Chapter 4 Quiz:Managing Income Taxes

The AVERAGE tax rate equals the MARGINAL tax rate for people in which of the following tax brackets; 10% and 15% 15% and 25% Correct! 10% 15% 25% This is true only for the 10% bracket. In all other brackets the average tax rate is less than the marginal tax rate.

10%

Suppose you currently make $50,000 per year in taxable income, but you are about to receive a raise. The rate at which the last dollar of your raise is taxed is called the: Adjusted tax rate New tax rate Average tax rate Correct! Marginal tax rate Eventual tax rate See page 117.

Marginal Tax Rate

For 2020, all of the following "adjustments" are commonly subtracted from a person's total income (up to certain limits) and therefore are not included in a person's adjusted gross income EXCEPT: Contributions to IRAs (Indivdual Retirement Accounts) Student loan interest Correct! Mortgage interest paid Moving expenses for members of the Armed Forces Penalties for early withdrawal of savings See pages 124 and 134.

Mortgage interest paid

Which of the following is not defined as part of gross income? Scholarship income spent on room and board Illegal income Correct! Gifts and inheritances Tips earned Capital gains

Gifts and inheritances

People talk about being pushed into the next (higher) bracket as though this is a bad thing. For individuals, $37,650 was the dividing line in 2016 between the 15% tax bracket and the 25% bracket. Imagine that you are single and, in 2015, your taxable income was $30,000, so you are used to thinking of yourself as being in the 15% tax bracket. But you are such a good employee that your company gave you a $10,000 end-of-the-year bonus. Your are worried, however, that the raise puts you in higher tax bracket. How much of your total income will be taxed at 25% rate? $2,350 $30,000 None of it $22,450 All $40,000 Only the amount about $37,650 is taxed at the 25% rate.

$2,350

Consider an individual who has a TAXABLE INCOME of $100,000. Using the table below, how much does he/she owe in taxes? In other words, what is his/her "tax liability" to the nearest thousand dollars? $21,000 $18,000 $35,000 $24,000 $28,000 Remember that only the amount above $91,550 is taxed at the 28% rate. That amount is $8,450. 28% of that is $2366. You add that to $18,558.75 to get $2092, or $21,000 when rounding to the nearest thousand.

$21,000

In 2016, a married couple (filing jointly) with a taxable income of $185,000 would have paid roughly $38,785 in federal income taxes. I calculated their tax liability using the table below. Their marginal tax rate was 28%. What was their AVERAGE tax rate (to the nearest percent). 18 Correct! 21 15 28 25 If the couple paid $38,785 in taxes on an income of $185,000, you divide the taxes into the income to get 21%. This is considerably lower than their marginal tax rate.

21

In the debate before passage of the Tax Cuts and Jobs Act of 2017, some political leaders proposed reducing the number of marginal tax brackets. In the end, the new law kept the same number of brackets as before (but with slightly lower marginal tax rates and boundaries for each bracket). How many many federal income tax brackets are there today and for the foreseeable future? 5 9 Correct! 7 3 1 See page 116.

7

After determining a person's (or household's) "taxable income," it is possible to calculate how much is owed ("tax liability"). But before the amount owed is fully determined, there are a few final things to consider. Which of the following describes an amount that is subtracted directly from the preliminary amount owed (a credit) for low-income working parents AND can result in a full tax refund even if a person doesn't owe any taxes (refundable)? Child tax credit Correct! Earned income credit Lifetime Learning credit Health care credit

Earned income credit

All of the following are categories of itemized deductions EXCEPT: Real estate property taxes paid Correct! Energy conservation expenses Medical and dental expenses Contributions to charity Mortgage interest paid See pages 126.

Energy conservation expenses

Which of the following persons is (are) practicing tax avoidance? Correct! Individuals who deducts state income taxes None of these Bartender who does not report all his tips All of these Plumber who does not report a barter transaction

Individuals who deducts state income taxes

Which of the following types of subtractions cannot be taken by a taxpayer if he or she itemizes deductions? Exclusions Tax credits Correct! Standard deduction Exemptions Adjustments to income

Standard deduction

Imagine that you are a married couple (filing jointly) and had a household taxable income of $100,000 in 2016. Here is the relevant tax table: Which of the following statements is TRUE? You pay 10% income on the first $75.301 and 25% on the remaining amount You pay 10% on the first $18,550 and 25% on the remaining amount of income You pay 15% income on the first $75,30169,000 and 25% on the remaining amount Correct! You pay 10% on the first $18,550 of income, 15% on the next $56,750, and 25% on the remaining income You pay 25% tax on your $100,000 income See Figure 4-1 on page 117.

You pay 10% on the first $18,550 of income, 15% on the next $56,750, and 25% on the remaining income