PFIN 6th Edition by Billingsley – Test Bank

 

 

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Sample Test

Chapter 03

 

1.    Russ and Lois got married on December 30. Even though they were single for most part of the year, they can legally file as married filing jointly taxpayers in the year of the wedding.

 

*a. True

1.    False

 

 

2.    Dwayne and Gayle were divorced on September 29. They have not remarried since and have no dependents. Their filing status for the year will be married filing separately since they were married for more than half of the year.

 

1.    True

*b. False

 

 

3.    If you are married, you can legally file as a single taxpayer.

 

1.    True

*b. False

 

 

4.    Gross income minus tax-exempt income equals adjusted gross income.

 

1.    True

*b. False

 

 

5.    Adjustments to gross income will decrease your taxable income.

 

*a. True

1.    False

 

 

6.    Qualified dividends are taxed at the highest capital gain rates.

 

1.    True

*b. False

 

 

7.    The alternative minimum tax (AMT) is applicable to taxpayers with moderate levels of income only.

 

1.    True

*b. False

 

 

8.    Tax credits are dollar for dollar reductions in taxable income.

 

1.    True

*b. False

 

 

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

 

1.    True

*b. False

 

 

10.  A tax audit is an examination by enrolled agents to validate the accuracy of a filed tax return.

 

1.    True

*b. False

 

 

11.  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 in the filed return.

 

1.    True

*b. False

 

 

12.  Tax preparers must be licensed by either the state or the federal government.

 

1.    True

*b. False

 

 

13.  Tax avoidance is legal, whereas tax evasion is illegal.

 

*a. True

1.    False

 

 

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

 

1.    True

*b. False

 

 

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

 

1.    True

*b. False

 

 

17.  Personal income taxes are:

 

1.    optional.

2.    regressive.

*c. progressive.

1.    deductible.

2.    unconditional.

 

 

18.  A progressive tax system is one in which:

 

1.    tax rates are directly proportional to inflation rates.

*b. people at higher-income levels pay tax at a higher rate than people at lower-income levels.

1.    tax rates are inversely related to inflation rates.

2.    people at higher-income levels pay tax at a lower rate than people at lower-income levels.

3.    there are no exemptions or deductions available from taxable income.

 

 

19.  Henry is married to Lillian, and they have two dependent children. Both of them want to file their own tax returns, reporting only his or her own income, deductions, and exemptions. The filing status of Henry and Lillian in their tax returns is:

 

1.    single taxpayer.

2.    married filing jointly.

3.    head of household.

4.    qualifying widow.

*e. married filing separately.

 

 

21.  Mandi and Thomas were married and had a child aged 7 in 2014. Mandi died in 2014, leaving Thomas a single parent. The most favorable filing status for Thomas in 2015 will be:

 

1.    single.

2.    married filing separately.

3.    head of household.

*d. qualifying widower.

1.    married filing jointly.

 

 

22.  Molly and Jason were married. Their only dependent was Spot, their black standard poodle. Jason died in 2014. Assuming Molly does not remarry, the only legal filing status for Molly in 2015 will be:

 

*a. single.

1.    married filing separately.

2.    head of household.

3.    qualifying widow.

4.    married filing jointly.

 

 

23.  Your take-home pay is what you are left with after subtracting withholdings from your:

 

*a. gross earnings.

1.    net earnings.

2.    taxable income.

3.    adjusted gross income.

4.    tax-exempt income.

 

 

24.  The _____ income is gross income less the tax deductions and payments for insurance and retirement savings.

 

*a. take-home

1.    EBIT

2.    adjusted gross

3.    taxable

4.    tax-exempt

 

 

25.  Your income tax withholding is dependent on:

 

1.    your age and educational qualification.

2.    the number of deductions claimed by your spouse.

*c. your income level and the number of withholding allowances you have claimed.

1.    the number of standard deductions you have claimed.

2.    the number of withholding allowances allowed by your employer.

 

 

26.  In 2015, the total Social Security tax rate was:

 

6.    6.0 percent.

7.    6.75 percent.

8.    7.25 percent.

9.    13.4 percent.

*e. 15.3 percent.

 

 

27.  Ben and Jack both earned $60,000 this year. Ben (age 30) is married with two children, and Jack (age 68) is single with no dependents. Which of the following is true regarding the amount of Social Security taxes they will have to pay?

