Income Tax Concepts and Applications
Review Questions
Course Introduction
This course provides an in-depth examination of fundamental income tax concepts and their practical applications for individuals, businesses, and other taxpayers. Students will explore the structure of federal income tax laws, rules governing gross income, allowable deductions, tax credits, and the determination of taxable income. Emphasis is placed on understanding tax compliance, planning strategies, and the ethical considerations in tax practice. The course also analyzes real-world scenarios and case studies to illustrate the impact of tax regulations, equipping students with the foundational knowledge necessary for effective tax preparation and decision-making.
Recommended Textbook
McGraw Hills Taxation of Individuals 2018 Edition 9th Edition by Spilker Brian C
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14 Chapters
1589 Verified Questions
1589 Flashcards
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Page 2
Chapter 1: An Introduction to Tax
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Sample Questions
Q1) Although the primary purpose of a tax system is to raise revenue,Congress uses the federal tax system for other purposes as well.Describe the other ways in which Congress uses the federal tax system.Be specific.
Answer: In addition to the general objective of raising revenue,Congress uses the federal tax system to encourage certain behavior and discourage other behavior.The charitable contribution deduction is intended to encourage taxpayers to support the initiatives of charitable organizations (social objective)whereas deductions for retirement contributions are intended to encourage retirement savings (social objective).Taxes are also often used to encourage investment and stimulate the economy.Likewise,taxes are also used to discourage certain less desirable taxpayer behavior.For example,"sin taxes" impose relatively high surcharges on alcohol and tobacco products to discourage their use.
Q2) The tax base for the federal income tax is taxable income.
A)True
B)False
Answer: True
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3
Chapter 2: Tax Compliance, The IRS and Tax Authorities
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Sample Questions
Q1) Dan received a letter from the IRS that gave him the choice of (1)requesting a conference with an Appeals Officer or (2)agreeing to a proposed tax adjustment.Dan received the:
A) 30-day letter.
B) 90-day letter.
C) Appeals letter.
D) Tax adjustment letter.
E) None of the choices are correct.
Answer: A
Q2) A tax practitioner can avoid IRS penalty relating to a tax return position:
A) if the position is frivolous and disclosed on the tax return.
B) if the position has a realistic possibility of being sustained by the IRS or courts.
C) if there is substantial authority to support the position.
D) if the position has a reasonable basis and is not disclosed on the tax return.
E) None of the choices are correct.
Answer: C
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Chapter 3: Tax Planning Strategies and Related Limitations
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Sample Questions
Q1) Assume that Shavonne's marginal tax rate is 50% and her tax rate on dividends is 15%.If a corporate bond pays 10.2% interest,what dividend yield would a dividend-paying stock (with no growth potential)have to offer for Shavonne to be indifferent between the two investments from a cash-flow perspective?
A) 6%.
B) 7%.
C) 10.2%.
D) 15%.
E) None of the choices are correct.
Answer: A
Q2) Assume that Juanita is indifferent between investing in a corporate bond that pays 10.2% interest and a stock with no growth potential that pays a 6% dividend yield.Assume that the tax rate on dividends is 15%.What is Juanita's marginal tax rate?
A) 50%.
B) 40%.
C) 30%.
D) 15%.
E) None of the choices are correct.
Answer: A
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Chapter 4: Individual Income Tax Overview, Exemptions, and Filing Status
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Sample Questions
Q1) All of the following are tests for determining qualifying child status except the
A) gross income test
B) age test
C) support test
D) residence test
Q2) When determining whether a child meets the qualifying child support test for the parents,scholarships earned by the child do not count as self-support provided by the child.
A)True
B)False
Q3) An individual may meet the relationship test to be a taxpayer's qualifying relative even if the individual has no family relationship with the taxpayer.
A)True
B)False
Q4) The standard deduction amount varies by filing status.
A)True
B)False
Page 6
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Chapter 5: Gross Income and Exclusions
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Sample Questions
Q1) The exclusion ratio for a purchased annuity is the cost of the annuity divided by the interest rate.
A)True B)False
Q2) Rhett made his annual gambling trip to Uwin Casino.On this trip Rhett won $250 at the slots and $1,200 at poker.Also this year,Rhett made several trips to the race track,but he lost $700 on his various wagers.What amount must Rhett include in his gross income?
