Deck 4: Using Tax Concepts for Planning

Question 1

Medicare is a government health insurance program that covers people over age 55 and provides payments to health care providers in case of illness.

Answer 1

False

Question 2

Knowledge of individual income taxes is crucial to sound financial planning.

Answer 2

True

Question 3

A branch of the U.S.Treasury Department,called the ________,administers the federal tax system.

A)U)S.Department of Tax
B)Internal Revenue Service
C)U)S.Tax Authority
D)U)S.Department of Collection

Answer 3

Internal Revenue Service

Question 4

Knowledge of tax laws can help you conserve your income.

Question 5

________ is withheld at a rate of 6.2% on the first $102,000 of your earnings.

Question 6

The Tax Relief Act of 2001 provided educational incentives to a broad range of taxpayers and reduced contribution limits to retirement plans.

Question 7

Self-employed individuals pay FICA taxes at a rate of

A)1)45 percent.
B)7)65 percent.
C)15.3 percent.
D)20.9 percent.

Question 8

Your gross wages are subject to FICA (Federal Insurance Contributions Act)taxes that fund the Social Security system and Medicare.

Question 9

Which of the following taxes is only paid on the first $102,000 of your salary?

A)Federal Income Tax
B)Social Security Tax
C)Medicare Tax
D)All of the above.

Question 10

Taxpayers can have more than the minimum amount of required income tax withheld from each pay.

Question 11

If you have a salary of $30,000,an IRA deduction of $2,000,a standard deduction of $4,400,and a FICA rate of 7.65 percent,how much did you pay in FICA this year?

A)$1,805
B)$1,958
C)$2,142
D)$2,295

Question 12

FICA taxes include two components,which consist of

A)accident and disability insurance.
B)unemployment compensation and disability insurance.
C)retirement and Medicare contributions.
D)old age and unemployment compensation.

Question 13

There is no Social Security tax on income beyond a certain level.

Question 14

The knowledge of tax laws can help you

A)conserve your income.
B)enhance your investments.
C)protect the transfer of your wealth at your death.
D)All of the above.

Question 15

The Tax Relief Act of 2001

A)raised the tax rates for the highest income portion of the population.
B)limits further the ability to contribute to retirement plans tax-free.
C)provided educational incentives to most taxpayers.
D)reduced the childcare credit available to most young families.

Question 16

Medicare taxes are 1.45% of your salary,regardless of the salary amount.

Question 17

Employers have an option of whether or not to match an employee's Social Security and Medicare taxes.

Question 18

Which of the following statements is not true regarding FICA taxes paid?

A)These taxes fund both Social Security and Medicare
B)Employers are required to match employee FICA contributions
C)All FICA taxes apply to your total income
D)There is a limit on how much of your income will be taxed for Social Security

Question 19

Students and other taxpayers earning less than $100,000 a year with no dependents are eligible to file the simplest tax return,which is the 1040E-Z.

Question 20

Determining taxes requires you to address all of the following topics except

A)gross income.
B)daily living expenses.
C)deductions.
D)exemptions.

Question 21

Gross income consists of all reportable income from any source.

Question 22

Income earned from the sale of an asset for more than you paid for it is classified as a(n)

A)dividend income.
B)interest income.
C)capital gain.
D)windfall.

Question 23

To qualify for "head of household" you must

A)be single.
B)have at least one dependent in your household.
C)be a homeowner.
D)Both answers A and B are correct.

Question 24

Which of the following gross income is not taxable income?

A)Health insurance reimbursements
B)Interest income
C)Dividends
D)Tips received

Question 25

If a stock was purchased in January 2009 for $1,000 and sold in December 2010 for $3,000,a ________ of $2,000 results.

A)long-term capital gain
B)short-term capital gain
C)long-term capital loss
D)short-term capital loss

Question 26

If you are a married taxpayer,you may use the ________ filing status.

A)single
B)married filing jointly or married filing separately
C)head of household
D)Any of the above may be used.

Question 27

All interest and dividends received by an individual taxpayer are taxable.

Question 28

Interest income would come from earnings on

A)stocks.
B)savings accounts.
C)capital gains on investments.
D)sale of mutual funds.

