Chapter 4 Personal Finance

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

Which of the following would be included in gross income?

salaries, wages, commissions, dividends, interest, and profits from business

Health _______ accounts are designed to promote personal saving out of which workers can pay routine health care expenses while working and can pay for Medicare copayments and deductibles later, during retirement.

savings

For calculating your total tax due, your taxable income is to be used in conjunction with either tax tables or tax rate _________

schedule

A(n) ______ can be helpful in maintaining and updating income and expense data.

spreadsheet program

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

tax attorney

True or false: Income tax is calculated on income minus deductions and exemptions.

True

State and local income taxes are deductible for:

federal tax purposes

If you find that you have income or deductions that you did not report on your tax return, you should:

file a 1040X to amend the return

If you get a large tax refund, it is wise to:

pay off credit cards save it for retirement change your withholding amount

Taxpayers pay income taxes through:

payroll withholding and through estimated tax payments.

Real estate ______ taxes are based on the value of land and buildings.

property

examples of tax deductions

property taxes mortgage interest charitable contributions medical expenses

Which of the following taxes are deductible?

real estate property taxes state income 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?

$1760 ($2200 - $2200*0.2)

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?

$3000 (direct offset bc it's a tax credit)

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?

$363.75 (5575-3150)*(.15) -- 0.15 capital gains = 0.25 tax bracket

If 403,000 people each receive an average refund of $3,000, based on an interest rate of 4 percent, what would be the lost annual income from savings on those refunds? Note: Do not round intermediate calculations.

$48360000 ((403000*3000)*0.04))

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?

$499.50 ((4950-2400)*0.396) - (4950-2400)*.2)

As of 2021, the IRA contribution limit was ______.

$6,000

A premature withdrawal from a traditional IRA will result in taxable income and a penalty of _________ of the withdrawn amount.

10%

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

1040X

The second installment for estimated tax is due by June _____

15

Two possible tax planning activities for April are filing the tax return by April ____, and, if necessary, filing for an automatic six-month _____

15 extension

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%

Select all the accurate observations below about different types of audits.

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

Which of the following statements are true about software and taxes?

A spreadsheet program such as MS Excel can help you with your tax planning. A spreadsheet program can help you keep track of income and expenses as the year plays out. Software packages such as H&R Block At Home and TurboTax help users prepare and file returns.

Which of the following is a tax avoidance strategy?

Delay the receipt of income because you want to delay the payment of taxes until next year. Accelerate deductions to save taxes this year.

Taxable income is calculated as salaries minus adjustments, such as IRA contributions, Keogh retirement plan contributions, and alimony.

False

Which of the following tax activities must be completed by April 15?

File your federal tax return or file for an extension.

What are tax-free savings accounts into which people with high-deductible health insurance plans can place funds each year called?

HSAs

Which of the following tax activities must be completed by September 15?

Pay the third installment of estimated taxes.

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

True

_____ 15 is the due date for the third installment for estimated tax

September

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.

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 and To lower income during high tax bracket times and shift some income to low tax bracket times.

Target your tax planning efforts toward paying your fair share of taxes while taking advantage of tax benefits appropriate to your personal and financial situation.

True

Taxable income is derived by reducing gross income by certain adjustments, deductions, and exemptions.

True

True or false: A filing system stores records that help provide proof of payment of charitable expenses, medical expenses, and other itemized deductions

True

Investment interest expense is deductible up to ______.

an amount equal to investment income

Financial planners recommend that copies of home ownership documents should be kept for:

an indefinite period

On filing Form 4868, you can ______ a six-month extension on filing an income tax return by filing the proper forms with the IRS before the April 15 filing deadline.

automatically receive

Which of the following types of interest expense is not deductible?

automobile loan interest

Tax _________ means using legitimate strategies to reduce taxes, while tax __________ involves using illegal means to lower tax liability.

avoidance evasion

A premature withdrawal from an IRA may be subject to a tax penalty. What is the age considered "premature"?

before age 59 1/2

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.

can deduct not deduct

The positive difference between the purchase price of a stock and its sale price is called _______ _______

capital gains

examples of tax credits

child tax credits education credits energy credits foreign tax credits

The simplest type of IRS audit is the ______ audit

correspondence

a tax ______ is directly subtracted from taxes owed

credit

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

deduction

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

estate tax

Based on the following data, would Ann and Carl Wilton receive a refund or owe additional taxes? Note: Input the amount as a positive value. Tax Info: -adjusted gross income = $47370 -standard deduction = $25100 -child care tax credit = $100 -federal income tax withheld = $2110 -tax rate on taxable income = 10%

tax due, $17 (find taxable income = adjusted gross income -standard deduction --> multiply by tax rate --> subtract child care tax credit and federal income tax withheld)

taxable income equation

taxable income = gross salary + interest earnings + dividend income - standard reduction - adjustments to income

Would you prefer a fully taxable investment earning 12.8 percent or a tax-exempt investment earning 9.7 percent? (Assume a 24 percent tax rate.)

taxable investment 12.80 percent

Taking advantage of tax credits, deferring capital gains and accelerating capital losses, and considering tax-exempt investments are all strategies to lower income ______

taxes

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

universities

True or false: The contribution limit for an IRA (as of 2021) is $6,000 for workers under the age of 50.

True

The two main taxes on salary are income taxes and estate taxes.

False

True or false: Anyone can file as single status.

False

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 and estimated quarterly payments.

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?

Keogh Plan

You filed a Form 4868 and received a six-month extension on your taxes for 2018. Which of the following is true?

The filing will not postpone your payment liability, so you must pay your estimated payment liability by April 15, 2019.

True or false: Adjusted gross income is gross income reduced for such things as IRA contributions and alimony payments (if deductible).

True

True or false: Married, filing separate returns require that each spouse is responsible for his or her own income tax.

True

True or false: Income includes only those earnings that you are actively involved in earning, such as salaries and income from managing a business.

false

Generally, you should keep your tax records for at least three years after filing your return. However, you may be held responsible for providing back documentation:

for up to seven years

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

income

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

itemized

You calculate taxable income by reducing gross income by adjustments, exemptions, and standard or _____ deductions

itemized

You calculate taxable income by reducing gross income by adjustments, exemptions, and standard or ______ deductions.

itemized

Real estate property taxes are a major source of revenue for ______.

local governments

One way to reduce your tax liability is to:

maximize contributions to tax-deferred retirement programs.

Interest income from ___________ bonds, which are issued by state and local governments, is not subject to federal income taxes.

municipal

On average, the portion of a person's earnings that goes to taxes is ______.

one-third

Investments held for less than one year will be taxed at ___________________________, whereas investments that have been held for over one year are taxed at ____________________________.

ordinary income rates capital gains rates

Adjusted gross income is gross income ______ by IRA contributions, alimony, and other adjustments.

reduced

When calculating total tax due, ______ are subtracted

tax credits

When calculating total tax due, ______ are subtracted.

tax credits

True or false: Travel expenses can be documented in a daily log with records of mileage, tolls, parking fees, and lodging costs

true

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

value