Federal Taxation for Individuals
Exam Answer Key
Course Introduction
Federal Taxation for Individuals introduces students to the principles and applications of the U.S. federal income tax system as it pertains to individual taxpayers. The course covers topics such as gross income, exclusions, deductions, credits, capital gains and losses, tax computation, and tax filing requirements. Students will explore the Internal Revenue Code, IRS regulations, and the ethical considerations involved in tax practice. The course aims to develop problem-solving skills through case studies and practical exercises, preparing students to understand, compute, and plan for federal tax obligations of individuals.
Recommended Textbook
South Western Federal Taxation 2018 Individual Income Taxes 41st Edition by William H. Hoffman
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20 Chapters
2583 Verified Questions
2583 Flashcards
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Chapter 1: An Introduction to Taxation and Understanding
Federal Tax Law
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Sample Questions
Q1) When a state decouples from a Federal tax provision, it means that this provision will not apply for state income tax purposes.
A)True
B)False
Answer: True
Q2) State income taxes generally can be characterized by:
A)The same date for filing as the Federal income tax.
B)No provision for withholding procedures.
C)Allowance of a deduction for Federal income taxes paid.
D)Applying only to individuals and not applying to corporations.
E)None of these.
Answer: A
Q3) The tax law allows an income tax deduction (or a credit) for foreign income taxes. Explain why.
Answer: The deduction (or a credit) for foreign income taxes can be justified on the grounds that it mitigates the double tax imposed on the same income.
Q4) Criminal fraud penalty
Answer: l
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Chapter 2: Working With the Tax Law
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Sample Questions
Q1) Rules of tax law do not include Revenue Rulings and Revenue Procedures.
A)True
B)False
Answer: False
Q2) A taxpayer may not appeal a case from which court:
A)U.S. District Court.
B)U.S. Circuit Court of Appeals.
C)U.S. Court of Federal Claims.
D)Small Case Division of the U.S. Tax Court.
E)None of these.
Answer: D
Q3) A U.S. District Court is the lowest trial court.
A)True
B)False
Answer: True
Q4) Revenue Rulings issued by the National Office of the IRS carry the same legal force and effect as Regulations.
A)True
B)False
Answer: False
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Chapter 3: Tax Formula and Tax Determination; an
Overview of Property Transactions
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187 Flashcards
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Sample Questions
Q1) Abandoned spouse
Answer: e
Q2) Since an abandoned spouse is treated as not married and has one or more dependent children, he or she qualifies for the standard deduction available to head of household.
A)True
B)False
Answer: True
Q3) Which, if any, of the following is a deduction for AGI?
A)State and local sales taxes
B)Interest on home mortgage
C)Charitable contributions
D)Unreimbursed moving expenses of an employee
E)None of these
Answer: D
Q4) Lucas, age 17 and single, earns $6,000 during 2017. Lucas's parents cannot claim him as a dependent if he does not live with them.
A)True
B)False
Answer: True
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Chapter 4: Gross Income: Concepts and Inclusions
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Sample Questions
Q1) Thelma and Mitch were divorced. The couple had a joint brokerage account that included stocks with a basis of $600,000 and a fair market value of $1,000,000. Under the terms of the divorce agreement, Mitch would receive the stocks and Mitch would pay Thelma $100,000 each year for 6 years, or until Thelma's death, whichever should occur first. Thelma and Mitch lived apart when the payments were made by Mitch. Mitch paid the $600,000 to Thelma over the six-year period. The divorce agreement did not contain the word "alimony." Then, Mitch sold the stocks for $1,300,000. Mitch's recognized gain from the sale is:
A)$0.
B)$1,000,000 ($1,300,000 - $300,000).
C)$700,000 ($1,300,000 - $600,000).
D)$300,000 ($1,300,000 - $1,000,000).
E)None of these.
Q2) Terri purchased an annuity for $100,000. She was to receive $10,000 per year and her life expectancy was 20 years. She died after receiving 8 payments. Terri's final return should reflect a loss of $20,000 ($100,000 - $80,000).
A)True
B)False
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Page 6
Chapter 5: Gross Income: Exclusions
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Sample Questions
Q1) The taxpayer's marginal tax bracket is 25%. Which would the taxpayer prefer?
A)$1.00 taxable income rather than $1.25 tax-exempt income.
B)$1.00 taxable income rather than $.75 tax-exempt income.
C)$1.25 taxable income rather than $1.00 tax-exempt income.
D)$1.40 taxable income rather than $1.00 tax-exempt income.
E)None of these.
