Chapter 4 Planning Your Tax Strategy

True/False Questions

1) Taxes are only considered in financial planning activities in April.

2. The principal purpose of taxes is to control economic conditions.

3. A state may impose a personal property tax.

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

5. Gift amounts over $10,000 are exempt from federal tax.

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

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

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

9. Taxable income is the total earnings of a person.

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

11. An exclusion is earnings not included in taxable income

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

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

Answer: True

 14. Most taxpayers have to file quarterly payments of estimated amounts owed for taxes.

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

 16. The simplest federal tax return form is the 1040A.  

17. The amount of a person's standard deduction is determined on Schedule A of Form 1040.

 18. Tax assistance from an attorney is more common than using a tax preparation servi

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

20. Several courses of appeal are available to taxpayers who disagree with an IRS ruling on their tax return audit.

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

22. Interest paid on credit cards and charge accounts may be deducted from your taxes.

 23. Tax-exempt income has a greater financial benefit than tax-deferred income.

24. Capital gains refer to profits from the sale of investments.

Multiple Choice Questions

25. The main purpose of taxes is to
    1. generate revenue for funding government programs.
    2. reduce the chances of inflation.
    3. create jobs.
    4. discourage use o
    5.  
    6. f certain goods and services.
    7.  
    8. decrease competition from foreign companies.

26. Which type of tax is imposed on specific goods and services at the time of purchase?
    1. estate
    2. inheritance
    3. excise
    4. general sales
    5. value-added

27. The                              property tax is based on the value of land and buildings.
    1. personal
    2. real estate
    3. direct
    4. proportional
    5. regressiv

28. What type of tax is imposed on the value of an individual's property at the time of his or her death?
    1. inheritance
    2. excise
    3. gift
    4. personal property
    5. estate

29. Taxable income is used to compute a person's
    1. exemptions.
    2. income tax.
    3. deductions.
    4. capital gains.
    5. exclusions.

30. Which of the following would result in a reduction of taxable income?
    1. portfolio income
    2. tax credits
    3. exclusions
    4. passive income
    5. earned income

31. Money received by an individual for personal effort is                          income.
    1. passive
    2. earned
    3. portfolio
    4. excluded
    5. capital gains
32. Money received in the form of dividends or interest is                          income.
    1. passive
    2. earned
    3. excluded
    4. capital gain
    5. investment

33. Earnings from a limited partnership would be an example of                           income.
    1. passive
    2. investment
    3. portfolio
    4. earned
    5. excluded
34. An amount not included in gross income is
    1. a tax credit.
    2. an exemption.
    3. an exclusion.
    4. earned income.
    5. portfolio income

35. Which of the following would be deducted from gross income to obtain adjusted gross income?
    1. alimony payments
    2. mortgage interest
    3. medical expenses
    4. foreign income exclusion
    5. charitable contribution

36. George Washburn had earnings from his salary of $34,000, interest on savings of $800, a contribution to an 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

37. An exclusion affects a person's taxes by
    1. reducing the amount of taxable income.
    2. increasing itemized deductions.
    3. decreasing itemized deductions.
    4. lowering a person's tax rate.
    5. increasing the number of exemptions a person can claim.

38. Reductions from gross income for such items as individual retirement account contributions and alimony payments will result in
    1. adjusted gross income.
    2. taxable income.
    3. earned income.
    4. passive income.
    5. total exclusions.

39. Tax-deferred retirement plans are a type of
    1. exemption.
    2. itemized deduction.
    3. passive income.
    4. tax shelter.
    5. tax credit.

40. Which of the following items is a set amount on which no taxes are paid?
    1. itemized deductions
    2. the standard deduction
    3. an earned tax credit
    4. withholding
    5. capital gains

41.                          are expenses that a taxpayer is allowed to deduct from adjusted gross income.
    1. Exemptions
    2. Exclusions
    3. Itemized deductions
    4. Tax credits
    5. Passive income
42. An expense that would be included in the itemized deductions of a taxpayer is
    1. travel to work.
    2. life insurance premiums.
    3. real estate property taxes.
    4. a driver's license fee.

43. A deduction from adjusted gross income for yourself, your spouse, and qualified dependents is
    1. the standard deduction.
    2. a tax credit.
    3. an itemized deduction.
    4. an exclusion.
    5. an exemption.

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

1. 6. nothing

B) $560

C) $1,600

D) $2,000

E) $4,480

44. An exemption affects a person's tax situation by
    1. increasing the standard deduction.
    2. increasing the taxpayer's marginal tax rate.
    3. decreasing itemized deductions.
    4. reducing the taxpayer's taxable income.
    5. increasing tax-exempt income.

45. Which of the following would qualify a person for an exemption when computing taxable income?
    1. mortgage interest
    2. a tax shelter
    3. a dependent
    4. charitable contributions
    5. passive income

46. For a dependent to qualify as an exemption, he or she must
    1. be married.
    2. be under age 16.
    3. be registered in school.
    4. receive more than one half of his or her support from the taxpayer.
    5. be a relative.

