Personal Finance 1

A recent tax strategy employed by the government is to allow employees with health care FSAs to carry over up to $____________ of unused funds

$500

Which of the following will increase the net worth of a household?

Decrease amount owed on credit cards.

When calculating federal income taxes, "gross income" includes all of the following except:

Earned income credit.

Which of the following is true regarding the use of software when preparing your Form 1040?

It can save you time

Tax planning starts with which of the following

Knowing current tax laws

A _________ form is used to amend a previously filed tax return

1040X

If you want to amend (change) a previous return, you would need to file a ______ form.

1040X

At the end of the year, Yvonne received a form from her bank that reported income from her savings. That form is called a:

1099

George Franklin paid taxes of $4,375 on a taxable income of $32,000. What was his average tax rate?

13.7%

Which of the following is not an IRS service for tax assistance?

Ernst & Young Tax Guide

Which of the following is not a recent tax strategy change? - Mortgage interest deduction - Streamlined options for home office deduction - carry over of $500 of flexible spending account funds

Mortgage interest deduction; has been around for years.

All but how many states currently have some type of state income tax?

Seven

The calculation of your total tax due begins by using your taxable income with either tax tables or a tax schedule.

True

If you file Form 4868 to obtain an automatic extension on filing your forms, you must pay your estimated taxes owed or face_______

a penalty for being just one day late

Real estate taxes and ______ are tax deductible by the homeowner.

mortgage interest

True or false: If you owe $10,000 in taxes but have paid $8,000 in withholding payments and $1,900 in estimated payments, you will have a refund.

False; You will still owe $100 ($10,000 owed minus $9,900 total payments made).

All of the following are sources of income except: -Interest earned on savings. -Commissions. -dividends -salary -social security taxes

social security taxes

____________ income is the net amount of income, after considering allowable deductions, on which tax is computed.

taxable

Which of the following taxes are deductible for the person/family paying them? - Real estate property taxes - Inheritance taxes - estate taxes - state income taxes

-Real estate property taxes -State income taxes Why not estate? Estate taxes are paid from the assets of the deceased; the deceased does not file an income tax return, but the estate files a return in that year.

Two possible tax planning activities for April are filing the tax return by April ________________ and, if necessary, filing for an automatic____________

15th; extension

Financial experts recommend a debt/payments ratio of less than ____ of take-home pay.

20%

If you are in the 28% tax bracket and owe $20,000 on $100,000 of taxable income, your average tax rate and marginal tax rate would be, respectively:

20% for average and 28% for marginal Why? The average tax rate is $20,000 divided by $100,000, which is 20%. The marginal tax rate is given - it is the "tax bracket."

Given the following information, calculate the net worth: Assets = $8,000 Cash inflows = $6,000 Cash outflows = $4,500 Liabilities = $5,000

3,000 8,000-5,000

The simplest type of IRS audit is the ___________ audit. This is taken directly from the text

Correspondence

Which of the following ratios indicates the amount of a person's earnings that goes for payments for credit cards, auto loans, and other debt (except mortgage)?

Debt-payments ratio

Which tool provides options for checking your refund status, requesting tax records, locating free tax prep help, and accessing other interactive tools?

IRS2Go App

Which statement best describes how taxpayers pay their taxes to the IRS?

It is a pay-as-you-go system utilizing withholding of tax from paychecks or making estimated payments.

The tax rate on your next dollar of taxable income is called the:

Marginal tax rate; The average tax rate is the tax owed divided by taxable income. The marginal tax rate is the tax on the next dollar of income, or the "tax bracket."

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?

Married, filing a joint return

As "Tax Freedom Day" came in mid-April, it means that the portion of the year people work to pay their taxes is represented by January 1 to:

Mid-April

Your ______ income is the basis for computing the amount of tax owed.

Taxable

True or false: A tax credit is an amount subtracted directly from taxes owed.

True

True or false: While municipal bonds pay a lower rate of interest than other types of bonds, the after-tax income may be higher than other types of bonds.

