Chapter 8 Income tax
What qualifies for the Lifetime Learning Credit?
Tuition for graduate courses Tuition for full time enrollment at a university Fees for continuing professional education required for job.
The __________________ tax was implemented to make sure that taxpayers who were generating income pay some income tax, rather than disproportionately benefiting from tax advantaged items.
Alternative minimum
A taxpayer is subject to the ____________________ when the tax on its base is higher than his regular tax liability.
Alternative minimum tax
Which of the following tax provisions was implemented to insure that the taxpayer pays some level of income tax, despite the disproportionate use of tax preference items to reduce regular taxable income.
Alternative minimum tax
True or false: a six month extension will allow the taxpayer to extend the tax payment date without penalty.
False. The extension will allow extra time for filing the return, but does not extend the time for payment.
True or false: The term tax bracket refers to the average tax rate that is applied to an individual's taxable income.
Fasle
When calculating a tax liability, the taxpayer will use the tax rate schedule that is determined by:
Filing status
Which one of the following types of income is not part of net investment income for purposes of calculating the Medicare contributions tax?
Gain on sale of a personal residence
Carol's AMT base is $240,000. Of this amount, $35,000 represents long-term capital gain income from investments. Carol is in the 28% marginal tax bracket for regular tax. Calculate the tentative tax resulting from AMT calculations.
$59,162
For certain taxpayers, a tax of ____________% may be assessed on net investment income.
3.8
Which of the following is NOT a criteria for meeting the eligibility requirements for the earned income credit for an individual with no children?
Can be claimed as a dependent for another taxpayer.
Which of the following statements is correct regarding the deductibility of self employment taxes?
Taxpayers are allowed to deduct the employer portion of their self employment taxes for AGI.
A tax ____________ reduces a taxpayer's tax liability dollar for dollar. A tax _________________ reduces taxable income, resulting in a tax savings that is dependent on the taxpayer's marginal tax bracket.
credit deduction
There are four different tax rate schedules. The rate schedule used by an individual is determined by his or her
filing status
The tax provision that reduces parents' ability to shift unearned income to children is called the
kiddie tax
Investment interest expense that was NOT deductible for regular taxable income will be deductible for AMTI to the extent it was attributable to interest income that was _____________________ for regular tax purposes, but is ____________for AMTI.
tax exempt, Taxable
Denis and Debbie are married and file jointly. They have two children that qualify for the child tax credit. Their AGI for the current year is $122,000. What is the amount of their child tax credit?
$1400(2 children x 1,000=2,000;Phase out 122,000-110,000=12,000;12,000 x $50 = 600; Credit: $2000-600 = $1,400
Baxter and bailey use the married filing jointly filing status on their tax return. They incurred $4000 in undergraduate tuition for Bailey to finish her degree. She was in her fifth year and graduated in May. Baxter started graduate school i August. They spent $8000 in tuition for his education. What is the amount of their lifetime learning credit?
$2000. The credit is equal to 20% of eligible expenses up to an annual maximum of $10,000 of eligible expenses (maximum of $2000)
Tim and Sandy have a ten year old daughter. During the current year, they spent $2000 on childcare expenses at a daycare center and paid $1500 in childcare expenses to Sandy's sister. Their child and dependent care credit will be calculated based on a maximum limit of __________in childcare expenses.
$3000. A relative who is a caregiver will qualify as long as the relative is not a dependent relative or child of the taxpayer.
Arnold has a tax liability of $700. He has a nonrefundable tax credit of $1,000, and his employer withheld $900 in federal income tax from Arnold's pay. What is the amount of Arnold's tax refund?
$900 the credit will offset the tax liability. Arnold will receive a refund for the amount withheld.
Sequence in which taxpayers apply the credits
1. Nonrefundable personal credits. 2. Business credits 3. Refundable credits.
The kiddie tax will NOT apply to a child whose net unearned income is equal to or less than $_____________
2200
The AMT is calculated by multiplying the first $194,800 of the AMT base by _____________% and multiplying the AMT base in excess of $194,800 by ______________%. Long-term capital gains are taxed at ______________ rates for alternative minimum tax.
26 28 lower
In order to meet the safe harbor provisions, a taxpayer, with an adjusted gross income of $120,000 in the prior year, must have withholdings and estimated tax payments that equal or exceed which of the following measures?
100% of their previous year tax liability. 90% of their current tax liability
Charlie's regular tax liability is $43,695. His tentative minimum tax is $58,304. He doesn't have any tax credits. What is the amount of Charlie's alternative minimum tax (AMT) and how much will he actually pay in tax for the current year?
AMT: $14,609; Tax: $58,304
How are the employees' portions of FICA tax liabilities paid?
Employers withhold the amounts from the employees' paychecks.