Question 29

The timing on the sale of an investment asset earning a capital gain makes little or no difference in the amount of taxes that are owed.

Question 30

All taxpayers have a large degree of freedom in choosing their filing status.

Question 31

Which of the following is not a tax filing status option?

A)Single
B)Divorced
C)Married filing jointly
D)Head of household

Question 32

A long-term capital gain results from profit on the sale of capital assets that were held 12 months or more.

Question 33

Gross income includes all of the following except

A)salary or wages.
B)interest or dividends received.
C)employer's current contribution to 401(k).
D)capital gains realized.

Question 34

If a stock was purchased for $5,000 in January 2010 and is sold in December 2010 for $3,000,a ________ of $2,000 results.

A)long-term capital gain
B)short-term capital gain
C)long-term capital loss
D)short-term capital loss

Question 35

Different tax rates are associated with each filing status such as single,married filing jointly,and head of household.

Question 36

If you are a surviving spouse,you may continue to use the married filing jointly tax rates unless

A)you are divorced and your ex-spouse died in the last five years.
B)your spouse died in the last two years.
C)you have children you can claim as an exemption.
D)you pay more than half the cost of maintaining your residence.

Question 37

If you were to receive $100,000 from a corporation,the most tax-efficient way to receive it would be as

A)dividends.
B)interest.
C)capital gains.
D)salary.

Question 38

Jerry is divorced and has two children that live with him.What filing status should Jerry claim on his tax return?

A)Single
B)Head of household
C)Married filing separately
D)Married filing jointly

Question 39

Employee contributions to qualified Individual Retirement Accounts (IRAs)and interest paid on student loans are adjusted from gross income to calculate a taxpayer's adjusted gross income.

Question 40

All of the following are types of nontaxable income except

A)child support payments.
B)casualty insurance reimbursements.
C)rental income.
D)reimbursements of moving expenses by an employer.

Question 41

The standard deduction is smallest for

A)single filers,assuming under age 65.
B)head of household filers,assuming over age 65 or blind.
C)married filing separately,assuming over age 65 or blind.
D)married filing jointly,assuming under age 65.

Question 42

The standard deduction (assuming you are not over 65 or blind)is largest for

A)single filers.
B)head of household filers.
C)married filing jointly.
D)married filing separately.

Question 43

For qualified individuals,a contribution to a traditional IRA (Individual Retirement Account)is a(n)

A)credit.
B)adjustment to gross income.
C)itemized expense.
D)additional exemption amount.

Question 44

All taxpayers have a choice of whether to take the standard deduction or itemize deductions.

Question 45

________ and ________ are both reported on a Schedule B.

Question 46

The government usually adjusts the exemptions and standard deductions amounts annually to account for inflation.

Question 47

Gross income and adjusted gross income can be the same if you do not have any special adjustments.Which of the following is not one of these special adjustments?

A)Capital gains are deducted and capital losses are added
B)IRA contributions are subtracted from gross income
C)Interest and dividend income is part of the income calculation
D)Alimony payments are deducted from gross income

Question 48

Itemized deductions can include mortgage interest expense,state income tax expense,charitable contributions,and other employee expenses.

Question 49

Jake invested $800 in an IRA.If he has a 15 percent marginal tax rate and the contribution is tax deductible,Jake will

A)pay $120 more in taxes.
B)pay $120 less in taxes.
C)receive no change to his tax liability.
D)have $800 more in adjusted gross income.

Question 50

If you own stock that has increased in price,it would be best to sell it after you have owned it for at least

A)6 months and one day.
B)12 months and one day.
C)18 months and one day.
D)24 months and one day.

Question 51

All medical expenses may be deducted from income as long as you have the receipts or can show proof of payment.

Question 52

The filing status that yields the largest standard deduction per taxpayer is

A)married,filing jointly.
B)head of household.
C)single individual.
D)married,filing separately.

Question 53

Interest expense paid on home loans and car loans is deductible from your income tax.

Question 54

________ are specific expenses instead of a standard amount that reduce adjusted gross income.

A)Exemptions
B)Household expenses
C)Itemized deductions
D)Tax credits

Question 55

Which of the following is not a legitimate itemized deduction?

