Federal Income Taxation Exam Preparation Guide
Course Introduction
This course provides a comprehensive introduction to the principles and applications of federal income taxation in the United States. It examines the structure of the Internal Revenue Code, the calculation of taxable income, and the determination of individual, partnership, and corporate tax liability. Core topics include income inclusion, exclusions, deductions, credits, capital gains and losses, tax accounting, and the tax treatment of various entities. Through case studies and hypothetical scenarios, students will gain practical skills in tax research, compliance, and planning, preparing them for further study or professional practice in taxation, accounting, and law.
Recommended Textbook Fundamentals of Taxation 9th Edition 2016 by Ana Cruz
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Chapter 1: Introduction to Taxation, the Income Tax
Formula, and Form 1040ez
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Sample Questions
Q1) Rev. Proc. 87-56 was the 56<sup>th</sup> Revenue Procedure issued in 1987.
A)True
B)False
Answer: True
Q2) A tax rate that increases as the tax base increases is an example of what kind of tax rate structure?
A) Progressive.
B) Proportional.
C) Regressive.
D)Recessive.
Answer: A
Q3) Determine the tax liability in each of the following cases.
a. Single individual, taxable income of $44,985.
b. Married couple, taxable income of $89,717.
c. Single individual, wage income of $86,437. No other sources of income.
Answer: Answers: are derived from the Tax Tables.
a. $7,038.
b. $14,019.
c. $14,825.
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Chapter 2: Expanded Tax Formula, Forms 1040a and 1040, and Basic Concepts
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Sample Questions
Q1) The basic standard deduction in 2015 for a taxpayer, 67 and not blind, filing head of household is:
A) $10,800.
B) $7,850.
C) $1,550.
D)$9,250.
Answer: A
Q2) A married couple in the process of obtaining a divorce cannot file a joint tax return.
A)True
B)False
Answer: False
Q3) When a taxpayer's AGI exceeds certain levels, certain tax benefits are reduced or eliminated.
A)True
B)False
Answer: True
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Chapter 3: Gross Income: Inclusions and Exclusions
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Sample Questions
Q1) Under the cash method, an individual reports income when:
A) income is received or constructively received.
B) income is accrued.
C) income is earned.
D)income is received or earned.
Answer: A
Q2) When an individual's marginal ordinary income tax rate is 25% or more and less than 39.60%, the tax rate on qualified dividends is:
A) 5%.
B) 15%.
C) 0%.
D)10%.
Answer: B
Q3) In what form can a taxpayer realize income?
Answer: A taxpayer can realize income in any form, i.e., money, property, or services. Even for a cash-basis taxpayer, receipt of property or services serves to trigger income recognition.
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Chapter 4: Adjustments for Adjusted Gross Income
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Q1) The qualified tuition and fees deduction is $4,000 for all eligible taxpayers.
A)True
B)False
Q2) Expenses for home schooling or for non-athletic supplies for health or physical education courses qualify for the education expense deduction.
A)True
B)False
Q3) In lieu of making cash payments of alimony directly to a former spouse, payments to a third party on behalf of the former spouse can qualify as alimony.
A)True
B)False
Q4) Deductible moving expenses may include moving household goods and personal effects from the old residence to the new residence.
A)True
B)False
Q5) What is the amount of self-employment tax that self-employed individuals must pay and what is the proper treatment on their tax return?
Q6) What is a Health Savings Account (HSA)?
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Chapter 5: Itemized Deductions
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Sample Questions
Q1) Explain the change in the tax treatment regarding the limitation of itemized deductions for high-income taxpayers.
Q2) Which of the following interest expenses incurred by Amanda is treated as personal interest expense and, therefore, not deductible as an itemized deduction?
A) Interest expense on personal credit cards.
B) Bonds purchased with accrued interest.
C) Interest on a home mortgage acquired in 2006.
D)Interest expense incurred by a partnership in which Amanda is a limited partner.
Q3) How is the medical expense deduction calculated? How is it limited?
Q4) What is usually the largest miscellaneous itemized deduction category? Does it require any special treatment?
Q5) Premiums paid for long-term care insurance policies may be deductible as medical expenses.