There is one tax infraction that incurs a penalty calculated as 15% of the amount of tax owed per month with a maximum penalty of 75%. What violation incurs this level of penalty?
Fraudulent failure to file.
How do employees deduct their unreimbursed business expenses?
From AGI as miscellaneous itemized deductions subject to the 2% of AGI floor.
Which of the following taxpayers can use the tax rate schedule to calculate the tax on all of his or her taxable income without having to perform additional calculations to determine the tax on varying types of income?
Harold received income from a partnership where he works full time and interest from corporate bonds.
Shonda is currently in the 28% tax bracket. She reports a $400 tax credit. How will this credit affect her tax liability?
Her tax liability will decrease by $400.
When a married couple's tax liability is smaller using the married filing jointly status than it would have been if both individuals were unmarried and filed as a single, the difference int eh tax liability is called a(n)
Marriage benefit
How does the kiddie tax reduce the incentive to shift income from parents to children?
It mandates that children must pay tax on most unearned income at the higher rate used by trusts and estates.
Alex and Alecia used the married filing jointly filing status when they prepared their tax return. During the current year, their joint tax liability totaled $9,300. If they were not married and had both filed as single, Alex would have had a $3,900 tax liability, and Alecia would have had a $5,000 tax liability. What is the term used for the $400 difference in their tax liability?
Marriage penalty
Which of the following individuals is eligible to receive (or qualify their parents to receive) the American Opportunity Credit?
Kim is single, works full time, and goes to college half time for her second year at LSU. She provides over half of her own support.
Choose the following statement that is INCORRECT regarding Social Security and Medicare taxes?
Low income taxpayers are exempt from paying social security and medicare taxes on their wages.
Which of the following statements BEST describes the treatment of medical expenses for alternative minimum taxable income?
Medical expenses are deductible for AMTI, subject to a 10% of AGI floor for all taxpayers regardless of age.
For years after 2012, a 3.8% tax is imposed on the ____________________________ of certain taxpayers when modified adjusted gross income exceeds a certain threshold.
Net investment income
Business tax credits are __________credits, but may be carried back one year or forward for _________years.
Nonrefundable;twenty
Match the term on the left with the best fitting definition on the right.
Provides basic pension coverage for the retired and disabled Helps pay medical costs for qualifying individuals Includes the employer and employee portion of FICA taxes
Which of the following types of income may be taxed at rates lower than the tax rate schedule would dictate?
Qualified dividend income Long term capital gain income
In order to qualify for the child tax credit, the child must meet the requirements to be a(n)____________ ______________and be under age______at the end of the year.
Qualifying child;17
Self employed persons pay FICA taxes on the _____________________earnings from their business while employees pay FICA taxes on __________.
Self employment;earnings
Sole proprietors and independent contractors pay _______________ taxes on their net profit which represents both the employee and employer component of FICA and Medicare.
Self-employment
How is the amount of the alternative minimum tax determined?
The amount of AMT is the excess of the AMT base multiplied by the AMT rate over the regular tax liability.
Employees pay _________________ _________________taxes on their salary, wages, and other compensation at a current rate of 6.2%.
Social security
The ___________ ____________tax is intended to provide basic pension coverage for the retired and disabled, and the_________________tax helps medical costs for qualifying individuals.
Social security;medicare
In general, the gross income threshold that requires an individual to file a tax return in the sum of the _________ _________ amount for the taxpayers filing status plus the ___________ -____________amount.
Standard deduction;personal exemption.
True or false: The AMT exemption amount phases out for higher income taxpayers resulting in a higher alternative minimum tax base for those individuals.
TRUE
Each separate range of income subject to a different tax rate is referred to as an
Tax bracket
What qualifies for the American Opportunity Credit?
Textbooks Required fees Tuition
For tax calculation purposes, the kiddie tax base is the child's net unearned income. The net unearned income is defined as:
The lesser of (1) the child's gross unearned income minus $2,200 or (2) the child's taxable income
When is the standard deduction NOT added back to regular taxable income to arrive at alternative minimum taxable income?
The standard deduction is not added back when the taxpayer deducted itemized deductions rather than the standard deduction.
Taxpayers may be subject to a(n) ___________ ___________ if they have taxes due and have NOT met the safe harbor provisions.
Underpayment penalty
The kiddie tax provision taxes a certain amount of a child's________________income at the parents rate
Unearned income
Which one of the following types of income is NOT part of net investment income for purposes of calculating the Net Investment Income tax?
Wage income
Darcy received $2000 in qualified dividends this year. She is in the 15% marginal tax bracket and the entire $2000 would have been taxed at 15% if ti were ordinary income. What tax rate will be assessed on the $2000, since it is a qualified dividend rather than ordinary income?
