Tax CH 8

Steve's only source of income for the year is a salary of $24,000. He is not married and has one dependent child who is eligible for the child tax credit. Steve's tax liability is $570 before any credits or prepayments are applied. He had $500 withheld from his salary. After applying the earned income credit, what is Steve's refund or balance due? $0 balance due/refund Rationale: The entire EIC is refundable. $3,526 - [(24,000-19,030) x .1598] = $2,732 - (570 - 500) = $2,662 $2,662 refund $3,456 refund Rationale: The EIC is subject to phaseout. $3,526 - [(24,000-19,030) x .1598] = $2,732 - (570 - 500) = $2,662 $ 70 balance due Rationale: Steve is eligible for the EIC, calculated as $3,526 - [(24,000-19,030) x .1598] = $2,732 - (570 - 500) = $2,662

$2,662 refund 3461 - [(24,000-18,660)*.1598] = 2607-(570-500) = 2678

Tim and Sandy have a ten year old daughter. During the current year, they spent $2000 on childcare expenses at a daycare center and paid $1500 in childcare expenses to Sandy's sister. Their child and dependent care credit will be calculated based on a maximum limit of __________in childcare expenses.

$3000. A relative who is a caregiver will qualify as long as the relative is not a dependent relative or child of the taxpayer.

For certain taxpayers, a tax of % may be assessed on net investment income.

3.8

What is the amount of the child tax credit? A maximum of $2,000 for each qualifying child A maximum of $2,000 per tax return Rationale: The credit is per child, not per return. A maximum of $1,000 per qualifying child Rationale: The credit is currently $2,000. A maximum of $1,000 per tax return Rationale: The credit is currently $2,000.

A maximum of $2,000 for each qualifying child

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

Age Filing status

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. Earned income credit Tax on net investment income Kiddie tax Alternative minimum tax Self-employment tax

Alternative minimum tax

American Opportunity Credit (AOC)

American Opportunity Credit

credit is available for students enrolled in a qualified post-secondary educational institution during the first four years of their education.

American opportunity Lifetime Learning

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. Rationale: The credit is nonrefundable. The credit may be reduced if the effective foreign tax rate is higher than the effective U.S. tax rate on the foreign income. The foreign tax credit helps reduce the double tax taxpayers may pay on foreign income. Taxpayers usually benefit from claiming the credit rather than the deduction because it is a dollar for dollar reduction in the tax.

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

Which of the following is NOT a criteria for meeting the eligibility requirements for the earned income credit for an individual with no children? Can be claimed as a dependent for another taxpayer Over age 25 Lived in the U.S. for at least half the year Under age 65

Can be claimed as a dependent for another taxpayer

Which of the following amounts is NOT added back to regular taxable income to arrive at alternative minimum taxable income? Standard deduction State income taxes Capital losses Tax-exempt income from private activity bonds

Capital losses

Arnold has a tax liability of $700. He has a refundable tax credit of $1,000, and his employer withheld $900 in federal income tax from Arnold's pay. What is the amount of Arnold's tax refund? $1,000 refund Rationale: $700 tax due - $1,000 - $900 taxes paid = $1,200 refund $900 refund Rationale: $700 tax due - $1,000 - $900 taxes paid = $1,200 refund $1,200 refund $200 refund

Correct Answer $1,200 refund $700 tax due - $1,000 - $900 taxes paid = $1,200 refund

How are the employees' portions of FICA tax liabilities paid? Employers withhold the amounts from the employees' paychecks. Employees must make estimated payments each quarter. Rationale: The employer withholds the tax from the employee's salary or wages. Employees do NOT pay FICA tax. The employer is responsible for paying the liability. Rationale: The employer withholds the tax from the employee's salary or wages. So, the employee does pay the tax. Employees add the FICA tax to their income tax and pay them when filing their income tax return. Rationale: The employer withholds the tax from the employee's salary or wages.

Employers withhold the amounts from the employees' paychecks.

When calculating a tax liability, the taxpayer will use the tax rate schedule that is determined by which of the following?

