Module 8 - Quiz

Question 1

Which one of the following is NOT allowed as an itemized deduction?

1) state income taxes
2) property taxes
3) local income taxes
4) FICA taxes

Answer 1

4) FICA taxes
- FICA (Social Security) taxes are not allowed as an itemized deduction.

• The maximum deduction for all state and local taxes, including property taxes, is $10,000 per year.

Question 2

Which one of the following circumstances would require most taxpayers to file a federal income tax return?

1) The taxpayer’s gross income exceeds the standard deduction
2) The taxpayer has dependent children
3) The taxpayer earned any amount of unearned income

Answer 2

1) The taxpayer’s gross income exceeds the standard deduction
- Dependent children have no impact on the necessity to file an income tax return

Question 3

Which one of the following is NOT a filing status for Federal income tax purposes?

1) single
2) qualified disabled
3) married filing jointly
4) married filing separately

Answer 3

2) qualified disabled

Question 4

What is the significance of a taxpayer supporting a minor child as a dependent for federal income tax purposes?

1) The taxpayer receives a larger standard deduction
2) The taxpayer receives an additional standard deduction
3) The taxpayer may claim a tax credit for each dependent child under the age of 17

Answer 4

3) The taxpayer may claim a tax credit for each dependent child under the age of 17

Question 5

Gross income includes all of the following types of income except:

1) tips
2) taxable interest
3) dividends interest
4) child support received

Answer 5

4) child support received

- Child support received is an exclusion.

Question 6

Which one of the following would be included in calculating a client’s gross income?

1) child support received
2) lottery prize money
3) inheritance received
4) life insurance proceeds paid upon a person’s death

Answer 6

2) lottery prize money

Question 7

Which one of the following is an “above the line” deduction?

1) Deductible IRA contribution
2) State taxes paid by the individual
3) Medical expenses
4) Gifts to charities

Answer 7

1) Deductible IRA contribution

Question 8

Which one of the following is NOT allowed as an itemized deduction?

1) Qualified medical expenses
2) Rent paid for an apartment
3) Qualified real estate taxes
4) Qualified mortgage interest

Answer 8

2) Rent paid for an apartment

Question 9

John and Mary, a married couple filing jointly, are planning on buying a home in 2019. What is the maximum mortgage amount that they can have and fully deduct the mortgage interest?

1) $750,000
2) $1 million
3) $1.5 million

Answer 9

1) $750,000

Question 10

What is the maximum current year deduction for a cash contribution to a public charity?

1) 30% of AGI
2) 50% of AGI
3) 60% of AGI

Answer 10

3) 60% of AGI
- 30% of AGI is the maximum deduction for a gift to a so-called 30% organization—private foundations, veterans’ groups, and fraternal organizations, for example.

Question 11

Which one of the following is a type of additional tax that applies only to higher income taxpayers?

1) The withholding tax
2) The Social Security tax on wages
3) The earned income credit tax
4) Medicare contribution tax

Answer 11

4) Medicare contribution tax
- The Medicare contribution tax is imposed on taxpayers with AGIs of over $250,000 (if married filing jointly) who also have net investment income. The tax is 3.8% on the lesser of the net investment income amount or the excess of modified AGI over the threshold amount, which for married filing jointly is $250,000.

Question 12

What is the maximum amount of Social Security benefits that can be taxed?

1) 25%
2) 50%
3) 85%

Answer 12

3) 85%

Question 13

Which one of the following statements correctly describes an asset’s adjusted basis?

1) The adjusted basis of an asset is always its cost basis
2) Capital improvements generally do not increase an asset’s basis
3) Adjusted basis is the original cost basis of an asset plus or minus certain adjustments
4) Depreciation increases an asset’s adjusted basis

Answer 13

3) Adjusted basis is the original cost basis of an asset plus or minus certain adjustments
- Capital improvements generally do increase an asset’s basis.
- Depreciation taken on an asset decreases, not increases, its adjusted basis.

Question 14

Which one of the following statements is correct regarding the basis of a gift received by a taxpayer?

1) A taxpayer’s basis in property received as a gift is generally its FMV on the day the gift is completed
2) A taxpayer’s basis in property received as a gift is generally the same basis as that of the person who gave the taxpayer the gift
3) A taxpayer’s basis in property received as a gift is not relevant since there are no tax consequences involved.