Zero
The starting point for determining the alternative minimum tax is:
regular taxable income
Sheri's only source of income for the year is a salary of $40,000. She is not married and has three dependent children who are not eligible for the child tax credit. Sheri's tax liability is $1795 before any credits or prepayments are applied. She had $2,000 withheld form her salary. After applying the earned income credit, what is the amount of Sheris refund?
$1,837. 21.06% x (40,000-18110)=4,610. Max credit $6242 -$1632 + 205 overpayment
Chris has taxable income of $123,000. A portion of this income is from capital gains and should receive preferential tax treatment. List the steps below in the order in which they should occur for Chris to be able to determine his overall tax liability.
1. Split taxable income into the portion taxed at preferential rates versus the portion taxed at ordinary rates. 2. Compute the tax separately on each type of income, using the tax rate schedule on the portion taxed at ordinary rates. 3. Add the tax on the income subject to preferential rates to the tax on the income subject to ordinary rates.
Which of the following individuals would NOT be subject to the kiddie tax assuming they have unearned income?
A child who is 19 at year end, a part time student, and claimed as a dependent on his parents' tax return
Which one of the following statements is CORRECT regarding the American opportunity and lifetime learning credits?
Both credits phase out for higher income taxpayers.
Which of the following amounts is NOT added back to regular taxable income to arrive at alternative minimum taxable income?
Capital losses
Choose the deductions that reduce both regular taxable income and AMTI. (Check all that apply.)
Charitable contributions Gambling losses Casualty losses (Presidentially declared disaster area) Home mortgage interest
Which one of the following credits is a tax subsidy designed to help taxpayers provide care for their dependents, so that they can work or look for work?
Child and dependent care credit
Christina's taxable income is $35,000, Charles' is $50,000, and Chris' is $500,000. Each of these taxpayers additionally earned $1,000 of long term capital gain income in 2019. All of the taxpayers file single. Which of the following answers is correct regarding the amount of tax liability assessed on the capital gain?
Chris will pay $200 in tax.
Choose the types of income that qualify as net investment income for the purposes of assessing the Net Investment Income tax. (Check all that apply.)
Dividend income Interest income Income from a trade or business that is a passive activity Long-term capital gains
Choose the types of income that qualify as net investment income for the purposes of assessing the Medicare contributions tax.
Dividend income Long-term capital gains Interest income
What is not acceptable method for treating income taxes paid to foreign countries?
Include the foreign earned income in gross income and deduct the foreign earned income fo AGI.
Which of the following factors suggests that a person is an independent contractor rather than an employee? (Check all that apply.)
Sets her own working hours Could realize a profit or loss from the activities Provides her own tools
Which of the following individuals would NOT be subject to the kiddie tax?
Shelby is a 17 year old, full time student who does NOT provide half of her own support. She has $3000 in babysitting income.
Christina is in the 15% tax bracket, Charles is in the 28% tax bracket, and Chris is in the 39.6% tax bracket. Each of these taxpayers earned $1,000 of long term capital gain income in the current year. Which of the following answers is correct regarding the amount of tax to be paid?
Since Chris in the 39.6% bracket, the preferential capital gains rate is 20%.
How can taxpayers protect themselves from incurring an underpayment penalty?
Taxpayers should meet one of the safe harbor provisions for estimated tax payment requirements.
Pay as you go basis
The basis for requiring employers to withhold taxes from employees' pay and requiring periodic estimated tax payments from taxpayers with income not subject to withholding.
Kiddie tax
The child is under 18 years old at year-end The child is 18 at year end but her earned income does not exceed half of her support. The child is over age 18 but under age 24 at year end, is a full time student during the year, and her earned income does not exceed half of her support (excluding scholarships). The kiddie tax does not apply unless the child has unearned income in excess of $2100.
Which of the following criteria are characteristic of eligible persons for the child tax credit? (Check all that apply.)
The individual must be under age 17 at year-end. The individual must be a qualifying child for dependent purposes. The credit is subject to phase-out based on taxpayer's AGI.
Other than the safe harbor provisions, what other tax due circumstances will prevent a taxpayer form incurring an underpayment penalty?
The taxpayer had no tax liability in the previous year. The taxpayers tax payable after subtracting withheld taxes is less than $1,000
During the current year, Barry (single taxpayer) has taxable income of $60,000. Of that amount, $10,000 is long-term capital gain. How will Barry calculate the tax on his income?
Use the tax rate schedule to calculate tax on $50,000; multiply the capital gain income of $10,000 by 15%; then add the two amounts together.
To help ensure that low-income taxpayers are NOT required to pay the alternative minimum tax, AMTI is reduced by a(n) ____________________ amount to determine the alternative minimum tax base.
exemption