PF2 Review Questions

All Formulas:

Income - Living Expenses = Surplus

Savings / Income = Savings Ratio

(Total Required Debt Payments / Gross Income) x 100 = Total Debt-to-Income Ratio

Selling Price - Basis (purchase price) - Selling Costs = Capital Gain/Loss

Gross Income - Deductions from AGI = AGI

AGI - Deductions from AGI = Taxable Income (tax base)

TI x Tax Rate(s) = Assessed Income Tax

AIT + other taxes/penalties - credits/withholdings = Net Tax Due (or refund)

(New Tax Liability - Old TL) / (New Income - Old I) = Marginal Tax Rate

(Total Federal Taxes / Taxpayer’s Total Gross Income) x 100 = Effective Tax Rate

(Annual Loan Interest Rate / 12 month) x Loan Balance = Interest charged on one month

FV (future value) = (payment / interest rate) x [(1 + interest rate)^N - 1]

What is the total Social Security tax that is assessed on self-employed workers in 2024?

Self-employed workers pay 12.4% on the tax base up to $167,700

Total is 12.4%

Employees pay 6.2% and employers match 6.2%

Sally budgets to save $2,000 a year based on her savings ratio. How much wealth will her savings be worth after 20 years if she can earn a 7% rate of return?

$81,991

FV (future value) = (payment / interest rate) x [(1 + interest rate)^N - 1]

FV = (2000 / 7%) x [(1 + 7%)²0 - 1]

FV = 28,571.43 × 2.87 = 82,000

Lisa just started her new job after graduating from college and is shopping for cars. While shopping for auto insurance, she is surprised that Protective Insurance wants her permission to pull a credit report. Why would the insurance company want her credit history?

Credit history reveals risky or risk averse attributes of person.

Tory just accepted a new job across the country. She needs to quickly sell her townhome, so she can qualify for a new mortgage to purchase her new residence. She anticipates a $25,000 long-term loss on the property. However, her new employer has offered a $20,000 relocation bonus to cover such things. How much of the capital loss can she recover in her next federal income tax return?

$0

Elsa is shopping for a new car. Her dream car costs $23,000 to purchase. A local dealer is offering a weekend financing special. The deal consists of a $3,000 down payment, 1.99% interest rate for 5 years, and a $1,000 origination fee. Her monthly payments of $367.99 include the origination fee. What is the total finance charge for the loan?

367.99 × 60 total payments = 22,079.40

22,079.40 - 20,000 loan principal = 2,079.40 in finance charges

Phillipe hopes to pay as little tax as possible. Which source of income would result in the lowest tax burden? (distributions from traditional ira, municpal bond interest, self-employment income, tips)

Municipal bond interest (it is not federally taxed)

You will know if you are an independent contractor if

your paycheck statement has no income taxes withheld

Delroy is a realtor and compensated based on every home sold. He receives 60% of what his firm earns on a sale, which is typically half of the customary 3% real estate fee on a property sold. If he sold $6,000,000 worth of property last year, what were his earnings?

6,000,000 x (3% x 0.5) = 90,000

90,0000 × 60% = 54,000 in earnings

What is the biggest difference between monthly payments on a revolving line of credit and monthly payments on an installment loan?

Monthly payments on a revolving line of credit can vary, whereas installment loan payments tend to be fixed.

Carla is perplexed by how her credit card balance never seems to go down. What information, required by federal law to be on her monthly credit card statement, could help her make a plan to pay down her credit card balance in a timely manner?

How much she must pay as a minimum monthly payment.

How much she must pay as penalty APR.

How much she could pay each month to be debt-free in full within three years.

How much available credit she has relative to her credit limit.

Jan needs some cash and is trying to figure out how much she can take from an ATM. She updates her check register regularly and it currently shows a balance of $615. Using her phone, she checks her account balance: $600. And she’s holding a birthday check from her grandmother for $35. At this moment, what is the maximum Jan could safely withdraw while avoiding overdrawing her account?

$600

Irene is 64 years old. She used to have employer-sponsored health insurance coverage until her employer laid her off. She has not been able to find alternative employment. She is worried she may need to see a doctor in the future. What program can she apply for that, if accepted for benefits, will provide health insurance coverage?

Medicaid.

