Personal Financial Planning Ch 3 Taxes in Your Financial Plan

standard deduction

A set amount on which no taxes are paid.

inheritance tax

A tax levied on the value of property bequeathed by a deceased person.

tax deduction

An amount subtracted from adjusted gross income to arrive at taxable income.

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? Single Married, filing a joint return Head of household Qualifying widow or widower Married, but filing individually

Married, filing a joint return

earned income

Money received for personal effort, such as wages, salary, commission, fees, tips, or bonuses.

investment income

Money received in the form of dividends, interest, or rent from investments; also called portfolio income.

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

Ordinary income rates; capital gains rates

taxable income

The net amount of income, after allowable deductions, on which income tax is computed.

marginal tax rate

The rate used to calculate tax on the last (and next) dollar of taxable income.

tax evasion

The use of illegal actions to reduce one's taxes.

Jacob contributed $2,200 to charity within this past year, which qualifies for a tax deduction. Tucker saved $2,200 with a tax credit within this past year. Assume both Jacob and Tucker are in a 20% tax bracket. What is the difference between Tucker's tax credit and Jacob's tax deduction? $2,200 $1,760 $880 $440 $0

$1,760

If 350,000 people each receive an average refund of $1,750, based on an interest rate of 3 percent, what would be the lost annual income from savings on those refunds? Lost annual income $

$18,375,000 ------------- $1,750 x 3% = $52.50 x 350,000 = $18,375,000

The maximum that an individual can contribute to a Coverdell Education Savings Account each year is $1,000. $2,000. $3,000. $5,000. $15,500.

$2,000

Wendy Brooks prepares her own income tax return each year. A tax preparer would charge her $195 for this service. Over a period of 10 years, how much does Wendy gain from preparing her own tax return? Assume she can earn 3 percent on her savings. Use Exhibit 1-B. (Round time value factor to 3 decimal places and final answer to 2 decimal places.) Future value $

$2235

If 400,000 people each receive an average refund of $2,000, based on an interest rate of 3 percent, what would be the lost annual income from savings on those refunds? Lost annual income $

$24,000,000

Betty Sims has $48,000 of adjusted gross income and $7,680 of medical expenses. She will be itemizing her tax deductions this year. The most recent tax year has a medical expenses floor of 10 percent. How much of a tax deduction will Betty be able to take? Tax deduction $

$2880 -------------- 7,680 - (.10 x 48,000) = 7,680 - 4,800 = 2880

Grace saved $3,000 by using a tax credit. Assume Grace is in a 25% tax bracket. What is the amount of her tax credit? $330 $660 $1,500 $2,340 $3,000

$3,000

In 2014, taxable income was reduced by ______ for each exemption claimed. $1,000 $2,500 $3,950 $5,000 $10,000

$3,950

Using the following table, calculate the taxes for an individual with taxable income of $45,000. --------------------------- 10% up to $8,500 15% $8,500 - $34,500 25% $34,500 - $83,600 28% $83,600 - $174,400 33% $174,400 - $379,150 35% over $379,150 ---------------------------- $6,025 $7,375 $8,625 $20,900 $45,000

$7,375 ----------- 45,000 - 34,500 = 10,500 x 25% = 1,050 45,000 - 8,500 = 36,500 x 15% = 5,475 45,000 - 36,500 = 8,500 x 10% = 850 < ----------------------- > 1,050 + 5,475 + 850 = $7,375

According to the video, what is (are) the main goal(s) of tax planning relating to retirement and education planning? To provide essential resources for specific events in the future. To lower income during high tax bracket times and shift some income to low tax bracket times. To calculate the income necessary to fulfill minimum living requirements. A and B B and C

A and B A. To provide essential resources for specific events in the future. B. To lower income during high tax bracket times and shift some income to low tax bracket times.

exemption

A deduction from adjusted gross income for yourself, your spouse, and qualified dependents.

tax audit

A detailed examination of your tax return by the Internal Revenue Service.

excise tax

A tax imposed on specific goods and services, such as gasoline, cigarettes, alcoholic beverages, tires, and air travel.

estate tax

A tax imposed on the value of a person's property at the time of death.

exclusion

An amount not included in gross income.

tax credit

An amount subtracted directly from the amount of taxes owed.

Individuals can file their federal taxes using all of the following except Use tax preparation software to file online. Use tax preparation software to print and mail. Electronic filing using Free File Alliance. Deliver in person. All of these can be used.

Deliver in person.

A tax imposed on the value of a person's property at the time of death is called a(n) Estate tax. Excise tax. Income tax. Real estate property tax. Sales tax.

Estate tax.

adjusted gross income (AGI)

Gross income reduced by certain adjustments, such as contributions to an individual retirement account (IRA) and alimony payments.

passive income

Income resulting from business activities in which you do not actively participate.

tax-exempt income

Income that is not subject to tax.

tax-deferred income

Income that will be taxed at a later date.

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? 401(K) Deficit Individual Retirement Accounts (IRA's) Keogh Plan Roth Individual Retirement Plans (Roth IRA)

Keogh Plan

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

Large Family Credits

capital gains

Profits from the sale of capital asset such as stocks, bonds, or real estate.