A) $1,450
B) $1,200
C) $750
D) $250
E) Zero - gambling winnings are not included in gross income
Q3) Anna received $15,000 from life insurance paid upon the death of her grandmother.Anna can exclude the entire amount of the life insurance from her gross income.
A)True B)False
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Chapter 6: Individual Deductions
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Sample Questions
Q1) Taxpayers traveling for the primary purpose of receiving essential and deductible medical care may deduct the cost of travel.
A)True
B)False
Q2) Which of the following is a true statement?
A) Congress allows self-employed taxpayers to deduct the employer portion of their self-employment tax.
B) To deduct expenses associated with any profit motivated activity, taxpayers must maintain a high level of involvement or effort in the activity throughout the year.
C) Business activities never require a relatively high level of involvement or effort from the taxpayer.
D) All business expenses are deducted for AGI.
E) All of the choices are true.
Q3) An individual who forfeits a penalty for prematurely withdrawing a certificate of deposit (CD)is allowed to net the penalty against the interest income from the CD.
A)True
B)False
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Chapter 7: Investments
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Sample Questions
Q1) Bill would like some tax benefits for his investment expenses incurred this year.His AGI is $190,000.Currently,his expenses consist of: (1)$1,000 investment advice fees,(2)$1,500 unreimbursed employee business expenses (a miscellaneous itemized deduction),and (3)$600 tax return preparation fees.How much more,if any,must Bill spend for investment expenses this year before he receives any tax benefit?
A) Zero, Bill is already receiving a benefit.
B) More than $500.
C) More than $700.
D) More than $900.
E) None of the choices are correct.
Q2) When the wash sale rules apply,the realized loss is:
A) recognized at time of sale.
B) not recognized at time of sale and does not affect basis of newly acquired stock.
C) recognized at time of sale and added to basis of the newly acquired stock.
D) not recognized at time of sale and added to basis of the newly acquired stock.
E) not recognized at time of sale and subtracted from the basis of the newly acquired stock.
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Page 9
Chapter 8: Individual Income Tax Computation and Tax Credits
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Sample Questions
Q1) Candace is claimed as a dependent on her parent's tax return.Her parents' ordinary income marginal tax rate is 33%.In 2017,Candace received $5,000 of interest income from corporate bonds she obtained several years ago.This is her only source of income.She is 15 years old at year-end.What is her gross tax liability?
Q2) Asteria earned a $25,500 salary as an employee in 2017.How much should her employer have withheld from her paycheck for FICA taxes (rounded to the nearest whole dollar amount)?
A) $370
B) $1,581
C) $1,951
D) $3,902
Q3) Atlas earned $17,300 from his sole proprietorship in 2017.This was his only source of income.How much in self-employment taxes will Atlas be able to deduct?
Q4) Which of the following does not affect the amount of the earned income credit?
A) Filing status.
B) Amount of credit taken in previous years.
C) Number of qualifying children.
D) Taxpayer's AGI.
Page 10
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Chapter 9: Business Income, Deductions, and Accounting Methods
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Sample Questions
Q1) Rock Island Corporation generated taxable income (before the domestic production activities deduction)of $10 million this year.The total income included $4,500,000 of qualified production activities income.The company paid $500,000 in W-2 wages to generate the qualified production activity income.What is Rock Island's domestic production activities deduction for the year?
Q2) This year Clark leased a car to drive between his office and various work sites.Clark carefully recorded that he drove the car 23,000 miles this year and paid $7,200 of operating expenses ($2,700 for gas,oil,and repairs,and $4,500 for lease payments).What amount of these expenses may Clark deduct as business expenses?
A) $7,200
B) Clark cannot deduct these costs because taxpayers must use the mileage method to determine any transportation deduction.
C) $4,500
D) $2,700
E) Clark is not entitled to any deduction if he used the car for any personal trips.
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Page 11
Chapter 10: Property Acquisition and Cost Recovery
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Sample Questions
Q1) Poplock LLC purchased a warehouse and land during the current year for $350,000.The purchase price was allocated as follows: $275,000 to the building and $75,000 to the land.The property was placed in service on August 12.Calculate Poplock's maximum depreciation for this first year.(Use MACRS Table 5 in the text)(Round final answer to the nearest whole number)
A) $2,648.
