Question 1

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. Taxpayers with higher incomes may not be able to claim the full amount or any of the credits.

Question 2

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 only applies to certain investment income such as interest, dividends, and capital gains.

Question 3

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. FICA taxes are mandatory payroll taxes that fund Social Security and Medicare programs.

Question 4

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 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

This statement is false. The determination of whether a taxpayer is classified as an employee or an independent contractor depends on multiple factors, including the degree of control the employer has over the taxpayer's work, the type of work being performed, and the relationship between the parties. While the ability to determine one's own working hours and work without frequent oversight may be relevant factors, they are not determinative on their own.

Question 6

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 taxable income.

Question 7

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

Accepted Answer

This statement is false. The American opportunity credit is available for any student who has not completed four years of postsecondary education and who meets other eligibility criteria.

Question 8

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 statement is false. Parents may claim the child and dependent care credit for dependents under age 13 or for dependents of any age who are physically or mentally incapable of caring for themselves.

Question 9

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 10

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 11

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 modified adjusted gross income (MAGI).

Question 12

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 is not restricted by age and can be used towards any course of instruction that improves a taxpayer's job skills.

Question 13

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

Accepted Answer

The additional Medicare tax is calculated based on the combined wages of married couples who file jointly.

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 half of the FICA taxes (Social Security and Medicare) while the employee is responsible for the other half. However, as an independent contractor, the taxpayer is responsible for paying both the employee and employer portion of the self-employment tax, which includes both Social Security and Medicare taxes.

Question 15

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 if they pay Janet to care for their child Dexter during the day.

Question 16

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 allows taxpayers to claim a credit based on a percentage of their qualifying expenses, which varies depending on their income. It is not equal to the full amount of expenses.

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

Question 18

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 19

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

Accepted Answer

Each individual spouse in a married couple is subject to the Social Security wage base limitation for their own wages and earnings.

Question 20

Employees are not allowed to deduct FICA taxes they pay.

Accepted Answer

FICA taxes, which consist of Social Security and Medicare taxes, are payroll taxes that employers are required to withhold from employees' paychecks and remit to the government. Employees are not allowed to deduct the FICA taxes they pay from their income tax liability because these taxes are not considered income taxes.

Quiz 8: Individual Income Tax Computation and Tax Credits