Focus on Personal Finance (Jack Kapoor 6th Edition-Test Bank

 

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Sample Test

Personal Finance, 6e (Kapoor)

Chapter 3   Taxes in Your Financial Plan

 

1) “Tax Freedom Day” represents how long the average person works to pay her or his taxes each year.

 

Answer:  TRUE

Difficulty: 1 Easy

Page Ref: 75

Topic:  Real and personal property taxes; Sales and excise taxes; Social Security and Medicare taxes; Income tax terminology

Learning Objective:  03-01 Identify the major tax types in our society.

Bloom’s:  Remember

Accessibility:  Keyboard Navigation

Gradable:  automatic

 

2) An example of an excise tax is Social Security.

 

Answer:  FALSE

Explanation:  Social Security is an example of a tax on earnings.

Difficulty: 2 Medium

Page Ref: 76

Topic:  Real and personal property taxes; Sales and excise taxes; Social Security and Medicare taxes; Income tax terminology

Learning Objective:  03-01 Identify the major tax types in our society.

Bloom’s:  Understand

Accessibility:  Keyboard Navigation

Gradable:  automatic

 

3) Individuals are allowed to give money or items of any value to a person without being subject to estate taxes.

 

Answer:  FALSE

Explanation:  Individuals are allowed to give money or items valued at $14,000 or less in a year to a person without being subject to estate taxes.

Difficulty: 1 Easy

Page Ref: 76

Topic:  Real and personal property taxes; Sales and excise taxes; Social Security and Medicare taxes; Income tax terminology

Learning Objective:  03-01 Identify the major tax types in our society.

Bloom’s:  Remember

Accessibility:  Keyboard Navigation

Gradable:  automatic

 

 

 

4) Amounts given for tuition payments or medical expenses are not subject to gift taxes.

 

Answer:  TRUE

Difficulty: 2 Medium

Page Ref: 76

Topic:  Real and personal property taxes; Sales and excise taxes; Social Security and Medicare taxes; Income tax terminology

Learning Objective:  03-01 Identify the major tax types in our society.

Bloom’s:  Understand

Accessibility:  Keyboard Navigation

Gradable:  automatic

 

5) Determining adjusted gross income is the final step in calculating federal income tax.

 

Answer:  FALSE

Explanation:  Determining adjusted gross income (AGI) is the first step in calculating income taxes.

Difficulty: 2 Medium

Page Ref: 78

Topic:  Income tax payments and penalties; Income tax preparation and computations; Income tax terminology

Learning Objective:  03-02 Calculate taxable income and the amount owed for federal income tax.

Bloom’s:  Understand

Accessibility:  Keyboard Navigation

Gradable:  automatic

 

6) Cash and prizes won on television game shows are subject to both federal and state taxes.

 

Answer:  TRUE

Difficulty: 2 Medium

Page Ref: 78

Topic:  Income tax payments and penalties; Income tax preparation and computations; Income tax terminology

Learning Objective:  03-02 Calculate taxable income and the amount owed for federal income tax.

Bloom’s:  Understand

Accessibility:  Keyboard Navigation

Gradable:  automatic

 

 

 

7) Adjusted gross income is increased by the itemized or standard deduction.

 

Answer:  FALSE

Explanation:  AGI is reduced by these.

Difficulty: 2 Medium

Page Ref: 78

Topic:  Income tax payments and penalties; Income tax preparation and computations; Income tax terminology

Learning Objective:  03-02 Calculate taxable income and the amount owed for federal income tax.

Bloom’s:  Understand

Accessibility:  Keyboard Navigation

Gradable:  automatic

 

8) When Tom calculates his taxable income, he should subtract his tax credits from adjusted gross income.

 

Answer:  FALSE

Explanation:  He should subtract his tax deductions, not his tax credits. Tax credits are subtracted directly from the amount of taxes owed.

Difficulty: 3 Hard

Page Ref: 79

Topic:  Income tax payments and penalties; Income tax preparation and computations; Income tax terminology

Learning Objective:  03-02 Calculate taxable income and the amount owed for federal income tax.

Bloom’s:  Apply

Accessibility:  Keyboard Navigation

Gradable:  automatic

 

9) The itemized deduction allowed for an individual 65 and older is higher than the itemized deduction for a younger taxpayer.

 

Answer:  FALSE

Explanation:  This would be true IF the statement said standarddeduction instead of itemized deduction.

Difficulty: 2 Medium

Page Ref: 78

Topic:  Income tax payments and penalties; Income tax preparation and computations; Income tax terminology

Learning Objective:  03-02 Calculate taxable income and the amount owed for federal income tax.

Bloom’s:  Understand

Accessibility:  Keyboard Navigation

Gradable:  automatic

 

 

 

10) When Marissa completes her taxes, she can include her qualified dependent children, her husband, and herself as exemptions.

 

Answer:  TRUE

Difficulty: 2 Medium

Page Ref: 80

Topic:  Income tax payments and penalties; Income tax preparation and computations; Income tax terminology

Learning Objective:  03-02 Calculate taxable income and the amount owed for federal income tax.

Bloom’s:  Understand

Accessibility:  Keyboard Navigation

Gradable:  automatic

 

11) Tax rate schedules list average tax rates.

 

Answer:  FALSE

Explanation:  Tax rate schedules show marginal tax rates.

Difficulty: 1 Easy

Page Ref: 81

Topic:  Income tax payments and penalties; Income tax preparation and computations; Income tax terminology

Learning Objective:  03-02 Calculate taxable income and the amount owed for federal income tax.

Bloom’s:  Remember

Accessibility:  Keyboard Navigation

Gradable:  automatic

 

12) The average tax rate is the tax paid on the next dollar of taxable income.

 

Answer:  FALSE

Explanation:  The marginal tax rate fits this definition. The average tax rate is calculated by dividing the total tax due by taxable income.

Difficulty: 2 Medium

Page Ref: 81

Topic:  Income tax payments and penalties; Income tax preparation and computations; Income tax terminology

Learning Objective:  03-02 Calculate taxable income and the amount owed for federal income tax.

Bloom’s:  Understand

Accessibility:  Keyboard Navigation

Gradable:  automatic

 

 

 

13) All individuals with taxable income are subject to the AMT calculation.

 

Answer:  FALSE

Explanation:  The AMT is an additional tax calculation designed to ensure that those who receive tax breaks also pay their fair share of taxes.

Difficulty: 2 Medium

Page Ref: 83

Topic:  Income tax payments and penalties; Income tax preparation and computations; Income tax terminology

Learning Objective:  03-02 Calculate taxable income and the amount owed for federal income tax.

Bloom’s:  Understand

Accessibility:  Keyboard Navigation

Gradable:  automatic

 

14) A tax credit has a full dollar effect in lowering taxes.

 

Answer:  TRUE

Difficulty: 2 Medium

Page Ref: 83

Topic:  Income tax payments and penalties; Income tax preparation and computations; Income tax terminology

Learning Objective:  03-02 Calculate taxable income and the amount owed for federal income tax.

Bloom’s:  Understand

Accessibility:  Keyboard Navigation

Gradable:  automatic

 

15) A tax credit reduces the taxable income on which the tax liability is computed.

 

Answer:  FALSE

Explanation:  The definition describes a tax deduction. A tax credit reduces the amount of taxes owed dollar for dollar.

Difficulty: 2 Medium

Page Ref: 83

Topic:  Income tax payments and penalties; Income tax preparation and computations; Income tax terminology

Learning Objective:  03-02 Calculate taxable income and the amount owed for federal income tax.

Bloom’s:  Understand

Accessibility:  Keyboard Navigation

Gradable:  automatic

 

 

 

16) If your tax payments are less than the amount of income tax you owe, you are entitled to a refund.

 

Answer:  FALSE

Explanation:  If your tax payments are greater than the amount of income tax you owe, then you are entitled to a refund.