Filing status

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? Rick earned wages from his employer and has long term capital gain income. Rationale: Long-term capital gains are taxed at lower rates than those used in the tax rate schedules. Sheri is 13 and a dependent of her parents. She has unearned income of $3,800. Rationale: When the taxpayer is a dependent child, her unearned income is taxed at her parent's marginal rate. Harold received income from a partnership where he works full-time and interest from corporate bonds. Yining has a profitable business and received qualified dividends. Rationale: Qualified dividends are taxed at lower rates than those used in the tax rate schedules.

Harold received income from a partnership where he works full-time and interest from corporate bonds.

Shonda is currently in the 24% tax bracket. She reports a $400 tax credit. How will this credit affect her tax liability Her tax liability will decrease by $400 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% - does not apply to social security or medicare ...

Her tax liability will decrease by $400

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 increase by $400. Rationale: A credit reduces the tax liability dollar for dollar. Her tax liability will decrease by $96. Rationale: A credit reduces the tax liability dollar for dollar. Her tax liability will increase by $96. Rationale: A credit reduces the tax liability dollar for dollar. Her tax liability will decrease by $400.

Her tax liability will decrease by $400.

Choose the deductions that reduce both regular taxable income and AMTI. (Check all that apply.) Real property taxes paid on principle residence State income tax Home equity interest - loan used to substantially improve the house Gambling losses Charitable contributions Casualty and theft losses

Home equity interest - loan used to substantially improve the house Gambling losses Charitable contributions Casualty and theft losses

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. Include the foreign income in gross income and deduct the foreign taxes paid as itemized deductions. Rationale: Including the foreign income in gross income and deducting the foreign taxes paid as itemized deductions is an acceptable method for treating income taxes paid to foreign countries. Include foreign income in gross income and claim a foreign tax credit for the foreign taxes paid. Rationale: Including the foreign income in gross income and claiming the foreign tax credit is an acceptable method for treating income taxes paid to foreign countries. Exclude the foreign earned income from gross income. Rationale: Excluding foreign earned income from gross income is 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.

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.) Excluded gain on sale of a personal residence Self-employment income Income from a trade or business that is a passive activity Distributions from qualified retirement plans Long-term capital gains Dividend income Tax-exempt interest income Interest income

Income from a trade or business that is a passive activity Long-term capital gain Dividend income Interest income

When is an individual required to file a tax return? Individuals must file a tax return when they have income tax withheld from their wages. Rationale: Filing requirements are based on gross income, not tax withholdings. Individuals must file a tax return when their gross income exceeds certain amounts based on their filing status and age. Individuals must file a tax return when they are no longer claimed as dependents. Rationale: This is true only if their income is over a certain threshold based on their filing status. All individuals must file an income tax return when they reach the required age. Rationale: Filing requirements are based on gross income in conjunction with age, but not on age alone.

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

Which of the following statements are true regarding the earned income credit? (Check all that apply.) Individuals with at least one qualifying child are eligible for the credit regardless of age. Individuals who are dependents of other taxpayers are not eligible for the credit. The credit is designed to offset the effect of employment taxes on compensation paid to low-income taxpayers. The earned income tax credit is a nonrefundable tax credit. Rationale: It is a refundable tax credit. Individuals with no qualifying children must be at least 21 years old to claim the credit. Rationale: Individuals must be at least 25 years of age, but younger than 65.

Individuals with at least one qualifying child are eligible for the credit regardless of age. Individuals who are dependents of other taxpayers are not eligible for the credit. The credit is designed to offset the effect of employment taxes on compensation paid to low-income taxpayers.

The credit is a maximum credit of $2,000 per taxpayer, while the American opportunity credit is a maximum credit of $2,500 per qualifying student.

