Question 1

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

Accepted Answer

Self-employed taxpayers can only deduct half of the self-employment tax they pay, not the full amount.

Question 2

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

Accepted Answer

The AOC is available for the first four years of postsecondary education.

Question 3

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 pay for the cost of courses that will help them acquire or improve their job skills. There is no age limit for this credit.

Question 4

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

Accepted Answer

FICA taxes, which fund Social Security and Medicare, are not deductible by employees on their personal tax returns.

Question 5

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 withholding and paying both the employee and employer portions of FICA taxes, while as an independent contractor, the individual is responsible for paying both portions themselves. However, there are benefits and drawbacks to both employee and independent contractor status, and the determination is based on factors such as control and independence over the work, financial arrangements, and other legal considerations.

Question 6

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 qualifying taxpayers to a credit based on a percentage of their qualified expenses, which varies based on their income. The maximum percentage is 35%.

Question 7

Due to the alternative minimum tax rate structure, a taxpayer with a large amount of long-term capital gains may be susceptible to the alternative minimum tax.

Accepted Answer

The alternative minimum tax is calculated using a different rate structure and rules than the regular income tax system. In general, taxpayers with high income, large deductions, or certain types of income (such as long-term capital gains) are more likely to be subject to the alternative minimum tax. Therefore, a taxpayer with a large amount of long-term capital gains may be susceptible to the alternative minimum tax.

Question 8

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

Alton must first calculate his net earnings from self-employment, which is 92.35% of his net income, before applying the self-employment tax rate.

Question 9

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

The child and dependent care credit can be claimed if the taxpayers pay someone to care for their child while they work, and the caregiver is not their spouse or dependent. Since Janet is Sally's sister, she is neither John nor Sally's spouse or dependent, and thus they can claim the credit based on the amount they pay her for caring for Dexter.

Question 10

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 11

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

The statement is false. The level of control exercised by the employer over the work performed is a crucial factor in determining the classification of a worker as an employee or an independent contractor. The more control an employer exercises over how, when, and where a worker performs the work, the more likely the worker will be classified as an employee. On the other hand, the more autonomy a worker has in determining how, when, and where to perform the work, the more likely the worker will be classified as an independent contractor. Additionally, there are other factors the IRS considers in worker classification, including the nature of the relationship between the worker and the employer, the type of work performed, and the degree of financial control the worker has over the work performed.

Question 12

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 for self-employment tax liability.

Question 13

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 dependent must be under the age of 13.

Question 14

Employees are not allowed to deduct FICA taxes they pay.

Accepted Answer

FICA taxes are payroll taxes that are automatically deducted from an employee's paycheck by their employer. These taxes are used to fund Social Security and Medicare programs. It is not permissible for employees to deduct these taxes from their tax return.

Question 15

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, meaning that taxpayers with higher incomes may not be eligible for the full credit or any credit at all.

Question 16

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

Each dependent must be under the age of 17 at year-end for the $2,000 child tax credit.

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 modified AGIs above certain amounts, which are $200,000 for single filers and $400,000 for married filing jointly filers.

Question 18

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

Accepted Answer

Tax credits reduce tax liability dollar for dollar.

Question 19

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

The Social Security wage base is limited; the Medicare wage base is not.

Question 20

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

Accepted Answer

Each spouse is considered separately for Social Security purposes, so the wage base limitation applies to each individual's earnings.

Quiz 8: Individual Income Tax Computation and Tax Credits