PF Chapter 3

State income tax returns are always required to be filed after the federal return is due.

False

Income includes only those earnings that you are actively involved in earning, such as salaries and income from managing a business.

False

Only cash contributions to qualified charitable organizations are allowed as deduction

False

Which of the following events might cause a taxpayer to make estimated tax payments?

*Royalties *Earnings from independent contracting *Significant earnings from savings or investments *Lump-sum payments from pensions

Interest income from _________ bonds issued by state and local governments is not subject to federal tax.

Blank 1: municipal

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

taxable

Select all the reasons most planners advise people to contribute as much as possible to a SEP-IRA or 401(k) plan.

*Contributions reduce adjusted gross income and therefore reduce taxes. *Increased value accumulates on a tax-free basis until funds are withdrawn.

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

1040X

A tax planning activity for February would be to check to see if you have received all of your W-2 forms (salary and wages) and all of your _________ forms (interest and dividends) so you can begin to organize and prepare your income tax return.

1099

Interest, dividend, and capital gains income are reported to the taxpayer and IRS by financial institution on Form ______. The taxpayer reports this to the IRS on a Schedule B form

1099

If you are in the 28% tax bracket and owe $20,000 on $100,000 of taxable income, your average tax rate and marginal tax rate would be, respectively

20% for average and 28% for marginal

A recent tax strategy employed by the government is to allow employees with health care FSAs to carry over up to $ __________ of unused funds. (Enter the numerical value.)

500

If Mary owes the IRS $5,000 for her income taxes and is in the 15% marginal tax bracket, what would be her average tax rate if she had taxable income of $41,667?

About 12%

Which of the following is true?

Bill, age 58, can contribute up to $7,000 in an IRA as of 2020.

A ___________ form is used to amend a previously filed tax return.

Blank 1: 1040X or 1040-X

Two possible tax planning activities for April are filing the tax return by April _______ necessary, filing for an automatic ____________

Blank 1: 15th, 15, or fifteenth Blank 2: extension

An additional 10 percent penalty is usually imposed on premature withdrawals unless the withdrawn funds are on account of death or

Blank 1: disability

Tax avoidance means using___________ strategies to reduce taxes, while tax_________ involves using illegal means to lower tax liability.

Blank 1: legitimate, legal, lawful, or legit Blank 2: evasion or evading

The biggest difference between a(n) ___________ IRA and a Roth IRA is that the Roth IRA contribution is not tax-deductible, but after five years, its earnings are tax-free.

Blank 1: traditional or regular

Which of the following is not a deductible tax?

Excise tax

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

False

Which of the following is true regarding automatic extensions by filing Form 4868?

Filing for an automatic extension extends your deadline for filing by six months.

Which of the following would have tax deductible interest?

Home mortgage

Which tool provides options for checking your refund status, requesting tax records, locating free tax prep help, and accessing other interactive tools?

IRS2Go App

Which of the following best describes the purpose of the alternative minimum tax?

It is to assure that people who receive tax breaks pay a fair share of taxes.

In which month is the SECOND installment for estimated taxes due?

June

Tax planning starts with which of the following?

Knowing current tax laws

Which of the following would potentially have tax-free withdrawals?

Roth IRA

The due date for the THIRD installment for estimated tax is in which month?

September

Which of the following taxes are deductible for the person/family paying them?

State income taxes Real estate property taxes

Which of the following are categories of taxes?

Taxes on earnings Taxes on property Taxes on purchases Taxes on wealth

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

True

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

Universities

Which of the following accurately describes the contribution limits of a 401(k) plan?

Up to $19,500 in 2020 for workers under the age of 50

If you have made estimated quarterly payments totaling $4,000 and your annual taxes owed total $3,700, then which of the following is true?

You will receive a refund of $300.

The ____ minimum tax is structured to ensure that those who receive tax breaks also pay their fair share of taxes.

alternative

A tax __________ is a detailed examination of your tax return by the IRS.

audit

You can file Form 4868 to obtain a(n) ______ six-month extension on filing an income tax return by filing the proper forms with the IRS before the April 15 filing deadline.

automatic

A tax that would require all taxpayers regardless of income level to pay the same percentage is:

flat tax

John owed $10,000 in taxes on taxable income of $40,000. If John earns an additional $1,000, he will pay an additional $280. Therefore

his average tax rate is about 25%

The two main types of taxes on wages and salary are federal and state ______ tax and Social Security tax

income

The tax rate on your next dollar of taxable income is called the:

marginal tax rate.

Components of income include earned, investment, and _________ income.

passive

A tax _____________ directly reduces taxes owed.

credit

Adjusted gross income is the gross income after certain ___________ such as IRA contributions, penalties for early withdrawal of savings, and alimony payments, have been made.

reductions, deductions, or subtractions

The simplest type of IRS audit is the ___________ audit. This is taken directly from the text.

Blank 1: correspondence, correspondance, or correspondent

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

*You can save time while preparing Form 1040 and its accompanying schedules. *A spreadsheet program can help you keep track of income and expenses as the year plays out. *Software packages such as H&R Block At Home and TurboTax help users prepare and file returns.

If you are in the 28% tax bracket and owe $20,000 on $100,000 of taxable income, your average tax rate and marginal tax rate would be, respectively:

20% for average and 28% for marginal

Which of the following types of interest expense is not deductible?

Automobile loan interest

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

property

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 or making estimated payments.

The actions the IRS will take if you make an error could include recalculating your tax and sending you a(n) _________ refund.

bill or invoice

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

estate tax

The value of properties upon which personal property taxes may be assessed include:

farm equipment. furniture. automobiles. boats.

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

itemized or itemize

A marginal tax rate is found by dividing the amount of taxes owed by the taxable income

False

Which of the following are the filing status categories for federal income tax purposes?

*Qualifying widow or widower *Single *Married, filing a separate return *Head of household *Married, filing a joint return

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

*With an office audit, you must visit the IRS office to answer questions about your return. *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.

A marginal tax rate is found by dividing the amount of taxes owed by the taxable income.

False

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

False