Chapter 4.

1 Concept Check

1. Distinguish between a progressive and a regressive tax. A progressive tax is a tax that
progressively increases as a taxpayer’s taxable income increases. And a regressive tax is
a tax rate that stays the same for all income. So regressive tax is generally the opposite of
progressive tax.
2. What is a marginal tax bracket, and how does it impact taxpayers making tax-
advantaged contributions to their retirement plans? A marginal tax bracket is the rate
at which your last dollar of income is taxed. Marginal tax impacts taxpayers making
contributions to their retirement plan because it takes tax dollars out of what they are
putting away.
3. Explain why some taxpayers have an effective marginal tax rate as high as 40
percent. Some taxpayers have an effective marginal tax rate as high as 40 percent
because of the addition of state income tax rates and city income tax rates.

Chapter 4.2 Concept Check

1. Give five examples of income that must be included in income reported to the
Internal Revenue Service. Income that must be included in income reported to the
Internal Revenue Service include wages and salaries, tips earned, social security income,
unemployment benefits, and severance pay.
2. How are long-term and short-term capital gains treated differently for income tax
purposes? Long-term capital gains are taxed at special low rates, while short-term capital
gains are taxed at the same rates as ordinary income.
3. Give five examples of income that is excluded from IRS reporting. Income tax that is
excluded from IRS reporting include gifts, tuition reduction, federal income tax refunds,
life insurance benefits, and social security benefits.
4. List three examples of adjustments to income. Three examples of adjusted income
include higher-education expenses, alimony payments, and money to teachers who
purchase classroom supplies.
5. Distinguish between a standard deduction and a personal exemption. A standard
deduction is a base amount of income that all taxpayers who do not itemize deductions
regardless of their actual pay may subtract from their adjusted gross income. A personal
exemption is a legally permitted amount, an allowance to reduce one’s taxable income,
based on the number of people supported by the taxpayer’s income.
6. What advice on filing a Form 1040X can you offer someone who did not file a
federal income tax return last year or in any one of the past three years? Advice I
would give to someone who did not file a federal income tax return last year or of the
past three years is to file on time.
 7. List five examples of tax credits. Five examples of tax credits include child tax credit,
savers tax credit, lifetime learning tax credit, earned income tax credit, and adoption
credit.

Chapter 4.3 Concept Check

1. Distinguish between two types of tax-sheltered investment returns. Two types of tax
sheltered investment returns are Coverdell Education Savings Account and Qualified
Tuition Program. Both the tax-sheltered investments returns are education savings
accounts, however, the Coverdell account has a maximum of $2,000 annually, while
there is no limit to Qualified Tuition Programs.
2. Explain how to reduce income taxes via your employer, and name three employer-
sponsored plans to do so. To reduce your taxes via your employer you can reduce your
income. Three employer sponsored plans include a premium-only plan, transit spending
account, and flexible spending account.
3. Summarize the differences between an individual retirement account (IRA) and a
Roth IRA. Roth IRA accounts accumulate late tax-free and withdrawals are tax-free.
Investments in individual retirement accounts accumulate tax-sheltered and income taxes
are owed on eventual withdrawals.
4. Identify three strategies to avoid overpayment of income taxes (different from
above), and summarize the essence of each. Three strategies to avoid overpayment of
income taxes include investing in municipal bonds, using a health savings account, and
claiming tax credits.