Medicare.

Federal Pell Grant.

TANF.

Zack is preparing to start his freshman year in college. His parents are concerned about Zack’s spending habits. Which of the following is the best method to monitor and fund Zack’s access to money?

A prepaid debit card.

A joint checking account for Zack and his parents.

An individual online checking account for Zack.

A credit card.

In what timeframe are the funds transferred from your account to the merchant account when using your debit card?

In two business days.

The next day.

The next business day.

Immediately.

Which taxpayer is most likely to qualify for a retirement savings credit?

Sasha w/ 25,000 AGI and 500 IRA Contribution

You qualify if you make under $38,250 for singles, and $76,500 for married filing jointly in 2023

When Olivia’s mother passed away this year, she left her 2,000 shares of ABC, Inc. stock as an inheritance. On the day she passed away, the stock was worth $27 per share. She had purchased the shares for $23 per share in 2006. Today, when the shares are transferred to Olivia’s account, the share price is $26. What is Olivia’s basis on this inherited stock?

54,000 (use basis on the day of mother’s passing)

Which one of the following statements regarding Social Security is correct?

Individuals can choose to receive a reduced Social Security benefit at any age.

Younger workers today should not expect to receive full Social Security benefits when they retire due to a shortage of Social Security funds.

Social Security tax rates increase as you earn more income.

To receive a Social Security retirement benefit, individuals must have at least 10 quarters of earnings that were subject to Social Security taxes.

What is included in gross income?

Included in gross income are wages, tips, stock dividends, and gains from the sale of stock (sale proceeds less purchase cost)

Scholarships and gifts are not included in gross income

What feature of a check identifies the bank that holds the account of the check?

Routing Number

Which of the following statements regarding the Fair Debt Collection Practices Act (FDCPA) is correct?

The law requires debt collectors to provide borrowers with a written notice within 10 days, which includes information about the debt, the amount owed, the lender's name, and the borrower's right to dispute the debt within 60 days.

The law prohibits a debt collector from misrepresenting the identity of the lender.

If a borrower is represented by an attorney, the debt collector can communicate with the attorney or borrower directly.

Debt collectors can only contact borrowers between the hours of 7 a.m. and 10 p.m.

Kim borrowed $10,000 to purchase a used car. The total amount to be paid over one year includes the $10,000 borrowed, $3,600 interest, and $250 loan fees. What is the annual percentage rate (APR) on Kim’s loan?

3600 interest + 250 loan fees = 3,850 finance charge

3,850 / 10,000 principal = 0.385 (38.5%)

Michael needs his car to function properly so that he can get to work. To protect against the risk of his car breaking down, which of the following is Michael’s best option?

Lease a new car every 2 years.

All of these answers are correct.

Purchase automobile insurance.

Create an emergency fund.

Valley Community Bank is offering a 5-year installment loan at 5% APR and no fees. Which person is likely worse off if he or she takes this loan?

Trudy is concerned that she does not have an emergency fund and intends to use the loan proceeds to fund a savings account for contingencies.

Bobby has a landscaping business that is doing well and running near full capacity. He has just been referred to a local golf course that no longer intends to keep staff to maintain its grounds. Bobby figures that he can expand his business to the golf course if he can purchase two industrial-size lawn tractors with the loan.

Brad is offered a much better paying job that requires non-public transportation. He intends to purchase a used car with the loan.

Maci has a $4,988.99 credit card balance that has an 11% APR, and she is paying the minimum payment. She intends to pay off the credit card with the loan.

The Nguyens’ only daughter (age 19) is a full-time student living in campus housing. Can they still claim her as a dependent?

Yes, as long as they continue to provide over 50% of her support.

Yes, unless she receives a scholarship for tuition and books.

No, because she is too old.

No, because she no longer lives with them.

Erin is a self-employed travel and leisure freelance writer. She earned $145,000 from her articles and had $35,000 in travel expenses related to her work. What is her self-employment tax situation?

$15,542.51 in FICA tax; $7,771.26 tax deduction FOR AGI.

$15,542.51 in FICA tax; FICA tax not deductible.

$16,830.00 in FICA tax; $8,415.00 tax deduction FOR AGI.

$16,830.00 in FICA tax; FICA tax not deductible.