A)True
B)False
Q6) What is home equity indebtedness and how does it differ from acquisition indebtedness? Are there any limits to the deductibility of home equity loan interest?
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Page 7
Chapter 6: Self-Employed Business Income
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Sample Questions
Q1) Once the more-than-50% business-use test is met for listed property, it does not matter if the business use falls below 50% in subsequent years.
A)True
B)False
Q2) Taxpayers must use the mid-month convention when more than 40% of the personal property is placed in service during the last three months of the tax year.
A)True B)False
Q3) Katherine earned $100,000 from her job at a local business in 2015. She also had $42,000 in self-employed consulting income. What is the amount of her self-employment tax rounded to the nearest dollar?
A) $0.
B) $3,419.
C) $6,333.
D)$6,426.
Q4) Under MACRS, the half-year convention is used for all real property.
A)True
B)False
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8
Chapter 7: Capital Gains and Other Sales of Property
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Sample Questions
Q1) The top tax rates for an individual with long-term capital gains on the sale of stock and on the sales of collectibles, sold after December 31, 2012 are:
A) 0%, 15%.
B) 15%, 25%.
C) 20%, 28%.
D)25%, 28%.
Q2) Heidi invested in a mid-sized local company with gross assets of $17,000,000. Heidi purchased 2,000 shares for $44,000 in 1999. In 2015, Heidi sold the stock for $84,000. How is the gain treated for tax purposes?
A) $40,000 capital gain and taxed at preferential rates.
B) $20,000 excluded from gross income under Section 1202 with the remaining gain recognized and taxed at regular rates.
C) $20,000 excluded from gross income under Section 1202 and $20,000 taxed at 28%.
D)$20,000 excluded from gross income under Section 1202 and $20,000 taxed at preferential capital gains rates.
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Chapter 8: Rental Property, Royalties, Income From
Flow-Through Entities
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Sample Questions
Q1) Royalties can be earned from allowing others the right to use or exploit:
A) Copyrights
B) Formulas
C) Coal mines
D)All of these
Q2) Jonathan and Sandy rented their cabin for 123 days and used the cabin for personal use for 55 days. The cabin is considered personal/rental property.
A)True
B)False
Q3) A royalty is a payment for the right to use intangible property.
A)True
B)False
Q4) Royalties can be earned from allowing others the right to use:
A) Books
B) Plays
C) Trademarks
D)All of these
Q5) Explain the difference between the two methods available; the Tax Court's method and the IRS method, to allocate expenses between personal and rental use of property.
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Chapter 9: Tax Credits
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Sample Questions
Q1) Which of the following statements is true with regard to child and dependent care expense credit?
A) The maximum amount of expenses for one dependent is 35% of all qualified expenses.
B) Married taxpayers may file separate returns and still qualify for the credit.
C) If a spouse is attending school full- time, the credit cannot be claimed.
D)The credit phases out completely if the taxpayer's AGI exceeds certain amounts.
Q2) Which of the following statements is true about education credits?
A) A taxpayer may be eligible to claim the education credits regardless of their AGI amount.
B) A taxpayer can use the same qualifying expenses for both the American opportunity tax and lifetime learning credits.
C) A taxpayer cannot claim an American opportunity tax credit or lifetime learning credit in the same year he/she takes a tax-free distribution from a Coverdell Education Savings Account.
D)The lifetime learning credit may be limited by AGI levels and may completely phase out when modified AGI exceeds a certain amount (the amount depending on the tax year).
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Page 11
Chapter 10: Payroll Taxes
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Q1) Self-employed taxpayers who also receive wages from an employer are not subject to FICA or federal withholding taxes.
A)True
B)False
Q2) Ladaris has two jobs. She earned $120,000 from her first job and $10,000 from her second job. How much total FICA taxes will Ladaris have withheld from her wages from working two jobs?
A) $9,065.25.
B) $9,830.25.
C) $9,852.00.
D)$9,945.00.
Q3) Form 941 is a quarterly reconciliation report an employer sends to the IRS showing all federal payroll tax liability and payments for the period.
A)True
B)False
Q4) Form 1040-ES is filed along with the Form 1040 when a taxpayer makes estimated payments during the year.