________________________ is the use of illegal actions to reduce your taxes, where as ________________________ is the use of legitimate methods to reduce one's taxes. Tax escaping; tax prevention Tax prevention; tax escaping Tax evasion; tax avoidance Tax avoidance, tax evasion Tax evasion; tax prevention

Tax evasion; tax avoidance

Assume your other itemized deductions exceed the standard deduction amount. On December 30, you decide to make a $2,300 charitable donation. a. If you are in the 27 percent tax bracket, how much will you save in taxes for the current year? Tax savings $ b. If you deposit that tax savings in a savings account for the next seven years at 9 percent, what will be the future value of that account? Use Exhibit 1-A. (Round time value factor to 3 decimal places and final answer to 2 decimal places). Future value $

Tax savings $621 Future value $1,135

According to the video, what is the biggest advantage for the Coverdell over the 529 plans when examining education plans? The education expenses that the Coverdell can cover range from K - 12 through college or post secondary education. The education expenses that the 529 plans can cover range from K - 12 through college or post secondary education. The education expenses are always cheaper with the Coverdell plan. There are more annual limits for contributions under the 529 plan. There are more income limits for qualifying to make contributions under the 529 plan.

The education expenses that the Coverdell can cover range from K - 12 through college or post secondary education.

You may be required to make estimated tax payments if You receive a paycheck with taxes withheld. You do not have interest income from savings. You have no pension payments. You are an independent contractor. You have no royalties.

You are an independent contractor.

Assume your other itemized deductions exceed the standard deduction amount. On December 30, you decide to make a $2,200 charitable donation. a. If you are in the 27 percent tax bracket, how much will you save in taxes for the current year? Tax savings $ b. If you deposit that tax savings in a savings account for the next six years at 7 percent, what will be the future value of that account? Use Exhibit 1-A. (Round time value factor to 3 decimal places and final answer to 2 decimal places.) Future value $

a. $594 b. $891.594 round = $892

Mark is divorced from his wife Sharon. Mark pays alimony to Sharon and ____________ this amount on his tax return. If Mark paid child support, he could ___________ this amount on his tax return. Doesn't report; not deduct cannot deduct; not deduct can deduct; deduct can deduct; not deduct cannot deduct; deduct

can deduct; not deduct

If a person in a 33 percent tax bracket makes a deposit of $4,000 to a tax-deferred retirement account, what amount would be saved on current taxes? Tax savings $

$1,320

Noor Patel has had a busy year! She decided to take a cross-country adventure. Along the way, she won a new car on the "Price Is Right" (valued at $13,000) and won $700 on a scratch-off lottery ticket (the first time she ever played). She also signed up for a credit card to start the trip and was given a sign-up bonus of $100. How much will she have to include in her federal taxable income? Amount to be included in the federal taxable income $

$13,800

Noor Patel has had a busy year! She decided to take a cross-country adventure. Along the way, she won a new car on the "Price Is Right" (valued at $13,800) and won $400 on a scratch-off lottery ticket (the first time she ever played). She also signed up for a credit card to start the trip and was given a sign-up bonus of $150. How much will she have to include in her federal taxable income? Amount to be included in the federal taxable income $

$14350

Dean initially invested $3,150 in a company and has held this investment for four years. Dean sold the investment after four years for $5,575. Assuming he is in the 25% tax bracket, what is his capital gains tax? $836.25 $787.50 $606.25 $472.50 $363.75

$363.75 ------------------------ Gain on Investment = Selling Price - Initial Cost = $5,575 - $3,150 = $2,425 Capital Gains Tax = Gain on Investment x Tax Rate on Long Term Capital Gains = $2,425 x 0.15 = $363.75

Mikey initially invested $2,400 in a company and has held this investment for 3 years. He sold the investment after 3 years for $4,950. Assuming he is in the 39.6% tax bracket, what is his tax savings with capital gains rates? $316.80 $480.00 $499.80 $510.00 $1,009.80

$499.80 ------------------------ Gain on Investment = Selling Price - Initial Cost = $4,950 - $2,400 = $2,550 Ordinary Income Tax = Gain x Tax Rate = $2,550 x 0.396 = $1,009.80 Capital Gains Tax = Gain x Tax Rate on LT Capital Gains = $2,550 x 0.20 = $510 Tax Savings = Ordinary Income Tax - Capital Gains Tax = $1,009.80 - $510 = $499.80

Retirees also have varying amounts of social security that is taxed based upon the amount of their income. In some cases, the difference can vary between _____ and _____ being taxed. 50%; 85% 40%; 75% 30%; 60% 20%; 65% 25%; 55%

50%; 85%

tax shelter

An investment that provides immediate tax benefits and a reasonable expectation of a future financial return.

itemized deductions

Expenses that can be deducted from adjusted gross income, such as medical expenses, real estate property taxes, home mortgage interest, charitable contributions, casualty losses, and certain work-related expenses.

A worker's primary goal should be to Pay his or her taxes using estimates for income and deductions. Pay no income taxes. Pay the average tax rate for people working in his or her industry. Pay his or her fair share of taxes while taking advantage of appropriate tax benefits. Pay no taxes of any type.

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

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

Taxpayer

tax avoidance

The use of legitimate methods to reduce one's taxes.

average tax rate

Total tax due divided by taxable income.

Reginald Sims deposits $4,000 each year in a tax-deferred retirement account. If he is in a 27 percent tax bracket, by what amount would his tax be reduced over a 15-year time period? Total tax savings $

$ 16200 ------------- $4,000 x 27% = $1,080 x 15yrs = $16,200

At the end of the year, Yvonne received a form from her bank that reported income from her savings. That form is called a 1040. 1099. W-2. W-4. Schedule A.

1099