#1
Which of the following is a deductible expense for individuals when filing income tax returns?
Medical expenses
ExplanationExpenses related to medical care that can be subtracted from adjusted gross income when calculating taxable income.
#2
What is the significance of the tax year-end in tax planning?
It allows for certain tax strategies before the year concludes.
ExplanationStrategic financial decisions can be made before the end of the tax year to optimize tax outcomes for the current year.
#3
What is the concept of tax deferral, and how does it apply to retirement accounts?
Tax deferral refers to delaying taxes until retirement, commonly seen in retirement account contributions.
ExplanationPostponing payment of taxes on income, such as earnings on investments, until a later date, often applied to retirement savings vehicles.
#4
What is the significance of the tax residency status for individuals?
Affects the tax rate applied to income earned in a specific country.
ExplanationDetermines which country's tax laws apply to an individual's income and assets, impacting the tax rate and obligations.
#5
What is the purpose of the IRS Form W-4 in the United States?
To determine the amount of income tax to be withheld from an employee's paycheck.
ExplanationForm used by employees to specify the amount of federal income tax to be withheld from their paychecks, based on their filing status and exemptions.
#6
What is the purpose of tax planning?
To minimize tax liability within the legal framework
ExplanationStrategizing financial affairs to reduce the amount of taxes owed while complying with tax laws.
#7
What is a tax credit?
A dollar-for-dollar reduction in the actual amount of tax owed
ExplanationA direct reduction in the amount of tax owed, providing taxpayers with greater benefits than deductions.
#8
What is the difference between a tax deduction and a tax credit?
Deductions reduce taxable income, while credits directly reduce the amount of tax owed.
ExplanationDeductions lower the taxable income amount, whereas credits directly decrease the tax liability dollar for dollar.
#9
What is the purpose of a tax-deferred investment?
To delay paying taxes on investment gains until a later date.
ExplanationInvestments where taxes on earnings are postponed until withdrawal, often used in retirement savings accounts.
#10
What is the difference between tax avoidance and tax evasion?
Tax avoidance is legal, while tax evasion is illegal.
ExplanationTax avoidance involves legal means to minimize tax liability, while tax evasion involves illegal methods to evade paying taxes.
#11
In tax terminology, what does AGI stand for?
Adjusted Gross Income
ExplanationTotal gross income minus specific deductions, representing the amount of income subject to taxation.
#12
What is the purpose of a tax audit?
To verify compliance with tax laws
ExplanationExamination of financial records and activities to ensure adherence to tax regulations and reporting requirements.
#13
What is the concept of progressive taxation?
Taxation that increases as income rises.
ExplanationA tax system where tax rates increase as income levels rise, imposing a higher burden on higher-income individuals.
#14
What is the purpose of the Alternative Minimum Tax (AMT)?
To provide an alternative method of calculating income tax.
ExplanationEnsures taxpayers with certain income pay at least a minimum amount of tax, preventing excessive use of deductions to avoid taxes.
#15
What is the purpose of a tax treaty between countries?
To avoid double taxation for individuals and businesses operating in both countries.
ExplanationAgreement between two countries to prevent individuals and businesses from being taxed on the same income by both countries.