Chapter 9 - Income Tax

2. Brett works as a mild-mannered reporter by day and a self-employed superstar guitar hero at night. He estimates that his current year taxes, including self-employment taxes, will be $13,600 based on his adjusted gross income of $60,000. Brett also estimates that his current year withholding from his newspaper job will be $4,000. His AGI and tax liability in the prior year were $50,000 and $10,500, respectively. What is the calculation that yields the minimum amount of estimated payments that Brett should make for the current year to avoid penalties? a. 100 percent of last year's taxes b. 110 percent of last year's taxes c. Brett does not need to make any estimated payments d. 90 percent of current year taxes

a. 100 percent of last year's taxes

5. Richard has several investment accounts. His investments generate interest and dividend income and he frequently buys and sells stocks and bonds. He may expect to receive the following information returns: a. 1099-INT, 1099-B, and 1099-DIV b. 1099-R, 1099-S, 1099-MISC c. 1099-INT, 1099-DIV, and 1099-MISC d. W-2, 1099-INT, and 1099-R e. W-2, W-3, and W-4

a. 1099-INT, 1099-B, and 1099-DIV

1. Which of the following statements is correct? a. The purpose of Form W-4 is to calculate the amount of Social Security taxes to withhold from an employee's wages. b. If no Form W-4 is completed, then the employer is required to withhold as if the employee is single with no exemptions. c. The employer is the one to calculate the number of withholding allowances. d. Employees must prove to their employer that they are entitled to the number of allowances claimed on the W-4 form.

b. If no Form W-4 is completed, then the employer is required to withhold as if the employee is single with no exemptions.

6. Leonard has a small manufacturing business reporting on a calendar year. His federal unemployment (FUTA) tax liability for the first quarter was $235, for the second quarter $190, for the third quarter $150, and for the fourth quarter $56. When was Leonard's first FUTA deposit due? a. December 31 b. October 31 c. October 15 d. January 31 of the following year

b. October 31

2. Which of the following is not an acceptable method for determining the required estimated tax payments for an individual who has no income subject to withholding? a. Payment of 100 percent of last year's tax liability b. Payment of 90 percent of last year's tax liability c. Payment of 90 percent of current year's tax liability d. Payment of 90 percent of this year's tax liability computed by annualizing on a quarterly basis e. Payment of 110 percent of last year's tax liability for high-income taxpayers

b. Payment of 90 percent of last year's tax liability

3. Which of the following statements about 2019 FICA tax is false? a. FICA tax is made up of two parts, Social Security and Medicare, with different rates. b. The maximum income base subject to Social Security tax did not change between 2018 and 2019. c. The Social Security portion of FICA tax is imposed on income limited to $132,900 in 2019. d. Both employer and employee contribute to the FICA payment.

b. The maximum income base subject to Social Security tax did not change between 2018 and 2019.

3. Larry worked two jobs as an employee during 2019. He earned wages of $70,000 at the first job and wages of $85,000 at the second job. What amount can Larry offset against his 2019 income tax liability because of excess Social Security tax withheld? a. $5,270.00 b. $1,649.20 c. $1,370.20 d. $4,340.00

c. $1,370.20

1. Gary is a single taxpayer and earns $6,000 monthly. He claims 4 withholding allowances on his Form W-4. Using the Percentage Method Tables, what should Gary's employer withhold for federal income tax for 2019? a. $218.68 b. $378.52 c. $597.20 d. $1,400.00

c. $597.20

2. Brian and Jan are married and file a joint return. Brian is self-employed, and Jan has wages subject to withholding. Brian estimates that their joint tax liability, including self-employment tax, will be $20,000 for 2019. Jan had federal income tax withholding of $4,000 in 2018 and expects the same amount in 2019. They applied an overpayment of $500 from 2018 to the 2019 first quarter estimated taxes. The 2018 total tax liability was $9,000. What is the minimum amount Brian and Jan should pay on their 2019 first quarter estimated tax payment? a. $1,250 b. $4,000 c. $750 d. $3,000 e. $1,750

c. $750

5. Dividends paid to a stockholder by a corporation should be reported on which of the following forms? a. 1099-INT b. 1099-MISC c. 1099-DIV d. 1099-R e. 1099-B

c. 1099-DIV

8. A direct, trustee-to-trustee transfer from one retirement plan to another: a. Is never permitted b. Can be done only once a year c. Has no current-year tax consequences d. Is always subject to withholding

c. Has no current-year tax consequences

7. For a plan to be a "qualified" retirement plan, it must meet all the following requirements except which of the following? a. The plan must be created for the exclusive benefit of the employees or their beneficiaries. b. The plan must meet certain participation and coverage requirements. c. The plan can discriminate in favor of the highly compensated employees. d. There is a minimum vesting requirement which must be met with respect to employee and employer contributions.

c. The plan can discriminate in favor of the highly compensated employees.

