Chapter 07 Individual Income Tax Computation and Tax Credits

Chapter 07

Individual Income Tax Computation and Tax Credits

True / False Questions

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.

True False

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

True False

3. 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.

True False

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

True False

5. 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.

True False

6. 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.

True False

7. All capital gains are taxed at preferential rates.

True False

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

True False

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

True False

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

True False

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

True False

12. 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.

True False

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

True False

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

True False

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

True False

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

True False

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.

True False

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

True False

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

True False

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

True False

21. Due to the alternative minimum tax rate structure, timing tax planning strategies are not effective under the alternative minimum tax system.

True False

22. Employees must pay both Social Security tax and Medicare tax on all of their wages no matter the amount of their wages.

True False

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

True False

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

True False

25. 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.

True False

26. 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.

True False

27. Self-employed taxpayers are allowed to deduct the full amount of the self-employment taxes they pay.

True False

28. Employees are not allowed to deduct FICA taxes they pay.

True False

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

True False

30. Katlyn reported $300 of net income from her sole proprietorship. She is not required to pay self-employment tax.

True False

31. 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.

True False

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

True False

33. The child tax credit is subject to phase-out based on the taxpayer's AGI.

True False

34. Parents may claim a 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.

True False

35. 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.

True False

36. 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.

True False

37. The child and dependent care credit entitles qualifying taxpayers to a credit equal to the full amount of qualified expenses.

True False

38. The American opportunity credit is available only for those students who are in their first or second year of postsecondary education.

True False

39. 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.

True False

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

True False

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

True False

42. To qualify for the earned income credit, the taxpayer must have a qualified dependent.

True False

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

True False

44. Business credits are generally refundable credits.

True False

45. Taxpayers are generally allowed to carry back and/or carry forward unused business credits.

True False

46. When applying credits against a taxpayer's gross tax liability, nonrefundable personal credits are applied first, then business credits, and finally refundable personal credits.

True False

47. An individual could pay 100% of her tax liability by the due date of her tax return and still be subject to underpayment tax penalties.

True False

48. Depending on the year, the original (unextended) due date for an individual's tax return may be after April 15.

True False

49. Depending on the year, the original (unextended) due date for an individual's tax return may be before April 15.

True False

50. Individuals may file for and receive a six-month extension of time to file their tax return and pay their taxes without penalty.

True False

51. The late payment penalty is based on the amount of tax owed and the number of days that the tax is not paid. The maximum amount of the penalty is unlimited.

True False

Multiple Choice Questions

52. Which of the following is not a taxpayer filing status for purposes of determining the appropriate tax rate schedule?

A. Head of Household

B. Qualifying Widow or Widower

C. Married Filing Separately

D. Single

E. All of these are taxpayer filing statuses

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

A. the same as

B. double

C. half the amount of

D. None of these

54. Linda is a qualifying widow in 2014. In 2014, she reported $75,000 of taxable income (all ordinary). What is her gross tax liability using the tax rate schedules?

A. $10,463

B. $14,606

C. $14,679

D. $13,163

55. Miley, a single taxpayer, plans on reporting $27,900 of taxable income this year (all of her income is from a part-time job). She is considering applying for a second part-time job that would give her an additional $10,000 of taxable income. By how much will the income from the second job increase her tax liability (use the tax rate schedules)?

A. $1,000

B. $1,500

C. $1,600

D. $2,500

56. Tamra and Jacob are married and they file a joint tax return. Tamra received nearly five times the salary that Jacob received. Which of the following statements is true?

A. Tamra and Jacob likely pay no tax marriage penalty nor receive a tax marriage benefit.

B. Tamra and Jacob likely pay a tax marriage penalty.

C. Tamra and Jacob likely receive a tax marriage benefit.

D. Tamra and Jacob likely will pay a tax marriage penalty and receive a tax marriage benefit.

57. Stephanie and Mitch are married and they file a joint tax return. Mitch received a slightly higher salary than Stephanie did during the year. Which of the following statements is true?

A. Stephanie and Mitch likely pay no tax marriage penalty nor receive a tax marriage benefit.

B. Stephanie and Mitch likely pay a tax marriage penalty.

C. Stephanie and Mitch likely receive a tax marriage benefit.

D. Stephanie and Mitch likely will pay a tax marriage penalty and receive a tax marriage benefit.

58. Harrison received a qualified dividend. Without knowing any additional facts, which of the following statements is true regarding the rate at which the dividend will be taxed to Harrison?