True; Because the interest is tax free, the after-tax income might be higher than corporate bonds, especially for high income tax payers

If you have made estimated quarterly payments totaling $4,000 and your annual taxes owed total $3,700, then which of the following is true?

You will receive a refund of $300; $4,000 paid minus $3,700 owed equals a $300 refund.

Which of the following is NOT a deductible tax? - excise tax - state and local income taxes - personal property taxes - Real estate taxes on your house

excise tax

The two main types of taxes on wages and salary are federal and state ______ tax and Social Security tax.

income

Medical costs, taxes, and interest are all examples of___________deductions that are subtracted from adjusted gross income.

itemized

A personal balance sheet reports:

items owned, amounts owed, and net worth.

Tax avoidance means using ____________ strategies to reduce taxes, while tax _________ involves using illegal means to lower tax liability

legitimate; evasion

According to Tax Service Warnings, who is responsible for supplying accurate and complete information for completing a tax return?

taxpayer

A person would file as head of household if he or she is:

unmarried with a dependent child

A budget system that can be kept on notebook paper or accounting paper is called a(n):

written budget

A tax that would require all taxpayers regardless of income level to pay the same percentage is:

Flat tax

Using the following table, calculate the taxes for an individual with taxable income of $45,000.

$7,375 Explanation Taxes = (10% × $8,500) + {15% × ($34,500 - $8,500)} + {25% × ($45,000 - $34,500)} = $850 + $3,900 + $2,625 = $7,375.

True or false: A tax deduction reduces tax liability directly, dollar for dollar.

False; A tax deduction reduces taxes indirectly by the amount of the tax rate. On the other hand, a tax credit would result in a direct dollar-for-dollar reduction.

True or false: The two main taxes on salary are income taxes and estate taxes.

False; Estate taxes are imposed on the value of a person's property upon death. The two main taxes on salary are income taxes and Social Security taxes.

Taxpayers pay income taxes either through payroll __________ or through estimated tax __________

withholding; payments

Interest income from _______________ bonds issued by state and local governments is not subject to federal tax.

municipal

The amount you would have left if all assets were sold and all debts were paid in full is called your:

net worth

Which of the following do not offer for-profit tax services?

universities

Estate taxes are calculated on the ______ of a person's property at death.

value

Which of the following is true? - Joan, age 48, can contribute up to $7,000 in an IRA as of 2020 - Bill, age 58, can contribute up to $7,000 in an IRA as of 2020. - Bob, age 55, can contribute up to $5,000 in an IRA as of 2020. - As of 2020, the contribution limit for IRAs is $5,000 for workers under 50 years old.

- Bill, age 58, can contribute up to $7,000 in an IRA as of 2020. Why? The contribution limit is $6,000 for workers under 50 years old., Bill is over 50, so he can contribute up to $7,000.

A CPA and enrolled agents both offer tax services including return preparation while a(n) ______ will represent you in the case of an IRS lawsuit.

attorney

The difference between the amount budgeted and the actual amount received or spent is called the:

budget variance

Money management refers to:

day to day financial activities

Which of the following ratios shows the relationship between debt and net worth?

debt ratio

A tax ______ is an amount subtracted from adjusted gross income to arrive at taxable income.

deduction

A tax ______ reduces taxable income, thereby reducing the tax liability.

deduction

A tax imposed on the value of a person's property upon that person's death is called a(n):

estate tax

Which of the following is NOT a tax that most people pay?

federal taxes on possessions

As of 2020, the IRA contribution limit for workers under age 50 was $6,000.

True

True or false: There are five filing statuses for your tax return, and they are affected by marital status and number of dependents.

True; Filing status is affected by whether you are single, married, or head of household with dependents.

Which of the following is not legal? - Delay deductions if you think you will have a higher tax rate next year. - Take cash for work done and do not declare it as income. - Accelerate deductions this year if you expect a lower tax rate next year. - Delay the receipt of income if you expect a lower tax rate next year.

