Personal Finance Chapter 3 SG

A common filing error is signing the return. (T/F)

False

A tax credit reduces the taxable income on which the tax liability is computed. (T/F)

False

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

False

All individuals with taxable income need to complete the AMT calculation. (T/F)

False

An example of an excise tax is Social Security. (T/F)

False

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

False

Stephen is planning to file taxes this year. He is married with two dependents. His household salary is relatively low. How should he file his tax forms? Why is that method appropriate for him?

He could go online and use a tax software. Do it on paper. He might qualify for filing free online. (Free File Alliance)

What are the five filing status categories for federal income taxes?

Married filing jointly Married filing separate Single Widow/Widower Head of the household

Identify at least five sections of Form 1040.

Personal Information Income Adjustments to income Tax computation Tax credits Tax payments Refund Signature

At the end of the year, Yvonne received a form from her bank that reports income from her savings. That form is called _____ A. 1040 B. 1099 C. W-2 D. W-4 E. Schedule A

B. 1099

How long should you generally keep tax records? A. Until you file your returns B. 3 years C. 5 years D. 10 years E. 15 years

B. 3 years

The taxes based on the total tax due divided by taxable income is called A. AMT B. Average tax rate C. Income tax rate D. Marginal tax rate E. Total tax rate

B. Average tax rate

Fees, tips, and bonuses are forms of A. Adjusted gross income B. Earned income C. Exclusions from income D. Tax-deferred income E. Tax-exempt income

B. Earned income

A tax due on the purchase of gasoline is called a(n) A. Estate tax B. Excise tax C. Income tax D. Real estate tax E. Inheritance tax

B. Excise tax

Which of the following is NOT a tax that most people pay? A. Federal taxes on earnings B. Federal taxes on possessions C. Federal taxes on wealth D. Local taxes on property E. State taxes on purchases

B. Federal taxes on possessions

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? A. Single B. Married, filing joint return C. Head of household D. Qualifying widow or widower E. Married, but filing individually

B. Married, filing joint return

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? A. Add his tax-exempt income B. Subtract his itemized deductions C. Add his tax credits D. Subtract his tax-exempt income E. Add his tax exemptions

B. Subtract his itemized deductions

Which of the following is NOT an action that can reduce your taxes? A. Owning a home. B. Taking out a consumer loan. C. Paying certain work expenses. D. Depositing money into a Flexible Spending Account (FSA). E. Investing in municipal bonds.

B. Taking out a consumer loan.

If Brenda wants to pay her fair share of taxes, no more and no less, she should practice A. Tax evasion B. Tax avoidance C. Tax elimination D. Tax maximization E. Tax acceleration

B. Tax avoidance

In 2008, taxable income was reduced by ______ for each exemption claimed. A. $1,000 B. $2,500 C. $3,500 D. $5,000 E. $10,000

C. $3,500

Amanda and Jack are working on their taxes and need to determine which form to file. They had wages, interest, and dividends. In addition they bought a house this past year and are thinking of itemizing their deductions. Which form should he use? A. 1040 EZ B. 1040A C. 1040 D. 1040X E. 1040Z

C. 1040 (Because of interests and dividends)

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? A. Until he files his returns B. 3 years C. 6 years D. 10 years E. 15 years

C. 6 years

This tax is a major financial planning factor for most people because it is sometimes imposed at the federal, state, and local levels. A. Estate tax B. Excise tax C. Income tax D. Real estate tax E. Sales tax

C. Income tax

Individuals can deduct expenses only in excess of 7.5 percent of adjusted gross income for A. Contributions to charitable organizations B. Mortgage interest C. Medical and dental expenses D. Miscellaneous expenses E. Taxes

C. Medical and dental expenses

An advantage of investing in a 401(k) plan is the A. Ability to invest up to 25% of your annual income B. Opportunity to save $5,000 per year C. Possibility of receiving an employer match on your contributions D. Ability to pay taxes on distributions E. Ability to roll IRA contributions into a 401(k)

C. Possibility of receiving an employer match on your contributions

Payroll deductions for federal government retirement benefits (such as old-age, survivor, and disability) are called A. Estate taxes B. Excise taxes C. Social Security taxes D. Real estate taxes E. Sales taxes

C. Social Security taxes

Who is ultimately responsible for supplying accurate and complete information for the completing of a tax return? A. Professional tax preparer B. IRS enrolled agent C. Taxpayer D. Taxpayer's dependents E. Taxpayer's attorney

C. Taxpayer

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 _____ A. 1040 B. 1099 C. W-2 D. W-4 E. Schedule A

C. 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. A. 1040 B. 1099 C. W-2 D. W-4 E. Schedule A

C. W-2

When calculating federal income taxes, what increases "income"? A. Exclusions B. Tax-exempt income C. Tax-deferred income D. Alimony E. Tax deductions

D. Alimony

An IRS agent visited Henry's home to verify some information on his tax return. This visit was called a(n) A. Correspondence audit B. Office audit C. Home audit D. Field audit E. Detailed audit

D. Field audit

A worker's primary goal should be to: A. Pay his or her taxes using estimates for income and deductions B. Pay no income taxes C. Pay the average tax rate for people working in his or her industry D. Pay his or her fair share of taxes while taking advantage of appropriate tax benefits E. Pay no taxes of any type