2. Jeremy, who is not a high-income taxpayer, estimates that his tax liability this year will be $9,000. Last year his liability was $7,600 and he had paid in $8,000, resulting in a $400 overpayment which he applied to the first quarter. What is the minimum amount Jeremy should pay on this year's first quarter estimated payment to avoid underpayment penalties? a. $2,250 b. $1,850 c. $1,625 d. $1,500

d. $1,500

1. Louise is a single taxpayer and claims three withholding allowances on her Form W-4. She is paid $2,500 monthly. Using the Wage Bracket Method, what should Louise's employer withhold for federal income tax? a. $163 b. $462 c. $119.80 d. $121

d. $121

3. Mary Lou worked three jobs during 2019. She earned $30,000, $27,000, and $11,000. What would be Mary Lou's total FICA (Social Security and Medicare) tax withheld in 2019? a. $3,842 b. $4,216 c. $2,856 d. $5,202

d. $5,202

6. Gabby has a telephone answering service and currently has three employees. So far this year she has paid them $8,000, $6,000 and $2,500. What is Gabby's current liability for FUTA tax after paying the required state unemployment tax? a. $87 b. $132 c. $99 d. $93

d. $93

2. In general, estimated payments for individual taxpayers are due on: a. March 15, June 15, September 15 and December 15 of the tax year. b. April 15, June 15, September 15 and December 15 of the tax year. c. March 15, June 15, September 15 of the tax year and January 15 of the following year. d. April 15, June 15, September 15 of the tax year and January 15 of the following year.

d. April 15, June 15, September 15 of the tax year and January 15 of the following year.

7. Alice is a valuable employee of the Wonderland Corporation and her employer has agreed to contribute 15 percent of her annual salary to a pension plan. What is this kind of a plan called? a. Defined benefit plan b. Employer stock option plan c. 401(k) plan d. Defined contribution plan e. Salary reduction plan

d. Defined contribution plan

8. Beverly needs a 30-day loan of $100,000 to bridge the gap while buying one house and selling another. She has $100,000 in her IRA and $100,000 in her 401(k) plan. What would you advise her to do? a. Go to a bank for a short-term loan despite the high interest rate. b. Borrow from her credit card for 30 days. c. Do a distribution rollover from her 401(k) plan. d. Do a distribution rollover from her IRA.

d. Do a distribution rollover from her IRA.

8. Tony, age 45, drives his car head-on into a tree while being chased by his soon-to-be-ex spouse. He is a little short on cash, so he takes a distribution from his IRA to buy a new car. If Tony doesn't pay back the $40,000 he withdrew, what are the consequences? a. Taxes, but not penalties, are due on the full withdrawal. b. Penalties, but not taxes, are due on the full withdrawal. c. No tax is due. d. Taxes and penalties are due on the full withdrawal.

d. Taxes and penalties are due on the full withdrawal.

4. George operates a small business with six employees. The lookback period wages show that he is a monthly depositor. During the current month, he withholds $4,000. When is his deposit due? a. The 20th day of the month following the month of withholding b. The last day of the month following the month of withholding c. The first day of the second week following the month of withholding d. The 15th day of the month following the month of withholding

d. The 15th day of the month following the month of withholding

5. Brian is an employee for a technology business. Which form will he receive from his employer during January of the year following his year of employment? a. W-3 b. 1099-MISC c. 941 d. W-2 e. W-4

d. W-2

1. Which answer best completes the following sentence? If reported tips do not exceed _____percent of gross sales, the employer must allocate tips to the employees. a. 6 b. 7 c. 9 d. 5 e. 8

e. 8

3. Edwina worked at three jobs during 2019. She earned $55,000, $45,000, and $16,000 respectively from the jobs and had $10,000 from self-employment income. What amount can Edwina apply as a credit against her 2019 income tax liability for overpayment of Social Security taxes? a. $765 b. $1,827 c. $9,639 d. $7,960.80 e. None of these responses listed are correct.

e. None of these responses listed are correct.

6. Which of the following is a correct statement? a. An employer must deposit federal unemployment tax for any quarter when the amount for the quarter plus any other amounts from previous quarters during the calendar year exceed $500. b. The first $132,900 of an employee's wages is subject to the federal unemployment tax. c. The federal unemployment tax liability is reported on Form 941. d. The federal unemployment tax is deducted from the employee's wages.

a. An employer must deposit federal unemployment tax for any quarter when the amount for the quarter plus any other amounts from previous quarters during the calendar year exceed $500.

