Federal Income Tax for Individuals Test Bank
Course Introduction
This course provides an in-depth introduction to the principles and concepts of federal income taxation as they apply to individuals. Topics include the determination of gross income, deductions, tax credits, and the calculation of taxable income and tax liability. Students will explore the Internal Revenue Code, relevant Treasury regulations, and judicial interpretations as they affect individuals, with an emphasis on tax planning and compliance. The course also covers the filing requirements, reporting obligations, and ethical considerations faced by taxpayers and tax professionals. Practical examples and problem-solving exercises will equip students with the skills necessary to navigate and apply federal income tax rules in real-life scenarios.
Recommended Textbook
Concepts in Federal Taxation 2019 26th Edition Kevin E. Murphy
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16 Chapters
2071 Verified Questions
2071 Flashcards
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Chapter 1: Federal Income Taxation-An Overview
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Sample Questions
Q1) Katarina, a single taxpayer, has total income from all sources of $100,000 for 2018. Her taxable income after taking into consideration $25,000 in deductions and $10,000 in exclusions is $65,000. Katarina's tax liability is $10,240. What are Katarina's marginal, average, and effective tax rates?
A)12% marginal; 15.8% average; 13.7% effective.
B)22% marginal; 15.8% average; 15.8% effective.
C)24% marginal; 13.7% average; 15.8% effective.
D)22% marginal; 15.8% average; 13.7% effective.
E)12% marginal; 13.7% average; 15.8% effective.
Answer: D
Q2) The Federal income tax is a
A)revenue neutral tax.
B)regressive tax.
C)value-added tax.
D)progressive tax.
E)form of sales tax.
Answer: D
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Page 3
Chapter 2: Income Tax Concepts
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Sample Questions
Q1) Mandy is a self-employed plumber. She spends $24,000 of her personal savings to buy an Airstream camper to use on camping trips. Why is this expenditure not currently deductible?
I.It is a capital expenditure.
II.It is a personal expenditure.
A)Only statement I is correct.
B)Only statement II is correct.
C)Both statements are correct.
D)Neither statement is correct.
Answer: B
Q2) An asset's adjusted basis is the amount of unrecovered investment after considering any increases and decreases in the original purchase price.
A)True
B)False
Answer: True
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Page 4
Chapter 3: Income Sources
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Sample Questions
Q1) Ronald, a single taxpayer, purchased 300 shares of Jasmine Inc., stock on October 14, 2015, for $4,000. He sells the stock on August 22, 2018, for $2,000. Ronald has no other capital asset transactions in 2018.
I.If Ronald's taxable income without considering the stock sale is $113,000, the sale of the stock will decrease his income tax liability by $480.
II.If Ronald's taxable income without considering the stock sale is $13,000, the sale of the stock will decrease his income tax liability by $240.
A)Only statement I is correct.
B)Only statement II is correct.
C)Both statements are correct.
D)Neither statement is correct.
Answer: C
Q2) Net collectibles gains are taxed at a maximum rate of 25 percent.
A)True
B)False
Answer: False
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Chapter 4: Income Exclusions
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Sample Questions
Q1) Clark, a single taxpayer with expected taxable income of $190,000, needs your advice on an investment decision. Clark wants to invest $10,000 in long-term bonds. Clark can obtain a 6% return by investing in 10-year Ford Motors' bonds. What is the minimum interest rate that Clark should demand from an investment in State of Tennessee bonds of identical risk and duration?
A)4.08%.
B)4.68%.
C)9.0%.
D)10.0%.
Q2) Items that are excluded from gross income include all of the following with the exception of: A)gifts.
B)inheritances.
C)life insurance proceeds.
D)municipal bond interest.
E)U.S. Treasury Bills interest.
Q3) Jeane's employer pays his medical premiums each month ($130/month).
A)Fully excluded from gross income.
B)Fully included in gross income.
C)Partially excluded from gross income.
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Chapter 5: Introduction to Business Expenses
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Sample Questions
Q1) Amortizable or deductible expense
A)Automobile used 75% for business.
B)Investment interest expense on loan to acquire municipal bonds.
C)Cost of investigating a new trade or business that the taxpayer enters.
D)Can be separated into two classifications.
E)Expenses related to royalty income
F)Expenditure to influence legislation.
G)Cost of a new roof for office building.
H)Relates to an income producing activity mainly carried on for recreation or personal enjoyment.
I)Deductibility depends on income and amount of personal and rental use.
J)Deductibility depends on whether the area is used exclusively for trade or business activities.
Q2) Which of the following can be deducted as a trade or business expense?
A)Lobbying expenses to influence taxpayers.
