Tax ch 8
100) Which of the following statements regarding the child and dependent care credit is true? A) A married couple must file jointly to claim the credit. B) A taxpayer may claim a credit for dependent care expenses for a dependent who is 14 years old or older but only if the dependent lives in the taxpayer's home for the entire year. C) All else equal, a taxpayer making qualifying expenditures for three children may claim more dependent care credit than a taxpayer making (the same amount of) qualifying expenditures for two children. D) None of these statements are true.
A Explanation: Married taxpayers must file jointly, and the credit is based on the income of the lesser-earning spouse.
119) Why would a taxpayer file a tax return if not required to do so? A) to remain in favor with the IRS B) to claim a refund of taxes paid C) all taxpayers are required to file returns D) in order to claim the standard deduction
B
88) Which of the following best describes the manner in which self-employed taxpayers may deduct self-employment taxes? A) Deduct employer portion from AGI. B) Deduct entire amount from AGI. C) Deduct employer portion for AGI. D) Deduct entire amount for AGI. E) No deduction.
C Explanation: This is a for AGI deduction, as it is considered a cost of doing business. The employer portion is deductible.
106) Which of the following statements regarding credits is correct? A) Business expenses are generally refundable credits. B) Business credits that are generated in one year but are not utilized in that year expire. C) Business credits that are generated in one year but are not utilized in that year may be carried forward to future years but not back to a prior year. D) Business credits that are generated in one year but are not utilized in that year may be carried back to the previous year and then forward to future years.
D Explanation: Excess business credits are carried back and then forward.
107) If there is not enough gross tax liability to use the foreign tax credit, ________. A) it expires unused B) it is carried back two years or forward 20 years C) it is carried back three years or forward five years D) it is carried back one year or forward 10 years
D Explanation: The foreign tax credit can be carried to years within this time period when the taxpayer has sufficient gross tax liability to use it.
84) Which of the following suggests that a working taxpayer is an independent contractor rather than an employee? A) Works for more than one firm B) May realize a loss from business activities C) Sets own working hours D) Works somewhere other than on employer premises E) All of these suggest independent contractor status
E Explanation: All factors suggest the worker is an independent contractor.
16) For alternative minimum tax purposes, taxpayers are required to add back the regular tax standard deduction amount for their filing status whether or not they itemized deductions for regular tax purposes.
FALSE
17) For alternative minimum tax purposes, taxpayers are allowed to deduct state income taxes but are not allowed to deduct charitable contributions.
FALSE
118) Taxpayers are not required to file a tax return unless their gross income passes a certain threshold. This threshold is generally the ________. A) applicable standard deduction amount B) AMT exemption amount C) twice the applicable standard deduction amount D) applicable standard deduction amount plus the personal exemption amount
A
81) Baker is single and earned $225,000 of salary as an employee in 2019. How much should his employer have withheld from his paycheck for FICA taxes? (Round your answer to the nearest whole dollar amount.) A) $11,727 B) $11,502 C) $10,879 D) $17,213
A Explanation: ($132,900 × 0.062) + ($200,000 × 0.0145) + ($25,000 × 0.0235)
74) Persephone has a regular tax liability of $12,475 and a tentative minimum tax of $11,500. Given just this information, what is her alternative minimum tax liability for the year? A) $0 B) $11,500 C) $975 D) $12,475
A Explanation: Because Persephone's regular tax liability exceeds the tentative minimum tax, she does not owe any alternative minimum tax.
62) The Olympians have three children. The kiddie tax applies to unearned income received by which of the following children? A) Poseidon is a 20-year-old full-time student who does not support himself B) Demeter is a 23-year-old full-time student who supports herself with a job at a grocery store C) Zeus is 20 years old and not a student D) Demeter is a 23-year-old full-time student who supports herself with a job at a grocery store and Zeus is 20 years old and not a student E) None of the choices are correct
A Explanation: Because Poseidon is under the age of 24, is a full-time student, and does not support himself, his income is subject to the kiddie tax.
112) Sheryl's AGI is $250,000. Her current tax liability is $52,068. Last year, her tax liability was $48,722. She will not owe underpayment penalties if her total estimated tax payments are at least which of the following (rounded) amounts? (Assume she makes the required payments each quarter.) A) $46,861 B) $48,722 C) $51,547 D) $53,594
A Explanation: Because Sheryl's AGI is over $150,000, her estimated payments must be either 90 percent of her current tax liability, which is $46,861, or 110 percent of her previous year's tax liability of $53,594.
85) Which of the following statements best describes the deductions independent contractors may claim for valid business expenses? A) for AGI deductions B) from AGI deductions C) from AGI deductions limited to income from the business activities D) for AGI deductions limited to income from the business activities
A Explanation: Independent contractors deduct expenses as for AGI deductions, unlike employees, who are unable to deduct employee business expenses.
