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True/False
Indicate whether the statement is true or false.
4. In the US, higher incomes face a higher income tax bracket those with lower incomes.
5. In the US, all individuals are allowed to exempt certain income from taxes.
9. The US individual tax code is complicated as there are many rules for what qualifies as a deduction.
10. Individuals get to either itemize deductions (i.e. count up their deductions) or take the standard deduction (i.e.
use a fixed deduction).
13. There is a difference between an average tax rate and a marginal tax rate.
14. In the US, higher income individuals have higher marginal tax rates.
15. As a result of recent income tax law changes, the highest marginal tax rate has fallen.
16. If an individual is in the 25% marginal tax bracket for federal income taxes and receives a $2,000 year end
bonus, then he will pay an additional $500 in federal income tax.
19. Social security consists of three main parts: disability income, survivor benefits, and retirement income.
1
Taxes Part 1 ID: A
20. There is a maximum social security benefit for retirees (for 2009 it is $2,323 a month for those at full
retirement age).
22. In order to qualify for Social Security, a worker needs to earn enough credits.
23. For those born after 1960, the minimum retirement age for Social Security is 62 and the full retirement age is
67.
26. For employees, 6.2% is deducted from their paychecks for social security and the employer contributes 6.2%
as well.
27. For those who are self-employed, they must pay both the employee and employer contributions to Social
Security .
28. For those who are self-employed, they must pay both the employee and employer contributions to Medicare.
29. For employees, 1.45% is deducted from their paychecks for medicare and the employer contributes 1.45% as
well.
Problems
31. Suppose you have the following marginal income tax rates
2
Taxes Part 1 ID: A
32. Suppose you have the following marginal income tax rates
3
ID: A
TRUE/FALSE
1. ANS: T
2. ANS: T
3. ANS: T
Florida and Nevada are examples of states with no income taxes.
4. ANS: T
5. ANS: T
This is mostly true. For very high income earners, exemptions are often phased out.
6. ANS: T
Individuals can either itemize or take a standard deduction. Although for very high income earners some
deductions are not allowed.
7. ANS: T
8. ANS: T
9. ANS: T
10. ANS: T
You have a choice of trying to keep track of where you money gets spent or use fixed number. If your
itemized deductions sum up to be larger than the standard deduction, you can use that larger number to reduce
your taxable income.
11. ANS: T
12. ANS: F
In a regressive tax system, the tax rate is higher for lower income groups. So the tax rate rises as income
declines.
13. ANS: T
This difference was discussed in class.
14. ANS: T
15. ANS: T
G.W. Bush has lowered the marginal tax rates and introduced a 10% tax bracket. The top federal income tax
bracket is now 35%.
Workers need to accumulate enough credits to qualify for social security (or to have a spouse who earned
enough credits.)
1
ID: A
23. ANS: T
If individuals can retire early at age 62, but there is a financial penalty for doing so. The benefit at age 62 is
70% of what it would be at age 67.
Source: http://www.socialsecurity.gov/retirement/1960.html
24. ANS: T
25. ANS: F
For 2009, social security taxes are paid on wages up to $106,800.
26. ANS: T
For 2009, this happens for wages up to $106,800.
27. ANS: T
28. ANS: T
29. ANS: T
Unlike social security, there is no income limit for medicare taxes.
PROBLEM
30. ANS:
.
31. ANS:
(a) Since you make more than $40,000, your marginal tax rate is 25%. (Note tax brackets and marginal tax
rates both mean the same thing.)
(b) You pay 0% on your first 10,000 of income, 10%on your next 30,000 of income, and 25% on your next
20,000. This totals to $0 + $3,000 + $5,000 = $8,000.
8,000
(c) Your average tax is = 13.33%.
60,000
(d) You use your marginal tax rate of 25%.
32. ANS:
Hint: Use the previous problem as a guide to solve this problem.