Difficulty: 1 Easy

Page Ref: 84

Topic:  Income tax payments and penalties; Income tax preparation and computations; Income tax terminology

Learning Objective:  03-02 Calculate taxable income and the amount owed for federal income tax.

Bloom’s:  Remember

Accessibility:  Keyboard Navigation

Gradable:  automatic

 

17) Individuals who have high income reported on Form 1099 may be required to pay estimated tax payments.

 

Answer:  TRUE

Difficulty: 2 Medium

Page Ref: 84

Topic:  Income tax payments and penalties; Income tax preparation and computations; Income tax terminology

Learning Objective:  03-02 Calculate taxable income and the amount owed for federal income tax.

Bloom’s:  Understand

Accessibility:  Keyboard Navigation

Gradable:  automatic

 

18) Federal income tax returns must be filed by April 1 of each year.

 

Answer:  FALSE

Explanation:  Federal income tax returns must be filed by April 15.

Difficulty: 1 Easy

Page Ref: 84

Topic:  Income tax payments and penalties; Income tax preparation and computations; Income tax terminology

Learning Objective:  03-02 Calculate taxable income and the amount owed for federal income tax.

Bloom’s:  Remember

Accessibility:  Keyboard Navigation

Gradable:  automatic

 

 

 

19) Form 4868 allows a taxpayer to obtain a six-month automatic extension on filing and paying federal taxes without penalty.

 

Answer:  FALSE

Explanation:  The extension does not delay the payment of your federal tax liability.

Difficulty: 2 Medium

Page Ref: 84

Topic:  Income tax payments and penalties; Income tax preparation and computations; Income tax terminology

Learning Objective:  03-02 Calculate taxable income and the amount owed for federal income tax.

Bloom’s:  Understand

Accessibility:  Keyboard Navigation

Gradable:  automatic

 

20) All citizens of the United States are required to file a federal income tax return if their income falls below a certain level.

 

Answer:  FALSE

Explanation:  Citizens whose income is above a certain level are required to file.

Difficulty: 1 Easy

Page Ref: 85

Topic:  Filing Your Federal Income Tax Return; Income tax filing requirements; Income tax forms; Income tax revisions and audits; State income taxes; Tax information sources

Learning Objective:  03-03 Prepare a federal income tax return.

Bloom’s:  Remember

Accessibility:  Keyboard Navigation

Gradable:  automatic

 

21) Most states do not require state income taxes.

 

Answer:  FALSE

Explanation:  Only seven states do not have a state income tax and additionally, another two states only tax dividends and interest.

Difficulty: 1 Easy

Page Ref: 88

Topic:  Income tax filing requirements; Income tax forms; Income tax revisions and audits; State income taxes; Tax information sources

Learning Objective:  03-03 Prepare a federal income tax return.

Bloom’s:  Remember

Accessibility:  Keyboard Navigation

Gradable:  automatic

 

 

 

22) Using tax software will not save a taxpayer any time when preparing Form 1040.

 

Answer:  FALSE

Explanation:  Using tax software will save a taxpayer time when preparing Form 1040.

Difficulty: 1 Easy

Page Ref: 89

Topic:  Income tax filing requirements; Income tax forms; Income tax revisions and audits; State income taxes; Tax information sources

Learning Objective:  03-03 Prepare a federal income tax return.

Bloom’s:  Remember

Accessibility:  Keyboard Navigation

Gradable:  automatic

 

23) The IRS has made online filing free for millions of taxpayers through the Free File Alliance.

 

Answer:  TRUE

Difficulty: 1 Easy

Page Ref: 90

Topic:  Income tax filing requirements; Income tax forms; Income tax revisions and audits; State income taxes; Tax information sources

Learning Objective:  03-03 Prepare a federal income tax return.

Bloom’s:  Remember

Accessibility:  Keyboard Navigation

Gradable:  automatic

 

24) Tom needs to complete his taxes. He should be able to find a tax preparation service to complete his simple tax return for as little as $15.

 

Answer:  FALSE

Explanation:  Fees typically range from $40 at a tax preparation service for a simple return.

Difficulty: 1 Easy

Page Ref: 92

Topic:  Income tax filing requirements; Income tax forms; Income tax revisions and audits; State income taxes; Tax information sources

Learning Objective:  03-03 Prepare a federal income tax return.

Bloom’s:  Remember

Accessibility:  Keyboard Navigation

Gradable:  automatic

 

 

 

25) One of the most frequent filing errors is signing the return.

 

Answer:  FALSE

Explanation:  A common error is NOT signing the return.

Difficulty: 2 Medium

Page Ref: 88

Topic:  Income tax filing requirements; Income tax forms; Income tax revisions and audits; State income taxes; Tax information sources

Learning Objective:  03-03 Prepare a federal income tax return.

Bloom’s:  Understand

Accessibility:  Keyboard Navigation

Gradable:  automatic

 

26) Some tax disputes have gone to the U.S. Supreme Court.

 

Answer:  TRUE

Difficulty: 1 Easy

Page Ref: 94

Topic:  Income tax filing requirements; Income tax forms; Income tax revisions and audits; State income taxes; Tax information sources

Learning Objective:  03-03 Prepare a federal income tax return.

Bloom’s:  Remember

Accessibility:  Keyboard Navigation

Gradable:  automatic

 

27) One of the best tax shelters is owning a car.

 

Answer:  FALSE

Explanation:  One of the best tax shelters is owning a home. Interest on automobile loans is not tax deductible but the interest on a mortgage is tax deductible.

Difficulty: 1 Easy

Page Ref: 95

Topic:  Taxation and investments; Taxation and retirement accounts; Tax planning strategies

Learning Objective:  03-04 Select appropriate tax strategies for various life situations.

Bloom’s:  Remember

Accessibility:  Keyboard Navigation

Gradable:  automatic

 

 

 

28) Interest paid on a home equity loan is not deductible.

 

Answer:  FALSE

Explanation:  Home equity interest (on loans up to $100,000) is deductible.

Difficulty: 2 Medium

Page Ref: 95

Topic:  Taxation and investments; Taxation and retirement accounts; Tax planning strategies

Learning Objective:  03-04 Select appropriate tax strategies for various life situations.

Bloom’s:  Understand

Accessibility:  Keyboard Navigation

Gradable:  automatic

 

29) Contributions to a Keogh or 401(k) are tax-exempt.

 

Answer:  FALSE

Explanation:  These are tax-deferred contributions.

Difficulty: 2 Medium

Page Ref: 96

Topic:  Taxation and investments; Taxation and retirement accounts; Tax planning strategies

Learning Objective:  03-04 Select appropriate tax strategies for various life situations.

Bloom’s:  Understand

Accessibility:  Keyboard Navigation

Gradable:  automatic

 

30) Every taxpayer receives at least the standard deduction, a set amount on which no taxes are paid.

 

Answer:  TRUE

Difficulty: 2 Medium

Page Ref: 78

Topic:  Income tax preparation and computations

Learning Objective:  03-02 Calculate taxable income and the amount owed for federal income tax.

Bloom’s:  Understand

Accessibility:  Keyboard Navigation

Gradable:  automatic

 

 

 

31) A taxpayer less than 65 years old can only deduct medical and dental expenses greater than 10% of AGI for 2017.

 

Answer:  TRUE

Difficulty: 2 Medium

Page Ref: 78

Topic:  Income tax preparation and computations

Learning Objective:  03-02 Calculate taxable income and the amount owed for federal income tax.

Bloom’s:  Understand

Accessibility:  Keyboard Navigation

Gradable:  automatic

 

32) For 2017, the seven-rate system for federal income tax ranges from 10% to 39.6%.

 

Answer:  TRUE

Difficulty: 1 Easy

Page Ref: 81

Topic:  Income tax preparation and computations

Learning Objective:  03-02 Calculate taxable income and the amount owed for federal income tax.

Bloom’s:  Remember

Accessibility:  Keyboard Navigation

Gradable:  automatic

 

33) A person with taxable income of $40,000 and a total tax bill of $4,200 would have an average tax rate of 15%.

