would likely be affected by tax laws.

*How should the business compensate employees? *What organizational form should a business use? *Where should a business locate?

Which of the following statements are correct regarding the history of the U.S. personal income tax?

*The income tax was once ruled unconstitutional. *The 16th Amendment to the U.S. Constitution gives Congress the power to assess income tax on individuals.

Which of the following statements are correct regarding a graduated tax?

*With a graduated tax, different portions of a tax base may be taxed at different rates. *With a graduated tax, higher income brackets may be assessed a higher tax rate than lower income brackets.

Randall is single and has total income from all sources (taxable and nontaxable) of $83,000. His taxable income is $62,000. Randall's tax liability is $11,239. What is Randall's effective tax rate?

13.54%

Steven and Sally have income from all sources (taxable and nontaxable) totaling $140,286. Their taxable income is $114,966. Their tax liability is $20,219. Their effective tax rate is ___% (rounded to the nearest whole number).

15

Arlene is single and has taxable income of $18,000. Her tax liability is currently $2,236. She has the opportunity to earn an additional $5,000 if she accepts and completes a special project at work. There are no additional expenses to offset the $5,000 income. Consequently, Arlene will have a tax liability of $2,986 if she accepts the special project. Arlene has a marginal tax rate of ___ %.

15%

Steven and Sally have income from all sources (taxable and nontaxable) totaling $140,286. Their taxable income is $114,966. Their tax liability is $20,219. Their average tax rate rounded to the nearest whole number is ___ %.

18%

Randall is single and has total income from all sources (taxable and nontaxable) of $83,000. His taxable income is $62,000. Randall's tax liability is $11,239. What is Randall's average tax rate?

18.13%

Arlene is single and has taxable income of $34,000. Her tax liability is currently $4,636. She has the opportunity to earn an additional $6,000 this year. Her tax liability will grow to $5,771 if she receives the additional income. What is Arlene's marginal tax rate for the additional $6,000?

18.92%

Cathy purchases a new computer for $500 in a state where the sales tax rate is 5%. The amount of sales tax that will be added to the purchase is $___.

25

Which of the following definitions describes a tax?

A payment required by a government that is unrelated to any specific benefit or service received from the government.

Marcus and Lydia Brown are married and filing jointly and have $161,000 in taxable income. Lydia has been offered a job promotion which will increase their taxable income to $180,000 in 2021. This additional income will move them into the next graduated tax bracket (24%). Which of the following statements is correct?

A portion of the additional $19,000 will be taxed at 22% and a portion will be taxed at 24%.

The city of Tinderville imposed a 1% tourism tax on all restaurant sales. The proceeds from the tax will be used to promote tourism in the city. What is this type of tax called?

An earmarked tax

In 2021, the annual gift exclusion totals $___ per donee. The unified tax ___ exempts up to $11,700,000 in lifetime gifts and bequests upon the death of a taxpayer.

Blank 1: 15,000 or 15000 Blank 2: credit

The first personal income tax was enacted in 1861 to fund the ___ ___.

Blank 1: Civil or civil Blank 2: War or war

Andrew argues that a tax rate increase will simply cause taxpayers to work more to generate the same after tax dollars as before the tax rate increase. Sally disagrees and believes that taxpayers will engage in more leisure activities since the after tax value of additional work has decreased. The basis of ___'s argument is the substitution effect, while the basis for ___'s argument is the income effect.

Blank 1: Sally or sally Blank 2: Andrew or andrew

___ forecasting ignores that taxpayers may respond to a tax change by changing their behavior. ___ forecasting attempts to account for possible taxpayer responses to the tax law change.

Blank 1: Static Blank 2: Dynamic

When evaluating a tax system, ___ suggests that taxpayers should be able to determine when to pay the tax, where to pay the tax, and how to determine the tax.

Blank 1: certainty

Jack has $1,000 to invest. He has a choice between municipal bonds with an interest rate of 4% or corporate bonds with an interest rate of 6%. Jack has a marginal tax rate of 25%. Given this information, Jack should invest in the ___ bonds. The after-tax rate of return on the municipal bonds is ___% and the after tax rate of return on the corporate bonds is ___%. The difference in the rates of return is known as ___ taxes.

Blank 1: corporate Blank 2: 4 or four Blank 3: 4.5 Blank 4: implicit

A tax that is assessed for a specific purpose is a(n) ___ tax.

Blank 1: earmarked, earmark, ear mark, ear marked, or ear-marked

When evaluating a tax system, ___ requires that a good tax system minimize the compliance and administration costs associated with the system.

Blank 1: economy

When evaluating a tax system, ___ considers how the tax burden should be distributed across taxpayers.