A. The dividend will be taxed at a 15% tax rate.

B. The dividend will be taxed at a 20% tax rate.

C. The entire dividend will be taxed at either 15% or the entire dividend will be taxed at 20% depending on Harrison's marginal ordinary income tax rate.

D. None of these.

59. Jamie is single. In 2014, she reported $100,000 of taxable income, including a long-term capital gain of $5,000. What is her gross tax liability, rounded to the nearest whole dollar amount (use the tax rate schedules)?

A. $22,576

B. $21,176

C. $20,526

D. $15,000

60. Angelena files as a head of household. In 2014, she reported $50,000 of taxable income, including a $10,000 qualified dividend. What is her gross tax liability, rounded to the nearest whole dollar amount (use the tax rate schedules)?

A. $5,353

B. $5,443

C. $7,500

D. $6,913

61. Allen Green is a single taxpayer with an AGI (and modified AGI) of $210,000, which includes $170,000 of salary, $25,000 of interest income, $10,000 of dividends, and $5,000 of long-term capital gains. What is Allen's Net Investment Income tax liability this year, rounded to the nearest whole dollar amount?

A. $2,465

B. $1,520

C. $570

D. $380

62. Which of the following is not a barrier to income shifting among family members?

A. The assignment of income doctrine

B. Net unearned income for children 18 and younger taxed at parents' marginal tax rates

C. Elimination of preferential tax rates (on dividends and long-term capital gains) for dependents

D. Two of these

63. The Olympians have three children. The kiddie tax applies to unearned income received by which of the following children?

A. Poseidon is a 20-year-old full-time student who does not support himself

B. Demeter, a 23-year-old full-time student who supports herself with a job at a grocery store

C. Zeus is 20 years old and not a student

D. Two of these.

E. None of these.

64. Assuming the kiddie tax applies, what amount of a child's income is subject to the kiddie tax?

A. All of it

B. All of the unearned income

C. The net unearned income

D. Taxable income less the standard deduction

65. During 2014, Montoya (age 15) received $2,200 from a corporate bond. He also received $600 from a savings account established for him by his parents. Montoya lives with his parents and he is their dependent. What is Montoya's taxable income?

A. $0

B. $2,200

C. $2,800

D. $1,800

66. During 2014, Jasmine (age 12) received $2,400 from a corporate bond. She also received $600 from a savings account established for her by her parents. Jasmine lives with her parents and she is their dependent. Assuming her parents' marginal tax rate is 28%, what is Jasmine's gross tax liability?

A. $0

B. $100

C. $280

D. $380

67. Hestia (age 17) is claimed as a dependent by her parents, Rhea and Chronus. In 2014, Hestia received $1,000 of interest income from a corporate bond that she owns. In addition, she has earned income of $200. What is her taxable income for 2014?

A. $0

B. $200

C. $650

D. $1,200

68. Montague (age 15) is claimed as a dependent by his parents Matt and Mary. In 2014, Montague received $5,000 of qualified dividends and he received $800 from a part time job. What is his taxable income for 2014?

A. $0

B. $3,800

C. $4,650

D. $4,800

69. Hester (age 17) is claimed as a dependent by his parents, Charlton and Abigail. In 2014, Hester received $10,000 of qualified dividends and he received $6,000 from a part time job. What is his taxable income for 2014?

A. $16,000

B. $15,000

C. $9,800

D. $9,650

70. The alternative minimum tax base is typically ______ the regular income tax base.

A. smaller than

B. about the same as

C. larger than

D. exactly the same as

71. The computation of the alternative minimum tax base begins with regular taxable income. Which of the following is not part of the formula for computing the alternative minimum tax base?

A. Subtract personal exemptions

B. Add the standard deduction amount if used for regular tax

C. Subtract the AMT exemption amount (if any)

D. Add back tax exempt interest from a private activity bond not issued in 2009 or 2010.

72. In 2014, Maia (who files as a head of household) reported regular taxable income of $115,000. She itemized her deductions, deducting $8,000 in charitable contributions and $3,000 in state income taxes. She claimed exemptions for herself and her son, Hermes, ($3,900 each). What is Maia's alternative minimum taxable income?