 

Answer:  FALSE

Explanation:  Average tax rate = tax due / taxable income; thus, $4,200/$40,000 = 10.5%

Difficulty: 3 Hard

Page Ref: 81

Topic:  Income tax preparation and computations

Learning Objective:  03-02 Calculate taxable income and the amount owed for federal income tax.

Bloom’s:  Apply

Accessibility:  Keyboard Navigation

Gradable:  automatic

 

 

 

34) Social Security is an example of a tax on earnings.

 

Answer:  TRUE

Difficulty: 2 Medium

Page Ref: 81

Topic:  Real and personal property taxes; Sales and excise taxes; Social Security and Medicare taxes; Income tax terminology

Learning Objective:  03-01 Identify the major tax types in our society.

Bloom’s:  Understand

Accessibility:  Keyboard Navigation

Gradable:  automatic

 

35) Individuals are allowed to give money or items valued at $14,000 or less in a year to a person without being subject to estate taxes.

 

Answer:  TRUE

Difficulty: 2 Medium

Page Ref: 81

Topic:  Real and personal property taxes; Sales and excise taxes; Social Security and Medicare taxes; Income tax terminology

Learning Objective:  03-01 Identify the major tax types in our society.

Bloom’s:  Understand

Accessibility:  Keyboard Navigation

Gradable:  automatic

 

36) Adjusted gross income is reduced by the itemized or standard deduction.

 

Answer:  TRUE

Difficulty: 2 Medium

Page Ref: 81

Topic:  Income tax payments and penalties; Income tax preparation and computations; Income tax terminology

Learning Objective:  03-02 Calculate taxable income and the amount owed for federal income tax.

Bloom’s:  Understand

Accessibility:  Keyboard Navigation

Gradable:  automatic

 

 

 

37) Tax rate schedules show marginal tax rates.

 

Answer:  TRUE

Difficulty: 1 Easy

Page Ref: 81

Topic:  Income tax payments and penalties; Income tax preparation and computations; Income tax terminology

Learning Objective:  03-02 Calculate taxable income and the amount owed for federal income tax.

Bloom’s:  Remember

Accessibility:  Keyboard Navigation

Gradable:  automatic

 

38) A worker’s primary goal should be to

1.   A) Pay his or her taxes using estimates for income and deductions.

2.   B) Pay no income taxes.

3.   C) Pay the average tax rate for people working in his or her industry.

4.   D) Pay his or her fair share of taxes while taking advantage of appropriate tax benefits.

5.   E) Pay no taxes of any type.

 

Answer:  D

Difficulty: 2 Medium

Page Ref: 75

Topic:  Real and personal property taxes; Sales and excise taxes; Social Security and Medicare taxes; Income tax terminology

Learning Objective:  03-01 Identify the major tax types in our society.

Bloom’s:  Understand

Accessibility:  Keyboard Navigation

Gradable:  automatic

 

39) Which of the following is NOT a tax that most people pay?

1.   A) Federal taxes on earnings

2.   B) Federal taxes on possessions

3.   C) Local taxes on property

4.   D) State taxes on purchases

 

Answer:  B

Difficulty: 2 Medium

Page Ref: 75-76

Topic:  Real and personal property taxes; Sales and excise taxes; Social Security and Medicare taxes; Income tax terminology

Learning Objective:  03-01 Identify the major tax types in our society.

Bloom’s:  Understand

Accessibility:  Keyboard Navigation

Gradable:  automatic

 

 

 

40) A tax due on the purchase of gasoline is called a(n)

1.   A) Estate tax.

2.   B) Excise tax.

3.   C) Income tax.

4.   D) Real estate property tax.

5.   E) Inheritance tax.

 

Answer:  B

Difficulty: 2 Medium

Page Ref: 75

Topic:  Real and personal property taxes; Sales and excise taxes; Social Security and Medicare taxes; Income tax terminology

Learning Objective:  03-01 Identify the major tax types in our society.

Bloom’s:  Understand

Accessibility:  Keyboard Navigation

Gradable:  automatic

 

41) A tax imposed on the value of a person’s property at the time of death is called a(n)

1.   A) Estate tax.

2.   B) Excise tax.

3.   C) Income tax.

4.   D) Real estate property tax.

5.   E) Sales tax.

 

Answer:  A

Difficulty: 1 Easy

Page Ref: 76

Topic:  Real and personal property taxes; Sales and excise taxes; Social Security and Medicare taxes; Income tax terminology

Learning Objective:  03-01 Identify the major tax types in our society.

Bloom’s:  Remember

Accessibility:  Keyboard Navigation

Gradable:  automatic

 

 

 

42) This tax is a major financial planning factor for most people because it is sometimes imposed at the federal, state, and local levels.

1.   A) Estate tax

2.   B) Excise tax

3.   C) Income tax

4.   D) Real estate property tax

5.   E) Sales tax

 

Answer:  C

Difficulty: 2 Medium

Page Ref: 76

Topic:  Real and personal property taxes; Sales and excise taxes; Social Security and Medicare taxes; Income tax terminology

Learning Objective:  03-01 Identify the major tax types in our society.

Bloom’s:  Understand

Accessibility:  Keyboard Navigation

Gradable:  automatic

 

43) The tax that is a major source of revenue for local governments is called a(n)

1.   A) Estate tax.

2.   B) Gift tax.

3.   C) Income tax.

4.   D) Real estate property tax.

5.   E) Sales tax.

 

Answer:  D

Difficulty: 2 Medium

Page Ref: 76

Topic:  Real and personal property taxes; Sales and excise taxes; Social Security and Medicare taxes; Income tax terminology

Learning Objective:  03-01 Identify the major tax types in our society.

Bloom’s:  Understand

Accessibility:  Keyboard Navigation

Gradable:  automatic

 

 

 

44) Taxes on earnings that fund old age, survivor, and disability insurance benefits are called

1.   A) Estate taxes.

2.   B) Excise taxes.

3.   C) Social Security taxes.

4.   D) Real estate property taxes.

5.   E) Sales taxes.

 

Answer:  C

Difficulty: 2 Medium

Page Ref: 76

Topic:  Real and personal property taxes; Sales and excise taxes; Social Security and Medicare taxes; Income tax terminology

Learning Objective:  03-01 Identify the major tax types in our society.

Bloom’s:  Understand

Accessibility:  Keyboard Navigation

Gradable:  automatic

 

45) The amount levied on the value of property bequeathed by a deceased person is

1.   A) Inheritance tax.

2.   B) Excise tax.

3.   C) Social Security tax.

4.   D) Real estate property tax.

5.   E) Sales tax.

 

Answer:  A

Difficulty: 2 Medium

Page Ref: 76

Topic:  Real and personal property taxes; Sales and excise taxes; Social Security and Medicare taxes; Income tax terminology

Learning Objective:  03-01 Identify the major tax types in our society.

Bloom’s:  Understand

Accessibility:  Keyboard Navigation

Gradable:  automatic

 

 

 

46) The maximum amount that an individual can give another in a year without being subject to estate taxes is

1.   A) All gifts are taxable.

2.   B) $10,000.

3.   C) $14,000.

4.   D) $15,000.

5.   E) No gifts are taxable.

 

Answer:  C

Difficulty: 2 Medium

Page Ref: 76

Topic:  Real and personal property taxes; Sales and excise taxes; Social Security and Medicare taxes; Income tax terminology

Learning Objective:  03-01 Identify the major tax types in our society.

Bloom’s:  Understand

Accessibility:  Keyboard Navigation

Gradable:  automatic

 

47) You may be required to make estimated tax payments if

1.   A) You receive a paycheck with taxes withheld.

2.   B) You do not have interest income from savings.

3.   C) You have no pension payments.

4.   D) You are an independent contractor.

5.   E) You have no royalties.

 

Answer:  D

Difficulty: 2 Medium

Page Ref: 84

Topic:  Real and personal property taxes; Sales and excise taxes; Social Security and Medicare taxes; Income tax terminology

Learning Objective:  03-01 Identify the major tax types in our society.

