Personal Finance Chapter 4
To qualify for "head of household" you must
be single and have at least one dependent in your household
which of the following is true regarding the differing treatment of dividend and interest income for tax purposes
both interest income and dividend income are included in gross income to determine taxable income, but dividend income is taxed at lower rates
The advantage of this plan is:
contributions are made after-tax but all monies grow tax-free and are not taxed upon withdrawal if used for allowable college education expenses.
Knowledge of tax laws can help you conserve your income.
true
Deductible medical expenses may be itemized if they are
unreimbursed and in excess of 7.5% of AGI in 2018 or in excess of 10% AGI in 2019 or later.
The deduction:
varies according to your filing status.
Section 529 College Savings Plans:
were created to encourage parents to save money for their children's future college education expenses.
What does FICA stand for and who pays FICA?
Federal Insurance Contributions Act and these taxes are paid equally by the employer and the employee.
The knowledge of tax laws can help you
conserve your income, enhance your investments, protect the transfer of your wealth at your death
Daniel has a marginal tax rate of 24%. He suddenly realizes that he neglected to include a $1,000 tax credit. How would his taxes be affected? When Daniel includes this credit, his taxes will:
decrease by $1,000
A marginal tax bracket is the:
tax rate imposed on any additional (marginal) income earned. A progressive tax system means the higher an individual's income, the higher the percentage of income tax paid.
Your filing status affects
tax rates and standard deductions.
The purpose of income tax is to:
finance governmental programs and services.
Dorinda earned $112,000. How much did she pay in Social Security taxes?
112000 x .062= $6944
Hareem is single and contributed $4,000 to a Traditional IRA during 2018. His taxable income for the year after deducting the $4,000 and his standard deduction was $104,000. How much did Hareem's IRA contribution lower his tax liability?
4000 x .24 = $960
The federal tax system is administered by the:
Internal Revenue Service, a branch of the U.S. Treasury Department.
Compute Lana's 2018 tax liability, using the tax table if she is single and earned $76,500 in wages. She will take the standard deduction. Assume her adjusted gross income is the same as her earned income.
Lana's tax liability is 76500- 12,000=64500 $4,453.50 + ($64,500 - $38,700) * 22% = $10129.5
What is Medicare? How much do you pay in Medicare taxes?
Medicare is a government health program that covers people 65 years of age and older by making payments to their health care providers. The Medicare tax is equal to 1.45% of your salary.
How is mortgage interest treated for tax purposes? How does it differ from auto loan interest?
Mortgage interest is deductible if you itemize. In contrast, auto loan interest is not deductible.
When Larry filed his taxes he forgot to include $2,500 in cash income he earned painting a friend's house. He was going through his checking account records and noticed the cash deposit and realized his mistake.
Should Larry ignore his mistake or file an amended return? Why or why not? Larry should amend his return and pay the legal amount owed. If he does not file an amended return he is committing tax fraud. b. What are possible consequences of Larry ignoring the error? If Larry's oversight is discovered by the IRS, he will pay the tax owed plus penalties.
The two portions of FICA are:
Social Security taxes, which are used to make payments to retirees, and Medicare taxes, which are used to provide payments to health care providers in the case of illness.
Brian makes $39,100 per year. How much can Brian expect to contribute to FICA taxes in 2018? How much will his employer contribute? (Hint: The total FICA tax rate is 7.65%.)
The amount Brian can expect to contribute to FICA taxes in 2018 is $2991.15 39100 x .0765= The amount his employer will contribute is $2991.15
Dawn's adjusted gross income in 2019 is $16,700. Dawn has $2,139 in unreimbursed medical expenses. How much can Dawn claim as an itemized deduction?
The amount Dawn can claim as an itemized deduction is medical expenses - AGI x 10% $1456.1
Emma's adjusted gross income in 2019 is $26,900. She has $2,006 in unreimbursed medical expenses. How much in medical expenses can Emma claim as an itemized deduction?