Q2) Agnes receives a $5,000 scholarship which covers her tuition at Parochial High School. She may not exclude the $5,000 because the exclusion applies only to scholarships to attend college.
A)True
B)False
Q3) Ashley received a scholarship to be used as follows: tuition $6,000; room and board
$9,000; and books and laboratory supplies $2,000. Ashley is required to include only $9,000 in her gross income.
A)True
B)False
Q4) What are the tax problems associated with payments received by a wife from her deceased husband's employer? (Assume the wife renders no services to the employer.)
Q5) What Federal income tax benefits are provided for college students?
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Chapter 6: Deductions and Losses: in General
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Sample Questions
Q1) Payments by a cash basis taxpayer of capital expenditures:
A)Must be expensed at the time of payment.
B)Must be expensed by the end of the first year after the asset is acquired.
C)Must be deducted over the actual or statutory life of the asset.
D)Can be deducted in the year the taxpayer chooses.
E)None of the above.
Q2) Which of the following legal expenses are deductible for AGI?
A) Incurred in connection with a trade or business.
B) Incurred in connection with rental or royalty property held for the production of income.
C) Incurred for tax advice relative to the preparation of an individual's income tax return.
D) Only a. and b. qualify.
E) a., b., and c. qualify.
Q3) For a taxpayer who is engaged in a trade or business, the cost of investigating a business in the same field is deductible only if the taxpayer acquires the business.
A)True
B)False
Q4) Are there any circumstances under which lobbying expenditures are deductible?
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Page 8
Chapter 7: Deductions and Losses: Certain Business
Expenses and Losses
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Sample Questions
Q1) The current position of the IRS is that a personal casualty loss deduction is not allowed for losses resulting from termites.
A)True
B)False
Q2) A bona fide debt cannot arise on a loan between father and son.
A)True
B)False
Q3) The limit for the domestic production activities deduction (DPAD) uses all W-2 wages paid to employees by the taxpayer during the tax year.
A)True
B)False
Q4) The cost of repairs to damaged property is not an acceptable measure of the loss in value of the property.
A)True B)False
Q5) Research and experimental expenditures do not include the cost of consumer surveys.
A)True B)False
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Chapter 8: Depreciation, Cost Recovery, Amortization, and Depletion
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Sample Questions
Q1) Orange Corporation begins business on April 2, 2017. The corporation reports startup expenditures of $64,000 all incurred last year. Determine the total amount that Orange can elect to deduct in 2017.
A)$0
B)$3,200
C)$4,267
D)$7,950
E)None of the above
Q2) Norm purchases a new sports utility vehicle (SUV) on October 12, 2017, for $60,000. The SUV has a gross vehicle weight of 6,200 lbs. It is used 100% of the time for business and it is the only business asset acquired by Norm during 2017. Compute the maximum deduction with respect to the SUV for 2017. Norm does not take additional first-year depreciation.
Q3) On March 3, 2017, Sally purchased and placed in service a building costing $12,000,000. The building has 10 floors. The bottom three floors are rented out to businesses. The top seven floors are residential apartments. The gross rents from the businesses are $60,000 and the gross rents from the apartments are $110,000. Determine Sally's cost recovery for the building in 2017.
Page 10
Q4) Discuss the reason for the inclusion amount with respect to leased automobiles. To view all questions and flashcards with answers, click on the resource link above.
Chapter 9: Deductions: Employee and
Self-Employed-Related Expenses
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Sample Questions
Q1) Distance test (for moving expenses) not satisfied
Q2) James has a job that compels him to go to many different states during the year. It is possible that James was never away from his tax home during the year.
A)True
B)False
Q3) The Federal per diem rates that can be used for "deemed substantiated" purposes are the same for all locations in the country.
A)True
B)False
Q4) Once the actual cost method is used, a taxpayer cannot change to the automatic mileage method in a later year.
A)True
B)False
Q5) Actual cost method of determining auto expense
Q6) Deductible job-hunting expenses
Q7) For tax purposes, a statutory employee is treated the same as a common law employee.
A)True
B)False
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Chapter 10: Deductions and Losses: Certain Itemized Deductions
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Sample Questions
Q1) Byron owned stock in Blossom Corporation that he donated to a museum (a qualified charitable organization) on June 8 this year. What is the amount of Byron's deduction assuming that he had purchased the stock for $10,500 last year on August 7, and the stock had a fair market value of $13,800 when he made the donation?
