Federal Income Taxation Solved
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Federal Income Taxation provides a comprehensive overview of the principles and applications of U.S. federal income tax law as it pertains to individuals, businesses, and other entities. The course explores the structure and function of the Internal Revenue Code, including the determination of gross income, deductions, credits, tax rates, and the calculation of taxable income. Students will examine important topics such as timing of income and deductions, taxation of property transactions, capital gains and losses, basis, and the tax treatment of various entities. Through case studies and problem-solving exercises, students will develop an understanding of the policy considerations and practical implications of federal tax law, preparing them for further study or practice in tax-related fields.
Recommended Textbook Fundamentals of Taxation 9th Edition 2016 by Ana Cruz
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Page 2
Chapter 1: Introduction to Taxation, the Income Tax
Formula, and Form 1040ez
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Q1) One of the criteria to file a Form 1040EZ is that the total taxable income of the taxpayer cannot exceed $100,000.
A)True
B)False
Answer: True
Q2) Alice is an employee of Valley Company. Alice properly completed her Form 1040EZ tax return and received a refund from the IRS of $1,244. Alice had income tax withholdings during the year of $4,782. Alice's tax liability for the year was:
A) $1,244.
B) $3,538.
C) $4,782.
D)$6,026.
Answer: B
Q3) A paid tax preparer who violates the provisions of Circular 230 can be subject to civil, but not criminal, penalties.
A)True
B)False
Answer: False
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Chapter
2:
Expanded Tax Formula, Forms 1040a and 1040, and Basic Concepts
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Q1) Which amount represents the standard deduction for a taxpayer who is single and 68 years of age?
A) $6,300.
B) $7,850.
C) $6,200.
D)$7,550.
Answer: B
Q2) A taxpayer can deduct a(an) __________ amount from AGI for each dependent.
A) Deduction
B) Exemption
C) Itemized
D)Adjustment
Answer: B
Q3) To be claimed as a dependent, a person must be a qualifying child or a qualifying relative.
A)True
B)False
Answer: True
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Chapter 3: Gross Income: Inclusions and Exclusions
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Q1) Interest on state bonds is tax-exempt if the bonds were issued for private activities, such as convention centers, industrial parks, or stadiums.
A)True
B)False
Answer: False
Q2) When an individual's marginal ordinary income tax rate is 25% and less than 39.60%, the taxation rate on qualified dividends is 15%.
A)True
B)False
Answer: True
Q3) Discounts provided to employees for food by a restaurant owner are not taxable if the discounts do not exceed the gross profit percentage of the business.
A)True
B)False
Answer: True
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Chapter 4: Adjustments for Adjusted Gross Income
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Q1) Qualified education expenses for the purpose of deductible student loan interest include expenses for:
A) Tuition and fees.
B) Books.
C) Room and board.
D)All of these.
Q2) What percentage of medical insurance premium payments are deductible by self-employed taxpayers as a deduction for adjusted gross income on their 2015 tax returns?
A) 0%.
B) 50%.
C) 75%.
D)100%.
Q3) Unreimbursed qualifying moving expenses are an above-the-line deduction for 2015.
A)True
B)False
Q4) Are any moving expenses deductible other than those incurred directly for the taxpayer? If so, what are the requirements for deductibility?
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Chapter 5: Itemized Deductions
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Q1) Individual taxpayers may carry forward for five years charitable contributions that are not allowed as a deduction in the current year due to the adjusted gross income limitation.
A)True
B)False
Q2) What is the maximum amount of home equity indebtedness on which interest is fully deductible?
A) $0.
B) $50,000.
C) $100,000.
D)$200,000.
Q3) When performing services for a charitable organization, is any charitable deduction allowed? If so, explain.
Q4) Which of the following organizations do not qualify for deductible charitable contributions?
A) The Red Cross.
B) A political party.
C) Religious organizations.
D)All of these.
