E.37 Income tax fundamentals and calculations Flashcards
(25 cards)
Which of the following is not a type of income tax?
a) Federal income tax
b) State income tax
c) Sales tax
d) Local income tax
Sales tax is not a type of income tax. Sales tax is a consumption tax on goods and services.
E.37 Income tax fundamentals and calculations
Which of the following is not considered taxable income?
a) Wages and salaries
b) Interest earned on a savings account
c) Inheritance received
d) Rental income
Inheritance received is not considered taxable income.
E.37 Income tax fundamentals and calculations
What is the tax rate for single filers with taxable income between $40,126 and $85,525 for tax year 2022?
a) 10%
b) 12%
c) 22%
d) 24%
22%. This tax rate is for the income range of $40,126 to $85,525 for single filers for tax year 2022.
E.37 Income tax fundamentals and calculations
Which of the following is not an allowable deduction for an individual taxpayer?
a) Charitable contributions
b) Mortgage interest paid
c) State and local income taxes paid
d) Personal living expenses
Personal living expenses are not an allowable deduction for an individual taxpayer.
E.37 Income tax fundamentals and calculations
What is the standard deduction for a married couple filing jointly for tax year 2023?
a) $12,550
b) $25,100
c) $25,200
d) $27,700
$27,700. This is the standard deduction for a married couple filing jointly for tax year 2023.
E.37 Income tax fundamentals and calculations
What is the maximum amount of earnings subject to Social Security tax for tax year 2023?
a) $147,000
b) $148,500
c) $150,000
d) $160,200
$160,200. This is the maximum amount of earnings subject to Social Security tax for tax year 2023.
E.37 Income tax fundamentals and calculations
Which of the following is not a tax credit?
a) Child Tax Credit
b) Earned Income Tax Credit
c) Lifetime Learning Credit
d) Social Security Credit
Social Security Credit is not a tax credit.
E.37 Income tax fundamentals and calculations
«fix»What is the tax rate for long-term capital gains for taxpayers in the 35% tax bracket?
a) 15%
b) 18%
c) 20%
d) 23.8%
23.8%. Taxpayers in the 35% tax bracket pay a 23.8% tax rate on long-term capital gains.
E.37 Income tax fundamentals and calculations
Which of the following is a tax-deferred retirement account?
a) Traditional IRA
b) Roth IRA
c) Health Savings Account
d) 529 Plan
Traditional IRA is a tax-deferred retirement account.
E.37 Income tax fundamentals and calculations
What is the tax rate for single filers with taxable income of $250,000 for tax year 2022?
a) 32%
b) 35%
c) 37%
d) 39.6%
37%. This is the tax rate for single filers with taxable income of $250,000 for tax year 2022.
E.37 Income tax fundamentals and calculations
John is a single taxpayer with taxable income of $80,000 for tax year 2022. What is his tax liability?
a) $13,552
b) $14,822
c) $16,082
d) $17,352
$14,822. To calculate John’s tax liability, we first need to find his tax bracket, which is 22%. Then we calculate his tax liability using the tax formula:
Tax Liability = (Taxable Income - Tax Bracket Minimum) * Tax Rate + Tax Bracket Base
Tax Liability = ($80,000 - $40,126) * 0.22 + $4,739.50
Tax Liability = $8,013.28 + $4,739.50
Tax Liability = $14,822.78
Therefore, John’s tax liability is $14,822.
E.37 Income tax fundamentals and calculations
Sarah and Tom are married and filing jointly for tax year 2022. Their taxable income is $120,000. What is their standard deduction?
a) $12,550
b) $24,800
c) $25,100
d) $25,200
$24,800. The standard deduction for a married couple filing jointly for tax year 2022 is $24,800.
E.37 Income tax fundamentals and calculations
Michael is a single taxpayer with a taxable income of $50,000 for tax year 2022. He made a charitable contribution of $2,000. What is his taxable income after deducting the charitable contribution?
a) $50,000
b) $48,000
c) $49,000
d) $52,000
$48,000. Michael’s taxable income after deducting the charitable contribution is $48,000.
