Finance chapter 3
FSAs lower taxes because they allow workers to put ______ dollars into employer and government sponsored programs.
pretax
Which of the following must file a federal tax return assuming their income exceeds a certain amount?
Citizens of the United States Residents of the United States Citizens of the United States who reside in Puerto Rico
True or false: If you itemize your deductions, you can deduct contributions made to charities and amounts paid for real estate taxes.
True
Taxes on earnings that fund old age, survivor, and disability insurance benefits are called:
social security taxes
A(n) ______ tax is calculated on the value of property bequeathed by a deceased person.
inheritance
Janet is completing her federal income taxes for the year and has identified the amounts listed here. How much can she rightfully deduct? (Assume itemized deductions) AGI: $42,000 Medical and dental expenses: $1,100 State income taxes: $1,000 Mortgage interest: $7,000 Qualified charitable contributions: $1,250
9250
The tax rate that is used to calculate the tax on the last (or next) dollar of taxable income is:
a marginal tax rate.
The calculation of your total tax due begins by using your taxable income with either tax tables or a tax schedule.
true
If Jack was in a 25% tax bracket and received a $1,000 tax deduction, by how much would his taxes be reduced?
$250
The maximum that an individual can contribute to a Roth IRA for the 2020 year is:
$6000
Janet is completing her federal income taxes for the year and has identified the amounts listed here. How much can she rightfully deduct? (Assume itemized deductions) AGI: $42,000 Medical and dental expenses: $1,100 State income taxes: $1,000 Mortgage interest: $7,000 Qualified charitable contributions: $1,250
$9,250 State income tax + Mortgage interest + Charitable contributions = $1,000 + $7,000 + $1,250 = $9,250.
If you want to amend (change) a previous return, you would need to file a ______ form.
1040X
The maximum that an individual can contribute to a Coverdell Education Savings Account each year is:
2000
Tax assistance sources include all of the following except:
All of these are tax assistance sources
The biggest difference between a(n) ___________IRA and a Roth IRA is that the Roth IRA contribution is not tax deductible, but after five years, its earnings are tax free.
Blank 1: traditional or regular
In which month should you decide whether to make payments that would be to your advantage for this year while determining whether you can defer income into the next tax year?
December
Which of the following is not a deductible tax?
Excise tax
True or false: Social Security taxes are calculated based on the value of your property to fund retirement benefits, while income taxes are imposed on wages.
False
Which of the following is not a deductible charitable donation?
Giving money to a homeless person on the street
Which of the following is not a recent tax strategy change?
Mortgage interest deduction
Which of the following are adjustments to gross income?
Penalties for early withdrawal of savings Keogh Plans IRA contributions
True or False: The IRS reviews all returns for completeness and accuracy.
True
True or false: A SEP-IRA plan is a tax-deferred retirement plan designed for self-employed people.
True
True or false: A tax credit is an amount subtracted directly from taxes owed.
True
Which statement best describes how taxpayers pay their taxes to the IRS?
automatic
A tax due on the purchase of gasoline is called a(n):
excise tax
Interest paid on a home equity loan is not deductible.
false
A tax that would require all taxpayers regardless of income level to pay the same percentage is:
flat tax
The tax that is a major source of revenue for local governments is called a(n):
real estate property tax
The tax that is a major source of revenue for local governments is called a(n):
real estate property tax.
Your ______ income is the basis for computing the amount of tax owed.
taxable
True or false: Income tax is paid during the year through withholding from paychecks and/or estimated payments.
true
All of the following can reduce your taxes today except investing in:
A Roth IRA
You should avoid which of the following when selecting a tax preparation service?
A preparer who earns a percentage of your refund
Which month is the deadline to file your federal tax return or file an extension if necessary?
April
Which of the following statements are true with regard to taxes on wages?
Income taxes are imposed by federal, some state, and some local governments to fund government operations. For most people, Social Security tax is 6.2 percent.
Making the final estimated tax payment from the previous year should be done in which month?