Blank 1: equity or fairness

A single tax rate applied to an entire base is known as a(n) ___ tax. When the base is divided into a series of monetary amounts, or brackets, and each bracket is taxed at a different rate, this system is known as a(n) ___ tax.

Blank 1: flat or proportional Blank 2: graduated

A tax is a payment required by a(n) ___ that is unrelated to any specific benefit or service received by the taxpayer.

Blank 1: government

A tax is a payment required by a(n) ___ that is unrelated to any specific benefit or service received by the taxpayer.

Blank 1: government or government agency

The term ___ equity means that two taxpayers in similar situations pay the same tax, while ___ equity means that taxpayers with the greater ability to pay tax, pay more tax that taxpayers with less ability to pay.

Blank 1: horizontal Blank 2: vertical

A(n) ___ tax is defined as the reduced before-tax return that a tax-favored asset produces because of its tax-advantaged status.

Blank 1: implicit

Since municipal bonds are tax-exempt, they typically earn a lower rate of return than taxable bonds. The lower rate of return relative to taxable bonds is often referred to as a(n) ___ tax.

Blank 1: implicit

The ___ effect predicts that when taxpayers are taxed more, they will work harder to generate the same after-tax dollars, while the ___ effect predicts they will engage in other pursuits since the marginal value of taxable activities has decreased.

Blank 1: income Blank 2: substitution

Most states and the District of Columbia impose ___ ___ on individuals and corporations who earn income within the state.

Blank 1: income Blank 2: tax or taxes

An example of a tax assessed by a state or local government is ___ tax.

Blank 1: income, sales, use, excise, property, or ad valorem

The federal individual income tax system in the United States uses a(n) ___ tax structure.

Blank 1: progressive

A sales tax is an example of a tax that uses a(n) ___ tax rate structure when compared to its tax base.

Blank 1: proportional, flat, or proportion

The formula to calculate the amount of tax ___ is the tax ___ multiplied by the tax .

Blank 1: rate Blank 2: base

Property taxes are commonly assessed on ___ property (such as buildings and land) and ___ property (such as cars and boats).

Blank 1: real Blank 2: personal

The social security tax is an example of a(n) ___ tax structure because as the tax base increases, the taxes paid increase, but the marginal tax rate decreases.

Blank 1: regressive

Assessing the ___ of a tax system means determining the amount of tax revenue needed to fund the government and ensuring that the funds are provided by the system.

Blank 1: sufficiency

A payment required by a government that is unrelated to any specific benefit or service received from the government is a(n) ___.

Blank 1: tax

Gift taxes are also known as ___ taxes.

Blank 1: transfer

Federal estate taxes are also known as ___ taxes.

Blank 1: transfer or death

The purpose of ___ tax is to provide temporary income for individuals terminated from their jobs without cause.

Blank 1: unemployment

Which of the following transactions would NOT likely be subject to an excise tax?

Car repair services

Which of the following common decisions would most likely NOT be influenced by the United States income tax laws?

Choosing a public school for your children

Which of the following decisions would most likely NOT be influenced by our tax system?

Choosing a vacation destination

Which of the following criteria is NOT a characteristic of a good tax system?

Complexity

Judging the equity of a tax system is best described by which of the following?

Considering how the tax burden should be distributed across taxpayers

Judging the certainty of a tax system is best described by which of the following?

Considering that taxpayers should be able to determine when, where, and how to calculate and pay the tax

Judging the sufficiency of a tax system is best described by which of the following?

Considering whether tax revenues generated are adequate to meet the financial needs of the government

By having employers withhold federal income tax from employees' pay and submitting the payments to the government, the system is adhering to which of the criteria for a good tax system?

Convenience

Which of the following criteria are often used to evaluate a good tax system?

Economy Certainty Equity Convenience Sufficiency

A(n) ___ tax is based on the quantity sold of particular products, rather than the monetary amount of the retail selling price.

Excise

Which of the following taxes is based on the quantity of a product sold, rather than the selling price of the product sold?

Excise tax

True or false: A tax can be defined as a fine or penalty.

False

True or false: The federal estate tax is the MOST significant tax assessed by the U.S. government because it generates more revenue for the government than other types of federal taxes.

False

Which of the following taxes uses a proportional tax rate structure?

Federal corporate income tax

Which of the following taxes uses a progressive tax rate structure?

Federal individual income tax

Which of the following taxes are known as transfer taxes?

Gift tax Estate tax

Which of the following federal taxes comprises the highest percentage (almost half) of all tax revenues collected by the U.S. government?

Income tax

Which of the following statements is correct regarding state income tax?

Many states also impose an income tax on corporations.

Which tax is assessed to provide medical insurance for individuals who are elderly or disabled?

