PF Ch 3 Practice Questions

You are preparing your own tax return. The least costly source for answering your questions would be IRS 800 numbers. private preparation service. tax accountant. tax lawyer. local post office.

IRS 800 numbers.

A tax deduction is more valuable than a tax credit.

false

As a single taxpayer with no dependents, one is generally eligible to file as "head of household."

false

Child support received is included in gross income.

false

Tax-deferred income is better than tax-free income.

false

____ income is gross income less tax deductions and payments for insurance and retirement savings. Take-home EBIT Adjusted gross Taxable Tax-exempt

Take-home

____ income is subject to federal taxes. Gross Adjusted gross Net Take-home Taxable

Taxable

A ____ would be most likely to have to pay estimated taxes. school teacher manager for a major industrial firm self-employed plumber union worker corporate attorney

self employed plumber

A capital gain is the result of selling an asset for less than its purchase price. holding an asset that has appreciated. selling an asset at the same price of purchase. selling an asset for more than its purchase price. none of these.

selling an asset for more than its purchase price.

In 2014, the total social security tax was 2.9%. 6.2%. 7.65%. 12.4%. 15.3%

15.3%

To qualify for the capital gain exclusion on a home sale, the seller must have resided in the residence for ___ of the previous 5 years. 1 2 3 4 5

2

State income taxes and real estate taxes are both itemized deduction items.

true

Tax avoidance is legal, tax evasion is illegal.

true

Tax credits are dollar-for-dollar reductions in taxes due.

true

The alternative minimum tax calculation includes in taxable income certain types of deductions otherwise allowed, such as state and local income and property taxes.

true

The alternative minimum tax is designed to ensure that individuals with many deductions and tax-shelter investments are paying their fair share of taxes.

true

The federal personal income tax is a progressive tax.

true

The main objective of tax planning is to maximize the amount of money you keep by minimizing the amount of taxes you pay.

true

The tax brackets (rates) and payments for married couples filing separately are now typically close to the same as for joint filers.

true

When a child qualifies as a dependent on her parent's return, the child cannot take a personal exemption for herself.

true

You should itemize deductions when total itemized deductions exceed the standard deduction.

true

Personal exemptions are deductions from AGI based on the number of persons supported by the taxpayer's income.

true

Qualified dividends are taxed at the same rates as long-term capital gains.

true

You made an error when you filed your tax return last year. You can correct this error by filing Form 1040ES. 1040X. 1040E. Schedule A. Schedule D.

1040X.

Barney Smith has only one itemized deduction item, the $4,400 he gave to his church. His standard deduction this year is $6,200, and he is in the 15% marginal tax bracket. How much will his contribution to the church save Barney in taxes this year? $4,400 $3,000 $660 $450 $0

$0

A taxpayer can file for an automatic extension of ___ months. 2 4 6 9 12

6

____ would be considered taxable income. An inheritance from your grandmother's estate A gift from your aunt Child support payments Alimony received A tuition scholarship

Alimony received

Which of the following offer tax preparation services? National and local tax services Certified public accountants (CPAs) Enrolled agents (EAs) Tax attorneys All of the above

All of the above

____ would not be considered taxable income. Child support payments Proceeds from an employer retirement plan Dividend income a and b a, b, and c

Child support payments

A tax audit is a(n) IRS revision of a previously filed return. IRS attempt to verify the accuracy of a return. IRS charge of illegal action. U.S. Tax Court action. U.S. Tax Court decision.

IRS attempt to verify the accuracy of a return.

Who would be most likely to have to pay estimated taxes? Independent consultant Teacher Corporate manager State worker State police officer

Independent consultant

Henry is married to Lillian, and they have two dependent children. Henry can legally file using which of the following filing statuses? Single Married filing jointly Head of household Qualifying widow Any of the above

Married filing jointly

Ben and Jack both earned $60,000 this year. Ben (age 30) is married with two children, and Jack (age 61) is single with no dependents. Which of the following is true regarding the amount of Social Security taxes they will pay? They will pay the same amount of Social Security taxes. Ben will pay less Social Security taxes because he is married. Ben will pay less Social Security taxes because he has children. Jack will pay less Social Security taxes because he is single. Jack will pay less Social Security taxes because he is over age 60.

They will pay the same amount of Social Security taxes.

On which of the following types of income would you normally have income tax withheld? Tips Interest Dividends Capital gains Self-employment income

Tips

Pete and Pam are married with four dependent children. Pete and Pam can legally file using which of the following filing statuses? married filing separately married filing jointly head of household a or b a, b, or c

a or b

For tax purposes, head of household refers to the person with the larger income when a couple is filing a joint return. a single individual with dependents. a single individual who owns a home. the spouse who has the only income for a couple filing a joint return. a widow(er) with no dependents but with debts from death of spouse three years earlier.

a single individual with dependents.

The standard deduction is a blanket deduction that depends on the taxpayers filing status age vision all of the above.

all of the above

You have no employer provided pension plan; your IRA contributions are treated as an adjustment to gross income. an additional personal exemption. part of the standard deduction. an itemized deduction. a tax credit.

an adjustment to gross income.

You have no employer provided pension plan; your IRA contributions are treated as an adjustment to gross income. an additional personal exemption. part of the standard deduction. an itemized deduction. a tax credit.

an adjustment to gross income.

Which of the following are legal methods of reducing your current tax liability? not reporting taxable income you receive investing in a tax deferred annuity shifting income to your children writing off deductions above the actual amount(s) spent b and c

b and c

The tax rate on capital gains for most people is the same as on regular income. dependent on the time the asset was owned. dependent on the amount of profit earned. higher than the rate on regular income. none of these.

dependent on the time the asset was owned.

