Taxes Test

You are a contestant on the game show 'Tax it like it hot'. The host asks you: 'All of the following are true about taxes EXCEPT:'

• All contestants and businesses are required to pay taxes, and those who earn higher incomes will pay a higher tax rate, meaning they pay a higher percentage of their income

• The show uses the money from taxes to pay for things like schools, military, roads, police departments, social programs, and other services

• As long as their income exceeds a certain threshold, every contestant must pay taxes on all sources of income, including their job, capital gains from investments, money received from government programs like social security, and anything else that puts money in their wallet

• The same tax rates are always applied to earned income, such as the wages earned from a job, and unearned income, like gains made in the stock market

Answer explanation

Correct! Certain types of income may be taxed at different tax rates. For example, long term capital gains, which means income you make from selling stocks or other investments that you held for at least one year, are taxed at a lower tax rate than the ordinary income you make at your job.

Last year, Shawn earned $80,000 from his freelance work for various clients, and Marco earned an $80,000 salary from his employer. Assuming they don't have any other sources of income, which of the following is NOT true regarding their tax situations:

• Marco’s taxes will have already been withheld from his paychecks since he’s an employee at 'Tax it like it hot'

• Shawn and Marco will be in different tax brackets because one of them is an employee and the other is an independent contractor

• As a freelancer, Shawn has likely not had any of his earnings withheld, so it’s up to him to set aside some of his income to pay his taxes

• Shawn will have to pay self-employment taxes, while Marco will not

Answer explanation

Correct! This is NOT true. Your tax bracket is determined by your total income, regardless of how you generate that income. So because Shawn and Marco both made $80,000 of income, they would be in the same tax bracket.

Taylor is a college student and she took out a $25,000 student loan to pay for her tuition. She also works a part-time job as a waitress to help cover her living expenses, where she earns $5,000 per year in hourly wages and $16,000 per year in tips. Which of these accurately represents the income she will be taxed on?

• She will have $46,000 of income because all money she receives from any source is subject to being taxed

• She will have $21,000 of income because the money received from loans is not taxed

• She will have $21,000 of income because the money received from loans is not taxed

• She will have $5,000 of income because money received from loans is not taxed, and tips are not taxed since they are paid by customers and not the employer

Answer explanation

Correct! Money taken out as a loan is not subject to being taxed because it’s not considered income and it has to be repaid. Her hourly wages and tips are both considered income, so they will be taxed.

Last year, Miguel made $90,000 of taxable income and paid $23,000 in taxes. This year he earned exactly the same amount of income, and all the tax brackets and tax rates remained the same. However, he also received a $2,000 tax credit for buying an electric vehicle. How will this affect his taxes?

• He will pay $25,000 of taxes

• His taxable income will be reduced from $90,000 to $88,000, which means his tax payment will be slightly less than $23,000

• He will still pay $23,000 of taxes because the standard deduction is greater than the $2,000 credit he received

• He will pay $21,000 of taxes

Answer explanation

Correct! A tax credit directly reduces the amount of taxes you owe. Since last year he paid $23,000 and this year he received a $2,000 tax credit, he will only pay $21,000 in taxes this year.

Isabel earned $140,000 before taxes. She has $9,000 in deductions and $4,000 in tax credits. Assuming the standard deduction is $12,500, which of the following best explains what Isabel can do to maximize her tax savings?

• Isabel can reduce her taxable income by $13,000 ($9,000 of deductions + $4,000 credit), so she’d only be taxed on $127,000

• Isabel can reduce her taxable income by $25,500 ($9,000 of deductions + $12,500 standard deduction + $4,000 credit), so she’d only be taxed on $114,500

• Isabel can reduce her taxable income by $9,000 from the deductions, meaning she’d pay taxes on $131,000 of taxable income; she can then use the standard deduction and the $4,000 tax credit to reduces the taxes she owes by $16,500

• Isabel can reduce her taxable income by $12,500 with the standard deduction; this lowers her taxable income to $127,500; she can then use the $4,000 tax credit to reduce the taxes she owes by $4,000

Answer explanation

Correct! Remember, deductions reduce your taxable income. So even though she has $9,000 of deductions, it’s better for her to use the standard deduction since $9,000 is less than $12,500. This adjusts her taxable income to $127,500. Tax credits directly reduce the taxes you owe. So whatever taxes she owes on $127,500 of taxable income will be reduced by $4,000 from her tax credits.

Which of the following answers lists the correct order of tax forms to fill in the blanks in the sentences above?

• W-4; W-2; 1099; 1040

• W-2; 1099; W-4; 1040

• W-4; W-2; 1040; 1099

• W-4; 1040; W-2; 1099

Answer explanation

Correct! All of the forms are correctly matched to the right definitions. Knowing your tax forms is a huge step toward understanding how taxes work, so you are on the right track.

Write the equation to calculate income tax.

Which of the following is NOT a type of tax credit?

• Nonrefundable Tax Credits

• Refundable Tax Credits

• None of the above

• Partially Refundable Tax Credits

What day must you file tax returns by?

• December 31

• April 1

• January 1

• April 15

When do you start paying taxes?

• When you turn 18

• When you make more than the minimum income requirement

• When you get a full time job (part time jobs do not count)

• When the IRS notifies you to start paying taxes