Lifetime Learning

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

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

Personal nonrefundable credits Business credits Refundable credit

For tax calculation purposes, the kiddie tax base is the child's net unearned income. The net unearned income is defined as: The lesser of (1) the child's gross unearned income minus $2,200 or (2) the child's taxable income The greater of (1) the child's gross unearned income or (2) the child's taxable income The lesser of (1) the child's gross unearned income or (2) the child's taxable income The greater of (1) the child's gross unearned income minus $2,200 or (2) the child's taxable income

The lesser of (1) the child's gross unearned income minus $2,200 or (2) the child's taxable income

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

Tuition Textbooks Required fees

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

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.

Which one of the following types of income is NOT part of net investment income for purposes of calculating the Net Investment Income tax? Long-term capital gain income Wage income Interest income Rationale: Interest income is considered in net investment income Passive activity income Rationale: Passive activity income should be considered in net investment income.

Wage income

The income tax is paid on a pay-as-you-go basis through _____ or ______ tax payments

Withholdings; estimated

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

alternative minimum

A taxpayer is subject to the when the tax on its base is higher than his regular tax liability.

alternative minimum tax,

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

april 15

Business tax credits are _____________ credits, but may be carried back one year or forward for ___________ years. a.) refundable; twenty b.) nonrefundable; five c.) nonrefundable; twenty d.) refundable; five

c.) nonrefundable; twenty

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 AMT: $0; Tax: $43,695 Rationale: The alternative minimum tax is the tentative minimum tax less the regular tax liability ($58,304-$43,695=$14,609). Charlie will actually have to pay the regular tax liability + the alternative minimum tax...which is the tentative minimum tax. AMT: $58,304; Tax: $43,695 Rationale: The alternative minimum tax is the tentative minimum tax less the regular tax liability ($58,304-$43,695=$14,609). Charlie will actually have to pay the regular tax liability + the alternative minimum tax...which is the tentative minimum tax. AMT: $58,304; Tax: $58,304 Rationale: The alternative minimum tax is the tentative minimum tax less the regular tax liability ($58,304-$43,695=$14,609). Charlie will actually have to pay the regular tax liability + the alternative minimum tax...which is the tentative minimum tax.

$58,304-$43,695=$14,609 Tax: $58,304

Carol's AMT base is $240,000. Of this amount, $35,000 represents long-term capital gain income from investments. Carol is in the 28% marginal tax bracket for regular tax. Calculate the tentative tax resulting from AMT calculations. $62,400 Rationale: (194,800 x .26) = 50,648 (10,200 x.32) = 3,264 (35,000 x .15) = 5,250 Tentative tax = $59,162 Carol's LTCG is taxed at 15% because all single taxpayers with a MTR of 32% are in the 15% LTCG bracket. $59,162 Rationale: (194,800 x .26) = 50,648 (10,200 x.32) = 3,264 (35,000 x .15) = 5,250 Tentative tax = $59,162 Carol's LTCG is taxed at 15% because all single taxpayers with a MTR of 32% are in the 15% LTCG bracket. $67,200 Rationale: (194,800 x .26) = 50,648 (10,200 x.32) = 3,264 (35,000 x .15) = 5,250 Tentative tax = $59,162 Carol's LTCG is taxed at 15% because all single taxpayers with a MTR of 32% are in the 15% LTCG bracket. $60,912 Rationale: (194,800 x .26) = 50,648 (10,200 x.32) = 3,264 (35,000 x .15) = 5,250 Tentative tax = $59,162 Carol's LTCG is taxed at 15% because all single taxpayers with a MTR of 32% are in the 15% LTCG bracket.

$59,162 Rationale: (194,800 x .26) = 50,648 (10,200 x.32) = 3,264 (35,000 x .15) = 5,250 Tentative tax = $59,162 Carol's LTCG is taxed at 15% because all single taxpayers with a MTR of 32% are in the 15% LTCG bracket.

Stacy is unmarried and has three children that qualify for the child tax credit. Their AGI for the current year is $97,000. What is the amount of her child tax credit?

$6,000

Darcy received $2,000 in qualified dividends this year. She has ordinary income of $20,000. Darcy has no other taxable income. What tax rate will be assessed on the $2,000, since it is a qualified dividend rather than ordinary income?