72) Which of the following items is not added back to regular taxable income in computing alternative minimum taxable income? A) Home mortgage interest expense B) Real property taxes C) Tax-exempt interest from a private activity bond issued in 2007 D) State income taxes
A Explanation: Interest expense on a home mortgage is deductible for AMT and so is not added back to regular taxable income.
122) Which of the following taxpayers (all age 40) is/are required to file a return? Taxpayer Filing Status Gross Income Jenny and Jim Married Filing Jointly $ 26,700 Allen Single $ 10,300 Timmy Head of Household $ 15,000 A) Jenny and Jim B) Allen C) Timmy D) None of the choices are correct
A Explanation: Jenny and Jim have a gross income in excess of the standard deduction for their filing status ($24,400).
99) Kaelyn's mother, Judy, looks after Kaelyn's four-year-old twins so Kaelyn can go to work (she drops off and picks up the twins from Judy's home every day). Since Judy is a relative, Kaelyn made sure, for tax purposes, to pay her mother the going rate for child care ($6,300 for the year). What is the amount of Kaelyn's child and dependent care credit if her AGI for the year was $36,000? (Exhibit 8-9) A) $1,440 B) $2,100 C) $6,000 D) $0
A Explanation: Judy is not a dependent relative of Kaelyn, so the expenditures are qualified up to $6,000 (for two qualifying persons). The applicable percentage is 24 percent. So, the allowable credit is $1,440 ($6,000 × 24%).
70) The computation of the alternative minimum tax base begins with regular taxable income. Which of the following is not part of the formula for computing the alternative minimum tax base? A) Subtract state income taxes paid B) Add the standard deduction amount if used for regular tax C) Subtract the AMT exemption amount (if any) D) Add back tax-exempt interest from a private activity bond not issued in 2009 or 2010
A Explanation: State income taxes are added back rather than subtracted.
93) Which of the following statements regarding the child tax credit is false? A) The child for whom the credit is claimed must be under the age of 15 at the end of the year B) The credit is subject to phase-out based on the taxpayer's AGI C) The full credit for a child who qualifies is $2,000 D) The child for whom the full credit is claimed must meet the definition of a qualifying child
A Explanation: The child must be under age 17 at the end of the year.
110) Which of the following represents the correct order in which credits are applied to gross tax liability (from first to last)? A) Nonrefundable personal, business, refundable B) Business, nonrefundable personal, refundable C) Refundable, nonrefundable personal, business D) Refundable, business, nonrefundable personal
A Explanation: This order is taxpayer-favorable.
54) Linda is a qualifying widow in 2019. In 2019, she reports $80,000 of taxable income (all ordinary). What is her gross tax liability using the tax rate schedules? (Tax rate schedules.) A) $9,317 B) $12,038 C) $13,459 D) $15,893
A Explanation: Using the married filing jointly or qualifying widow(er) tax rate schedule, the tax is $9,086 +
71) In 2019, Maia (who files as a head of household) reported regular taxable income of $115,000. She itemized her deductions, deducting $8,000 in charitable contributions and $3,000 in state income taxes. What is Maia's alternative minimum taxable income? A) $115,000 B) $118,000 C) $123,000 D) $126,000
B Explanation: $118,000 = $115,000 + $3,000.
60) Angelena files as a head of household. In 2019, she reported $53,450 of taxable income, including a $10,000 qualified dividend. What is her gross tax liability, rounded to the nearest whole dollar amount? (Use the Tax rate schedules, long-term capital gains tax brackets.) A) $6,137 B) $5,042 C) $4,937 D) $6,437
B Explanation: $43,450 is taxed at ordinary rates, $9,300 is taxed at 0 percent, and $700 is taxed at 15 percent.
105) Carolyn has an AGI of $38,000 (all from earned income) and two qualifying children and is filing as a head of household. What amount of earned income credit is she entitled to? (Exhibit 8-10) A) $0 B) $1,833 C) $3,526 D) $3,995 E) $5,828
B Explanation: $5,828 maximum credit minus $3,995 phase-out (($38,000 - $19,030) × 0.2106) = $1,833.
76) Which of the following statements accurately describes the alternative minimum tax rate(s)? A) The top AMT marginal rate is higher than the top regular tax marginal tax rate. B) The AMT rates represent a progressive tax rate structure. C) The AMT rate is the same rate for all taxpayers. D) None of the choices are correct.
B Explanation: AMT rates are 26 percent and 28 percent (higher rate for higher incomes). This represents a progressive tax rate structure.
75) Harmony reports a regular tax liability of $15,000 and tentative minimum tax of $17,000. Given just this information, what is her alternative minimum tax liability for the year? A) $0 B) $2,000 C) $15,000 D) $17,000
B Explanation: Because Harmony's tentative minimum tax exceeds her regular tax, the $2,000 difference is her alternative minimum tax liability for the year.
