Question 1

An exemption affects a person's tax situation by:

Accepted Answer

Exemptions reduce a taxpayer's taxable income, which in turn can lower their tax liability. Therefore, choice D, which states that an exemption reduces the taxpayer's taxable income, is the best choice. The other options are not accurate statements regarding the effects of exemptions.

Question 2

Money received by an individual for personal effort is classified as ______________ income.

Accepted Answer

Earned income is money received by an individual for personal effort, such as wages, salary, tips, and self-employment income. Passive income is money earned without active involvement in the activity that generated the income, such as rental income or dividends. Portfolio income is earned from investments, and excluded income is not subject to taxation, such as certain types of insurance proceeds. Capital gains are profits earned from the sale of investments.

Question 3

Tax-deferred retirement plans are a type of:

Accepted Answer

Tax-deferred retirement plans, such as 401(k)s and IRAs, are considered tax shelters because they allow individuals to contribute pre-tax dollars, which reduces their taxable income for the year. These contributions and any subsequent earnings on them are not taxed until they are withdrawn in retirement, allowing individuals to potentially save on taxes over the course of their working years.

Question 4

Which one of the following would be deducted from gross income to obtain adjusted gross income?

Accepted Answer

Alimony payments are deducted from gross income to arrive at adjusted gross income.

Question 5

An expense that would be included in the itemized deductions of a taxpayer is:

Accepted Answer

Real estate property taxes are deductible as itemized deductions on Schedule A. Personal postage expenses, life insurance premiums, retirement plan contributions, and annual interest paid on credit cards are not deductible as itemized deductions.

Question 6

Money received in the form of dividends or interest is classified as ____________ income.

Accepted Answer

Dividends or interest received from investments are classified as investment income, which is separate from earned income (salary or wages) and passive income (rental income or business income in which the individual does not materially participate).

Question 7

Which of the following would be excluded from gross income?

Accepted Answer

Exclusions are items that are not considered as part of gross income, such as gifts, inheritances, life insurance proceeds, and certain types of employee benefits. Portfolio income, investment income, passive income, and earned income are all types of income that are generally included in gross income.

Question 8

A person has $4,000 in medical expenses and an adjusted gross income of $32,000.If taxpayers are allowed to deduct the amount of medical expenses that exceed 7.5 percent of adjusted gross income,what would be the amount of the deduction in this situation?

Accepted Answer

First, we need to calculate 7.5% of the adjusted gross income: 
7.5% of $32,000 = 0.075 x $32,000 = $2,400

Since the medical expenses amount to $4,000 and are greater than $2,400, we can deduct the amount that exceeds this threshold: 
$4,000 - $2,400 = $1,600

Therefore, the deduction in this situation would be $1,600, which is option B.

Question 9

A deduction from adjusted gross income for yourself,your spouse,and qualified dependents is:

Accepted Answer

An exemption is a deduction from adjusted gross income for yourself, your spouse, and qualified dependents. This reduces your taxable income, thereby decreasing your tax liability.

Question 10

George Washburn had earnings from his salary of $34,000,interest on savings of $800,a contribution to a traditional individual retirement account of $1,500,and dividends from mutual funds of $600.George's adjusted income would be:

Accepted Answer

George's adjusted income is calculated by subtracting the contribution to the traditional IRA from his total earnings. Total earnings are $34,000 (salary) + $800 (interest) + $600 (dividends) = $35,400. Subtract the IRA contribution of $1,500, resulting in an adjusted income of $33,900.

Question 11

Which one of the following is included in gross income?

Accepted Answer

Earned income, such as wages, salaries, bonuses, and tips, is included in gross income. Tax credits, exemptions, exclusions, and deductions are all mechanisms to reduce taxable income or tax liability, not components of gross income.

Question 12

A taxpayer with a taxable income of $47,856 and a total tax bill of $5,889 would have an average tax rate of ____ percent.

Accepted Answer

Average tax rate is the ratio of total tax paid to taxable income. 
Average tax rate = (Total tax paid / Taxable income) x 100%
= (5,889 / 47,856) x 100%
= 0.123 x 100%
= 12.3% 
Therefore, the taxpayer would have an average tax rate of 12.3 percent.

Question 13

An exclusion affects a person's taxes by:

Accepted Answer

An exclusion reduces the amount of gross income that is subject to taxation. It is not related to itemized deductions or exemptions.

Question 14

Which one of the following items is a set amount of income on which no taxes are paid?

Accepted Answer

The standard deduction is a set amount of income on which no taxes are paid. It is a fixed dollar amount that reduces the amount of income that is subject to tax, and the amount varies depending on your filing status. Itemized deductions, deferred income, withholding, and capital gains all involve some form of taxation.

Question 15

Reductions from gross income for such items as individual retirement account contributions and alimony payments will result in:

Accepted Answer

Reductions from gross income such as individual retirement account contributions and alimony payments will result in adjusted gross income (AGI). AGI is then used to determine taxable income.

Question 16

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

Accepted Answer

Itemized deductions are expenses that a taxpayer can deduct from their adjusted gross income. These expenses include things like mortgage interest, state and local taxes, charitable donations, and medical expenses. Taxpayers can choose to either take the standard deduction or to itemize their deductions on their tax return, whichever is more beneficial to them.

Question 17

Earnings from a limited partnership would be an example of ____________ income.

Accepted Answer

Earnings from a limited partnership are considered passive income because the limited partners are not actively involved in the management of the partnership.

Question 18

Which of the following would qualify a person for an exemption when computing taxable income?

Accepted Answer

A dependent may qualify a person for an exemption when computing taxable income. Mortgage interest, tax shelters, charitable contributions, and passive income may have tax deductions or credits, but they do not qualify for exemptions when calculating taxable income.

Question 19

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

Accepted Answer

Michele's total itemized deductions now exceed the standard deduction for her tax bracket, which means that the additional $2,000 contribution will be fully tax-deductible at a rate of 28%. Therefore, the contribution will reduce her taxes by 28% of $2,000, which is $560.

Question 20

For a dependent to qualify as an exemption,he or she must:

Accepted Answer

To qualify as an exemption, the dependent must receive more than half of their support from the taxpayer. The other criteria listed (marriage, age, school registration, and being an exchange student) are not necessary for the dependent to qualify as an exemption.

Quiz 4: Planning Your Tax Strategy