Question 1

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

Accepted Answer

The American opportunity tax credit is available for students who are in their first four years of postsecondary education, not just the first two.

Question 2

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

Accepted Answer

The American opportunity tax credit and lifetime learning credit have income limits and phase-out ranges, so they are not available to all taxpayers regardless of income level.

Question 3

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

Parents can claim a child and dependent care credit for the amount paid to a caregiver, such as a sibling, as long as the caregiver is not a dependent of either parent and the care is provided in the caregiver's home.

Question 4

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

Allowing taxpayers to determine their own working hours and work without frequent oversight actually supports the classification as an independent contractor, as it suggests a level of independence in the relationship between the worker and the service recipient. Factors such as control and independence, financial risk, and relationship to the employer/client are key in determining whether someone is classified as an employee or an independent contractor.

Question 5

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 (called the Social Security Wage Base), but Medicare tax is paid on the full amount of wages without a cap.

Question 6

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 for the cost of any course of instruction, whether or not the education is part of a degree or certificate program and regardless of the student's income level.

Question 7

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 18 at year-end.

Accepted Answer

The age limit for the child and dependent care credit is not limited to children between the ages of 14 and 18. The credit can be claimed for expenses incurred for care of individuals of any age who are unable to care for themselves, such as elderly or disabled dependents.

Question 8

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

Accepted Answer

Katlyn is not required to pay self-employment tax because her net income is below the threshold amount.

Question 9

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

Accepted Answer

Each spouse's earnings are taken into account separately when calculating Social Security benefits, including the wage base limitation.

Question 10

Employees are not allowed to deduct FICA taxes they pay.

Accepted Answer

FICA taxes are paid by both employees and employers to fund Social Security and Medicare. The employee's portion of the tax is automatically deducted from their paycheck and they cannot deduct it on their tax return.

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 allows taxpayers to claim a percentage of qualified expenses, based on their income level. The maximum credit percentage is 35% of expenses.

Question 12

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

Accepted Answer

Employees are not allowed to deduct any portion of the FICA taxes they pay. These taxes are a mandatory contribution to the Social Security and Medicare programs. However, self-employed individuals can deduct a portion of the self-employment taxes they pay, which include both the employer and employee portions of FICA taxes.

Question 13

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

To determine self-employment tax, Alton must first calculate his net earnings from self-employment, which is 92.35% of his net income, and then multiply that amount by the self-employment tax rate.

Question 14

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

Accepted Answer

The additional Medicare tax is based on an individual's wages, but for married couples who file jointly, the threshold for the tax increases to $250,000 of combined wages.

Question 15

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 16

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

Accepted Answer

Tax credits directly reduce the amount of taxes owed, not just taxable income. They are typically more beneficial than tax deductions, which only reduce taxable income.

Question 17

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

Accepted Answer

The child tax credit begins to phase out for taxpayers with AGI above $200,000 for single filers and $400,000 for married filing jointly.

Question 18

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, not the full amount.

Question 19

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

Accepted Answer

The earned income credit is sometimes referred to as a negative income tax because it provides a refundable tax credit to low-income workers that can exceed the amount of taxes they owe, effectively resulting in a negative tax liability.

Question 20

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 a portion of the FICA taxes, while the employee is responsible for paying the other portion through withholding. As an independent contractor, the individual is responsible for paying the entire FICA tax themselves, but they may have other tax benefits such as deducting business expenses. Whether it is advantageous to be an employee or independent contractor depends on individual circumstances and factors.

Quiz 8: Individual Income Tax Computation and Tax Credits