53) The taxable income levels in the married filing jointly tax rate schedule are ________ those in the married filing separately schedule. A) the same as B) double C) half the amount of D) none of the choices are correct
B Explanation: Because the income levels include the income from two people rather than one, the income levels have been doubled.
57) Stephanie and Mitch are married and they file a joint tax return. Mitch received a slightly higher salary than Stephanie did during the year. They both make very high salaries. Which of the following statements is true? A) Stephanie and Mitch likely pay no tax marriage penalty nor receive a tax marriage benefit. B) Stephanie and Mitch likely pay a tax marriage penalty. C) Stephanie and Mitch likely receive a tax marriage benefit. D) Stephanie and Mitch likely will pay a tax marriage penalty and receive a tax marriage benefit.
B Explanation: Couples earning similarly large amounts of income are likely to pay a marriage penalty.
66) Hestia (age 17) is claimed as a dependent by her parents, Rhea and Chronus. In 2019, Hestia received $1,000 of interest income from a corporate bond that she owns. In addition, she has earned income of $200. What is her taxable income for 2019? A) $0 B) $100 C) $650 D) $1,200
B Explanation: Gross income of $1,200 less the greater of (1) $1,100 or (2) $550 ($200 earned income + $350) is $100.
90) Which of the following statements concerning a comparison between employees and independent contractors is most accurate? A) Employees and independent contractors deduct business expenses as miscellaneous itemized deductions. B) While employees are typically eligible for nontaxable fringe benefits from employers, independent contractors are not. C) Employers are required to withhold either FICA or self-employment taxes from compensation paid to employees and compensation paid to independent contractors. D) Employers typically withhold federal income taxes from compensation paid to employees and to independent contractors.
B Explanation: Nonemployees are ineligible for nontaxable fringe benefits.
103) Which of the following statements regarding the earned income credit is true? A) It is a nonrefundable credit B) It is possible that a taxpayer with more earned income may receive more credit than a taxpayer with less earned income C) A 70-year-old taxpayer with no dependents can qualify for the credit in certain circumstances D) A taxpayer whose only source of income is interest from corporate bonds is eligible for the credit
B Explanation: Over a certain range taxpayers with more earned income will receive more credit than taxpayers with less income.
86) The wage base for which of the following taxes is capped? A) Federal income B) Social Security C) Medicare D) Alternative minimum
B Explanation: Social Security wage base is capped. Remember, the associated benefits are also capped.
82) Hera earned a $175,000 salary in 2019. Her husband, Zeus, earned $100,000 salary in 2019. Hera and Zeus file a joint tax return. How much in FICA taxes will they owe in 2019? A) $14,440 B) $18,652 C) $19,547 D) $4,213
B Explanation: The cap on Social Security taxes applies to each individual taxpayer. Thus, Hera will owe ($132,900 × 6.2% = $8,239.80) and Zeus will owe ($100,000 × 6.2% = $6,200), totaling $14,439.80 in Social Security taxes. Their Medicare tax liability is determined jointly based on their combined salaries of $275,000, as follows: (sum of (a) Medicare tax, $275,000 × 1.45% = $3,987.50 + (b) additional Medicare tax, $25,000 × .9% = $225, which equals $4,212.50). Thus, Hera and Zeus will owe $18,652 in FICA taxes ($14,439.80 Social Security tax + $3,987.50 Medicare tax + $225 additional Medicare tax), rounded.
83) Which of the following statements regarding FICA taxes is true? A) Low-income employees are not required to pay FICA taxes. B) An employee who has two different employers during the year may be entitled to a tax credit for overpaid FICA taxes. C) The maximum amount of Medicare taxes an employee is required to pay is capped each year but the maximum amount of Social Security taxes is not. D) The wage base limit for Social Security taxes depends on the taxpayer's filing status.
B Explanation: The cap on Social Security taxes applies to the taxpayer even if the taxpayer had more than one employer. Employers withhold on the salary they individually pay, so in the aggregate, if the taxpayer earns more than the Social Security wage base limit via multiple jobs, there may be more withheld than the taxpayer is required to pay.
104) Which of the following does not affect the amount of the earned income credit? A) Filing status B) Amount of credit taken in previous years C) Number of qualifying children D) Taxpayer's AGI
B Explanation: The credit is calculated independently of credits claimed in previous years.
97) Which of the following statements regarding the child and dependent care credit is false? A) Taxpayers may claim a credit for only a portion of qualifying dependent care expenditures. B) If a taxpayer's income is too high, she will be ineligible to claim any child and dependent care credit. C) A single taxpayer must have earned income to claim any child and dependent care credit. D) A taxpayer is not eligible to claim the dependent care credit if any dependent relative provides the care.
B Explanation: The dependent care credit is not fully phased out no matter the taxpayer's income level.