47. A tax                          is an amount subtracted directly from the amount of taxes owed.
    1. credit
    2. exemption
    3. deduction
    4. exclusion
    5. shelter

48. Which of the following is an example of a tax credit?
    1. mortgage interest
    2. child and dependent care expenses
    3. individual retirement account contributions
    4. amounts withheld for social security
    5. passive investment incom

49. 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)

50. Most people pay federal income tax by
    1. paying the total amount owed by April 15.
    2. filing quarterly tax payments.
    3. having amounts withheld from income.
    4. earning tax credits for various deductions.

51. Estimated quarterly tax payments must be made by people who
    1. are employed in a foreign country.
    2. receive dividends.
    3. work for the government.
    4. do not have adequate amounts withheld from income.

52. A taxpayer whose spouse recently died is most likely to use the                          filing status.
    1. single
    2. married filing joint return
    3. married filing separate return
    4. head of household
    5. qualifying widow or widower

53. The "head of household" filing status is for people who are
    1. recently divorced.
    2. the surviving spouse.
    3. not living with a spouse and have dependent children.
    4. married but only one spouse has income.
    5. married and each spouse makes about the same income.

54. Which form would an individual use who has less than $50,000 in taxable income from wages, salaries, tips, unemployment compensation, interest, or dividends, and who is married and does not itemize deductions?
    1. Form 1040
    2. Form 1040EZ
    3. Form 1040A
    4. Schedule A

55. The Form 1040 is most helpful to a person who
    1. is single with no other exemptions.
    2. makes less than $50,000 with no interest or dividends.
    3. itemizes deductions.
    4. does not itemize deductions.
    5. has a simple tax situation.

56. Which of the following people is least likely to have to file a federal income tax return?
    1. a U.S. citizen who is a resident of Puerto Rico
    2. a U.S. citizen living and working in a foreign country
    3. a person earning less than $7,050
    4. a person over age 65
    5. a college student
57. Itemized deductions are recorded on
    1. Form 1040A.
    2. Schedule A.
    3. Schedule B.
    4. Form 2106.

58. A person with a total tax liability of $4,350 and withholding of federal taxes of $3,975 would
    1. receive a refund of $3,975.

B) owe $4,350.

3. owe $375.
4. receive a refund of $4,350.
5. receive a refund of $375.

59. Kelly Vernon wants her tax return prepared by a government approved tax expert. Which of the following tax preparers should Kelly use?
    1. a CPA
    2. an enrolled agent
    3. a nationally-certified tax preparer
    4. a tax attorney
    5. a local tax preparer

60. Which type of tax expert would be of most value when you have a difference of opinion with the IRS?
    1. an enrolled agent
    2. a nationally-chartered tax preparer
    3. a CPA
    4. a tax accountant
    5. an attorney

61. Which type of audit is the least complicated for taxpayers?
    1. a field audit

an office audit

1. 2. a research audit
   3. a correspondence audit
   4. a documentation audit

62. The use of legitimate methods to reduce one's taxes is tax                         .
    1. evasion
    2. avoidance
    3. exemptions
    4. deferred techniques
    5. reductions

63. Union dues, fees for tax return preparation, and other miscellaneous expenses are
    1. not deductible.
    2. fully deductible.
    3. deductible for self-employed individuals only.
    4. deductible for people in certain income categories.
    5. deductible for the amount that exceeds two percent of adjusted gross incom

64. An example of an itemized deduction is
    1. interest on a credit card or charge account.
    2. certain job-related travel expenses.
    3. the cost of commuting to work.
    4. life insurance premiums.
    5. a traffic violation fee.

65. For which of the following types of credit plans is the interest tax deductible?
    1. a home equity loan
    2. an auto loan
    3. a credit card
    4. a life insurance policy cash value loan
    5. aperson cash loan from a credit union
66. An example of a tax-exempt investment is
    1. interest on U.S. savings bonds.
    2. dividends from corporate stock.
    3. earnings from a mutual fund.
    4. interest on municipal bonds.
    5. interest on corporate bonds.

67. Capital gains refer to
    1. tax-exempt investments.
    2. retirement accounts.
    3. profits from the sale of an investment asset.
    4. earnings from investments such as dividends or interest.
    5. tax-deferred investments

68. As of 2002, a short-term capital gain referred to investments
    1. made involving small companies.
    2. not taxed as ordinary income.
    3. held less than 18 months.
    4. in foreign companies.
    5. involving real estate.

69. The Roth IRA differs from the regular IRA in that
    1. earnings on the account are tax free after five years.
    2. contributions may exceed $2,000.
    3. deposits must be in federally-insured accounts.
    4. funds are only to be used for education expenses.
    5. only self-employed workers can use this account.

70. 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.

71. An IRA, Keogh plan, and 401(k) plan are examples of
    1. tax-exempt retirement plans.
    2. tax-deferred retirement plans.
    3. capital gains.
    4. self-employment insurance programs.
    5. job-related expenses that are tax deductible.