Finance Chapter 3 The federal personal income tax is a progressive tax

Chapter 3—Preparing Your Taxes

1. The federal personal income tax is a progressive tax.

a.

True

b.

False

True

Easy

2. The federal personal income tax is a flat tax.

a.

True

b.

False

Easy

3. Tax avoidance is legal, tax evasion is illegal.

a.

True

b.

False

True

Easy

4. One’s marginal tax rate is typically lower than one’s average tax rate.

a.

True

b.

False

Moderate

Chapter 3—Preparing Your Taxes

5. One’s average tax rate is typically lower than one’s marginal tax rate.

a.

True

b.

False

True

Moderate

6. If you have any earned income, you are required to file a tax return.

a.

True

b.

False

Moderate

7. The main objective of tax planning is to maximize the amount of money you keep by minimizing the amount of taxes

you pay.

a.

True

b.

False

True

Easy

Chapter 3—Preparing Your Taxes

8. If you are eligible to receive a tax refund, you will have to file a tax return to get the refund.

a.

True

b.

False

True

Easy

9. Income tax refunds are automatically sent to those who qualify for refunds no later than April 15.

a.

True

b.

False

Easy

10. As a single taxpayer with no dependents, one is generally eligible to file as “head of household.”

a.

True

b.

False

Easy

11. Russ and Lois got married December 30. Although they were single for most of the year, they can legally file as

married taxpayers in the year of the wedding.

a.

True

b.

False

True

Chapter 3—Preparing Your Taxes

Easy

12. Dwayne and Gayle were divorced September 29, have not remarried, and have no dependents. Their filing status for

the year will each be “married” since they were married for more than half of the year.

a.

True

b.

False

Moderate

13. If you are married, you can legally file a single tax return.

a.

True

b.

False

Easy

14. A spouse and spouse is the only couple combination that can file a joint return.

a.

True

b.

False

True

Easy

Chapter 3—Preparing Your Taxes

15. The tax brackets (rates) and payments for married couples filing separately are now typically close to the same as for

joint filers.

a.

True

b.

False

True

Easy

16. The Internal Revenue Service is responsible for making changes to the federal income tax codes.

a.

True

b.

False

Moderate

17. Congress considers tax law changes throughout the year.

a.

True

b.

False

True

Moderate

18. Social security taxes are deducted from all wages and salaries earned in a year.

a.

True

b.

False

Chapter 3—Preparing Your Taxes

19. Social security taxes are paid on earned income but not on investment income.

a.

True

b.

False

True

Easy

20. There is no limit on the amount of social security tax withheld annually.

a.

True

b.

False

Easy

21. The Medicare portion of the FICA tax is paid on 100% of earnings.

a.

True

b.

False

True

Moderate

Chapter 3—Preparing Your Taxes

22. Your marital status will affect the amount of social security you must pay in a year.

a.

True

b.

False

Moderate

23. Child support received is included in gross income.

a.

True

b.

False

Easy

24. Alimony received is included in gross income for the receiver and deducted from gross income for the payer.

a.

True

b.

False

True

Moderate

25. Gifts received from family and friends are included in gross income.

a.

True

b.

False

Chapter 3—Preparing Your Taxes

False

Moderate

26. Gross income minus tax exempt income equals adjusted gross income.

a.

True

b.

False

Challenging

27. Dividends received from the stock you own will be taxable income.

a.

True

b.

False

True

Moderate

28. Qualified dividends are taxed at the same rates as long-term capital gains.

a.

True

b.

False

True

Challenging

Chapter 3—Preparing Your Taxes

29. Portfolio-related expenses can be written off against passive income.

a.

True

b.

False

Challenging

30. A short-term capital gain would be taxed at the same rate as your salary.

a.

True

b.

False

True

Challenging

31. A long-term capital gain is taxed at the same rate as ordinary income.

a.

True

b.

False

Challenging

32. The sale of your home will rarely result in a taxable capital gain.

a.

True

b.

False

Chapter 3—Preparing Your Taxes

True

Moderate

33. An investment must be owned over one year in order to qualify for long-term capital gains treatment.

a.

True

b.

False

True

Easy

34. An investment must be owned over two years in order to qualify for long-term capital gains treatment.

a.

True

b.

False

Easy

35. To receive the most favorable capital gains treatment, a taxpayer must own and occupy a home for at least two of the

five years prior to its sale.

a.

True

b.

False

True

Chapter 3—Preparing Your Taxes

36. Adjustments to income will decrease your taxable income.

a.