A. $118,000

B. $126,000

C. $133,900

D. $125,900

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

A. Home mortgage interest expense

B. Real property taxes

C. Tax exempt interest from a private activity bond issued in 2007

D. Miscellaneous itemized deductions in excess of the 2% floor

74. Which of the following statements regarding the AMT exemption amounts is not true?

A. The amount of the exemption depends on the taxpayer's filing status.

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

C. Taxpayers must choose whether they will claim the exemption or itemize deductions.

D. None of these statements is false (All of these statements are true).

75. Persephone has a regular tax liability of $12,475 and a tentative minimum tax of $11,500. Given just this information, what is her alternative minimum tax liability for the year?

A. $0

B. $11,500

C. $975

D. $12,475

76. Harmony reports a regular tax liability of $15,000 and tentative minimum tax of $17,000. Given just this information, what is her alternative minimum tax liability for the year?

A. $0

B. $2,000

C. $15,000

D. $17,000

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

A. The top AMT marginal rate is higher than the top regular tax marginal tax rate.

B. The AMT rates represent a progressive tax rate structure.

C. The AMT rate is the same rate for all taxpayers.

D. None of these.

78. Which of the following is not typical of taxpayers who are most likely affected by the AMT?

A. Have many dependents

B. Pay high state income tax

C. Pay high property taxes

D. Have relatively low capital gains

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

A. Regular tax rates have decreased since the AMT was enacted

B. The AMT exemption amount is indexed to increase with inflation

C. Property values are decreasing

D. The personal and dependency exemption amounts are not increasing as fast as the AMT exemption is decreasing

80. Asteria earned a $25,500 salary as an employee in 2014. How much should her employer have withheld from her paycheck for FICA taxes (rounded to the nearest whole dollar amount)?

A. $370

B. $1,581

C. $1,951

D. $3,902

81. Baker earned $225,000 of salary as an employee in 2014. How much should his employer have withheld from his paycheck for FICA taxes (rounded to the nearest whole dollar amount)?

A. $10,742

B. $10,517

C. $7,254

D. $17,213

82. Hera earned $175,000 salary in 2014. Her husband, Zeus, earned $100,000 salary in 2014. Hera and Zeus file a joint tax return. How much FICA taxes will they owe in 2014?

A. $21,263

B. $17,667

C. $13,454

D. $4,213

83. Which of the following statements regarding FICA taxes is true?

A. Low income employees are not required to pay FICA taxes.

B. An employee who has two different employers during the year may be entitled to a tax credit for overpaid FICA taxes.

C. The maximum amount of Medicare taxes an employee is required to pay is capped each year but the maximum amount of Social Security taxes is not.

D. The wage base limit for Social Security taxes depends on the taxpayer's filing status.

84. Which of the following suggests that a working taxpayer is an independent contractor rather than an employee?

A. Works for more than one firm

B. May realize a loss from business activities

C. Sets own working hours

D. Works somewhere other than on employer premises

E. All of these suggest independent contractor status

85. Which of the following statements best describes the deductions independent contractors may claim for valid business expenses?

A. for AGI deductions

B. from AGI deductions not subject to the two percent of AGI floor

C. from AGI deductions subject to a two percent of AGI floor

D. for AGI deductions limited to income from the business activities

86. The wage base for which of the following taxes is capped?

A. Federal income

B. Social Security

C. Medicare

D. Alternative minimum

87. Which of the following statements regarding the self-employment tax is most accurate?

A. The self-employment tax base is generally the taxpayer's net income from self-employment (usually net income from Schedule C).

B. Taxpayers who report less than $600 of net income from self-employment (usually net income from Schedule C) are not required to pay self employment taxes.

C. The self-employment tax base is net earnings from self employment which is less than net income from self-employment.

D. The Social Security tax limit does not apply to self-employment taxes.

88. Which of the following best describes the manner in which self-employed taxpayers may deduct self-employment taxes?

A. Deduct employer portion from AGI.

B. Deduct entire amount from AGI.

C. Deduct employer portion for AGI.

D. Deduct entire amount for AGI.

E. No deduction

89. For taxpayers who receive both salary as an employee and self-employment income as an independent contractor in the same year, which of the following statements regarding FICA and self-employment taxes is most accurate?