0%

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

1) 100% of their previous year tax liability 2) 90% of their current tax liability

Other than the safe harbor provisions, what other tax due circumstances will prevent a taxpayer from incurring an underpayment penalty

1) The taxpayer's tax payable after subtracting withheld taxes is less than $1,000 2) The taxpayer had no tax liability in the previous year

The following expenses will qualify for the American Opportunity Credit in the current year?

1) Tuition for a term beginning in January is paid in December of the current year 2) Textbooks and required lab fees are paid in the current year

Denis and Debbie are married and file jointly. They have two children that qualify for the child tax credit. Their AGI for the current year is $422,000. What is the amount of their child tax credit?

1st --> 2 children X $2,000 = $4,000. 2nd --> then take care of Phase out ($422,000 - $400,000)/1,000 = 22 3rd --> 22X$50 = $1,100 4th --> $4,000 - $1,100 = $2,900

The kiddie tax will NOT apply to a child whose net unearned income is equal to or less than $

2200

The AMT is calculated by multiplying the first $194,800 of the AMT base by % and multiplying the AMT base in excess of $194,800 by %. Long-term capital gains are taxed at rates for alternative minimum tax.

26 28 preferential

Which of the following individuals would NOT be subject to the kiddie tax assuming they have unearned income A child over age 18, but under age 24, at year end and a full time student whose earned income does not exceed half of her support Rationale: The child is subject to the earned income credit if the unearned income exceeds $2,200 because the child is a full time student and does not provide over half of her own support. A child who is 19 at year end, a part time student, and claimed as a dependent on his parents' tax return A child who is 18 at year end, a part time student whose earned income does not exceed half of her support Rationale: The child is subject to the earned income credit if the unearned income exceeds $2,200 because the child is 18 and does not provide over half of her own support. A child under 18 years old at year end Rationale: A child under 18 years old is subject to the kiddie tax if the unearned income exceeds $2,200.

A child who is 19 at year end, a part time student, and claimed as a dependent on his parents' tax return

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

Both credits phase out for higher income taxpayers.

Which one of the following statements is CORRECT regarding the American opportunity and lifetime learning credits? Both credits phase out for higher income taxpayers. The AOC is taken on a per taxpayer basis and the LLC is taken on a per student basis. Rationale: The AOC is taken on a per student basis, and the LLC is taken on a per return basis. The qualifying expenses are the same for both education credits. Rationale: The lifetime learning credit includes expenses for any course of instruction (not just the first four years) and generally does not include the cost of books. A taxpayer can take both credits for the same student if qualifying expenses are sufficient. Rationale: Only one credit may be claimed per student, per tax year. Both credits are nonrefundable. Rationale: The AOC credit is partially refundable, but the LLC is not.

Both credits phase out for higher income taxpayers.

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 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. Rationale: Since Chris' taxable income is over $434,550, the preferential capital gains rate is 20%. Charlie will pay $280 in tax. Rationale: Charlie would only pay 15% since his taxable income is more than $39,375 but less than $434,550. But, Since Chris' taxable income is over $434,550, the preferential capital gains rate is 20%. Each of the taxpayers would pay $150 in tax. Rationale: Christina would pay $0 (0%) and Chris would pay $200 (20%). Only Charlie would pay 15% on his capital gains. Christina will pay $100. Rationale: Christina would not be subject to tax on her long term capital gains because her taxable income is less than $39,375. But, Since Chris' taxable income is over $434,550, the preferential capital gains rate is 20%.

Chris will pay $200 in tax. Rationale: Since Chris' taxable income is over $434,550, the preferential capital gains rate is 20%.