A)$3,300
B)$10,500
C)$12,150
D)$13,800
E)None of the above
Q2) Trent sells his personal residence to Chester on July 1, 2017. He had paid $7,000 in real property taxes on March 1, 2017, the due date for property taxes for 2017. Trent may not deduct the portion of the taxes he paid for the period the property was owned by Chester.
A)True
B)False
Q3) A phaseout of certain itemized deductions applies for all taxpayers who choose to itemize their deductions.
A)True
B)False
Page 12
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Chapter 11: Investor Losses
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Sample Questions
Q1) From January through November, Vern participated for 420 hours as a salesman in a partnership in which he owns a 50% interest. The partnership has four full-time employees. During December, Vern spends 110 hours cleaning the store and painting the walls in order to meet the material participation standards. Vern qualifies as a material participant.
A)True
B)False
Q2) Significant participation activity.
Q3) Jackson Company incurs a $50,000 loss on a passive activity during the year. The company has active income of $34,000 and portfolio income of $24,000. If Jackson is a personal service corporation, it may deduct $34,000 of the passive activity loss.
A)True
B)False
Q4) All of a taxpayer's tax credits relating to a passive activity can be utilized when the activity is sold at a loss.
A)True
B)False
Q5) Treatment of a disposition of a passive activity at death.
Q6) Treatment of a disposition of a passive activity by gift.
Page 13
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Chapter 12: Alternative Minimum Tax
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Sample Questions
Q1) Frederick sells equipment whose adjusted basis for regular income tax purposes is $345,000 and for AMT purposes is $380,000. The sales proceeds are $850,000. Determine the effect on:
a.Taxable income. b.AMTI.
Q2) After personal property is fully depreciated for both regular income tax purposes and AMT purposes, the positive and negative adjustments that have been made for AMT purposes will net to zero.
A)True
B)False
Q3) Melinda is in the 35% marginal regular tax bracket. She reports a net capital gain of $150,000 on the sale of land which is eligible for the lower tax on net capital gain in calculating the regular income tax. Discuss the tax rate that applies to the $150,000 net capital gain in calculating the tentative minimum tax (TMT) for Melinda.
Q4) Andrea, who is single, is entitled to a personal exemption deduction in calculating her 2017 taxable income. She has no dependency exemptions. What is the amount of the AMT adjustment in calculating AMTI?
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Page 14
Chapter 13: Tax Credits and Payment Procedures
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Sample Questions
Q1) Cheryl is single, has one child (age 6), and files as head of household during 2016. Her salary for the year is $19,500. She qualifies for an earned income credit of the following amount.
A)$0.
B)$3,115.
C)$3,215.
D)$3,400.
Q2) The credit for child and dependent care expenses is an example of a refundable credit.
A)True
B)False
Q3) Employers are encouraged by the work opportunity tax credit to hire individuals who have been long-term recipients of family assistance welfare benefits. A)True
B)False
Q4) An employer's tax deduction for wages is affected by the work opportunity tax credit. A)True
B)False
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Page 15
Chapter 14: Property Transactions: Determination of Gain or
Loss and Basis Considerations
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Sample Questions
Q1) The taxpayer owns stock with an adjusted basis of $15,000 and a fair market value of $8,000. If the stock or cash is going to be given to her niece, it is preferable for the taxpayer to sell the stock and give the $8,000 of cash to her niece. The same preference would exist if the recipient were a qualified charitable organization.
A)True
B)False
Q2) Steve purchased his home for $500,000. As a sole proprietor, he operates a certified public accounting practice in his home. For this business, he uses one room exclusively and regularly as a home office. In Year 1, $3,042 of depreciation expense on the home office was deducted on his income tax return. In Year 2, Steve sustained losses in his business; therefore, no depreciation was taken on the home office. Had he been allowed to deduct depreciation expense, his depreciation expense would have been $3,175. What is the adjusted basis in the home?
A)$493,783
B)$496,825
C)$496,958
D)$500,000
E)None of the above
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Chapter 15: Property Transactions: Nontaxable Exchanges
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Sample Questions
Q1) The exchange of unimproved real property located in Topeka (KS) for improved real property located in Atlanta (GA) does not qualify as a like-kind exchange.
A)True
B)False
Q2) Jake exchanges an airplane used in his business for a smaller airplane to be used in his business. His adjusted basis for the airplane is $325,000 and the fair market value is $310,000. The fair market value of the smaller airplane is $300,000. In addition, Jake receives cash of $10,000. Calculate Jake's realized and recognized gain or loss and his adjusted basis for the assets received.