A)Mortgage interest expense
B)Real estate tax
C)Interest paid on credit cards
D)State income tax

Question 56

An expense that could be included in the itemized deductions of a taxpayer is

A)life insurance premiums.
B)real estate property taxes.
C)travel to work expenses.
D)driver license fees.

Question 57

If you sell an asset that you owned for less than 12 months for more than you paid for it,you will report a(n)________.

Question 58

A young couple buying a home would usually be better off to take the standard deduction rather than itemizing deductions.

Question 59

A personal exemption can be claimed for the person filing a tax return,for a spouse,and for each dependent.

Question 60

Reductions of gross income for such items as individual retirement accounts (IRAs),moving expenses,and student loan interest payments will result in

A)adjusted gross income.
B)taxable income.
C)earned income.
D)passive income.

Question 61

Jerry is divorced and has two children that live with him.In addition he baby-sits three other children in the evenings and has a cat and two dogs.How many exemptions can he claim on his tax return?

A)One
B)Two
C)Three
D)Four

Question 62

Only the income that remains after deductions and exemptions are subtracted from adjusted gross income is taxable.

Question 63

An earned income credit is a special credit that reduces the amount of taxes owed by taxpayers who earn high incomes.

Question 64

A standard amount which taxpayers can claim for themselves and dependents is called a(n)

A)allowance.
B)deduction.
C)exemption.
D)exclusion.

Question 65

When you own a house as a primary residence

A)it is always best to itemize deductions on your tax return.
B)your property taxes are not deductible.
C)you get a straight $5,000 deduction.
D)interest and taxes may increase your allowable deductions to the point where it is beneficial to itemize them.

Question 66

Purchasing which of the following items on credit will help reduce your tax bill?

A)Automobile
B)Home
C)Stereo
D)Boat

Question 67

In 2001,the tax laws were changed to allow substantial tax benefits for parents who wish to set aside money for their children's future college expenses.

Question 68

Which of the following can be deducted from your taxes even if you do not itemize?

A)Mortgage interest expense
B)Real estate taxes
C)State income taxes
D)Student loan interest

Question 69

Which of the following items is not impacted by the taxpayer's income level?

A)Amount withheld for Social Security
B)Amount withheld for Medicare taxes
C)College expense credits
D)Personal exemptions

Question 70

Which item below cannot be taken as an itemized deduction?

A)Medical expenses
B)Charitable contributions
C)Child and dependent care expenses
D)Real estate taxes

Question 71

Which of the following is not a tax credit mentioned in the chapter?

A)Child tax credit
B)Second income credit
C)College expense credit
D)Earned income credit

Question 72

The tax method that uses the principle of taxing those more who earn more is called ________ taxation.

A)benefits received
B)payment burden
C)progressive
D)regressive

Question 73

You should claim itemized deductions if

A)itemized deductions exceed the standard deduction.
B)the standard deduction exceeds itemized deductions.
C)itemized deductions exceed exemptions.
D)itemized deductions exceed tax credits.

Question 74

Which of the following is the correct method for starting with gross income and computing taxable income?

A)Subtract the standard deduction and exemptions
B)Add the itemized deductions and subtract the exemptions
C)Subtract IRA contributions and add exemptions
D)Subtract adjustments,deductions,and exemptions

Question 75

When taxable income exceeds certain levels,the itemized deductions and exemptions

A)are reduced.
B)are limited but may be carried over to future years.
C)reach a maximum allowable amount.
D)increase in proportion to increases in taxable income.

Question 76

Which of the following conditions will not afford you a tax advantage?

A)Being over age 65
B)Being deaf
C)Being widowed within the past two years
D)Being blind

Question 77

The ________ is a fixed amount deducted from adjusted gross income to determine taxable income.

Question 78

Tax credits amount to the same savings as tax deductions.

Question 79

The highest tax rate a taxpayer is charged on his or her federal tax return is called the ________ rate.

A)marginal
B)average
C)maximum
D)true

Question 80

Under the Tax Relief Act of 2003,the lowest tax bracket for single taxpayers earning $8,000 or less is 15 percent.