Take cash for work done and do not declare it as income.; this is tax evasion and is not legal... the rest are legal tax avoidance strategies

Select all the accurate observations below about different types of audits. - An office audit usually is the most complex type of audit. - A field audit involves an IRS agent visit to your home or office and is the most complex type of audit. - With an office audit, you must visit the IRS office to answer questions about your return. - The simplest audit is a correspondence audit.

- A field audit involves an IRS agent visit to your home or office and is the most complex type of audit. - With an office audit, you must visit the IRS office to answer questions about your return. - The simplest audit is a correspondence audit.

A budget deficit results when a person's or family's:

Actual spending exceeds planned spending.

All of the following are ways that households can increase their net worth except: -Increase their savings. -Reduce spending. -Increase value of investments. -Decrease their debt ratio. -Increase their debt ratio.

All EXCEPT increase debt ratio; lower debt ratio is better

Which month is the deadline to file your federal tax return or file an extension if necessary?

April

You can file Form 4868 to obtain a(n) ______ six-month extension on filing an income tax return by filing the proper forms with the IRS before the April 15 filing deadline.

Automatic

The tax based on the total tax due divided by taxable income is called the:

Average tax rate

A tax _________ directly reduces taxes owed

Credit

Which of the following best describes why the home can be a tax shelter?

Mortgage interest and real estate taxes are tax deductible, which helps lower the cost of home ownership.

Brenda plans to reduce her spending by $55 a month. What would be the future value of this reduced spending over the next 12 years? (Assume an annual deposit to her savings account and an annual interest rate of 6 percent.) Use Exhibit 1-B. (Round discount factor to 3 decimal places and final answer to 2 decimal places.)

Reduction in annual spending = Reduction in monthly spending × 12= $55 × 12= $660 Future value of spending reduction = Reduction in annual spending × Future value annuity factor= $660 × 16.870= $11,134.20

Use the following items to determine the total assets, total liabilities, net worth, total cash inflows, and total cash outflows. -Rent for the month$700 -Monthly take-home salary $2,235 -Spending for food$370 -Cash in checking account $460 -Savings account balance $1,900 -Balance of educational loan $2,220 -Current value of automobile $8,900 -Telephone bill paid for month $70 -Credit card balance $240 -Loan payment$90 -Auto insurance $240 -Household possessions $3,500 -Video equipment $2,375 -Payment for electricity $95 -Lunches/parking at work $185 -Donations$170 -Personal computer$1,250 -Value of stock investment $885 -Clothing purchase $115 -Restaurant spending$ 135

a. Total assets = $19,270 (Cash in checking accounts, Savings account balance, Current value of automobile, Household possessions, vid equipment, Home computer, Value of stock investment) b. Liabilities = $2,460 (educational loan balance, credit card balance) c. Net worth = $16,810 (assets-liabilities) d. Total cash inflows = $2,235 (monthly take-home salary) e. Total cash outflows = $2,170 (rent, spending for food, telephone bill, auto insurance, loan payment, electricity bill payment, parking/lunches at work, donations, clothing purchases, restaurant spending)

True or false: State income tax returns are always required to be filed after the federal return is due.

false; State income tax returns are usually required to be filed when the federal return is due.

Which of the following statements are true about software and taxes? - You can directly submit your tax return without preparing Form 1040 by using a spreadsheet program. - A spreadsheet program can help you keep track of income and expenses as the year plays out. - You can save time while preparing Form 1040 and its accompanying schedules. - Software packages such as H&R Block At Home and TurboTax help users prepare and file returns.

- A spreadsheet program can help you keep track of income and expenses as the year plays out. - You can save time while preparing Form 1040 and its accompanying schedules. - Software packages such as H&R Block At Home and TurboTax help users prepare and file returns.

True or false: If you itemize your deductions, you can deduct contributions made to charities and amounts paid for real estate taxes.

True; Charitable contributions and real estate taxes paid are common itemized deductions.

When taxes are added to a product for each stage in the manufacturing process, this is called:

VAT