Finance Chapter 3

Using the following table, calculate the taxes for an individual with taxable income of $20,800.

$2,695. Taxes = (10% × $8,500) + (15% × {$20,800 - $8,500}) = $850 + $1,845 = $2,695.

If Jack was in a 25% tax bracket and received a $1,000 tax deduction, by how much would his taxes be reduced?

$250

In 2014, taxable income was reduced by ______ for each exemption claimed.

$3,950

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

1040Z

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

6 years

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

A Roth IRA.

Which of the following is NOT a tax credit?

Domestic tax credit

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

False, Fees typically range from $40 at a tax preparation service for a simple return.

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

Federal taxes on possessions

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

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.

Fees, tips, and bonuses are forms of

earned income

Using the following table, calculate the taxes for an individual with taxable income of $30,000.

$4,075 Taxes = (10% × $8,500) + {15% × ($30,000 - $8,500)} = $850 + $3,225 = $4,075.

Janet is completing her federal income taxes for the year and has identified the amounts listed here. How much can she rightfully deduct? AGI: $42,000• Medical and dental expenses: $1,100• State income taxes: $1,000• Mortgage interest: $7,000• Charitable contributions: $1,250

$9,250 Deductions include the following: State income tax + Mortgage interest + Charitable contributions = $1,000 + $7,000 + $1,250 = $9,250. Medical and dental expenses are not deductible because they must be greater than 10% of her AGI (42,000 × 10% = 4,200).

Using the following table, calculate the taxes for an individual with taxable income of $45,000.

$7,375 Explanation Taxes = (10% × $8,500) + {15% × ($34,500 - $8,500)} + {25% × ($45,000 - $34,500)} = $850 + $3,900 + $2,625 = $7,375.

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

AMT.

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

Accelerate receipt of income.

Tax credits are

Adoption tax credit Foreign tax credit Earned income credit Savers credit

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.

A person with taxable income of $40,000 and a total tax bill of $4,200 would have an average tax rate of 15%.

False, Average tax rate = tax due / taxable income; thus, $4,200/$40,000 = 10.5%

Tax rate schedules list average tax rates.

False, Tax rate schedules show marginal tax rates.

One of the best tax shelters is owning a car.

False, One of the best tax shelters is owning a home.

Most states do not require state income taxes.

False, Only seven states do not have a state income tax.

Lauren owns her 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

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

Tax avoidance.

Some tax disputes have gone to the U.S. Supreme Court.

True