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 false. As an employee, the employer is responsible for withholding and paying both the employee and employer portions of the FICA taxes. As an independent contractor, the taxpayer is responsible for paying both portions of the FICA taxes themselves. This statement is false. As an employee, the employer is responsible for paying half of the FICA taxes, while the employee pays the other half. As an independent contractor, the individual is responsible for paying the entire amount of the self-employment tax, which includes the equivalent of both the employer and employee portions of FICA taxes. However, being an employee may provide certain benefits and protections that independent contractors do not have.

Question 2

Employees are not allowed to deduct FICA taxes they pay.

Accepted Answer

FICA taxes are considered employer and employee taxes, meaning both the employer and employee are responsible for paying their own portion of the tax. The employee's portion is automatically withheld from their paycheck and reported on their W-2 at year-end. The employee cannot deduct this amount on their income tax return. Only the employer can deduct and match FICA taxes for their employees. Employees cannot deduct these taxes on their personal tax returns.

Question 3

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

Accepted Answer

Employees are not allowed to deduct a portion of the FICA taxes they pay. FICA taxes are mandatory payroll taxes that fund Social Security and Medicare programs, and employees are not able to deduct them on their tax returns.

Question 4

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

Accepted Answer

Each spouse's individual earnings are subject to the Social Security wage base limit. Each spouse is subject to their own individual Social Security wage base limitation for calculating their benefits.

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

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 may claim a child and dependent care credit for the amount they pay Janet to care for Dexter, as long as Janet is not their child and is providing care in her home. According to the IRS, expenses paid for the care of a qualifying individual to enable both parents, if living, or the taxpayer and spouse if filing jointly, to work or actively look for work are eligible for the child and dependent care credit. As long as Janet is a qualified care provider and John and Sally are both working or actively seeking employment, they can claim the credit based on the amount they pay Janet to care for Dexter.

Question 7

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 8

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

Accepted Answer

The earned income credit is a refundable tax credit designed to assist low-income workers. It can result in a negative tax liability, meaning the taxpayer may receive a refund even if they had no tax liability to begin with. This is why it is sometimes referred to as a negative income tax. The earned income credit is often referred to as a negative income tax because it is a tax credit that can result in a refund for taxpayers with low to moderate incomes, effectively reducing their tax liability below zero.

Question 9

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 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

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

Accepted Answer

The additional Medicare tax applies to individuals with wages or self-employment income above a certain threshold, regardless of marital status. However, for married couples filing jointly, the additional Medicare tax is based on their combined wages. The additional Medicare tax is based on the combined wages of married couples filing jointly, but for couples filing separately, the tax is based on individual wages.

Question 12

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 their first or second year. False, the American opportunity tax credit is available for students who are in their first four years of postsecondary education.

Question 13

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 for any course of instruction to acquire or improve job skills, without any age restrictions. The lifetime learning credit can indeed be used towards any course of instruction to acquire or improve a taxpayer's job skills, and there is no age restriction for the taxpayer.

Question 14

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 statement is incorrect. The child and dependent care credit can be claimed for dependents who are under age 13 or who are unable to care for themselves due to a disability, regardless of their age. The age limit for the child and dependent care credit is actually under age 13, not under age 18.

Question 15

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

Accepted Answer

Both the American opportunity tax credit and lifetime learning credit have income limits for eligibility. The American opportunity tax credit has a modified adjusted gross income limit of $80,000 ($160,000 for married couples filing jointly) while the lifetime learning credit has a limit of $68,000 ($136,000 for married couples filing jointly) in 2021. The American opportunity tax credit and lifetime learning credit have income limits and are not available to taxpayers whose income exceeds certain thresholds.

Question 16

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 determination of employee or independent contractor classification is based on a variety of factors, including the amount of control the employer has over the worker's behavior and work results. While the ability to determine working hours and work independently may be one factor, it is not the sole determinant of classification. The statement is actually opposite to the truth. Taxpayers are more likely to be classified as independent contractors rather than employees if they have control over their working hours and the way they perform their work without frequent oversight. This is because control over these factors is one of the key criteria used by the IRS to determine the classification of workers.

Question 17

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 for a credit of a percentage of qualified expenses, not the full amount. The percentage varies based on income level. The child and dependent care credit entitles qualifying taxpayers to a credit equal to a percentage of their qualified expenses, up to a maximum amount. The percentage ranges from 20-35%, depending on the taxpayer's income.

Question 18

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 (adjusted gross income). This means that the credit amount gradually decreases as the taxpayer's income goes above certain levels. The child tax credit begins to phase out when a taxpayer's AGI exceeds certain thresholds, so it is subject to phase-out based on the taxpayer's AGI.

Question 19

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 20

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

Accepted Answer

Tax credits reduce a taxpayer's tax liability (the amount of tax owed) dollar for dollar, not their taxable income. Tax credits reduce a taxpayer's tax liability dollar for dollar, not their taxable income.

Quiz 8: Individual Income Tax Computation and Tax Credits