E.36 Fundamental and current tax law Flashcards
(21 cards)
Which of the following is a characteristic of a tax credit?
A) It reduces taxable income
B) It reduces the amount of tax owed
C) It increases the amount of tax owed
D) It is a deduction from gross income
It reduces the amount of tax owed
Explanation: A tax credit reduces the amount of tax owed, while a tax deduction reduces taxable income.
E.36 Fundamental and current tax law
Which of the following is a current highest federal tax rate for long-term capital gains for most taxpayers?
A) 10%
B) 15%
C) 20%
D) 25%
20%
Explanation: Long-term capital gains tax rates depend on an individual’s taxable income and filing status, but the maximum rate for most taxpayers is 20%. This differs from short-term capital gains, which is taxed as ordinary income.
E.36 Fundamental and current tax law
Which of the following is an example of a tax-exempt organization?
A) Non-profit hospital
B) Private foundation
C) For-profit corporation
D) LLC
Non-profit hospital
Explanation: A non-profit hospital may be considered a tax-exempt organization if it meets the requirements set forth by the IRS.
E.36 Fundamental and current tax law
Julia recently had several financial transactions and interactions. Which of the following transactions involving Julia would be considered a taxable event for her?
A) Selling her primary residence at a loss of $5,000.
B) Receiving a gift of $12,000 from her uncle.
C) Donating her old coats to a local charity.
D) Withdrawing funds from her Roth IRA at age 57.
Withdrawing funds from her Roth IRA at age 57.
Explanation: Withdrawing funds from a Roth IRA before age 59 ½ can result in both taxes and penalties on the earnings portion of the withdrawal, making it a taxable event.
E.36 Fundamental and current tax law
A taxpayer is considering converting their traditional IRA to a Roth IRA. Which of the following is a potential advantage of a Roth IRA for those who expect to be in a higher tax bracket?
A) Tax-deductible contributions
B) Tax-free withdrawals in retirement
C) No required minimum distributions (RMDs)
D) Lower income tax rates in retirement
Tax-free withdrawals in retirement
Explanation: Roth IRA allows for tax-free withdrawals in retirement, which can be advantageous for individuals who expect to be in a higher tax bracket in retirement. There is also no RMD’s which are a potential benefit to all retirees, not just those in a higher tax bracket.
E.36 Fundamental and current tax law
What is the maximum amount an individual can contribute to a traditional IRA in 2023 for those under 50 years old?
A) $5,500
B) $6,000
C) $6,500
D) $7,000
$6,500
Explanation: The maximum amount an individual can contribute to a traditional IRA in 2023 is $6,500, which is $1,000 more than the previous year.
E.36 Fundamental and current tax law
Which of the following is true regarding the standard deduction in 2023?
A) The standard deduction for married couples filing jointly will decrease.
B) The standard deduction for single filers will increase.
C) The standard deduction for head of household filers will remain the same.
D) The standard deduction for all filers will increase.
The standard deduction for all filers will increase
E.36 Fundamental and current tax law
What is the maximum amount of income that can be earned before an individual is required to file a tax return in 2023?
A) $10,000
B) $12,000
C) $14,000
D) $15,000
$12,000
Explanation: In 2023, an individual who earns $12,000 or more is required to file a tax return.
E.36 Fundamental and current tax law
Which of the following taxes is a flat tax?
A) Federal income tax
B State income tax
C) Sales tax
D Excise tax
Sales Tax
Explanation: A flat tax is a tax system in which everyone pays the same tax rate, regardless of their income level or other circumstances. The sales tax is a type of flat tax because it applies to everyone who purchases goods or services, regardless of their income level.
E.36 Fundamental and current tax law
What is the purpose of a tax credit?
A) To reduce taxable income
B) To increase taxable income
C) To reduce tax liability
D) To increase tax liability
To reduce tax liability
Explanation: A tax credit is a dollar-for-dollar reduction in the amount of tax that a person owes. Tax credits are designed to help taxpayers reduce their tax liability, which is the total amount of tax that they owe to the government.
E.36 Fundamental and current tax law
Which of the following tax forms is used to report self-employment income?
