Chapter 4

Note: If you print a Schedule A from the IRS site (see the Web Work) it will help with this question. _______________ is (are) fully deductible as an itemized deduction on Schedule A.

a) Mortgage interest on a primary residence

A taxpayer has $10,000 in charitable contributions and will be using Schedule A with no limitations. The taxpayer is in the 28% marginal tax bracket. The charitable contribution reduced taxable income and his/her taxes by:

Taxable income is $10,000 lower; taxes reduced by $1,500.

Note: If you print Form 1040 & Schedule A from the IRS site (see the Web Work) it will help with this question. A couple (both age 35) is qualified to take a $12,700 standard deduction. They have adjusted gross income of $90,000 and the following items: Qualifying medical expenses = $11,000 Home mortgage interest = $10,000 Property taxes = $2,000 Gifts to charity = $1,000 With respect to their deductions on Form 1040 page 2:

Their itemized deductions are $15,000, thus they should use Schedule A..

A tax credit is an amount subtracted directly from the amount of taxes owed. T/F

True

Note: If you print a Form 1040 from the IRS site (see the Web Work) it will help with this question. An example of an adjustment that is subtracted from gross income to compute "adjusted gross income" or "AGI" is:

IRA contributions (traditional IRA)

An IRA, Keogh plan, and 401(k) plan are examples of: A. tax-exempt retirement plans. B. tax-deferred retirement plans. C. capital gains. D. self-employment insurance programs. E. job-related expenses that are tax deductible.

B

Interest earnings of $1,600 from a taxable investment for a person in a 28 percent tax bracket would result in after-tax earnings of . $1,600 B. $1,152 C. $1,100 D. $448 E. $152

B

Randal is 36 years old. He has adjusted gross income of $32,000. He has medical expenses for the year of $6,000. How much of these expenses can he deduct from adjusted gross income? A. $0 B. $2,800 C. $3,600 D. $6,000

B

The use of legitimate methods to reduce one's taxes is tax ____________. A. evasion B. avoidance C. exemptions D. deferred techniques E. reductions

B

With respect to the taxability of corporate dividends paid to individuals and capital gains on stocks and bonds,

Both dividends from corporations and capital gains are taxable to individuals

An amount not included in gross income is: A. a tax credit. B. an exemption. C. an exclusion. D. earned income. E. portfolio income.

C

_____________ are the next group of expenses that a taxpayer is allowed to deduct once adjusted gross income is calculated. A. Exemptions B. Exclusions C. Itemized deductions D. Tax credits E. Passive income

C

A tax credit of $50 for a person in a 28 percent tax bracket would reduce a person's taxes by: A. $10 . B. $28. C. $14. D. $50. E. $35.

D

Note: If you print a Form 1040 from the IRS site (see the Web Work) it will help with this question. Using a UCF graduate's current year tax data below, what is the adjusted gross income: Wages = $55,000 Ordinary dividends = $1,000 Interest on municipal bonds = $2,000 Traditional IRA contribution = $3,000 Short term capital gain = $ 9,000 Alimony paid = $20,000

$42,000

A $1,000 tax deduction is more valuable than a $300 tax credit (assuming the taxpayer is in a 25% tax bracket).

False

Note: If you print a Schedule A from the IRS site (see the Web Work) it will help with this question. A UCF graduate under 65 years old has $110,000 of adjusted gross income and $12,500 of qualifying medical expenses. This individual's itemized deductions for medical expenses on Schedule A would be:

$500

Money received in the form of dividends or interest is commonly called "earned income." T/F

False

An example of tax-exempt income is

Interest or mutual fund dividends derived from municipal bonds or municipal bond mutual funds.

Jim had earnings from his salary of $34,000, interest on savings of $800, a contribution to a traditional individual retirement account of $1,500, and dividends from mutual funds of $600. George's adjusted income (AGI) would be: A. $33,900. B. $34,000. C. $34,600. D. $34,800. E. $35,400.

A

A personal exemption refers to:

A reduction from adjusted gross income for the taxpayer(s) and each dependent listed on the tax return