Russ and Lois got married December 30. Although they were single for most of the year, they can legally file as married taxpayers in the year of the wedding.

true

Tax practitioners that are federally licensed are called certified public accountants certified financial planners tax attorneys enrolled agents none of the above.

enrolled agents

A long-term capital gain is taxed at the same rate as ordinary income.

false

Federal income taxes paid can be deducted the following year.

false

Gifts received from family and friends are included in gross income.

false

Gross income minus tax exempt income equals adjusted gross income.

false

If you are married, you can legally file a single tax return.

false

Income shifting refers to the process of transferring income from the taxpayer to the IRS.

false

Marginal tax and average tax rate refer to the same thing.

false

Most any wage earner can open an IRA and contribute up to $7,500 of tax-deferred income each year to the account.

false

Most major software providers have free online versions for preparing federal taxes for all taxpayers.

false

Persons who work for more than one employer in any year will owe more social security taxes than if all their income was earned from a single employer.

false

Social security taxes are deducted from all wages and salaries earned in a year.

false

The Internal Revenue Service is responsible for making changes to the federal income tax codes.

false

The federal personal income tax is a flat tax.

false

The regular income tax filing deadline is April 1 of each year.

false

The tax year corresponds to the April 15 filing deadline, with a new tax year beginning April 16th.

false

You should itemize deductions when total itemized deductions are less than the standard deduction.

false

Your marital status will affect the amount of social security you must pay in a year.

false

Social security taxes are paid on earned income but not on investment income.

true

All major software providers have online versions for preparing federal taxes. This software is free to all tax filers free to qualified tax filers for a fee for all tax filers available on a free trial to all tax filers available on a free trial to qualified tax filers

free to qualified tax filers

Your take-home pay is what you are left with after subtracting withholdings from your gross earnings. net earnings. taxable income. adjusted gross income. tax exempt income.

gross earnings.

Which of the following is not one of the three basic categories for individual income? active income passive income gross income portfolio income

gross income

The federal government gets the majority of its revenue from the ____ tax. sales property excise income estate

income

Your income tax withholding is dependent on income level and deductions. deductions and age. income level and number of withholding allowances. number of withholding allowances and deductions. number of withholding allowances and dependents.

income level and number of withholding allowances.

You would typically not include ____ in your gross income. wages and salaries life insurance death benefit payments interest and dividends pension income gambling winnings

life insurance death benefit payments

Itemized nonbusiness expenses do not include charitable contributions. state income taxes. residential mortgage interest. medical expenses. life insurance premiums.

life insurance premiums.

You have owned and lived in your home for 8 years. Now you have received an excellent promotion, but you will have to sell your home and move to another community. You expect to realize a capital gain of $100,000 on the home's sale. The capital gain will be taxable as ordinary income. be taxable at the 15% tax bracket. be taxable at the appropriate long-term capital gains rate. not be taxable because the home was your principal residence. not be taxable because this is a job-related move.

not be taxable because the home was your principal residence.

The federal income tax is integrative. regressive. progressive. flat rate. none of the above.

progressive

Mandi and Thomas were married and had one child, age 7. Mandi died in 2013 leaving Thomas a single parent. In 2014, the most favorable filing status for Thomas would be single. married filing separately. head of household. qualifying widow(er). any of the above.

qualifying widow(er).

Molly and Jason were married. Their only "dependent" was Spot, their black standard poodle. Jason died in 2013. Assuming she does not remarry, in 2014 the only legal filing status for Molly would be single. married filing separately. head of household. qualifying widow(er). any of the above.

single.

If you do not wish to itemize deductions, you can use the pay-as-you-go amount. bracket deduction. standard deduction. exemption. withholding allowance.

standard deduction.

A progressive tax system is one in which higher-income people pay ____ than lower-income people. a higher dollar amount in taxes tax at a higher rate a lower dollar amount in taxes tax at a lower rate tax at the same rate

tax at a higher rate

Your average tax rate is your adjusted gross income divided by tax withheld. tax liability divided by gross income. tax liability divided by taxable income. taxable income divided by tax withheld. gross income divided by tax refund.

tax liability divided by taxable income.

Tax credits reduce your tax liability. adjusted gross income. tax refund. tax withholding. taxable income.

tax liability.

Jackson is a 25-year-old college student whose parents contribute to his support. His parents may claim him as a tax dependent in 2014 as long as they contribute more than half of his support for the year. he is under 30. he makes under $5,000. a and c. a, b, and c.

they contribute more than half of his support for the year.

Mike is a 19-year-old college student who earned $10,000 and spent it all on his support during the year. His parents may claim him as a tax dependent as long as they contribute more than half of his support for the year. he is under 21. he makes under $12,000. he lives at home. all these things are true.

they contribute more than half of his support for the year.

A spouse and spouse is the only couple combination that can file a joint return.

true

Adjustments to income will decrease your taxable income.

true

An investment must be owned over one year in order to qualify for long-term capital gains treatment.

true

Congress considers tax law changes throughout the year.

true

Dividends received from the stock you own will be taxable income.

true

Estimated tax payments must be made by those who do not have taxes deducted from their earnings.

true

If you are eligible to receive a tax refund, you will have to file a tax return to get the refund.

true

If you earn less than $15,000, you probably pay more in social security taxes than in federal income taxes.

true

If your AGI is less than $100,000 and you do not itemize deductions, the IRS will compute your taxes for you.

true

Mortgage interest and paid home property taxes are both itemized deduction items.

true

Municipal bond investments typically provide tax-free interest income.

true

Opening a traditional IRA would allow you to defer taxes on the earnings.

true