Managing Income Taxes

When you file your federal income tax you may take a subtraction from your taxable income called an exemption for each person legally defined as your

Dependent

It is illegal to prepay the next year's professional association dues and take the deduction during the current year.

False

Other factors being equal, tax-sheltered income is preferable to tax-free income.

False

Tax-exempt income is most valuable to low-income taxpayers.

False

The income of children over 18 years of age (or 24 if a full time student) is taxed at the parents' marginal tax rate.

False

The kiddie tax applies to children under the age of 14 and means that all the child's income is taxed at their parents' marginal tax rate.

False

The most commonly used defined-contribution plan is the Roth IRA.

False

Marc is a university student seeking a degree in international business. He has received a scholarship for $6,000. This income was used as follows: Tuition and fees $2,400 Room and board $3,600 How much of the $6,000 is included in gross income?

$3,600

Kerri and Jason Smith have an adjusted gross income of $55,000. During the year they incurred unreimbursed expenses of $500 on prescription drugs, $2,506 on doctor and dentist bills, $1,200 on health insurance premiums, and $150 on medical related transportation costs. Assuming they have enough total itemized deductions to itemize, how much will they be allowed to deduct for these unreimbursed medical expenses?

$0

Maxine Marshall received $24,000 in disability payments from an insurance policy she paid for. How much of the $24,000 is included in Maxine's gross income?

$0

You just sold your comic book collection that you had worked on for the past ten years for a capital gain of $7,500. Assuming you are in the 15 percent marginal tax bracket, how much federal income tax will be due on this gain?

$0

A person who is claimed as a dependent on someone else's tax return can claim ____ exemption(s) and at least a ____ standard deduction on his or her own tax return.

$0; $6,200

Depending on their level of income, low- and moderate-income taxpayers can claim a maximum nonrefundable ____ retirement savings contribution credit.

$1,000

Sandra Maxwell is a full-time student and her husband, Joel, is employed, so they take their young son, Sam, to a child care center during the day. They qualify for a 25 percent dependent care tax credit, and they are in the 15 percent marginal tax bracket. If the annual cost of the child care is $6,200, how much will it save Sandra and Joel on their income taxes?

$1,550

Taxpayers with taxable incomes up to ____ can use the IRS tax tables.

$100,000

A tax credit of up to ____ is available for qualifying costs of an adoption.

$13,190

Vicki Chadwell made a $1,000 capital gain on an investment she owned for 15 months. Assuming Vicki is in the 35 percent marginal tax bracket, how much federal income tax would she pay on this capital gain?

$150

A donation of old toys and clothes to the Salvation Army valued at $500 will save a single taxpayer in the 33 percent marginal tax bracket

$165 if he or she has other itemized deductions of at least $6,200

Sue is a single mom in the 15 percent marginal tax bracket. Her son, Billy, is in day care, which costs $8,600 annually. How much will Sue's dependent care credit be if she qualifies for a 30 percent credit?

$2,580

Which of the following is most valuable to a taxpayer for the tax savings it provides? $200 dependent care credit $200 charitable contribution $200 employee business expense $200 unreimbursed medical expense

$200 dependent care credit

The Fishers did very well on their investment choice. They earned $280 in dividend income from their stock investment this year. Later in the same year when they sold the stock, they realized a long-term capital gain of $2,984. How much of this dividend and capital gain income will they have to pay taxes on?

$3,264

Marla and Victor Zapata have the following eligible miscellaneous itemized deductions: Unreimbursed employee business expenses $1,670 Tax preparation fees $350 Job hunting expenses $2,946 ​ They have an adjusted gross income of $63,000 and other itemized deductions of $8,580. How much of the above miscellaneous expenses can they add to their other itemized deductions?

$3,706

Sally McKrachen is a single young professional with a gross income of $51,000. Sally has no adjustments to gross income, but she does have itemized deductions totaling $4,275. If personal exemptions for the year are $3,700 each and the standard deduction is $5,800, what is Sally's taxable income?

$41,500

Melissa and Martin McArthur incurred the following interest expenditures: Home mortgage $4,700 Investment loan $840 Credit card debt $1,425 Higher education loan $1,460 ​ How much will these expenditures add to their itemized deductions?

$5,540

Anne and Jose Romero are in the 28 percent marginal federal tax bracket. Two years ago they purchased 100 shares of ABC stock for $28 per share, paying commissions of $75. Last week they sold this stock for $35 per share and paid commissions of $50. How much is their taxable capital gain on this investment?

$575

Jeff is trying to decide whether to sell his baseball card collection. He has been offered a price that would give him a profit of $2,500 by a dealer who has agreed to pay Jeff this price now or in January of next year. This year Jeff is in the 28 percent marginal tax bracket, but next year Jeff expects to be in the 15 percent marginal tax bracket. Therefore, the estimated income tax liability on this $2,500 income would be ____ this year and ____ next year.

