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Exam 7: Individual Income Tax Computation and Tax Credits

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Question 51

True/False

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Employees are not allowed to deduct FICA taxes they pay.

A) True
B) False

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Question 52

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Which of the following statements concerning differences between employees and independent contractors is most accurate?

A) Employees and independent contractors deduct business expenses as miscellaneous itemized deductions.
B) While employees are typically eligible for nontaxable fringe benefits from employers, independent contractors are not.
C) Employers are required to withhold either FICA or self employment taxes from compensation paid to employees and compensation paid to independent contractors.
D) Employers typically withhold federal income taxes from compensation paid to employees and to independent contractors.

E) B) and C)
F) A) and D)

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Question 53

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Lexa worked as an employee during the first half of the year earning $65,000 of salary. Lexa's employer withheld $4,030 of Social Security tax and $943 of Medicare tax. In the second half of the year, she was self-employed and she reported $180,000 of self-employment income on her ScheduleC. What amount of self-employment taxes is Lexa required to pay? $11,549. $\begin{array}{c}\begin{array}{|l|} \hline \text {Description}\\ \hline \text {(1) Social Security wage base limit less}\\ \text { employee compensation subject to }\\ \text {Social Security tax}\\ \hline \text {(2) Net carnings from self-employment}\\ \hline \text {(3) Social Security portion of self}\\ \text {employment tax}\\ \hline \text {(4) Employer pertion of Medicare tax on }\\ \text {the self-employment income}\\ \hline \text {(5) Sum of taxpayer's compensation and net }\\ \text {earnings from self-employment}\\ \hline \text {(6) Lesser of [Step (5) amount or \$ 200,000] }\\ × 1.45 \% \\ \hline \text {(7) Greater of [(a) zero or (b) the amount}\\\text { from Step(5) minus \$ 200,000] × 2.35 \% }\\\hline \text {(8) Steps (6) + (7) - Medicare taxes}\\ \text { withheld by Lexa's employer. This is }\\ \text {the employee portion of Medicare tax}\\ \text { on the self-employment income.}\\\hline \text {(9) Steps (3) +(4)+(8) }\\\hline\end{array}\begin{array}{l|}\hline\text { Amount }\\\hline\$52,000\\\\\\\hline166,230\\\hline6,448\\\\\hline2,410\\\\\hline231,230\\\\\hline2,900\\\\\hline734\\\\\hline2,691\\\\\\\\\hline11,549\\\hline\end{array}\begin{array}{l|} \hline \text {Explamation}\\ \hline\text {\$ 117,000-\$ 65,000 , limited to \$ 0}\\\\\\ \hline \$ 180,000×92.35 \% \\\hline\text { Lesser of [ Step(1) or (2)] × 12.4 \% } \\\\\hline \text {Step (2)× 1.45 \%} \\\\\hline\text { \$ 65,000+ Step (2) }\\\\\hline 200,000×1.45 \% \\\\\hline 31,230× 2.35 \% \\\\\hline 2,900+734-943 \\\\\\\\\hline\\\hline\end{array}\end{array}$

An 80-year-old taxpayer with earned income and no dependent children could qualify for the earned income credit.

Kaelyn's mother, Judy, looks after Kaelyn's four-year-old twins so Kaelyn can go to work (she drops off and picks up the twins from Judy's home every day) . Since Judy is a relative, Kaelyn made sure, for tax purposes, to pay her mother the going rate for child care ($6,300 for the year) . What is the amount of Kaelyn's child and dependent care credit if her AGI for the year was $36,000?

The taxable income levels in the married filing jointly tax rate schedule are _______ those in the married filing separately schedule.

Assume Georgianne underpaid her estimated tax liability by $150 in the first quarter, $500 in the second quarter, $400 in the third quarter, and $200 in the fourth quarter. Calculate her underpayment penalty for the year, assuming the federal short-term interest rate is five percent.

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

Johann had a gross tax liability of $22,508 in 2014, but his employer only withheld taxes of $19,500. Johann's gross tax liability was $21,000 in 2013. Calculate Johann's under/overpayment in each quarter for 2014 tax purposes.

How could an individual obtain a business tax credit?

Which of the following could explain why large number of taxpayers are subject to (or could become subject to) AMT?

In 2014, Shawn's AGI is $170,000. He earned the income evenly throughout the year. He owed $24,900 in federal income tax plus alternative minimum tax of $263, and self-employment taxes of $2,590. Last year, he had a gross tax liability of $50,000. What is the minimum quarterly estimated tax payment Shawn must pay each quarter to avoid underpayment penalties for 2014?

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.

In 2014, John (52 years old) files as a head of household with one 18-year old dependent (qualifying) child. John is eligible to claim a $700 American opportunity credit for the year. John did not have any taxes withheld by his employer during the year and he did not make any estimated tax payments. After taking credits into account, what is the amount of John's taxes payable or refund assuming that his AGI is $26,000 (all from salary) and his taxable income is $9,000?

Which of the following items is not added back to regular taxable income in computing alternative minimum taxable income?

Trudy is Jocelyn's friend. Trudy looks after Jocelyn's four-year-old son during the day so Jocelyn can go to work. During the year, Jocelyn paid Trudy $4,000 to care for her son. What is the amount of Jocelyn's child and dependent care credit if her AGI for the year was $30,000?

Which of the following statements regarding credits is correct?

Which of the following statements accurately describes the alternative minimum tax rate(s) ?

Which of the following statement(s) concerning estimated tax payments and underpayment penalties for individuals is (are) true?

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