Question 1

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 actually false. As an employee, the employer is responsible for paying half of the FICA taxes (Social Security and Medicare) and the employee is responsible for paying the other half through payroll deductions. However, as an independent contractor, the taxpayer is responsible for paying both the employer and employee portions of the FICA taxes on their own, which can lead to a higher tax burden.

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

Question 3

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 are actually more likely to be classified as independent contractors if they are allowed to determine their own working hours and work without frequent oversight, because these factors suggest that the worker has more control over the job and operates independently of the employer. Other factors, such as level of skill required, tools and equipment provided, and degree of integration into the employer's business, also play a role in determining worker classification.

Question 4

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.

Question 5

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 6

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 7

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 and phaseouts, so not all taxpayers are eligible.

Question 8

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.

Question 9

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 incorrect. Parents may claim a child and dependent care credit for expenses incurred in providing for their dependents while the parents work, but the children must be under age 13 at year-end (or any age if the dependent is disabled).

Question 10

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 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 entitles qualifying taxpayers to a credit equal to a percentage (usually 20-35%) of their qualified expenses, not the full amount. The percentage varies based on income and other factors.

Question 12

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 13

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 Janet to care for Dexter, as long as they meet certain qualifications and requirements set by the IRS.

Question 14

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 the first four years of postsecondary education.

Question 15

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 courses that improve their job skills.

Question 16

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

Accepted Answer

The additional Medicare tax is based on the combined wages of a married couple if they file a joint tax return. If they file separately, the tax is calculated based on each individual's wages.

Question 17

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 a certain income threshold and reduces the credit by $50 for every $1,000 above that threshold.

Question 18

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 19

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

Accepted Answer

Each spouse has their own separate Social Security earnings record and can earn up to the wage base limit for their own account.

Question 20

Employees are not allowed to deduct FICA taxes they pay.

Accepted Answer

FICA taxes are paid by employees to fund Social Security and Medicare programs. These taxes cannot be deducted by the employees, as they are a mandatory contribution towards these programs.

Quiz 8: Individual Income Tax Computation and Tax Credits