98) Trudy is Jocelyn's friend. Trudy looks after Jocelyn's four-year-old son during the day so Jocelyn can go to work. During the year, Jocelyn paid Trudy $4,000 to care for her son. What is the amount of Jocelyn's child and dependent care credit if her AGI for the year was $30,000? (Exhibit 8-9) A) $0 B) $810 C) $1,080 D) $3,000
B Explanation: The maximum expenditure for one child is $3,000. The applicable percentage is 27 percent. So, the allowable credit is $810 ($3,000 × 27%).
123) What is the underpayment penalty rate that taxpayers pay when they underpay their estimated taxes? A) Federal short-term interest rate B) Federal short-term interest rate plus 3 percentage points C) Federal long-term interest rate plus 6 percentage points D) Zero. The government does not pay interest on overpayments
B Explanation: The penalty rate is the federal short-term interest rate plus 3 percentage points.
116) What happens if the taxpayer owes an underpayment penalty, but does not compute it on Form 2210? A) Nothing, unless the taxpayer is audited B) The taxpayer is immediately sent to the Tax Court C) The IRS will compute and assess the penalty D) The penalty is increased by five percentage points
C
124) Which of the following statements regarding late filing penalties is true? A) If a taxpayer fails to file a tax return, the late filing penalty will continue to grow until the taxpayer files the tax return. B) The amount of the late filing penalty is the same for both fraudulent failure to file and nonfraudulent failure to file. C) Taxpayers who owe no tax as of the due date of their tax returns are not subject to late filing penalties even if they file late. D) None of the choices are correct.
C
80) Asteria earned a $25,500 salary as an employee in 2019. How much should her employer have withheld from her paycheck for FICA taxes? (Round your answer to the nearest whole dollar amount.) A) $370 B) $1,581 C) $1,951 D) $3,902
C Explanation: $25,500 × (0.062 + 0.0145)
59) Jamie is single. In 2019, she reported $100,000 of taxable income, including a long-term capital gain of $5,000. What is her gross tax liability, rounded to the nearest whole dollar amount? (Use the Tax rate schedules.) A) $15,000 B) $18,175 C) $17,725 D) $16,975
C Explanation: $95,000 of the taxable income is taxed at the ordinary rates, and $5,000 of the taxable income is taxed at 15 percent.
95) Rhianna and Jay are married filing jointly in 2019. They have six children under age 17 for whom they may claim the child tax credit. Their AGI was $419,400. What amount of child tax credit may they claim on their 2019 tax return? A) $12,000 B) $11,050 C) $11,000 D) $6,000
C Explanation: ($419,400 − $400,000) / 1,000 = 19.4, rounded up to 20. 20 × $50 = $1,000 phase-out. $12,000 − $1,000 = $11,000.
55) Miley, a single taxpayer, plans on reporting $30,475 of taxable income this year (all of her income is from a part-time job). She is considering applying for a second part-time job that would give her an additional $10,000 of taxable income. By how much will the income from the second job increase her tax liability? (Use the Tax rate schedules.) A) $1,000 B) $1,200 C) $1,300 D) $2,400
C Explanation: Based on the single-taxpayer tax rate schedule, of the additional $10,000 of taxable income, $9,000 is taxed at 12 percent (the increase $30,475 to $39,475) and the remaining $1,000 ($40,475 − $39,475) is taxed at 22 percent. To summarize, ($9,000 × 12%) + ($1,000 × 22%) = $1,300.
108) Which of the following tax credits is fully refundable? A) American opportunity credit B) Dependent care credit C) Earned income credit D) None of the choices are correct
C Explanation: Because it is refundable, the earned income credit is sometimes referred to as a negative income tax.
56) Tamra and Jacob are married and they file a joint tax return. Tamra received nearly five times the salary that Jacob received. Which of the following statements is true? A) Tamra and Jacob likely pay no tax marriage penalty nor receive a tax marriage benefit. B) Tamra and Jacob likely pay a tax marriage penalty. C) Tamra and Jacob likely receive a tax marriage benefit. D) Tamra and Jacob likely will pay a tax marriage penalty and receive a tax marriage benefit.
C Explanation: Couples with a primary breadwinner are likely to receive a tax marriage benefit.
91) Which of the following statements concerning tax credits is true? A) The tax benefit a taxpayer receives from a credit depends on the taxpayer's marginal tax rate. B) Refundable tax credits are limited to a taxpayer's gross tax liability. C) Tax credits are generally more beneficial than tax deductions. D) None of these are true statements.
C Explanation: Credits reduce taxes payable dollar for dollar, while deductions reduce taxes payable at the marginal tax rate.
114) Which of the following statements about estimated tax payments and underpayment penalties is true for individual taxpayers? A) Taxpayers who have paid their full tax liability by the original tax return due date are protected from underpayment penalties. B) Taxpayers who have paid their full tax liability by the extended tax return due date are protected from underpayment penalties. C) Taxpayers who have uneven income streams can pay estimated tax quarterly in uneven amounts and not be susceptible to underpayment penalties. D) Taxpayers who have paid their required amount of estimated tax, even though not on time, are protected from underpayment penalties.
