sample questions ch.4 section 6

Assume you are still single and have no children, but your two siblings live with you in your home, you should file as A) single. B) head of household with two dependents. C) single with two dependents. D) single filing separately.

A

Erin has a tax credit of $100 and a marginal tax rate of 28 percent. Erin's income tax liability will be reduced by how much as a result of the credit? A) $100 B) $128 C) $28 D) $2,800

A

Gross income and adjusted gross income can be the same if you do not have any special adjustments. Which of the following is not one of these special adjustments? A) Capital gains are deducted and capital losses are added. B) IRA contributions are subtracted from gross income. C) Interest and dividend income is part of the income calculation. D) Alimony payments are deducted from gross income.

A

If a stock was purchased in January 2014 for $1,000 and sold in December 2015 for $3,000, a ________ of $2,000 results. A) long-term capital gain B) short-term capital gain C) long-term capital loss D) short-term capital loss

A

If you are a surviving spouse, you may continue to use the married filing jointly tax rates unless A) you are divorced and your ex-spouse died in the last five years. B) your spouse died in the last two years. C) you have children you can claim as an exemption. D) you pay more than half the cost of maintaining your residence.

A

Michael's brother, Thomas, lives with Michael in his own home. Thomas has a full-time job and pays his brother for rent and utilities. Michael's filing status is A) single. B) head of household. C) married, filing separately. D) a qualifying widow(er).

A

Reductions of gross income for such items as individual retirement accounts (IRAs), moving expenses, and student loan interest payments will result in A) adjusted gross income. B) taxable income. C) earned income. D) passive income.

A

Taxpayers who are blind get the benefit of A) an additional exemption. B) an additional amount added to their standard deduction. C) an additional amount added to their itemized deduction. D) not having to file a tax return because they are blind.

A

The highest tax rate a taxpayer is charged on his or her federal tax return is called the ________ rate. A) marginal B) average C) maximum D) true

A

The standard deduction is smallest for A) single filers, assuming under age 65. B) head of household filers, assuming over age 65 or blind. C) married filing separately, assuming over age 65 or blind. D) married filing jointly, assuming under age 65.

A

When taxable income exceeds certain levels, the itemized deductions and exemptions A) are reduced. B) are limited but may be carried over to future years. C) reach a maximum allowable amount. D) increase in proportion to increases in taxable income.

A

Which of the following gross income is not taxable income? A) Health insurance reimbursements B) Interest income C) Dividends D) Tips received

A

Which tax form is generally used by taxpayers whose filing status is married, has no dependents, and whose taxable income if less than $100,000?A) 1040 B) 1040 A C) 1040 EZ D) 1040 X

A

You should claim itemized deductions if A) itemized deductions exceed the standard deduction. B) the standard deduction exceeds itemized deductions. C) itemized deductions exceed exemptions. D) itemized deductions exceed tax credits.

A

A branch of the U.S. Treasury Department, called the ________, administers the federal tax system. A) U.S. Department of Tax B) Internal Revenue Service C) U.S. Tax Authority D) U.S. Department of Collection

B

All reportable income from any source is called A) wages and salaries. B) gross income. C) interest income. D) dividend income.

B

An expense that could be included in the itemized deductions of a taxpayer is A) life insurance premiums. B) real estate property taxes. C) travel to work expenses. D) driver license fees.

B

Determining taxes requires you to address all of the following topics except A) gross income. B) daily living expenses. C) deductions. D) exemptions.

B

For qualified individuals, a contribution to a traditional IRA (Individual Retirement Account) is a(n) A) credit. B) adjustment to gross income. C) itemized expense. D) additional exemption amount.

B

If you are a married taxpayer, you may use the ________ filing status. A) single B) married filing jointly or married filing separately C) head of household D) Any of the above may be used.

B

If you are married with two children and your two elderly parents live with you in an "in- law" suite, but pay a nominal rent monthly, you should file as A) married filing separately. B) married filing jointly with 4 total personal exemptions. C) married filing jointly with 6 total personal exemptions. D) married filing jointly with parents.

B

If you own stock that has increased in price, it would be best to sell it after you have owned it for at least A) 6 months and one day. B) 12 months and one day. C) 18 months and one day. D) 24 months and one day.

B

Interest income would come from earnings on A) stocks. B) savings accounts. C) capital gains on investments. D) sale of mutual funds.

B

Jerry is divorced and has two children that live with him. What filing status should Jerry claim on his tax return? A) Single B) Head of household C) Married filing separately D) Married filing jointly

B

Purchasing which of the following items on credit will help reduce your tax bill? A) Automobile B) Home C) Stereo D) Boat

B

Stephanie, who was divorced in 2015, had filed a joint tax return with her husband in 2014. During 2015, she did not remarry and continued to maintain her home in which her three dependent children lived. In preparation of her 2015 tax return, Stephanie should file as A) single. B) head of household. C) married filing separately. D) qualifying widow(er).