E.37 Income tax fundamentals and calculations
Lisa is a single taxpayer with a taxable income of $200,000 for tax year 2022. She sold an investment for a long-term capital gain of $20,000. What is her tax liability on the capital gain?
a) $2,000
b) $3,760
c) $4,760
d) $4,760.80
$4,760.80. Lisa’s tax liability on the capital gain is $4,760.80. The tax rate on long-term capital gains for taxpayers in the 32% tax bracket (which Lisa falls into) is 15%.
Tax Liability on Capital Gain = Capital Gain * Tax Rate
Tax Liability on Capital Gain = $20,000 * 0.15
Tax Liability on Capital Gain = $3,000
Since Lisa’s taxable income is $200,000, she is also subject to the Net Investment Income Tax (NIIT) of 3.8% on the capital gain.
NIIT on Capital Gain = Capital Gain * NIIT Rate
NIIT on Capital Gain = $20,000 * 0.038
NIIT on Capital Gain = $760
Therefore, Lisa’s total tax liability on the capital gain is $3,000 + $760 = $4,760.80.
E.37 Income tax fundamentals and calculations
James and Elizabeth are married and filing jointly for tax year 2022. Their taxable income is $180,000. They have two dependent children under the age of 17. What is their Child Tax Credit?
a) $1,000
b) $2,000
c) $3,000
d) $4,000
$4,000. The Child Tax Credit for tax year 2022 is $2,000 per qualifying child. James and Elizabeth have two dependent children, so their total Child Tax Credit is $4,000.
E.37 Income tax fundamentals and calculations
John and Mary are married and filing jointly for tax year 2022. Their taxable income is $400,000. What is their marginal tax rate?
a) 22%
b) 24%
c) 32%
d) 35%
35%. John and Mary’s marginal tax rate for tax year 2022 is 35%.
E.37 Income tax fundamentals and calculations
David is a single taxpayer with a taxable income of $90,000 for tax year 2022. He made a contribution of $6,000 to a traditional IRA. What is his taxable income after deducting the IRA contribution?
a) $84,000
b) $90,000
c) $94,000
d) $96,000
$84,000. David’s taxable income after deducting the IRA contribution is $84,000.
E.37 Income tax fundamentals and calculations
Tom and Sarah are married and filing jointly for tax year 2022. They have two children under the age of 17. Their taxable income is $150,000. What is their Child Tax Credit?
a) $2,000
b) $3,000
c) $4,000
d) $6,000
$4,000. Tom and Sarah’s Child Tax Credit is $4,000 for tax year 2022, as they have two qualifying children.
E.37 Income tax fundamentals and calculations
Jennifer is a single taxpayer with a taxable income of $50,000 for tax year 2022. She made a contribution of $5,000 to a traditional IRA. What is her taxable income after deducting the IRA contribution?
a) $45,000
b) $50,000
c) $55,000
d) $60,000
$45,000. Jennifer’s taxable income after deducting the IRA contribution is $45,000.
E.37 Income tax fundamentals and calculations
Tim and Sarah are married and filing jointly for tax year 2022. Their taxable income is $500,000. What is their tax liability?
a) $101,790
b) $116,070
c) $141,270
d) $176,870
$141,270. Tim and Sarah’s tax liability for tax year 2022 is $141,270.
To calculate their tax liability, we use the tax formula:
Tax Liability = (Taxable Income - Tax Bracket Minimum) * Tax Rate + Tax Bracket Base
Tim and Sarah’s taxable income of $500,000 puts them in the 35% tax bracket. Their tax liability can be calculated as follows:
Tax Liability = ($500,000 - $217,950) * 0.35 + $43,481
Tax Liability = $282,050 * 0.35 + $43,481
Tax Liability = $98,717.50 + $43,481
Tax Liability = $141,270.50
Therefore, Tim and Sarah’s tax liability is $141,270.