A. The Social Security limit applies to the salary but not to the self-employment income.

B. The Social Security limit applies to the self-employment income but not to the salary.

C. Salary is first applied against the Social Security limit and then self-employment income is applied against the Social Security limit.

D. Self-employment income is first applied against the Social Security limit and then salary is applied against the Social Security limit.

90. 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.

91. Which of the following statements concerning tax credits is true?

A. The tax benefit a taxpayer receives from a credit depends on the taxpayer's marginal tax rate.

B. Refundable tax credits are limited to a taxpayer's gross tax liability.

C. Tax credits are generally more beneficial than tax deductions.

D. None of these is a true statement.

92. Which of the following is not one of the general tax credit categories?

A. Nonrefundable personal

B. Refundable personal

C. Business

D. Refundable business

93. Which of the following statements regarding the child tax credit is false?

A. The child for whom the credit is claimed must be under the age of 15 at the end of the year

B. The credit is subject to phase-out based on the taxpayer's AGI

C. The full credit for a child who qualifies is $1,000

D. The child for whom the credit is claimed must meet the definition of a qualifying child

94. Quantitatively, what is the relationship between the AGI phase-out thresholds for the child tax credit?

A. Head of household/Single = Married Filing Separately = Married Filing Jointly

B. Head of household/Single < Married Filing Separately < Married Filing Jointly

C. Head of household/Single = Married Filing Separately > Married Filing Jointly

D. Head of household/Single > Married Filing Separately < Married Filing Jointly

95. Rhianna and Jay are married filing jointly in 2014. They have six children for whom they may claim the child tax credit. Their AGI was $123,440. What amount of child tax credit may they claim on their 2014 tax return?

A. $5,300

B. $6,000

C. $12,000

D. $4,000

96. The amount of expenditures eligible for the child and dependent care credit is the least of three amounts. Which of the following is not one of those amounts?

A. The total amount of child and dependent care expenditures for the year

B. $3,000 for one qualifying person or $6,000 for two or more qualifying persons

C. The dependent's earned income for the year

D. The taxpayer's earned income for the year

97. Which of the following statements regarding the child and dependent care credit is false?

A. Taxpayers may claim a credit for only a portion of qualifying dependent care expenditures.

B. If a taxpayer's income is too high, she will be ineligible to claim any child and dependent care credit.

C. A single taxpayer must have earned income to claim any child and dependent care credit.

D. A taxpayer is not eligible to claim the dependent care credit if any dependent relative provides the care.

98. 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?

A. $0

B. $810

C. $1,080

D. $3,000

99. 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?

A. $1,440

B. $2,100

C. $6,000

D. $0

100. Which of the following statements regarding the child and dependent care credit is true?

A. A married couple must file jointly to claim the credit.

B. A taxpayer may claim a credit for dependent care expenses for a dependent who is 14 years old or older but only if the dependent lives in the taxpayer's home for the entire year.

C. All else equal, a taxpayer making qualifying expenditures for three children may claim more dependent care credit than a taxpayer making (the same amount of) qualifying expenditures for two children.

D. None of these statements is true.

101. Which of the following is not true of the American opportunity credit?

A. A taxpayer with multiple eligible dependents can claim a credit for each dependent's qualifying expenses

B. The credit is available for students during their first four years of postsecondary education only

C. It is phased out based on the taxpayer's AGI

D. A taxpayer may not claim a credit unless the taxpayer pays a dependent's qualifying educational expenses

102. Which of the following is not true of the lifetime learning credit?

A. It is a nonrefundable credit.

B. The credit can be claimed by taxpayers who have graduated from college and are taking professional training courses to improve their job skills.

C. A taxpayer with multiple dependents can claim a credit for each dependent's qualifying expenses.

D. The credit is subject to phase out based on the taxpayer's AGI.

103. Which of the following is not a true statement about the American opportunity credit (AOC) and lifetime learning credits?

A. A taxpayer may not report both an AOC and a lifetime learning credit on the same tax return

B. Certain educational expenses qualify for both credits but taxpayers must claim one credit or the other for the expenditures (the taxpayer cannot claim both credits for the same expenditures)

C. Taxpayers may choose to either (1) deduct qualifying education expenses of an individual as for AGI deductions or claim educational credits for the individual's expenses (but not both)

D. The AGI phase-out threshold for phasing out the AOC is higher than the AGI phase-out threshold for the lifetime learning credit.

