Federal Income Taxation
Pre-Test Questions
Course Introduction
Federal Income Taxation is a comprehensive course that examines the fundamental principles and structure of the federal income tax system in the United States. The course explores statutory, regulatory, and judicial authorities related to the taxation of individuals, corporations, and other entities. Topics include gross income, deductions, tax credits, capital gains and losses, tax accounting, and the administration of tax laws. Through case studies, problem-solving exercises, and analysis of current issues, students gain a thorough understanding of how federal income tax rules are applied and develop the analytical skills necessary for effective tax planning and compliance.
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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Q1) Which of the following would disqualify a taxpayer from filing a Form 1040EZ?
A) The taxpayer has total income of $74,000.
B) The taxpayer has interest income of $500.
C) The taxpayer is age 63.
D)The taxpayer has one dependent.
Answer: D
Q2) On Form 1040EZ, the permitted deduction from income for a single taxpayer is:
A) $0.
B) $1,500.
C) $10,300.
D)$20,600.
Answer: C
Q3) For equivalent amounts of gross income, a single person will have a higher tax liability than will married persons filing jointly.
A)True
B)False
Answer: True
Q4) What is the definition of a regressive tax?
Answer: A regressive tax is one in which the tax rate decreases as the tax base increases.
Page 3
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Chapter
2:
Expanded Tax Formula, Forms 1040a and 1040, and Basic Concepts
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Q1) A couple who is legally married on the last day of the tax year cannot file married filing separately.
A)True
B)False
Answer: False
Q2) Many deductions and credits are determined with reference to adjusted gross income (AGI).
A)True
B)False
Answer: True
Q3) A taxpayer can deduct a(an) __________ amount from AGI for each dependent.
A) Deduction
B) Exemption
C) Itemized
D)Adjustment
Answer: B
Q4) A taxpayer must be married to claim Head of Household status.
A)True
B)False
Answer: False
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Chapter 3: Gross Income: Inclusions and Exclusions
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Q1) How does the taxpayer report interest income on an original issue discount (OID) instrument?
Answer: The taxpayer must include part of the OID in interest income every year, regardless of the taxpayer's method of accounting. This imputed interest is calculated by using the effective interest method. Using this method, total interest income is equal to the carrying amount of the bond multiplied by the effective interest rate.
Q2) Life insurance proceeds because of the death of the insured are fully excludable from the gross income of the recipient if the payment is made:
A) It does not matter how these payments are made.
B) Over time.
C) As a lump sum.
D)It does not matter how these payments are made and over time.
Answer: C
Q3) For tax purposes, name the three conditions that a transaction must meet for income recognition.
Answer: A transaction is recognized as income on the taxpayer's tax return if it meets three conditions: economic benefit, existence from start to completion, and not exempt from income tax.
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Chapter 4: Adjustments for Adjusted Gross Income
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Q1) Peter, having moved from Oregon to Florida in the current year, met all the requirements to deduct moving expenses. Which of the following expenses that he incurred is not deductible as qualified moving expenses?
A) Home improvements to sell his home in Oregon.
B) Shipping costs for his classic Corvette.
C) Temporary storage costs incurred while his furniture was in transit from Oregon to Florida.
D)The cost of an oil change incurred in driving his other car from Oregon to Florida.
Q2) As a for AGI deduction, the expense for self-employed health insurance premiums:
A) Is never limited.
B) Can be limited by the amount of net earnings of the business.
C) Can be limited by the availability of other health insurance coverage.
D)Is limited by both can be limited by the amount of net earnings of the business and can be limited by the availability of other health insurance coverage.
Q3) Define each of the following: alimony, child support, and a property settlement.
Q4) Self-employment tax is calculated on the gross earnings of the business.
A)True
B)False
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Chapter 5: Itemized Deductions
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Q1) The adjusted gross income limitation on casualty losses is 7.5 percent.
A)True
B)False
Q2) Which of the following costs are potentially deductible on Form 1040, Schedule A as taxes for 2015?