B

The filing status that yields the largest standard deduction per taxpayer is A) married, filing jointly. B) head of household. C) single individual. D) married, filing separately.

B

Under the Affordable Care Act of 2010, if an individual does not have medical insurance coverage in 2016, they will A) still not have to pay 100% of their medical expenses if they cannot afford them. B) be subject to a tax penalty of up to 2.5% of income or $695 per adult. C) only have to pay 75% of billed medical expenses. D) be subject to a $250 fine.

B

Which of the following conditions will not afford you a tax advantage? A) Being over age 65 B) Being deaf C) Being widowed within the past two years D) Being blind

B

Which of the following is not a tax credit mentioned in the chapter? A) Child tax credit B) Second income credit C) College expense credit D) Earned income credit

B

Which of the following is not a tax filing status option? A) Single B) Divorced C) Married filing jointly D) Head of household

B

Which of the following taxes is only paid on the first $118,500 of your salary? A) Federal Income Tax B) Social Security Tax C) Medicare Tax D) All of the above.

B

A allowable amount which taxpayers can claim for themselves and dependents is called a(n) A) allowance. B) deduction. C) exemption. D) exclusion.

C

All of the following are types of nontaxable income except A) child support payments. B) casualty insurance reimbursements. C) rental income. D) reimbursements of moving expenses by an employer.

C

FICA taxes include two components, which consist of A) accident and disability insurance. B) unemployment compensation and disability insurance. C) Social Security and Medicare contributions. D) old age and unemployment compensation.

C

Gross income includes all of the following except A) salary or wages. B) interest or dividends received. C) employer's current contribution to 401(k). D) capital gains realized.

C

If you were to receive $100,000 from a corporation, the most tax-efficient way to receive it would be as A) dividends. B) interest. C) capital gains. D) salary.

C

In order to claim a tax deduction for a charitable contribution, you must be A) over 21 years of age. B) earning more than $50,000 per year. C) itemizing deductions on your income tax return. D) in at least the 25% tax bracket.

C

Income earned from the sale of an asset for more than you paid for it is classified as a(n) A) dividend income. B) interest income. C) capital gain. D) windfall.

C

Jerry is divorced and has two children that live with him. In addition he baby-sits three other children in the evenings and has a cat and two dogs. How many exemptions can he claim on his tax return? A) One B) Two C) Three D) Four

C

The Tax Relief Act of 2001 A) raised the tax rates for the highest income portion of the population. B) limits further the ability to contribute to retirement plans tax-free. C) provided educational incentives to most taxpayers. D) reduced the child care credit available to most young families.

C

The standard deduction (assuming you are not over 65 or blind) is largest for A) single filers. B) head of household filers. C) married filing jointly. D) married filing separately.

C

The tax method that uses the principle of taxing those more who earn more is called ________ taxation. A) benefits received B) payment burden C) progressive D) regressive

C

Which item below cannot be taken as an itemized deduction? A) Medical expenses B) Charitable contributions C) Child and dependent care expenses D) Real estate taxes

C

Which of the following is not a legitimate itemized deduction? A) Mortgage interest expense B) Real estate tax C) Interest paid on credit cards D) State income tax

C

Which of the following is not taxable for income tax purposes? A) Interest income B) Income from a rental property C) Child support D) Dividend income from selling stock

C

Which of the following statements is not true regarding FICA taxes paid? A) These taxes fund both Social Security and Medicare. B) Employers are required to match employee FICA contributions. C) All FICA taxes apply to your total income. D) There is a limit on how much of your income will be taxed for Social Security.

C

________ are specific expenses instead of a standard amount that reduce adjusted gross income. A) Exemptions B) Household expenses C) Itemized deductions D) Tax credits

C

If a stock was purchased for $5,000 in January 2015 and is sold in December 2015 for $3,000, a ________ of $2,000 results. A) long-term capital gain B) short-term capital gain C) long-term capital loss D) short-term capital loss

D

If you are paying taxes at the 35% tax bracket, you should A) consider investing in tax free municipal bonds. B) make the maximum tax deductible contribution to your company 401K. C) increase the interest expenses you pay by taking loans on expensive autos instead of paying cash. D) Both A and B are correct.

D

In 2015, self-employed individuals paid FICA taxes at a rate of A) 1.45 percent. B) 7.65 percent. C) 13.3 percent. D) 15.3 percent.

D

Legal methods of reducing your taxes include all of the following except A) organizing your records to track appropriate expenses and contributions. B) preparing your return early in the year so you are not rushed. C) seeking the advice of an accountant. D) overstating cash contributions to Salvation Army Christmas kettles.

D

Prudent tax planning considers ways to A) reduce your taxes by not recognizing some of your income. B) reduce income by deferring recognition via 401k and IRA accounts. C) maximize long term capital gains. D) Both B and C are correct.

