Chapter 4

On filing Form 4868, you can _____ a six-month extension on filing an income tax return by filing the proper forms with the IRS before the April 15 filing deadline.

automatically receive

The simplest type of IRS audit is the _____ audit.

correspondence

A tax ______ is an amount subtracted from adjusted gross income to arrive at taxable income.

deduction

itemized deductions

expenses you can subtract from adjusted gross income to determine your taxable income

Anyone can file as single status.

false

State and local income taxes are deductible for:

federal tax purposes

Generally, you should keep your tax records for at least three years after filing your return. However, you may be held responsible for providing back documentation:

for up to 6 years

The two main types of federal taxes on wages and salary are Blank______ tax and Social Security tax.

income

Passive Income

income resulting from business activities in which you do not actively participate

tax-deferred income

income that is taxed at a later date

Taking advantage of tax credits, deferring capital gains and accelerating capital losses, and considering tax-exempt investments are all strategies to lower income

tax

tax avoidance

the use of legitimate methods to reduce one's taxes

A tax credit is an amount subtracted directly from taxes owed.

true

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

universities

excise tax

a tax on the production or sale of a good

The two key tax planning activities of December are deciding whether to make payments that would be to your _______ for this year while deferring ______ into the next tax year.

advantage or benefit, income

exclusion

amount not included in gross income

tax deduction

amount subtracted from adjusted gross income to arrive at taxable income

Financial planners recommend that copies of home ownership documents should be kept for:

an indefinite period

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

added together

tax shelter

an investment that provides immediate tax benefits and a reasonable expectation of a future financial return

Medical costs, taxes, and interest are all examples of ______ , deductions that are subtracted from adjusted gross income.

itemized

tax audit

a detailed examination of your tax return by the IRS

As of 2018, the IRA contribution limit was

$5500

Select all the accurate observations below about different types of audits.

- A field audit involves an IRS agent visit to your home or office and is the most complex type of audit. - The simplest audit is a correspondence audit. - With an office audit, you must visit the IRS office to answer questions about your return.

Which of the following tax activities should be completed in December?

- Decide if you can defer income to the following year - Determine if you should make estimated payments for the next year

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

1040X

tax credit

An amount subtracted directly from the tax owed

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

Estate tax

A tax deduction reduces tax liability directly, dollar for dollar.

False

Earned Income

Money earned from working for pay

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.

On average, the portion of a person's earnings that goes to taxes is ______.

One third

A filing system stores records that help provide proof of payment of charitable expenses, medical expenses, and other itemized deductions.

True

Adjusted gross income is gross income reduced for such things as IRA contributions and alimony payments (if deductible).

True

If you itemize your deductions, you can deduct contributions made to charities and amounts paid for real estate taxes.

True

Income tax is calculated on income minus deductions and exemptions.

True

Target your tax planning efforts toward paying your fair share of taxes while taking advantage of tax benefits appropriate to your personal and financial situation.

True

Travel expenses can be documented in a daily log with records of mileage, tolls, parking fees, and lodging costs.

True

exemption

a deduction from adjusted gross income for the taxpayer, the spouse, and qualified dependents

One way to reduce your tax liability is to:

maximize contributions to tax-deferred retirement programs.

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

mortgage interest

Interest income from _____ bonds, which are issued by state and local governments, is not subject to federal income taxes.

municipal

Taxpayers pay income taxes through:

payroll withholding and through estimated tax payments.

capital gains

profits from the sale of a capital asset such as stocks, bonds, or real estate

Which of the following statements are true about software and taxes?

- A spreadsheet program such as MS Excel can help you with your tax planning. - Software packages such as H&R Block At Home and TurboTax help users prepare and file returns. - A spreadsheet program can help you keep track of income and expenses as the year plays out.

Which of the following is a tax avoidance strategy?

- Delay the receipt of income because you want to delay the payment of taxes until next year. - Accelerate deductions to save taxes this year.

Which of the following taxes are deductible?

- real estate property taxes - state income taxes

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 and estimated quarterly payments.

The two main taxes on salary are income taxes and estate taxes.

False

Real estate property taxes are a major source of revenue for ______.

Local governments

You filed a Form 4868 and received a six-month extension on your taxes for 2018. Which of the following is true?

The filing will not postpone your payment liability, so you must pay your estimated payment liability by April 15, 2019.

standard deduction

a set amount on which no taxes are paid

inheritance tax

a state tax collected on the property left by a person to his or her heir(s) in a will

estate tax

a tax on the total value of the money and property of a person who has died

a tax ____ is directly subtracted from taxes owed. This is a one-word answer.

credit

If you find that you have income or deductions that you did not report on your tax return, you should:

file a 1040X to amend the return

A(n) ______ can be helpful in maintaining and updating income and expense data.

spreadsheet program

CPAs and enrolled agents both offer tax services including return preparation, while a(n) ______ will represent you in the case of an IRS lawsuit.

tax attorney

average tax rate

taxes paid divided by taxable income

taxable income

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

marginal tax rate

the rate used to calculate tax on the last (and next) dollar of taxable income

tax evasion

the use of illegal actions to reduce one's taxes

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

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

value

Tax _____ means using legitimate strategies to reduce taxes, while tax ____ involves using illegal means to lower tax liability. (Enter only one word per blank.)

avoidance, evasion

investment income

earnings from dividends, interest, and rent

Real estate ______ taxes are based on the value of land and buildings.

property

Adjusted gross income is gross income ______ by IRA contributions, alimony, and other adjustments.

reduced