C Explanation: Even if the stream of income changes throughout the year, quarterly estimated tax can be paid using rolling percentages of the estimated tax liability for the year.
68) Hester (age 17) is claimed as a dependent by his parents, Charlton and Abigail. In 2019, Hester received $10,000 of qualified dividends, and he received $12,000 from a part-time job. What is his taxable income for 2019? A) $22,000 B) $20,900 C) $9,800 D) $9,650
C Explanation: Gross income of $22,000 less the greater of (1) $1,100 or (2) $12,200 ($12,000 earned income + $350—not to exceed the basic standard deduction amount of $12,200) is $9,800.
67) Montague (age 15) is claimed as a dependent by his parents, Matt and Mary. In 2019, Montague received $5,000 of qualified dividends, and he received $800 from a part-time job. What is his taxable income for 2019? A) $0 B) $3,900 C) $4,650 D) $4,750
C Explanation: Gross income of $5,800 less the greater of (1) $1,100 or (2) $1,150 ($800 earned income + $350) is $4,650.
113) If an employer withholds taxes from an employee, in general, when are these taxes treated as paid to the IRS? A) As withheld B) As the employee requests on his/her W-4 form C) Evenly throughout the year D) On April 15
C Explanation: In general, even if the amount withheld changes throughout the year, the withholdings will be treated as evenly withheld throughout the year.
69) The alternative minimum tax base is typically ________ the regular income tax base. A) smaller than B) about the same as C) larger than D) exactly the same as
C Explanation: In general, the AMT system has a more inclusive approach toward income than does the regular income tax system.
89) For taxpayers who receive both salary as an employee and self-employment income as an independent contractor in the same year, which of the following statements regarding FICA and self-employment taxes is most accurate? A) The Social Security limit applies to the salary but not to the self-employment income. B) The Social Security limit applies to the self-employment income but not to the salary. C) Salary is first applied against the Social Security limit and then self-employment income is applied against the Social Security limit. D) Self-employment income is first applied against the Social Security limit and then salary is applied against the Social Security limit.
C Explanation: Salary is applied against the limit first. This is favorable to the taxpayer because the self-employment income is taxed at a higher rate and not as much of the income will be subject to the Social Security tax as there would be if self-employment income were applied first.
73) Which of the following statements regarding the AMT exemption amounts is not true? A) The amount of the exemption depends on the taxpayer's filing status. B) The exemption amount is completely phased out for high-income taxpayers. C) Taxpayers must choose whether they will claim the exemption or itemize deductions. D) None of the other statements are false (all of the other statements are true).
C Explanation: Taxpayers claim the exemption if their income is not too high. The exemption has nothing to do with itemized deductions.
61) Which of the following is not a barrier to income shifting among family members? A) The assignment of income doctrine B) Net unearned income for children 18 and younger taxed at marginal tax rates for trusts C) Elimination of preferential tax rates (on dividends and long-term capital gains) for dependents D) None of the choices are correct
C Explanation: The assignment of income doctrine and net unearned income for children 18 and younger taxed at marginal tax rates for trusts reduce the benefits of shifting income to family members. However, under the tax laws, preferential rates on dividends or long-term capital gains apply to taxpayers who are dependents of others, so this is not a barrier to income shifting among family members.
125) Which of the following statements regarding late filing penalties and/or late payment penalties is true? A) An extension of time to file the tax return protects a taxpayer from late payment penalties as long as the tax is paid by the extended due date of the return. B) The penalty rate for late filing penalties is less than the penalty rate for late payment penalties. C) If a taxpayer has not paid the full tax liability by the original due date of the return and the taxpayer has not filed a tax return by the due date of the return, the maximum late filing and late payment penalty will be no greater than the late filing penalty by itself. D) None of the choices are correct.
C Explanation: The combined penalty cannot exceed 5 percent per month, which is the amount of the late filing penalty.
102) Which of the following is not true of the lifetime learning credit? A) It is a nonrefundable credit. B) The credit can be claimed by taxpayers who have graduated from college and are taking professional training courses to improve their job skills. C) A taxpayer with multiple dependents can claim a credit for each dependent's qualifying expenses. D) The credit is subject to phase-out based on the taxpayer's AGI.
C Explanation: The credit applies to the taxpayer and not to the taxpayer's dependents.
121) Which of the following is not true of the extension to file an individual tax return? A) It is granted automatically by the IRS if requested B) It must be requested by the original due date of the return C) It extends the due date for the return and associated tax payments beyond the original due date of the tax return D) The extension is for six months beyond the original due date
C Explanation: The extension is for filing the return—the taxes are still due on the original due date.
63) Assuming the kiddie tax applies, what amount of a child's income is subject to the kiddie tax? A) All of the child's income B) All of the unearned income C) The net unearned income D) Taxable income less the standard deduction
C Explanation: The kiddie tax base is the child's net unearned income. Net unearned income is the lesser of (1) the child's gross unearned income minus $2,200 or (2) the child's taxable income (the child is not taxed on more than her taxable income).
