Deck 4: Planning Your Tax Strategy

Question 1

An office audit requires that a taxpayer visit an IRS office to clarify some aspect of his or her tax return.

Answer 1

True

Question 2

A person's filing status is affected by marital status and dependents.

Answer 2

True

Question 3

Money received in the form of dividends or interest is commonly called "earned income."

Answer 3

False

Question 4

The main purpose of taxes is to:

A) generate revenue for funding government programs.
B) reduce the chances of inflation.
C) create jobs.
D) discourage use of certain goods and services.
E) decrease competition from foreign companies.

Question 5

Real-estate property taxes are a major source of revenue for local governments.

Question 6

Tax avoidance refers to illegal actions to reduce one's taxes.

Question 7

A drawback of Flexible Spending Accounts (FSA) is that any account funds must be used to pay for expenses incurred before year's end or the money is lost.

Question 8

The ______________ property tax is based on the value of land and buildings at some point in time.

A) personal
B) real estate
C) direct
D) proportional
E) regressive

Question 9

A general sales tax is also referred to as an excise tax.

Question 10

A tax credit is an amount subtracted directly from the amount of taxes owed.

Question 11

The principal purpose of taxes is to control economic conditions.

Question 12

Taxes are only considered as financial planning activities in April.

Question 13

An exclusion is earnings not included in taxable income.

Question 14

Capital gains refer to profits from the sale of investments.

Question 15

A tax on the value of automobiles, boats, or furniture is referred to as a personal property tax.

Question 16

Tax evasion is the use of illegal actions to reduce one's taxes.

Question 17

Which type of tax is imposed on specific goods and services at the time of purchase?

A) Estate
B) Inheritance
C) Excise
D) General sales
E) Value-added

Question 18

An estate tax is imposed on the value of an individual's property at the time of his or her death.

Question 19

A state may impose a personal property tax.

Question 20

Exemptions are deductions for yourself, your spouse, and qualified dependents that you can deduct from adjusted gross income.

Question 21

Interest earnings of $1,600 from a taxable investment for a person in a 28 percent tax bracket would result in after-tax earnings of:

A) $1,600.
B) $1,152.
C) $1,100.
D) $448.
E) $152.

Question 22

_____________ are expenses that a taxpayer is allowed to deduct from adjusted gross income.

A) Exemptions
B) Exclusions
C) Itemized deductions
D) Tax credits
E) Passive income

Question 23

A person has $4,000 in medical expenses and an adjusted gross income of $32,000. If taxpayers are allowed to deduct the amount of medical expenses that exceed 7.5 percent of adjusted gross income, what would be the amount of the deduction in this situation?

A) $300
B) $1,600
C) $2,400
D) $4,000
E) $32,000

Question 24

A $2,000 deposit to a tax-deferred retirement account for a person in a 25 percent tax bracket would result in a reduced tax bill of:

A) $2,000.
B) $1,500.
C) $1,200.
D) $500.
E) $300.

Question 25

Which of the following would result in a reduction of taxable income?

A) Portfolio income
B) Tax credits
C) Exclusions
D) Passive income
E) Earned income

Question 26

George Washburn had earnings from his salary of $34,000, interest on savings of $800, a contribution to a traditional individual retirement account of $1,500, and dividends from mutual funds of $600. George's adjusted income (AGI) would be:

A) $33,900.
B) $34,000.
C) $34,600.
D) $34,800.
E) $35,400.

Question 27

Tax-deferred retirement plans are a type of:

A) exemption.
B) itemized deduction.
C) passive income.
D) tax shelter.
E) tax credit.

Question 28

Which one of the following items is a set amount of income on which no taxes are paid?

A) Itemized deductions
B) Standard deduction
C) Earned tax credit
D) Withholding
E) Capital gains

Question 29

Earnings from a limited partnership would be an example of ____________ income.

A) passive
B) capital gain
C) portfolio
D) earned
E) excluded

Question 30

What type of tax is imposed on the value of an individual's property at the time of his or her death?

A) Inheritance
B) Excise
C) Gift
D) Personal property
E) Estate

Question 31

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

A) personal postage expenses.
B) life insurance premiums.
C) real estate property taxes.
D) a driver's license fee.
E) annual interest paid on credit cards.

Question 32

Taxable income is used to compute a person's:

A) exemptions.
B) income tax.
C) deductions.
D) capital gains.
E) exclusions.

Question 33

Money received by an individual for personal effort is classified as ______________ income.

A) passive
B) earned
C) portfolio
D) excluded
E) capital gains

Question 34

Reductions from gross income for such items as individual retirement account contributions and alimony payments will result in:

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

Question 35

Which of the following would be deducted from gross income to obtain adjusted gross income?

A) Alimony payments
B) Mortgage interest
C) Medical expenses
D) Foreign income exclusion
E) Charitable contributions

Question 36

An exclusion affects a person's taxes by:

A) reducing the amount of taxable income.
B) increasing itemized deductions.
C) decreasing itemized deductions.
D) decreasing the number of exemptions a person can claim.
E) increasing the number of exemptions a person can claim.

