Question 1

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

Accepted Answer

Income from an active trade or business is not subject to the 3.8 percent net investment income tax. This tax applies to certain investment income such as interest, dividends, and rental income.

Question 2

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.

Accepted Answer

The lifetime learning credit can be used by taxpayers of any age to cover the cost of any course of instruction that improves their job skills.

Question 3

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

Accepted Answer

Employees are not allowed to deduct FICA taxes from their income tax return. However, employers can deduct their portion of FICA taxes as a business expense.

Question 4

Employees are not allowed to deduct FICA taxes they pay.

Accepted Answer

FICA taxes are a mandatory deduction from the employee's paycheck and cannot be deducted by the employee themselves.

Question 5

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.

Accepted Answer

Taxpayers being allowed to determine their own working hours and work without frequent oversight are actually indicators of independent contractor status rather than employee status. Employee status typically involves a set schedule and regular oversight from supervisors. Factors such as level of control, financial aspects, and the relationship between the taxpayer and the entity they work for are considered in determining employment status.

Question 6

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.

Accepted Answer

The child tax credit generally applies to dependent children who are under 17 years of age at the end of the tax year.

Question 7

Self-employed taxpayers are allowed to deduct the full amount of the self-employment taxes they pay.

Accepted Answer

Self-employed taxpayers are allowed to deduct only 50% of the self-employment taxes they pay as an adjustment to income on their tax return.

Question 8

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

Accepted Answer

The American opportunity credit and lifetime learning credit have income limits for eligibility.

Question 9

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

Accepted Answer

The answer of Katlyn reported $300 of net income from...

Question 10

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.

Accepted Answer

The answer of Alton reported net income from his sole...

Question 11

The child and dependent care credit entitles qualifying taxpayers to a credit equal to the full amount of qualified expenses.

Accepted Answer

The child and dependent care credit only entitles taxpayers to a credit equal to a percentage of their qualified expenses, based on their adjusted gross income. The percentage ranges from 20 to 35%.

Question 12

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.

Accepted Answer

John and Sally can claim a child and dependent care credit for the amount they pay to Janet to watch their child Dexter.

Question 13

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

Accepted Answer

Tax credits reduce a taxpayer's tax liability dollar for dollar, not their taxable income. Tax deductions reduce taxable income.

Question 14

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.

Accepted Answer

This statement is false. As an employee, the employer is responsible for paying their portion of FICA taxes, while the employee is responsible for paying their portion. However, as an independent contractor, the taxpayer is responsible for paying both the employer and employee portions of the self-employment tax, which includes FICA taxes.

Question 15

The American opportunity credit is available only for those students who are in their first or second year of postsecondary education.

Accepted Answer

The American opportunity credit is available for students who are in their first four years of postsecondary education.

Question 16

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

Accepted Answer

Each spouse is responsible for paying Social Security taxes on their own income up to the wage base limit, regardless of whether they file jointly or separately.

Question 17

Employees must pay both Social Security tax and Medicare tax on the full amount of their wages no matter the amount of their wages.

Accepted Answer

Employees pay Social Security tax only up to a certain wage limit (the Social Security Wage Base), but Medicare tax is paid on the full amount of wages without a cap.

Question 18

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.

Accepted Answer

The correct age range for children to qualify for the child and dependent care credit is under age 13, not under age 20.

Question 19

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

Accepted Answer

The additional Medicare tax for married couples is based on their combined wages.

Question 20

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

Accepted Answer

The child tax credit is subject to phase-out based on the taxpayer's AGI. The phase-out begins at an AGI of $200,000 for single filers and $400,000 for married filing jointly.

Quiz 8: Individual Income Tax Computation and Tax Credits