 

*a. They will pay the same amount of Social Security taxes.

1.    Ben will pay lesser Social Security taxes because he is married.

2.    Ben will pay lesser Social Security taxes because he has children.

3.    Jack will pay lesser Social Security taxes because he is single.

4.    Jack will pay lesser Social Security taxes because he is over the age of 65.

 

 

28.  Mark is not married and has dependent parents. He pays more than half of the cost of keeping up a home for himself and his parents. His tax filing status is _____.

 

1.    single taxpayer

2.    married filing jointly

3.    married filing separately

*d. head of household

1.    qualifying widow

 

 

29.  Which of the following statements is true of the tax levied under the Federal Insurance Contributions Act (FICA)?

 

1.    It is also known as property tax.

*b. It is paid equally by employer and employee.

1.    It is not applicable to self-employed persons.

2.    It is applicable to all federal employees.

3.    It is used to provide insurance against theft.

 

 

30.  Taxable income is calculated by:

 

1.    adding adjustments to and subtracting the larger of itemized or standard deductions and exemptions from gross income.

*b. subtracting adjustments, the larger of itemized or standard deductions, and exemptions from gross income.

1.    adding adjustments, the larger of itemized or standard deductions, and exemptions to gross income.

2.    subtracting adjustments from and adding the larger of itemized or standard deductions and exemptions to gross income.

3.    adding adjustments and the larger of itemized or standard deductions to and subtracting exemptions from gross income.

 

 

31.  Which of the following is subject to federal income tax?

 

1.    The tax credit earnings on a Roth IRA

2.    Municipal bond interest

3.    Child-support payments

*d. Alimony received

1.    Personal exemptions

 

 

33.  _____ would be considered a part of your taxable income.

 

1.    Your (Individual retirement account) IRA contributions

2.    A gift from your aunt

3.    Your child-support payments

*d. A gain from the sale of your assets

1.    Your tuition scholarship

 

 

34.  A capital gain is the result of:

 

1.    selling an asset for less than its purchase price.

2.    holding an asset that has depreciated.

3.    selling an asset at its purchase price.

*d. selling an asset for more than its purchase price.

1.    buying a new asset at a rate lower than the market rate of the asset.

 

 

35.  Tom sold mutual fund shares, which he had owned for 3 years, so that he could use the proceeds to return to college. Tom is in the 15% marginal tax bracket, and his capital gain from the sale was $11,000. How much tax does Tom owe on the gain?

 

1.    $11,000

2.    $3,080

3.    $1,650

4.    $1,100

*e. $0

 

 

36.  Diana sold mutual fund shares, which she had owned for 4 years, so that she could use the proceeds to travel across Europe with her son. Diana is in the 35 percent marginal tax bracket, and her capital gains from the sale were $30,000. Diana’s tax liability on the gain is _____.

 

1.    $10,500

2.    $8,400

3.    $6,000

*d. $4,500

1.    $1,500

 

 

37.  Sarah is a homeowner and a single taxpayer. She has owned and occupied the house as a principal residence for the last 8 years. In the current taxable year, she receives a promotion. She sells her home and moves to another area. The capital gain on the sale of the principal residence will:

 

1.    be taxable as ordinary income.

2.    be taxable at a rate of 25%.

3.    be taxable at the appropriate short-term capital gains rate.

*d. be taxable excluding the first $250,000 of the gain.

1.    not be taxable because the relocation is a job-related move.

 

 

38.  Murray (age 68, single) sold his home owned for 35 years so that he could relocate to a place that is closer to where his grandchildren live. He realized a $400,000 capital gain on the home. Murray’s tax liability on capital gain is computed on _____.

 

1.    $400,000

2.    $300,000

3.    $250,000

*d. $150,000

1.    $0

 

 

39.  Molly and Justin are considering contributing $5,000 to a tax-deductible charity. This contribution will bring their total itemized deductions to $20,000. Assuming they are in the 28% marginal tax bracket, how much will they save in taxes by contributing the $5,000 to charity?

 

1.    $0

2.    $840

*c. $1,400

1.    $5,600

2.    $5,000

 

 

40.  John and Charlotte are considering contributing $1,000 to their church. This contribution will bring their total itemized deductions to $2,000. Assuming they are in the 15% marginal tax bracket, how much will they save in taxes by contributing the $1,000 to their church?