Answer 14

2) A taxpayer’s basis in property received as a gift is generally the same basis as that of the person who gave the taxpayer the gift

Question 15

Under which of the following scenarios would a 55 year old individual NOT be subject to the 10% penalty tax regarding an annuity?

1) If the individual begins receiving annuity payments for life
2) If the individual takes a partial lump sum distribution
3) If the individual closes out the annuity and takes a full distribution

Answer 15

1) If the individual begins receiving annuity payments for life
- There is no 10% penalty tax with annuitization. The 10% penalty tax would apply on earnings for a lump sum distribution, which includes a full distribution.

Question 16

Which of the following is a common nonrecognition transaction?

1) Gain from the sale of a principal residence
2) Property transferred after a divorce
3) Property transferred as a gift

Answer 16

1) Gain from the sale of a principal residence
- Common nonrecognition transactions include property transferred when ex-spouses divide marital property pursuant to a divorce settlement, not after.
- Common nonrecognition transactions do not include property transferred as a gift. Generally, there would be a carryover of the donor’s basis to the individual receiving the gift.

Question 17

Which of the following is NOT one of the three main types of income?

1) Deducted
2) Portfolio
3) Active
4) Passive

Answer 17

1) Deducted

Question 18

A tax planning strategy that shifts taxes to other individuals would include all of the following except:

1) Nontaxable property exchanges
2) Utilization of a trust to transfer assets within a family
3) Gifting of income-producing assets
4) Employing a family member

Answer 18

1) Nontaxable property exchanges
- Nontaxable property exchanges are an example of a tax planning strategy that eliminates or reduces taxes, not shifts taxes, to other individuals.

Question 19

T / F - The first step in the filing process is determining a taxpayer’s proper filing status

Answer 19

True

Question 20

T / F - The first step in the filing process is determining a taxpayer’s AGI

Answer 20

False

Question 21

T / F - The first step in the filing process is determining a taxpayer’s gross income

Answer 21

False

Question 22

T / F - A standard deduction may be taken to arrive at adjusted gross income (AGI)

Answer 22

False - The standard deduction may be deducted FROM AGI

Question 23

T / F - A standard deduction may be taken from adjusted gross income (AGI)

Answer 23

True

Question 24

T / F - A standard deduction may be taken from taxable income

Answer 24

False - The standard deduction is deducted FROM AGI to arrive at taxable income

Question 25

All of the following are potential long-term capital gain tax rates EXCEPT:

1) 0%
2) 20%
3) 28%
4) 35%

Answer 25

4) 35%
- There is no 35% capital gains tax rate.
- A 0% long-term capital gains tax rate applies to taxpayers who have relatively low taxable incomes—$78,750 for joint returns, or $39,375 for single taxpayers (for 2019).
- 20% is the highest long-term capital gains tax rate.
- 28% is the maximum long-term capital gains tax rate, and it applies to collectibles.

Question 26

T / F - The child and dependent care tax qualification is available to families whose income is not too high, and is $3,000 for each dependent child, though only 20% of that can be claimed ($600 credit)

Answer 26

True - Families with children under age 17 and under the income limit, may receive a $3,000 tax qualification for one child ($6,000 for two or more children), though only $600 (20% of $3,000) can be claimed as the credit.

Question 27

T / F - The child and dependent care tax credit is available to those whose income is not too high, and is $1,500 for each child under the age of 17

Answer 27

False - Families with children under age 17 and under the income limit, may receive a $3,000 tax qualification for one child ($6,000 for two or more children), though only $600 (20% of $3,000) can be claimed as the credit.

Question 28

T / F - The child and dependent care credit is available to help offset day care costs, and is capped at $1,000 for one child, and $2,000 for two or more children

Answer 28

False - Families with children under age 17 and under the income limit, may receive a $3,000 tax qualification for one child ($6,000 for two or more children), though only $600 (20% of $3,000) can be claimed as the credit.

Question 29

Itemized deductions are reported on which one of the following schedules?

1) Schedule A
2) Schedule B
3) Schedule C
4) Schedule D

Answer 29

1) Schedule A
- Interest earned and dividends received are reported on Schedule B
- Sole proprietorship income and expenses are reported on Schedule C
- Capital gains are reported on Schedule D

Question 30

T / F - The Lifetime Learning and American Opportunity educational tax credits will reduce any tax liability, dollar for dollar.