104. Which of the following statements regarding the earned income credit is true?

A. It is a nonrefundable credit

B. It is possible that a taxpayer with more earned income may receive more credit than a taxpayer with less earned income

C. A 70-year-old taxpayer with no dependents can qualify for the credit in certain circumstances

D. A taxpayer whose only source of income is interest from corporate bonds is eligible for the credit

105. Which of the following does not affect the amount of the earned income credit?

A. Filing status

B. Amount of credit taken in previous years

C. Number of qualifying children

D. Taxpayer's AGI

106. Carolyn has an AGI of $38,000 (all from earned income), two qualifying children, and is filing as a head of household. What amount of earned income credit is she entitled to?

A. $0

B. $1,212

C. $3,305

D. $4,248

E. $5,460

107. Which of the following statements regarding credits is correct?

A. Business expenses are generally refundable credits

B. Business credits that are generated in one year but are not utilized in that year expire

C. Business credits that are generated in one year but are not utilized in that year may be carried forward to future years but not back to a prior year

D. Business credits that are generated in one year but are not utilized in that year may be carried back to the previous year and then forward to future years

108. If there is not enough gross tax liability to use the foreign tax credit, __________.

A. it expires unused

B. it is carried back 2 years or forward 20 years

C. it is carried back 3 years or forward 5 years

D. it is carried back 1 year or forward 10 years

109. Which of the following tax credits is fully refundable?

A. American opportunity credit

B. Dependent care credit

C. Earned income credit

D. None of these

110. How could an individual obtain a business tax credit?

A. Through self-employment activities

B. Through flow-through from a partnership or S corporation

C. By working overseas and obtaining a foreign tax credit

D. All of these

111. Which of the following represents the correct order in which credits are applied to gross tax liability (from first to last)?

A. Nonrefundable personal, business, refundable

B. Business, nonrefundable personal, refundable

C. Refundable, nonrefundable personal, business

D. Refundable, business, nonrefundable personal

112. Cassy reports a gross tax liability of $1,000. She also claims $400 of nonrefundable personal credits, $700 of refundable personal credits, and $200 of business credits. What is Cassy's tax refund or tax liability due after applying the credits?

A. $1,000 taxes payable

B. $0 refund or taxes payable

C. $700 refund

D. $300 refund

113. Sheryl's AGI is $250,000. Her current tax liability is $52,068. Last year, her tax liability was $48,722. She will not owe underpayment penalties if her total estimated tax payments are at least which of the following (rounded) amounts (assume she makes the required payments each quarter)?

A. $46,861

B. $48,722

C. $51,547

D. $53,594

114. If an employer withholds taxes from an employee, in general, when are these taxes treated as paid to the IRS?

A. As withheld

B. As the employee requests on his/her W-4 form

C. Evenly throughout the year

D. On April 15

115. Which of the following statements about estimated tax payments and underpayment penalties is true for individual taxpayers?

A. Taxpayers who have paid their full tax liability by the original tax return due date are protected from underpayment penalties.

B. Taxpayers who have paid their full tax liability by the extended tax return due date are protected from underpayment penalties.

C. Taxpayers who have uneven income streams can pay estimated tax quarterly in uneven amounts and not be susceptible to underpayment penalties.

D. Taxpayers who have paid their required amount of estimated tax, even though not on time, are protected from underpayment penalties.

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

A. Whether taxpayers are subject to underpayment penalties is determined on a quarterly basis.

B. Due dates for estimated tax payments for a given year are April 15, June 15, September 15 of that year and January 15 of the next year unless these dates fall on a weekend or a holiday.

C. The amount of penalty depends on the amount of the underpayment among other factors.

D. All of these statements are true.

117. What happens if the taxpayer owes an underpayment penalty, but does not compute it on Form 2210?

A. Nothing, unless the taxpayer is audited

B. The taxpayer is immediately sent to the Tax Court

C. The IRS will compute and assess the penalty

D. The penalty is increased by five percentage points

118. Happy, Sleepy, Grumpy, and Doc all did not make adequate estimated payments. Which of them will not owe underpayment penalties for 2014 given the following information?

A. Happy

B. Sleepy

C. Grumpy

D. Doc

E. Two of these

F. None of these

119. Taxpayers are not required to file a tax return unless their gross income passes a certain threshold. This threshold is generally the ________.

