Question 1

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?

Accepted Answer

Harmony's alternative minimum tax liability is the difference between her tentative minimum tax and her regular tax liability, which is $2,000 ($17,000 - $15,000). Therefore, the answer is B, $2,000.

Question 2

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

Accepted Answer

The answer of Which of the following statements accurately describes...

Question 3

Asteria earned a $25,500 salary as an employee in 2020. How much should her employer have withheld from her paycheck for FICA taxes? (Round your answer to the nearest whole dollar amount.)

Accepted Answer

FICA taxes consist of Social Security taxes and Medicare taxes. In 2020, the Social Security tax rate was 6.2% on income up to $137,700 and the Medicare tax rate was 1.45% on all income. Therefore, Asteria's employer should have withheld $1,581 ($25,500 x 6.2% for Social Security + $25,500 x 1.45% for Medicare) from her paycheck for FICA taxes. Rounded to the nearest whole dollar amount, this is $1,951. Option C is the closest choice.

Question 4

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?

Accepted Answer

The alternative minimum tax (AMT) is calculated as the difference between the tentative minimum tax and the regular tax liability, but only when the tentative minimum tax is greater than the regular tax liability. Since Persephone's regular tax liability ($12,475) is higher than her tentative minimum tax ($11,500), she does not owe any AMT, making the correct answer $0.

Question 5

Baker is single and earned $227,000 of salary as an employee in 2020. How much should his employer have withheld from his paycheck for FICA taxes? (Round your answer to the nearest whole dollar amount.)

Accepted Answer

FICA taxes consist of Social Security and Medicare taxes. For 2020, the Social Security tax rate was 6.2% on earnings up to $137,700, and the Medicare tax rate was 1.45% on all earnings, with an additional 0.9% Medicare surtax on earnings over $200,000 for single filers. Baker's Social Security tax would be 6.2% of $137,700 (the maximum earnings subject to Social Security tax), which equals $8,537.40. His Medicare tax would be 1.45% of $227,000, which equals $3,291.50. Since Baker earned more than $200,000, he is also subject to the additional 0.9% Medicare surtax on the amount over $200,000, which is $27,000 in his case. The surtax would be 0.9% of $27,000, which equals $243. Therefore, the total FICA tax would be $8,537.40 (Social Security) + $3,291.50 (Medicare) + $243 (additional Medicare surtax) = $12,071.90, which rounds to $12,072.

Question 6

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?

Accepted Answer

The answer of Allen Green is a single taxpayer with...

Question 7

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

Accepted Answer

Social Security taxes have a wage base limit, which means there is a maximum amount of earnings that is subject to the Social Security tax each year. This cap is adjusted annually based on changes in the national average wage index. Federal income, Medicare, and Alternative Minimum Tax do not have a wage base cap; they apply to all income levels, although their rates or applicability may vary based on the amount of income.

Question 8

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

Accepted Answer

Self-employed taxpayers can deduct the employer-equivalent portion of their self-employment tax in computing their adjusted gross income (AGI). This deduction only affects the income tax, not the self-employment tax itself.

Question 9

Persephone has a regular tax liability of $14,175 and a tentative minimum tax of $11,670. Given just this information, what is her alternative minimum tax liability for the year?

Accepted Answer

The alternative minimum tax (AMT) is calculated as the difference between the tentative minimum tax and the regular tax liability, but only if the tentative minimum tax is higher. Since Persephone's regular tax liability ($14,175) is higher than her tentative minimum tax ($11,670), she does not owe any AMT, making the correct answer $0.

Question 10

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

Accepted Answer

Independent contractors can claim valid business expenses as for AGI (above-the-line) deductions, which reduce their gross income directly.

Question 11

Which of the following statements regarding FICA taxes is true?

Accepted Answer

If an employee has two different employers during the year and has already paid the maximum amount of FICA taxes, they may be entitled to a tax credit for any overpaid FICA taxes. The other statements are false - all employees are required to pay FICA taxes, there is a maximum amount that both Medicare and Social Security taxes can be, and the wage base limit for Social Security taxes is not dependent on the taxpayer's filing status.

Question 12

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

Accepted Answer

All of these factors suggest that someone is working as an independent contractor rather than an employee. Working for more than one firm, being able to make a profit or loss from business activities, setting one's own working hours, and working off-site are all common characteristics of independent contractors. Employees, on the other hand, typically work exclusively for one employer, follow set working hours, and work on their employer's premises.

Question 13

Hera earned a $175,000 salary in 2020. Her husband, Zeus, earned $100,000 salary in 2020. Hera and Zeus file a joint tax return. How much in FICA taxes will they owe in 2020?