Question 37

When a taxpayer's income increases $1,000 and the taxes owed increases from $7,867 to $8,177, the marginal tax rate is ______ percent.

A) 15
B) 20
C) 25
D) 28
E) 31

Question 38

Which one of the following is not included in gross income?

A) Tax credit
B) Exemption
C) Exclusion
D) Earned income
E) Portfolio income

Question 39

Money received in the form of dividends or interest is classified as ____________ income.

A) passive
B) earned
C) excluded
D) capital gain
E) investment

Question 40

A taxpayer with a taxable income of $47,856 and a total tax bill of $5,889 would have an average tax rate of ____ percent.

A) 8.6
B) 10.3
C) 12.3
D) 14.2
E) 16.7

Question 41

A tax credit of $50 for a person in a 28 percent tax bracket would reduce a person's taxes by:

A) $10.
B) $28.
C) $14.
D) $50.
E) $35.

Question 42

Most people pay federal income tax by:

A) paying the total amount owed on April 15.
B) filing quarterly tax payments.
C) having amounts withheld from income.
D) earning tax credits for various deductions.
E) filing the 1040 EZ form.

Question 43

Kelly Vernon wants her tax return prepared by a government approved tax expert. Which of the following tax preparers should Kelly use?

A) CPA
B) Enrolled agent
C) Nationally-certified tax preparer
D) Tax attorney
E) Local tax preparer

Question 44

Which type of audit is the least complicated for taxpayers?

A) A field audit
B) An office audit
C) A research audit
D) A correspondence audit
E) A documentation audit

Question 45

A tax ____________ is an amount subtracted directly from the amount of taxes owed.

A) credit
B) exemption
C) deduction
D) exclusion
E) shelter

Question 46

Union dues, fees for tax return preparation, and other miscellaneous expenses are:

A) not deductible.
B) fully deductible.
C) deductible for self-employed individuals only.
D) deductible for people in certain income categories.
E) deductible to the extent they exceed two percent of adjusted gross income.

Question 47

Estimated quarterly tax payments must be made by people who:

A) are employed in a foreign country.
B) receive dividends.
C) work for the government.
D) do not have adequate amounts withheld from income.
E) itemize deductions.

Question 48

Which of the following would qualify a person for an exemption when computing taxable income?

A) Mortgage interest
B) A tax shelter
C) A dependent
D) Charitable contributions
E) Passive income

Question 49

A taxpayer whose spouse recently died is most likely to use the ____________ filing status.

A) single
B) married filing joint return
C) married filing separate return
D) head of household
E) qualifying widow or widower

Question 50

Which one of the following people is least likely to have to file a federal income tax return?

A) A U.S. citizen who is a resident of Puerto Rico
B) A U.S. citizen living and working in a foreign country
C) A person earning less than $9,000
D) A person over age 65
E) A college student

Question 51

Itemized deductions are recorded on:

A) Form 1040A.
B) Schedule A.
C) Schedule B.
D) Form 2106.
E) Form 1040B.

Question 52

A deduction from adjusted gross income for yourself, your spouse, and qualified dependents is:

A) the standard deduction.
B) a tax credit.
C) an itemized deduction.
D) an exclusion.
E) an exemption.

Question 53

The Form 1040 is most helpful to a person who:

A) is single with no other exemptions.
B) makes less than $50,000 with no interest or dividends.
C) itemizes deductions.
D) has exempt income.
E) has a simple tax situation.

Question 54

For a dependent to qualify as an exemption, he or she must:

A) be married.
B) be under age 16.
C) be registered in school.
D) receive more than one half of his or her support from the taxpayer.
E) be a relative.

Question 55

An exemption affects a person's tax situation by:

A) increasing the standard deduction.
B) increasing the taxpayer's marginal tax rate.
C) decreasing itemized deductions.
D) reducing the taxpayer's taxable income.
E) decreasing tax credits.

Question 56

Michele Walsh is considering an additional charitable contribution of $2,000 to a tax-deductible charity, bringing her total itemized deductions to $16,000. If Michele is in a 28 percent tax bracket, how much will this $2,000 contribution reduce her taxes?

A) $0
B) $560
C) $1,600
D) $2,000
E) $4,480

Question 57

A person with a total tax liability of $4,350 and withholding of federal taxes of $3,975 would:

A) receive a refund of $3,975.
B) owe $4,350.
C) owe $375.
D) receive a refund of $4,350.
E) receive a refund of $375.

Question 58

Which one of these terms is defined as the use of legitimate methods to reduce one's taxes?

A) Tax evasion
B) Tax avoidance
C) Tax exemption
D) Tax deferral
E) Tax deduction

Question 59

Which form would an individual use who has less than $100,000 in taxable income from wages, salaries, tips, unemployment compensation, interest, or dividends, and who is married and does not itemize deductions?

A) Form 1040X
B) Form 1040EZ
C) Form 1040A
D) Schedule A
E) Schedule E

Question 60

The "head of household" filing status is for people who are:

A) recently divorced.
B) the surviving spouse.
C) unmarried and have dependent children.
D) married but only one spouse has income.
E) married and each spouse makes about the same income.