96) The amount of expenditures eligible for the child and dependent care credit is the least of three amounts. Which of the following is not one of those amounts? A) The total amount of child and dependent care expenditures for the year B) $3,000 for one qualifying person or $6,000 for two or more qualifying persons C) The dependent's earned income for the year D) The taxpayer's earned income for the year
C Explanation: The reason there is a tax credit is because the taxpayer is taking care of someone who cannot take care of him/herself; thus, "the dependent's earned income for the year" does not make sense.
87) Which of the following statements regarding the self-employment tax is most accurate? A) The self-employment tax base is generally the taxpayer's net income from self-employment (usually net income from Schedule C). B) Taxpayers who report less than $600 of net income from self-employment (usually net income from Schedule C) are not required to pay self-employment taxes. C) The self-employment tax base is net earnings from self employment, which is less than net income from self-employment. D) The Social Security tax limit does not apply to self-employment taxes.
C Explanation: The tax base for self-employment taxes is net earnings from self-employment, which is net income from self-employment multiplied by 92.35 percent.
115) Which of the following statements concerning estimated tax payments and underpayment penalties for individuals is true? A) Whether taxpayers are subject to underpayment penalties is determined on a quarterly basis. B) Due dates for estimated tax payments for a given year are April 15, June 15, September 15 of that year, and January 15 of the next year, unless these dates fall on a weekend or a holiday. C) The amount of penalty depends on the amount of the underpayment among other factors. D) All of these statements are true.
D
111) Cassy reports a gross tax liability of $1,000. She also claims $400 of nonrefundable personal credits, $700 of refundable personal credits, and $200 of business credits. What is Cassy's tax refund or tax liability due after applying the credits? A) $1,000 taxes payable B) $0 refund or taxes payable C) $700 refund D) $300 refund
D Explanation: $1,000 tax liability minus $400 nonrefundable personal credits minus $200 (business credit is nonrefundable) minus $700 refundable credit = $(300). (The last $700 is refundable.)
64) During 2019, Montoya (age 15) received $2,200 from a corporate bond. He also received $600 from a savings account established for him by his parents. Montoya lives with his parents and he is their dependent. What is Montoya's taxable income? A) $0 B) $2,200 C) $2,800 D) $1,700
D Explanation: $2,800 interest income minus $1,100 standard deduction for person claimed as a dependent on another's tax return.
77) Which of the following is typical of taxpayers who are most likely affected by the AMT? A) Pay high mortgage interest B) Pay high state income tax C) Pay high property taxes D) Have very high capital gains
D Explanation: A taxpayer with relatively high capital gains is more likely to be affected by AMT due to an increased AMTI and thus has a decreased AMT exemption amount.
109) How could an individual obtain a business tax credit? A) Through self-employment activities B) Through flow-through from a partnership or S corporation C) By working overseas and obtaining a foreign tax credit D) All of these choices are correct
D Explanation: All of the above represent ways in which an individual could obtain a business tax credit.
92) Which of the following is not one of the general tax credit categories? A) Nonrefundable personal B) Refundable personal C) Business D) Refundable business
D Explanation: Business credits are nonrefundable.
58) Harrison received a qualified dividend. Without knowing any additional facts, which of the following statements is true regarding the rate at which the dividend will be taxed to Harrison? A) The dividend will be taxed at a 15 percent tax rate. B) The dividend will be taxed at a 20 percent tax rate. C) The entire dividend will be taxed at 15 percent or the entire dividend will be taxed at 20 percent, depending on Harrison's marginal ordinary income tax rate. D) None of the choices are correct.
D Explanation: Depending on Harrison's level of taxable income, the dividend may be taxed at 0 percent, 15 percent, 20 percent, or some combination.
65) During 2019, Jasmine (age 12) received $6,500 from a corporate bond. She also received $600 from a savings account established for her by her parents. Jasmine lives with her parents and she is their dependent. What is Jasmine's gross tax liability? (Use the Estates and trusts and Tax rate schedules.) A) $0 B) $110 C) $812 D) $922
D Explanation: Jasmine's taxable income is $6,000 ($7,100 minus $1,100 standard deduction). Her net unearned income is $4,900 ($7,100 gross unearned income minus $2,200). This is taxed at trust and estate tax rates ($260 + ($4,900 − $2,600) × 24%) = ($812 tax). The remaining $1,100 of her taxable income ($6,000 − 4,900 taxed at her rate) is taxed at 10 percent ($110 tax). Total tax is $922 ($812 + 110).
94) Quantitatively, what is the relationship between the AGI phase-out thresholds for the child tax credit? A) Head of household/Single = Married Filing Separately = Married Filing Jointly B) Head of household/Single < Married Filing Separately < Married Filing Jointly C) Head of household/Single = Married Filing Separately > Married Filing Jointly D) Head of household/Single > Married Filing Separately < Married Filing Jointly
D Explanation: The key here is not to memorize the threshold amounts, but to recognize that the threshold for MFJ will be twice that of MFS, and that it does not make sense for the HoH/S threshold to be less than the MFS threshold.