Answer 30

True - Tax credits offset tax liability dollar for dollar.

Question 31

T / F - Only the Lifetime Learning credit, and not the American Opportunity credit, is phased out if a taxpayer’s income is too high.

Answer 31

False - Both the American Opportunity and Lifetime Learning tax credits are completely phased-out (eliminated) once a taxpayer reaches a certain level of AGI.

Question 32

T / F - Both the American Opportunity and Lifetime Learning tax credits are available for life.

Answer 32

False - The Lifetime Learning credit is available for life; however, the American Opportunity credit is only available for the first four years of postsecondary education.

Question 33

Which one of the following correctly describes the tax consequences of tax credits?

1) Tax credits have a significantly smaller impact on a taxpayer’s tax liability than tax deductions do.
2) Tax credits reduce a taxpayer’s actual tax liability on a dollar-for-dollar basis.
3) Tax credits reduce a taxpayer’s actual tax liability based on his or her marginal tax bracket.
4) Tax deductions and tax credits have the same tax significance.

Answer 33

2) Tax credits reduce a taxpayer’s actual tax liability on a dollar-for-dollar basis.

Question 34

Assuming the client has only $2,500 of discretionary income available to divert to employee benefits, which one of the following benefits offered by an employer to employees would result in the greatest amount of tax savings from current income?

1) ability to make employee contributions to a 401(k) plan
2) ability to make contributions to a flexible spending account (FSA)
3) ability to purchase company merchandise at a discount
4) ability to purchase additional group life insurance

Answer 34

2) ability to make contributions to a flexible spending account (FSA)
- There are no income taxes nor Social Security taxes due on contributions made to a flexible spending account.
- Contributions to a 401(k) plan are pretax, which would save paying income taxes on current income.
- A company discount will save an employee money if they make a purchase, but it will not result in any tax savings (or possibly just a marginal amount of savings on sales tax).
- Ability to purchase additional group life insurance will not result in any tax savings.

Question 35

Which of the following taxpayer scenarios is possible?

1) marginal tax rate of 24% and effective tax rate of 28%
2) marginal tax rate of 32% and effective tax rate of 23%
3) marginal tax rate of 37% and effective tax rate of 39%

Answer 35

2) marginal tax rate of 32% and effective tax rate of 23%
- The effective tax rate is the amount paid in taxes divided by gross income. The marginal tax rate is the rate at which the last dollar was taxed. The marginal rate will always be higher.

Question 36

Which one of the following correctly describes the holding period for a capital gain or loss to be classified as long term?

1) The property must be held for more than 18 months.
2) The property must be held for more than 12 months.
3) The property must be held for more than six months.
4) The property must be held for more than three months.

Answer 36

2) The property must be held for more than 12 months.

- A capital asset must be held for more than 12 months in order for its gain or loss to be classified as long-term.

Question 37

T / F -

Any lump sum distributions from an annuity are taxed on a first in first out (FIFO) basis.

Answer 37

False - Annuities are taxed LIFO not FIFO, meaning any distributions will be considered earnings first, then return of principal.

Question 38

T / F - If an annuity is annuitized, any annuity payments will be fully taxable.

Answer 38

False - If an annuity is annuitized then an exclusion ratio will be calculated, whereby part of each payment will be taxable, and part of each payment will be excluded from income (return of principal).

Question 39

T / F - If annuitized, both fixed rate and variable annuities will be partially taxable.

Answer 39

True - If an annuity is annuitized then an exclusion ratio (or exclusion amount) will be calculated, whereby part of each payment will be taxable, and part of each payment will be excluded from income (return of principal).

Question 40

T / F - Only fixed rate annuities can be annuitized.

Answer 40

False - Both fixed rate and variable annuities can be annuitized.

Question 41

Which one of the following is a characteristic of Section 529 plans?

1) low contribution amounts allowed
2) no tax deferral of earnings
3) account beneficiary can be changed
4) high phaseout amounts

Answer 41

3) account beneficiary can be changed
- Section 529 plans allow for large amounts to be contributed. For example, the Colorado plan (CollegeInvest) allows for contributions up to $400,000.
- There is tax deferral of earnings with Section 529 plans.
- Changing the account beneficiary is a beneficial characteristic of Section 529 plans.
- There are no contribution phaseout thresholds for high-income individuals.