Individual Income Tax Computation and Tax Credits

Chapter 07

True / False Questions

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 di”erence between the lowest tax rate and the highest tax rate) vary

by $ling status.

True False

2. The tax rate schedules are set up to tax lower levels of income at higher tax rates

than higher levels of income.

True False

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 False

4. If a married couple has one primary breadwinner, $ling a joint return will likely result

in a marriage penalty.

True False

5. If both spouses of a married couple earn roughly equivalent wages, the couple is

likely to pay a marriage penalty due to the nature of the tax rate schedules.

True False

6. A marriage penalty occurs when a couple pays more taxes by $ling a joint tax return

than they would have paid had they $led married $ling separate returns.

True False

7. All capital gains are taxed at preferential rates.

True False

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in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

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

preferential rates.

True False

9. Generally, income from an active trade or business is subject to the 3.8% Medicare

contribution tax.

True False

10. In certain circumstances a child with very little income may have their income taxed

at the parents’ marginal tax rate.

True False

11. The kiddie tax does not apply to children over 24 years old at the end of the tax

year.

True False

12. 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.

True False

13. Regular taxable income is the starting point for determining the alternative minimum

tax.

True False

14. The alternative minimum tax is the AMT base multiplied by the AMT rate.

True False

15. Long-term capital gains are taxed at the stated AMT rate for purposes of the

alternative minimum tax.

True False

16. Taxpayers are not allowed to deduct personal or dependency exemptions for

alternative minimum tax purposes.

True False

7-2

in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

17. For alternative minimum tax purposes, taxpayers are required to add back the

regular tax standard deduction amount for their $ling status whether or not they

itemized deductions for regular tax purposes.

True False

18. For alternative minimum tax purposes, taxpayers are allowed to deduct state income

taxes but are not allowed to deduct charitable contributions.

True False

19. The AMT exemption amount is phased-out for high income taxpayers.

True False

20. All else equal, a reduction in regular income tax rates would require more taxpayers

to pay the alternative minimum tax.

True False

21. Due to the alternative minimum tax rate structure, timing tax planning strategies are

not e”ective under the alternative minimum tax system.

True False

22. Employees must pay both Social Security tax and Medicare tax on all of their wages

no matter the amount of their wages.

True False

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

each spouse.

True False

24. For married couples, the Medicare tax is based on the couple’s combined wages.

True 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.

True 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.

True False

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in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

27. Self-employed taxpayers are allowed to deduct the full amount of the

self-employment taxes they pay.

True False

28. Employees are not allowed to deduct FICA taxes they pay.

True False

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

True False

30. Katlyn reported $300 of net income from her sole proprietorship. She is not required

to pay self-employment tax.

True 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.

True False

32. Tax credits reduce a taxpayer’s taxable income dollar for dollar.

True False

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

True False

34. Parents may claim a 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.

True False

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.

True False

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 False

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in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

37. The child and dependent care credit entitles qualifying taxpayers to a credit equal to

the full amount of qualified expenses.

True False

38. The American opportunity credit is available only for those students who are in their

first or second year of postsecondary education.

True False

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 False

40. The American opportunity credit and lifetime learning credit are available to all

taxpayers regardless of their income level.

True False

41. The earned income credit is sometimes referred to as a negative income tax.

True False

42. To qualify for the earned income credit, the taxpayer must have a quali$ed

dependent.

True False

43. An 80-year-old taxpayer with earned income and no dependent children could qualify

for the earned income credit.

True False

44. Business credits are generally refundable credits.

True False

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

credits.

True False

46. When applying credits against a taxpayer’s gross tax liability, nonrefundable personal

credits are applied first, then business credits, and $nally refundable personal

credits.

True False

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in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

47. An individual could pay 100% of her tax liability by the due date of her tax return and

still be subject to underpayment tax penalties.

True False

48. Depending on the year, the original (unextended) due date for an individual’s tax

return may be after April 15.

True False

49. Depending on the year, the original (unextended) due date for an individual’s tax

return may be before April 15.

True False

50. Individuals may $le for and receive a six-month extension of time to $le their tax

return and pay their taxes without penalty.

True 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.

True False

Multiple Choice Questions

52. Which of the following is not a taxpayer $ling status for purposes of determining the

appropriate tax rate schedule?

A. Head of

Household

B. Qualifying Widow or

Widower

C. Married Filing