True

b.

False

True

Easy

37. Itemized deductions could include certain taxes, medical expenditures, and home mortgage interest.

a.

True

b.

False

True

Easy

38. You should itemize deductions when total itemized deductions exceed the standard deduction.

a.

True

b.

False

True

Moderate

39. You should itemize deductions when total itemized deductions are less than the standard deduction.

a.

True

Chapter 3—Preparing Your Taxes

b.

False

Moderate

40. Mortgage interest and paid home property taxes are both itemized deduction items.

a.

True

b.

False

True

Easy

41. State income taxes and real estate taxes are both itemized deduction items.

a.

True

b.

False

True

Moderate

42. A tax deduction is more valuable than a tax credit.

a.

True

b.

False

Moderate

Chapter 3—Preparing Your Taxes

43. Federal income taxes paid can be deducted the following year.

a.

True

b.

False

Easy

44. Personal exemptions are deductions from AGI based on the number of persons supported by the taxpayer’s income.

a.

True

b.

False

True

Easy

45. The personal exemption for a student can be taken both by the parent and by the child.

a.

True

b.

False

Moderate

46. When a child qualifies as a dependent on her parent’s return, the child cannot take a personal exemption for herself.

a.

True

Chapter 3—Preparing Your Taxes

b.

False

True

Easy

47. The alternative minimum tax is designed to ensure that individuals with many deductions and tax-shelter investments

are paying their fair share of taxes.

a.

True

b.

False

True

Moderate

48. Tax credits are dollar-for-dollar reductions in taxes due.

a.

True

b.

False

True

Moderate

49. Estimated tax payments must be made by those who do not have taxes deducted from their earnings.

a.

True

b.

False

True

Easy

Chapter 3—Preparing Your Taxes

50. A person with a significant amount of investment income would have a high probability of needing to make estimated

tax payments.

a.

True

b.

False

True

Moderate

51. All taxpayers have an equal probability of having their tax returns audited.

a.

True

b.

False

Moderate

52. You have up to three years after mailing your tax return to file an amended tax return (1040X).

a.

True

b.

False

True

Easy

Chapter 3—Preparing Your Taxes

53. If your AGI is less than $100,000 and you do not itemize deductions, the IRS will compute your taxes for you.

a.

True

b.

False

True

Easy

54. A married couple filing a joint return has Ms. Cindy Cook, a CPA, complete their return. The IRS will hold only Ms.

Cook responsible for any errors on the return.

a.

True

b.

False

Easy

55. Marginal tax and average tax rate refer to the same thing.

a.

True

b.

False

Moderate

56. If you earn less than $15,000, you probably pay more in social security taxes than in federal income taxes.

a.

True

b.

False

True

Chapter 3—Preparing Your Taxes

57. Opening a traditional IRA would allow you to defer taxes on the earnings.

a.

True

b.

False

True

Challenging

58. Opening a traditional IRA would allow you to take advantage of tax-free earnings.

a.

True

b.

False

Challenging

59. Tax-deferred income is better than tax-free income.

a.

True

b.

False

Challenging

Chapter 3—Preparing Your Taxes

60. Municipal bond investments typically provide tax-free interest income.

a.

True

b.

False

True

Easy

61. Most any wage earner can open an IRA and contribute up to $7,500 of tax-deferred income each year to the account.

a.

True

b.

False

Challenging

62. Tax avoidance is a legal means to minimize tax liabilities.

a.

True

b.

False

True

Easy

63. Tax evasion is a legal means to avoid tax liabilities.

a.

True

b.

False

Easy

Chapter 3—Preparing Your Taxes

64. Persons who work for more than one employer in any year will owe more social security taxes than if all their income

was earned from a single employer.

a.

True

b.

False

Challenging

65. A taxpayer claiming himself and one dependent had personal exemptions in 2014 amounting to $7,900.

a.

True

b.

False

True

Easy

66. The regular income tax filing deadline is April 1 of each year.

a.

True

b.

False

Easy

67. By filing a tax extension, one does not have to pay his income tax liability until October 15.

a.

True

b.

False

Moderate

68. Income shifting refers to the process of transferring income from the taxpayer to the IRS.

a.

True

b.

False

Moderate

69. The standard deduction in 2014 for a single filer was $6,500 and for married persons filing jointly was $13,000.

a.

True

b.

False

Moderate

70. Most major software providers have free online versions for preparing federal taxes for all taxpayers.

a.

True

b.

False