Test Bank for Fundamentals of Taxation for Individuals and Business Entities A Practical Approach, 2025 Edition By Gregory A. Carnes (All Chapters 1-18, 100% Original Verified, A+ Grade) Fundamentals of Taxation for Individuals and Business Entities, 2025 Test Bank Chapter 1: The Professional Practice of Taxation 1) Which of the following is false about tax planning? A) The appropriate goal for tax planning is to maximize after-tax income. B) The appropriate goal for tax planning is to minimize a taxpayer's tax liability for the year. C) Once a taxpayer understands the tax consequences of a particular transaction, they can move on to the tax planning stage. D) Tax evasion is not a tax planning strategy. Answer: B Explanation: Minimizing a taxpayer's liability is not the appropriate goal for tax planning because if that were the goal, it could be met by reducing a taxpayer's income to zero–actually an easy goal to meet. If a taxpayer has no income for the year, then there would be no tax liability, and you will have minimized their taxes. But your client will also be a very poor and hungry person, so this cannot be the proper goal. Diff: 1 Learning Objective: LO 1.1 AACSB / AICPA: Knowledge / Accounting Competencies Bloom's: Knowledge Section Reference: Sec. 1.1 Time on Task: 5 min
2) Jessica has received several job offers from various accounting firms located in 4 different states. She has performed an analysis to determine her income, her non-income tax costs (e.g. cost of living, etc.) and income tax. Jessica is trying to make a decision on which offer to accept, and she has asked for your advice. Based on the appropriate goal of tax planning, which of the following states would you advise Jessica to choose?
California New York Virginia Texas
Gross Wages 120,000 100,000 70,000 50,000
Non-Income Tax Costs 52,000 37,000 10,800 6,000
Income Tax 24,000 20,000 10,500 5,000
A) Texas © 2025 John Wiley & Sons, Inc. All rights reserved. Instructors who are authorized users of this course are permitted to download these materials and use them in connection with the course. Except as permitted herein or by law, no part of these materials should be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording or otherwise.
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B) California C) Virginia D) New York Answer: C Explanation: The appropriate goal for tax planning is to maximize after-tax income. After-tax income is net income after reducing revenue for all expenses, including federal income taxes. See table below for calculation of after-tax income for each state. With that in mind, you should advise Jessica to choose Virginia because doing so maximizes her after-tax income. The state with the lowest income tax (i.e., Texas) is not the right answer because minimizing a taxpayer's liability is not the appropriate goal for tax planning because if that were the goal, then the ultimate success would be to reduce a taxpayer's tax liability to zero–an easy goal to meet. If a taxpayer has no income for the year, then there would be no tax liability, and you will have minimized their taxes. But your client will also be a very poor and hungry person, so this cannot be the proper goal.
California New York Virginia Texas
Gross Wages (A) 120,000 100,000 70,000 50,000
Non-Income After-Tax Tax Costs Income Tax Income (B) (C) (D) = (A) - (B) - (C) 52,000 24,000 44,000 37,000 20,000 43,000 10,800 10,500 48,700 6,000 5,000 39,000
Diff: 2 Learning Objective: LO 1.1 AACSB / AICPA: Analytic / Accounting Competencies Bloom's: Application Section Reference: Sec. 1.1 Time on Task: 8 min
3) Which of the following is not correct regarding tax and non-tax costs? A) Both tax and non-tax costs must be considered when making financial and investment decisions. B) Tax costs include any type of tax paid to a local, state, federal, or foreign government. C) Non-tax costs are all costs other than tax costs. D) Effective tax planning requires prioritizing tax costs. Answer: D © 2025 John Wiley & Sons, Inc. All rights reserved. Instructors who are authorized users of this course are permitted to download these materials and use them in connection with the course. Except as permitted herein or by law, no part of these materials should be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording or otherwise.
