Chapter 8

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 (1)%.

1. 0

Individual tax returns are due on (1) (2) for calendar-year individuals.

1. April 2. 15

When are individual tax returns typically due for calendar-year taxpayers?

April 15

Which of the following amounts is NOT added back to regular taxable income to arrive at alternative minimum taxable income?

Capital losses

Select all that apply 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

How are the employees' portions of FICA tax liabilities paid?

Employers withhold the amounts from the employees' paychecks.

True or false: A six-month extension will allow the taxpayer to extend the tax payment date without penalty.

False

Shonda is currently in the 24 percent tax bracket. She reports a $400 tax credit. How will this credit affect her tax liability?

Her tax liability will decrease by $400.

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.

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

True or false: The lifetime learning credit is available for any course of instruction and is NOT limited to courses taken at postsecondary educational institutions.

True

Which one of the following types of income is NOT part of net investment income for purposes of calculating the Net Investment Income tax?

Veteran's benefits

True or false: Personal nonrefundable credits should be applied to a taxpayer's tax liability before other types of credits. After personal nonrefundable credits, any business credits should be used followed by all personal refundable credits.

true

List the order in which taxpayers with multiple credits should apply them against their gross tax.

1: Business credits 2: Refundable credits 3: Personal nonrefundable credits

Select all that apply Choose the deductions that reduce both regular taxable income and AMTI. (Check all that apply.)

Home mortgage interest Charitable contributions Gambling losses

Select all that apply Which of the following types of income may be taxed at rates lower than the tax rate schedule would dictate? (Check all that apply.)

Long-term capital gain income Qualified dividend income

Select all that apply Other than the safe harbor provisions, what other tax due circumstances will prevent a taxpayer from incurring an underpayment payment penalty? (Check all that apply.)

The taxpayer's tax payable after subtracting withheld taxes is less than $1,000. The taxpayer had no tax liability in the previous year.

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. What is the amount of Allie's earned income credit?

$3,060

The (1) (2) tax is intended to provide basic pension coverage for the retired and disabled, and the (3) tax helps pay medical costs for qualifying individuals.

1. social 2. security 3. medicare

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 (1) (2) for regular tax purposes, but is (3) for AMTI.

1. tax 2. exempt 3. taxable

The income tax is paid on a pay-as-you-go basis through (1) or (2) tax payments.

1. withholdings 2. estimated

Select all that apply 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? (Check all that apply.)

90% of their current tax liability 100% of their previous year tax liability

Select all that apply 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.)

Filing status Age

When is an individual required to file a tax return?

Individuals must file a tax return when their gross income exceeds certain amounts based on their filing status and age.

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.

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.

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

Select all that apply Which of the following expenses qualify for the American Opportunity Credit? (Check all that apply.)

Tuition Textbooks Required fees

Select all that apply Which of the following expenses will qualify for the American Opportunity Credit in the current year? (Check all that apply.)

Tuition for a term beginning in January is paid in December of the current year. Textbooks and required lab fees are paid in the current year.

Select all that apply Which of the following expenses typically qualify for the Lifetime Learning Credit? (Check all that apply.)

Tuition for full-time enrollment at a university Tuition for graduate courses Fees for continuing professional education required for job

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:

pay-as-you-go basis.

Taxpayers with a(n) (1) tax liability in the previous year or whose tax payable after subtracting their withholding amounts is less than $(2) are NOT subject to underpayment penalties.

1. 0 2. 1,000

The lifetime learning credit is equal to (1)% of eligible expenses up to an annual maximum of (2) of eligible expenses in one year.

1. 20 2. 10000

Each separate range of income subject to a different tax rate is referred to as a(n) (1) (2).

1. tax 2. bracket

Taxpayers may be subject to a(n) (1) (2) if they have taxes due and have NOT met the safe harbor provisions.

1. underpayment 2. penalty

The kiddie tax provision taxes a certain amount of a child's net (1) income at the higher rates normally used for trusts and estates.

1. unearned

Match the tax rate with the corresponding type of tax.

12.4%: Social Security Tax rate 2.9%: Medicare Tax Rate on the tax base up to $200,000 (for single taxpayers). 3.8%: Medicare Tax Rate on the tax base above $200,000 (for single taxpayers). 15%: This rate does not apply to either Social Security or Medicare taxes.

How do self-employed independent contractors deduct their business expenses?

For AGI against business income

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

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.

The starting point for determining the alternative minimum tax is:

regular taxable income

How are business tax credits, except for the foreign tax credit, handled when they exceed the taxpayer's gross tax for the year?

The credits are carried back one year and forward 20 years.

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: 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

Which of the following types of income may be taxed at rates higher than the tax rate schedule would dictate?

Unearned income when the taxpayer is a dependent child

The tax provision that reduces parents' ability to shift unearned income to children is called the (1) (2).

1. kiddie 2. tax

The (1) (2) credit is available for individuals in any course of instruction to acquire or improve their job skills.

1. lifetime 2. learning

The (1) and (2) (3) credit helps taxpayers pay the cost of providing care for dependents, so that taxpayers can work.