January
______ 15 is the deadline for filing a tax return for those who received the automatic six-month extension.
October
Using the following table, calculate the taxes for an individual with taxable income of $30,000. 10% Up to $9,875 12% $9,876-$40,125 22% $40,126-$85,525 24% $85,526-$163,300 32% $163,301-$207,350 35% $207,351-$518,400
Taxes = (10% × $8,500) + {15% × ($30,000 - $8,500)} = $850 + $3,225 = $4,075. (10% x 9875) + (12% x (40,125-9875)) = 987.5 + 3630 = $4617.5
Salary is an example of ______ income.
earned
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 six years
Two of the tax advantages of being self-employed are that you can deduct the cost of both health and certain ______ insurance as a business expense.
life
"Tax Freedom Day" represents how long the average person works to pay her or his taxes each year.
true
A filing system stores records that help provide proof of payment of charitable expenses, medical expenses, and other itemized deductions.
true
Cash and prizes won on television game shows are subject to both federal and state taxes.
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
Which of the following types of interest expense is not deductible?
Automobile loan interest
Which of the following is not an IRS service for tax assistance?
Ernst & Young Tax Guide
Federal income tax returns must typically be filed by April 1 of each year.
False
One of the best tax shelters is owning a car.
False
True or false: A marginal tax rate is found by dividing the amount of taxes owed by the taxable income.
False
Fred has been completing his own tax returns for years. The IRS has recently contacted him with questions about some of his prior returns. How many years back is he responsible for providing documentation?
6 years
Which is true regarding refund anticipation loans?
They frequently charge very high interest rates.
Which of the following statements are true about software and taxes?
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. You can save time while preparing Form 1040 and its accompanying schedules.
The two key tax planning activities of December are deciding whether to make payments that would be to your ____________for this year while deferring __________into the next tax year.
Blank 1: advantage or benefit Blank 2: income
Factors to consider when evaluating tax services include experience and training of the provider, the fee, and if the provider will represent you with the IRS in the case of a(n) ________.This is a one word answer.
Blank 1: audit
The actions the IRS will take if you make an error could include recalculating your tax, sending you a(n) ----- or refund
Blank 1: bill or invoice
Medical costs, taxes, and interest are all examples of ________ deductions that are subtracted from adjusted gross income.
Blank 1: itemized or itemize
Tax avoidance means using _________strategies to reduce taxes, while tax_________involves using illegal means to lower tax liability.
Blank 1: legitimate, legal, lawful, or legit Blank 2: evasion or evading
An example of tax-exempt income is the interest from most _____________bonds while an example of tax-deferred income is earnings on an IRA.
Blank 1: municipal , city, state, or muni
Adjusted gross income is the gross income after certain_________, such as IRA contributions, penalties for early withdrawal of savings, and alimony payments, have been made.
Blank 1: reductions, deductions, or subtractions
The biggest difference between a(n) __________IRA and a Roth IRA is that the Roth IRA contribution is not tax deductible, but after five years, its earnings are tax free.
Blank 1: traditional or regular
Taxpayers pay income taxes either through payroll_______or through estimated tax_________.
Blank 1: withholding, deductions, deduction, withholdings, or witholding Blank 2: payments, payment, or payout
As of 2020, the IRA contribution limit for workers under age 50 was $6,000.
True
If you are an employee, your employer should withhold a certain amount for taxes from your paycheck while self-employed individuals should make estimated tax payments.
True
Which of the following best describes why the home can be a tax shelter?
Which of the following best describes why the home can be a tax shelter?
Select all the accurate observations below about different types of audits.
With an office audit, you must visit the IRS office to answer questions about your return. 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.
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.
Gross income less adjustments to income equals:
adjusted gross income
Financial planners recommend that copies of home ownership documents should be kept for:
an indefinite period
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
A tax _______is a detailed examination of your tax return by the IRS.
audit
Annie was required to clarify or document minor questions about her tax form by a mail inquiry. She participated in a(n):
correspondence audit
A tax ______directly reduces taxes owed.
credit
A tax _____directly reduces taxes owed.
credit
People who claim large or unusual ______ increase their odds of getting audited.
deductions
An additional 10 percent penalty is usually imposed on premature withdrawals unless the withdrawn funds are on account of death or _______
disability
Fees, tips, and bonuses are forms of:
earned income
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
True or false: Most people who work as employees would need to make estimated tax payments.
false
When Tom calculates his taxable income, he should subtract his tax credits from adjusted gross income.
false
The tax rate on your next dollar of taxable income is called the:
marginal tax rate
Some employers provide a _________contribution in their 401(k) plans.
matching
Components of income include earned, investment, and __________income.
passive
The purpose of the W-2 is to:
report annual earnings and amounts paid in taxes
Interest on ______mortgages can result in a person paying the AMT.
second
Every U.S. citizen who earns above a certain amount must file a tax return. The amount is determined by filing _____ and other factors.
status
A tax credit has a full dollar effect in lowering taxes.
true
Travel expenses should be documented in a daily log with records of mileage, tolls, parking fees, and lodging costs.
true
A _______form is used to amend a previously filed tax return.
