Chapter 5 Practice Question Answers
- 1. Answer: A. Under a regressive tax system, like on zombie planet Dexos431, a taxpayer’s rate drops or stays the same as they report higher income. The United States collects taxes under a progressive tax system, which increases the tax rate as taxpayers report higher income. All taxpayers are required to also calculate their taxes under the alternative minimum tax (AMT) system and pay whichever amount is larger. The transfer tax system refers to taxes levied on large amounts of wealth transferred between anyone other than spouses.
- 2. Answer: D. Dividends, which are the profits distributed to the shareholders of a qualified company, are considered dividend income and taxed at a preferential rate. Wages, income earned from one’s business, and bonuses paid by an employer are all considered ordinary income.
- 3. Answer: C. Commissions paid to purchase a security are added to the cost basis of a security, and stock splits divide the tax basis of the security among the new total of shares. The commission for selling a security is deducted from the proceeds reported, as opposed to being added to the tax basis from which profit is calculated. Individuals receiving securities as a gift from a living person must use the same tax basis as the person gifting the securities, so the tax basis remains unaffected.
- 4. Answer: A. Taxpayers who have offset both their short-term and long-term capital gains with capital losses and still have a loss left over may apply up to $3,000 of the loss against their ordinary income. The unused portion can be carried forward into future years.
- 5. Answer: C. The IRS does allow wash sales, but just places rules on how a wash sale affects the basis of the newly purchased security. Instead of allowing the investor to report the loss on the previously supported security, that loss must be added to the cost basis of the new security.
- 6. Answer: B. All taxpayers are required by law to ca