Arnold has a tax liability of $700. He has a nonrefundable tax credit of $1,000, and his employer withheld $900 in federal income tax from Arnold's pay. What is the amount of Arnold's tax refund? $1,000 refund Rationale: The credit will offset the tax liability but Arnold cannot collect the excess of a nonrefundable credit. Arnold will receive a refund only for the amount withheld.. $1,200 refund Rationale: The credit will offset the tax liability but Arnold cannot collect the excess of a nonrefundable credit. Arnold will receive a refund only for the amount withheld. $200 refund Rationale: The credit will offset the tax liability but Arnold cannot collect the excess of a nonrefundable credit. Arnold will receive a refund only for the amount withheld. $900 refund Correct Answer $900 refund

Correct Answer $900 refund

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

Correct Answer Filing status Age

Which of the following factors suggests that a person is an independent contractor rather than an employee? (Check all that apply.) Provides her own tools Work is supervised by the firm Could realize a profit or loss from the activities Sets her own working hours Works for only one firm

Correct Answer Provides her own tools Could realize a profit or loss from the activities Sets her own working hours

Which of the following statements is correct regarding the deductibility of self-employment taxes? Taxpayers are allowed to deduct the employee portion of their self-employment taxes FROM AGI. Taxpayers are allowed to deduct the employee portion of their self-employment taxes FOR AGI. Taxpayers are allowed to deduct the employer portion of their self-employment taxes FOR AGI. Taxpayers are allowed to deduct the employer portion of their self-employment taxes FROM AGI.

Correct Answer Taxpayers are allowed to deduct the *employer* portion of their self-employment taxes FOR AGI.

How can taxpayers protect themselves from incurring an underpayment penalty? When income is unpredictable, the tax return should be filed by the end of the year. Taxpayers should meet one of the safe harbor provisions for estimated tax payment requirements. As long as the tax return is filed and taxes are paid by the due date, there is no underpayment penalty. Rationale: Taxpayers should meet one of the safe harbor provisions. The taxpayer should file an extension if they can NOT pay the taxes that are due.

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

Which of the following is NOT a criteria for the American Opportunity credit? The individual must be a full-time student. The student must be in the first four years of postsecondary education. The student must be enrolled in a qualified postsecondary education institution. The amount of the credit is 100 percent of the first $2,000 and 25 percent of the next $2,000 spent on qualifying expenses.

Correct Answer The individual must be a full time student.

Other than the safe harbor provisions, what other tax due circumstances will prevent a taxpayer from incurring an underpayment payment penalty? The taxpayer files the tax return on or before April 15, regardless of the amount due. The taxpayer's tax payable after subtracting estimated payments is less than $1,000. The taxpayer had no tax liability in the previous year. The taxpayer's tax payable after subtracting withheld taxes is less than $1,000.

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

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: revenue recognition basis. cash basis. wherewithal-to-pay basis. pay-as-you-go basis.

Correct Answer pay-as-you-go basis.

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.

Falce The underpayment is calculated and assessed for each quarter the taxpayer is underpaid_

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

False Rationale: The extension will allow extra time for filing the return, but does not extend the time for payment.

By which of the following ways can self-employed taxpayers, such as independent contractors, always deduct their business expenses? For AGI against business income From AGI against all forms of income For AGI against all forms of income From AGI against business income

For AGI against business income

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. It mandates that children must pay tax on income at the higher rate used by trusts and estates. Rationale: Only unearned income is subject to the kiddie tax. It disallows any preferential rates on qualified dividends or long-term capital gain income for dependent children. Rationale: The kiddie tax does not disallow the preferential rates on qualified dividends or long term capital gains. It makes shifting income to children illegal. Rationale: Children may legally earn income on the assets they hold, even if the assets were received from the parents.

It mandates that children must pay tax on most unearned income at the higher rate used by trusts and estates.

Choose the following statement that is INCORRECT regarding Social Security and Medicare taxes? The Social Security tax rate is 12.4% of wages up to a maximum wage amount. Rationale: This statement is true. Single taxpayers will pay an increased rate of Medicare tax when their tax base exceeds $200,000. Rationale: This statement is true. There is no wage cap (maximum wage limitation) for Medicare taxes. Rationale: This statement is true. Low-income taxpayers are exempt from paying Social Security and Medicare taxes on their wages.

Low-income taxpayers are exempt from paying Social Security and Medicare taxes on their wages.