 

*a. $0

1.    $150

2.    $300

3.    $500

4.    $1,000

 

 

41.  For those under the age of 65, medical and dental expenses may be included as itemized deductions:

 

1.    when they exceed 4% of the adjusted gross income.

2.    up to a maximum of $7,500 per individual per tax year.

3.    only if they do not exceed 7.5% of the gross income.

*d. only for amounts in excess of 10% of the adjusted gross income.

1.    when they exceed 2% of the taxable income.

 

 

42.  Mr. and Mrs. Davenport, aged 40 and 38, respectively, have three children aged 3, 6, and 13. Their financial details for 2015 are as follows: Adjusted gross income (AGI) – $65,000

Unreimbursed medical expenses – $6,750

The Davenports’ claim for itemized deductions for medical expenses is _____.

 

1.    $0

*b. $250

1.    3,500

2.    $2,750

3.    $4,500

 

 

44.  Connie is a 20-year-old college student who earned $8,000 and spent it all supporting herself during the year. Her parents may claim her as a tax dependent as long as:

 

*a. they provide more than half of the amount she needs to support herself during the year.

21.  she is under 21.

22.  she makes under $10,000.

23.  she lives at home.

24.  she does not get her Social Security number.

 

 

45.  Peter’s tax computed as per the tax rate schedule amounts to $2,000, and his tax credits amount to $500. His total tax liability is _____.

 

1.    $2,500

*b. $1,500

1.    $3,000

2.    $2,200

3.    $4,000

 

 

46.  Based on the given information, Max’s portfolio income is:

Interest from savings account	$1,000
Capital gains realized	$5,000
Salary	$8,000

 

 

1.    $13,000.

*b. $6,000.

1.    $8,000.

2.    $6,000.

3.    $18,000.

 

 

47.  _____ are the deductions from adjusted gross income (AGI) that are based on the number of persons supported by the taxpayer’s income.

 

1.    Taxable assets

2.    Tax credits

3.    Liabilities

4.    Extensions

*e. Exemptions

 

 

48.  The total amount of income tax you owe in one year is your tax:

 

1.    withholding.

2.    credit.

3.    rate.

4.    refund.

*e. liability.

 

 

49.  Which of the following statements is true about tax credits?

 

1.    They are deductions that depend on the taxpayer’s filing status, age, and vision and that can be claimed by a taxpayer whose total itemized deductions are small.

2.    They are deductions from the adjusted gross income based on the number of persons supported by the taxpayer’s income.

3.    They represent the income remaining after subtracting all allowable adjustments to income from the gross income.

4.    They are personal expenditures that can be deducted from adjusted gross income when determining taxable income.

*e. They are deductions from a taxpayer’s tax liability that directly reduce the person’s taxes due.

 

 

50.  What is the maximum amount of adoption tax credit available for an individual?

 

1.    $10,000

*b. $13,400

1.    10 percent of the adjusted gross income

2.    15 percent of the adjusted gross income

3.    $25,000

 

 

51.  Tax credits reduce your:

 

*a. tax liability.

1.    adjusted gross income.

2.    tax refund.

3.    tax withholding.

4.    taxable income.

 

 

52.  Mr. and Mrs. McMurray have three children, aged 6, 12, and 18, for whom they paid childcare expenses of $6,000 in 2015. The McMurrays’ tax liability calculated as per the tax schedule is $10,000. The McMurrays’ tax liability is _____.

 

*a. $8,000

1.    $8,500

2.    $8,800

3.    $13,190

4.    $10,000

 

 

53.  Jamil and Vicki have one child, aged 3, for whom they paid childcare expenses of $2,500 this year. If they are eligible for a 20% dependent care credit plus child tax credit, by how much will these credits reduce their tax liability?

 

1.    $500

*b. $1,500

1.    $2,000

2.    $2,500

3.    $3,000

 

 

54.  A simplified version of Form 1040 for individual income tax if you have a taxable income of less than $100,000 from wages only and you do not claim any itemized deductions or any tax credit is:

 

1.    Schedule A.

2.    Schedule B.

3.    Form 1040S.

4.    Form 1040A.

*e. Form 1040EZ.

