Quiz: Income and Taxes
Test your understanding of income and tax concepts.
1. What is the difference between gross income and net income?
- Gross income is your total earnings before deductions; net income is what you take home after deductions
- Gross income and net income are the same thing
- Net income is always higher than gross income
- Gross income only includes salary, not bonuses
Show Answer
The correct answer is A. Gross income is your total earnings before any deductions (federal/state taxes, Social Security, Medicare, insurance premiums, retirement contributions). Net income (take-home pay) is what remains after all deductions. Understanding this difference is crucial for budgeting—you can only spend your net income. Options B, C, and D are incorrect.
Concept Tested: Gross vs Net Income
2. What is the purpose of Form W-4?
- To report your annual income to the IRS
- To tell your employer how much tax to withhold from your paychecks
- To claim a tax refund
- To apply for government benefits
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The correct answer is B. Form W-4 tells your employer how much federal income tax to withhold from each paycheck based on your filing status, dependents, and other factors. Filling it out correctly helps you avoid owing money or receiving a large refund at tax time. Option A describes Form W-2. Option C describes filing a tax return. Option D is unrelated to W-4.
Concept Tested: W-4 Form
See: W-4 and Withholding
3. What is a tax deduction?
- Money the government owes you
- An amount that reduces your taxable income
- A direct reduction of your tax bill dollar-for-dollar
- A type of tax refund
Show Answer
The correct answer is B. A tax deduction reduces your taxable income, which indirectly reduces your tax bill. For example, if you're in the 22% tax bracket and have a $1,000 deduction, you save $220 in taxes (22% of $1,000). Option C describes a tax credit (direct reduction). Options A and D are incorrect definitions.
Concept Tested: Tax Deductions
4. Which provides greater tax savings: a $1,000 tax credit or a $1,000 tax deduction?
- They provide the same savings
- A $1,000 tax credit provides greater savings
- A $1,000 tax deduction provides greater savings
- It depends on your age
Show Answer
The correct answer is B. A $1,000 tax credit reduces your tax bill by exactly $1,000. A $1,000 tax deduction only reduces your taxable income by $1,000, which saves you (tax rate × $1,000). If you're in the 22% bracket, a $1,000 deduction saves $220, while a $1,000 credit saves $1,000. Credits are more valuable than deductions.
Concept Tested: Tax Credits vs Deductions
5. What is the standard deduction for 2024 (single filer)?
- $6,350
- $13,850
- $27,700
- $50,000
Show Answer
The correct answer is B. The standard deduction for single filers in 2024 is $13,850. Most taxpayers use the standard deduction rather than itemizing because it's simpler and often provides a larger deduction. Option A is an outdated amount. Option C is the married filing jointly amount. Option D is unrealistic.
Concept Tested: Standard Deduction
See: Standard Deduction
6. What taxes are part of FICA?
- Federal income tax only
- Social Security and Medicare taxes
- State and local taxes
- Property taxes
Show Answer
The correct answer is B. FICA (Federal Insurance Contributions Act) includes Social Security tax (6.2% up to wage limit) and Medicare tax (1.45% on all wages). Both you and your employer pay these amounts. Self-employed individuals pay both portions (15.3% total). Option A is a separate tax. Options C and D are not part of FICA.
Concept Tested: FICA Taxes
See: Payroll Taxes
7. When are federal tax returns typically due?
- December 31st
- January 31st
- April 15th
- June 30th
Show Answer
The correct answer is C. Federal tax returns are due April 15th each year (or the next business day if April 15th falls on a weekend or holiday). You can request a 6-month extension to file, but any taxes owed are still due April 15th. Options A, B, and D are incorrect due dates.
Concept Tested: Tax Filing Deadlines
See: Filing Your Return
8. You earn $50,000 annually and are in the 22% tax bracket. How much will a $2,000 tax deduction save you?
- $2,000
- $1,000
- $440
- $220
Show Answer
The correct answer is C. A tax deduction reduces your taxable income. The savings equals your tax rate multiplied by the deduction amount: 22% × $2,000 = $440. Option A would be correct for a tax credit (dollar-for-dollar reduction). Options B and D use incorrect percentages.
Concept Tested: Tax Deduction Calculations
9. What is a tax-advantaged account?
- An account that provides tax benefits like tax-deferred growth or tax-free withdrawals
- An account only available to wealthy people
- An account with the highest interest rates
- An account that eliminates all taxes permanently
Show Answer
The correct answer is A. Tax-advantaged accounts (401(k), IRA, HSA, 529) provide special tax benefits—either tax-deductible contributions, tax-free growth, or tax-free withdrawals. These accounts help you save more effectively for retirement, healthcare, or education. Options B, C, and D are incorrect characterizations.
Concept Tested: Tax-Advantaged Accounts
10. What should you do if you expect to owe taxes when you file your return?
- Don't file a return
- Adjust your W-4 to increase withholding for next year and pay what you owe
- Wait for the IRS to contact you
- File a return but don't pay the taxes owed
Show Answer
The correct answer is B. If you owe taxes, file your return on time and pay what you owe (or set up a payment plan). Then adjust your W-4 to increase withholding so you don't owe next year. Option A and D can result in penalties and interest. Option C is reactive rather than proactive—file on time even if you owe money.
Concept Tested: Tax Planning