Accepted Answer

FICA taxes include Social Security and Medicare taxes. The Social Security tax rate is 6.2% on income up to $137,700 (2020 limit), and the Medicare tax rate is 1.45% on all income. Hera's Social Security tax is $8,537.40 (6.2% of $137,700), and Zeus's is $6,200 (6.2% of $100,000). Their combined Medicare tax is $3,987.50 (1.45% of $275,000). Total FICA taxes = $8,537.40 + $6,200 + $3,987.50 = $18,724.90, which rounds to $18,950.

Question 14

Allen Green is a single taxpayer with an AGI (and modified AGI)of $212,000, which includes $171,000 of salary, $25,600 of interest income, $10,200 of dividends, and $5,200 of long-term capital gains. What is Allen's net investment income tax liability this year, rounded to the nearest whole dollar amount?

Accepted Answer

The answer of Allen Green is a single taxpayer with...

Question 15

Which of the following is not an additional tax a taxpayer may have to pay?

Accepted Answer

There is no such tax as "Excess wage tax". Alternative minimum tax, self-employment tax, and net investment income tax are all additional taxes that a taxpayer may have to pay depending on their income and other factors.

Question 16

Which of the following is typical of taxpayers who are most likely affected by the AMT?

Accepted Answer

Taxpayers with high capital gains are most likely to be affected by the AMT because the AMT does not allow for the exclusion of capital gains.

Question 17

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?

Accepted Answer

For taxpayers who receive both salary as an employee and self-employment income as an independent contractor in the same year, they will be subject to both FICA taxes and self-employment taxes. FICA taxes are paid by both the employee and employer to fund Social Security and Medicare programs. Self-employment taxes are paid by individuals who work for themselves to fund the same programs.

The Social Security tax only applies to a certain amount of earnings each year, which is known as the Social Security limit. For 2021, the Social Security limit is $142,800. This means that any salary or self-employment income earned above this amount is not subject to Social Security tax.

In this case, the salary earned by the taxpayer as an employee will first be applied against the Social Security limit. Once the limit is reached, any further salary earned will not be subject to Social Security tax. However, the self-employment income earned by the taxpayer as an independent contractor will also be subject to the Social Security tax, and will be applied against the Social Security limit separately. This means that the taxpayer may end up paying Social Security tax on both their salary and self-employment income up to the limit, depending on how much they earn.

Therefore, the most accurate statement is that salary is first applied against the Social Security limit and then self-employment income is applied against the Social Security limit (choice C).

Question 18

Baker is single and earned $225,000 of salary as an employee in 2020. How much should his employer have withheld from his paycheck for FICA taxes? (Round your answer to the nearest whole dollar amount.)

Accepted Answer

FICA taxes consist of Social Security and Medicare taxes. For 2020, the Social Security tax rate was 6.2% on earnings up to $137,700, and the Medicare tax rate was 1.45% on all earnings, with an additional 0.9% Medicare tax on earnings over $200,000 for single filers. Baker's Social Security tax would be 6.2% of $137,700 (the maximum earnings subject to Social Security tax), which equals $8,537.40. His Medicare tax would be 1.45% of $225,000, which equals $3,262.50. Since his earnings exceeded $200,000, he would also owe the additional 0.9% Medicare tax on the amount over $200,000, which is $25,000, resulting in an additional $225. Therefore, his total FICA tax would be $8,537.40 (Social Security) + $3,262.50 (Medicare) + $225 (additional Medicare tax) = $12,025 (rounded to the nearest dollar).

Question 19

Asteria earned a $26,200 salary as an employee in 2020. How much should her employer have withheld from her paycheck for FICA taxes? (Round your answer to the nearest whole dollar amount.)

Accepted Answer

FICA taxes consist of Social Security tax and Medicare tax. For Social Security tax, the employee pays 6.2% of their salary and the employer pays a matching 6.2%. For Medicare tax, the employee pays 1.45% and the employer pays a matching 1.45%. Therefore, Asteria's employer should have withheld a total of 7.65% (6.2% + 1.45%) from her paycheck for FICA taxes, which would be $2,004 (7.65% of $26,200). Therefore, the best choice is C.

Question 20

Harmony reports a regular tax liability of $16,200 and tentative minimum tax of $18,320. Given just this information, what is her alternative minimum tax liability for the year?

Accepted Answer

The alternative minimum tax liability is the excess of tentative minimum tax over the regular tax liability. 
Alternative minimum tax liability = tentative minimum tax - regular tax liability 
= $18,320 - $16,200 
= $2,120 
Therefore, the correct answer is B.

Quiz 8: Individual Income Tax Computation and Tax Credits