Question 1

A progressive tax structure is one in which:

Accepted Answer

In a progressive tax structure, the larger the amount of taxable income, the higher the rate at which it is taxed. This means that those who earn more money will pay a higher percentage of their income in taxes, while those who earn less will pay a lower percentage. This is designed to create a fairer tax system where those who can afford to pay more, do so, while those who have less are not burdened with high taxes.

Question 2

The highest marginal tax rate is currently:

Accepted Answer

The highest marginal tax rate for individuals for tax year 2021 is 37%, which applies to income over $523,600 for single filers and $628,300 for married filers filing jointly.

Question 3

The Internal Revenue Service (IRS) will compute taxes for those whose taxable income is less than $100,000 and who do not itemize deductions.

Accepted Answer

According to the IRS, they will automatically calculate taxes for taxpayers who earn less than $100,000 and do not itemize their deductions. This is known as the standard deduction. However, taxpayers are still responsible for verifying the accuracy of the information and ensuring they have claimed all eligible credits and deductions.

Question 4

If you are legally separated from your spouse by a separation decree, you can legally file as a single taxpayer.

Accepted Answer

A separation decree legally recognizes the couple as living separately, allowing each spouse to file as a single taxpayer.

Question 5

Qualified dividends are taxed at a higher rate than long-term capital gains.

Accepted Answer

Qualified dividends and long-term capital gains are taxed at the same lower rates, which are generally less than the rates applied to ordinary income.

Question 6

Mandi and Thomas were married and had a child, age 7, in 2018 . Mandi died in 2018, leaving Thomas a single parent. The most favorable filing status for Thomas in 2019 will be:

Accepted Answer

Thomas can file as a qualifying widower with dependent child for the tax year in which his spouse died (2018) and the following tax year (2019). This filing status allows him to use the higher standard deduction and tax brackets of a married couple filing jointly for two additional years after the tax year of his spouse's death. However, after that he will have to file as either single or head of household, depending on his circumstances.

Question 7

Tax avoidance is legal, whereas tax evasion is illegal.

Accepted Answer

Tax avoidance refers to the practice of using legal methods to reduce one's tax liability, while tax evasion involves the use of illegal methods to avoid paying taxes owed.

Question 8

Gross income minus tax-exempt income equals adjusted gross income (AGI).

Accepted Answer

Adjusted Gross Income (AGI) is calculated by subtracting allowable deductions from your gross income, not by subtracting tax-exempt income. Tax-exempt income is income that is not subject to tax and is not included in gross income.

Question 9

A tax audit is an examination by local government officials to identify people who do not pay enough taxes.

Accepted Answer

A tax audit is an examination of an individual's or organization's tax returns by a tax authority to verify that income and deductions are accurately reported. It is not limited to local government officials but can be conducted by state, federal, or other tax authorities depending on the jurisdiction.

Question 10

Adjustments to (gross) income will decrease your taxable income.

Accepted Answer

Adjustments to income such as contributions to traditional IRAs, student loan interest paid, and certain educational expenses can lower your taxable income.

Question 11

Pete and Pam are married with four dependent children. Which of the following filing statuses can Pete and Pam use if they want to legally file one tax return?

Accepted Answer

As a married couple with dependent children, the best filing status for Pete and Pam is married filing jointly. This status generally offers the most tax benefits and credits compared to the other options listed.

Question 12

A married couple filing a joint return has Ms. Cindy Cook, a certified public accountant (CPA), complete their return. The Internal Revenue Service (IRS) will hold only Ms. Cook responsible for any errors in the filed return.

Accepted Answer

The married couple filing the joint return are ultimately responsible for the accuracy of the information provided on the return, and both parties can be held responsible for any errors or omissions. While the CPA may face penalties or disciplinary action for any professional misconduct, they are not solely responsible for any errors on the return filed by the couple.

Question 13

Russ and Lois were married on December 30. Even though they were single for most of the year, they can legally file as married filing jointly taxpayers in the year of the wedding.

Accepted Answer

As long as the couple was married by the last day of the tax year (December 31), they can file as married filing jointly for that entire year.

Question 14

All taxpayers have an equal probability of having their tax returns audited.

Accepted Answer

Taxpayers are selected for audit based on a variety of factors, including the amount of income reported, certain deductions claimed, and potential red flags identified by the IRS. Some taxpayers may have a higher likelihood of being audited based on these factors.

Question 15

Tax credits are dollar-for-dollar reductions in taxable income.

Accepted Answer

Tax credits are dollar-for-dollar reductions in the amount of tax owed, not in taxable income.

Question 16

The federal government receives a majority of its revenue from ____ taxes.

Accepted Answer

The federal government receives the majority of its revenue from income taxes, which are collected from individuals and businesses based on their earnings and profits.

Question 17

Dwayne and Gayle were divorced on September 29. They have not remarried since and have no dependents. Their filing status for the year will be married filing separately since they were married for more than half of the year.

Accepted Answer

Their filing status would be single because they were divorced by December 31, making them unmarried for the entire tax year according to IRS rules.

Question 18

The alternative minimum tax (AMT) is applicable to taxpayers with moderate levels of income only.

Accepted Answer

The alternative minimum tax (AMT) can apply to taxpayers with higher levels of income, as it is designed to ensure that high-income taxpayers pay a minimum amount of tax and do not take advantage of too many deductions or credits.

Question 19

Henry is married to Lillian, and they have two dependent children. Both of them want to file their own tax returns, reporting only his or her own income, deductions, and exemptions. The filing status of Henry and Lillian is:

Accepted Answer

Henry and Lillian cannot file as single taxpayers or head of household as they are married. They also cannot file as qualifying widow or widower as both spouses are alive. The only option left is to file separately as married individuals. However, they should consider the potential tax implications and possible loss of certain tax benefits such as the earned income credit and education credits if they choose to file separately.

Question 20

Income shifting refers to the process of transferring income from the taxpayer to the Internal Revenue Service (IRS).

Accepted Answer

Income shifting actually refers to the process of transferring income from a high-tax bracket taxpayer to a lower-tax bracket taxpayer, such as a dependent child or spouse, in order to reduce overall tax liability.

Quiz 3: Preparing Your Taxes