Chapter 8

Employees __________ deduct their unreimbursed business expenses , while self-employed individuals can deduct their business expenses _______ AGI.

cannot, for

The ________ _________ credit is available for individuals in any course of instruction to acquire or improve their job skills.

lifetime, learning

The ________ ________ credit is a maximum credit of $2,000 per taxpayer, while the ______ _______ credit is a maximum credit of $2,500 per qualifying student.

lifetime, learning, American, opportunity

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 single, the difference in the tax liability is called a(n) _________ _________

marriage benefit

Employees pay _________ taxes on their salary, wages, and other compensation at a current rate of 1.45% (2.35% for higher income taxpayers).

medicare

The kiddie tax provision taxes a certain amount of a child's net ___________ income at the higher rates normally used for trusts and estates

unearned

The income tax is paid on a pay-as-you-go basis through _________ or ________ tax payments.

withholdings, estimated

Darcy received $2,000 in qualified dividends this year and has ordinary income of $20,000. Assuming Darcy has no other taxable income, the tax rate will be assessed on the $2,000 dividend is ___%

0

The lifetime learning credit is equal to ___ % of eligible expenses up to an annual maximum of ____________ of eligible expenses in one year.

20, 10,000

Allie's only source of income for the year is wages from a part-time job of $9,000. She is not married and has one dependent child. Allie has no tax liability and she had no income tax withheld by her employer. After applying the earned income credit, what is the amount of Allie's refund? a. $3,060 b. $529 c. $3,526 d. $0

A

How are the employees' portions of FICA tax liabilities paid? a. Employers withhold the amounts from the employees' paychecks. b. Employees do NOT pay FICA tax. The employer is responsible for paying the liability. c. Employees add the FICA tax to their income tax and pay them when filing their income tax return. d. Employees must make estimated payments each quarter.

A

How does the kiddie tax reduce the incentive to shift income from parents to children? a. It mandates that children must pay tax on most unearned income at the higher rate used by trusts and estates. b. It makes shifting income to children illegal. c. It mandates that children must pay tax on earned income at the higher rate used by trusts and estates. d. It disallows any preferential rates on qualified dividends or long-term capital gain income for dependent children.

A

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 is known as the: a. pay-as-you-go basis. b. revenue recognition basis. c. cash basis. d. wherewithal-to-pay basis.

A

When is an individual required to file a tax return? a. Individuals must file a tax return when their gross income exceeds certain amounts based on their filing status and age. b. All individuals must file an income tax return when they reach the required age. c. Individuals must file a tax return when they are no longer claimed as dependents. d. Individuals must file a tax return when they have income tax withheld from their wages.

A

Which of the following individuals would NOT be subject to the kiddie tax? a. Shelby is a 17 year old, full time student who does NOT provide half of her own support. She has $3,000 in babysitting income. b. Zach is a 16 year old, full time student who does NOT provide half of his own support. He has $3,000 in capital gain income. c. Tyler is an 18 year old, part time student who does NOT provide half of his own support. He has $3,000 in interest income. d. Tori is a 20 year old, full-time student who does NOT provide half of her own support. She has $3,000 in dividend income this year.

A

Which of the following is NOT a criteria for the American Opportunity credit? a. The individual must be a full time student. b. To claim the credit in 2019, eligible expenses must be paid for an academic period beginning in 2019 or by March of 2020. c. The student must be in the first four years of postsecondary education. d. The student must be enrolled in a qualified postsecondary education institution.

A

Which of the following expenses qualify for the American Opportunity Credit? (Check all that apply.) a. Required fees b. Tuition c. Textbooks d. Parking fees e. Meal plans f. Housing

A, B, C

Which of the following types of income may be taxed at rates lower than the tax rate schedule would dictate: (select all that apply) a. Qualified dividend income b. Partnership income when the taxpayer is a limited partner c. Long-term capital gain income d. Unearned income when the taxpayer is a dependent child

A, C

The child and dependent care credit is available for expenses paid to provide care for which of the following individuals? (Check all that apply.) a. A dependent under age 13 b. A dependent who is a qualifying child regardless of age c. A dependent who is physically or mentally incapable of caring for himself d. A spouse who is physically or mentally incapable of caring for himself e. A dependent, elderly parent who can take care of herself, but is low-income and does not provide over half of her own support.

A, C, D

Which of the following expenses typically qualify for the Lifetime Learning Credit? (Check all that apply.) a. Fees for continuing professional education required for job b. Meal plans on campus c. Housing in a university dormitory d. Tuition for full-time enrollment at a university e. Tuition for graduate courses f. Textbooks required for courses at a university

A, D, E

Individual tax returns are due on _______ ________ for calendar-year individuals.

April, 15th

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? a. Joint penalty b. Marriage penalty c. Joint benefit d. Marriage benefit

B

Baxter and Bailey use the married filing jointly filing status on their tax return.They incurred $4,000 in undergraduate tuition for Bailey to finish her degree. She was in her fifth year and graduated in May. Baxter started graduate school in August. They spent $8,000 in tuition for his education. What is the amount of their lifetime learning credit? a. $2,400 b. $2,000 c. $12,000 d. $10,000

B

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? a. Use the tax rate schedule to calculate tax on $50,000; multiply the capital gain income of $10,000 by 15%; then subtract the two amounts. b. 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. c. Use the tax rate schedule to calculate tax on $60,000; multiply the capital gain income of $10,000 by 15%; then add the two amounts together. d. Use the tax rate schedule to calculate tax on $60,000; multiply the capital gain income of $10,000 by 15%; then subtract the two amounts.