The amount Emma can claim as an itemized deduction for medical expenses is $0.00
Tracy is single and had adjusted gross income of $38,200 in 2018. Tracy also has the following items: .Unreimbursed medical expenses $3,239 State income tax 1,817 Interest expense (first mortgage) 2,526 Real estate tax 837 Interest expense—car loan 549 Interest expense—credit card 1,050 Gifts to charity 307 How much may Tracy claim as itemized deductions?
The amount Tracy may claim in itemized deductions is 38200 x .075=2758 medical expenses + state income tax + interest expense +real estate tax + gifts to charity= $5861
Stephen is in a 10 percent marginal tax bracket. In 2018, he sold stock that he had held for nine months for a gain of $1,300. How much tax must he pay on this capital gain? How much would the tax be if he had held the stock for 19 months?
The amount of tax he must pay on this capital gain is 1300 x .10= $130 If he had held the stock for 19 months, the tax would be $130
Alys makes $630 per week. How much will be withheld from her weekly check for Social Security taxes? Medicare taxes? Total FICA taxes? (Hint: The Social Security tax rate is 6.20% and the Medicare tax rate is 1.45%.)
The amount withheld from her weekly check for Social Security taxes is 630 x .062= $39.06 The amount withheld from her weekly check for Medicare taxes is 630 x .0145= $9.14 The amount withheld from her weekly check for total FICA taxes is 39.06 + 9.14= The amount withheld from her weekly check for total FICA taxes is $48.2
Daniel has a marginal tax rate of 22% and itemizes his deductions. He suddenly realizes that he neglected to include a $1,000.00 tax deduction. How will this oversight affect his taxes? When Daniel includes this overlooked deduction, his taxes will:
decrease by $220.00 .22 x 1000=
Daniel has a marginal tax rate of 24% and itemizes his deductions. He suddenly realizes that he neglected to include a $1,560.00 tax deduction. How will this oversight affect his taxes? When Daniel includes this overlooked deduction, his taxes will:
decrease by $374.40.
Which of the following is not a tax filing status option?
divorced
Emily and Paul are married and filed a joint return for this year. In 2018, the standard deduction for their filing status is $24,000. They have the following itemized deductions: Medical bills above the 7.5% limit $718 Mortgage Interest 11,279 State income taxes 2,738 Charitable contributions 572 Should Emily and Paul itemize their deductions or use the standard deduction?
emily and paul should use the standard deduction
A standard deduction is a
fixed amount deducted from adjusted gross income to determine taxable income.
Jerry is divorced and has two children who live with him. What filing status should Jerry claim on his tax return?
head of household
What are the five filing statuses? Briefly describe how your filing status is determined. What parts of the tax form are affected by your filing status?
head of household: single but providing care for a dependent married filing separately: married and filing different returns married filing jointly: married and filing on the same return single: not married qualifying widow or widower: lost spouse and caring for a dependent child
Capital gains occur when
if you sell investment assets for more than you paid
The following would be included in gross income:
income from a business and salaries
Nick and Nora are married and file jointly. In 2018. they have an adjusted gross income of $42,400. If they have itemized deductions of $23,600 and the standard deduction is $24,000, what is their taxable income?
income- standard deduction= 42400- 24000= 18400
interest income comes from
interest on investments such as bonds and CDs
It is important to understand the tax consequences of your financial decisions because it can help you:
to minimize your tax liability and ultimately increase your level of wealth.
Different tax brackets are associated with each filing status such as single, married filing jointly, and head of household.
true
Medicare taxes are 1.45% of your salary, regardless of the salary amount.
true
The Tax Cuts and Jobs Act of 2017 changed the standard deduction for married taxpayers filing joint returns to $24,000.
true
There is no Social Security tax on income beyond a certain level.
true
Jauna made $178,200 in salary during 2018. How much were her FICA withholdings for that year? (Note: the Social Security tax component of FICA is capped at $128,700.)
Jauna's Social Security tax withholding is 128700 x .062= $7979.4 Jauna's Medicare tax withholding is 178200 x .0145= $2583.9 Jauna's total FICA tax withholding amount is 7979.4 + 2583.9 $10563.3
