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CONCEPT QUESTIONS
Concept Check 3-1 (p. 63)
1. What are the four major categories of taxes?
Taxes on purchases, taxes on property, taxes on wealth, and taxes on earnings.
2. For each of the following situations, list the type of tax that is being described.
Financial planning situation
(a) A tax on the value of a persons house.
(b) The additional charge for gasoline and air travel.
(c) Payroll deductions for federal government retirement
benefits.
(d) Amount owed property received from a deceased person.
(e) Payroll deductions for a direct tax on earnings.
Type of tax
property tax
excise tax
Social Security tax
inheritance tax
income tax
a tax deduction, or
a tax credit.
X
X
X
X
1040EZ
1040A
X
X
X
Tax-exempt
X
Tax-deferred
X
X
X
1040
7. Would you prefer a fully taxable investment earning 10.7 percent or a tax-exempt investment
earning 8.1 percent? Why?
Assuming a 28 percent tax rate, 10.7 percent times 0.72 equals 7.704 percent; an 8.1 percent
tax-exempt return would be preferred.
8. On December 30, you decide to make a $1,000 charitable donation.
a. If you are in the 27 percent tax bracket, how much will you save in taxes for the current
year?
$270 tax savings
b. If you deposit that tax savings in a savings account for the next five years at 8 percent,
what will be the future value of that account?
$270
1.469 = $396.63
b.
What is his total tax liability? (Use Exhibit 35, page 74.) What is his average tax rate?
Tax liability is $3,026 ($3,426 from tax table less $400 tax credit). His average tax rate is
11.56 percent ($3,026 divided by $26,180).
c. Based on his withholding, will Eric receive a refund or owe additional tax? What is the
amount?
Eric receives a refund of $152. ($3,178 withheld less $3,026 liability.)