AFC Tax Planning and Financial Literacy 1 — Questions and Answers
Question 1: Which filing status generally results in the lowest federal income tax rate for a single parent with a dependent child?
- Single
- Head of Household (Correct answer)
- Married Filing Separately
- Qualifying Surviving Spouse
Correct answer: Head of Household
Head of Household status offers wider tax brackets and a higher standard deduction than Single filing for eligible single parents.
Question 2: What is the primary purpose of a W-4 form?
- To report annual income to the IRS
- To tell an employer how much federal income tax to withhold (Correct answer)
- To claim a tax refund
- To report self-employment income
Correct answer: To tell an employer how much federal income tax to withhold
The W-4 tells employers the correct amount of federal income tax to withhold from each paycheck based on the employee's situation.
Question 3: A tax credit differs from a tax deduction in that a credit:
- Reduces taxable income dollar-for-dollar
- Reduces the actual tax owed dollar-for-dollar (Correct answer)
- Only applies to business expenses
- Must be itemized on Schedule A
Correct answer: Reduces the actual tax owed dollar-for-dollar
A tax credit directly reduces your tax liability dollar-for-dollar, making it generally more valuable than a deduction of the same amount.
Question 4: Which of the following is an example of a refundable tax credit?
- Child and Dependent Care Credit
- Earned Income Tax Credit (EITC) (Correct answer)
- Lifetime Learning Credit
- Mortgage Interest Credit
Correct answer: Earned Income Tax Credit (EITC)
The Earned Income Tax Credit is refundable, meaning if it exceeds your tax liability, the IRS pays you the difference as a refund.
Question 5: Capital gains on assets held longer than one year are taxed at:
- Ordinary income tax rates
- Long-term capital gains rates (0%, 15%, or 20%) (Correct answer)
- A flat 28% rate
- The self-employment tax rate
Correct answer: Long-term capital gains rates (0%, 15%, or 20%)
Long-term capital gains (assets held over one year) are taxed at preferential rates of 0%, 15%, or 20% depending on taxable income.
Question 6: What is the standard deduction for a married couple filing jointly for tax year 2024?
- $13,850
- $20,800
- $29,200 (Correct answer)
- $27,700
Correct answer: $29,200
For 2024, the standard deduction for married filing jointly is $29,200, adjusted annually for inflation.
AFC Tax Planning and Financial Literacy 1
Which filing status generally results in the lowest federal income tax rate for a single parent with a dependent child?