Chapter 3

Question 1

A tax structure in which additional taxable income is taxed at a higher rate is referred to as a _____________.

Answer 1

Progressive tax structure

Question 2

The tax paid on the next dollar of taxable income is referred to as the _______ tax rate.

Answer 2

Marginal

Question 3

The overall rate at which income is taxed, determined by dividing the tax liability by the taxable income, is referred to as the ___________ tax rate.

Answer 3

Average

Question 4

A person who is unmarried or considered unmarried and pays more than half of the cost of keeping up a home for himself/herself and an eligible dependent child or relative is called ___________.

Answer 4

Head of household

Question 5

A person who is unmarried or legally separated from their spouses by either a separation or final divorce decree.

Answer 5

Single taxpayer

Question 6

A married couple who combine their income and allowance deductions and file one tax return.

Answer 6

Married filling jointly

Question 7

Each spouse files his or her own return, reporting only his or her income and deductions.

Answer 7

Married filling separately

Question 8

The amount of income subject to taxes; it is calculated by subtracting adjustments, the larger of itemized or standard deductions, from gross income.

Answer 8

Taxable income

Question 9

What is the major source of revenue for the federal government.

Answer 9

Income taxes

Question 10

The total of all of a taxpayer’s income (before adjustments, deductions, or exemptions) subject to federal taxes; it includes active portfolio, and passive income.

Answer 10

Gross income

Question 11

Income earned on the job, such as wages and salaries, bonuses and tips; most other forms of noninvestment income, including pension income and alimony.

Answer 11

Active income

Question 12

Earnings (interest, dividends, and capital gains [profits on the sale of investments]) generated from most types of investment holdings; includes savings accounts, stocks, bonds, mutual funds, options, and features.

Answer 12

Portfolio income

Question 13

A special category that includes income derived from real estate, limited partnerships, and other forms of tax shelters

Answer 13

Passive income

Question 14

A blanket deduction taken in lieu of itemizing deductions.

Answer 14

Standard deduction

Question 15

Allowing taxpayer to reduce their AGI by the amount of their allowable personal expenditures.

Answer 15

Itemized deductions

Question 16

Deductions from AGI based on the number of persons supported by the taxpayer’s income ( suspended for years 2018-2025)

Answer 16

Exemptions

Question 17

This term essentially includes all subject to federal tax

Answer 17

Gross income

Question 18

To qualify for exclusion during this transaction, you must have owned and occupied for two of the five prior years.

Answer 18

Sale of a home

Question 19

This is calculated by determining income subject to taxes less adjustments, deductions, and exemptions and applying the appropriate rate(s).

Answer 19

Tax liability

Question 20

This item is taxed at different rates depending on the holding period.

Answer 20

Capital gains

Question 21

This is used to offset passive income

Answer 21

Real estate or limited partnership expenses

Question 22

Allowance deductions from gross income, including certain employee, personal retirement, insurance, and support expenses.

Answer 22

Adjustment to (gross) income

Question 23

The amount of income remaining after subtracting all allowable adjustments to income from gross income

Answer 23

Adjusted gross income (AGI)

Question 24

Using taxable income, it is based on tax tables or tax rate schedules.

Answer 24

Tax liability

Question 25

During this transaction, you can exclude the first $250,000 ($500,000 for married taxpayers) of gain on sale.

Answer 25

Sale of a home

Question 26

This term includes income from tax shelters

Answer 26

Passive income

Question 27

Investment income is offset with this related expense.

Answer 27

Investment expense

Question 28

This term includes wages, salaries, bonuses/commissions, and interest/dividends/alimony.

Answer 28

Gross income

Question 29

This term refers to an asset sold for more than its original value.

Answer 29

Capital gains

Question 30

This is a claim made by the taxpayer for each person supported by the taxpayer’s income

Answer 30

Exemption

Question 31

Many of these are based on a percentage of AGI

Answer 31

Itemized deduction

Question 32

Taken against gross income, they result in AGI

Answer 32

Adjustments

Question 33

This term equals gross income less adjustments

Answer 33

Adjusted gross income

Question 34

This term refers to allowable expenses that are deducted from AGI

Answer 34

Deductions

Question 35

Examples of this term include charitable deductions, state and local taxes, and moving expenses

Answer 35

Itemized deduction

Question 36

This can be either standard or itemized

Answer 36

Deductions

Question 37

This can be claimed if taxpayer provides more than half their support

Answer 37

Exemption

Question 38

This term includes all income less certain allowable adjustments

Answer 38

Adjusted gross income

Question 39

This is a blanket deduction that includes various deductible expenses normally incurred by taxpayers

Answer 39

Standard deduction

Question 40

This is adjusted gross income less deductions and exemptions

Answer 40

Steps to taxable income

Question 41

Deductions such as employee, personal retirement, higher education, and support expenses are included in this category

Answer 41

Adjustments

Question 42

Non-licensed preparers for straight forward returns because they are trained only in tax preparation and are usually less expensive. They would be categorized as _____________.

Answer 42

A national or local tax service firm

Question 43

These individuals assist with more complex types of income and expense expenditures while providing guidance on tax planning strategies: prepare and audit financial statements; and prepare tax returns. These individuals or groups of individuals have passed a certification examination are ___________.

Answer 43

Certified public accountant (CPAs)

Question 44

Individuals federally licensed to assist individuals with tax preparation at various levels of complexity are referred to as ___________.

Answer 44

Enrolled agents

Question 45

Individuals who specialize in legal issue and tax planning are referred to as __________.

Answer 45

Attorneys

Question 46

Individuals in work situations where taxes are not withheld are required to _________.

Answer 46

Make estimated tax payments

Question 47

Individual tax filers must file their annual federal return no later than __________.

Answer 47

April 15

Question 48

With a filing extension in hand, a taxpayer must pay any taxes owed ____________.

Answer 48

When the extension request is filed.

Question 49

If a taxpayer wants to amend a return previously filed, they can complete Form ________.

Answer 49

1040X

Question 50

The act of reducing taxes in ways that are legal and compatible with the intent of Congress is called _________.

Answer 50

Tax avoidance

Question 51

An examination by the IRS to validate the accuracy of a given tax return.

Answer 51

Tax audit

Question 52

The illegal act of failing to report income or deductions accurately and, in extreme cases, failing to pay taxes altogether

Answer 52

Tax evasion

Question 53

Income that is not subject to taxes immediately but that will be subject to taxes later

Answer 53

Tax deferred