$700; $375

Joe and Marcia, a married couple with three young children, have a gross income of $120,000, adjustments of $6,700, and itemized deductions totaling $16,900. If personal exemptions for the year are $3,700 each and the standard deduction is $11,600 for married couples, what is Joe and Maria's taxable income if they file jointly?

$77,900

Mike has a chronic illness. He had an adjusted gross income of $42,000. During the year he incurred unreimbursed expenses of $2,500 on prescription drugs, $3,500 on doctor and dentist bills, $2,400 on health insurance premiums, and $250 on medical related transportation costs. Assuming he had enough total itemized deductions to itemize, how much will he be allowed to deduct for these unreimbursed medical expenses?

$8,650

Judy Hays wants to give $3,200 to the building fund at her local church. Assuming Judy can itemize her deductions, how much will this contribution save her on her federal income taxes if she is in the 28 percent marginal tax bracket?

$896

A way to defer income taxes to later years is to -contribute to defined-contribution retirement plans. -defer income to a later year. -(all of these) -contribute to individual retirement accounts.

-(all of these)

Which of the following deductible expenses can be prepaid for tax purposes? -Charitable contributions -Personal property taxes -All of these -Medical expenses

-All of these

Lucy and Max, ages 28 and 30, have earned income of $30,400 and adjusted gross income of $29,500,500. They spent $4,200 on child care for their young son so that they could both work part time and finish their college degrees. Which of the following tax credits could reduce their taxes? -Earned income credit -Neither dependent care credit nor earned income credit -Dependent care credit -Both dependent care credit and earned income credit

-Both dependent care credit and earned income credit

Which of the following would be considered smart financial planning? -Ignore the impact of income taxes in your -personal financial planning. -Withhold too much income in order to receive a refund next year. -Turn all your income tax planning over to someone else. -Contribute to your employer-sponsored 401(k) retirement plan at least up to the amount of the employer's matching contribution.

-Contribute to your employer-sponsored 401(k) retirement plan at least up to the amount of the employer's matching contribution.

Iris Rosales is an unmarried college student age 21, and is claimed as a dependent on her married parents' tax return. What is the maximum number of personal exemptions Iris can legally claim on her own tax return?

0

Irma and Dave Cedeno have a potential $2,000 capital gain on stock they have owned 11 months. They are in the 28 percent marginal tax bracket. How much longer would they have to hold this stock to reduce the tax liability on this gain?

1 month and 1 day

Which tax form do you use to file an amended tax return for previous year?

1040X

Dave Scott's total income is $52,000, but his taxable income is only $39,625. Therefore, his tax liability is $5,763. Dave's average tax rate is approximately ____ percent.

11.1

Ben and Susan Shew, filing jointly, would pay $7,054 in taxes on $53,100 of taxable income. If Ben won $6,000 in the lottery, they would pay $7,954, in taxes. What is the couple's marginal tax rate?

15 Percent

The yield on a taxable money market mutual fund earning 3.0 percent is equivalent to a ____ percent yield on a tax-exempt money market fund for a taxpayer in the 28 percent marginal tax bracket.

2.2

Long-term capital gains are taxed at a maximum rate of ____ percent.

20

A single individual pays $7,813 on a taxable income of $47,810 and $7,838 on a taxable income of $47,910. What is the marginal tax rate?

25 Percent

A tax-exempt municipal bond is currently earning 5.4 percent interest while a similar taxable bond is earning 7.5 percent interest. Taxpayers in the ____ percent marginal tax bracket and above would benefit by investing in the tax-exempt bond.

33

Matt and Kat are in the 25 percent marginal income tax bracket and are subject to the 7.65 percent Social Security tax. If Kat gets a $750 bonus, approximately what percent of this bonus would she get to keep?

67 Percent

The yield on a tax-exempt municipal bond earning 5.0 percent is equivalent to ____ percent on a taxable corporate bond for a taxpayer in the 35 percent marginal tax bracket.

7.7

Which of the following sources of income associated with divorce is (are) reported as part of gross taxable income?

Alimony

Adjustments to gross income: -can be taken even if one takes the standard deduction. -are subtracted from gross income. -help one qualify for other deductions. -All of these

All of these

Which of the following types of income is (are) excludable from federal income taxation? -Income from a car pool -Life insurance benefits received -Compensatory damages in physical injury cases -All of these

All of these

You are legally required to include which of the following in gross income? -Lottery winnings -All of these -Illegal income -Alimony received

All of these

Which is not characteristic of a Coverdell education savings account?

Contributions are tax deductible.

Which of the following persons is (are) practicing tax avoidance? -All of these -Plumber who does not report a barter transaction -Employee who deducts qualifying job-related expenses -Bartender who does not report all his tips

Employee who deducts qualifying job-related expenses

Your average tax rate

Equals your marginal tax rate

A taxpayer must purchase replacement property to avoid paying taxes on capital gains on the sale of his or her home.

False

Because of their tax-exempt status, municipal bonds offer higher nominal returns than taxable alternatives.

