Question 1

Both the width (or range) of the tax brackets (the amount of income taxed at a particular rate) in the tax rate schedules and the range of the tax rates in the tax rate schedules (the difference between the lowest tax rate and the highest tax rate) vary by filing status.

Accepted Answer

False

Question 2

In certain circumstances a child with very little income may have their income taxed at the parents' marginal tax rate.

Accepted Answer

This is known as the "kiddie tax" and applies to children under the age of 18 (or under 24 if a full-time student) who have unearned income exceeding a certain threshold. In these cases, the child's income is taxed at the parents' marginal tax rate.

Question 3

A marriage penalty occurs when a couple pays more taxes by filing a joint tax return than they would have paid had they filed married filing separate returns.

Accepted Answer

False

Question 4

If both spouses of a married couple earn roughly equivalent wages, the couple is likely to pay a marriage penalty due to the nature of the tax rate schedules.

Accepted Answer

The tax rate schedules for married couples are designed in a way that may cause them to pay more taxes than if they were single taxpayers with the same income. This is known as the marriage penalty, and it can affect couples with comparable incomes, especially if they are in high tax brackets.

Question 5

The alternative minimum tax is the AMT base multiplied by the AMT rate.

Accepted Answer

The answer of The alternative minimum tax is the AMT...

Question 6

The alternative minimum tax system requires taxpayers to apply an alternative tax rate on the regular income tax base to determine the amount of the alternative minimum tax.

Accepted Answer

The alternative minimum tax (AMT) requires taxpayers to calculate their tax liability twice—once under the regular income tax system and once under the AMT system, which uses a broader definition of taxable income and allows fewer deductions. The taxpayer then pays the higher of the two amounts.

Question 7

Regular taxable income is the starting point for determining the alternative minimum tax.

Accepted Answer

This statement is true. The alternative minimum tax (AMT) is calculated based on a taxpayer's adjusted gross income, with certain deductions and exemptions added back, to arrive at taxable income. This starting point is the same as for calculating regular income tax.

Question 8

The kiddie tax does not apply to children over 24 years old at the end of the tax year.

Accepted Answer

This is true. The kiddie tax only applies to children who are under 18 years old at the end of the tax year, or those who are between the ages of 18 and 24 and are full-time students.

Question 9

The tax rate schedules are set up to tax lower levels of income at higher tax rates than higher levels of income.

Accepted Answer

The tax rate schedules are typically set up to tax higher levels of income at higher tax rates than lower levels of income. This is known as a progressive tax system, where those who earn more income pay a higher percentage in taxes than those who earn less income.

Question 10

Tax rate schedules are provided for use by (relatively) higher income taxpayers while the tax tables are provided for use by (relatively) lower income taxpayers.

Accepted Answer

This is because tax rate schedules account for the progressive nature of the tax system, where higher earners are subject to higher tax rates on certain portions of their income. Tax tables, on the other hand, provide a simplified method of calculating tax liability for those with lower incomes who may not be subject to the same level of complexity in the tax code.

Question 11

All else equal, a reduction in regular income tax rates would require more taxpayers to pay the alternative minimum tax.

Accepted Answer

If regular income tax rates are reduced, more taxpayers may be exempt from paying regular income taxes, but the alternative minimum tax (AMT) has its own separate tax rate and income thresholds. Therefore, a reduction in regular income tax rates could cause more taxpayers to exceed the AMT income thresholds and become subject to paying the AMT.

Question 12

Taxpayers are not allowed to deduct personal or dependency exemptions for alternative minimum tax purposes.

Accepted Answer

Taxpayers cannot claim personal or dependency exemptions for alternative minimum tax purposes.

Question 13

For alternative minimum tax purposes, taxpayers are allowed to deduct state income taxes but are not allowed to deduct charitable contributions.

Accepted Answer

The statement is false. Taxpayers are allowed to deduct charitable contributions for alternative minimum tax purposes, but they are not allowed to deduct all state income taxes. Only a certain amount of state income taxes can be deducted for AMT purposes.

Question 14

Generally, income from an active trade or business is subject to the 3.8% Net Investment Income tax.

Accepted Answer

Income from an active trade or business is generally not subject to the 3.8% Net Investment Income tax, which primarily applies to certain passive investment income.

Question 15

All capital gains are taxed at preferential rates.

Accepted Answer

Capital gains can be taxed at different rates depending on factors such as the asset's holding period and the taxpayer's income level. Long-term capital gains generally receive preferential tax rates, while short-term capital gains are taxed at ordinary income tax rates.

Question 16

If a married couple has one primary breadwinner, filing a joint return will likely result in a marriage penalty.

Accepted Answer

Filing jointly often results in lower taxes due to more favorable tax brackets and deductions, not a penalty, especially when there's a significant income disparity between spouses.

Question 17

For alternative minimum tax purposes, taxpayers are required to add back the regular tax standard deduction amount for their filing status whether or not they itemized deductions for regular tax purposes.

Accepted Answer

The answer of For alternative minimum tax purposes, taxpayers are...

Question 18

The AMT exemption amount is phased-out for high income taxpayers.

Accepted Answer

The AMT exemption amount is phased-out for high income taxpayers. This means that as a taxpayer's income increases, the AMT exemption amount is reduced until it is completely phased out for those with very high incomes.

Question 19

Long-term capital gains, dividends, and taxable interest income are all taxed at preferential rates.

Accepted Answer

The answer of Long-term capital gains, dividends, and taxable interest...

Question 20

Long-term capital gains are taxed at the stated AMT rate for purposes of the alternative minimum tax.

Accepted Answer

Long-term capital gains are taxed at preferential rates under both the regular tax system and the Alternative Minimum Tax (AMT) system, not at the AMT's stated rates.

Quiz 7: Individual Income Tax Computation and Tax Credits