Bloom’s:  Understand

Accessibility:  Keyboard Navigation

Gradable:  automatic

 

 

 

48) When calculating federal income taxes, “gross income” includes all of the following except

1.   A) Earned income.

2.   B) Alimony.

3.   C) Investment income.

4.   D) Earned income credit.

5.   E) Passive income.

 

Answer:  D

Difficulty: 2 Medium

Page Ref: 78

Topic:  Income tax payments and penalties; Income tax preparation and computations; Income tax terminology

Learning Objective:  03-02 Calculate taxable income and the amount owed for federal income tax.

Bloom’s:  Understand

Accessibility:  Keyboard Navigation

Gradable:  automatic

 

49) When calculating federal income taxes, what increases “gross income”?

1.   A) Exclusions

2.   B) Tax-exempt income

3.   C) Tax-deferred income

4.   D) Alimony received

5.   E) Tax deductions

 

Answer:  D

Difficulty: 2 Medium

Page Ref: 78

Topic:  Income tax payments and penalties; Income tax preparation and computations; Income tax terminology

Learning Objective:  03-02 Calculate taxable income and the amount owed for federal income tax.

Bloom’s:  Understand

Accessibility:  Keyboard Navigation

Gradable:  automatic

 

 

 

50) Income that is not subject to tax is called

1.   A) Adjusted gross income.

2.   B) Earned income.

3.   C) Passive income.

4.   D) Tax-deferred income.

5.   E) Tax-exempt income.

 

Answer:  E

Difficulty: 2 Medium

Page Ref: 78

Topic:  Income tax payments and penalties; Income tax preparation and computations; Income tax terminology

Learning Objective:  03-02 Calculate taxable income and the amount owed for federal income tax.

Bloom’s:  Understand

Accessibility:  Keyboard Navigation

Gradable:  automatic

 

51) Income that is taxed at a later date is

1.   A) Adjusted gross income.

2.   B) Earned income.

3.   C) Exclusions from income.

4.   D) Tax-deferred income.

5.   E) Tax-exempt income.

 

Answer:  D

Difficulty: 2 Medium

Page Ref: 78

Topic:  Income tax payments and penalties; Income tax preparation and computations; Income tax terminology

Learning Objective:  03-02 Calculate taxable income and the amount owed for federal income tax.

Bloom’s:  Understand

Accessibility:  Keyboard Navigation

Gradable:  automatic

 

 

 

52) Gross income less Adjustments to Income equals

1.   A) Adjusted gross income.

2.   B) Earned income.

3.   C) Exclusions from income.

4.   D) Tax-deferred income.

5.   E) Tax-exempt income.

 

Answer:  A

Difficulty: 2 Medium

Page Ref: 79

Topic:  Income tax payments and penalties; Income tax preparation and computations; Income tax terminology

Learning Objective:  03-02 Calculate taxable income and the amount owed for federal income tax.

Bloom’s:  Understand

Accessibility:  Keyboard Navigation

Gradable:  automatic

 

53) Fees, tips, and bonuses are forms of

1.   A) Passive income.

2.   B) Earned income.

3.   C) Exclusions from income.

4.   D) Tax-deferred income.

5.   E) Tax-exempt income.

 

Answer:  B

Difficulty: 2 Medium

Page Ref: 78

Topic:  Income tax payments and penalties; Income tax preparation and computations; Income tax terminology

Learning Objective:  03-02 Calculate taxable income and the amount owed for federal income tax.

Bloom’s:  Understand

Accessibility:  Keyboard Navigation

Gradable:  automatic

 

 

 

54) Gross (or total) income includes

1.   A) Exclusions.

2.   B) Tax deductions.

3.   C) Tax-deferred income.

4.   D) Passive income.

5.   E) Tax-exempt income.

 

Answer:  D

Difficulty: 2 Medium

Page Ref: 78

Topic:  Income tax payments and penalties; Income tax preparation and computations; Income tax terminology

Learning Objective:  03-02 Calculate taxable income and the amount owed for federal income tax.

Bloom’s:  Understand

Accessibility:  Keyboard Navigation

Gradable:  automatic

 

55) Joseph needs to complete his income taxes for the year. He has already calculated his adjusted gross income. What does he need to do next?

1.   A) Add his tax-exempt income.

2.   B) Subtract his itemized deductions.

3.   C) Add his tax credits.

4.   D) Subtract his tax-exempt income.

5.   E) Add his tax exemptions.

 

Answer:  B

Difficulty: 3 Hard

Page Ref: 79

Topic:  Income tax payments and penalties; Income tax preparation and computations; Income tax terminology

Learning Objective:  03-02 Calculate taxable income and the amount owed for federal income tax.

Bloom’s:  Apply

Accessibility:  Keyboard Navigation

Gradable:  automatic

 

 

 

56) Adjustments to income include all of the following except

1.   A) Alimony payments.

2.   B) Contributions to a Keogh retirement plan.

3.   C) Traditional IRA contributions.

4.   D) Charity contributions.

5.   E) Penalties for early withdrawal of savings.

 

Answer:  D

Difficulty: 2 Medium

Page Ref: 78

Topic:  Income tax payments and penalties; Income tax preparation and computations; Income tax terminology

Learning Objective:  03-02 Calculate taxable income and the amount owed for federal income tax.

Bloom’s:  Understand

Accessibility:  Keyboard Navigation

Gradable:  automatic

 

57) Taxpayers over 65 can only deduct expenses that are greater than 7.5% of adjusted gross income for

1.   A) Contributions to charitable organizations.

2.   B) Mortgage interest.

3.   C) Medical and dental expenses.

4.   D) Miscellaneous expenses.

5.   E) Taxes.

 

Answer:  C

Difficulty: 1 Easy

Page Ref: 78-79

Topic:  Income tax payments and penalties; Income tax preparation and computations; Income tax terminology

Learning Objective:  03-02 Calculate taxable income and the amount owed for federal income tax.

Bloom’s:  Remember

Accessibility:  Keyboard Navigation

Gradable:  automatic

 

 

 

58) Athena wants to determine if she should itemize her deductions. She has identified several possible deductions. Which of the following is NOT a proper itemized deduction?

1.   A) Contributions to charitable organizations

2.   B) Mortgage interest

3.   C) Medical and dental expenses that exceed 10% of AGI

4.   D) Miscellaneous expenses less than 2% of AGI

5.   E) State income taxes

 

Answer:  D

Difficulty: 3 Hard

Page Ref: 79-80

Topic:  Income tax payments and penalties; Income tax preparation and computations; Income tax terminology

Learning Objective:  03-02 Calculate taxable income and the amount owed for federal income tax.

Bloom’s:  Apply

Accessibility:  Keyboard Navigation

Gradable:  automatic

 

59) Shannon is working on her federal income tax form and wants to determine if she should itemize her deductions. She has identified several possible deductions. Which of the following is an acceptable deduction?

1.   A) $10,000 gift to her cousin

2.   B) Credit card interest

3.   C) Medical and dental expenses less than 10% of AGI

4.   D) Miscellaneous expenses that exceed 2% of AGI

5.   E) Moving expenses for a new job that is 25 miles from her old home

 

Answer:  D

Difficulty: 3 Hard

Page Ref: 79-80

Topic:  Income tax payments and penalties; Income tax preparation and computations; Income tax terminology

Learning Objective:  03-02 Calculate taxable income and the amount owed for federal income tax.

Bloom’s:  Apply

Accessibility:  Keyboard Navigation

Gradable:  automatic

 

 

 

60) How long should you keep tax documentation from the date you file your return?

1.   A) Until you file your returns.

2.   B) 6 years.

3.   C) 5 years.

4.   D) 10 years.

5.   E) 15 years.

 

Answer:  B

Difficulty: 1 Easy

Page Ref: 80

Topic:  Income tax payments and penalties; Income tax preparation and computations; Income tax terminology

Learning Objective:  03-02 Calculate taxable income and the amount owed for federal income tax.

