Finance Chapter 6 Final Test

Another name for take-home pay is

• gross pay

• salary

• net pay

• income

Which of the following statements about taxes is true?

• Only the federal government has the right to tax a person's income.

• Any taxes collected by the government are returned to the person when they file their income tax return.

• Taxes are the major source of revenue for the government.

• Taxes can only be taken out of a person's income when they have a full-time job.

From the following, select the tax that is matched with its correct explanation:

• Payroll tax: money deducted from a person's salary that is sent to the government by the employer.

• Real estate tax: money paid to the government to use for building federally subsidized housing.

• Sales tax: a percentage of money that the federal government deducts from the cost of new purchases.

• Income tax: money that an employer pays out of company profits to the federal government for each person employed.

If a person is self-employed and earns $70,000 annually, the person

• does not have to pay federal income tax because their salary is too low.

• must pay estimated income taxes every quarter.

• is only responsible for paying FICA tax to cover Social Security.

• will not have to pay any local or state taxes.

The purpose of the IRS is to

• pass laws to determine what will be taxed.

• enforce tax laws and carry out the federal tax system.

• prepare tax returns for businesses and individuals.

• cut federal taxes and distribute taxes that have been collected to local and state governments.

A person completes their federal 1040EZ form and sees that they paid total quarterly estimated taxes of $12,000. But the calculations show that they should have only paid $9,500 in taxes. What will happen if they send the IRS this completed form with the necessary supporting documents?

• Nothing, because they completed the short form, the 1040EZ, instead of the long form, the 1040.

• The IRS will deduct the over payment of $2,500 from next year's taxes.

• They will receive a federal tax refund of $2,500.

• The IRS will make sure that their employer deducts the correct amount of taxes in the next year.

Juanita and Jessica work at the same company. Each is married and earns $75,000 per year. Juanita is paying more in taxes than Jessica. What two factors can help to explain why this is true?

• Juanita does not have any children and does not itemize deductions; Jessica itemizes deductions and has three children.

• Jessica earns an additional $15,000 from a part-time job and rents her house; Juanita owns her house and does not earn any additional income.

• Juanita contributes the maximum she is allowed by law to her pension plan and Jessica does not contribute more than the minimum that her employer will match to her pension plan.

• Jessica files her return as a single person and lets her husband claim their three children as exemptions on his taxes when he files as head of household.

Which of the following statements about adjusted gross income is true?

• It will always be higher than a person's gross income.

• It is the amount used to determine what a person actually has to pay in taxes.

• It will decrease when a person takes a deduction for real estate taxes, contributes to charities, and interest on a mortgage.

• It is the amount used to determine if a person gets a refund for paying Social Security taxes.

Which of the following statements about taxes and financial planning is true?

• It makes sense for everyone to use the services of a tax professional in order to avoid paying additional taxes.

• It is not really possible to reduce the taxes a person has to pay.

• Using a tax planner does not really make sense until a person is earning more than $85,000 a year.

• In most cases it is possible for people to reduce their tax liability by adjusting their financial plan.

A person looks over their pay stub and sees that in addition to paying state and federal personal income taxes, they are paying other personal taxes such as Social Security and Medicare. They are only age 20, so they are sure that their employer has made a mistake since Social Security and Medicare are for old people, and the money should be returned to them. Are they right?

• No. The money they are contributing to Social Security and Medicare is paying the benefits for today's older people.

• No. If they pay Social Security and Medicare taxes now they can start collecting benefits now.

• Yes. Only people within 20 years of retiring are expected to pay Social Security and Medicare taxes.

• Yes. They need to let their employer know that they do not want to pay into the Social Security and Medicare benefits program in the future.