PFIN 6th Edition by Billingsley - Test Bank

1. The average propensity to consume is commonly viewed as a key determinant of standard of living. a. True b. False ANSWER: False 2. Financial planning can improve your standard of living. a. True b. False ANSWER: True 3. Standard of living is defined as the necessities, comforts, and luxuries desired by an individual or a family. a. True b. False ANSWER: True 4. Personal financial plans help individuals have the same standard of living across the country. a. True b. False ANSWER: False 5. The most effective way to achieve financial objectives is through personal financial planning. a. True b. False ANSWER: True 6. Two persons with significantly different income can have equal average propensities to consume because of differences in their standards of living. a. True b. False ANSWER: True 7. Mike’s annual income is $35,000, and he spends $30,800 for current needs. Mike’s average propensity to consume is 80%. a. True b. False ANSWER: False 8. Tangible assets are earning assets that are held for the returns they promise. a. True b. False ANSWER: False 9. It is very easy to change your partner’s financial style, so there is no need for financial planning to resolve conflicts regarding money matters. a. True b. False ANSWER: False 10. The need for financial planning declines as your income increases. a. True b. False ANSWER: False 11. A good financial plan is completed when one is in his or her 30s and will typically last a lifetime. a. True b. False ANSWER: False 12. Saving $3,000 for a large, flat-screen TV within the next 6 years is an example of a short-term goal. a. True b. False ANSWER: False 13. Short-term planning should include creating and maintaining an emergency fund with six to nine months’ worth of income. a. True b. False ANSWER: True 14. It is not good to discuss your financial goals and attitudes toward money with your partner. a. True b. False ANSWER: False 15. For employees of large firms, managing employee benefits is an important part of financial planning. a. True b. False ANSWER: True 16. Accumulating wealth for later years is called estate planning. a. True b. False ANSWER: False 17. The longer you wait to begin retirement planning, the less you are likely to have in your retirement fund. a. True b. False ANSWER: True 18. Tax plans are closely tied to investment plans. a. True b. False ANSWER: True 19. Most people tend to be more liberal about their expenditures during a recession or crisis. a. True b. False ANSWER: False 20. You should always spend more than what you earn. a. True b. False ANSWER: False 21. Commission-based financial planners charge fees for the financial products they sell. a. True b. False ANSWER: False 22. Fee-only financial planners charge commission for the products they sell. a. True b. False ANSWER: False 23. Estate planning does not include taking advantage of and managing employer-sponsored benefits. a. True b. False ANSWER: False 24. Recessions and financial crises will always result in job loss. a. True b. False ANSWER: False 25. Financial planning takes place in a dynamic economic environment created by the actions of the government, business, and consumers. a. True b. False ANSWER: True 26. Your purchase, saving, investment, and retirement plans and decisions are influenced only by the present state of the economy. a. True b. False ANSWER: False 27. The federal government delegates its regulating economic activity function to businesses and consumers. a. True b. False ANSWER: False 28. Living costs are constant throughout the country. a. True b. False ANSWER: False 29. Geographic factors affect your earning power. a. True b. False ANSWER: True 30. Marital status affects the income level of individuals. a. True b. False ANSWER: True 31. The decisions you make in career planning are independent of the decisions you make in financial planning. a. True b. False ANSWER: False 32. Setting long-term and short-term career goals helps in career planning. a. True b. False ANSWER: True 33. Career plans should be fixed once the long-term and short-term career goals are set. a. True b. False ANSWER: False 34. Personal financial planning is important because it: a. controls inflation. b. limits consumption. c. reduces social disparity. d. results in an improved standard of living. e. reduces economic differences among individuals. ANSWER: d 35. Financial planning helps us: a. control inflation. b. have flexibility to handle job loss. c. control unemployment rates. d. obtain a social security number. e. decrease national debt. ANSWER: b 36. An individual’s quality of life is closely tied to his or her: a. political orientation. b. charitable contributions. c. pollution control efforts. d. standard of living. e. educational qualifications. ANSWER: d 37. A key determinant of an individual’s quality of life is his or her: a. tax bill. b. financial goal. c. wealth. d. motivation. e. growth potential. ANSWER: