Chapter 3: Taxes in Your Financial Plan

Peter filed his federal income taxes, but needs to make a correction to his income. Which form should he use?

1040X

Which of the following is NOT a valid form for filing federal income taxes?

1040Z

At the end of the year, Walter received a form that showed his payments form independent contracting. That form is called

1099

At the end of the year, Yvonne received a form from her bank that reports income from her savings. That form is called

1099

The maximum than an individual can contribute to a Keogh Plan each year is

25% of annual income, up to a maximum of $30,000

The taxes based on the total tax due divided by taxable income is called

Average tax rate

A tax imposed on the value of a person's property at the time of death is called a(n)

Estate tax

The amount owed on property received from a deceased person is

Estate tax

A tax due on the purchase of gasoline is called a(n)

Excise tax

Total income (gross) includes

Passive income

Payroll deductions for federal government retirement benefits (such as old-age, survivor, and disability) are called

Social Security taxes

Joseph needs to complete his income taxes for the year. He has already calculated his adjusted gross income. What does he need to do next?

Subtract his itemized deductions

Which of the following is NOT an action that can reduce your taxes?

Taking out a consumer loan

If Brenda wants to pay her fair share of taxes, no more and no less, she should practice

Tax avoidance

Individuals can file their federal taxes using

Tax software, E-file, Electronic filing, and Telephone

Income that is taxed at a later date is

Tax-deferred income

Income that is never subject to tax is called

Tax-exempt income

Who is ultimately responsible for supplying accurate and complete information for the completing of a tax return?

Taxpayer

Tax tables list average tax rates.

false

Individuals are allowed to give money or items of any value to a person without being subject to taxes.

false

Interest paid on a home equity loan is not deductible.

false

When Tom calculated his taxable income, he should subtract his tax credits form adjusted gross income.

false

The itemized deduction allowed for an individual 65 and older is higher than the itemized deduction for a younger taxpayer.

false

Tom needs to complete his taxes. He should be able to find a tax preparation service to complete his tax forms for as little as $15.

false

Jason's household consists of himself, his wife, and their 2-year old daughter. How much can Jason claim for his exemptions?

$10,500

The tax designed to ensure that those who receive tax breaks also pay their fair share of taxes is called

AMT

When calculating federal income taxes, what increases "income"?

Alimony

Which of the following is NOT a tax that most people pay?

Federal taxes on possessions

An IRS agent visited Henry's home to verify some information on his tax return. This visit was called a(n)

Field audit

Recent tax credit include all except

Graduate learning tax credit

When Paul completes his taxes, he can include all of the following as exemptions except

His 20 year old son who is working full-time and living in an apartment

Individuals can deduct expenses only in excess of 7.5 percent of adjusted gross income for

Medical and dental expenses

Shannon is working on her federal income tax form and wants to determine if she should itemize her deductions. She has identified several possible deductions. Which of the following is an acceptable deduction?

Miscellaneous expenses in excess of 2% of AGI

Adjustments to income include all except

Roth IRA contributions

At the end of the year, Xavier received a form from his employer that reports annual earnings and the amounts deducted for taxes. That form is called a

W-2

At the end of the year, employees receive a ______ form that reports annual earnings and the amounts deducted for taxes from their employer.

W-2

A tax credit has a full dollar effect in lowering taxes.

true

Amounts given for tuition payments or medical expense are not subject to gift taxes.

true

Cash and prizes won on television game shows are usually subject to both federal and state taxes.

true

Individuals who have high income reported on Form 1099 may be required to pay estimated tax payments.

true

Some tax disputes have been escalated to the U.S. Supreme Court.

true

The major sections of Form 1040 include all except

All are sections for Form 1040 (Filing status and exemptions, Adjustments to income (AGI), Tax credits, and Signature)

Tax resources include all except

All of the above are tax resources (IRS publications, Enrolled agents, Accountants, Attorneys)

This tax is a major financial planning factor for most people because it is sometimes imposed at the federal, state, and local levels.

Income tax

Lauren owns her own business and is thinking about saving for retirement. She wants to invest up to 25% of her annual income. Which plan should she use?

Keogh plan

The tax due on the next dollar of income is referred to as the

Marginal tax rate

Nancy is married to Jerry and needs to complete her tax form. They both earn about the same amount of money each year. What filing status would be best for Nancy?

Married, filing joint return

Athena wants to determine if she should itemize her deductions. She has identified several possible deductions. Which of the following is NOT a proper deduction?