Bloom’s:  Remember

Accessibility:  Keyboard Navigation

Gradable:  automatic

 

61) Fred has been completing his own tax returns for years. The IRS has recently contacted him with questions about some of his prior returns. How many years back is he responsible for providing documentation?

1.   A) Until he files his returns.

2.   B) 3 years.

3.   C) 6 years.

4.   D) 10 years.

5.   E) 15 years.

 

Answer:  C

Difficulty: 3 Hard

Page Ref: 80

Topic:  Income tax payments and penalties; Income tax preparation and computations; Income tax terminology

Learning Objective:  03-02 Calculate taxable income and the amount owed for federal income tax.

Bloom’s:  Apply

Accessibility:  Keyboard Navigation

Gradable:  automatic

 

 

 

62) When Paul completes his taxes, he can include all of the following as exemptions except

1.   A) His 12-year-old son.

2.   B) Himself.

3.   C) His 22-year-old daughter who is a full-time student.

4.   D) His wife.

5.   E) His 20-year-old son who is working full-time and living in an apartment.

 

Answer:  E

Explanation:  To qualify for tax exemptions, a dependent must be under age 19 or a full-time student under the age of 24.

Difficulty: 2 Medium

Page Ref: 80

Topic:  Income tax payments and penalties; Income tax preparation and computations; Income tax terminology

Learning Objective:  03-02 Calculate taxable income and the amount owed for federal income tax.

Bloom’s:  Understand

Accessibility:  Keyboard Navigation

Gradable:  automatic

 

63) In 2017, taxable income was reduced by ________ for each exemption claimed.

1.   A) $1,000

2.   B) $2,500

3.   C) $4,050

4.   D) $5,000

5.   E) $10,000

 

Answer:  C

Difficulty: 1 Easy

Page Ref: 81

Topic:  Income tax payments and penalties; Income tax preparation and computations; Income tax terminology

Learning Objective:  03-02 Calculate taxable income and the amount owed for federal income tax.

Bloom’s:  Remember

Accessibility:  Keyboard Navigation

Gradable:  automatic

 

 

 

64) In 2017, the U.S. federal tax tables included tax rates of

1.   A) 0%, 10%, 20%, 30%, 40%, and 50%.

2.   B) 7%, 15%, 30%, 33%, 38%, and 52%.

3.   C) 0%, 25%, 50%, and 75%.

4.   D) 10%, 15%, 25%, 28%, 33%, 35%, and 39.6%.

5.   E) 0%, 5%, 20%, 30%, and 50%.

 

Answer:  D

Difficulty: 1 Easy

Page Ref: 81

Topic:  Income tax payments and penalties; Income tax preparation and computations; Income tax terminology

Learning Objective:  03-02 Calculate taxable income and the amount owed for federal income tax.

Bloom’s:  Remember

Accessibility:  Keyboard Navigation

Gradable:  automatic

 

65) The tax based on the total tax due divided by taxable income is called the

1.   A) AMT.

2.   B) Average tax rate.

3.   C) Income tax rate.

4.   D) Marginal tax rate.

5.   E) Total tax rate.

 

Answer:  B

Difficulty: 2 Medium

Page Ref: 81

Topic:  Income tax payments and penalties; Income tax preparation and computations; Income tax terminology

Learning Objective:  03-02 Calculate taxable income and the amount owed for federal income tax.

Bloom’s:  Understand

Accessibility:  Keyboard Navigation

Gradable:  automatic

 

 

 

66) The tax designed to ensure that those who receive tax breaks also pay their fair share of taxes is called the

1.   A) AMT.

2.   B) Average tax rate.

3.   C) Income tax rate.

4.   D) Marginal tax rate.

5.   E) Total tax rate.

 

Answer:  A

Difficulty: 2 Medium

Page Ref: 83

Topic:  Income tax payments and penalties; Income tax preparation and computations; Income tax terminology

Learning Objective:  03-02 Calculate taxable income and the amount owed for federal income tax.

Bloom’s:  Understand

Accessibility:  Keyboard Navigation

Gradable:  automatic

 

67) The rate used to calculate the tax due on the next dollar of income is referred to as the

1.   A) AMT.

2.   B) Average tax rate.

3.   C) Income tax rate.

4.   D) Marginal tax rate.

5.   E) Total tax rate.

 

Answer:  D

Difficulty: 1 Easy

Page Ref: 81

Topic:  Income tax payments and penalties; Income tax preparation and computations; Income tax terminology

Learning Objective:  03-02 Calculate taxable income and the amount owed for federal income tax.

Bloom’s:  Remember

Accessibility:  Keyboard Navigation

Gradable:  automatic

 

 

 

68) Tanya is a single low-income working parent, and Fred is a single high-income working parent. Because of her status, Tanya, but not Fred, may be eligible for the

1.   A) Alternative minimum tax.

2.   B) Earned income credit.

3.   C) Itemized deduction credit.

4.   D) Student deduction.

5.   E) Withholding credit.

 

Answer:  B

Difficulty: 2 Medium

Page Ref: 83

Topic:  Income tax payments and penalties; Income tax preparation and computations; Income tax terminology

Learning Objective:  03-02 Calculate taxable income and the amount owed for federal income tax.

Bloom’s:  Understand

Accessibility:  Keyboard Navigation

Gradable:  automatic

 

69) Which of the following is NOT a tax credit?

1.   A) Adoption tax credit

2.   B) Domestic tax credit

3.   C) Earned income credit

4.   D) Foreign tax credit

5.   E) Savers credit

 

Answer:  B

Difficulty: 2 Medium

Page Ref: 83

Topic:  Income tax payments and penalties; Income tax preparation and computations; Income tax terminology

Learning Objective:  03-02 Calculate taxable income and the amount owed for federal income tax.

Bloom’s:  Understand

Accessibility:  Keyboard Navigation

Gradable:  automatic

 

 

 

70) Recent tax credits include all of the following except the

1.   A) Earned income credit.

2.   B) Foreign tax credit.

3.   C) Adoption tax credit.

4.   D) AMT tax credit.

5.   E) Savers credit.

 

Answer:  D

Difficulty: 2 Medium

Page Ref: 83

Topic:  Income tax payments and penalties; Income tax preparation and computations; Income tax terminology

Learning Objective:  03-02 Calculate taxable income and the amount owed for federal income tax.

Bloom’s:  Understand

Accessibility:  Keyboard Navigation

Gradable:  automatic

 

71) At the end of the year, employees receive a ________ form that reports annual earnings and the amounts deducted for taxes from their employers.

1.   A) 1040

2.   B) 1099

3.   C) W-2

4.   D) W-4

5.   E) Schedule A

 

Answer:  C

Difficulty: 1 Easy

Page Ref: 84

Topic:  Income tax payments and penalties; Income tax preparation and computations; Income tax terminology

Learning Objective:  03-02 Calculate taxable income and the amount owed for federal income tax.

Bloom’s:  Remember

Accessibility:  Keyboard Navigation

Gradable:  automatic

 

 

 

72) At the end of the year, Xavier received a form from his employer that reported annual earnings and the amounts deducted for taxes. That form is called a

1040.         A) 1040.

1041.         B) 1099.

1042.         C) W-2.

1043.         D) W-4.

1044.         E) Schedule A.

 

Answer:  C

Difficulty: 2 Medium

Page Ref: 84

Topic:  Income tax payments and penalties; Income tax preparation and computations; Income tax terminology

Learning Objective:  03-02 Calculate taxable income and the amount owed for federal income tax.

Bloom’s:  Understand

Accessibility:  Keyboard Navigation

Gradable:  automatic

 

73) At the end of the year, Yvonne received a form from her bank that reported income from her savings. That form is called a

1040.         A) 1040.

1041.         B) 1099.

1042.         C) W-2.

1043.         D) W-4.

1044.         E) Schedule A.

 

Answer:  B

Difficulty: 2 Medium

Page Ref: 84

Topic:  Income tax payments and penalties; Income tax preparation and computations; Income tax terminology

Learning Objective:  03-02 Calculate taxable income and the amount owed for federal income tax.