c 38. The average propensity to consume refers to the: a. dollars of income spent on luxury goods. b. dollars of income saved by an individual. c. expenditure on the basic necessities of life. d. percentage of income spent for current consumption. e. fact that people with higher propensity to consume earn lower income. ANSWER: d 39. Becky graduated with a master’s degree in personal financial planning. After working for two years in a small financial planning firm, Becky earns $60,000 annually and saves $10,000 a year after spending on her current needs. What is her average propensity to consume? a. 16.7% b. 25.5% c. 75.7% d. 83.3% e. 95.5% ANSWER: d 40. Which of the following is a reason for a decrease in the average propensity to consume with an increase in income? a. The amount of savings decreases, and the consumption of necessities increases. b. The expenditure on luxury goods increases, and the amount of savings decreases. c. The expenditure on luxury goods represents only a small portion of income. d. The amount of savings represents only a small portion of income. e. The cost of necessities represents only a small portion of income. ANSWER: e 41. _____ is equal to the net total value of all the items that an individual owns. a. Wealth b. Propensity to consume c. Consumer price index d. Purchasing power e. Extended credit limit ANSWER: a 42. Stocks, bonds, and mutual funds are _____. a. physical assets b. intangible assets c. fixed assets d. national assets e. real assets ANSWER: b 43. The last step in the financial planning process is to: a. develop financial plans and strategies to achieve goals. b. use financial statements to evaluate results of plans and budgets, taking corrective action as required. c. implement financial plans and strategies. d. redefine goals and revise plans and strategies as personal circumstances change. e. periodically develop and implement budgets to monitor and control progress toward goals. ANSWER: d 44. When setting financial goals, one should typically start by setting: a. short-term goals. b. intermediate goals. c. long-term goals. d. goals that are not time-bound. e. goals that are unrealistic. ANSWER: c 45. Which of the following financial goals is most useful for developing a financial plan? a. Make a $12,000 down payment on an automobile in 4 years. b. Retire with a comfortable lifestyle in 25 years. c. Buy a $125,000 house. d. Purchase a $40,000 boat. e. Join the county club on retirement in 20 years. ANSWER: a 46. Financial plans include setting goal dates, which are: a. dates in the future when the goals are expected to be achieved. b. dates in the future when the goals will be compared with other goals that have already been achieved. c. dates in the past when the goals were revised and redefined. d. dates in the past when the goals were set. e. dates in the future when the goals will be discussed with family members. ANSWER: a 47. Which of the following is true about setting long-term goals? a. The goals should be very ambitious. b. The goals should be realistic. c. The objective of the goals should be to squander surplus funds. d. The goals should be very conservative. e. The goals should be set only once. ANSWER: b 48. Which of the following is one of the most emotional issues in any relationship, including that with a partner, parents, or children? a. Utility b. Economic cycles c. Fiscal policy d. Money e. Gross domestic product ANSWER: d 49. The best way to resolve money disputes is to: a. never discuss money matters with family and ensure that only one person in the family makes financial decisions. b. communicate consistently about money matters with family and be willing to compromise. c. make financial decisions independently and ensure that individuals do not interfere in other family members’ financial matters. d. adopt a third party’s opinion, who is not a part of the family, to set financial goals. e. always handle the money disputes of the family according to the local state law. ANSWER: b 50. _____ is an important part of the conflict resolution process when there are disputes relating to money matters in families. a. Life cycle analysis b. Personality development c. Financial planning d. Personal counseling e. Stress management ANSWER: c 51. Which of the following statements is true about money and relationships? a. It is highly likely to change a partner’s financial style. b. One of the most important aspects of a marriage is financial compatibility. c. Money does not cause emotional issues in any relationship. d. The best way to resolve a money dispute is to avoid such a discussion. e. Financial planning does not help in resolving conflicts related to money. ANSWER: b 52. Knowing what you need to accomplish _____, and how you intend to do it, gives you an edge over someone who merely reacts to monetary events as they unfold. a. socially b. physically c. financially d. legally e. politically ANSWER: c 53. Financial