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Income Tax Fundamentals and Calculations - Answer Key

1. D

All of the answers (except for D), involve investing the child's assets in tax-free or tax-deferred investments. Buying high yield bonds and dividend paying stocks in a brokerage account would create even more taxable income.

2.
C

Medical expenses and charitable contributions are itemized deductions that are considered "below-the-line" deductions. Adjustments are "above-the-line" deductions taken from gross income to calculate AGI.

3.
A

Tax credits are a dollar-for-dollar offset from the actual tax liability incurred, so they provide more reduced tax liability benefits than itemized deductions or adjustments to gross income.

4.
B

For tax year 2013 and beyond, the total Social Security and Medicare tax for self-employed individuals is 15.3%.

5. D

A child can earn up to $950 and have no tax liability. The 25% tax rate for married filing jointly couples is taxable income of $72,501 to $146,400. All statements above are true.

6.
A

Sally would qualify as Head of Household and be entitled to two personal exemptions at $3,900 each. Income phase outs could disqualify her of the child tax credit. Her standard deduction would be limited to $8,950.

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