 

 

55.  Itemized deductions are listed on:

 

*a. Schedule A of Form 1040.

1040.       Schedule B of Form 1040.

1041.       Schedule C of Form 1040.

1042.       Schedule D of Form 1040.

1043.       Schedule F of Form 1040.

 

 

56.  If you are a professional who is likely to receive income that is not subject to withholding, then you are required to _____.

 

*a. pay an estimated tax

1.    file an amended return

2.    file an extension

3.    deduct tax credit

4.    calculate itemized deductions

 

 

57.  A _____ would most likely have to pay estimated taxes.

 

1.    school teacher

2.    manager for an industrial firm

*c. self-employed plumber

1.    union worker

2.    corporate attorney

 

 

58.  A declaration of estimated taxes is made in:

 

1.    Schedule B.

2.    Form 1040EZ.

3.    Schedule Z.

*d. Form 1040-ES.

1.    Form 1040 A.

 

 

61.  Which of the following individuals should pay estimated taxes?

 

*a. An entrepreneur

1.    A teacher

2.    A corporate manager

3.    A State worker

4.    A State police officer

 

 

62.  A taxpayer can file for an automatic extension of _____ months.

 

1.    2

2.    4

*c. 6

1.    9

2.    12

 

 

64.  Which of the following private tax preparers are required to pass an exam administered by the Internal Revenue Service (IRS)?

 

1.    National and local tax services

2.    Certified public accountants (CPAs)

*c. Enrolled agents (EAs)

1.    Tax attorneys

2.    Corporate managers

 

 

65.  You are preparing your own tax return. The least costly source for getting your questions answered would be:

 

*a. the IRS office toll-free number.

1.    an enrolled agent.

2.    a tax accountant.

3.    a tax lawyer.

4.    the local post office.

 

 

66.  Tax practitioners who are federally licensed are called:

 

1.    certified public accountants.

2.    certified financial planners.

3.    tax attorneys.

*d. enrolled agents.

1.    chartered financial analysts.

 

 

67.  The Robertsons, a couple with an adjusted gross income of $28,500, decides to contribute the maximum amount possible toward their individual retirement accounts (IRAs) even though Mr. Robertson is covered by a pension plan where he works. He names his wife the beneficiary of the IRA. What is such a tax strategy called?

 

*a. Tax deferral strategy

1.    Tax avoidance strategy

2.    Tax evasion strategy

3.    Tax ignorance strategy

4.    Income shifting strategy

 

 

68.  Which of the following is an illegal method of reducing your current tax liability?

 

*a. Not reporting the taxable income you receive

1.    Investing in a tax deferred annuity

2.    Shifting income to your children

3.    Investing money in municipal bonds

4.    Putting money in a Roth IRA

 

 

69.  The highest marginal tax rate is currently ____________. ​

 

35.  35.6 percent

36.  35 percent

*c. 39.6 percent

1.    41 percent

 

 

70.  Christy lives by herself with her dog, Tex. Her filing status should be ____________. ​

 

1.    head of household

2.    qualifying widow

*c. single

1.    married filing separately

 

 

71.  Payments under the provisions of the Federal Insurance Contributions Act (FICA) are also known as ____________. ​

 

1.    income tax

*b. Social Security tax

1.    property tax

2.    capital gains tax

 

 

72.  A tax credit could result from ____________. ​

 

1.    owning a home

*b. adopting a child

1.    charitable contributions

2.    investing in municipal bonds

 

 

73.  If your income is high, then there is ____________ probability of your income being audited. ​

 

1.    zero

2.    an equal

*c. a low

1.    a high

 

 

74.  Tax ____________ is an illegal practice. ​

 

1.    avoidance

2.    planning

*c. evasion

1.    deferring

 

 

75.  When an individual gives his or her child an income-producing asset, he or she is ____________. ​

 

*a. shifting his or her income

1.    maximizing his or her deductions

2.    deferring his or her tax

3.    executing his or her will

 

 

76.  Shawn earns $65,000. If the total Social Security tax rate is 15.3%, then how much is his Social Security tax? How much does his employer pay toward Social Security taxes for Shawn? (Show all work.)

 

 

77.  From the information given below, determine Marcie’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