Q3) Milt's building which houses his retail sporting goods store is destroyed by a flood. Sandra's warehouse which she is leasing to Milt to store the inventory of his business also is destroyed in the same flood. Both Milt and Sandra receive insurance proceeds that result in a realized gain. Sandra will have less flexibility than Milt in the type of building in which she can invest the proceeds and qualify for postponement treatment under § 1033 (nonrecognition of gain from an involuntary conversion).
A)True
B)False
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Chapter 16: Property Transactions: Capital Gains and Losses
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Sample Questions
Q1) A security that was purchased by an individual and qualifies as § 1244 stock becomes worthless. The taxpayer is single and the loss is $30,000. The loss is treated as an ordinary loss.
A)True
B)False
Q2) A net short-term capital loss first offsets any 28% net long-term capital gain before it offsets either 25% net long-term capital gain or 0%/15%/20% net long-term capital gain.
A)True B)False
Q3) Martha is unmarried with one dependent and files as head of household. She had 2017 taxable income of $45,000 which included $16,000 of 0%/15%/20% net long-term capital gain. What is her tax on taxable income using the alternative tax on net long-term capital gain method?
Q4) The tax law requires that capital gains and losses be separated from other types of gains and losses because there are limitations on the deduction of net capital losses.
A)True B)False
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Chapter 17: Property Transactions: 1231 and Recapture
Provisions
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Sample Questions
Q1) Personal use property casualty gains and losses are not subject to the § 1231 rules.
A)True
B)False
Q2) Section 1231 lookback losses may convert some or all of § 1245 gain into ordinary income.
A)True
B)False
Q3) A business machine purchased April 10, 2015, for $98,000 was fully depreciated in 2015 using § 179 immediate expensing. On August 15, 2017, the machine was sold for $67,000. What is the amount and nature of the gain or loss from disposition of the machine?
Q4) For § 1245 recapture to apply, accelerated depreciation must have been taken on the property.
A)True B)False
Q5) A sheep must be held more than 18 months to qualify as a § 1231 asset.
A)True
B)False
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Chapter 18: Accounting Periods and Methods
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Sample Questions
Q1) A calendar year, cash basis corporation began business on April 1, 2016, and paid $2,400 for a 24-month liability insurance policy. An accrual basis, calendar year taxpayer also began business on April 1, 2016, and purchased a 24-month liability insurance policy. The accrual basis taxpayer must amortize the premiums over 24 months but the cash basis taxpayer may deduct the total premiums in 2016.
A)True B)False
Q2) Franklin Company began business in 2013 and has consistently used the cash method to report income from the sale of inventory in income tax returns filed for 2013 through 2017. As a result of an audit by the IRS, Franklin was required to change to the accrual method of accounting beginning with 2018. The net adjustment due to the change is a positive adjustment to income. The adjustment may be spread equally over 2018 and the three following years.
A)True B)False
Q3) The taxpayer does need the IRS's permission to change from the FIFO inventory method to the LIFO method.
A)True B)False
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Page 20
Chapter 19: Deferred Compensation
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Sample Questions
Q1) Contributions to a Roth IRA can be made up to the due date (excluding extensions) of the taxpayer's income tax return.
A)True
B)False
Q2) Income is taxed if a taxpayer's control over the amount earned is subject to substantial restrictions.
A)True
B)False
Q3) Which of the followings is not a characteristic of a Keogh plan?
A)A trust is established.
B)Considered to be a qualified plan.
C)Contribution to plan by extension due date.
D)Favorable 10-year forward averaging is not available.
E)All of the above are characteristics.
Q4) From an employee's point of view, discuss the difference between the tax treatment accorded to a nonqualified stock option (NQSO) that has an ascertainable fair market value and one that does not.
Q5) Compare a § 401(k) plan with an IRA.
Q6) What is a highly compensated employee?
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Chapter 20: Corporations and Partnerships
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Q1) A partner's basis in the partnership interest is increased by his or her share of the tax-exempt income received by the partnership.
A)True
B)False
Q2) In what manner do the tax rules dealing with capital gains differ for corporations and individuals?
Q3) Corporate taxpayers lose the benefits of lower tax brackets and the rates cease to be progressive once taxable income reaches a certain level. Explain this statement.
Q4) In computing the NOL of a corporation, the dividends received deduction cannot be claimed.
A)True
B)False
Q5) When might an NOL carryback to prior years be ill-advised?
Q6) Taxpayers who want both limited liability and the passthrough of losses should choose either the Subchapter S or the LLC entity form of doing business.
A)True
B)False
Q7) What causes a partner's basis in a partnership interest to fluctuate?
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