A)True
B)False
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Chapter 11: Retirement and Other Tax-Deferred Plans and Annuities:
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Sample Questions
Q1) Godfrey is age 77. He paid $240,000 for a single life annuity contract that will pay him $28,800 per year for life. The taxable amount of the first $28,800 payment is
A) $7,371.
B) $8,965.
C) $17,479.
D)$21,429.
Q2) Patrick is entitled to receive monthly payments of $1,500 over his life from his employer's qualified pension plan or he can take $1,300 monthly over his life and the life of his wife. The payments begin January 1, 2015. He contributed $85,250 to the plan prior to his retirement. Patrick is 64 and his wife is 62. Using the simplified method, how much of the payments will be included in Patrick's taxable income for 2015 if he chooses to take $1,300 monthly over his life and the life of his wife?
A) $1,300.
B) $3,300.
C) $12,300.
D)$15,600.
Q3) What is a good rule of thumb you should use when thinking about the taxability of retirement plan distributions?
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Chapter 12: Special Property Transactions
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Sample Questions
Q1) Julia exchanges a machine used in her business with Elvira for another machine. The basis of Julia's old machine is $100,000, FMV is $132,000, and she gives Elvira cash of $28,000. Elvira's basis in her machine is $140,000 and the FMV is $160,000. What, if any, gain is recognized on the transaction and what is the adjusted basis of the property received by Julia and by Elvira?
Q2) An apartment building with an adjusted basis of $500,000 was destroyed by a tornado on April 30, 2015. On May 10, 2015, the insurance company paid the owner $695,000. The owner reinvested $570,000 in a new apartment complex. What is the basis of the new complex if non-recognition of gain from an involuntary conversion is elected?
A) $500,000.
B) $570,000.
C) $625,000.
D)$695,000.
Q3) A wash sale occurs when a taxpayer sells stock or securities at a loss and, within a period of 60 days before or 60 days after the sale, the taxpayer acquires substantially identical stock or securities.
A)True
B)False
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Chapter 13: At-Riskpassive Activity Loss Rules and the
Individual Alternative Minimum Tax
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Q1) Which of the following decreases a taxpayer's at-risk amount?
A) Cash distributions.
B) Increases in liabilities.
C) Income items.
D)Cash contributions.
Q2) Generally, the gains and losses recognized for regular tax purposes are the same amount as the gains and losses recognized for AMT purposes.
A)True
B)False
Q3) The at-risk amount is increased each tax year by:
A) Income items.
B) The basis of assets contributed.
C) The share of debt the investor is liable to repay.
D)All of these.
Q4) Itemized deductions are allowed in their entirety for AMT purposes.
A)True
B)False
Q5) Most real estate debt meets the requirements of qualified nonrecourse financing.
A)True
B)False
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Chapter 14: Partnership Taxation
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Sample Questions
Q1) If Janelle's partnership basis was $5,000 and she received a distribution of land that had a basis of $10,000, the basis of the land in Janelle's hands would be $10,000.
A)True
B)False
Q2) How does a partner treat premiums on health insurance provided by the partnership?
A) As a guaranteed payment.
B) As an ordinary income item reported on a W-2.
C) As a separately stated item.
D)As a capital gain item.
Q3) When a partner is released of a partnership liability, the partner is treated as receiving a money distribution, which reduces his or her partnership basis.
A)True
B)False
Q4) All income and expense items of a partnership that may be treated differently at the partner level must be "separately stated."
A)True
B)False
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Chapter 15: Corporate Taxation
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Q1) A corporation can choose to voluntarily revoke a valid Subchapter S election. How do the shareholders accomplish a voluntary revocation and when will the revocation be effective?
Q2) A corporation can deduct a charitable contribution of up to 50% of its adjusted gross income.
A)True
B)False
Q3) Which of the following statements is incorrect?
A) A distribution from earnings and profits in excess of stockholder basis is a nontaxable return of capital.
B) Distributions paid in excess of earnings and profits are nontaxable to the extent of stockholder basis.
C) A distribution of appreciated property creates a gain to the corporation. D)Earnings and profits are conceptually similar to retained earnings.
Q4) Corporations are not subject to alternative minimum tax. A)True B)False
Q5) There are four characteristics that a C Corporation must meet in order to elect Subchapter S status. List the characteristics.
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