Bloom’s:  Understand

Accessibility:  Keyboard Navigation

Gradable:  automatic

 

 

 

74) At the end of the year, Walter received a form that showed his payments from independent contracting. That form is called a

1040.         A) 1040.

1041.         B) 1099.

1042.         C) W-2.

1043.         D) W-4.

1044.         E) Schedule A.

 

Answer:  B

Difficulty: 2 Medium

Page Ref: 84

Topic:  Income tax payments and penalties; Income tax preparation and computations; Income tax terminology

Learning Objective:  03-02 Calculate taxable income and the amount owed for federal income tax.

Bloom’s:  Understand

Accessibility:  Keyboard Navigation

Gradable:  automatic

 

75) Penny knows that she needs to file her federal income taxes, but she is unable to do so by April 15. What form does she need to complete to obtain an automatic six-month extension?

1.   A) 1040

2.   B) 1099

3.   C) 4868

4.   D) W-2

5.   E) W-4

 

Answer:  C

Difficulty: 2 Medium

Page Ref: 84

Topic:  Income tax payments and penalties; Income tax preparation and computations; Income tax terminology

Learning Objective:  03-02 Calculate taxable income and the amount owed for federal income tax.

Bloom’s:  Understand

Accessibility:  Keyboard Navigation

Gradable:  automatic

 

 

 

76) Nancy is married to Jerry and needs to complete her tax form. They both earn about the same amount of money each year. What filing status would be best for them?

1.   A) Single

2.   B) Married, filing a joint return

3.   C) Head of household

4.   D) Qualifying widow or widower

5.   E) Married, but filing individually

 

Answer:  B

Difficulty: 2 Medium

Page Ref: 85

Topic:  Income tax filing requirements; Income tax forms; Income tax revisions and audits; State income taxes; Tax information sources

Learning Objective:  03-03 Prepare a federal income tax return.

Bloom’s:  Understand

Accessibility:  Keyboard Navigation

Gradable:  automatic

 

77) Bob was married to Sandy, and they have a 12-year-old son. Sandy passed away last year. Bob needs to complete his federal income taxes for the year. What filing status could he use for 2 years after the death of his spouse?

1.   A) Single

2.   B) Married, filing a joint return

3.   C) Head of household

4.   D) Qualifying widow or widower

5.   E) Married, but filing individually

 

Answer:  D

Difficulty: 2 Medium

Page Ref: 85

Topic:  Income tax filing requirements; Income tax forms; Income tax revisions and audits; State income taxes; Tax information sources

Learning Objective:  03-03 Prepare a federal income tax return.

Bloom’s:  Understand

Accessibility:  Keyboard Navigation

Gradable:  automatic

 

 

 

78) Which of the following is NOT a valid form for filing federal income taxes?

1.   A) 1040EZ

2.   B) 1040A

3.   C) 1040

4.   D) 1040X

5.   E) 1040Z

 

Answer:  E

Difficulty: 1 Easy

Page Ref: 85-86

Topic:  Income tax filing requirements; Income tax forms; Income tax revisions and audits; State income taxes; Tax information sources

Learning Objective:  03-03 Prepare a federal income tax return.

Bloom’s:  Remember

Accessibility:  Keyboard Navigation

Gradable:  automatic

 

79) Peter filed his federal income taxes, but he needs to make a correction to his income. Which form should he use?

1.   A) 1040EZ

2.   B) 1040A

3.   C) 1040

4.   D) 1040X

5.   E) 1040Z

 

Answer:  D

Difficulty: 2 Medium

Page Ref: 86

Topic:  Income tax filing requirements; Income tax forms; Income tax revisions and audits; State income taxes; Tax information sources

Learning Objective:  03-03 Prepare a federal income tax return.

Bloom’s:  Understand

Accessibility:  Keyboard Navigation

Gradable:  automatic

 

 

 

80) Amanda and Jack are working on their taxes and need to determine which form to file. They had wages, interest, and dividends. In addition, they bought a house this past year and are thinking of itemizing their deductions. Which form should they use?

1.   A) 1040EZ

2.   B) 1040A

3.   C) 1040

4.   D) 1040X

5.   E) 1040Z

 

Answer:  C

Difficulty: 2 Medium

Page Ref: 86

Topic:  Income tax filing requirements; Income tax forms; Income tax revisions and audits; State income taxes; Tax information sources

Learning Objective:  03-03 Prepare a federal income tax return.

Bloom’s:  Understand

Accessibility:  Keyboard Navigation

Gradable:  automatic

 

81) The major sections of Form 1040 include all of the following except

1.   A) Filing status and exemptions.

2.   B) Adjustments to income (AGI).

3.   C) Tax credits.

4.   D) Signature.

5.   E) All of these are major sections of Form 1040.

 

Answer:  E

Difficulty: 2 Medium

Page Ref: 85-86

Topic:  Income tax filing requirements; Income tax forms; Income tax revisions and audits; State income taxes; Tax information sources

Learning Objective:  03-03 Prepare a federal income tax return.

Bloom’s:  Understand

Accessibility:  Keyboard Navigation

Gradable:  automatic

 

 

 

82) Individuals can file their federal taxes using all of the following except

1.   A) Use tax preparation software to file online.

2.   B) Use tax preparation software to print and mail.

3.   C) Electronic filing using Free File Alliance.

4.   D) Deliver in person.

5.   E) All of these can be used.

 

Answer:  D

Difficulty: 1 Easy

Page Ref: 89-90

Topic:  Income tax filing requirements; Income tax forms; Income tax revisions and audits; State income taxes; Tax information sources

Learning Objective:  03-03 Prepare a federal income tax return.

Bloom’s:  Remember

Accessibility:  Keyboard Navigation

Gradable:  automatic

 

83) Tax assistance sources include all of the following except

1.   A) IRS publications.

2.   B) IRS phone hotline.

3.   C) The Ernst & Young Tax Guide.

4.   D) The Internet.

5.   E) All of these are tax assistance sources.

 

Answer:  E

Difficulty: 1 Easy

Page Ref: 91-92

Topic:  Income tax filing requirements; Income tax forms; Income tax revisions and audits; State income taxes; Tax information sources

Learning Objective:  03-04 Select appropriate tax strategies for various life situations.

Bloom’s:  Remember

Accessibility:  Keyboard Navigation

Gradable:  automatic

 

 

 

84) According to Tax Service Warnings, who is responsible for supplying accurate and complete information for completing a tax return?

1.   A) Professional tax preparer

2.   B) IRS enrolled agent

3.   C) Taxpayer

4.   D) Taxpayer’s dependents

5.   E) Taxpayer’s attorney

 

Answer:  C

Difficulty: 2 Medium

Page Ref: 93

Topic:  Income tax filing requirements; Income tax forms; Income tax revisions and audits; State income taxes; Tax information sources

Learning Objective:  03-03 Prepare a federal income tax return.

Bloom’s:  Understand

Accessibility:  Keyboard Navigation

Gradable:  automatic

 

85) An IRS agent visited Henry’s home to verify some information on his tax return. This visit was called a(n)

1.   A) Correspondence audit.

2.   B) Office audit.

3.   C) Home audit.

4.   D) Field audit.

5.   E) Detailed audit.

 

Answer:  D

Difficulty: 2 Medium

Page Ref: 94

Topic:  Income tax filing requirements; Income tax forms; Income tax revisions and audits; State income taxes; Tax information sources

Learning Objective:  03-03 Prepare a federal income tax return.