B)Political contribution to elect a local Congressman.
C)Illegal bribes to government
D)Rent paid on a office to run an illegal gambling operation.
E)None of the above can be deducted.
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Page 7
Chapter 6: Business Expenses
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Sample Questions
Q1) Caroline is a doctor in Little Rock. She travels to Atlanta to attend a two-day seminar for health professionals about investing in real estate. Transportation expenses are $400, the hotel cost $104/day, and meals cost $50/day. How much can Caroline deduct for travel to the seminar?
A)$- 0 -
B)$258
C)$308
D)$658
E)$708
Q2) Margie is single and is an employee of the Stitch Corporation. She is an active participant in the company's pension plan. Margie's adjusted gross income is $67,000 and she contributes the maximum amount allowable as a deduction to her regular IRA account during the current year. How much can Margie contribute to her Roth IRA?
A)$- 0 -
B)$1,000
C)$2,200
D)$4,000
E)$5,500
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8
Chapter 7: Losses-Deductions and Limitations
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Sample Questions
Q1) Active participant
A)A loss that is generally not deductible.
B)The borrower is personally liable for the debt.
C)The loss is used to offset income in future periods.
D)A liability that is only secured by the underlying property.
E)The loss may be used to offset income from prior periods.
F)A type of stock that receives some ordinary loss treatment.
G)Involved in a rental activity for more than 500 hours in a year.
H)Cash or other assets contributed plus recourse debts of the activity.
I)Owns at least a 10% interest and is significantly involved in the rental activity.
J)The amount of the loss for fully destroyed property is the property's adjusted basis.
K)The amount of loss is limited to the lower of the property's adjusted basis, or the reduction in fair market value.
L)Management is left to at least one general partner whose liability is not limited and who is responsible for the on-going activities of the business.
Q2) Why did Congress enact the at-risk rules?
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Chapter 8: Taxation of Individuals
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Sample Questions
Q1) Thomas has adjusted gross income of $228,000, total itemized deductions of $39,000 and has a standard deduction of $24,000. Which is his filing status?
A)Single.
B)Head of household.
C)Married filing a joint return.
D)Married filing separately.
Q2) Head of household
A)Unmarried without dependents.
B)Generally used when financial disagreement exists.
C)Unmarried and provides a household for a dependent.
D)Use the same tax rate schedule as married, filing jointly.
E)Determines which tax rate schedule and standard deduction amount is applicable.
Q3) Sale of stock results in a loss of $7,000. The only other capital transaction for the year results in a gain of $6,000. Amount: $7,000
A)Not Deductible
B)Deductible - For AGI
C)Deductible - From AGI
Q4) Explain the support test and the gross income test to be a qualifying relative.
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Page 10
Chapter 9: Acquisitions of Property
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Sample Questions
Q1) Terry gives Brenda 1,000 shares of stock he had purchased several years ago for $5,000. On the date of the gift, the stock has a fair market value of $4,000. Brenda sells the 1,000 shares for $5,500 one month after the gift, Brenda realizes a
A)$- 0 - gain or loss
B)$500 short-term capital gain
C)$500 long-term capital gain
D)$1,500 short-term capital gain
E)$1,500 long-term capital gain
Q2) Buffey operates a delivery service. She purchased a van in 2016 for $25,000, and she sold it in 2018 for $15,000. Buffey did not deduct any depreciation on the van from 2016 through 2018, although total allowable depreciation on the van would have been $17,000. What is the amount of Buffey 's recognized gain or loss on the sale of the van?
A)$10,000 loss
B)$7,000 gain
C)$8,000 gain
D)$15,000 gain
E)$17,000 gain
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Chapter 10: Cost Recovery on Property: Depreciation, Depletion,
and Amortization
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Sample Questions
Q1) Jason purchases a patent at a cost of $24,000. The patent has 8 years of legal life remaining from the date of purchase.
I.If the patent is the only asset Jason purchased, he must amortize the patent over 15 years.
II.If the patent was part of the purchase of all the assets of a business, he must amortize the patent over 15 years.
A)Only statement I is correct.
B)Only statement II is correct.
C)Both statements are correct.
D)Neither statement is correct.
Q2) Rand Company purchases and places into service a company automobile costing $40,000 in April 2018. What is the 2018 depreciation deduction on the auto?
A)$4,000
B)$8,000
C)$10,000
D)$18,000
E)$40,000
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Chapter 11: Property Dispositions
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Sample Questions
Q1) Virginia and Dan each own investment realty that they would like to trade. Virginia's property is subject to mortgage debt of $2,000 and has a net of mortgage value of $6,000. Dan's property is subject to mortgage debt of $30,000 and has a net of mortgage value of $5,000. Virginia and Dan agree to exchange properties and assume each other's debt. Dan pays Virginia $1,000 cash, and the exchange is completed. What is the gross selling price of Virginia's property?
