Chapter 3

Which of the following do not offer for-profit tax services?

Universities

A tax Blank______ reduces taxable income, thereby reducing the tax liability.

deduction

Estate taxes are calculated on the ______ of a person's property at death.

value

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

Interest income from ____________ bonds issued by state and local governments is not subject to federal tax.

Blank 1: municipal

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

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

When taxes are added to a product for each stage in the manufacturing process, this is called:

VAT

If you want to amend (change) a previous return, you would need to file a ______ form.

1040X

The simplest type of IRS audit is the ______________ audit. This is taken directly from the text.

Blank 1: correspondence, correspondance, or correspondent

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.

Which of the following is not a recent tax strategy change?

Mortgage interest deduction

Underpayment of taxes due to negligence or fraud can result in penalties of ________ percent.

50 to 75

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.

Which of the following is true?

Bill, age 58, can contribute up to $7,000 in an IRA as of 2020.

A _______________ form is used to amend a previously filed tax return.

Blank 1: 1040X or 1040-X

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.)

Blank 1: 500

Which of the following is not an IRS service for tax assistance?

Ernst & Young Tax Guide

True or false: A tax deduction reduces tax liability directly, dollar for dollar.

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: State income tax returns are always required to be filed after the federal return is due.

False

Which of the following is true regarding automatic extensions by filing Form 4868?

Filing for an automatic extension extends your deadline for filing by six months.

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 true regarding the use of software when preparing your Form 1040?

It can save you time.

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 or making estimated payments.

Tax planning starts with which of the following?

Knowing current tax laws

Which of the following are the filing status categories for federal income tax purposes?

Married, filing joint return Single Head of household Married, filing separate return Qualifying widow or widower

All but how many states currently have some type of state income tax?

Seven

Which of the following is not legal?

Take cash for work done and do not declare it as income.

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.

As of 2020, the IRA contribution limit for workers under age 50 was $6,000.

True

True or false: A tax credit is an amount subtracted directly from taxes owed.

True

True or false: Income tax is calculated on adjusted gross income less deductions and exemptions.

True

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.

When husband and wife file a joint return, the income of a husband and wife is:

added together.

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

You can file Form 4868 to obtain a(n) ______ six-month extension on filing an income tax return by filing the proper forms with the IRS before the April 15 filing deadline.

automatic

A tax _____________ directly reduces taxes owed.

credit

A tax imposed on the value of a person's property upon that person's death is called a(n):

estate tax

A tax that would require all taxpayers regardless of income level to pay the same percentage is:

flat tax

Real estate taxes and ______ are tax deductible by the homeowner.

mortgage interest

________________ income is the net amount of income, after considering allowable deductions, on which tax is computed.

taxable