Q5) What are four major categories of deductible taxes for individual returns?
Page 7
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Chapter 6: Self-Employed Business Income
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Q1) For an expense to be ordinary, it must be customary or usual in the taxpayer's particular business.
A)True
B)False
Q2) The §179 expense deduction is limited to earned income.
A)True
B)False
Q3) 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
Q4) The luxury auto limits on depreciation must be reduced if business use is less than 100%.
A)True
B)False
Q5) Transportation costs are deductible when a taxpayer goes to a business meeting away from his or her regular workplace.
A)True
B)False
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Chapter 7: Capital Gains and Other Sales of Property
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Q1) Diane gifted 100 shares of Runners Link common stock with a FMV of $8,000 to her brother, Sean. The stock originally cost Diane $11,000. Sean later sells the stock on the open market for $9,000. Sean recognizes:
A) no gain or loss.
B) a $1,000 gain.
C) a $2,000 loss.
D)a $2,000 gain.
Q2) In general, the basis of property purchased is the cost of the asset including cash, debt obligations, and other property or services included in acquiring the asset.
A)True
B)False
Q3) The forms used to report a gain or loss on the sale of an asset depend on the classification of the asset being sold rather than on how the asset was used prior to sale. A)True
B)False
Q4) A computer used exclusively in a sole proprietor's business is a capital asset. A)True
B)False
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Page 9
Chapter 8: Rental Property, Royalties, Income From
Flow-Through Entities
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Q1) There are two methods available to taxpayers to allocate expenses between personal and rental use of properties.
A)True
B)False
Q2) Which of the following entity(ies) is(are) considered flow-through?
A) C corporation
B) Sole proprietorship
C) Publicly traded corporation
D)S corporation
Q3) In the case of personal/rental property, a taxpayer can deduct expenses only to the extent that there is rental income.
A)True
B)False
Q4) A primarily rental property may report its income and expenses on a Schedule E.
A)True
B)False
Q5) Capital improvements on rental properties may be deducted in the current year.
A)True
B)False
Q6) What are the different types of income that may be reported on Schedule E? Page 10
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Chapter 9: Tax Credits
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Q1) There are two types of education credits available, American opportunity tax credit and lifetime learning credit.
A)True B)False
Q2) Guillermo and Felicia are married, file a joint return, and have one dependent child; Hannah, age 6. Guillermo has earned income of $38,000. Felicia was a full-time student (for 8 months) with no income. They paid a qualified day care center $4,800. What is the amount of their child and dependent care credit for the year?
A) $0.
B) $460.
C) $600.
D)$4,800.
Q3) Enrique and Anna filed a joint tax return and reported modified AGI of $112,000. They have one qualifying child. What is the amount of their child tax credit?
Q4) The earned income credit (EIC) is a nonrefundable credit.
A)True B)False
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Page 12
Chapter 10: Payroll Taxes
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Q1) Esmeralda is single and is paid $759 per week claiming two allowances. What is the amount of federal income tax withheld on Esmeralda's gross wages for the week? Use the wage bracket table in Appendix A at the end of the chapter.
A) $75.
B) $76.
C) $86.
D)$88.
Q2) 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.
Q3) A taxpayer pays 6.2% of taxable wages for both social security and Medicare taxes.
A)True B)False
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Chapter 11: Retirement and Other Tax-Deferred Plans and Annuities:
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Q1) With a Roth IRA, contributions are deductible, the account grows tax-free, and distributions are not taxable.
A)True
B)False
Q2) Harriett is age 52, married, and reported AGI of $102,000 in tax year 2015. She is an active participant in her employer's pension plan. What is the maximum deductible IRA contribution she can make for her own account in 2015?
A) $4,400.
B) $5,200.
C) $6,500.
D)Some other number.
Q3) What is an annuity contract? Who are the parties to an annuity contract?
Q4) The expected return on an annuity contract that will last for a specified amount of time is determined with reference to the life expectancy tables published by the IRS.