Calculate tax base:

145,000 - 35,000 = 110,000 net savings

1120,000 × 0.9235 = 101,585

FICA:

101,585 × 15.3% = 15,542.51

Tax Deduction:

15,542.51 / 2 = 7,771.26

Max is thinking about purchasing a new car. However, he is nearing his goal to purchase a home and wants to keep his total debt-to-income at 35%. Max’s current monthly gross salary is $5,000. Based on his expenses, what monthly car payment can he afford?

Total debt = 1500 rent + car payment

0.35 = (1500 + x) / 5000

250 = x

Karen is planning to purchase an apartment in six months when her current lease expires. She is looking at ways to improve her credit score. Which strategy will help her toward this goal?

Open a new installment loan since she just paid off her auto loan.

Close existing revolving credit accounts that she does not use.

Increase limits on existing credit accounts if a new application is not required.

Spread monthly purchase charges over different existing credit cards.

Who is the individual, in addition to the borrower, who will be held responsible for repayment of the debt?

Co-signer.

Co-beneficiary.

Co-originator.

Co-lender.

Harold and Maud bought 1,000 shares of BuyRite stock 5 years ago. BuyRite did not pay any dividends, but the stock appreciated in value by $25,000 in that time. What tax consequence did Harold and Maud have over this period?

Recognized $25,000 income but not realized any income.

None. BuyRite has tax-exempt growth of $25,000.

None. BuyRite has tax-deferred growth of $25,000.

Realized $25,000 income but not recognized any income.

Letting assets appreciate in value over a long period of time before realizing (dividends/sales) the gains results in tax-deferred growth

Tchiki and Taylor (married filing jointly) sold a stock that they have held for years and profited $100,000 in the sale. They are in the 37% marginal tax rate. How much tax will they pay on this gain?

$20,000.

$37,000.

There is not enough information to answer this question.

$15,000.

The asset was held for over a year, so the holding period is long-term. Based on their marginal tax rate of 37%, they would pay the highest long-term capital gains rate of 20%. They owe 20% of $100,000, which equals $20,000.

Tyson is expecting his year-end bonus of $10,000, which his employer likes to pay on New Year’s Eve. His marginal tax rate is 37%, and his effective tax rate is 23%. How much tax will he owe on this bonus?

$2,000.

$2,300.

$3,700.

$1,500.

10,000 × 37% = 3700

Hannah bought 1,000 shares of Zoom Technologies stock at $15 from an initial public offering. Hannah sold the stock after it rose 40% on the opening day of trading. Hannah has a 24% effective tax rate and a 37% marginal tax rate. How much tax does Hannah owe from the stock sale?

$1,200.

$1,440.

$2,220.

$900.

1000 × 15 = 15,000 initial profit

15,000 × 00% = 6000

6000 × 37% = 2200

Xavier failed to make loan payments, and the court ordered his employer to pay a portion of his wages directly to the creditor. What does this example represent?

Credit default.

Garnished wages.

Repossession.

Employer non-elective contribution.

Willie is looking to purchase the new limited special edition Ford Mustang. He needs a loan, but he is reluctant to shop around to many banks because his brother told him that multiple inquiries will lower his credit score. What should Willie do?

Survey as many banks as possible and apply for any loans that seem like a good deal within a 14-day window.

Survey as few banks as possible to find a good deal and apply for only the single best loan.

Survey as many banks as possible and apply for any loans that seem like a good deal (taking care to apply for no more than one loan per 14-day window).

Survey as many banks as possible but apply for only the single best loan.

Rebecca has a 5-year variable installment loan. Every year the rate can change based on the prime rate. She borrowed $10,000 for 5 years. The initial rate was 5% APR. Her initial monthly payment was $188.71. After the first year, the rate increased to 5.5% APR. The new monthly payment will be $190.57 with an $8,194.48 balance from the end of that year. What will be the first interest payment in the following month?

$34.79.

$37.56.

$34.14.

$36.85

5.5% / 12 months = 0.004583

interest cost = 8194.48 × 0.004853 = 37.56

The Fair Debt Collection Practices Act (FDCPA) defines what is unfair or abusive in terms of collecting money from borrowers. All of the following statements regarding debt collectors are correct EXCEPT?