1040X
True or false: Many taxpayers view an annual tax refund as a "windfall," extra money they can count on each year.
true
John owed $10,000 in taxes on taxable income of $40,000. If John earns an additional $1,000, he will pay an additional $280. Therefore:
his average tax rate is about 25%
Which month is the deadline for filing a tax return for those who received the automatic six-month extension?
October
Match the following forms to their purpose:
W-2 salary, wages, and taxes withheld 1099 Interest, dividends, capital gains and losses, self-employment income, lump-sum payments. W-2P Pension income
Theft and __________ losses are financial losses resulting from federally declared disasters only.
casualty
Select all the reasons most planners advise people to contribute as much as possible to a SEP-IRA or 401(k) plan.
Increased value accumulates on a tax-free basis until funds are withdrawn. Contributions reduce adjusted gross income and therefore reduce taxes.
Which of the following best describes the purpose of the alternative minimum tax?
It is to assure that people who receive tax breaks pay a fair share of taxes.
Which of the following is generally true regarding how many taxpayers view an annual tax refund?
They view it as a "windfall", or extra money they can count on.
True or false: Casualty and theft deductions are allowed for financial losses resulting from federally declared natural disasters.
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
Adjustments to income include all of the following except:
charity contributions
Which of the following would have tax deductible interest?
home mortgage
Interest income from_____ bonds issued by state and local governments is not subject to federal tax.
municipal
Some tax disputes have gone to the U.S. Supreme Court.
true
Which of the following are tax-deferred investments?
Health savings plans IRA Tax-deferred annuities
Which of the following strategies if employed help to support your tax return in the event of an IRS audit?
Keep accurate records. Avoid common filing errors. Retain all your receipts and canceled checks.
As of 2020, a SEP-IRA permits contribution of 25 percent of the qualifying person's annual income, up to a maximum of $______.
57,000
In which month should you check to see if you have received all of your W-2 and 1099 forms so you can begin to organize and prepare your income tax return?
February
Which of the following is not a document included in an individual's income records?
1098 Reason: This is a form on which mortgage interest is reported
A tax planning activity for February would be to check to see if you have received all of your W-2 forms (salary and wages) and all of your _________ forms (interest and dividends) so you can begin to organize and prepare your income tax return.
1099
The tax based on the total tax due divided by taxable income is called the:
Average tax rate.
Two possible tax planning activities for April are filing the tax return by April ________, and, if necessary, filing for an automatic__________.
Blank 1: 15th, 15, or fifteenth Blank 2: extension
Which of the following is NOT an action that can reduce your taxes?
taking out a consumer loan
The maximum amount that an individual can give another in a year without being subject to estate taxes is:
14,000
The TCJA may allow you to deduct up to ______ percent of the income due to the Qualified Business Income deduction.
20
Two tax planning activities for the month of January include:
making the final estimated tax payment from the previous year record-keeping
Many employers provide a(n) ____________________ for their employees' 401(k) plans.
matching contribution
Joseph needs to complete his income taxes for the year. He has already calculated his adjusted gross income. What does he need to do next?
subtract his itemized deductions
Which of the following is not a strategy employed to help support your tax return in the event of an IRS audit?
Avoid earning dividend income from investments.
Which of the following is not a reason that tax planners suggest people contribute as much as possible to 401(k) plans?
Contributions to a 401(k) are never taxed
True or false: Social Security taxes are calculated based on the value of your property to fund retirement benefits, while income taxes are imposed on wages.
False Reason: Social Security is calculated based on wages and salaries
Which of the following events might cause a taxpayer to make estimated tax payments?
Lump-sum payments from pensions Significant earnings from savings or investments Earnings from independent contracting Royalties
Which of the following events might cause a taxpayer to make estimated tax payments?
Royalties Earnings from independent contracting Lump-sum payments from pensions Significant earnings from savings or investments
All but how many states currently have some type of state income tax?
Seven
Which of the following accurately describes the contribution limits of a 401(k) plan?
Up to $19,500 in 2020 for workers under the age of 50
Which of the following are tax-deferred investments?
