Personal Finance Chapter 4 Part 2
For job related expenses to be deductible, they must exceed ______ of adjusted gross income.
2%
Charitable contributions greater than __ % of adjusted gross income are subject to limitations on deductibility.
20
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
A tax ------ is directly subtracted from taxes owed. This is a one-word answer.
credit
Payments for ______ taxes are due by April 15, June 15, September 15, and January 15 of the following year.
estimated
State and local income taxes are deductible for:
federal tax purposes.
Financial losses resulting from ______ are deductible for amounts exceeding AGI, less $100, if they are not reimbursed by an insurance company or other source.
federally declared disasters
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.
Which of the following are types of investment income?
rent interest dividends
The purpose of the W-2 is to:
report, document annual earnings and amounts paid in taxes.
Which of the following is not true about filing your income tax return online?
"Free file fillable forms" option is available for taxpayers whose income is below the income limitations for free file.
Which of the following tax activities should be completed in February?
Check to make sure you received all forms to complete your tax return.
True or false: A deduction for moving expenses is allowed if you move for any reason at least 25 miles away from your current residence.
False
The due dates for quarterly estimated payments are April 15, June 15, and September 15 of the current year and ______ 15 of the following year.
January
Which of the following is a tax-deferred investment?
a retirement plan
The simplest type of IRS audit is the ----- audit. This is a one-word answer.
Blank 1: correspondence
Interest income from ----- bonds, which are issued by state and local governments, is not subject to federal income taxes.
Blank 1: municipal
A tax ______ reduces taxable income, thereby reducing the tax liability.
deduction
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 25% approximately.
Medical costs, taxes, and interest are all examples of ------ deductions that are subtracted from adjusted gross income.
itemized
Qualifying widow or widower status is for an individual whose spouse has ----- within the past ------ years and who has a dependent. This is found in the discussion of who must file.
Blank 1: died, deceased, passed, or passed away Blank 2: 2 or two
Investment interest expense is deductible up to ______.
an amount equal to investment income
The second installment for estimated tax is due by June -----
15, 15th, or fifteenth
True or false: A tax-exempt investment generates income to be taxed in later years, while a tax-deferred investment produces tax-free income.
False
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: Only cash contributions to qualified charitable organizations are deductible.
False
As of 2018, the IRA contribution limit was
$5500
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.
Blank 1: 1099
True or false: A marginal tax rate is found by dividing the amount of taxes owed by taxable income.
False Reason: Correct. Marginal tax rate is the rate used to calculate tax on the last (and next) dollar of taxable income, whereas average tax is the total tax due divided by taxable income.
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.
True or false: The advantage of a Coverdell Education Savings Account is that the contribution of $2,000 per year is tax deductible.
False Reason: Correct. The contribution is not tax deductible, but the earnings are tax free.
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.
----- 15 is the due date for the third installment for estimated tax.
September
Select all the accurate observations below about different types of audits.
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.
True or false: A filing system stores records that help provide proof of payment of charitable expenses, medical expenses, and other itemized deductions.
True
True or false: Casualty and theft deductions are allowed for financial losses resulting from federally declared disasters only. Deductions are for the amount exceeding 10% of AGI, less $100, for losses not reimbursed by an insurance company or other source.
True
True or false: If you itemize your deductions, you can deduct contributions made to charities and amounts paid for real estate taxes.
True
True or false: The IRS reviews all returns for completeness and accuracy.
True
True or false: Underpayment penalties are usually avoided if you make sure you pay in, through withholding and estimated payments, an amount that is equal to or more than last year's tax liability or pay in at least 90% of the current year's tax liability.
True
True or false: W-2, W-2P, and 1099 forms make up the proof of income documents for a taxpayer.
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
Form 1098 reports ______.
mortgage interest
Real estate taxes and ______ are tax deductible by the homeowner.
mortgage interest
Many taxpayers have found filing:
online to be easier and less expensive than paper filing.
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.
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.
Which of the following do not offer for-profit tax services?
universities
Interest, dividend, and capital gain income are reported to the taxpayer and IRS by financial institutions on form ______. The taxpayer reports this to the IRS on a Schedule B form.
1099
A premature withdrawal from a traditional IRA will result in taxable income and a penalty of ______% of the withdrawn amount.
10
Two possible tax planning activities for April ----- are filing the tax return by April , and, if necessary, filing for an automatic six-month ---- .
Blank 1: 15th, 15, or fifteenth Blank 2: extension
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.