1. child 2. dependent 3. care

True or false: The term tax bracket refers to the average tax rate that is applied to an individual's taxable income.

False

True or false: There is no underpayment penalty assessed if the taxpayer chooses to pay nothing throughout the year, but sends in just enough of an estimated payment at year-end to meet the safe harbor rules.

False

Employees pay (1) (2) taxes on their salary, wages, and other compensation at a current rate of 6.2%.

1. social 2. security

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?

$2,000

Bruce is a part-time student (more than half time) enrolled at a qualified postsecondary educational institution. He files as a single taxpayer and cannot be claimed as a dependent on any other tax return. He paid $3,000 in qualified education expenses during the year. What is the amount of his American Opportunity Credit?

$2,250

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. What is Steve's refund or balance due after applying the earned income credit but before considering the child tax credit?

$2,662 refund

Tim and Sandy have a ten-year-old daughter. During the current year, they spent $2,000 on childcare expenses at a daycare center and paid $1,500 in childcare expenses to Sandy's sister. Their child and dependent care credit will be calculated based on a maximum limit of $(1) in childcare expenses.

1. 3000

The late filing penalty equals (1)% of the amount of tax owed for each month that the tax return is late, with a maximum penalty of (2)%.

1. 5 2. 25

The (1) (2) tax was implemented to make sure that taxpayers who were generating income pay some income tax, rather than disproportionately benefiting from tax advantaged items.

1. alternative 2. minimum

Employees (1) deduct their unreimbursed business expenses , while self-employed individuals can deduct their business expenses (2) AGI.

1. cannot 2. for

A tax (1) reduces a taxpayer's tax liability dollar for dollar. A tax (2) reduces taxable income, resulting in a tax savings that is dependent on the taxpayer's marginal tax bracket.

1. credit 2. deduction

To help ensure that low-income taxpayers are NOT required to pay the alternative minimum tax, AMTI is reduced by a(n) (1) amount to determine the alternative minimum tax base.

1. exemption

Self-employed taxpayers may deduct the employer portion of their self-employment taxes (1) (for/from) AGI.

1. for

The (1) (2) credit is claimed by taxpayers for the income taxes they pay in other countries. This credit may be restricted if the effective tax rate on the international earnings is (3) (higher/lower) than the effective U.S. tax rate on the international earnings.

1. foreign 2. tax 3. higher

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) (1) (2).

1. marriage 2. benefit

Employees pay (1) taxes on their salary, wages, and other compensation at a current rate of 1.45% (2.35% for higher income taxpayers).

1. medicare

Sole proprietors and independent contractors pay (1) - (2) taxes on their net profit which represents both the employee and employer component of FICA and Medicare.

1. self 2. employment

Individual taxpayers who are unable to file by the due date can request an automatic (1)-(2) extension to file.

1. six 2. month

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

What is the amount of the child tax credit?

A maximum of $2,000 for each qualifying child

Select all that apply 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 spouse who is physically or mentally incapable of caring for himself A dependent who is physically or mentally incapable of caring for himself A dependent under age 13

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

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 as 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.

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.

Rhonda is currently in the 12 percent tax bracket. She reports a $400 tax deduction. How will this deduction affect her tax liability?

Her tax liability will decrease by $48.

Select all that apply Which of the following are acceptable methods for treating income taxes paid to foreign countries? (Check all that apply.)

Include foreign income in gross income and claim a foreign tax credit for the foreign taxes paid. Include the foreign income in gross income and deduct the foreign taxes paid as itemized deductions. Exclude the foreign earned income from gross income.

Which of the following is NOT an acceptable method for treating income taxes paid to foreign countries?

Include the foreign earned income in gross income and deduct the foreign earned income for AGI.

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 $3,000 in babysitting income.

Match the term on the left with the best fitting definition on the right.

Social Security Tax: Provides basic pension coverage for the retired and disabled Medicare Tax: Helps pay medical costs for qualifying individuals Self employment tax: Includes the employer and employee portion of FICA taxes

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.

Step 1: Split taxable income into the portion taxed at preferential rates versus the portion taxed at ordinary rates. Step 2: Compute the tax separately on each type of income, using the tax rate schedule on the portion taxed at ordinary rates. Step 3: Add the tax on the income subject to preferential rates to the tax on the income subject to ordinary rates.

How can taxpayers protect themselves from incurring an underpayment penalty?

Taxpayers should meet one of the safe harbor provisions for estimated tax payment requirements.

Which of the following statements is INCORRECT regarding the child and dependent care credit?

The credit completely phases out for high income taxpayers.

Which of the following choices is NOT characteristic of the foreign tax credit?

The credit is refundable to the taxpayer if it is in excess of the tax liability after deducting other credits.

Select all that apply Which of the following statements regarding the child tax credit are true? (Check all that apply.)

The individual claimed must be under age 17 at year-end. To get the maximum credit, the individual claimed must be a qualifying child.

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.

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.

What type of penalty will be assessed on a taxpayer who pays her taxes due after the due date of the return?

late payment

Business tax credits are _______ credits, but may be carried back one year or forward for ______ years.

nonrefundable; twenty