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Chapter 3—Preparing Your Taxes
d.
Tax attorneys
e.
All of the above
121. You are preparing your own tax return. The least costly source for answering your questions would be
a.
IRS 800 numbers.
b.
private preparation service.
c.
tax accountant.
d.
tax lawyer.
e.
local post office.
122. Your average tax rate is your
a.
adjusted gross income divided by tax withheld.
b.
tax liability divided by gross income.
c.
tax liability divided by taxable income.
d.
taxable income divided by tax withheld.
e.
gross income divided by tax refund.
123. If you itemize deductions and your income is over $100,000, you must use
Chapter 3—Preparing Your Taxes
a.
Schedule A.
b.
Schedule B.
c.
Form 1040.
d.
Form 1040A.
e.
both a and c.
124. The Robertsons, a couple with an AGI of $28,500, decided to contribute the maximum amount possible towards their
IRAs even though Mr. Robertson had a pension plan at work. He named his wife as beneficiary of the IRA. What is such
a tax strategy called?
a.
tax deferral since he'll have to pay taxes later when he withdraws the money
b.
tax avoidance since he'll never have to pay taxes on the IRA contribution
c.
tax evasion since this is illegal
d.
tax ignorance since he can't deduct the contribution anyway due to his pension plan at work
e.
income shifting to another person in a lower tax bracket
125. Which of the following are legal methods of reducing your current tax liability?
a.
not reporting taxable income you receive
b.
investing in a tax deferred annuity
c.
shifting income to your children
d.
writing off deductions above the actual amount(s) spent
e.
b and c
Chapter 3—Preparing Your Taxes
126. The income-shifting tax strategy is least effective when income-producing gifts are given to persons
a.
over age 65.
b.
over age 50.
c.
under age 19.
d.
under age 25.
e.
Age is not an issue.
127. Itemized deductions are listed on Schedule
a.
A.
b.
B.
c.
C.
d.
D.
e.
F.
128. Tax practitioners that are federally licensed are called
a.
certified public accountants
b.
certified financial planners
c.
tax attorneys
d.
enrolled agents
e.
none of the above.
Chapter 3—Preparing Your Taxes
129. All major software providers have online versions for preparing federal taxes. This software is
a.
free to all tax filers
b.
free to qualified tax filers
c.
for a fee for all tax filers
d.
available on a free trial to all tax filers
e.
available on a free trial to qualified tax filers
130. Who would be most likely to have to pay estimated taxes?
a.
Independent consultant
b.
Teacher
c.
Corporate manager
d.
State worker
e.
State police officer
131. A taxpayer can file for an automatic extension of ___ months.
a.
2
b.
4
c.
6
d.
9
e.
12
Chapter 3—Preparing Your Taxes
132. To qualify for the capital gain exclusion on a home sale, the seller must have resided in the residence for ___ of the
previous 5 years.
a.
1
b.
2
c.
3
d.
4
e.
5
INSTRUCTIONS: Choose the word or phrase in [ ] which will correctly complete the statement. Select A for the first
item, B for the second item, and C if neither item will correctly complete the statement.
133. Tax [avoidance | evasion] is a perfectly legal practice.
134. Tax [avoidance | evasion] focuses on reducing taxes in ways that are legal and compatible with the intent of
Congress.
Chapter 3—Preparing Your Taxes
135. Tax [avoidance | evasion] involves failure to accurately report income or deductions, and, in extreme cases, a failure
to pay taxes altogether.
136. The major source of revenue for the federal government is [income | estate] taxes.
137. Tax planning is [confined to the first quarter of the year | a year-round activity].
138. The lowest marginal tax rate is currently [10% | 15%].
Chapter 3—Preparing Your Taxes
139. The highest marginal tax rate is currently [39.6% | 28%].
140. Your income tax filing status is determined primarily by your [economic | family] situation.
141. Federal income taxation is [progressive | regressive].
142. Christy lives with her dog, Tex, who is dependent on her for support. She [can | cannot] use the Head of Household
filing status.
Chapter 3—Preparing Your Taxes
143. Usually a married couple will pay less income tax if they file [jointly | separately].
144. The common name for Federal Insurance Contribution Act payments is [income taxes | social security].
145. [Both you and your employer | Only your employer] will make social security contributions based on your wages.
146. When matching social security contributions, employers pay [the same | a lesser] amount of social security taxes
as/than the employee.
Chapter 3—Preparing Your Taxes
147. Your marital status [will | will not] have an effect on the amount of social security tax you pay.
148. The IRS definition of [gross | adjusted] income is "all income that is subject to federal taxes."
149. [Alimony | Child support] received would be reported as taxable income.
150. Dividends received from stocks are known as [passive | portfolio] income.
151. Earnings from real estate investments are an example of [active | passive] income.
Chapter 3—Preparing Your Taxes
152. Qualified dividends are taxed at the same rates as [earned income | long-term capital gains].
153. You will have to list and be able to prove [standard | itemized] deductions if audited.
154. [All | Some] of your medical expenses during the year could be taken as an itemized deduction.