78) Which of the following is not an additional tax a taxpayer may have to pay? A) Alternative minimum tax B) Self-employment tax C) Net investment income tax D) Excess wage tax
D Explanation: The remaining taxes are additional taxes.
79) Allen Green is a single taxpayer with an AGI (and modified AGI) of $210,000, which includes $170,000 of salary, $25,000 of interest income, $10,000 of dividends, and $5,000 of long-term capital gains. What is Allen's net investment income tax liability this year, rounded to the nearest whole dollar amount? A) $2,465 B) $1,520 C) $570 D) $380
D Explanation: The tax is 3.8 percent times the lesser of: (a) $40,000 net investment income or (b) $210,000 modified AGI - $200,000 threshold. Difficulty: 3 Hard
101) Which of the following is not true of the American opportunity credit? A) A taxpayer with multiple eligible dependents can claim a credit for each dependent's qualifying expenses B) The credit is available for students during their first four years of postsecondary education only C) It is phased out based on the taxpayer's AGI D) A taxpayer may not claim a credit unless the taxpayer pays a dependent's qualifying educational expenses
D Explanation: The taxpayer may claim the credit if the dependent pays the expenses or if a third party pays the expenses on behalf of the dependent.
117) Happy, Sleepy, Grumpy, and Doc all did not make adequate estimated payments. Which of them will not owe underpayment penalties for 2019 given the following information? Tax liability 2019 2018 2017 Happy $ 2,200 $ 0 $ 500 Sleepy $ 1,500 $ 500 $ 700 Grumpy $ 1,200 $ 200 $ 0 Doc $ 800 $ 1,100 $ 1,001 A) Happy B) Sleepy C) Grumpy D) Doc E) "Happy" and "Doc". F) None of the choices are correct.
E Explanation: Happy will not have underpayment penalties because he did not owe taxes last year. Doc will not have underpayment penalties because his tax liability is less than $1,000.
120) Looking at the following partial calendar for April, when will individual tax returns be due? April Sunday Monday Tuesday Wednesday Thursday Friday Saturday 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 National Accountants Day (Federal Holiday) 18 19 20 21 22 A) Friday, April 14 B) Saturday, April 15 C) Sunday, April 16 D) Monday, April 17 E) Tuesday, April 18
E Explanation: If April 15 falls on a weekend or a holiday, the deadline will be moved to the next day that is not a holiday or a weekend.
52) Which of the following is not a taxpayer filing status for purposes of determining the appropriate tax rate schedule? A) Head of household B) Qualifying widow or widower C) Married filing separately D) Single E) All of these are taxpayer filing statuses
E Explanation: Qualifying widows or widowers use the same tax rate schedule as taxpayers who are married filing jointly.
2) The tax rate schedules are set up to tax lower levels of income at higher tax rates than higher levels of income.
FALSE
21) Generally, income from an active trade or business is subject to the 3.8 percent net investment income tax.
FALSE
25) Alton reported net income from his sole proprietorship of $90,000. To determine his self-employment tax, he would multiply $90,000 by the self-employment tax rate.
FALSE
26) Employee status is always better than independent contractor status for a taxpayer because the employee is responsible for paying the employee portion of the FICA taxes.
FALSE
27) Self-employed taxpayers are allowed to deduct the full amount of the self-employment taxes they pay.
FALSE
29) Employees are allowed to deduct a portion of the FICA taxes they pay.
FALSE
31) All else equal, taxpayers are more likely to be classified as employees rather than independent contractors if they are allowed to determine their own working hours and work without frequent oversight.
FALSE
37) The child and dependent care credit entitles qualifying taxpayers to a credit equal to the full amount of qualified expenses.
FALSE
4) If a married couple has one primary breadwinner, filing a joint return will likely result in a marriage penalty.
FALSE
40) The American opportunity credit and lifetime learning credit are available to all taxpayers regardless of their income level.
FALSE
42) To qualify for the earned income credit, the taxpayer must have a qualified dependent.
FALSE
44) Business credits are generally refundable credits.
FALSE
49) Depending on the year, the original (unextended) due date for an individual's tax return may be before April 15.
FALSE
51) The late payment penalty is based on the amount of tax owed and the number of days that the tax is not paid. The maximum amount of the penalty is unlimited.
FALSE
6) A marriage penalty occurs when a couple pays more taxes by filing a joint tax return than they would have paid had they filed married filing separately.
FALSE
8) Long-term capital gains, dividends, and taxable interest income are all taxed at preferential rates.
FALSE
13) The alternative minimum tax is the AMT base multiplied by the AMT rate.
FALSE Explanation: Above is the definition of the tentative minimum tax.