Which of the following best describes the purpose of the alternative minimum tax? This is found in the discussion of calculating taxes owed.
It is to assure that people who receive tax breaks pay a fair share of taxes.
Which of the following tax activities must be completed by June 15?
Pay the second installment of estimated taxes.
Which of the following tax activities must be completed by September 15?
Pay the third installment of estimated taxes.
You received your W-2 and it had the following information: Wages, tips, other compensation: $35,000, Federal income tax withheld: $4,500. You do your 1040 and find that your taxes owed are $3,500. Which of the following is true?
You will receive a refund of $1,000.
The tax rate that is used to calculate the tax on the last (or next) dollar of taxable income is ______.
a marginal tax rate
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 (medical) and ______ insurance as a business expense.
life
True or false: Travel expenses can be documented in a daily log with records of mileage, tolls, parking fees, and lodging costs.
True
Which of the following expenses qualify to be deducted as job-related expenses if they total more than 2 percent of AGI?
Unreimbursed job travel Cost of required continuing education Union dues
Which of the following is not a wise financial decision regarding an income tax refund?
Use it to make an impulse purchase.
Salary and wages are reported on:
W-2 forms, while pension income is reported on W-2P forms.
Tax ----- means using legitimate strategies to reduce taxes, while tax ----- involves using illegal means to lower tax liability. (Enter only one word per blank.)
Blank 1: avoidance Blank 2: evasion
The actions the IRS will take if you make an error could include recalculating your tax, sending you a(n) ----- or refund, or, in a worst-case scenario, notifying you of a tax ---- . These are one-word answers.
Blank 1: bill or invoice Blank 2: audit
Mortgage interest is reported to you by your mortgage lender on form ------
1098
Investment income in the form of dividends, interest, and rent from investments is also called (found in discussion of types of income) ______.
portfolio income
Which of the following taxes are deductible?
real estate property taxes state income taxes
Two tax planning activities for the month of January include ______.
record-keeping making your final estimate quarterly payment for the previous year for income not covered by withholding
Adjusted gross income is gross income ______ by IRA contributions, alimony, and other adjustments.
reduced
Which of the following is (are) reported on the W-2?
salary taxes withheld wages
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
When calculating total tax due, ______ are subtracted.
tax credits
From a tax standpoint, which of the following is most beneficial?
tax-exempt investments
Moving expenses are deductible when a change in residence is associated with a new job that is at least ______ miles farther from your former home than your old main job location.
50
If you want to amend (change) a previous return, you would need to file a ______ form.
1040X
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. A spreadsheet program such as MS Excel can help you with your tax planning. Software packages such as H&R Block At Home and TurboTax help users prepare and file returns.
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 an -----
Blank 1: audit
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 deductible
Which of the following is a tax consequence of self-employment?
Business owners must pay self-employment tax.
Which of the following tax activities should be completed in December?
Decide if you can defer income to the following year Determine if you should make estimated payments for the next year
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.
Which of the following tax activities must be completed by April 15?
File your federal tax return or file for an extension.
Which of the following tax activities should be completed in January?
If you expect a refund, file your return for the previous year. Make your final estimated quarterly tax payment for the previous year by the 15th.
Which of the following are tax-deferred investments?
Keogh tax-deferred annuities Section 529 savings plans IRA
You did some independent contracting in 2018 that resulted in a tax liability of $1,000. You did not make estimated tax payments. Your withholding for 2018 was $2,500 and your total tax liability is $3,200. Your tax liability for 2017 was $2,100. Will you incur penalties as a result of your underpayment in 2018?
No, because your withholding is more than your tax liability for the previous year.
Which of the following is an indicator of a good tax preparation service?
Tax preparation is the main business activity.
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.
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: Married, filing separate returns require that each spouse is responsible for his or her own income tax.
True
True or false: The EIC is a credit that low-income working families can claim to lower their taxes or receive a check from the IRS.
True
True or false: The contribution limit for an IRA (as of 2018) is $5,500 for workers under the age of 50.
True
People who claim large or unusual deductions increase their chances of ______.
an audit
Financial planners recommend that copies of home ownership documents should be kept for:
an indefinite period.
People who claim a large or unusually high amount of ______ increase their odds of getting audited.
deductions
Very low-income workers can benefit from the ______.
earned income credit
Which of the following might trigger alternative minimum tax?
high tax deductions for state taxes high tax deductions for local taxes significant amount of second mortgage interest
