The right answers can save you a bundle: tax quiz - Brief Article

Nation's Business, April, 1996

The Right Answers Can Save You A Bundle

What you don't know about taxes can cast you money. Test your knowledge with the quiz below, supplied by the Institute of Certified Financial Planners.

1. Which is more valuable, a $500 tax deduction or a $500 tax credit?

2. Child-support payments are tax-deductible.

True or False?

3. The maximum amount that can be contributed tax-deductible to a nonworking spouse's individual retirement account is $250.

True or False?

4. What's the highest federal rate at which capital gains from the sale of an investment held at least one year can be taxed?

A. 28% B. 31% C. 36% D. 39.6%

5. Profits from the sale of tax-free municipal bonds are free of ali federal taxes.

True or False?

6. Social Security benefits are not subject to income tax.

True or False?

7. Married couples generally pay more in income taxes than the combined total they would pay if they were single.

True or False?

8. How many hours does the Internal Revenue Service estimate it will take you to prepare your Form 1040, including record keeping?

A. 6.4 B. 9.5 C. 11.5 D. 15.0

9. Death benefits paid from a life-insurance policy are free of income tax. True or False?

10. To prove a charitable donation of over $250, all you need is your canceled check.

True or False?

Answers:

1. The tax credit, which reduces your taxes dollar for dollar. Because a deduction is subtracted from your taxable income, you figure the tax savings by multiplying the deduction by your tax rate. For instance, if you're in the 28 percent bracket, a $500 tax deduction would save/you $140 in taxes.

2. False. Alimony payments are deductible, but not child support.

3. False. A married couple with an unemployed spouse can contribute up to $2,250 tax-deductible to their IRA accounts, but they can split the contribution as they choose, as long as neither spouse's contribution exceeds $2,000.

4. A. 28%

5. False. The interest earned is generally free of federal taxes, but any profit from the sale of a municipal bond is taxable.

6. False. As much as 85 percent of benefits may be taxed if the recipient earns above a certain level olincome during the year ($44,000 for a married couple in 1995).

7. True. This is known as the "marriage penalty."

8. C. And if you add Schedules A, B, D, E, and SE, it takes 27.5 hours.

9. True. They are not necessarily free of estate tax, however.

10. False. You also need an acknowledgment letter from the charity.