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Explanation: Effective tax planning requires consideration of both tax and non-tax costs. Diff: 1 Learning Objective: LO 1.1 AACSB / AICPA: Knowledge / Accounting Competencies Bloom's: Knowledge Section Reference: Sec. 1.1 Time on Task: 5 min
4) Samson's wages are $100,000. He lives in Maryland and his expenses include $25,000 rent, $12,000 other living expenses, $27,000 income tax, $6,200 payroll tax and $5,500 property tax. What are Samson's tax costs? A) $27,000 B) $33,200 C) $61,300 D) $38,700 Answer: D Explanation: $38,700 = $27,000 + $6,200 + $5,500. Tax costs include any type of tax paid to a local, state, federal, or foreign government. Diff: 1 Learning Objective: LO 1.1 AACSB / AICPA: Analytic / Accounting Competencies Bloom's: Application Section Reference: Sec. 1.1 Time on Task: 5 min
5) Samson's wages are $100,000. He lives in Maryland and his expenses include $25,000 mortgage interest, $12,000 other living expenses, $27,000 income tax, $6,200 payroll tax and $5,500 property tax. What are Samson's non-tax costs? A) $37,000 B) $12,000 C) $61,300 D) $38,700 Answer: A Explanation: $37,000 = $25,000 + $12,000. Non-tax costs are all costs other than tax costs. Tax costs include any type of tax paid to a local, state, federal, or foreign government. Diff: 1 © 2025 John Wiley & Sons, Inc. All rights reserved. Instructors who are authorized users of this course are permitted to download these materials and use them in connection with the course. Except as permitted herein or by law, no part of these materials should be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording or otherwise.
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Learning Objective: LO 1.1 AACSB / AICPA: Analytic / Accounting Competencies Bloom's: Application Section Reference: Sec. 1.1 Time on Task: 5 min
6) Samson's wages are $100,000. He lives in Maryland and his non-tax costs include $25,000 rent and $12,000 other living expenses. His tax costs include $27,000 income tax, $6,200 payroll tax and $5,500 property tax. What is Samson's after-tax income? A) $73,000 B) $24,300 C) $61,300 D) $29,000 Answer: B Explanation: $24,300 = $100,000 - $25,000 - $12,000 - $27,000 - $6,200 - $5,500. After-tax income is net income after reducing revenue for all expenses, including federal income taxes. Diff: 2 Learning Objective: LO 1.1 AACSB / AICPA: Analytic / Accounting Competencies Bloom's: Application Section Reference: Sec. 1.1 Time on Task: 8 min
7) Which of the following statements is false? A) Individuals file their individual income taxes on Form 1040. B) Income lines on the Form 1040 are Line 1 - 9 C) Deduction lines on Form 1040 are Line 10, 12 - 13 D) Demographic information is included on the second page of the Form 1040 Answer: D Explanation: The top half of page 1 of Form 1040 is for demographic information. Diff: 1 Learning Objective: LO 1.2 AACSB / AICPA: Analytic / Accounting Competencies Bloom's: Application Section Reference: Sec. 1.2 Time on Task: 5 min © 2025 John Wiley & Sons, Inc. All rights reserved. Instructors who are authorized users of this course are permitted to download these materials and use them in connection with the course. Except as permitted herein or by law, no part of these materials should be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording or otherwise.
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8) Which of the following are reported on Schedule 1 of the 1040? A) Student loan interest deduction B) Self-employment tax C) Repayment of first-time homebuyer credit D) Foreign tax credit Answer: A Explanation: Schedule 1 is used to report additional income and adjustments to income. Student loan interest deduction is reported on Schedule 1. Foreign tax credits are reported on Schedule 3. Self-employment tax and repayment of first-time homebuyer credit are reported on Schedule 2. Diff: 2 Learning Objective: LO 1.2 AACSB / AICPA: Knowledge / Accounting Competencies Bloom's: Knowledge Section Reference: Sec. 1.2 Time on Task: 5 min
9) Which of the following are reported on Schedule 2 of the 1040? A) Student loan interest deduction B) Taxable refunds or credits C) Repayment of first-time homebuyer credit D) Foreign tax credit Answer: C Explanation: Schedule 2 is used to report additional taxes. Repayment of first-time homebuyer credit is reported on Schedule 2. Student loan interest deduction and Taxable refunds or credits are reported on Schedule 1. Foreign tax credits are reported on Schedule 3. Diff: 2 Learning Objective: LO 1.2 AACSB / AICPA: Knowledge / Accounting Competencies Bloom's: Knowledge Section Reference: Sec. 1.2 Time on Task: 5 min
10) Which of the following are reported on Schedule 3 of the 1040? A) Student loan interest deduction © 2025 John Wiley & Sons, Inc. All rights reserved. Instructors who are authorized users of this course are permitted to download these materials and use them in connection with the course. Except as permitted herein or by law, no part of these materials should be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording or otherwise.