B

How do self-employed independent contractors deduct their business expenses? a. From AGI against all forms of income b. For AGI against business income c. From AGI against business income d. For AGI against all forms of income

B

Steve's only source of income for the year is a salary of $24,000. He is not married and has one dependent child who is eligible for the child tax credit. Steve's tax liability is $570 before any credits or prepayments are applied. He had $500 withheld from his salary. After applying the earned income credit, what is Steve's refund or balance due? a. $ 70 balance due b. $2,662 refund c. $3,456 refund d. $0 balance due/refund

B

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? a. Tax on net investment income b. Alternative minimum tax c. Kiddie tax d. Earned income credit e. Self-employment tax

B

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? a. Child tax credit b. Child and dependent care credit c. Earned income credit d. Caregiving assistance credit

B

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. a. Compute the tax separately on each type of income, using the tax rate schedule on the portion taxed at ordinary rates. b. Split taxable income into the portion taxed at preferential rates versus the portion taxed at ordinary rates. c. Add the tax on the income subject to preferential rates to the tax on the income subject to ordinary rates.

B, A, C

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.) a. Excluded gain on sale of a personal residence b. Interest income c. Dividend income d. Self-employment income e. Income from a trade or business that is a passive activity f. Distributions from qualified retirement plans g. Tax-exempt interest income

B, C, E

Individual taxpayers are required to file a tax return only if their gross income exceeds certain thresholds which vary based on: (Check all that apply.) a. Prior year tax liability b. Filing status c. Amount of earned income d. Age

B, D

How are the employees' portions of FICA tax liabilities paid? a. Employees do NOT pay FICA tax. The employer is responsible for paying the liability. b. Employees must make estimated payments each quarter. c. Employers withhold the amounts from the employees' paychecks. d. Employees add the FICA tax to their income tax and pay them when filing their income tax return.

C

What is the amount of the child tax credit? a. A maximum of $1,000 per tax return b. A maximum of $2,000 per tax return c. A maximum of $2,000 for each qualifying child d. A maximum of $1,000 per qualifying child

C

Which of the following individuals would NOT be subject to the kiddie tax assuming they have unearned income? a. A child over age 18, but under age 24, at year end and a full time student whose earned income does not exceed half of her support b. A child who is 18 at year end, a part time student whose earned income does not exceed half of her support c. A child who is 19 at year end, a part time student, and claimed as a dependent on his parents' tax return d. A child under 18 years old at year end

C

Which one of the following types of income is NOT part of net investment income for purposes of calculating the Net Investment Income tax? a. Interest income b. Annuity income c. Veteran's benefits d. Passive activity income

C

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 as single. Which of the following answers is correct regarding the amount of tax liability assessed on the capital gain? A. Christina will pay $100. B. Each of the taxpayers will pay $150 in tax. C. Charlie will pay $280 in tax. D. Chris will pay $200 in tax.

D

Shonda is currently in the 24 percent tax bracket. She reports a $400 tax credit. How will this credit affect her tax liability? A. Her tax liability will decrease by $96. B. Her tax liability will increase by $400. C. Her tax liability will increase by $96. D. Her tax liability will decrease by $400.

D

When is an individual required to file a tax return? a. Individuals must file a tax return when they are no longer claimed as dependents. b. Individuals must file a tax return when they have income tax withheld from their wages. c. All individuals must file an income tax return when they reach the required age. d. Individuals must file a tax return when their gross income exceeds certain amounts based on their filing status and age.

D

Which of the following individuals is eligible to receive (or qualify their parents to receive) the American Opportunity Credit? a. Kris is a fifth-year senior at IU. She is 23, a full time student, and a dependent of her parents. b. Khloe is married and in her third year as a full time student at UCLA. She uses the married filing separately filing status on her tax return. c. Kourtney is a graduate student at NYU, but is still a dependent of her parents. d. 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.

D

Which of the following types of income may be taxed at rates higher than the tax rate schedule would dictate? a. Qualified dividend income b. Partnership income when the taxpayer is a limited partner c. Long-term capital gain income d. Unearned income when the taxpayer is a dependent child

D

Which of the following expenses will qualify for the American Opportunity Credit in the current year? (Check all that apply.) a. Housing fees are paid in the current year. b. Parking permit is paid in the current year. c. Tuition is billed during December of the current year for the term beginning in January. Payment is made in January. d. Tuition for a term beginning in January is paid in December of the current year. e. Textbooks and required lab fees are paid in the current year.

D, E

Which one of the following statements is CORRECT regarding the American opportunity and lifetime learning credits? a. The AOC is taken on a per taxpayer basis and the LLC is taken on a per student basis. b. The qualifying expenses are the same for both education credits. c. A taxpayer can take both credits for the same student if qualifying expenses are sufficient. d. Both credits are nonrefundable. e. Both credits phase out for higher income taxpayers.

E

T/F: Self-employed taxpayers pay the employee portion of the FICA tax burden through self-employment taxes, but they are exempt from paying the employer portion.

False

T/F: The term tax bracket refers to the average tax rate that is applied to an individual's taxable income. True

False

Employees pay _______ ________ taxes on their salary, wages, and other compensation at a current rate of 6.2%.

Social, security

Each separate range of income subject to a different tax rate is referred to as a(n) ______ ________

Tax bracket

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 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

In order to qualify for the maximum 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

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

Individual taxpayers who are unable to file by the due date can request an automatic _______ - ______ extension to file.

six, month

The __________ ___________ tax is intended to provide basic pension coverage for the retired and disabled, and the __________ tax helps pay medical costs for qualifying individuals.

social, security, medicare