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

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? A. Single B. Married, filing joint return C. Head of household D. Qualifying widow or widower E. Married, but filing individually

D. Qualifying widow or widower

The tax that is a major source of revenue for local governments is called a(n) A. Estate tax B. Excise tax C. Income tax D. Real estate tax E. Sales tax

D. Real estate tax

Adjustments to income include all except A. Alimony payments B. Contributions to a Keogh retirement plan C. Traditional IRA contributions D. Roth IRA contributions E. Penalties for early withdrawal of savings

D. Roth IRA contributions

Income that is taxed at a later date is A. Adjusted gross income B. Earned income C. Exclusions from income D. Tax-deferred income E. Tax-exempt income

D. Tax-deferred income

You may be required to make estimated tax payments if: A. You receive a paycheck with taxes withheld B. You do not have interest income C. You are married D. You own your own business E. None of the above are correct

D. You own your own business

Individuals can file their federal taxes using A. Tax software B. E-file C. Electronic filing D. Telephone E. All of the above

E. All of the above

Tax resources include all except A. IRS publications B. Enrolled agents C. Accountants D. Attorneys E. All of the above are tax resources.

E. All of the above are tax resources.

When Paul completes his taxes, he can include all of the following as exemptions except A. His 12 year old son B. Himself C. His 22 year old daughter who is a full-time student D. His wife E. His 20 year old son who is working full-time and living in an apartment

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

Income that is never subject to tax is called A. Adjusted gross income B. Earned income C. Foreign income D. Tax-deferred income E. Tax-exempt income

E. Tax-exempt income

Stephanie is planning to file taxes this year. She is married with two dependents and is considering using a tax preparation service. What are three factors she should consider before hiring a particular service?

She should consider: How much it will cost The experience within that person The availability Credible, good reputation Represent you if audited? Is it their main business?

A tax credit has a full dollar effect in lowering taxes. (T/F)

True

Amounts given for tuition payments or medical expenses are not subject to gift taxes. (T/F)

True

Cash and prizes won on television game shows are usually subject to both federal and state taxes. (T/F)

True

Individuals who have high income reported on Form 1099 may be required to pay estimated tax payments. (T/F)

True

Some tax disputes have been escalated to the U.S. Supreme Court. (T/F)

True

Tax Freedom Day represents the day that the average person works until to pay their taxes each year. (T/F)

True

The IRS has made online filing free for millions of taxpayers through the Free File Alliance. (T/F)

True

When Marissa completes her taxes, she can include her children, her husband, and herself as exemptions. (T/F)

True

When you receive an audit notice, you have certain rights. What are some (3) suggestions to follow with an audit?

-Contact the person who prepared your taxes -Don't be defensive -Be to the meeting on time -Keep your answers brief and only answer questions asked -Bring all your documents

Describe the calculation for Adjusted Gross Income

1st: Add all income together 2nd: Subtract appropriate adjustments

Gross income after certain reductions have been made is A. Adjusted gross income B. Earned income C. Exclusions from income D. Tax-deferred income E. Tax-exempt income

A. Adjusted gross income

Annie was required to clarify or document minor questions of her tax form by mail. She participated in a(n) A. Correspondence audit B. Office audit C. Home audit D. Field audit E. Detailed audit

A. Correspondence audit

A tax imposed on the value of a person's property at the time of death is called a(n) A. Estate tax B. Excise tax C. Income tax D. Real estate tax E. Sales tax

A. Estate tax

The amount owed on property received from a deceased person is A. Estate tax B. Excise tax C. Social Security tax D. Real estate tax E. Sales tax

A. Estate tax

The maximum amount (in 2009) that an individual can give another in a year without being subject to federal taxes is: A. All gifts are taxable B. $10,000 C. $13,000 D. $15,000 E. No gifts are taxable

C. $13,000

Determining Adjusted Gross Income is the final step in calculating federal income tax. (T/F)

False

Federal income tax returns must be filed by April 1 of each year. (T/F)

False

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

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. (T/F)

False

Individuals are allowed to give money or items of any value to a person without being subject to taxes. (T/F)

False

Interest paid on a home equity loan is not deductible. (T/F)

False

Most states do not require state income taxes (T/F)

False

One of the best tax shelters is owning a car (T/F)

False

Tax software can save taxpayers 25 hours or more when preparing Form 1040. (T/F)

False

Tax tables list average tax rates. (T/F)

False

The Adjusted Gross Income is increased by the itemized or standard deduction. (T/F)

False

The average tax rate is the taxes paid on the next dollar of income. (T/F)

False

The itemized deduction allowed for an individual 65 and older is higher than the itemized deduction for a younger taxpayer. (T/F)

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. (T/F)

False

When Tom calculates his taxable income, he should subtract his tax credits from adjusted gross income. (T/F)

False

Identify and provide examples for four types of taxes that most people pay.

Purchases -Sales taxes, excise taxes Income Tax -Social Security, Medicare, Federal, State Property Taxes -Real estate, Personal property tax. Wealth -Estate taxes, inheritance taxes

What is the difference between tax-exempt income and tax-deferred income?

Tax-exempt: Not subject to taxes EVER Tax deferred: Income that will be taxed at a later date