planning for young people primarily concerns: a. career. b. insurance. c. investment. d. taxes. e. retirement. ANSWER: a 54. Martha is 60 and has a very high net worth. Her most pressing financial concern is probably: a. asset acquisition planning. b. liability planning. c. estate planning. d. insurance planning. e. savings planning. ANSWER: c 55. Employee benefits may include: a. asset purchase. b. estate management. c. investment advice. d. pension payments. e. savings planning. ANSWER: d 56. Tax planning is most commonly done to: a. determine the tax penalty. b. evade taxes. c. minimize taxes. d. pay extra taxes. e. learn the tax code. ANSWER: c 57. Estate planning involves: a. considering how your wealth can be most effectively passed on to your heirs. b. payment of all back taxes to ensure minimum tax liability. c. the dissolution of all privately held corporations by filing bankruptcy under Chapter 13. d. the valuation and auctioning of your valuables by hiring a professional tax planner. e. planning for retirement and obtaining medical insurance. ANSWER: a 58. Ideally, retirement planning should begin: a. during the year before retirement. b. when the last child has left home. c. as soon as the mortgage is paid off. d. when one gets married. e. as soon as one starts earning. ANSWER: e 59. Professional financial planners: a. provide services on fee or commission basis. b. provide services to wealthy investors only. c. set the financial goals of retired investors. d. make financial decisions for investors. e. are most sought after during retirement years. ANSWER: a 60. At which of the following stages does an individual tend to have the highest income? a. Early childhood b. Career development c. Pre-retirement d. High school and college e. Pre-family independence ANSWER: c 61. Managing health and disability insurance is an important part of: a. asset acquisition planning. b. tax planning. c. retirement planning. d. estate planning. e. employee benefit planning. ANSWER: e 62. Which of the following is included in employee benefits packages? a. Estate plans b. Retirement plans c. Federal plans d. Personal plans e. Bankruptcy plans ANSWER: b 63. Which of the following is true about investments? a. As income increases, the need for investment decreases. b. Keeping money idle is a form of investment. c. Higher returns on investment will lead to the accumulation of lesser wealth. d. Investment is measured by the amount of debt incurred. e. The length of time for which money is invested is important. ANSWER: e 64. Ben invests $10,000 at a rate of interest of 5 percent for 40 years. Which of the following is true about the return on the investment? a. Ben will receive more money at the end of 30 years compared to the money received at the end of 40 years. b. Ben will receive more money at a 3 percent rate of interest instead of the existing rate. c. Ben will receive an interest of $5,000 at the end of ten years. d. Ben will receive no interest on his investment at the end of the investment period. e. Ben will receive a significant amount at the end of the investment period, due to the feature of compounding. ANSWER: e 65. Which of the following will legitimately reduce an investor’s tax liability? a. Tax evasion b. Tax shelter c. Tax penalty d. Tax accounting e. Tax portfolio ANSWER: b 66. Which of the following practices helps an individual survive in a financial crisis? a. Spending more than his or her earnings to maintain a good lifestyle b. Investing regularly to make money work toward achieving financial goals c. Giving emergency funds the least priority while saving for the future d. Developing financial plans only after reaching the highest tax brackets e. Planning tax without considering tax shelters ANSWER: b 67. Which of the following is true about the effects of an economic recession? a. An increase in the standard of living b. A decrease in unemployment c. An increase in the expenditure on luxury goods d. A decrease in the value of retirement accounts e. An increase in the value of insurance purchased ANSWER: d 68. _____ provide the roadmap for achieving monetary goals. a. Political plans b. Social plans c. Financial plans d. Technological plans e. Legal plans ANSWER: c 69. In addition to discussing your financial goals with your partner, you must allocate responsibility for _____ tasks and decisions. a. skill management b. stress management c. household management d. money management e. business cycle management ANSWER: d 70. _____ is something we owe, which is measured by the amount of debt we incur. a. An asset b. An estate c. A liability d. Insurance e. A goal ANSWER: c 71. The financial planning process helps in: a. increasing assets. b. increasing debts. c. reducing utility. d. reducing emergency funds. e. increasing financial risk. ANSWER: a 72. Which of the following practices will help in dealing with unexpected financial shocks? a. Purchasing low-utility products