Bloom’s:  Understand

Accessibility:  Keyboard Navigation

Gradable:  automatic

 

 

 

86) Annie was required to clarify or document minor questions about her tax form by a mail inquiry. She participated in a(n)

1.   A) Correspondence audit.

2.   B) Office audit.

3.   C) Home audit.

4.   D) Field audit.

5.   E) Detailed audit.

 

Answer:  A

Difficulty: 2 Medium

Page Ref: 95

Topic:  Income tax filing requirements; Income tax forms; Income tax revisions and audits; State income taxes; Tax information sources

Learning Objective:  03-03 Prepare a federal income tax return.

Bloom’s:  Understand

Accessibility:  Keyboard Navigation

Gradable:  automatic

 

87) If Brenda wants to pay her fair share of taxes, no more and no less, she should practice

1.   A) Tax evasion.

2.   B) Tax avoidance.

3.   C) Tax elimination.

4.   D) Tax maximization.

5.   E) Tax acceleration.

 

Answer:  B

Difficulty: 3 Hard

Page Ref: 95

Topic:  Taxation and investments; Taxation and retirement accounts; Tax planning strategies

Learning Objective:  03-04 Select appropriate tax strategies for various life situations.

Bloom’s:  Apply

Accessibility:  Keyboard Navigation

Gradable:  automatic

 

 

 

88) Connie thinks that her salary and tax rate for next year will be lower than for this year. What step should she take to minimize her taxes in the current year?

1.   A) Accelerate receipt of income.

2.   B) Delay deductions.

3.   C) Practice tax evasion.

4.   D) Accelerate deductions.

5.   E) None of these will allow her to minimize her taxes.

 

Answer:  D

Difficulty: 3 Hard

Page Ref: 95

Topic:  Taxation and investments; Taxation and retirement accounts; Tax planning strategies

Learning Objective:  03-04 Select appropriate tax strategies for various life situations.

Bloom’s:  Apply

Accessibility:  Keyboard Navigation

Gradable:  automatic

 

89) David thinks that his salary and tax rate for next year will be higher than for this year. What step should he take minimize taxes over the period this year and next year?

1.   A) Delay receipt of income.

2.   B) Delay filing taxes.

3.   C) Accelerate receipt of income.

4.   D) Accelerate deductions.

5.   E) None of these will allow him to minimize his taxes.

 

Answer:  C

Difficulty: 3 Hard

Page Ref: 95

Topic:  Taxation and investments; Taxation and retirement accounts; Tax planning strategies

Learning Objective:  03-04 Select appropriate tax strategies for various life situations.

Bloom’s:  Apply

Accessibility:  Keyboard Navigation

Gradable:  automatic

 

 

 

90) Which of the following is NOT an action that can reduce your taxes?

1.   A) Owning a home.

2.   B) Taking out a consumer loan.

3.   C) Paying certain work expenses such as union dues.

4.   D) Depositing money into a flexible spending account (FSA).

5.   E) Investing in municipal bonds.

 

Answer:  B

Explanation:  Interest on home equity loans is deductible, but not interest on consumer loans.

Difficulty: 2 Medium

Page Ref: 95

Topic:  Taxation and investments; Taxation and retirement accounts; Tax planning strategies

Learning Objective:  03-04 Select appropriate tax strategies for various life situations.

Bloom’s:  Understand

Accessibility:  Keyboard Navigation

Gradable:  automatic

 

91) All of the following can reduce your taxes today except investing in

1.   A) Municipal bonds.

2.   B) A tax-deferred annuity.

3.   C) A Section 529 savings plan.

4.   D) A 401(k) plan.

5.   E) A Roth IRA.

 

Answer:  E

Explanation:  Roth IRA contributions are not deductible.

Difficulty: 2 Medium

Page Ref: 95-97

Topic:  Taxation and investments; Taxation and retirement accounts; Tax planning strategies

Learning Objective:  03-04 Select appropriate tax strategies for various life situations.

Bloom’s:  Understand

Accessibility:  Keyboard Navigation

Gradable:  automatic

 

 

 

92) Evan is not concerned about immediate tax benefits but instead wants his investment to grow in value on a tax-free basis. Which of these would be the best for him to invest in today?

1.   A) Municipal bonds

2.   B) A tax-deferred annuity

3.   C) A Section 529 savings plan

4.   D) A 401(k) plan

5.   E) A Roth IRA

 

Answer:  E

Difficulty: 3 Hard

Page Ref: 97

Topic:  Taxation and investments; Taxation and retirement accounts; Tax planning strategies

Learning Objective:  03-04 Select appropriate tax strategies for various life situations.

Bloom’s:  Apply

Accessibility:  Keyboard Navigation

Gradable:  automatic

 

93) The maximum that an individual can contribute to a Roth IRA for the 2017 year is

1.   A) $1,000.

2.   B) $3,000.

3.   C) $5,500.

4.   D) $10,000.

5.   E) $15,500.

 

Answer:  C

Difficulty: 1 Easy

Page Ref: 97

Topic:  Taxation and investments; Taxation and retirement accounts; Tax planning strategies

Learning Objective:  03-04 Select appropriate tax strategies for various life situations.

Bloom’s:  Remember

Accessibility:  Keyboard Navigation

Gradable:  automatic

 

 

 

94) The maximum that an individual can contribute to a Coverdell Education Savings Account each year is

1.   A) $1,000.

2.   B) $2,000.

3.   C) $3,000.

4.   D) $5,000.

5.   E) $15,500.

 

Answer:  B

Difficulty: 1 Easy

Page Ref: 97

Topic:  Taxation and investments; Taxation and retirement accounts; Tax planning strategies

Learning Objective:  03-04 Select appropriate tax strategies for various life situations.

Bloom’s:  Remember

Accessibility:  Keyboard Navigation

Gradable:  automatic

 

95) The maximum that an individual can contribute to a Keogh plan for the 2017 year is

1.   A) $2,000.

2.   B) 10% of annual income.

3.   C) $5,000.

4.   D) $15,500.

5.   E) 25% of annual income, up to a maximum of $54,000.

 

Answer:  E

Difficulty: 1 Easy

Page Ref: 97

Topic:  Taxation and investments; Taxation and retirement accounts; Tax planning strategies

Learning Objective:  03-04 Select appropriate tax strategies for various life situations.

Bloom’s:  Remember

Accessibility:  Keyboard Navigation

Gradable:  automatic

 

 

 

96) Lauren owns her business and is thinking about saving for retirement. She wants to invest up to 25% of her annual income. Which plan should she use?

1.   A) Roth IRA

2.   B) 401(k)

3.   C) Keogh plan

4.   D) FSA

5.   E) Traditional IRA

 

Answer:  C

Difficulty: 2 Medium

Page Ref: 97

Topic:  Taxation and investments; Taxation and retirement accounts; Tax planning strategies

Learning Objective:  03-04 Select appropriate tax strategies for various life situations.

Bloom’s:  Understand

Accessibility:  Keyboard Navigation

Gradable:  automatic

 

97) An advantage of investing in a 401(k) plan is the

1.   A) Ability to invest up to 25% of your annual income.

2.   B) Opportunity to save $25,000 per year.

3.   C) Possibility of receiving an employer match on your contributions.

4.   D) Ability to pay taxes on distributions.

5.   E) Ability to withdraw contributions before age 55 without penalty.

 

Answer:  C

Difficulty: 2 Medium

Page Ref: 97

Topic:  Taxation and investments; Taxation and retirement accounts; Tax planning strategies

Learning Objective:  03-04 Select appropriate tax strategies for various life situations.

Bloom’s:  Understand

Accessibility:  Keyboard Navigation

Gradable:  automatic

 

 

 

98) Janet is completing her federal income taxes for the year and has identified the amounts listed here. How much can she rightfully deduct?

 

• AGI: $42,000
• Medical and dental expenses: $1,100
• State income taxes: $1,000
• Mortgage interest: $7,000
• Charitable contributions: $1,250

1.   A) $3,350

2.   B) $7,000

3.   C) $8,250

4.   D) $9,250

5.   E) $10,350

 

Answer:  D

Explanation:  Deductions include the following: State income tax + Mortgage interest + Charitable contributions = $1,000 + $7,000 + $1,250 = $9,250.

