Chapter 4
Practice Test
1. As of 1999, a short-term capital gain referred to
investments
A) made involving small companies.
B) not taxed as ordinary income.
C) held less than 18 months.
D) in foreign companies.
E) involving real estate.
2. Taxes are only considered in financial planning in April.
A) True
B) False
3. Tax-exempt income has a greater financial benefit than
tax-deferred income.
A) True
B) False
4. An IRA, Keogh plan, and 401(k) plan are examples of
A) tax-exempt retirement plans.
B) tax-deferred retirement plans.
C) capital gains.
D) self-employment insurance programs.
E) job-related expenses that are tax
deductible.
5. The main purpose of taxes is to
A) generate revenue for funding government
programs.
B) reduce the chances of inflation.
C) create jobs.
D) discourage use of certain goods and
services.
E) decrease competition from foreign
companies.
6. An exemption affects a person's tax situation by
A) increasing the standard deduction.
B) increasing the taxpayer's marginal tax
rate.
C) decreasing itemized deductions.
D) reducing the taxpayer's taxable income.
E) increasing tax-exempt income.
7. A tax credit is an amount subtracted directly from the
amount of taxes owed.
A) True
B) False
8. Which type of tax expert would be of most value when you
have a difference of opinion with the IRS?
A) an enrolled agent
B) a nationally-chartered tax preparer
C) a CPA
D) a tax accountant
E) an attorney
9. The "head of household" filing status is for
people who are
A) recently divorced.
B) the surviving spouse.
C) not living with a spouse and have
dependent children.
D) married but only one spouse has income.
E) married and each spouse makes about the
same income.
10. For a dependent to qualify as an exemption, he or she must
A) be married.
B) be under age 16.
C) be registered in school.
D) receive more than one half of his or her
support from the taxpayer.
E) be a relative.
11. A person with a total tax liability of $4,350 and withholding
of federal taxes of $3,975 would
A) receive a refund of $3,975.
B) owe $4,350.
C) owe $375.
D) receive a refund of $4,350.
E) receive a refund of $375.
12. Tax avoidance refers to illegal actions to reduce one's taxes.
A) True
B) False
13. Interest paid on credit cards and charge accounts may be
deducted from your taxes.
A) True
B) False
14. Gift amounts over $10,000 are exempt from federal tax.
A) True
B) False
15. Money received in the form of dividends or interest is
____________ income.
A) passive
B) earned
C) excluded
D) capital gain
E) investment
16. An example of a tax-exempt investment is
A) interest on
B) dividends from corporate stock.
C) earnings from a mutual fund.
D) interest on municipal bonds.
E) interest on corporate bonds.
17. Several courses of appeal are available to taxpayers who
disagree with an IRS ruling on their tax return audit.
A) True
B) False
18. Tax-deferred retirement plans are a type of
A) exemption.
B) itemized deduction.
C) passive income.
D) tax shelter.
E) tax credit.
19. The amount of a person's standard deduction is determined on
Schedule A of Form 1040.
A) True
B) False
20. Michele
Barbour is considering an additional contribution of $2,000 to a tax-deductible
charity, bringing her total itemized deductions to $16,000. If Michelle is in a 28 percent tax bracket,
how much will this $2,000 contribution reduce her taxes?
A) nothing
B) $560
C) $1,600
D) $2,000
E) $4,480