Question 1

____ taxes are based on one's ability to pay.

Accepted Answer

Progressive taxes are designed to take a larger percentage of income from individuals with higher incomes, based on the principle of ability to pay. This means that those who earn more pay a higher portion of their income in taxes, while those who earn less pay a lower portion. Regressive taxes, on the other hand, take a larger percentage of income from individuals with lower incomes, which means that those who are less able to afford it pay a higher percentage of their income in taxes. Marginal taxes refer to the tax rate that applies to the highest portion of an individual's income, and may or may not be progressive.

Question 2

Your average tax rate

Accepted Answer

Your average tax rate is the total amount of tax you pay divided by your taxable income. This gives you an overall percentage of your income that goes towards taxes. Your marginal tax rate, on the other hand, is the percentage you pay on the last dollar you earn, and it may be higher than your average tax rate due to the progressive tax system. So, your average tax rate is generally less than your marginal tax rate.

Question 3

A tax that requires a higher-income person to pay a higher percentage of his or her income in taxes is called a ____ tax.

Accepted Answer

A progressive tax is designed to require higher-income individuals to pay a higher percentage of their income in taxes, while lower-income individuals pay a lower percentage. This approach is intended to create a more equitable redistribution of wealth, as those who can afford to pay more are asked to contribute more to the government's revenue.

Question 4

Tax losses are created when deductions generated from an investment (such as depreciation and net investment losses) exceed the income from an investment.

Accepted Answer

Tax losses are created when the deductions exceed the income from an investment.

Question 5

Which of the following would be considered smart financial planning?

Accepted Answer

Contributing to a 401(k) retirement plan and taking advantage of an employer match is an example of smart financial planning. It allows you to save for retirement while also receiving additional funds from your employer. Options A, B, and C are all examples of poor financial planning and can lead to missed savings opportunities and/or inflated tax burdens.

Question 6

Dave Scott's total income is $52,000,but his taxable income is only $39,625.Therefore,his tax liability is $5,763.Dave's average tax rate is approximately ____ percent.

Accepted Answer

The answer of Dave Scott's total income is $52,000,but his...

Question 7

You pay personal taxes on your calculated ____ income.

Accepted Answer

Personal taxes are based on taxable income, which is calculated by subtracting deductions and exemptions from gross income. Marginal income is used in calculating tax rates, adjusted gross income is used to determine eligibility for certain deductions or credits, but taxable income is what is taxed.

Question 8

The income of children over 18 years of age (or 24 if a full time student) is taxed at the parents' marginal tax rate.

Accepted Answer

The income of children over 18 (or 24 if a full time student) is no longer taxed at the parents' marginal tax rate. They are considered separate taxpayers and are taxed at their own marginal tax rate.

Question 9

Matt and Kat are in the 25 percent marginal income tax bracket and are subject to the 7.65 percent Social Security tax.If Kat gets a $750 bonus,approximately what percent of this bonus would she get to keep?

Accepted Answer

The correct answer is B because Kat would get to keep approximately 67 percent of her $750 bonus after taxes.

Question 10

Judy Hays wants to give $3,200 to the building fund at her local church.Assuming Judy can itemize her deductions,how much will this contribution save her on her federal income taxes if she is in the 28 percent marginal tax bracket?

Accepted Answer

To calculate Judy's tax savings, we need to multiply her contribution by her marginal tax rate. 
$3,200 x 0.28 = $896 
Therefore, Judy's contribution will save her $896 on her federal income taxes. The answer is B).

Question 11

There are now ____ marginal tax rates for federal income taxes.

Accepted Answer

The federal income tax system has seven marginal tax rates, which range from 10% to 37%. These rates apply to different income brackets, with higher rates applied to higher income levels. Knowing these rates can help individuals accurately calculate their tax liability and plan accordingly.

Question 12

It is illegal to prepay the next year's professional association dues and take the deduction during the current year.

Accepted Answer

According to tax regulations, if you pay an expense in advance, you can only deduct the amount that applies to your use of the item or service within the tax year. However, for many professional association dues, if the benefit period does not extend beyond 12 months and ends in the next tax year, you can deduct the full amount in the year you pay it. This is considered a prepaid expense that is deductible when paid if it meets the IRS criteria for prepayment.

Question 13

A single individual pays $7,813 on a taxable income of $47,810 and $7,838 on a taxable income of $47,910.What is the marginal tax rate?

Accepted Answer

The marginal tax rate is calculated by the change in tax divided by the change in income. The tax increases by $25 ($7,838 - $7,813) when the income increases by $100 ($47,910 - $47,810), resulting in a marginal tax rate of 25%.

Question 14

Ben and Susan Shew,filing jointly,would pay $7,054 in taxes on $53,100 of taxable income.If Ben won $6,000 in the lottery,they would pay $7,954,in taxes.What is the couple's marginal tax rate?

Accepted Answer

The marginal tax rate is calculated by the additional tax paid on the additional income. The additional tax is $900 ($7,954 - $7,054) on the additional $6,000 income, which results in a marginal tax rate of 15% ($900 / $6,000).

Question 15

Seeking legal ways to reduce,eliminate or defer income taxes is called

Accepted Answer

Tax planning specifically involves finding legal strategies or opportunities to reduce, eliminate, or defer income taxes. Financial planning, income maximization, and asset allocation may all be related to tax planning, but they do not specifically refer to finding ways to reduce income taxes.

Question 16

Jeff is trying to decide whether to sell his baseball card collection.He has been offered a price that would give him a profit of $2,500 by a dealer who has agreed to pay Jeff this price now or in January of next year.This year Jeff is in the 28 percent marginal tax bracket,but next year Jeff expects to be in the 15 percent marginal tax bracket.Therefore,the estimated income tax liability on this $2,500 income would be ____ this year and ____ next year.

Accepted Answer

The tax liability for this year is calculated as $2,500 * 28% = $700, and for next year it is $2,500 * 15% = $375.

Question 17

The tax break for losses from passive investments begins to phase out for taxpayers higher incomes.

Accepted Answer

The tax break for losses from passive investments does begin to phase out for taxpayers with higher incomes. This is known as the passive activity loss (PAL) rules, which limit the amount of passive losses that can be claimed on a tax return. The phase-out threshold for 2021 is $150,000 of modified adjusted gross income (MAGI) for single filers and $300,000 MAGI for married filing jointly.

Question 18

Taxable income is determined by subtracting all but which one of the following from gross income?

Accepted Answer

Taxable income is calculated by subtracting exemptions, adjustments, and exclusions from gross income. Credits are subtracted from the tax owed, not from gross income to determine taxable income.

Question 19

Taxpayers with taxable incomes up to ____ can use the IRS tax tables.

Accepted Answer

Taxpayers with taxable incomes up to $100,000 can use the IRS tax tables.

Question 20

Which of the following taxes is progressive?

Accepted Answer

Federal income taxes are based on a progressive tax system, meaning taxpayers who earn more pay a higher percentage of their income in taxes compared to those who earn less. This is achieved through tax brackets where different rates are applied to different levels of income. State sales taxes and Social Security taxes, on the other hand, are regressive taxes, as they take a higher proportion of income from low-income earners than high-income earners.

Quiz 4: Managing Income Taxes