Which of the following individuals would NOT be subject to the kiddie tax? Tyler is an 18 year old, part time student who does NOT provide half of his own support. He has $3,000 in interest income. Rationale: Tyler is subject to the kiddie tax because he 18 years old with unearned income in excess of $2,200, and he does not provide over half of his support. 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. Tori is a 20 year old, full-time student who does NOT provide half of her own support. She has $3,000 in dividend income this year. Rationale: Tori is subject to the kiddie tax because she is under 24 and a full-time student with unearned income in excess of $2,200. She does not provide over half of her own support. Zach is a 16 year old, full time student who does NOT provide half of his own support. He has $3,000 in capital gain income. Rationale: Zach is subject to the kiddie tax because he is under 18 with unearned income in excess of $2,200, and he does not provide over half of his own support.

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.

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? As long as the tax return is filed and taxes are paid by the due date, there is no underpayment penalty. Rationale: Taxpayers should meet one of the safe harbor provisions. When income is unpredictable, the tax return should be filed by the end of the year. Taxpayers should meet one of the safe harbor provisions for estimated tax payment requirements. The taxpayer should file an extension if they can NOT pay the taxes that are due.

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

How is the amount of the alternative minimum tax determined? The amount of AMT is the AMT base multiplied by the AMT. Rationale: This is the tentative tax. It must be compared to the regular tax. The excess of this amount over the regular tax is the AMT. The amount of AMT is the excess of the AMT base multiplied by the AMT rate over the regular tax liability. The amount of AMT is the AMT base multiplied by the AMT rate added to the regular tax liability. Rationale: Only the amount of AMT that exceeds the regular tax liability is added to the regular tax liability.

The amount of AMT is the excess of the AMT base multiplied by the AMT rate over the regular tax liability.

When is the standard deduction NOT added back to regular taxable income to arrive at alternative minimum taxable income? The standard deduction is never added back to regular taxable income to arrive at AMTI. The standard deduction is not added back when the taxpayer deducted itemized deductions rather than the standard deduction. The standard deduction is always added back to regular taxable income to arrive at AMTI.

The standard deduction is not added back when the taxpayer deducted itemized deductions rather than the standard deduction.

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 False Rationale: The correct order is as follows: personal nonrefundable credits, business credits, and finally, personal refundable credits.

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 False

True Rationale: The exemption amount protects lower income taxpayers from paying the AMT, but the exemption is phased out for higher income taxpayers. False Rationale: The exemption amount protects lower income taxpayers from paying the AMT, but the exemption is phased out for higher income taxpayers.

What qualifies for the Lifetime Learning Credit?

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

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

Unearned income when the taxpayer is a dependent child

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

social security

employees who incur reimbursed business expenses relating to their business expenses deduct these expenses, while self-employed individuals can deduct expenses relating to their business as AGI deductions

cannot, for

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

credit deductions

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

exemption

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

for

What type of penalty will be assessed on a taxpayer who pays her taxes due after the due date of the return? fraudulent filing gross income late payment late filing

late payment

For years after 2012, a 3.8% tax is imposed on the of certain taxpayers when modified adjusted gross income exceeds a certain threshold.

net investment income

The starting point for determining the alternative minimum tax is: regular tax liability Rationale: The starting point is regular taxable income. From this number, several adjustments are made, and the AMT exemption amount is deducted. The result is AMTI which is multiplied by the AMT rate to determine a taxpayer's tentative minimum tax. adjusted gross income Rationale: The starting point is regular taxable income. From this number, several adjustments are made, and the AMT exemption amount is deducted. The result is AMTI which is multiplied by the AMT rate to determine a taxpayer's tentative minimum tax. regular taxable income gross income Rationale: The starting point is regular taxable income. From this number, several adjustments are made, and the AMT exemption amount is deducted. The result is AMTI which is multiplied by the AMT rate to determine a taxpayer's tentative minimum tax.

regular taxable income

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

self-employment

Self-employed persons pay FICA taxes on the earnings from their business while employees pay FICA taxes on

self-employment/salary

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

social security medicare

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

yes