Deck 17: The Personal Income Tax

Question 1

The Haig-Simons definition of income

A) is measured over a given time.
B) measures an individual's power to consume.
C) is a net change measure.
D) all of these answer options are correct.

Answer 1

all of these answer options are correct.

Question 2

AGI is

A) found by subtracting certain business expenses from H-S income.
B) found by subtracting exemptions from taxable income.
C) not used in modern tax policy.
D) none of these answer options are correct.

Answer 2

found by subtracting certain business expenses from H-S income.

Question 3

Since its inception in 1913,there have been many revisions to the income tax code.

A) True
B) False
C) Uncertain

Answer 3

True

Question 4

The standard deduction for two individuals is higher than the standard deduction for a married couple,causing a "marriage tax."

A) True
B) False
C) Uncertain

Question 5

Tax expenditures are revenues that

A) are always recouped during tax season.
B) only apply to large corporations.
C) are needed to get full exemptions.
D) are forgone due to preferential tax treatment.

Question 6

A Roth IRA differs from a traditional IRA in that

A) the Roth IRA allows for savings towards retirement.
B) the Roth IRA is phased out at certain income levels.
C) the Roth IRA is not tax deductible at the time it is deposited.
D) all of these answer options are correct.

Question 7

State and local income taxes should be deducted from federal income tax.

A) True
B) False
C) Uncertain

Question 8

Unreimbursed medical expenses in excess of 8.5% of AGI are tax deductible.

A) True
B) False
C) Uncertain

Question 9

Inflation

A) has no impact on taxing strategies.
B) can be temporarily offset with tax cuts.
C) only became a tax problem in the late 1990s.
D) generally affects state governments most severely.

Question 10

Flat taxes are more equitable than graduated tax schedules.

A) True
B) False
C) Uncertain

Question 11

A 401(k)account means that the maximum amount of savings that can be deposited is $401,000.

A) True
B) False
C) Uncertain

Question 12

The lowest marginal tax rate used in the United States is

A) 10 percent.
B) 28 percent.
C) 33 percent.
D) 39.6 percent.

Question 13

The current federal tax structure has ______ tax brackets.

A) 5
B) 6
C) 7
D) 8

Question 14

Which of the following is(are)indexed to inflation?

A) Standard deduction
B) Employer contributions to pensions
C) Gifts and inheritances
D) None of the answer options are correct.

Question 15

According to the H-S definition of income,employer contributions are excluded from money income.

A) True
B) False
C) Uncertain

Question 16

The Haig-Simons definition of income includes

A) employer pension contributions and insurance purchases.
B) transfer payments.
C) income in-kind.
D) all of these answer options are correct.

Question 17

Which of the following is an allowable deduction?

A) Unreimbursed medical expenses that exceed 7.5% of AGI
B) State and local income and property taxes
C) Interest on qualified education loans up to a certain limit
D) All of the answer options are correct.

Question 18

Flat tax

A) is same tax rate to everyone.
B) is same tax rate to each component of income.
C) allows a tax base with no deductions with a few exemptions and expenses.
D) is same tax rate to everyone and to each component of income only.
E) all of these answer options are correct.

Question 19

A tax credit

A) is not the same as a tax deduction.
B) is another phrase for a tax deduction.
C) is never calculated on federal tax returns.
D) only applies to the EITC.

Question 20

Capital gains are

A) treated exactly like other sources of income.
B) taxed differently than other sources of income.
C) generally not associated with a "lock-in effect."
D) only realized at death.

Question 21

Only realized capital gains are included in taxable income.

A) True
B) False
C) Uncertain

Question 22

How much do you believe that current tax policy is influenced by politics,as opposed to sound and efficient tax policy?

Question 23

Martha Stewart earns $4,000 and she wants to save it for retirement,which is 10 years away.She can either save it in a taxable account or put it into a Roth IRA.Suppose that Martha can receive an annual rate of return of 8 percent and her marginal tax rate is 25 percent.By the time she reaches retirement,how much money would she have in either option?
NOTE: Martha has to pay tax on the $4,000,so she cannot put the full amount into either the taxable account or the Roth.

Question 24

Suppose you paid $500,000 for an asset.You hold the asset for five years.The interest rate that you get for the asset is 10%.Assume the tax rate on capital gains is 20%.
(A)If capital gains are taxed only when the asset is realized,how much will you have earned on the asset?
(B)Suppose that capital gains are taxed annually instead of at realization.How much will you have earned on the asset?
(C)How big is the difference in the two taxing schemes?

Question 25

Consider an individual who earns $95,000,has two children,pays $6,000 in child care expenses for one child,pays $19,000 in college tuition for the other child,pays $6,500 in mortgage interest (mortgage interest is tax deductible),and pays $9,600 in medical expenses.Medical expenses in excess of 7.5 percent of one's income are deductible.Personal exemptions are $3,050 per person (including the tax filer).When the individual's income is $30,000 or above,he/she gets a 12% child care credit.A college credit of 9% of tuition costs is given to those that have income less than $90,000.Her statutory marginal tax rate is 15 percent.What is her actual or effective marginal tax rate?

Question 26

Investors considering switching capital assets may also consider the potential tax liability and decide not to switch.This is known as bracket creep.

A) True
B) False
C) Uncertain

Question 27

Exemptions are more desirable than deductions for a person in the 36% tax bracket.

A) True
B) False
C) Uncertain

Question 28

AGI always exceeds taxable income.

A) True
B) False
C) Uncertain

Question 29

Discuss the advantages of using an income tax system such as the one discussed in this chapter,as opposed to a consumption tax.

Question 30

Which would a taxpayer in the 35% tax bracket prefer: a $2,000 tax exemption or a $700 tax credit? What if the taxpayer were in the 25% tax bracket?

Question 31

Suppose there is a simple tax system that says you pay 10% for income up to $10,000,25% for income between $10,000 and $50,000,and 35% for all income above $50,000.Mr.Campbell has income of $72,000.Mrs.Campbell has income of $55,000.
(A)What is Mr.Campbell's individual tax liability? Mrs.Campbell's?
(B)What is their liability if they file a joint return?
(C)Is there a marriage penalty? If so,how much is it?