Medicare tax

Which of the following statements is true regarding taxes?

Political candidates often distinguish themselves from their opponents based on their tax policies.

Which of the following statements is INCORRECT regarding sales tax?

Products purchased on the internet are never subject to sales tax.

Which of the following taxes are commonly assessed by state and/or local governments?

Property tax Income tax Sales tax

Blade pays tax of $5,000 on taxable income of $50,000 while Caden pays tax of $10,000 on taxable income of $100,000. What type of tax rate structure appears to be in force?

Proportional

Which of the following statements is true regarding sin taxes?

Sin taxes discourage undesirable, yet legal, behaviors such as smoking and drinking.

Which of the following types of taxes are paid by employers based upon their employees' wages?

Social Security tax Medicare tax Unemployment tax

Which tax is assessed to provide monthly retirement, survivor, and disability benefits for qualifying individuals?

Social Security taxes

Which of the following taxes uses a regressive tax rate structure?

Social security tax

Judging the convenience of a tax system is best described by which of the following?

Suggesting that a tax system should be designed to facilitate the collection of tax revenue without undue hardship

Which of the following calculations is correct for determining the amount of tax?

Tax base x tax rate

The state of Indiana charges a 6% sales tax on most consumer goods. Grant purchased a generator for $400 and paid an additional $24 in sales tax. In this example, what is the "tax base?"

The $400 retail price of the generator

Which of the following sentences describes the average tax rate?

The average level of taxation on each dollar of the taxpayer's taxable income

What is the tax base for the gift tax?

The fair market value of the gift on the date the gift is given

Which of the following is necessary for a payment to be considered a tax?

The payment is required by a governmental body.

The state of Indiana charges a 6% sales tax on most consumer goods. Grant purchased a generator for $400 and paid an additional $24 in sales tax. In this example, what is the "tax rate?"

The percentage of tax being charged (6%)

Which of the following statements describes implicit taxes?

The reduced before-tax return that a tax-favored asset produces because of its tax-advantaged status

Which of the following statements is INCORRECT regarding use tax?

The retailer is responsible for collecting and remitting the tax to the state where the consumer resides.

Which of the following statements regarding the tax base is correct?

The tax base describes what is actually being taxed.

Which of the following sentences describes the marginal tax rate?

The tax rate applied to the next additional increment of a taxpayer's taxable income (or deductions)

How do taxpayers benefit from taxes paid to a government?

They benefit from government-provided programs and services, such as national defense and public schools.

Jose has been offered a new job. The new job will pay more than his current job. Jose is hesitant to take the new job because it will cause his income to exceed the maximum amount in his current tax bracket. He is concerned that the increase in taxes will exceed his increased income from the new job.

This is not possible. Only the portion of income that exceeds Jose's current bracket will be taxed at the higher rate, not his total taxable income.

What is the general purpose of a tax?

To fund the operations of the government

True or false: Gasoline sales often have a state excise tax built in to the price that is based on the quantity of fuel purchased rather than the price of the fuel purchased.

True

True or false: The estate tax is based on the fair market value of the estate upon death.

True

The federal income tax is designed on a progressive rate structure so that those taxpayers earning more income are taxed at higher rates than those taxpayers earning less. This structure is based on what premise?

Vertical equity

When evaluating a tax system, ___ suggests that the system should be designed to facilitate the collection of tax revenues without undue hardship on the taxpayer or the government.

convenience

In order to raise revenue in the city of Hamlet, the city considered assessing a local tax on food served in restaurants. When forecasting the amount of revenue that would be generated by the new tax, the budget officials suggested that about 10% of current customers would likely quit eating out in Hamlet and drive to the nearest town. This is an example of:

dynamic forecasting

Property taxes are ad valorem taxes which means that the tax base is the:

fair market value of the property.

True or false: The general purpose of a tax is to provide incentives that will stimulate and improve the economy.

false

Is it true that a "tax" is essentially the same as a fine or penalty?

no

A(n) ______ tax structure applies the same tax rate to all levels of income, while a(n) ______ tax structure applies higher tax rates as the tax base increases and a(n) ______ tax structure applies lower tax rates as the tax base increases.

proportional, progressive, regressive

The tax ___ determines the level of taxes imposed on the tax base and is usually expressed as a percentage.

rate

The tax base for sales tax is the ______ of goods and certain services provided.

retail sales price

A tax imposed on a legal product or service that may be addictive in nature is known as a(n):

sin tax

True or false: While taxpayers benefit from government-provided programs and services, such as national defense and law enforcement, taxes paid are NOT directly related to any specific benefit received by the taxpayer.

true

Which type of tax is based on the retail price of goods owned, possessed, or consumed within a state that were NOT purchased within the state?

use tax