1) Property tax on principal residence.
2) Garbage pickup itemized on the real estate bill.
3) Real estate tax on property owned as an investment.
4) Sales tax paid on the purchase of a personal car.
A) None of the items.
B) 2 and 4.
C) 1, 3, & 4.
D)All of the items.
Q3) In order for a personal property tax to be deductible as an itemized deduction, what three tests are required?
Q4) If a taxpayer's personal property is completely destroyed, the casualty loss deduction is still reduced by a required floor amount.
A)True
B)False
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Chapter 6: Self-Employed Business Income
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Q1) In June 2015, Kelly purchased new equipment for $26,000 to be used in her business. Assuming Kelly has net income from her business of $75,000 prior to the deduction, what is the maximum amount of cost recovery Kelly can deduct rounded to the nearest dollar, assuming she does not elect §179 expense or bonus depreciation?
A) $3,715.
B) $13,000.
C) $14,858.
D)$26,000.
Q2) For a cash-basis taxpayer, any account receivable that is not collected can be written off as a bad debt.
A)True
B)False
Q3) On November 30, 2015, Constance purchased an apartment building for $750,000. Determine her cost recovery deduction for 2015 rounded to the nearest dollar.
A) $0.
B) $2,400.
C) $3,413.
D)$26,138.
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Chapter 7: Capital Gains and Other Sales of Property
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Q1) Yolanda, a single taxpayer, has W-2 income of $87,500. She also has a short-term capital loss of $7,000, a short-term capital gain of $1,000, and a long-term capital gain of $2,000. What is Yolanda's AGI for 2015?
A) $83,500.
B) $84,500.
C) $89,500.
D)$90,500.
Q2) To figure the gain or loss from the sale of property received as a gift, the donee must know the donor's adjusted basis as well as the FMV at the date of the gift.
A)True
B)False
Q3) Tamiko buys a painting from a collector for resale in her gallery for $3,500. She sold it 15 months later for $5,500. What are the nature and amount of the gain on the sale of the painting?
A) $2,000 Section 1245 gain.
B) $2,000 ordinary income.
C) $2,000 Section 1231 gain.
D)$2,000 gain subject to 28% collectibles tax rate.
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Chapter 8: Rental Property, Royalties, Income From
Flow-Through Entities
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Q1) The income from a partnership to its partner is considered self-employment income. A)True
B)False
Q2) What is meant by ordinary rental expenses and what criteria must be met to be deductible? Provide some examples of deductible rental expenses. For this question, assume no personal use of the rental property.
Q3) Which of the following entity(ies) is(are) considered flow-through?
A) C corporation
B) Sole proprietorship
C) Publicly traded corporation
D)S corporation
Q4) In the case of a primarily personal property, a taxpayer may report a net loss as long as the correct allocation method was used.
A)True
B)False
Q5) Flow-through entities are named as such because they are taxed continuously. A)True
B)False
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Chapter 9: Tax Credits
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Q1) The earned income credit is adjusted each year for inflation.
A)True
B)False
Q2) The amount of foreign tax credit is equal to the amount paid to the foreign government but cannot exceed that portion of U.S. income tax attributable to the foreign income.
A)True
B)False
Q3) Presley and Jake are married filing joint taxpayers. They have twin sons, ages 7. If their AGI is $116,950, what amount of child tax credit can they claim?
A) $0.
B) $1,000.
C) $1,650.
D)$2,000.
Q4) A student can only receive the American opportunity tax credit if he/she is enrolled in the first four years of postsecondary education.
A)True
B)False
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Chapter 10: Payroll Taxes
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Q1) Angie earned $120,000 during 2015. She is single, claims two withholding allowances, and is paid monthly. How much will Angie's employer withhold in Medicare taxes for 2015?
A) $1,680.00.
B) $1,711.00.
C) $1,718.25.
D)$1,740.00.
Q2) Angie earned $120,000 during 2015. She is single, claims two withholding allowances, and is paid monthly. How much FICA tax must Angie's employer remit to the federal government in 2015?
