Question 1

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.

Question 2

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

Accepted Answer

The alternative minimum tax (AMT) is calculated based on an adjusted version of taxable income which includes certain tax preferences and adjustments. Therefore, regular taxable income is the starting point for determining the AMT.

Question 3

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 4

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 5

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 when a child has unearned income over a certain amount. In this case, the child's income is taxed at the parents' marginal tax rate.

Question 6

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 7

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 exempt from the 3.8% Net Investment Income tax. This tax only applies to certain types of passive investment income, such as interest, dividends, and capital gains.

Question 8

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 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.

Question 9

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 10

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

Accepted Answer

The AMT exemption amount is phased-out for taxpayers with income above a certain threshold. The phase-out starts when income exceeds $1,036,800 for married filing jointly and $518,400 for other taxpayers in 2020. As income increases beyond the threshold, the exemption amount is reduced by 25 cents for each additional dollar of income.

Question 11

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 not simply twice the amount of the schedules for single individuals, which can lead to a higher tax rate for a married couple with similar incomes. This is known as the marriage penalty.

Question 12

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

Accepted Answer

The kiddie tax only applies to children who are under 19 years old at the end of the tax year, or who are under 24 years old and full-time students. Children over 24 years old are not subject to the kiddie tax.

Question 13

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

Accepted Answer

This is because the alternative minimum tax (AMT) was designed to ensure that high-income taxpayers who take advantage of certain tax deductions and credits still pay a minimum amount of tax. As regular income tax rates decrease, more taxpayers may fall into the category of benefiting from these deductions and credits, which could trigger the AMT.

Question 14

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

Tax rate schedules are provided for taxpayers with higher incomes because they have more complex tax situations and may have more deductions or credits to consider, whereas tax tables are simpler and easier to use for lower income taxpayers who may not have as many deductions or credits.

Question 15

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

The answer of Both the width (or range) of the...

Question 16

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 17

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

The answer of A marriage penalty occurs when a couple...

Question 18

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 state income taxes may be limited or not deductible.

Question 19

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 20

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

Accepted Answer

The alternative minimum tax does not allow for personal or dependency exemptions to be deducted.

Quiz 7: Individual Income Tax Computation and Tax Credits