practice quiz 4 - 4\n1. how does tax avoidance differ from tax evasion?\n2. what common tax - saving methods…

practice quiz 4 - 4\n1. how does tax avoidance differ from tax evasion?\n2. what common tax - saving methods are available to most individuals and households?\n3. for the following tax situations, indicate whether the item refers to tax - exempt income or tax - deferred income.\na. interest earned on municipal bonds\nb. earnings on a traditional individual retirement account\nc. education ira earnings used for college expenses\nd. earnings on a roth individual retirement account\naction activity:

practice quiz 4 - 4\n1. how does tax avoidance differ from tax evasion?\n2. what common tax - saving methods are available to most individuals and households?\n3. for the following tax situations, indicate whether the item refers to tax - exempt income or tax - deferred income.\na. interest earned on municipal bonds\nb. earnings on a traditional individual retirement account\nc. education ira earnings used for college expenses\nd. earnings on a roth individual retirement account\naction activity:

Answer

Brief Explanations:

  1. Tax - avoidance is legal use of tax laws to reduce tax liability, while tax - evasion is illegal non - payment or under - payment of taxes.
  2. Common tax - saving methods for individuals and households include contributing to retirement accounts (like 401(k)s, IRAs), taking deductions for mortgage interest, property taxes, and charitable donations.

a. Interest earned on municipal bonds is tax - exempt income as it is not subject to federal income tax and often state and local taxes as well. b. Earnings on a traditional individual retirement account are tax - deferred income. Taxes are paid when the money is withdrawn in retirement. c. Education IRA earnings used for college expenses are tax - exempt income as long as the funds are used for qualified educational expenses. d. Earnings on a Roth individual retirement account are tax - exempt income. Contributions are made with after - tax dollars, and qualified withdrawals (including earnings) are tax - free.

Answer:

  1. Tax - avoidance is legal; tax - evasion is illegal.
  2. Contributions to retirement accounts, mortgage interest deductions, property tax deductions, charitable donation deductions.

a. Tax - exempt income b. Tax - deferred income c. Tax - exempt income d. Tax - exempt income