Family Finance Exam 1 Chapter 4

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You can use tax form ... to amend tax returns filed in error during the past three years.

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1040-X

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The way to reduce overwithholding is to complete the ... form proper- ly.

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IRS W-4

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Capital gains on property held for personal use ... capital losses on property held for personal use

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Are taxable, not deductible

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Are not included in gross income reported to the IRS.

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Exclusions

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All medical, dental, and hospital expenses are tax deductible.

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False

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The fees you pay to obtain assistance in income tax filing are tax deductible.

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True

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Low-income workers ages 25 through 64 can qualify for a special subsidy called

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The Earned Income Credit

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The tax rate at which your last dollar earned is taxed is your

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Marginal Tax Rate

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Income from rents, dividends, capital gains, interest, and royalties is called

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Unearned Income

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The IRS form that is used to notify your employer of the number of exemptions for which you qualify and that serves as a basis, along with income earned, for calculating your payroll withholding is the

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W-4 Form

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If you earn substantial income from sources that do not use payroll withholding you must

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Pay Estimated Taxes Quarterly

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You do not need to report .... to the IRS.

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Total Income

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Specific expenses that can be subtracted from adjusted gross income to reduce taxable income are called

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Itemized Deductions

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A tax-credit that cannot reduce your final tax liability below $0 is a(n)

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Non-refundable tax credit.

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A taxpayer's gross income, minus adjustments to income, minus the amount for the standard deduction or total itemized deductions, and minus the amount subtracted based on the number of exemptions allowed is his or her

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Taxable Income

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The tax credit for educational expenses that allows a tax reduction to be claimed for tuition and related expenses beyond the first two years of post-secondary school is the

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Hope Scholarship Credit

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Reducing your tax liability through legal means is called

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Tax Avoidance

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Which of the following is the type of Section 529 qualified education savings plan that allows the setting of an investment account for a designated beneficiary?

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College Savings Plan

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Arranging your income tax deductions so that they add up to enough in one year to allow itemization of deductions is referred to as

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Bunching Deductions

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A person's effective marginal tax rate is higher than his or her federal marginal tax rate.

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True

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Modification of income tax brackets to reduce the effects of inflation is called

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Indexing

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Legally permitted reductions from a taxpayer's gross income based on the total number of individuals supported by that income.

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Exemptions

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You can take both the standard deduction and your itemized deductions when calculating your taxable income.

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False

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The number of exemptions that you use when completing your W-4 payroll withholding form must be the same as the number you declare on your tax return.

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False

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tax planning tool that provides a reduction or postponement of income tax liability.

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Tax Shelter

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The tax rate applied to a taxpayer's last dollar of income, which takes into account other taxes besides the federal income tax, is called the

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Effective Marginal Tax Rate

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Income from salaries, wages, fringe benefits, and sole proprietorships is called

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Earned Income

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Describes a select group of legal reductions to gross income including contributions to individual retirement accounts, alimony paid, and certain business-related expenses

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Adjustments to Income

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When filing an income tax return, taxpayers may deduct an amount that is the government's legally permissible estimate of any likely tax-deductible expenses. It is called the

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Standard Deduction

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After determining your tax liability based on your taxable income, you can further reduce your tax liability and obtain your final tax liability by taking advantage of any available

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Tax Credits

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Salary reduction programs that set aside up to $5,000 of an employee's pre-tax income for government approved medical and/or dependent-care expenses are called

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Flexible Spending Accounts

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An inequity of the U.S. tax system that results in married couples with the same level of taxable income as an unmarried couple filing separately to pay a higher level of income taxes is called the

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Marriage Penalty

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The dollar amounts at which the tax brackets change are adjusted each year for inflation in a process referred to as

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Indexing

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The practice of one person with a high marginal tax rate transferring income to another person who is in a lower tax bracket is referred to as

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Income Splitting

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A trust or custodial account set up to pay for future higher education expenses for a designated beneficiary (under age 18) is called a

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Coverdell Education Savings Account.

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Asking your employer to delay giving you your 2005 bonus until January of 2006 in order to avoid moving into a higher income tax bracket for 2005 is an example of

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Postponing Income

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In order to adjust the return on a taxable investment in order to compare it to a non-taxable investment you should calculate its

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After-Tax Yield

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Income received from the sale of a capital asset above the costs to purchase and sell the asset.

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Capital Gain

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A person's adjusted gross income (AGI) is an important figure because many the allowable portion of many income tax deductions depends on the amount of the AGI.

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True

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Tax shelters generally defer taxes to a later date rather than eliminate them altogether.

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True

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To save on taxes as a result of certain expenses such as retirement account deposits, health care expenses and dependent care expenses you would want to make them with pre-tax dollars.

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True

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Modification of the tax brackets to reduce the effect of inflation is referred to as

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Indexing

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A person in the 28marginal tax bracket who had a long-term capital gain from sale of stocks in a given year would pay what percentage of the gain in federal income taxes?

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0, as long-term capital gains are exempt from federal income taxation

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The method of prepaying taxes in which your employer withholds a portion of each of your paychecks as an estimate of the tax you owe and forwards those funds to the government is called

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Payroll withholding.

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Used to describe a select group of legal reductions to gross income known as above-the-line deductions?

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Adjustments to Income

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Which of the following directly reduces your tax liability rather than your income subject to federal income taxes?

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A Tax Deduction

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Methods of deferring taxes on income until a later date when the tax rate might be lower are called

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Tax Shelters

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In order to adjust the return on a tax-exempt investment in order to compare it to a taxable investment you should calculate its

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Equivalent taxable yield.

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The type of employer-sponsored retirement plan that allows workers to make pre-tax deposits into the plan is called a

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Defined Contribution Plan

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The type of bond for which the interest earnings are exempt from federal income taxation even if not used for educational expenses is a(n)

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Municipal Bond