E.37 Income tax fundamentals and calculations
John and Jane, a married couple, have a portfolio that is comprised of stocks at LMN Brokerage and tax-exempt bonds at DEF Brokerage. Their investment income is as follows:
- Interest from banks: $2,500
- Non-qualifying dividends from LMN Brokerage: $2,500
- Tax-exempt interest subject to alternative minimum tax (AMT) from DEF Brokerage: $2,500
- Tax-exempt interest not subject to alternative minimum tax (AMT) from DEF Brokerage: $4,000
John and Jane file a joint federal tax return, have an adjusted gross income (AGI) of $65,000, and itemize their deductions. They paid investment interest of $3,000 to LMN and $2,500 to DEF. Assuming no special elections, what amount of investment interest expense is deductible for regular tax purposes on their federal income tax return?
A) $3,000
B) $5,000
C) $5,500
D) $6,000
E) $7,500
$5,000
Explanation: The investment interest expense deduction is limited to the couple’s net investment income.
Net investment income includes:
* Interest from banks: $2,500
* Non-qualifying dividends from LMN Brokerage: $2,500
(We don’t include tax-exempt interest for this calculation.)
Total net investment income: $5,000
E.37 Income tax fundamentals and calculations
Jane and John, both aged 58 and 55 respectively, purchased their primary residence 17 years ago for $300,000. Over the years, they have spent $80,000 on renovations. They fall under the 32% marginal federal tax bracket. Last year, they utilized one of the rooms in their home as an office for their design business, which led to a depreciation expense of $1,500 against their Schedule C earnings. This year, they sold the property for $750,000. From the sale, they had to pay a broker fee of $50,000 and clear their remaining mortgage of $480,000. How should they report the sale of the house on their income tax returns?
A) Exclude gain of $340,000 from taxable income and pay a 25% tax on $1,500
B) Exclude the entire transaction from taxable income
C) Include the long-term capital gain of $340,000 in their taxable income
D) Report ordinary income of $1,500
Exclude gain of $340,000 from taxable income and pay a 25% tax on $1,500
Explanation: Jane and John can exclude up to $500,000 of gain from the sale of their primary residence if they meet certain requirements. The gain is calculated as:
Sale price ($750,000) - Purchase price ($300,000) - Improvements ($80,000) - Broker commission ($50,000) = $320,000.
However, they have to recapture the $1,500 of depreciation they claimed, which is taxed at 25%. Thus, they can exclude the gain of $340,000 from their taxable income and pay a 25% tax on the $1,500 depreciation.
E.37 Income tax fundamentals and calculations
A taxpayer is in the 32% marginal tax bracket and itemizes their deductions. Which of the following would provide the GREATEST income tax savings?
$355 tax credit
Explanation: To determine which option provides the greatest income tax savings, we need to consider the direct and indirect impact of each on the taxpayer’s income tax liability:
A) Child support payments are generally not deductible. Therefore, this would provide $0 in tax savings.
B) $1,000 of additional itemized deductions would reduce taxable income by $1,000. With a marginal tax rate of 32%, the savings would be: $1,000 x 0.32 = $320.
C) An $800 short-term capital loss would also reduce taxable income. Thus, the tax savings would be: $800 x 0.32 = $256.
D) A tax credit directly reduces the amount of tax owed, dollar for dollar. So, a $355 tax credit would provide $355 in tax savings.
Among the given options, the $355 tax credit provides the greatest income tax savings.
E.37 Income tax fundamentals and calculations
For a taxpayer who is in the 32% marginal tax bracket and itemizes deductions, which of the following would provide the **LEAST **income tax savings?
A) $1,320 child support payments
B) $1,000 of additional itemized deductions
C) $800 short-term capital loss
D) $355 tax credit
$1,320 child support payments
Explanation: For the options provided, here’s a breakdown of their potential tax savings:
Child support payments are neither deductible for the payer nor taxable to the recipient. Therefore, they provide no tax savings.
$1,000 of additional itemized deductions would provide a tax saving of $1,000 x 32% = $320.
An $800 short-term capital loss would provide a tax saving of $800 x 32% = $256.
A tax credit is a dollar-for-dollar reduction in the tax owed. Therefore, a $355 tax credit would provide $355 in tax savings.
Comparing the savings from each option, the $1,320 child support payments (Option A) would provide the least income tax savings, which is zero.
E.37 Income tax fundamentals and calculations