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B) Self-employment tax C) Repayment of first-time homebuyer credit D) Foreign tax credit Answer: D Explanation: Schedule 3 is used to report additional payments and credits. Foreign tax credits are reported on Schedule 3. Student loan interest deduction is reported on Schedule 1. Selfemployment tax and repayment of first-time homebuyer credit are reported on Schedule 2. Diff: 2 Learning Objective: LO 1.2 AACSB / AICPA: Knowledge / Accounting Competencies Bloom's: Knowledge Section Reference: Sec. 1.2 Time on Task: 5 min
11) Which of the following is false? A) Schedule 2 is used to report additional taxes. B) Repayment of first-time homebuyer credit is reported on Schedule 3. C) The Schedule 3 is used to report additional payments and credits. D) Adoption credit is reported on Schedule 3. Answer: B Explanation: Repayment of first-time homebuyer credit is reported on Schedule 2. Diff: 2 Learning Objective: LO 1.2 AACSB / AICPA: Knowledge / Accounting Competencies Bloom's: Knowledge Section Reference: Sec. 1.2 Time on Task: 5 min
12) Tariq has a mortgage interest credit of $7,000 and taxable state refund of $3,000. On what schedules of the 1040 should Tariq report the mortgage interest credit and the taxable state refund? A) Both the mortgage interest credit and the Taxable state refund should be reported on Schedule 2. B) The mortgage interest credit is reported on Schedule 3 while the Taxable State refund is reported on Schedule 1. C) The mortgage interest credit is reported on Schedule 1 while the Taxable State refund is © 2025 John Wiley & Sons, Inc. All rights reserved. Instructors who are authorized users of this course are permitted to download these materials and use them in connection with the course. Except as permitted herein or by law, no part of these materials should be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording or otherwise.
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reported on Schedule 2. D) Both the mortgage interest credit and the Taxable state refund should be reported on Schedule 3. Answer: B Explanation: The mortgage interest credit is reported on Schedule 3 while the Taxable State refund is reported on Schedule 1. Schedule 1 is used to report additional income and adjustments to income. Schedule 2 is used to report additional taxes. Schedule 3 is used to report additional payments and credits. Diff: 2 Learning Objective: LO 1.2 AACSB / AICPA: Knowledge / Accounting Competencies Bloom's: Knowledge Section Reference: Sec. 1.2 Time on Task: 5 min
13) Tariq has a mortgage interest credit of $1,400, unemployment compensation of $400, and taxable state refund of $3,000. What is the total amount to be reported on schedule 1 of the 1040? A) $400 B) $2,000 C) $3,000 D) $3,400 Answer: D Explanation: $3,400 = $3,000 + $400. The mortgage interest credit is reported on Schedule 3 while the Taxable State refund and unemployment compensation are reported on Schedule 1. Schedule 1 is used to report additional income and adjustments to income. Schedule 2 is used to report additional taxes. Schedule 3 is used to report additional payments and credits. Diff: 2 Learning Objective: LO 1.2 AACSB / AICPA: Knowledge / Accounting Competencies Bloom's: Knowledge Section Reference: Sec. 1.2 Time on Task: 5 min
14) Tariq has a mortgage interest credit of $1,400, unemployment compensation of $400, and taxable state refund of $3,000. What is the total amount to be reported on schedule 2 of the © 2025 John Wiley & Sons, Inc. All rights reserved. Instructors who are authorized users of this course are permitted to download these materials and use them in connection with the course. Except as permitted herein or by law, no part of these materials should be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording or otherwise.
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1040? A) $400 B) $2,000 C) $0 D) $3,400 Answer: C Explanation: $0. The mortgage interest credit is reported on Schedule 3 while the Taxable State refund and unemployment compensation are reported on Schedule 1. Schedule 1 is used to report additional income and adjustments to income. Schedule 2 is used to report additional taxes. Schedule 3 is used to report additional payments and credits. Diff: 2 Learning Objective: LO 1.2 AACSB / AICPA: Knowledge / Accounting Competencies Bloom's: Knowledge Section Reference: Sec. 1.2 Time on Task: 5 min
15) Tariq has a mortgage interest credit of $1,400, unemployment compensation of $400, and taxable state refund of $3,000. What is the total amount to be reported on schedule 3 of the 1040? A) $1,400 B) $2,000 C) $3,000 D) $3,400 Answer: A Explanation: $1,400. The mortgage interest credit is reported on Schedule 3 while the Taxable State refund and unemployment compensation are reported on Schedule 1. Schedule 1 is used to report additional income and adjustments to income. Schedule 2 is used to report additional taxes. Schedule 3 is used to report additional payments and credits. Diff: 2 Learning Objective: LO 1.2 AACSB / AICPA: Knowledge / Accounting Competencies Bloom's: Knowledge Section Reference: Sec. 1.2 Time on Task: 5 min
© 2025 John Wiley & Sons, Inc. All rights reserved. Instructors who are authorized users of this course are permitted to download these materials and use them in connection with the course. Except as permitted herein or by law, no part of these materials should be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording or otherwise.