50) Individuals may file for and receive a six-month extension of time to file their tax return and pay their taxes without penalty.
FALSE Explanation: An extension does not extend the amount of time to pay the taxes due.
34) Parents may claim a $2,000 child tax credit for a dependent child who is 22 years of age at the end of the year if the child is a full-time student.
FALSE Explanation: Each dependent must be under the age of 17 at year-end for parents to claim the $2,000 child tax credit.
14) Long-term capital gains are taxed at the stated AMT rate for purposes of the alternative minimum tax.
FALSE Explanation: Long-term capital gains are taxed at preferential rates for AMT purposes.
7) All capital gains are taxed at preferential rates.
FALSE Explanation: Long-term capital gains are taxed at preferential rates.
32) Tax credits reduce a taxpayer's taxable income dollar for dollar.
FALSE Explanation: Tax credits reduce tax liability dollar for dollar.
11) The alternative minimum tax system requires taxpayers to apply an alternative tax rate on the regular income tax base to determine the amount of the alternative minimum tax.
FALSE Explanation: Taxpayers make several "plus" and "minus" adjustments to regular taxable income to compute alternative minimum taxable income (AMTI).
43) An 80-year-old taxpayer with earned income and no dependent children could qualify for the earned income credit.
FALSE Explanation: Taxpayers must be at least 25 years old and younger than 65 years old at the end of the year to claim the credit.
38) The American opportunity credit is available only for those students who are in their first or second year of postsecondary education.
FALSE Explanation: The AOC is available for the first four years of postsecondary education.
22) Employees must pay both Social Security tax and Medicare tax on the full amount of their wages no matter the amount of their wages.
FALSE Explanation: The Social Security wage base is limited; the Medicare wage base is not.
35) Parents may claim a child and dependent care credit for expenses incurred in providing for their dependents while the parents work as long as the children are over age 14 and under age 20 at year-end.
FALSE Explanation: The dependent must be under the age of 13.
1) Both the width (or range) of the tax brackets (the amount of income taxed at a particular rate) in the tax rate schedules and the range of the tax rates in the tax rate schedules (the difference between the lowest tax rate and the highest tax rate) vary by filing status.
FALSE Explanation: While each filing status has its own tax rate schedule, all tax rate schedules consist of tax brackets taxed at 10 percent, 12 percent, 22 percent, 24 percent, 32 percent, 35 percent, and 37 percent. However, the width or range of income within each bracket varies by filing status.
10) The kiddie tax does not apply to children over 24 years old at the end of the tax year.
TRUE
12) Regular taxable income is the starting point for determining the alternative minimum tax.
TRUE
15) Taxpayers are not allowed to deduct the standard deduction for alternative minimum tax purposes.
TRUE
18) The AMT exemption amount is phased out for high-income taxpayers.
TRUE
19) All else equal, a reduction in regular income tax rates would require more taxpayers to pay the alternative minimum tax.
TRUE
20) Due to the alternative minimum tax rate structure, a taxpayer with a large amount of long-term capital gains may be susceptible to the alternative minimum tax.
TRUE
23) For married couples, the Social Security wage base limitation applies separately to each spouse.
TRUE
24) For married couples, the additional Medicare tax is based on the couple's combined wages.
TRUE
28) Employees are not allowed to deduct FICA taxes they pay.
TRUE
3) Tax rate schedules are provided for use by (relatively) higher-income taxpayers, while the tax tables are provided for use by (relatively) lower-income taxpayers.
TRUE
30) Katlyn reported $300 of net income from her sole proprietorship. She is not required to pay self-employment tax.
TRUE
33) The child tax credit is subject to phase-out based on the taxpayer's AGI.
TRUE
36) John and Sally pay Janet (Sally's older sister) to watch John and Sally's child Dexter during the day. Janet cares for Dexter in her home. John and Sally may claim a child and dependent care credit based on the amount they pay Janet to care for Dexter.
TRUE
39) The lifetime learning credit can be used toward the cost of any course of instruction to acquire or improve a taxpayer's job skills, no matter the age of the taxpayer.
TRUE
41) The earned income credit is sometimes referred to as a negative income tax.
TRUE
45) Taxpayers are generally allowed to carry back and/or carry forward unused business credits.
TRUE
46) When applying credits against a taxpayer's gross tax liability, nonrefundable personal credits are applied first, then business credits, and finally refundable personal credits.
TRUE
47) An individual could pay 100 percent of her tax liability by the due date of her tax return and still be subject to underpayment tax penalties.
TRUE
48) Depending on the year, the original (unextended) due date for an individual's tax return may be after April 15.
TRUE
5) If both spouses of a married couple earn roughly equivalent high levels of wages, the couple is likely to pay a marriage penalty due to the nature of the tax rate schedules.
TRUE
9) In certain circumstances a child with very little income may have at least a portion of their income taxed at the trust and estate tax rates.
TRUE