A)True
B)False
Q5) What is a good rule of thumb you should use when thinking about the taxability of retirement plan distributions?
Page 14
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Chapter 12: Special Property Transactions
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Q1) Jasmine sold land for $250,000 in 2015. The land had a basis of $118,000 and she incurred selling expenses of $10,000. Jasmine received $50,000 cash down in 2015 and will receive five additional annual payments of $40,000 each. What is Jasmine's gross profit percentage on the sale?
A) 47.2%.
B) 48.8%.
C) 51.2%.
D)100.0%.
Q2) The ownership test for the sale of a personal residence states:
A) That a taxpayer must have owned the home for at least two years.
B) That a taxpayer must have lived in the home for at least two years.
C) That a taxpayer be the original owner of the residence.
D)None of these.
Q3) If one spouse sells a home and excludes the gain on the sale, the gain on the sale of a residence by the other spouse is:
A) Never excluded.
B) Excluded up to $500,000.
C) Excluded up to $250,000.
D)Excluded up to $250,000 plus any gain exclusion not used by the first spouse.
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Page 15
Chapter 13: At-Riskpassive Activity Loss Rules and the
Individual Alternative Minimum Tax
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Q1) For AMT purposes, the standard deduction and personal exemptions are:
A) Allowed for AMT purposes.
B) Added as a positive AMT adjustment.
C) Subtracted as a negative AMT adjustment.
D)Reduced by half for AMT purposes.
Q2) The standard deduction is added back as a positive adjustment to AMTI.
A)True
B)False
Q3) When determining whether a limited partnership loss is deductible, a taxpayer must first:
A) Apply only the passive activity loss rules.
B) Apply only the at-risk rules.
C) Apply the passive activity loss rules and then the at-risk rules.
D)Apply the at-risk rules and then the passive activity loss rules.
Q4) Which of the following is a passive activity?
A) A limited partnership interest.
B) Rental real estate activities where the owner is a real estate professional and works 800 hours per year.
C) A trade or business in which the taxpayer materially participates.
D)All of these.
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Chapter 14: Partnership Taxation
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Q1) Parker, a 25% partner in Delta Partnership, has a basis of $25,000 in his partnership interest. Parker receives a cash distribution of $24,000 at year-end. What is Parker's recognized gain or loss?
A) $0.
B) $1,000.
C) $24,000.
D)$25,000.
Q2) Rich is a partner in RKW partnership. Rich owned 50% from January 1, 2015 to April 30, 2015, when he bought Kevin's 25% interest. He owned 75% for the rest of the year (assume a 365-day year). The partnership had ordinary income of $150,000 and $25,000 in long-term capital gains. Barring any special allocations in a partnership agreement, Rich's share of the income items is:
A) $75,000 ordinary income; $12,500 capital gain.
B) $100,172 ordinary income; $16,696 capital gain.
C) $112,500 ordinary income; $18,750 capital gain.
D)$150,000 ordinary income; $25,000 capital gain.
Q3) Ordinary income from a partnership is not considered self-employment income.
A)True B)False
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Page 17
Chapter 15: Corporate Taxation
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Q1) A corporation can elect to be taxed as a Subchapter S corporation if it meets certain requirements including that it has 100 or fewer shareholders, all of whom are individuals, estates, and certain trusts.
A)True
B)False
Q2) When a corporation is formed, if the sole shareholder receives stock in exchange for property subject to a liability, the shareholder will recognize a gain.
A)True
B)False
Q3) Which of the following statements is correct?
A) Distributions paid in excess of earnings and profits are taxable to the extent of stockholder basis.
B) Distributions of appreciated property create a gain to the stockholder recipient.
C) A distribution from earnings and profits is a dividend.
D)Earnings and profits are exactly the same as retained earnings.
Q4) There are four characteristics that a C Corporation must meet in order to elect Subchapter S status. List the characteristics.
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