b. Accumulating debt c. Acquiring assets with low financial value d. Saving money regularly for emergency funds e. Planning for retirement after retiring ANSWER: d 73. The three key groups in the economic environment are: a. government, regulation, and business. b. government, consultants, and business. c. consumers, economists, and business. d. consumers, business, and managers. e. government, consumers, and business. ANSWER: e 74. The Government places constraints on the personal financial environment by the use of: a. leverage policy. b. taxation. c. competition. d. budgetary deficits. e. free-enterprise system. ANSWER: b 75. Which of the following statements is true about businesses? a. Businesses provide goods and services and receive payment in money. b. Businesses frame rules and regulations to maintain the law and order in a country. c. Businesses determine the kinds of goods and services that a government will use. d. Businesses do not interact with other players in the economy. e. Businesses are seldom affected by economic cycles. ANSWER: a 76. The amount of goods and services each dollar buys at a given point in time is called: a. inflation. b. the consumer price index. c. the purchasing power. d. the gross domestic product. e. the opportunity cost. ANSWER: c 77. The consumer is: a. a member of the business group. b. the central player in the financial planning environment. c. an important force in the government. d. an advocacy group that fights corruption in the government. e. relatively unimportant to the business or the government. ANSWER: b 78. A strong economy leads to: a. a low gross domestic product. b. high tax evasion opportunities. c. high employment opportunities. d. low tax penalty rates. e. a low value of retirement account. ANSWER: c 79. The stage in which the economy hits a peak is called: a. expansion. b. contraction. c. stagnation. d. recession. e. depression. ANSWER: a 80. Which of the following statements is true about Andy if the inflation rate is increasing every year by 1 percent and there is no growth in her salary? a. Andy’s gross domestic product will increase. b. Andy’s purchasing power will decrease. c. Andy’s employment opportunities will increase. d. The annual growth in Andy’s salary will be equal to the average inflation rate. e. Andy’s cost of borrowing will be less than 5 percent. ANSWER: b 81. Inflation refers to: a. increasing prices. b. declining population. c. increasing tax evasion. d. increasing stock index. e. decreasing birth rate. ANSWER: a 82. An economy experiences _____ after a peak. a. a convolution b. an expansion c. a contraction d. recovery e. prosperity ANSWER: c 83. The financial crisis of 2008 and 2009 is best characterized as a _____. a. recession b. depression c. hyperdeflation d. business peak e. bubble ANSWER: a 84. Understanding the economic environment will allow you to make better _____ decisions. a. social b. political c. technological d. financial e. legal ANSWER: d 85. The _____ environment of your country affects the interest rates you pay on your mortgage and credit cards as well as those you earn on savings accounts and bonds. a. economic b. political c. technological d. social e. legal ANSWER: a 86. People with low incomes tend to be: a. educated. b. very old. c. childless. d. married. e. very skillful. ANSWER: b 87. Salaries could vary across geographical areas because of: a. legal costs. b. living costs. c. social costs. d. psychological costs. e. technological costs. ANSWER: b 88. Which of the following statements is true about the earning power of an individual? a. Income varies across different geographic locations due to varying costs of living. b. Heads of households who have less formal education earn more. c. Career planning does not help in improving earning potential. d. People who are very old have very high income. e. Marital status does not have any impact on an individual’s personal income. ANSWER: a 89. Career planning: a. does not require any goal setting. b. and personal financial planning are unrelated activities. c. does not influence an individual’s lifetime earnings. d. impacts the inflation rate in an economy. e. helps in improving professional satisfaction. ANSWER: e 90. The best way to achieve your financial objectives is to ____________ a. have a luxurious standard of living. b. spend your money at once to reach your objectives swiftly. c. develop a sound financial plan. d. create a good tax evasion strategy. ANSWER: c 91. ____________ help in making decisions regarding retirement. a. Personal financial plans b. Federal tax policies c. Government foreign policies d. The employer’s business expansion plans ANSWER: a 92. The purchase of a car is an example of ____________. a. current consumption b. social conservation c. deferred tax d. economic contraction ANSWER: a 93. The purchase of ____________ is an example of the purchase of a financial asset. a. a home b. stocks c. a car