A. applicable standard deduction amount

B. personal exemption amount

C. twice the applicable standard deduction amount

D. applicable standard deduction amount plus the personal exemption amount

120. Why would a taxpayer file a tax return if not required to do so?

A. to remain in favor with the IRS

B. to claim a refund of taxes paid

C. all taxpayers are required to file returns

D. in order to claim the standard deduction

121. Looking at the following partial calendar for April, when will individual tax returns be due?

A. Friday, April 14

B. Saturday, April 15

C. Sunday, April 16

D. Monday, April 17

E. Tuesday, April 18

122. Which of the following is not true of the extension to file an individual tax return?

A. It is granted automatically by the IRS if requested

B. It must be requested by the original due date of the return

C. It extends the due date for the return and associated tax payments beyond the original due date of the tax return

D. The extension is for six months beyond the original due date

123. Which of the following taxpayers (all age 40) are required to file a return?

A. Jenny and Jim

B. Allen

C. Timmy

D. None of these

124. What is the underpayment penalty rate that taxpayers pay when they underpay their estimated taxes?

A. Federal short-term interest rate.

B. Federal short-term interest rate plus three percentage points.

C. Federal long-term interest rate plus six percentage points.

D. Zero. The government does not pay interest on overpayments.

125. Which of the following statements regarding late filing penalties is true?

A. If a taxpayer fails to file a tax return, the late filing penalty will continue to grow until the taxpayer files the tax return.

B. The amount of the late filing penalty is the same for both fraudulent failure to file and non fraudulent failure to file.

C. Taxpayers who owe no tax as of the due date of their tax returns are not subject to late filing penalties even if they file late.

D. None of these.

126. Which of the following statements regarding late filing penalties and/or late payment penalties is true?

A. An extension of time to file the tax return protects a taxpayer from late payment penalties as long as the tax is paid by the extended due date of the return.

B. The penalty rate for late filing penalties is less than the penalty rate for late payment penalties.

C. If a taxpayer has not paid the full tax liability by the original due date of the return and the taxpayer has not filed a tax return by the due date of the return, the maximum late filing and late payment penalty will be no greater than the late filing penalty by itself.

D. None of these

Essay Questions

127. Jocelyn, a single taxpayer, had $742,000 of taxable income in 2014. All of the income is ordinary. What is her tax liability for the year?

128. Paul and Melissa plan on filing jointly in 2014. For the year, the couple reported taxable income of $130,000. What is their gross tax liability?

129. Maria and Tony are married. They are preparing to file their 2014 tax return. If they were to file as single taxpayers, Maria and Tony would report $40,000 and $60,000 of taxable income, respectively. On their joint tax return, their taxable income is $100,000. How much of a marriage penalty or benefit will Maria and Tony experience in 2014?

130. Maria and Tony are married. They are preparing to file their 2014 tax return. If they were to file as single taxpayers, Maria and Tony would report $10,000 and $70,000 of taxable income, respectively. On their joint tax return, their taxable income is $80,000. How much of a marriage penalty or benefit will Maria and Tony experience in 2014?

131. In 2014, Athena reported $37,500 of taxable income. Of this, $32,500 came from her work at the local library and the remaining $5,000 was from capital gains to be taxed at preferential rates. Compute her tax liability for 2014 as a single taxpayer.

132. Henry and Janice are married and file jointly. They have an AGI (and modified AGI) of $290,000, which includes $90,000 of salary, $170,000 of active business income, $10,000 of interest income, $15,000 of dividends, and $5,000 of long-term capital gains. What is Henry and Janice's Net Investment Income tax liability this year, rounded to the nearest whole dollar amount?

133. Hera wants to reduce her income tax liability by shifting some of her income to her 10-year-old daughter (a dependent), Athena. Last year, Hera gifted corporate bonds to Athena. This year, Athena received $1,500 in interest income from the bonds. What amount of tax will Athena pay on the interest income?

134. Max is a 14-year-old dependent of his parents. During 2014, Max earned $1,800 working part time jobs and he received $1,500 of interest income from corporate bonds that were given to him last year. What is Max's 2014 taxable income?