The law requires debt collectors to provide borrowers with a written notice within 5 days, which includes information about the debt, the amount owed, the lender's name, and the borrower's right to dispute the debt within 30 days.

Debts owed to the government are generally excluded from protection under FDCPA.

Debt collectors may contact a borrower’s employer if debt is not paid after 120 days.

Debt collectors can only contact borrowers between the hours of 8 a.m. and 9 p.m.

Trudy initiates a $5,000 2-year fixed-rate installment loan on November 1. Her initial monthly payment is $25 in interest and $196.60 in principal repayment. What will be the ending balance for the year end?

$4,803.40.

$4,605.82.

$4,407.25.

$4,556.80.

Monthly payment: 25 + 196.6 = 221.6

Monthly interest rate: 25 / 5000 = 0.005

November ending balance: 5000 - 196.6 = 4803.4

December Interest payment: 4803.4 x .005 = 24.02

December principal: 221.6 - 24.02 = 197.58

December ending balance = 4,803.4 - 197.58 = 4,605.82

Martie just took an auto loan with a $500 monthly payment. Over time, what will happen to the parts of her payment that are principal and interest?

The part that is interest will increase while the part that is principal will decrease.

The part that is principal will stay the same while the part that is interest will decline.

The part that is interest will decrease while the part that is principal will increase.

The part that is interest and the part that is principal will stay the same.

Narvia purchased a used roadster with a $15,000 3-year loan at 6%. Her monthly payments are $456.33. After just one payment, an auto collector she met at a concert offered her $30,000 for the car. How much would she have to pay her lender to release the lien on the car?

$14,925.28.

$14,543.67.

$15,000.00.

$14,618.67.

6% / 12 = 0.005

15,000 × 0.005 = 75

456.33 - 75 = 381.33 (princ. payment)

15000 - 381.33 = 14,618.67

Tyler was attracted to an advertisement for new Bluetooth earphones, offering zero financing for the $200 item if fully paid in 1 month. If not paid in a month, then a 24% APR will be assessed from the purchase date. What would the finance charge be if Tyler missed the deadline by a month?

8.08

24% / 12 = 0.02

0.02 × 200 = 4

200 + 4 = 204 (first payment)

204 x .02 = 4.08

4.08 + 4 = 8.08

Kim borrowed $10,000 to purchase a used car. The total amount to be paid over one year includes the $10,000 borrowed, $3,600 interest, and $250 loan fees. What is the annual percentage rate (APR) on Kim’s loan?

3600 + 250 = 3850

3850 / 10,000 = 38.5%

What do all installment loan lenders disclose to credit applicants?

Any finance charges expressed as a percentage of the loan balance.

Any finance charge expressed in dollars.

All of these answers are correct.

Interest rate expressed as an annual percentage yield (APY).

Devon purchased an investment property on October 1 last year. He financed 100% of the purchase with a $100,000 20-year loan at 6% APR. He can deduct the interest portion of his loan payments. His monthly loan payments are $716.43. How much interest will he pay throughout his 20-year loan?

716.43 × 240 months = 171,943

171,943 - 100,000 = 71, 943

Adnan and Lola (married filing jointly) just sold their primary residence for $950,000. They have lived there for the past 6 years. The cost basis for the home is $400,000. They have a 37% marginal tax rate. What is the tax on the sale of their home?

950,000 - 400,000 = 550,000

for married joint, 500,000 is exempt

50,000 × 20% = 10,000

Which statements are correct?

average millionaire invests more than 20% of income

ppl in 20’s should save

“save more tmrw” will increate savings rate after 5-10 years

all of the above

In what way are revolving loans and installment loans similar?

Ability to pay more than monthly payment due

Jill’s business had a gross income of 84K. How much FICA tax does she owe? She is self-employed.

84,000 × 0.9235 employment tax = 77,574

77,574 × 0.153 = 11,868.82

A couple sold a municipal bond (had for 12 years) at a 4,000 loss. What tax consequence is there?

long term capital loss is capped at 3k

3k is split between the 2 of them, so total of 1.5k

kingston’s card had a 625 charge, but he only reported after 3 days. how much would he have saved after 2 days?

$50 liability after 2 days

Waiting 3 days but less than 6 months = $500 liability

500 - 50 = 450