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16) Which of the following is false? A) Closed transactions are preferred over open transactions. B) Marginal tax rates should always be used when evaluating tax planning alternatives. C) Variances in rates across time period creates tax planning opportunities. D) Saving a dollar of taxes today is worth more than saving a dollar of taxes next year. Answer: A Explanation: A tax professional prefers an open transaction because the tax professional can consider a range of options for structuring the transaction and choose the one that has the best tax results for his/her client. Diff: 1 Learning Objective: LO 1.3 AACSB / AICPA: Knowledge / Accounting Competencies Bloom's: Knowledge Section Reference: Sec. 1.3 Time on Task: 5 min
17) What rates should always be used when evaluating tax planning alternatives? A) Federal tax rate only B) Federal and state tax rate C) Statutory tax rate of the applicable jurisdiction D) Marginal tax rate Answer: D Explanation: Marginal tax rates should always be used when evaluating tax planning alternatives. Diff: 1 Learning Objective: LO 1.3 AACSB / AICPA: Knowledge / Accounting Competencies Bloom's: Knowledge Section Reference: Sec. 1.3 Time on Task: 5 min
18) Which of the following is false? A) An open transaction is a transaction that is not yet completed. B) A closed transaction is one where the relevant events have already happened, and the facts are set. C) A closed transaction provides opportunity for tax planning. © 2025 John Wiley & Sons, Inc. All rights reserved. Instructors who are authorized users of this course are permitted to download these materials and use them in connection with the course. Except as permitted herein or by law, no part of these materials should be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording or otherwise.
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D) Open transactions are preferred over closed transactions for tax planning. Answer: C Explanation: A closed transaction doesn't result in tax planning because the relevant events have already happened, and the facts are set. A closed transaction results in tax compliance. Diff: 1 Learning Objective: LO 1.3 AACSB / AICPA: Knowledge / Accounting Competencies Bloom's: Knowledge Section Reference: Sec. 1.3 Time on Task: 5 min
19) Sharon has a total income of $1,500,000, taxable income of $800,000 and a tax liability of $200,000. Each additional dollar of deduction will save her 37 cents in taxes. What is Sharon's marginal, average, and effective tax rates? A) Marginal tax rate = 37%; Average tax rate = 37%; Effective tax rate = 37% B) Marginal tax rate = 37%; Average tax rate = 13%; Effective tax rate = 25% C) Marginal tax rate = 37%; Average tax rate = 25%; Effective tax rate = 13% D) Marginal tax rate = 37%; Average tax rate = 25%; Effective tax rate = 5% Answer: C Explanation: Marginal tax rate = 37% (0.37 / 1). Marginal tax rate is the tax rate applied to the next additional dollar of income earned. Average tax rate = 25% = ($200,000 / $800,000). Average Tax rate is total income tax divided by taxable income. Effective tax rate = 13% ($200,000 / $1,500,000). Effective tax rate is the total income tax divided by total income. Diff: 2 Learning Objective: LO 1.3 AACSB / AICPA: Analytic / Accounting Competencies Bloom's: Analysis Section Reference: Sec. 1.3 Time on Task: 8 min
20) Stacy is a single filer. Her taxable income is $250,000. Her total income is $310,000. The applicable tax rate schedule for Stacy in 2024 is: If Taxable Income is: The Tax Is: Over $243,725 but not over $609,350 $55,678.50 plus 35% of excess over $243,725 What is Stacy's marginal tax rate? A) 35% © 2025 John Wiley & Sons, Inc. All rights reserved. Instructors who are authorized users of this course are permitted to download these materials and use them in connection with the course. Except as permitted herein or by law, no part of these materials should be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording or otherwise.