Tax chap 8 connect

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. $46,861 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.

Linda is a qualifying widow in 2022. In 2022, she reports $80,000 of taxable income (all ordinary). What is her gross tax liability using the tax rate schedules? (Use the Tax rate schedules.) a. $9,189 b. $11,717 c. $13,217 d. $15,893

a. $9,189 explanation: Using the married filing jointly or qualifying widow(er) tax rate schedule, the tax is $9,189 {$2,055 + [12% × ($80,000 − $20,550)]}.

Which of the following 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. For AGI deductions explanation: Independent contractors deduct expenses as for AGI deductions, unlike employees, who are unable to deduct employee business expenses.

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. Nonrefundable personal, business, refundable

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 in years other than 2021. d. The child for whom the full credit is claimed must meet the definition of a qualifying child.

a. The child for whom the credit is claimed must be under the age of 15 at the end of the year. explanation: The child must be under age 17 at the end of the year.

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 8-11) a. $0 b. $2,401 c. $3,341 d. $3,692 e. $6,164

b. $2,401 explanation: $6,164 maximum credit minus $3,763 phase-out [($38,000 − $20,130) × 0.2106] = $2,401.

Angelena files as a head of household. In 2022, she reported $56,800 of taxable income, including a $10,000 qualified dividend. What is her gross tax liability? (Use the tax rate schedules, long-term capital gains tax brackets.) a. $6,613 b. $5,473 c. $5,323 d. $6,823

b. $5,473 explanation: $46,800 is taxed at ordinary rates, $9,000 is taxed at 0 percent, and $1,000 is taxed at 15 percent.

Hestia (age 17) is claimed as a dependent by her parents, Rhea and Chronus. In 2022, 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 2022? a. $0 b. $50 c. $600 d. $1,200

b. $50 explanation: Gross income of $1,200 less the greater of (1) $1,150 or (2) $700 ($200 earned income + $500) is $50.

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. Amount of credit taken in previous years explanation: The credit is calculated independently of credits claimed in previous years.

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. d. A taxpayer whose only source of income is interest from corporate bonds is eligible for the credit.

b. It is possible that a taxpayer with more earned income may receive more credit than a taxpayer with less earned income. explanation: Over a certain range taxpayers with more earned income will receive more credit than taxpayers with less income.

The wage base for which of the following taxes is capped? a. Federal income b. Social Security c. Medicare d. Alternative minimum

b. Social Security explanation: Social Security wage base is capped. Remember, the associated benefits are also capped.

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. While employees are typically eligible for nontaxable fringe benefits from employers, independent contractors are not. explanation: Nonemployees are ineligible for nontaxable fringe benefits.

Miley, a single taxpayer, plans on reporting $32,775 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. $1,300 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 $32,775 to $42,775) and the remaining $1,000 ($42,775 − $41,775) is taxed at 22 percent. To summarize, ($9,000 × 12%) + ($1,000 × 22%) = $1,300.

Asteria earned a $25,500 salary as an employee in 2022. How much should her employer have withheld from her paycheck for FICA taxes? a. $370 b. $1,581 c. $1,951 d. $3,902

c. $1,951 explanation: $25,500 × (0.062 + 0.0145)

Hester (age 17) is claimed as a dependent by his parents, Charlton and Abigail. In 2022, Hester received $10,000 of qualified dividends, and he received $13,000 from a part-time job. What is his taxable income for 2022? (Use Standard deduction.) a. $23,000 b. $21,850 c. $10,050 d. $9,600

c. $10,050 explanation: Gross income of $23,000 less the greater of (1) $1,150 or (2) $12,950 ($13,000 earned income + $500—not to exceed the basic standard deduction amount of $12,950) is $9,500.

Rhianna and Jay are married filing jointly in 2022. They have six children under age 18 and over age 8 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 2022 tax return? a. $12,000 b. $11,050 c. $11,000 d. $6,000

c. $11,000 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.

Jamie is single. In 2022, she reported $100,000 of taxable income, including a long-term capital gain of $5,000. What is her gross tax liability? (Use the tax rate schedules, long-term capital gains tax brackets.) a. $15,000 b. $17,836 c. $17,386 d. $16,636

c. $17,386 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.

Montague (age 15) is claimed as a dependent by his parents, Matt and Mary. In 2022, Montague received $5,000 of qualified dividends, and he received $800 from a part-time job. What is his taxable income for 2022? a. $0 b. $3,850 c. $4,600 d. $4,650

c. $4,600 explanation: Gross income of $5,800 less the greater of (1) $1,150 or (2) $1,200 ($800 earned income + $400) is $4,600.

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. A taxpayer with multiple dependents can claim a credit for each dependent's qualifying expenses. explanation: The credit applies to the taxpayer and not to the taxpayer's dependents.

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. Deduct employer portion for AGI. explanation: This is a for AGI deduction, as it is considered a cost of doing business. The employer portion is deductible.

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. Salary is first applied against the Social Security limit and then self-employment income is applied against the Social Security limit. 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.

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. Tax credits are generally more beneficial than tax deductions. explanation: Credits reduce taxes payable dollar for dollar, while deductions reduce taxes payable at the marginal tax rate.

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. The net unearned income 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 $2,300 or (2) the child's taxable income (the child is not taxed on more than her taxable income).

During 2022, 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 claimed as a dependent in their tax return. Assuming her parents' marginal tax rate is 24%, what is Jasmine's gross tax liability? (Use Tax Rate Schedule, Standard deduction.) a. $0 b. $115 c. $1,152 d. $1,267

d. $1,267 explanation: Jasmine's taxable income is $5,950 ($7,100 minus $1,150 standard deduction). Her net unearned income is $4,800 ($7,100 gross unearned income minus $2,300). This is taxed at Jasmine's parents marginal tax rate of 24% ($4,800 × 24%) = ($1,152 tax). The remaining $1,150 of her taxable income ($5,950 − $4,800 taxed at her rate) is taxed at 10 percent ($115 tax). Total tax is $1,267 ($1,152 + 115).

During 2022, 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. $1,650

d. $1,650 explanation: $2,800 interest income minus $1,150 standard deduction for person claimed as a dependent on another's tax return.

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. $300 refund 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.)

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. $380 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.

Which of the following is not true of the American opportunity tax 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. A taxpayer may not claim a credit unless the taxpayer pays a dependent's qualifying educational expenses. 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.

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. 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. explanation: Excess business credits are carried back and then forward.

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. All of these suggest independent contractor status explanation: All factors suggest the worker is an independent contractor.

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

Employees are allowed to deduct a portion of the FICA taxes they pay.

false

Generally, income from an active trade or business is subject to the 3.8 percent net investment income tax.

false

Long-term capital gains, dividends, and taxable interest income are all taxed at preferential rates.

false

Tax credits reduce a taxpayer's taxable income dollar for dollar.

false

The American opportunity tax credit and lifetime learning credit are available to all taxpayers regardless of their income level.

false

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.

All capital gains are taxed at preferential rates.

false explanation: Long-term capital gains are taxed at preferential rates.

Employees are not allowed to deduct FICA taxes they pay.

true

For married couples, the Social Security wage base limitation applies separately to each spouse.

true

For married couples, the additional Medicare tax is based on the couple's combined wages.

true

Katlyn reported $300 of net income from her sole proprietorship. She is not required to pay self-employment tax.

true

Taxpayers are generally allowed to carry back and/or carry forward unused business credits.

true

The child tax credit is subject to phase-out based on the taxpayer's AGI.

true