A) $18,130.05.
B) $18,174.00.
C) $18,288.00. D)$18,360.00.
Q3) Employers are required to deposit FUTA taxes when their liability exceeds:
A) $100.
B) $500.
C) $1,000.
D)$2,500.
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Chapter 11: Retirement and Other Tax-Deferred Plans and Annuities:
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Q1) Regarding a Coverdell Education Savings Account:
A) Distributions are tax-free to the beneficiary if they are used for his or her qualified education expenses.
B) Qualified education expenses include required tuition, fees, books, supplies, and equipment at an eligible educational institution.
C) Qualified expenses must be reduced by scholarships or other tax-free income.
D)All of these.
Q2) Damian is age 77. He purchased a single life annuity contract that will pay him $6,000 per month for life. The expected return on the contract is:
A) $67,200.
B) $806,400.
C) $871,200.
D)$1,526,400.
Q3) What is an annuity contract? Who are the parties to an annuity contract?
Q4) Roth IRA withdrawals are deemed to first come from contributions followed by earnings.
A)True
B)False
Page 13
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Chapter 12: Special Property Transactions
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Q1) The time period to replace property destroyed in an involuntary conversion is two years from the event.
A)True
B)False
Q2) If a taxpayer excludes the gain on the sale of his personal residence and, within two years, sells a second residence, he or she can exclude (up to $250,000 for a single taxpayer):
A) The entire gain on the second sale if the sale is due to health, employment reasons or unforeseen circumstances.
B) The entire gain for any reason.
C) A ratio of the days owned divided by 730 days and only if the sale is due to health, employment reasons or unforeseen circumstances.
D)A ratio of the days owned divided by 730 days for any reason.
Q3) The receipt of boot in a like-kind exchange causes the recognition of a realized gain.
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) Jonathan is married, files a joint return, and has one child. During 2015, Jonathan has $85,000 of taxable income. He has $20,000 of positive AMT adjustments and $28,000 of tax preferences. Since Jonathan rents his home (pays no mortgage interest) and lives in Florida (has no state income tax), he does not itemize his deductions but takes the standard deduction. Calculate Jonathan's AMTI (before exclusion amount).
A) $137,600.
B) $145,000.
C) $145,600.
D)$157,600.
Q2) How much, in rental losses, can an individual earning a salary of $125,000 per year offset against salary if he or she owns at least 10% of a rental activity and actively participates in the rental activity?
A) $0.
B) $2,500.
C) $12,500.
D)$25,000.
Q3) Tax preference items can be either positive or negative.
A)True
B)False
Page 15
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Chapter 14: Partnership Taxation
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Q1) Generally, guaranteed payments do not have an impact on a partner's basis in the partnership interest.
A)True
B)False
Q2) Partnership income and losses are divided into two components: ordinary items and separately stated items.
A)True
B)False
Q3) Sabrina has a $12,000 basis in her S&B partnership interest. Sabrina receives a current cash distribution of $10,000 and equipment with a $5,000 basis (FMV $6,000). What is Sabrina's basis in the equipment received?
A) $0.
B) $2,000.
C) $5,000.
D)$6,000.
Q4) Liquidation occurs when a partner's entire interest is redeemed by the partnership.
A)True
B)False
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Chapter 15: Corporate Taxation
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Q1) A corporation must file Form 1120 2½ months after the end of its fiscal year.
A)True
B)False
Q2) If a shareholder receives cash from a corporation in complete liquidation of his or her ownership interest and the cash received is less than the shareholder's basis in the stock, the shareholder will report a loss.
A)True
B)False
Q3) A corporation makes a pro rata distribution of property to its shareholders as part of its normal operations. The FMV of the property is less than its basis. The corporation will record a loss on the distribution.
A)True
B)False
Q4) Once a corporation properly elects to be a Subchapter S corporation, it cannot terminate its election for five years.
A)True
B)False
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