Medical and dental expenses are not deductible because they must be greater than 10% of her AGI (42,000 × 10% = 4,200).

Difficulty: 3 Hard

Page Ref: 78-79

Topic:  Income tax payments and penalties; Income tax preparation and computations; Income tax terminology

Learning Objective:  03-02 Calculate taxable income and the amount owed for federal income tax.

Bloom’s:  Apply

Accessibility:  Keyboard Navigation

Gradable:  automatic

 

 

 

99) Sam and Diane are completing their federal income taxes for the year and have identified the amounts listed here. How much can they rightfully deduct?

 

• AGI: $80,000
• Medical and dental expenses: $9,000
• State income taxes: $3,500
• Mortgage interest: $9,500
• Charitable contributions: $1,000

1.   A) $14,000.

2.   B) $15,000.

3.   C) $20,000.

4.   D) $23,000.

5.   E) $57,000.

 

Answer:  B

Explanation:  Deductions include the following: Medical & dental in excess of 10% of AGI + State income tax + Mortgage interest + Charitable contributions = 1,000 [9,000 – (80,000 × 10%)] + $3,500 + $9,500 + $1,000 = $15,000.

Difficulty: 3 Hard

Page Ref: 78-79

Topic:  Income tax payments and penalties; Income tax preparation and computations; Income tax terminology

Learning Objective:  03-02 Calculate taxable income and the amount owed for federal income tax.

Bloom’s:  Apply

Accessibility:  Keyboard Navigation

Gradable:  automatic

 

 

 

100) Using the following table, calculate the taxes for an individual with taxable income of $20,800.

 

10%	Up to $8,500
15%	$8,500–$34,500
25%	$34,500–$83,600
28%	$83,600–$174,400
33%	$174,400–$379,150
35%	Over $379,150

 

850.             A) $850.

851.             B) $2,695.

852.             C) $5,175.

853.             D) $6,025.

854.             E) $20,800.

 

Answer:  B

Explanation:  Taxes = (10% × $8,500) + (15% × {$20,800 − $8,500}) = $850 + $1,845 = $2,695.

Difficulty: 3 Hard

Page Ref: 81

Topic:  Income tax payments and penalties; Income tax preparation and computations; Income tax terminology

Learning Objective:  03-02 Calculate taxable income and the amount owed for federal income tax.

Bloom’s:  Apply

Accessibility:  Keyboard Navigation

Gradable:  automatic

 

 

 

101) Using the following table, calculate the taxes for an individual with taxable income of $30,000.

 

10%	Up to $8,500
15%	$8,500–$34,500
25%	$34,500–$83,600
28%	$83,600–$174,400
33%	$174,400–$379,150
35%	Over $379,150

 

1.   A) $850

2.   B) $2,125

3.   C) $4,075

4.   D) $4,500

5.   E) $6,025

 

Answer:  C

Explanation:  Taxes = (10% × $8,500) + {15% × ($30,000 − $8,500)} = $850 + $3,225 = $4,075.

Difficulty: 3 Hard

Page Ref: 81

Topic:  Income tax payments and penalties; Income tax preparation and computations; Income tax terminology

Learning Objective:  03-02 Calculate taxable income and the amount owed for federal income tax.

Bloom’s:  Apply

Accessibility:  Keyboard Navigation

Gradable:  automatic

 

 

 

102) Using the following table, calculate the taxes for an individual with taxable income of $45,000.

 

10%	Up to $8,500
15%	$8,500–$34,500
25%	$34,500–$83,600
28%	$83,600–$174,400
33%	$174,400–$379,150
35%	Over $379,150

 

1.   A) $6,025

2.   B) $7,375

3.   C) $8,625

4.   D) $20,900

5.   E) $45,000.

 

Answer:  B

Explanation:  Taxes = (10% × $8,500) + {15% × ($34,500 − $8,500)} + {25% × ($45,000 − $34,500)} = $850 + $3,900 + $2,625 = $7,375.

Difficulty: 3 Hard

Page Ref: 81

Topic:  Income tax payments and penalties; Income tax preparation and computations; Income tax terminology

Learning Objective:  03-02 Calculate taxable income and the amount owed for federal income tax.

Bloom’s:  Apply

Accessibility:  Keyboard Navigation

Gradable:  automatic

 

 

 

103) If Jack was in a 25% tax bracket and received a $1,000 tax deduction, by how much would his taxes be reduced?

1.   A) $25

2.   B) $50

3.   C) $250

4.   D) $500

5.   E) $1,000

 

Answer:  C

Explanation:  Taxes would be reduced by (Tax deduction) × (Tax rate) = $1,000 × 25% = $250.

Difficulty: 3 Hard

Page Ref: 82

Topic:  Income tax payments and penalties; Income tax preparation and computations; Income tax terminology

Learning Objective:  03-02 Calculate taxable income and the amount owed for federal income tax.

Bloom’s:  Apply

Accessibility:  Keyboard Navigation

Gradable:  automatic

 

104) If Diane was in a 25% tax bracket and received a $1,000 tax credit, by how much would her taxes be reduced?

1.   A) $25

2.   B) $50

3.   C) $250

4.   D) $500

5.   E) $1,000

 

Answer:  E

Explanation:  Taxes would be reduced by the full amount of the tax credit: $1,000.

Difficulty: 3 Hard

Page Ref: 82

Topic:  Income tax payments and penalties; Income tax preparation and computations; Income tax terminology

Learning Objective:  03-02 Calculate taxable income and the amount owed for federal income tax.

Bloom’s:  Apply

Accessibility:  Keyboard Navigation

Gradable:  automatic

 

 

 

105) George Franklin paid taxes of $4,375 on a taxable income of $32,000. What was his average tax rate?

1.   A) 10%

2.   B) 13.7%

3.   C) 15%

4.   D) 25%

5.   E) 28%

 

Answer:  B

Explanation:  Average taxes = Taxes paid/Taxable income = $4,375/$32,000 = 0.1367 = 13.67% or 13.7%.

Difficulty: 3 Hard

Page Ref: 81

Topic:  Income tax payments and penalties; Income tax preparation and computations; Income tax terminology

Learning Objective:  03-02 Calculate taxable income and the amount owed for federal income tax.

Bloom’s:  Apply

Accessibility:  Keyboard Navigation

Gradable:  automatic

 

106) The types of tax services available that offer professional tax assistance include:

1.   A) National Firms (such as H&R Block)

2.   B) Enrolled Agents

3.   C) Accountants

4.   D) Attorneys

5.   E) All of these choices are correct.

 

Answer:  E

Difficulty: 2 Medium

Page Ref: 92

Topic:  Income tax preparation and computations

Learning Objective:  03-03 Prepare a federal income tax return.

Bloom’s:  Understand

Accessibility:  Keyboard Navigation

Gradable:  automatic

 

Personal Finance, 6e (Kapoor)

Chapter 5   Consumer Credit: Advantages, Disadvantages, Sources, and Costs

 

1) Typically, credit use is not a contributing factor to living beyond your means.

 

Answer:  FALSE

Explanation:  Many people use credit to live beyond their means.

Difficulty: 2 Medium

Page Ref: 141

Topic:  Consumer credit – Advantages and disadvantages; Consumer credit – general

Learning Objective:  05-01 Analyze advantages and disadvantages of using consumer credit.

Bloom’s:  Understand

Accessibility:  Keyboard Navigation

Gradable:  automatic

 

2) You can lend money to micro-entrepreneurs through Kiva.org, a micro-lending website.

 

Answer:  TRUE

Difficulty: 1 Easy

Page Ref: 149

Topic:  Credit capacity and ratio analysis; Credit reports and ratings; Five C’s of credit

Learning Objective:  05-02 Assess the types and sources of consumer credit.

Bloom’s:  Remember

Accessibility:  Keyboard Navigation

Gradable:  automatic