d. jewelry ANSWER: b 94. One trend with a profound effect on people’s standard of living is the ____________, which requires greater responsibility to manage money wisely. a. single-income family b. two-income family c. no-income family d. retirement-income family ANSWER: b 95. A carefully developed financial plan should provide for saving a portion of ____________ for deferred, future spending. a. retirement funds b. tax penalty c. current income d. future income ANSWER: c 96. Regardless of income or wealth, setting aside some portion of current income regularly for future use increases the amount of ____________. a. income saved b. tax-exempt income c. deferred tax d. employer-sponsored benefits ANSWER: a 97. Personal ____________ is a systematic process that considers important elements of an individual’s monetary affairs in order to fulfill monetary goals. a. conflict resolving b. financial planning c. standard of living d. legal counselling ANSWER: b 98. Most families find it difficult to discuss ____________. a. money matters b. economic matters c. social matters d. political matters ANSWER: a 99. ____________ would be considered to be real property. a. Stocks b. Land c. Cash d. Bonds ANSWER: b 100. Income tends to ____________ between the ages of 65 and 80. a. increase b. decrease c. stabilize d. fluctuate ANSWER: b 101. Sarah starts investing in an individual retirement account (IRA) at the age of 30 earning 10 percent for 35 years. At age 65, she will get more returns as compared to those returns if she ____________. a. starts investing at the age of 25 b. invests at 12% c. invests for 45 years d. invests up to the age of 60 ANSWER: d 102. Tax planning is most common among individuals with ____________. a. low income b. high income c. no income d. erratic income ANSWER: b 103. In ____________, the employer allocates a certain amount of money to each employee and lets the employee spend that money for benefits that suit him or her. a. cafeteria plans b. fixed-benefit plans c. estate plans d. profit-sharing plans ANSWER: a 104. A decrease in the gross domestic product (GDP) would indicate that the economy is experiencing a(n) ____________. a. expansion b. contraction c. deflation d. stagflation ANSWER: b 105. Following an economic trough, the economy will often enter a period of ____________. a. expansion b. contraction c. deflation d. stagflation ANSWER: a 106. The consumer price index (CPI) is a measure of ____________. a. unemployment b. inflation c. stagnation d. recession ANSWER: b 107. An individual’s salary will be lower if he or she lives in a(n) ____________ area. a. metropolitan b. overpopulated c. industrial d. rural ANSWER: d 108. Heads of households who have more formal education ____________. a. pay more tax penalty b. earn more annual income c. can only use tax shelters d. plan careers for the entire family ANSWER: b 109. Our ____________ is an important factor in determining how well we live. a. income b. marital status c. credit d. deflation ANSWER: a 110. A person’s ____________ leads to increase in income potential in his or her career. a. formal education b. social status c. marital status d. corporate loyalty ANSWER: a 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 b. False ANSWER: True 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. a. True b. False ANSWER: False 3. If you are married, you can legally file as a single taxpayer. a. True b. False ANSWER: False 4. Gross income minus tax-exempt income equals adjusted gross income. a. True b. False ANSWER: False 5. Adjustments to gross income will decrease your taxable income. a. True b. False ANSWER: True 6. Qualified dividends are taxed at the highest capital gain rates. a. True b. False ANSWER: False 7. The alternative minimum tax (AMT) is applicable to taxpayers with moderate levels of income only. a. True b. False ANSWER: False 8. Tax credits are dollar for dollar reductions in taxable income. a. True b. False ANSWER: False 9. All taxpayers have an equal probability of having their tax returns audited. a. True b. False ANSWER: False 10. A tax audit is an examination by enrolled agents to validate the accuracy of a filed tax return. a. True b. False ANSWER: 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. a. True b. False ANSWER: False 12. Tax preparers must be licensed by either the state or the federal government. a. True b. False ANSWER: False 13. Tax avoidance is legal, whereas tax evasion is illegal. a. True b. False ANSWER: True 14. Tax evasion is a legal means to avoid tax liabilities. a. True b. False ANSWER: False 15. Income shifting refers to the process of transferring income from the taxpayer to the IRS. a. True b. False ANSWER: False 16. The federal government gets a majority of its revenue from _____ tax. a. sales b. property c. excise d. income e. estate ANSWER: d 17. Personal income taxes are: a. optional. b. regressive. c. progressive. d. deductible. e. unconditional. ANSWER: c 18. A progressive tax system is one in which: a. 