IRA Health savings plans Tax-deferred annuities
Which of the following is an adjustment to income rather than an itemized deduction?
IRA contributions
Which of the following strategies if employed help to support your tax return in the event of an IRS audit?
Keep accurate records. Retain all your receipts and canceled checks. Avoid common filing errors.
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
Which of the following are examples of earned income?
Wages Salary Commissions
The simplest type of IRS audit is the ________audit. This is taken directly from the text.
Blank 1: correspondence, correspondance, or correspondent
All of the following can reduce your taxes today except investing in:
Roth IRA
True or false: Income tax is calculated on adjusted gross income less deductions and exemptions.
true
Which of the following is not a (possible) tax-deferred investment in that contributions to it do not reduce your taxable income for the current year?
Roth IRA
Investment income in the form of dividends, interest, and rent from investments is also called:
portfolio income
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
A recent tax strategy employed by the government is to allow employees with health care FSAs to carry over up to $ __________ of unused funds. (Enter the numerical value.)
500
If Mary owes the IRS $5,000 for her income taxes and is in the 15% marginal tax bracket, what would be her average tax rate if she had taxable income of $41,667?
About 12%
Which of the following is considered an indicator for an increased likelihood of being audited?
Filing large deductions
When taxes are added to a product for each stage in the manufacturing process, this is called:
VAT
At the end of the year, employees receive a ____ form that reports annual earnings and the amounts deducted for taxes from their employers.
W-2
When calculating federal income taxes, "gross income" includes all of the following except:
earned income credit
Which of the following is true?
Tim, age 55, can contribute a maximum of $26,000 to a 401(k) as of 2020.
A tax credit reduces the taxable income on which the tax liability is computed.
false
Contributions to a Keogh or 401(k) are tax-exempt.
false
True or false: State income tax returns are always required to be filed after the federal return is due.
false
When Tom calculates his taxable income, he should subtract his tax credits from adjusted gross income.
False should subtract deductions and not tax credits
A premature withdrawal from a traditional IRA will result in taxable income and a penalty of ______ percent of the withdrawn amount.
10
In 2021, the U.S. federal tax tables included tax rates of:
10% 12% 22% 24% 32% 35% 37%
Which of the following statements is not true regarding tax services?
Refund anticipation loans are always good for the taxpayer.
Which of the following is true?
Bill, age 58, can contribute up to $7,000 in an IRA as of 2020.
True or false: Most people who work as employees would need to make estimated tax payments.
False
The amount levied on the value of property bequeathed by a deceased person is:
Inheritance tax
Which of the following is not legal?
Take cash for work done and do not declare it as income.
Which of the following statements is true?
Tax-exempt income is not subject to tax while tax-deferred income will be taxed at a later date.
According to the text, the IRS reviews all tax returns for completeness and_______
accuracy
The _______minimum tax is structured to ensure that those who receive tax breaks also pay their fair share of taxes.
alternative
Which of the following are types of investment income?
Rent from investments Dividends Interest
Which of the following would potentially have tax-free withdrawals?
Roth IRA
Which of the following might trigger alternative minimum tax?
Significant amount of second mortgage interest High tax deductions for state taxes High tax deduction for local taxes
True or false: Adjusted gross income is gross income reduced for such things as IRA contributions and alimony payments.
True
Which of the following taxes are deductible for the person/family paying them?
State income taxes Real estate property taxes
Flexible spending accounts (FSAs) allow you to reduce your taxable _______ when paying for medical and _________care expenses. This is taken directly from the text.
Blank 1: income Blank 2: child or dependent
Which of the following do not offer for-profit tax services?
Universities
True or false: Only cash contributions to qualified charitable organizations are allowed as deduction.
False
True or false: A tax deduction reduces tax liability directly, dollar for dollar.
False Reason: 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.
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 of the following is not a document included in an individual's income records?
1098
A tax credit for working parents with taxable income under a certain amount is called _________-income credit.
earned
Which of the following is true regarding the use of software when preparing your Form 1040?
It can save you time.
When husband and wife file a joint return, the income of a husband and wife is:
added together.
The form a worker receives after the end of the year that reports the worker's annual earnings and amounts deducted for taxes is called a ______.
W-2
A tax ______ reduces taxable income, thereby reducing the tax liability.
deduction
Which of the following statements are true with regard to taxes on wages?
For most people, Social Security tax is 6.2 percent. Income taxes are imposed by federal, some state, and some local governments to fund government operations.