A)$2,000
B)$6,000
C)$8,000
D)$5,000
E)$35,000
Q2) When a taxpayer sells only a portion of the securities that they own, the average cost method is used to establish the cost basis for the shares sold.
A)True
B)False
Q3) Discuss the general differences between Section 1245 and Section 1250 property.
Q4) The amount realized equals the gross selling price less any selling expenses.
A)True
B)False
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Chapter 12: Non-Recognition Transactions
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Sample Questions
Q1) Rosilyn trades her old business-use luxury car with an adjusted basis of $13,000 and an outstanding loan liability balance of $2,000 for a new business-use economy car valued at $9,000 plus $3,000 cash from Bob's Auto Sales and Loan Company. Bob assumes Rosilyn's loan balance. What is Rosilyn's amount realized on the transaction?
A)$3,000
B)$9,000
C)$12,000
D)$13,000
E)$14,000
Q2) Rebecca trades in her four-wheel drive truck for a new one. Rebecca's truck cost $20,000 and has an $8,000 basis on the date of the trade-in. The price of the new truck is $27,000 and the dealer gives Rebecca a $10,000 trade in allowance on her old truck. She uses the trucks in her business. What is Rebecca's basis in the new truck?
A)$8,000
B)$18,000
C)$25,000
D)$27,000
E)$29,000
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Page 14
Chapter 13: Choice of Business Entity-General Tax and Nontax Factorsformation
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Sample Questions
Q1) Corporations generally are required to use the accrual method of accounting. A)True
B)False
Q2) The shareholder of an S corporation can reduce income taxes by passing income to the owner-employee as a dividend rather than paying salary.
A)True
B)False
Q3) A limited partner
I.Can lose any or all of their investment in the partnership.
II.Can participate in the management of the partnership.
A)Only statement I is correct.
B)Only statement II is correct.
C)Both statements are correct.
D)Neither statement is correct.
Q4) Limited liability refers to
A)whether the entity ceases to exist with a change in ownership. B)who manages the entity.
C)whether the owners are risking any more than they invested in the firm. D)the ease with which ownership can be transferred.
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Chapter 14: Choice of Business Entity-Operations and Distributions
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Sample Questions
Q1) If a sole proprietorship has a net operating loss for the current period, the loss can only be used to offset other business income in the current year. Any current loss can be carried back three years and forward five years and used to offset business income in those years.
A)True
B)False
Q2) Withdrawals of cash by a partner are taxable.
A)True
B)False
Q3) Byron is a partner in the Dowdy Group. At the close of the current year, Byron's basis in the partnership is $34,000. At that time, the partnership distributes cash of $8,000 and property with a basis of $9,000 and a fair market value of $13,000 to each partner. What is Byron's basis in the partnership after the distribution?
A)$13,000
B)$17,000
C)$26,000
D)$34,000
Q4) Discuss two tax-planning techniques that can be used by a 100% owner-employee to reduce his/her tax liability.
Page 16
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Chapter 15: Choice of Business Entity-Other Considerations
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Q1) IRA
A)A separate, parallel tax system designed to ensure a taxpayer pays some tax.
B)A compensation tool that is based on potential price increases of the company's stock.
C)An individual trust account maintained for the exclusive benefit of an individual or beneficiary.
D)A type of defined contribution pension plan in which the company and the employee contribute a fixed percentage of the employee's salary to the plan.
E)A pension plan in which the benefits are based on the number of years an employee has worked for a company and on the employee's annual salary.
F)A pension plan whose benefits are determined by the amount of contributions the employee and the company contribute to the plan and the earnings of the plan.
Q2) A Keogh plan is administratively more convenient and economical than a simplified employee pension plan (SEP).
A)True
B)False
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Chapter 16: Tax Research
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Q1) A tax treaty with a foreign country negotiated by the president is considered a legislative source of tax law.
A)True
B)False
Q2) Joint Conference Committee
A)Where federal tax legislation generally originates.
B)Has jurisdiction over all tax matters in the U.S. Senate.
C)The committee responsible for initial hearings and deliberations on a tax bill.
D)Responsible for negotiating a resolution of the differences in the House and Senate versions of a tax bill.
E)The agency within the administrative branch of government with overall responsibility for administration of tax law.
F)Oversees the operation and administration of the tax system as a whole, and prepares a general explanation of any tax bill signed by the President.
Q3) Citators provide the full text of court decisions.
A)True
B)False
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