7. Lawrence is a full-time gardener at Chatterly House, Inc. His employer values his services highly and has established a plan where he will retire at 80 percent of his current salary of $40,000. The employer makes an appropriate contribution to the plan annually. This plan is called a: a. Defined benefit plan b. Profit sharing plan c. Defined contribution plan d. Salary deferral plan

a. Defined benefit plan

5. Which of the following is true concerning a Form W-2? a. Employers must provide a Form W-2 if requested by a terminated employee, the later of 30 days of the employee's request for his/her Form W-2 or within 30 days after the last wage payment is made. b. Employers must provide a Form W-2 to the Social Security Administration by February 28 after the end of the year. c. Employers must provide a Form W-2 to the state of the employee's residence by January 31. d. Employers must provide a Form W-2 to the employee by February 28.

a. Employers must provide a Form W-2 if requested by a terminated employee, the later of 30 days of the employee's request for his/her Form W-2 or within 30 days after the last wage payment is made.

8. During 2019, Henry, age 35, decided to change jobs. Henry asked his old company to make a direct transfer of his $10,000 balance from his old company's retirement account into his IRA. To avoid paying taxes and penalties on this distribution, Henry must do which of the following? a. Henry does not need to do anything. b. Henry must deposit $8,000 into his IRA within the 60-day rollover period. c. Henry must deposit $2,000 into his IRA within the 30-day rollover period since 20 percent should have been withheld for taxes. d. Henry must deposit $10,000 into his IRA within the 60-day rollover period.

a. Henry does not need to do anything.

4. Which of the following is true concerning employers' requirements for depositing employment taxes? a. New employers are deemed to be monthly depositors. b. Typically, employers are either weekly or monthly depositors. c. If employers have yearly employment tax liabilities of $10,000 or less, then they are allowed to file once a year. d. To determine their deposit schedule, employers estimate their employment taxes for the year.

a. New employers are deemed to be monthly depositors.

8. Which of the following statements is not true of a distribution rollover? a. There is no limit on the number of distribution rollovers one may do from IRA to IRA in a year. b. To avoid taxes and penalties on a distribution rollover, the taxpayer must contribute 100 percent of the distribution to the new plan, even if he received only 80 percent, after withholding, in cash from the old plan. c. Withholding is required on a rollover distribution from a qualified plan but not from an IRA. d. Assuming there are no unusual events, the taxpayer must transfer the assets to the new plan within 60 days.

a. There is no limit on the number of distribution rollovers one may do from IRA to IRA in a year.

4. Select the answer which incorrectly completes the following sentence. Form 941 is filed with the IRS quarterly and it reports... a. net wages paid, after withholding. b. employer's share of FICA c. Social Security tax withheld. d. Medicare tax withheld. e. federal income tax withheld. f. deposits made during the quarter.

a. net wages paid, after withholding.

1. What amount of tips must an employer report as allocated to employees if gross food and beverage sales in the restaurant are $175,000 and the employees report no tips to the employer? a. $21,000 b. $14,000 c. $26,250 d. $17,500 e. $10,500

b. $14,000

6. In 2019, Wilhelm Company had five employees. Four of the employees worked full-time and earned salaries of $20,000, $25,000, $30,000, and $35,000, respectively. The fifth employee worked only part-time during the first 6 months of the year and earned $3,000. The employer timely paid state unemployment tax equal to 5.4 percent of employee wages and is eligible for a full credit. How much federal unemployment tax was paid by Wilhelm Company for 2019? a. $1,674 b. $186 c. $1,922 d. $904 e. $6,102

b. $186

5. In 2019, Brian, age 45, has an interest-bearing savings account, an investment account, and in his spare time does some consulting for businesses other than his employer. Which of the following would he be most likely to receive from his consulting clients? a. 1099-DIV b. 1099-MISC c. 1099-B d. 1099-INT e. 1099-R

b. 1099-MISC

3. Which of the following accurately describes the 2019 Social Security portion of the FICA tax that is imposed on wages up to $132,900? a. 6.2 percent for only the employer b. 6.2 percent for the employee and 6.2 percent for the employer c. 6.2 percent for the employee and 7.65 percent for the employer d. 1.45 percent for the employee and 1.45 percent for the employer e. 0.6 percent for the employee and 5.4 percent for the employer

b. 6.2 percent for the employee and 6.2 percent for the employer

2. For individual taxpayers, what are the four installment dates for estimated tax payments? a. April 15, June 15, September 15, and December 15 of the tax year b. April 15, June 15, September 15 of the tax year, and January 15 of the next year c. May 15, July 15, October 15 of the tax year, and January 15 of the next year d. January 15, April 15, September 15, and December 15

b. April 15, June 15, September 15 of the tax year, and January 15 of the next year