D

The knowledge of tax laws can help you A) conserve your income. B) enhance your investments. C) protect the transfer of your wealth at your death. D) All of the above.

D

To qualify for "head of household" you must A) be single. B) have at least one dependent in your household. C) be a homeowner. D) Both A and B are correct.

D

When you own a house as a primary residence, A) it is always best to itemize deductions on your tax return. B) your property taxes are not deductible. C) you get a straight $5,000 deduction. D) interest and taxes may increase your allowable deductions to the point where it is beneficial to itemize them.

D

Which of the following can be deducted from your taxable income even if you do not itemize?A) Mortgage interest expense B) Real estate taxes C) State income taxes D) Student loan interest

D

Which of the following is not an acceptable method of reducing your tax bill? A) Have a mortgage on your home with tax deductible interest B) Increase your contributions to tax-advantage retirement accounts C) Invest in municipal bonds D) Have your paycheck deposited directly to an off-shore bank

D

Which of the following is not includable in gross income for Federal income tax purposes? A) Sales commissions B) Cash you receive for painting your neighbor's house C) Qualifying dividends D) Municipal bond interest

D

Which of the following is not subject to immediate taxation? A) A Christmas bonus B) Tips from your waitressing job C) Salary and wages D) Contributions to your employer-sponsored retirement account

D

Which of the following is the correct method for starting with gross income and computing taxable income? A) Subtract the standard deduction and exemptions B) Add the itemized deductions and subtract the exemptions C) Subtract IRA contributions and add exemptions D) Subtract adjustments, deductions, and exemptions

D

Which of the following items is not impacted by the taxpayer's income level? A) Amount withheld for Social Security B) Amount withheld for Medicare taxes C) College expense credits D) Personal exemptions

D

A young couple buying a home would usually be better off to take the standard deduction rather than itemizing deductions.

FALSE

All interest and dividends received by an individual taxpayer are taxable.

FALSE

All medical expenses may be deducted from income as long as you have the receipts or can show proof of payment.

FALSE

All taxpayers have a large degree of freedom in choosing their filing status.

FALSE

An earned income credit is a special credit that reduces the amount of taxes owed by taxpayers who earn high incomes.

FALSE

Employers have an option of whether or not to match an employee's Social Security and Medicare taxes.

FALSE

Interest expense paid on home loans and car loans is deductible from your income tax.

FALSE

Medicare is a government health insurance program that covers people over age 55 and provides payments to health care providers in case of illness.

FALSE

Tax credits amount to the same savings as tax deductions.

FALSE

The Tax Relief Act of 2001 provided educational incentives to a broad range of taxpayers and reduced contribution limits to retirement plans.

FALSE

The timing on the sale of an investment asset earning a capital gain makes little or no difference in the amount of taxes that are owed.

FALSE

Under the Tax Relief Act of 2003, the lowest tax bracket for single taxpayers earning $8,000 or less is 15 percent.

FALSE

A dollar's worth of tax credits is more valuable than a dollar's worth of deductions.

TRUE

A long-term capital gain results from profit on the sale of capital assets that were held 12 months or more.

TRUE

A personal exemption can be claimed for the person filing a tax return, for a spouse, and for each dependent.

TRUE

All taxpayers have a choice of whether to take the standard deduction or itemize deductions.

TRUE

Different tax rates are associated with each filing status such as single, married filing jointly, and head of household.

TRUE

Employee contributions to qualified Individual Retirement Accounts (IRAs) and interest paid on student loans are adjusted from gross income to calculate a taxpayer's adjusted gross income.

TRUE

Gross income consists of all reportable income from any source.

TRUE

In 2001, the tax laws were changed to allow substantial tax benefits for parents who wish to set aside money for their children's future college expenses.

TRUE

Itemized deductions can include mortgage interest expense, state income tax expense, charitable contributions, and other employee expenses.

TRUE

Knowledge of individual income taxes is crucial to sound financial planning.

TRUE

Knowledge of tax laws can help you conserve your income.

TRUE

Medicare taxes are 1.45% of your salary, regardless of the salary amount.

TRUE

Only the income that remains after deductions and exemptions are subtracted from adjusted gross income is taxable.

TRUE

Students and other taxpayers earning less than $100,000 a year with no dependents are eligible to file the simplest tax return, which is the 1040E-Z.

TRUE

Taxpayers can have more than the minimum amount of required income tax withheld from each pay.

TRUE

The government usually adjusts the exemptions and standard deductions amounts annually to account for inflation.

TRUE

The key tax planning decisions in building your financial plan are knowing what tax savings are currently available to you and how you can increase your tax savings in the future.

TRUE

There is no Social Security tax on income beyond a certain level.

TRUE

Your gross wages are subject to FICA (Federal Insurance Contributions Act) taxes that fund the Social Security system and Medicare.

TRUE