False

Contributions to a Roth IRA and a Coverdell education savings account are both tax-deductible and earnings accumulate tax-free.

False

Homeowners with appreciated principal residences can avoid tax on gains of up to $500,000 if married and filing jointly and up to $250,000 if single. The home must have been owned and used as the taxpayer's private residence for two out of the last three years prior to the date of sale.

False

Which of the following taxes is progressive? -State sales taxes -Federal Income taxes -Social Security taxes -All of these

Federal Income Taxes

Which of the following is not a deductible medical expense?

Funeral Expenses

Which of the following is not defined as part of gross income?

Gifts and Inheritances

Total itemized deductions must be ____ to reduce your tax liability.

Greater than your standard deduction

The Affordable Care Act provides that individuals and families may take a tax credit called the______ to help them purchase health insurance through a health insurance exchange.

Health Insurance Premium Tax Credit

It is possible to deduct some types of transportation expenses with all of the following itemized deductions EXCEPT

Home buying

Which of the following expenses on a home is not tax deductible annually?

Homeowners insurance premium

Which of the following is an example of unearned income?

Interest

Sal is a 27-year-old single taxpayer in the 28 percent marginal tax bracket. Assuming Sal's standard deduction is $5,800 and she has itemized deductions totaling $6,500, Sal should take the ____ for the additional tax savings of ____.

Itemized Deduction; $196

Tax-sheltering for which of the following types of expenses cannot be had through a type of FSA?

Life insurance premiums

Numerous job-related expenses can potentially be deducted from federal income taxes as ____ expenses.

Miscellaneous

All income other than capital gains is referred to as

Ordinary Inome

____ taxes are based on one's ability to pay. -Regressive -Progressive -Marginal -All of these

Progressive

Which of the following types of taxes is deductible for federal income tax purposes?

Real Estate Property Taxes

Which of the following job-related apparel is most likely to qualify as a deductible expense?

Safety goggles for a welder

Which of the following is an example of earned income?

Self-Employment Income

Adjusted gross income is not a factor in calculating which of the following itemized deductions?

Taxes

The tax credit(s) for qualifying higher education expenses is

The American Opportunity Credit and Lifetime Learning Credit

____ cannot be deducted as an adjustment to income.

The amount contributed to an individual retirement account (IRA)

Which is not an example of unearned income?

Tips

Practically everything you receive in return for your work or services and any profit from the sale of assets is considered income, whether the compensation is paid in cash, property, or services. Listing these earnings will reveal your

Total Income

Deferring income can achieve the same result as accelerating deductions.

True

Flexible spending accounts are subject to a use-it-or-lose-it rule.

True

Funds in a flexible spending account (FSA) can be accessed via an FSA debit card.

True

Homeowners with appreciated principal residences can avoid tax on gains of up to $500,000 if married and filing jointly and up to $250,000 if single. The home must have been owned and used as the taxpayer's private residence for two out of the last five years prior to the date of sale.

True

If a child is under age 18 and has net investment income exceeding $2,100, the excess is taxed as if it were the income of the parent.

True

If a taxpayer expects to be in a lower tax bracket the next year, he or she would benefit by defering income to the later year.

True

Income taxes must be paid when distributions are taken from most qualified retirement plans.

True

Section 529 college savings plans are state-sponsored.

True

Tax deferral with a traditional IRA allows investment income to grow without being taxed until it is withdrawn.

True

Tax losses are created when deductions generated from an investment (such as depreciation and net investment losses) exceed the income from an investment.

True

Tax-deferred compounding refers to the tax-free growth of investments in a tax-deferred account.

True

The tax break for losses from passive investments begins to phase out for taxpayers higher incomes.

True

Typically, a tax shelter defers taxes until a later date rather than avoiding taxes forever.

True

Earned income is reported to the recipient on a

W-2 Form

The strategy of shifting the payment dates of deductible items is called

accelerated deductions.

The penalty for tax evasion can include: all of these. penalties. interest charges. jail sentences.

all of these.

High-income households who have sufficient adjustments, deductions and credits to reduce their income tax liability to low levels may instead be subject to the ______ so that they pay a more appropriate level of taxes based on their gross income.

alternative-minimum tax

A casualty or theft loss is difficult to qualify for because the loss must

be unreimbursement and exceed 10% of AGI plus $100

A(n) ____ is an IRS-approved retirement plan sponsored by an employer to which employees may make pretax contributions that lower their tax liability.

defined-contribution retirement plan

There are now ____ marginal tax rates for federal income taxes.

seven

Interest penalties for early withdrawal of savings from certificates of deposit are

subtractable as an adjustment to gross income.

Certain real estate losses are deductible against ordinary taxable income up to a limit of $25,000 when the

taxpayer has an adjusted gross income of $150,000 or less and the taxpayer actively participates in the management of the property.

The practice in which any unspent dollars in a Flexible Spending Account (FSA) at the end of the year are forfeited and not returned to the employee is known as the

use-it-or-lose-it rule.