Miscellaneous expenses less than 2% of AGI

A worker's primary goal should be to

Pay his or her fair share of taxes while taking advantage of appropriate tax benefits

A common filing error is signing the return.

false

A tax credit reduces the taxable income on which the tax liability is computed.

false

All citizens of the United States are required to file a federal income tax return if their income falls below a certain level.

false

All individuals with taxable income need to complete the AMT calculation.

false

An example of an excise tax is Social Security.

false

Contributions to a Keogh or 401(k) are tax-exempt.

false

Determining Adjusted Gross Income is the final step in calculating federal income tax.

false

Federal income tax returns must be filed by April 1 of each year.

false

Form 4868 allows a taxpayer to obtain a six-month extension on filing and paying federal taxes without penalty.

false

If your taxes due are greater than the amount you had withheld for the year, then you should expect a refund after you complete your federal income taxes.

false

The maximum amount (in 2009) that an individual can give another in a year without being subject to federal taxes is:

$13,000

If Diane was in a 28% tax bracket and received a $2,000 tax credit, how much would her taxes be reduced?

$2,000

The maximum that an individual can contribute to an education IRA each year is

$2,000

Sam and Diane are completing their federal income taxes for the year and have identified the amounts listed below. How much can they rightfully deduct? (AGI: $90,000 Medical and dental expenses: $10,000 State income taxes: $4,500 Mortgage interest: $10,500 Charitable contributions: $2,000)

$20,250

In 2008, federal tax tables included tax rates of:

10%, 15%, 25%, 28%, 33%, 35%

Annie was required to clarify or document minor questions of her tax form by mail. She participated in a(n)

Correspondence audit

Which of the following is NOT a tax credit?

Domestic tax credit

Fees, tips, and bonuses are forms of

Earned income

Tanya is a single low-income working parent and Fred is a single high-income working parent. Because of her status, Tanya, but not Fred, may be eligible for the

Earned-income credit

The tax that is a major source of revenue for local governments is called a(n)

Real estate tax

All of the following can reduce your taxes today except investing in

Roth IRA

Evan wants to minimize his future taxes. Which of these would be the best for him to invest in today?

Roth IRA

You may be required to make estimated tax payments if:

You own your own business

Tax Freedom Day represents the day that the average person works until to pay their taxes each year.

true

The IRS has made online filing free for millions of taxpayers through the Free File Alliance.

true

When Marissa completes her taxes, she can include her children, her husband, and herself as exemptions.

true

THe maximum than an individual can contribute to a Roth IRA each year is

$5,000

If Jack was in a 28% tax bracket and received a $2,000 tax deduction, how much would his taxes be reduced?

$560

Janet is completing her federal income taxes for the year and has identified the amounts listed below. How much can she rightfully deduct? (AGI: $40,000 Medical and dental expenses: $600 State income taxes: $500 Mortgage interest: $6,500 Charitable contributions: $750)

$7,750

In 2008, taxable income was reduced by _____ for each exemption claimed.

$3,500

Tax software can save taxpayers 25 hours or more when preparing Form 1040.

false

George Franklin paid taxes of $4,400 on a taxable income of $42,000. What was his average tax rate?

10.5%

Amanda and Jack are working on their taxes and need to determine which for to file. They had wages, interest, and dividends. In addition they bought a house this past year an dare thinking of itemizing their deductions. Which form should he use?

1040

How long should you generally keep tax records?

3 years

The Adjusted Gross Income is increased by the itemized or Standard deduction.

false

Penny knows that she needs to file her taxes, but is unable to do so by April 15. What form does she need to complete to obtain an automatic six-month extension?

4868

Fred has been completing his own returns for years. The IRS has recently contracted him with questions about some of his prior returns. How many years back is he responsible for providing documentation?

6 years

Connie thinks that her salary and tax rate for next year will be lower than for this year. What step should she take to minimize her taxes in the current year?

Accelerate deductions

David thinks that his salary and tax rate for next year will be higher than for this year. What step should he take to minimize his taxes?

Accelerate receipt of income.

When calculating federal income taxes, "income" includes all of the following categories except

Active income

Gross income after certain reductions have been made is

Adjusted gross income

The average tax rate is the taxes paid on the next dollar of income.

false

An advantage of investing in a 401(k) plan is the

Possibility of receiving an employer match on your contributions

Bob was married to Sandy and they have a 12 year old son. Sandy passed away last year. Bob needs to complete his federal income taxes for the year. What filing status could he use because of his marital status?

Qualifying widow or widower

Most states do not require state income taxes.

false

One of the best tax shelters is owning a car.

false