Question 61

An itemized deduction of $500 with a 36 percent tax rate would reduce a person's taxes by:

A) $500.
B) $36.
C) $464.
D) $280.
E) $180.
$500 × .36 = $180

Question 62

Alex Bates goes on Jeopardy and earns $875,000 in winnings. What type of income is this?

A) Earned income
B) Investment income
C) Passive income
D) Other income
E) Deferred income

Question 63

Haley Thomas has adjusted gross income of $40,000. She paid $3,600 in property taxes during the year. How much of the tax can she deduct from adjusted gross income?

A) $3,600
B) $3,000
C) $1,800
D) $600
E) $0

Question 64

Al Barkley is single and earns $40,000 in taxable income. He uses the following tax rate schedule to calculate the taxes he owes. What is Al's average tax rate?

A) 15.45%
B) 18.27%
C) 21.35%
D) 23.87%
E) 25.00%

Question 65

Capital gains refer to:

A) tax-exempt investments.
B) retirement accounts.
C) profits from the sale of an investment asset.
D) earnings from investments such as dividends or interest.
E) tax-deferred investments.

Question 66

A traditional IRA, Keogh plan, and 401(k) plan are examples of:

A) tax-exempt retirement plans.
B) tax-deferred retirement plans.
C) capital gains.
D) self-employment insurance programs.
E) job-related expenses that are tax deductible.

Question 67

Tim Bridges owns a bass fishing boat. His state imposes an annual 3.25 percent tax on the current value of this boat. What type of tax is this most likely to be?

A) General sales tax
B) Excise tax
C) Personal property tax
D) Income tax
E) Estate tax

Question 68

Elizabeth Gleason just died. At the time of her death the total value of her assets was $150,000. The federal government collected $7,500 in taxes based on this value. What type of tax is this most likely to be?

A) General sales tax
B) Excise tax
C) Personal property tax
D) Income tax
E) Estate tax

Question 69

The state of Oklahoma imposes a tax of $.17 per gallon on gasoline. What type of tax is this most likely to be?

A) General sales tax
B) Excise tax
C) Personal property tax
D) Income tax
E) Estate tax

Question 70

Joan Sanchez is single and earns $40,000 in taxable income. She uses the following tax rate schedule to calculate the taxes she owes. What is Joan's marginal tax rate?

A) 10%
B) 15%
C) 25%
D) 28%
E) between 10% and 15%

Question 71

For which of the following types of credit plans is the interest tax deductible?

A) Home equity loan
B) Auto loan
C) Credit card
D) Life insurance policy cash value loan
E) Personal cash loan from a credit union

Question 72

Which one of these investments produces tax-exempt income?

A) U.S. savings bonds
B) Corporate stock
C) Stock mutual fund
D) Municipal bond
E) Corporate bond

Question 73

Randal Ice is 57 years old, and has adjusted gross income of $32,000. He has medical expenses for the year of $6,000. How much of these expenses can he deduct from adjusted gross income?

A) $0
B) $2,400
C) $2,800
D) $3,600
E) $4,500

Question 74

John Camey goes into a local department store and purchases a new suit. He pays $43 in taxes on this purchase. What type of tax is this most likely to be?

A) General sales tax
B) Excise tax
C) Personal property tax
D) Income tax
E) Estate tax

Question 75

Mr. and Mrs. Keating want to give their son Dudley a total of $24,000. They each write him a check for $12,000 so they won't have to pay any gift tax. This is an example of:

A) fraud.
B) tax evasion.
C) tax exclusion.
D) tax avoidance.
E) tax deferred income.

Question 76

Drew Davis earns $4,500 per month from his job at Cisco Systems; $900 is withheld from this amount each month for taxes. What type of tax is this most likely to be?

A) General sales tax
B) Excise tax
C) Personal property tax
D) Income tax
E) Estate tax

Question 77

Which one of the following is most apt to qualify as an itemized deduction?

A) Interest on a credit card or charge account
B) Unreimbursed job-related travel expenses
C) Cost of commuting to work
D) Life insurance premiums
E) Traffic violation fee

Question 78

Kim Ye is single and earns $40,000 in taxable income. He uses the following tax rate schedule to calculate the taxes he owes. Calculate the dollar amount of estimated taxes that Kim owes.

A) $6,000.00
B) $6,181.25
C) $10,000.00
D) $11,200.25
E) $16,181.25

Question 79

Which one of these statements correctly applies to a Roth IRA?

A) Earnings on the account are tax-free after five years.
B) Annual contributions may exceed $2,000.
C) Deposits must be in federally-insured accounts.
D) Funds are only to be used for educational expenses.
E) Only self-employed workers can contribute to a Roth IRA.

Question 80

A short-term capital gain is profit earned on an investment that is:

A) made involving small companies.
B) not taxed as ordinary income.
C) held less than 12 months.
D) in foreign companies.
E) made in real estate.