1. Apply What Youve Learned - Managing Income Taxes

Demonstrate your knowledge of the U.S. tax system by answering the following questions:

Experts describe the U.S. tax system as being a progressive system. This means that:

every taxpayer in the United States pays the same tax rate on their taxable income.

a smaller tax rate is applied to the last dollar of earned income than on the first dollar of taxable income.

a greater tax rate is applied to the last dollar of taxable income than on the first dollar of taxable income.

only those taxpayers that earn income will incur income taxes.

Which of the following equations represent the correct formula for computing a taxpayers taxable income? Check all that apply.

Taxable income = Total income - Adjustments to income - Deductions - Exemptions

Taxable income = Gross income - Adjustments to income - Deductions - Exemptions

Taxable income = Adjusted gross income - (Deductions + Exemptions)

Taxable income = Total income - Exclusions

Taxable income = Adjusted gross income - Tax credits

Taxable income = Total income + Deductions and Exemptions

Taxable income = Gross income - Adjustments

Taxable income = Gross income - Exclusions

Which of the following must be included in the computation of a taxpayers taxable income?

Interest and dividend income

Inherited money or property

Veterans benefits

Social security benefits

Home ownership can provide significant income tax savings compared to renting a comparable home. This is because a taxpayers tax deductible.

The contributions or expenses associated with cannot be paid with pre-tax dollars, and therefore, cannot reduce your taxable income

Money placed in a flexible spending account to pay for out-of-pocket unreimbursed expenses for medical and dental fees

may be subtracted as an adjustment to gross income.

may be subtracted as a credit from taxable income

may be included in itemized deductions

should be considered to be taxable income

Which of the following is not considered to be a tax sheltered investment?

The contribution to a flexible spending account.

An investment in a Coverdell education savings account

An investment in tax-exempt municipal bonds

An investment in a mutual fund

Why is a refundable tax credit more valuable than a tax deduction or a nonrefundable tax credit?

It may reduce your tax liability to below zero (provide a refund).

It reduces tax liability by one dollar for every dollar of the credit.

It may be taken even if you do not itemize deductions.

All of these are reasons.