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. c. tax rates are inversely related to inflation rates. d. people at higher-income levels pay tax at a lower rate than people at lower-income levels. e. there are no exemptions or deductions available from taxable income. ANSWER: b 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: a. single taxpayer. b. married filing jointly. c. head of household. d. qualifying widow. e. married filing separately. ANSWER: e 20. Pete and Pam are married with four dependent children. Which of the following filing statuses can Pete and Pam use if they want to legally file one tax return? a. Married filing separately b. Married filing jointly c. Head of household d. Single e. Qualifying widow or widower with dependent child ANSWER: b 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: a. single. b. married filing separately. c. head of household. d. qualifying widower. e. married filing jointly. ANSWER: d 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. b. married filing separately. c. head of household. d. qualifying widow. e. married filing jointly. ANSWER: a 23. Your take-home pay is what you are left with after subtracting withholdings from your: a. gross earnings. b. net earnings. c. taxable income. d. adjusted gross income. e. tax-exempt income. ANSWER: a 24. The _____ income is gross income less the tax deductions and payments for insurance and retirement savings. a. take-home b. EBIT c. adjusted gross d. taxable e. tax-exempt ANSWER: a 25. Your income tax withholding is dependent on: a. your age and educational qualification. b. the number of deductions claimed by your spouse. c. your income level and the number of withholding allowances you have claimed. d. the number of standard deductions you have claimed. e. the number of withholding allowances allowed by your employer. ANSWER: c 26. In 2015, the total Social Security tax rate was: a. 6.0 percent. b. 6.75 percent. c. 7.25 percent. d. 13.4 percent. e. 15.3 percent. ANSWER: e 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. b. Ben will pay lesser Social Security taxes because he is married. c. Ben will pay lesser Social Security taxes because he has children. d. Jack will pay lesser Social Security taxes because he is single. e. Jack will pay lesser Social Security taxes because he is over the age of 65. ANSWER: a 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 _____. a. single taxpayer b. married filing jointly c. married filing separately d. head of household e. qualifying widow ANSWER: d 29. Which of the following statements is true of the tax levied under the Federal Insurance Contributions Act (FICA)? a. It is also known as property tax. b. It is paid equally by employer and employee. c. It is not applicable to self-employed persons. d. It is applicable to all federal employees. e. It is used to provide insurance against theft. ANSWER: b 30. Taxable income is calculated by: a. 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. c. adding adjustments, the larger of itemized or standard deductions, and exemptions to gross income. d. subtracting adjustments from and adding the larger of itemized or standard deductions and exemptions to gross income. e. adding adjustments and the larger of itemized or standard deductions to and subtracting exemptions from gross income. ANSWER: b 31. Which of the following is subject to federal income tax? a. The tax credit earnings on a Roth IRA b. Municipal bond interest c. Child-support payments d. Alimony received e. Personal exemptions ANSWER: d 32. You would typically include _____ in your gross income. a. child-support payments b. life insurance death benefit payments c. municipal bond interest d. income from pensions e. personal exemptions ANSWER: d 33. _____ would be considered a part of your taxable income. a. Your (Individual retirement account) IRA contributions b. A gift from your aunt c. Your child-support payments d. A gain from the sale of your assets e. Your tuition scholarship ANSWER: d 34. A capital gain is the result of: a. selling an asset for less than its purchase price. b. holding an asset that has depreciated. c. selling an asset at its purchase price. d. selling an asset for more than its purchase price. e. buying a new asset at a rate lower than the market rate of the asset. ANSWER: d 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? a. $11,000 b. $3,080 c. $1,650 d. $1,100 e. $0 ANSWER: e 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 _____. a. $10,500 b. $8,400 c. $6,000 d. $4,500 e. $1,500 ANSWER: d 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: a. be taxable as ordinary income. b. be taxable at a rate of 25%. c. be taxable at the appropriate short-term capital gains rate. d. be taxable excluding the first $250,000 of the gain. e. not be taxable because the relocation is a job-related move. ANSWER: d 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 _____. a. $400,000 b. $300,000 c. $250,000 d. $150,000 e. $0 ANSWER: d 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? a. $0 b. $840 c. $1,400 d. $5,600 e. $5,000 ANSWER: c 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 b. $150 c. $300 d. $500 e. $1,000 ANSWER: a 41. For those under the age of 65, medical and dental expenses may be included as itemized deductions: a. when they exceed 4% of the adjusted gross income. b. up to a maximum of $7,500 per individual per tax year. c. 