A) Form W-2
B) Form 1099
C) Form 1040
D) Form 8829
Form 1040
Explanation: Form 1040 is the tax form used by individuals to report their income to the IRS. This form is used to report all types of income, including self-employment income.
E.36 Fundamental and current tax law
Which of the following is not considered a tax deduction?
A) Home mortgage interest
B) Charitable donations
C) Medical expenses
D) Rental income
Rental income
Explanation: Rental income is not a tax deduction. Instead, rental income is included in your taxable income and subject to taxation.
E.36 Fundamental and current tax law
What is the current (lifetime) federal estate tax exemption for individuals?
a) $1 million
b) $5 million
c) $12.92 million
d) $20 million
$12.92 million
Explanation: The current federal estate tax exemption for individuals is $12.92 million (for 2021). This means that any amount of an individual’s estate above $12.92 million is subject to federal estate tax.
E.36 Fundamental and current tax law
Which of the following is not a capital asset?
A) Stocks
B) Real estate
C) Collectibles
D) Inventory held for sale to customers
Inventory held for sale to customers
Explanation: Inventory held for sale to customers is not a capital asset. Capital assets are typically assets held for investment purposes, such as stocks, real estate, or collectibles.
E.36 Fundamental and current tax law
John and Mary are married and filing jointly. Their taxable income for the year is $100,000. What is their marginal tax rate for federal income tax purposes?
a) 10%
b) 12%
c) 22%
d) 24%
John and Mary’s marginal tax rate is 22%. The marginal tax rate is the rate at which the last dollar of income is taxed. For 2021, the 22% tax bracket applies to taxable income between $81,050 and $172,750 for married couples filing jointly.
E.36 Fundamental and current tax law
Which of the following tax forms is used to report income from self-employment?
A. Form 1040
B. Form 1099-MISC
C. Form 1120
D. Form 1040-ES
Form 1040. Self-employed individuals report their income and expenses on Schedule C of Form 1040.
E.36 Fundamental and current tax law
Which of the following is NOT a requirement for claiming the Earned Income Tax Credit (EITC)?
A. The taxpayer must have earned income.
B. The taxpayer must have a qualifying child or be between the ages of 25 and 65.
C. The taxpayer’s adjusted gross income must be below a certain threshold.
D. The taxpayer must have a valid Social Security number.
The taxpayer must have a qualifying child or be between the ages of 25 and 65. The EITC has strict eligibility requirements, including earned income, adjusted gross income below a certain threshold, and a valid Social Security number. However, the requirement of having a qualifying child or being between certain ages is not accurate.
E.36 Fundamental and current tax law
Which of the following is a tax credit for qualified educational expenses?
A. Child tax credit
B. American Opportunity Tax Credit
C. Lifetime Learning Credit
D. Earned Income Tax Credit
Lifetime Learning Credit. The Lifetime Learning Credit is a tax credit available to taxpayers who pay qualified educational expenses for themselves or their dependents.
E.36 Fundamental and current tax law
Which of the following is true about the standard deduction?
A. It is only available to taxpayers who do not itemize their deductions.
B. It is a fixed amount that reduces taxable income.
C. It is the same for all taxpayers regardless of filing status.
D. All of the above.
It is a fixed amount that reduces taxable income.
Explanation: The standard deduction is a fixed amount that reduces a taxpayer’s taxable income, but it is not available to all taxpayers and it varies based on filing status.
E.36 Fundamental and current tax law
Sarah owns a rental property that she rents out for $1,500 per month. She incurs $1,000 in expenses related to the property each month. How much rental income does she need to report on her tax return?
A. $0
B. $500
C. $1,000
D. $1,500
$1,500
Explanation: Rental income is generally reported on a taxpayer’s tax return even if there are expenses related to the rental property.
E.36 Fundamental and current tax law
Mark sold a stock that he owned for less than a year and realized a $3,000 capital loss. How much of this loss can he use to offset other income?
A. $0
B. $1,500
C. $2,000
D. $3,000
$3,000
Explanation: Short-term capital losses can be used to offset other income up to a maximum of $3,000 per year.
E.36 Fundamental and current tax law
