FIN 2010 OU Chapter 3 Quiz Review

T/F The IRS has made online filing free for millions of taxpayers through the Free File Alliance.

TRUE

A person with a total tax liability of $8,050 and withholding of federal taxes of $5,400 would: a.) owe $2,650. b.) receive a refund of $5,400. c.) receive a refund of $2,650. d.) owe $8,050. e.) receive a refund of $8,050.

a.) owe $2,650 *Additional amount owed = amount owed - amount withheld/paid*

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) $5,000. e) $15,500.

b) $2,000

The tax based on the total tax due divided by taxable income is called the: a) AMT. b) Average tax rate. c) Income tax rate. d) Marginal tax rate. e) Total tax rate.

b) Average tax rate.

According to the video, which of the following is not an example of tax credits? a) Child Tax Credits b) Large Family Credits c) Foreign Tax Credits d) Residential Energy Credits e) Education Credits

b) Large Family Credits *Examples of tax credits mentioned in the video include child tax credits, foreign tax credits, residential energy credits, and education credits*

Investments held for less than one year will be taxed at ___________________________, whereas investments that have been held for over one year are taxed at ____________________________. a) Capital gains rates; ordinary income rates b) Ordinary income rates; capital gains rates c) Capital gains rates; short term rates d) Long term rates; ordinary income rates e) Long term rates; short term rates

b) Ordinary income rates; capital gains rates *Investments held for less than one year will be taxed at ordinary income rates, whereas investments that have been held for over one year are taxed at capital gains rates*

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). e) Investing in municipal bonds.

b) Taking out a consumer loan. *Interest on home equity loans is deductible, but not interest on consumer loans*

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

An itemized deduction of $7,000 with a 38 percent tax rate would reduce a person's taxes by: a.) $7,000.00. b.) $2,660.00. c.) $6,790.00. d.) $3,920.00. e.) $7,038.00.

b.) $2,660.00. *Dollar reduction in taxes = amount of tax deduction × your tax bracket percent*

George Franklin paid taxes of $3,400 on a taxable income of $25,000. What was his average tax rate? a.) 7.81% b.) 13.60% c.) 19.20% d.) 32.00% e.) 35.84%

b.) 13.60% *Average tax rate = total tax due / taxable income*

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) $250 *Taxes would be reduced by (Tax deduction) × (Tax rate) = $1,000 × 25% = $250*

The maximum that an individual can contribute to a Roth IRA for the 2014 year is a) $1,000. b) $3,000. c) $5,500. d) $10,000. e) $15,500.

c) $5,500

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. e) Total tax rate.

d) Marginal tax rate

What type of tax deduction is discussed in the Kahn Academy video? a) Medical expenses b) Work related expenses c) Investment expenses d) Mortgage interest

d) Mortgage interest

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) deliver in person

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) $1,000 *Taxes would be reduced by the full amount of the tax credit: $1,000.*

A tax credit of $370 for a person in a 28 percent tax bracket would reduce a person's taxes by: a.) $74. b.) $207.2. c.) $259. d.) $103.6. e.) $370.

e.) $370 *A tax credit reduce the amount of taxes owed dollar-for-dollar*

T/F "Tax Freedom Day" represents how long the average person works to pay her or his taxes each year.

TRUE

T/F A tax credit has a full dollar effect in lowering taxes.

TRUE

T/F When Tom calculates his taxable income, he should subtract his tax credits from adjusted gross income

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 One of the best tax shelters is owning a car.

FALSE *One of the best tax shelters is owning a home*

T/F Tax rate schedules list average tax rates

FALSE *Tax rate schedules show marginal tax rates*

T/F The itemized deduction allowed for an individual 65 and older is higher than the itemized deduction for a younger taxpayer.

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

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) Inheritance tax

According to Tax Service Warnings, who is responsible for supplying accurate and complete information for completing a tax return? a) Professional tax preparer b) IRS enrolled agent c) Taxpayer d) Taxpayer's dependents e) Taxpayer's attorney

c) taxpayer

George Franklin paid taxes of $4,375 on a taxable income of $32,000. What was his average tax rate? a.) 10% b.) 13.7% c.) 15% d.) 25% e.) 28%

b.) 13.7% *Average taxes = Taxes paid/Taxable income = $4,375/$32,000 = .1367 = 13.67% or 13.7%.*

Using the following table, calculate the taxes for an individual with taxable income of $30,800. 10% Up to $9,500 15% $9,500-$39,500 25% $39,500-$93,600 28% $93,600-$189,400 33% $189,400-$399,150 35% Over $399,150 a.) $950. b.) $4,145. c.) $5,925. d.) $6,875. e.) $30,800.

b.)$4,145 *Taxes owed = sum of taxes from each tax bracket. For example, if taxable income is $30,800, then the taxes owed = $950 + $3,195 = $4,145: 10% bracket: $9,500 × 10% = $950 15% bracket: ($30,800 − $9,500) × $15% = $3,195*

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 e) Traditional IRA

c) Keogh plan

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) Possibility of receiving an employer match on your contributions. d) Ability to pay taxes on distributions. e) Ability to withdraw contributions before age 55 without penalty

c) Possibility of receiving an employer match on your contributions

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 e) Schedule A

c) W-2

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.) $14,000

Preston is currently self-employed and owns Financial Planning by Preston. He currently can contribute 20% of his business income into his retirement account. Which of the following retirement plans does he most likely have? a) 401(K) b) Deficit c) Individual Retirement Accounts (IRA's) d) Keogh Plan e) Roth Individual Retirement Plans (Roth IRA)

d) Keogh Plan *Keogh Plans are reserved for self-employed individuals that own their own business. They can provide a tremendous amount of tax savings by allowing contributions of up to 25% of their business income*

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.

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 *To qualify for tax exemptions, a dependent must be under age 19 or a full-time student under the age of 24*