155. Interest you paid on your [car | house] loan could be taken as an itemized deduction on your tax return.
Chapter 3—Preparing Your Taxes
156. Your tax filing status [would | would not] be a factor in determining the amount of standard deduction you could
take.
157. My son, age 21, earned $5,000 last year. He still lives at home, and I provide over 50% of his support. I [can |
cannot] claim him as a dependent on my tax return if he is a full-time college student.
158. My son, age 26 and a full-time college student, earned $5,000 last year. He still lives at home, and I provide over
50% of his support. I [can | cannot] claim him as a dependent on my tax return.
159. If you are claimed as a dependent on your parents' tax return, you [may also | may not] claim yourself on your tax
return.
Chapter 3—Preparing Your Taxes
160. A tax credit would result from [an IRA contribution | child care expenses].
161. A tax credit could result from [owning a home | adopting a child].
162. A tax credit is subtracted from your [taxable income | tax liability].
163. You are age 30 and single with no dependents. You take the standard deduction. Based on this information, you
[could | could not] use the 1040EZ.
Chapter 3—Preparing Your Taxes
164. You will itemize your deductions. You [could | could not] use the 1040A.
165. There is a [high | low] chance that one's tax return will be audited in a given year.
166. The higher your income, the [greater | smaller] the probability you will be audited.
167. If you pay a professional to prepare your taxes, any errors on the return will be [your | the preparer's] responsibility.
Chapter 3—Preparing Your Taxes
168. The terms "tax free" and "tax deferred" [do | do not] mean the same thing.
169. The date by which your tax liability must be paid in order to avoid late payment penalties and/or interest is [April 15 |
August 15].
170. When one gives a child an income-producing asset, one is [maximizing their deductions | income shifting].
171. Tax credits directly reduce a taxpayer's [taxes due | taxable income].
Chapter 3—Preparing Your Taxes
172. The standard deduction directly reduces the taxpayer's [taxable income | taxes due].
173. Major software providers have online versions for preparing federal taxes that are [free to all tax filers |
free to qualified tax filers].
174. If your gross earnings are less than $15,000, you likely pay more in [federal income tax | social security taxes].
175. The tax year corresponds to the [April 15 filing deadline | calendar year].
Chapter 3—Preparing Your Taxes
176. Marci has taxable income of $50,000. She is single and her tax rates are 10% on the first $9,075 of taxable income,
15% of the amount over $9,075 up to $36,900 of taxable income, and 25% on the remainder. What is Marci's tax liability,
her marginal tax rate, and her average tax rate? (Show all work.)
177. Charlie earned $70,000. If the total social security tax rate is 15.3%, then how much was his total social security tax?
Of this, how much did his employer pay in social security taxes for Charlie? (Show all work.)
178. From the information given below, determine Rosie's gross income for tax purposes:
Salary
$40,000
Interest (checking account)
50
Cash received as birthday gift
900
Dividends (mutual funds)
500
Inheritance received on father's death
22,000
Cash received from insurance for accident claim settlement
3,200
Cash dividend from stock
750
Chapter 3—Preparing Your Taxes
179. From the information given below, determine Steve's gross income for tax purposes:
Salary
$32,000
Interest (checking account)
25
Cash received as birthday gift
1,000
Dividends (mutual funds)
5,500
Child support payments received from ex-wife
24,000
Life insurance benefits received from aunt's death
50,000
180. Lori and Ajay are married taxpayers in the 33% marginal tax bracket. In 2014, they sold common stock shares for a
long-term capital gain of $3,800. They also sold some technology stock for a long-term capital loss of $9,000. In addition,
they sold the home they had lived in for the past 10 years and experienced a $75,000 gain on the house. How much will
their net capital gains (or losses) be for 2014?
181. Hector is a single taxpayer in the 28% marginal tax bracket. In 2014, he sold stock shares for a long-term capital gain
of $8,500. He also sold some financial services stock for a long-term capital loss of $2,000. In addition, he sold the home
that he had lived in for the past 3 years and experienced a $15,000 gain on the house. How much will his net capital gains
(or losses) be for 2014? How much will he pay (or save) in taxes as a result of these transactions?
Chapter 3—Preparing Your Taxes
182. Jose has the following expenses that he wants to include as itemized deductions for the year. His adjusted gross
income is $60,000. What is the total itemized deduction he can take? (Show all work.)
Medical expenses
$4,500
Home mortgage interest
8,000
Credit card interest
450
Charitable contributions
1,500
State property taxes
2,400
Job-related expenses
1,900
183. Larry is single and his standard deduction for the year is $6,200. He has itemized deductions of $13,000. If he is in
the 25% marginal tax bracket, how much tax would he save by using his itemized deductions?
