Chapter 8 SmartBook

The __________ credit is available for students enrolled in a qualified postsecondary educational institution during the first four years of their education.

American Opportunity

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

April 15

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

For AGI against business income

There is one tax infraction that incurs a penalty calculated as 15% of the amount of tax owed per month with a maximum penalty of 75%. What violation incurs this level of penalty? Multiple choice question.

Fraudulent failure to file

When is an individual required to file a tax return?

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

Investment interest expense that was NOT deductible for regular taxable income will be deductible for AMTI to the extent it was attributable to interest income that was __________ for regular tax purposes, but is __________ for AMTI.

Tax exempt; taxable

How can taxpayers protect themselves from incurring an underpayment penalty?

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

Choose the following statement that are CORRECT regarding Social Security and Medicare taxes?

The Social Security tax rate is 12.4% of wages up to a maximum wage amount. Single taxpayers will pay an increased rate of Medicare tax when their tax base exceeds $200,000. There is no wage cap (maximum wage limitation) for Medicare taxes.

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

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

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

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

When a married couple's tax liability is smaller using the married filing jointly status than it would have been if both individuals were unmarried and filed as single, the difference in the tax liability is called

marriage benefit

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

nonrefundable; twenty

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

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: $58,304; Tax: $58,304 Reason: 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.

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

False Reason: The underpayment is calculated and assessed for each quarter the taxpayer is underpaid.

True or false: Self-employed taxpayers pay the employee portion of the FICA tax burden through self-employment taxes, but they are exempt from paying the employer portion.

False Reason: Self-employed taxpayers pay the entire FICA tax burden, not just the employee portion, through the self-employment tax.

Which of the following taxpayers can use the tax rate schedule to calculate the tax on all of his or her taxable income without having to perform additional calculations to determine the tax on varying types of income?

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

Medicare Tax

Helps pay medical costs for qualifying individuals

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

Her tax liability will decrease by $400.

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

Her tax liability will decrease by $48.

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 is the amount of the alternative minimum tax determined?

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

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

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

Unearned income when the taxpayer is a dependent child

During the current year, Barry (single taxpayer) has taxable income of $60,000. Of that amount, $10,000 is long-term capital gain. How will Barry calculate the tax on his income?

Use the tax rate schedule to calculate tax on $50,000; multiply the capital gain income of $10,000 by 15%; then add the two amounts together.

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

Withholdings; estimated

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

alternative minimum tax

Taxpayers may be subject to an __________ if they have taxes due and have NOT met the safe harbor provisions.

underpayment penalty

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

$2,250 Reason: He is limited to 100 percent of the first $2,000 and 25 percent of the next $2,000.

Sheri's only source of income for the year is a salary of $40,000. She is not married and has three dependent children who are not eligible for the child tax credit. Sheri's tax liability is $1,795 before any credits or prepayments are applied. She had $2,000 withheld from her salary. After applying the earned income credit, what is the amount of Sheri's refund?

$2,512 refund Reason: 21.06% * ($40,000 - $19,330) = $4,353. Max credit $6,660 - $4,353 = $2,307 + 205 overpayment ($2,000 - $1,795). So, $2,307 + $205 = $2,512.

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. The amount of their child tax credit is

$2,900

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

$3,000

Ben's tax information is as follows: AGI for 2020 = $101,000 Withholding for 2020 = $5,600 Total tax for 2020 = $10,400 Total tax for 2019 = $11,750 How much per quarter must Ben pay in estimated taxes to avoid a penalty?

$940 per quarter Reason: To avoid the underpayment penalty, Ben must pay the lesser of 90% of the current year tax liability ($9,360) or 100% of the previous year tax liability ($11,750). Since his 2020 withholding will be $5,600, Ben must pay at least $3,760 ($9,360 - $5,600). So, $3,760/4 = $960 per quarter.

Darcy received $2,000 in qualified dividends this year and has ordinary income of $20,000. Assuming Darcy has no other taxable income, the tax rate will be assessed on the $2,000 dividend is

0%

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

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

Social Security Tax rate

12.4%

Medicare Tax Rate on the tax base up to $200,000 (for single taxpayers).

2.9%

The lifetime learning credit is equal to _____ of eligible expenses up to an annual maximum of _____ of eligible expenses in one year.

20%; $10,000

Allie's only source of income for the year is wages from a part-time job of $9,000. She is not married and has one dependent child. Allie has no tax liability and she had no income tax withheld by her employer. What is the amount of Allie's earned income credit? Multiple choice question.

3,060 Reason: She will receive a refund of $3,060 ($9,000 x .34) even though she has no tax liability and no withholdings.

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

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

Christina's taxable income is $35,000. Charlie's is $50,000, and Chris' is $500,000. Each of these taxapyers additionally earned $1,000 of long term capital gain income in 2020. All of the taxpayers file as single. Which of the following answers is correct regarding the amount of tax liability assessed on the capital gain?

Chris will pay $200 in tax. Reason: Since Chris' taxable income is over $441,450, the preferential capital gains rate is 20%.

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

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

Medicare

Which one of the following types of income ARE part of net investment income for purposes of calculating the Net Investment Income tax?

Passive activity income Interest income Annuity income Dividends income

Social Security Tax

Provides basic pension coverage for the retired and disabled

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

Social Security

Which of the following amounts ARE added back to regular taxable income to arrive at alternative minimum taxable income?

State income taxes Standard deduction Tax-exempt income from private activity bonds

Employees _____ deduct their unreimbursed business expenses , while self-employed individuals can deduct their business expenses _____ AGI.

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.

credits; deduction

The basis for requiring employers to withhold taxes from employees' pay and requiring periodic estimated tax payments from taxpayers with income not subject to withholding is known as the:

pay-as-you-go basis.

In order to qualify for the maximum child tax credit, the child must meet the requirements to be a __________ and be under age _____ at the end of the year.

qualifying child; 17

The starting point for determining the alternative minimum tax is

regular taxable income

Individual taxpayers who are unable to file by the due date can request an automatic __________ extension to file.

six-month

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

Each separate range of income subject to a different tax rate is referred to as a

tax bracket

Baxter and Bailey use the married filing jointly filing status on their tax return.They incurred $4,000 in undergraduate tuition for Bailey to finish her degree. She was in her fifth year and graduated in May. Baxter started graduate school in August. They spent $8,000 in tuition for his education. What is the amount of their lifetime learning credit?

$2,000 Reason: 20% of the first $10,000 in eligible expenses

What is the amount of the child tax credit? Multiple choice question.

A maximum of $2,000 for each qualifying child

Medicare Tax Rate on the tax base above $200,000 (for single taxpayers).

3.8%

The late filing penalty equals _____ of the amount of tax owed for each month that the tax return is late, with a maximum penalty of _____

5%; 25%

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

6,000

To avoid underpayment penalties, taxpayers should ensure the amount of withholding and/or estimated tax payments equal or exceed _____ of their current tax liability or _____ of their previous-year tax liability (_____ for individuals with AGI greater than $150,000).

90%; 100%; 110%

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

Expenditures for care within the home can qualify for the credit. The qualifying expenditures are limited to the earned income of the lesser-earning spouse when married filing jointly. The minimum dependent care credit is 20% of qualifying expenditures.

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

False

Self employment tax

Includes the employer and employee portion of FICA taxes

The __________ credit is available for individuals in any course of instruction to acquire or improve their job skills.

Lifetime Learning

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

Long-term capital gain income Qualified dividend income

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

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