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. e. when they exceed 2% of the taxable income. ANSWER: d 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 _____. a. $0 b. $250 c. 3,500 d. $2,750 e. $4,500 ANSWER: b 43. If you do not wish to itemize deductions, the other deduction you can take is the: a. pay-as-you-go deduction. b. bracket deduction. c. standard deduction. d. exemption deduction. e. withholding allowance deduction. ANSWER: c 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. b. she is under 21. c. she makes under $10,000. d. she lives at home. e. she does not get her Social Security number. ANSWER: a 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 _____. a. $2,500 b. $1,500 c. $3,000 d. $2,200 e. $4,000 ANSWER: b 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 a. $13,000. b. $6,000. c. $8,000. d. $6,000. e. $18,000. ANSWER: b 47. _____ are the deductions from adjusted gross income (AGI) that are based on the number of persons supported by the taxpayer’s income. a. Taxable assets b. Tax credits c. Liabilities d. Extensions e. Exemptions ANSWER: e 48. The total amount of income tax you owe in one year is your tax: a. withholding. b. credit. c. rate. d. refund. e. liability. ANSWER: e 49. Which of the following statements is true about tax credits? a. 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. b. They are deductions from the adjusted gross income based on the number of persons supported by the taxpayer’s income. c. They represent the income remaining after subtracting all allowable adjustments to income from the gross income. d. 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. ANSWER: e 50. What is the maximum amount of adoption tax credit available for an individual? a. $10,000 b. $13,400 c. 10 percent of the adjusted gross income d. 15 percent of the adjusted gross income e. $25,000 ANSWER: b 51. Tax credits reduce your: a. tax liability. b. adjusted gross income. c. tax refund. d. tax withholding. e. taxable income. ANSWER: a 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 b. $8,500 c. $8,800 d. $13,190 e. $10,000 ANSWER: a 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? a. $500 b. $1,500 c. $2,000 d. $2,500 e. $3,000 ANSWER: b 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: a. Schedule A. b. Schedule B. c. Form 1040S. d. Form 1040A. e. Form 1040EZ. ANSWER: e 55. Itemized deductions are listed on: a. Schedule A of Form 1040. b. Schedule B of Form 1040. c. Schedule C of Form 1040. d. Schedule D of Form 1040. e. Schedule F of Form 1040. ANSWER: a 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 b. file an amended return c. file an extension d. deduct tax credit e. calculate itemized deductions ANSWER: a 57. A _____ would most likely have to pay estimated taxes. a. school teacher b. manager for an industrial firm c. self-employed plumber d. union worker e. corporate attorney ANSWER: c 58. A declaration of estimated taxes is made in: a. Schedule B. b. Form 1040EZ. c. Schedule Z. d. Form 1040-ES. e. Form 1040 A. ANSWER: d 59. You made an error when you filed your tax return last year. You can correct this error by filing: a. Form 1040-ES. b. Form 1040X. c. Form 1040EZ. d. Schedule A. e. Schedule D. ANSWER: b 60. A tax audit is a(n): a. Internal Revenue Service (IRS) revision of a previously filed return. b. Internal Revenue Service (IRS) attempt to verify the accuracy of a return. c. Internal Revenue Service (IRS) charge of illegal action. d. U.S. Tax Court action. e. U.S. Tax Court decision. ANSWER: b 61. Which of the following individuals should pay estimated taxes? a. An entrepreneur b. A teacher c. A corporate manager d. A State worker e. A State police officer ANSWER: a 62. A taxpayer can file for an automatic extension of _____ months. a. 2 b. 4 c. 6 d. 9 e. 12 ANSWER: c 63. Which of the following is true about enrolled agents? a. They are tax professionals who advise only professionals in tax planning. b. They are taxpayers with relatively common types of income and expenditure. c. They are federally licensed individual tax practitioners. d. They are lawyers who specialize in tax planning. e. They are federal agents who collect taxes from taxpayers. ANSWER: c 64. Which of the following private tax preparers are required to pass an exam administered by the Internal Revenue Service (IRS)? a. National and local tax services b. Certified public accountants (CPAs) c. Enrolled agents (EAs) d. Tax attorneys e. Corporate managers ANSWER: c 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. b. an enrolled agent. c. a tax accountant. d. a tax lawyer. e. the local post office. ANSWER: a 66. Tax practitioners who are federally licensed are called: a. certified public accountants. b. certified financial planners. c. tax attorneys. d. enrolled agents. e. chartered financial analysts. ANSWER: d 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 b. Tax avoidance strategy c. Tax evasion strategy d. Tax ignorance strategy e. Income shifting strategy ANSWER: a 68. Which of the following is an illegal method of reducing your current tax liability? a. Not reporting the taxable income you receive b. Investing in a tax deferred annuity c. Shifting income to your children d. Investing money in municipal bonds e. Putting money in a Roth IRA ANSWER: a 69. The highest marginal tax rate is currently ____________. a. 35.6 percent b. 35 percent c. 39.6 percent d. 41 percent ANSWER: c 70. Christy lives by herself with her dog, Tex. Her filing status should be ____________. a. head of household b. qualifying widow c. single d. married filing separately ANSWER: c 71. Payments under the provisions of the Federal Insurance Contributions Act (FICA) are also known as ____________. a. income tax b. Social Security tax c. property tax d. capital gains tax ANSWER: b 72. A tax credit could result from ____________. a. owning a home b. adopting a child c. charitable contributions d. investing in municipal bonds ANSWER: b 73. If your income is high, then there is ____________ probability of your income being audited. a. zero b. an equal c. a low d. a high ANSWER: c 74. Tax ____________ is an illegal practice. a. avoidance b. planning c. evasion d. deferring ANSWER: c 75. When an individual gives his or her child an income-producing asset, he or she is ____________. a. shifting his or her income b. maximizing his or her deductions c. deferring his or her tax d. executing his or her will ANSWER: a 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.) ANSWER: Alex’s Social Security tax = [(15.3% × $65,000) ÷ 2] = $4,973 Alex’s employer would also pay the same amount of $4,973. 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 ANSWER: Marcie’s gross income for tax purposes = $40,000 + $50 + $500 + $750 = $41,300. 78. From the information given below, determine Steve’s gross income for tax purposes. Salary $ 32,000 Interest (checking account) $ 25 Cash received as birthday gift $ 1,000 Dividends (mutual funds) $ 5,500 Child-support payments received from ex-wife $ 24,000 Life insurance benefits received after aunt’s death $ 50,000 ANSWER: Steve’s gross income for tax purposes = $32,000 + $25 + $5,500 = $37,525 79. Sue and Tim are married taxpayers in the 33% marginal tax bracket. In 2015, they sold common stock shares, which they held for more than 40 months, for a capital gain of $3,800. They also sold some technology stock for a long-term capital loss of $9,000. In addition, they sold the home they had lived in for the past 10 years and experienced a $75,000 gain on the house. How much will their net capital gains (or losses) be for 2015? How much will they pay (or save) in taxes as a result of these transactions? ANSWER: The net loss is $5,200 ($9,000 - $3,800), and $3,000 of the capital loss can be written off against active income this year. The remaining capital loss of $2,200 will be carried over to the next year. The capital gain on the house is tax free because a gain on the sale of a principal residence is excluded up to $500,000 for married couples. The savings in tax as a result of the capital loss is $990, calculated as 33% of $3,000. 80. George, aged 40, has the following expenses. He wants to include them under itemized deductions for the year. His adjusted gross income is $60,000. What is the total itemized deduction he can take? (Show all work.) Medical expenses $4,500 Home mortgage interest 8,000 Credit card interest 450 Charitable contributions 1,500 State property taxes 2,400 Job-related expenses 1,900 ANSWER: Medical expenses $ 0 [$4,500 - (0.1 × $60,000)] Home mortgage interest 8,000 Credit card interest (not allowed) Charitable contributions 1,500 State property tax 2,400 Job-related expenses 700 [$1,900 - (.02 × $60,000)] Total itemized deduction $12,600 81. Jamie has taxable income of $45,000. She is single, and her tax rate is 10% on the first $9,225 of the taxable income, 15% on the amount over $9,225 up to $37,450 of the taxable income, and 25% on the remainder. What are Jamie’s tax liability, marginal tax rate, and average tax rate? (Show all work.) ANSWER: Tax liability = 10% × $9,225 + 15% × ($37,450 - $9,225) + 25% × ($45,000 - $37,450) = $922.5 + $4,233.75 + $1887.5 = $7043.75 Marginal tax rate = 25% Average tax rate = $7,043.75 ÷ $45,000 = 0.1565 or 15.65% pfin textbook p-fin index questions, test bank pdf, ati pn fundamentals test bank, ati pn test bank,