135. Pyrrha, a 12-year-old dependent of Epimetheus and Pandora, received $2,100 of interest income in 2014. Her parents' marginal tax rate is 35%. What is Pyrrha's gross tax liability for the year?

136. Candace is claimed as a dependent on her parent's tax return. Her parents' ordinary income marginal tax rate is 33%. In 2014, Candace received $5,000 of interest income from corporate bonds she obtained several years ago. This is her only source of income. She is 15 years old at year end. What is her gross tax liability?

137. Jerusha is married and she files a separate tax return in 2014. She claims two exemptions (2 × 3,950 = $7,900). She claimed the standard deduction for regular tax purposes ($6,200). She had no other adjustments. Her regular taxable income was $67,800. What is Jerusha's AMTI?

138. Apollo is single and his AMT base is $100,250. This amount includes $500 of qualified dividends (the dividends were taxed at 15% in determining the regular tax liability). What is Apollo's tentative minimum tax?

139. Costa is a single taxpayer. His regular tax liability was $38,000. For 2014, he reported $190,000 of alternative minimum taxable income. What is his alternative minimum tax? [Use 2014 AMT Exemption amount]

140. Selene made $54,300 in 2014 working at the local burger joint, Moon Café. How much should her employer withhold from her paycheck for FICA taxes if the calculation is made correctly?

141. Jackson earned a salary of $254,000 in 2014. What amount of FICA taxes should Jackson's employer withhold from his paycheck?

142. Harmony was self-employed for the first half of 2014, earning $18,000 of Schedule C (business) net income. During the second half of the year, she began working as an employee and earned $38,000 in salary. What amount of self-employment taxes is Harmony required to pay?

143. 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 Schedule C. What amount of self-employment taxes is Lexa required to pay?

144. Atlas earned $17,300 from his sole proprietorship in 2014. This was his only source of income. How much in self-employment taxes will Atlas be able to deduct?

145. Demeter is a single taxpayer. Her AGI in 2014 is $81,200. Demeter may claim a child tax credit for her daughter Persephone. What amount of child tax credit is Demeter entitled to claim after any applicable phase-out?

146. Jack paid $5,000 in daycare expenses for his five-year-old daughter so he could work. His AGI for the year was $37,500 (all earned income). What is the amount of his child and dependent care credit?

147. Wolfina's twins, Romulus and Remus, finished their first year of school at an accredited university in 2014. She paid $10,000 in qualified educational expenses for Romulus and $2,000 of qualifying expenses for Remus. Wolfina is a head of household with an AGI of $85,000. What amount of American opportunity credit may she claim?

148. Akiko and Hitachi (married filing jointly for 2014) are both educators. They attended a conference to further their job-related skills. Tuition for the conference was $2,000 for each person. Their AGI was $114,000. How much lifetime learning credit can they claim?

149. Julien and Sarah are married, file a joint return, and have two children, Kaya and Christopher. Kaya just finished her third year at college and Christopher just finished his first year of graduate school (fifth year of college). Tuition and books for the past year were $1,800 for Kaya and $5,000 for Christopher. How much can Julien and Sarah claim in educational credits if their joint AGI was $120,000 for 2014?

150. Sam is 30 years old. In 2014, he reported an AGI of $12,000, all from his job as a server at the local café. He is single and has no dependents. What amount of earned income credit may he claim in 2014?

151. 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?

152. Clarissa's gross tax liability for 2014 is $1,300. She has a $1,500 nonrefundable personal tax credit, a $750 business tax credit, and a $400 refundable personal tax credit. Her employer withheld $1,000 from her pay for taxes. What is her net tax due or refund for this year?

153. 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?

154. 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.

155. 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.

156. Keith and Nicole are married filing joint with two daughters who qualify as dependents. Their gross income for 2014 is $21,000. Are they required to file a tax return? How do you know this without memorizing the gross income thresholds? In 2014, the standard deduction for taxpayers filing a joint return is $12,400 and the personal exemption is $3,950.

157. During all of 2014, Mr. and Mrs. Clay lived with their four children (all are under the age of 17). They provided over one-half of the support for each child. Mr. and Mrs. Clay file jointly for 2014. Neither is blind, and both are under age 65. They reported the following tax-related information for the year

A. What is the Clays' taxes payable or (refund due) (ignore the alternative minimum tax)?

B. What is the Clays' tentative minimum tax and alternative minimum tax?