B) $3,371.
C) $3,751.
D) $4,774.
E) None of the choices are correct.
Q2) Alexandra purchased a $35,000 automobile during 2017.The business use was 70 percent.What is the allowable depreciation for the current year (ignore any possible bonus depreciation)? Exhibit 10-8 in the text
Q3) Northern LLC only purchased one asset this year.In 2017,Northern LLC placed in service on September 6 machinery and equipment (7-year property)with a basis of $2,200,000.Assume that Northern has sufficient income to avoid any limitations.Calculate the maximum depreciation expense including §179 expensing (ignore any potential bonus expensing).(Use MACRS Table 1 in the text)(Round final answer to the nearest whole number)
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Page 12
Chapter 11: Property Dispositions
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Sample Questions
Q1) Which of the following is not true regarding §1239?
A) It only applies to related taxpayers.
B) It only applies to gains on sales of depreciable property.
C) It only applies to gains on sales of non-residential real property.
D) It does not apply to losses.
E) None of the choices are correct.
Q2) Which of the following is not true regarding an asset's adjusted basis?
A) Tax adjusted basis is usually greater than book adjusted basis.
B) Tax adjusted basis is usually less than book adjusted basis.
C) Adjusted basis is cost basis less cost recovery deductions.
D) Tax adjusted basis may change over time.
Q3) Odintz traded machinery for machinery.Odintz originally purchased its machine for $150,000 and the adjusted basis was $90,000 at the time of the exchange.The machinery received was purchased for $200,000,had an adjusted basis of $155,000 at the time of the exchange,and was subject to a mortgage of $50,000 that was paid off before the transfer.What is Odintz's adjusted basis in the new machinery after the exchange?
Q4) Bull Run sold a computer for $1,200 on November 10 of the current year.The computer was purchased for $2,800.Bull Run had taken $1,000 of depreciation deductions.What is Bull Run's gain or loss realized on the computer?
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Chapter 12: Compensation
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Sample Questions
Q1) Which of the following statements is true regarding the $1,000,000 limit on covered employees for publicly-traded companies?
A) The limitation applies to all employees.
B) The limitation applies to all officers.
C) The limitation applies only to the CEO and three other highest compensated officers.
D) The limitation applies only to the CEO and three other highest compensated officers, not including the CFO.
Q2) Hazel received 20 NQOs (each option gives her the right to purchase 10 shares of stock for $7 per share)at the time she started working when the stock price was $14 per share.Now that the share price is $20 per share,she intends to exercise all of her options.If Hazel holds the shares for two years and sells them when the market price is $25,how much gain will Hazel recognize on the sale and how much tax will she pay assuming her marginal tax rate is 25 percent?
Q3) When stock options are exercised they are converted into actual employer stock. A)True
B)False
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Chapter 13: Retirement Savings and Deferred Compensation
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Sample Questions
Q1) Both 401(k)plans and Roth 401(k)plans are forms of defined contribution plans.
A)True
B)False
Q2) Kathy is 48 years of age and self-employed.During 2017,she reported $100,000 of revenues and $40,000 of expenses relating to her self-employment activities.If Kathy has no other retirement accounts in her name,what is the maximum amount she can contribute to an individual 401(k)for 2017? (Round your final answer to the nearest whole number)
A) $11,152.
B) $17,152.
C) $29,152.
D) $54,000.
Q3) Which of the following statements regarding defined contribution plans is false?
A) Employers bear investment risk relating to the plan.
B) Employees immediately vest in their contributions to the plan.
C) Employers typically match employee contributions to the plan to some extent.
D) An employer's vesting schedule is used for employers' contributions in determining the amount of the plan benefits the employee is entitled to receive on retirement.
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Chapter 14: Tax Consequences of Home Ownership
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Sample Questions
Q1) Taxpayers are allowed to deduct real property taxes at the time they pay estimated real property taxes to an escrow account established by the lender for the taxpayer's property taxes.
A)True
B)False
Q2) Jorge owns a home that he rents for 360 days and uses for personal purposes for five days.Jorge is not required to allocate expenses associated with the home between rental and personal use.
A)True
B)False
Q3) Robin purchased a home on July 1,year 1 for $300,000.She paid $200,000 down and financed the remaining $100,000.On January 1,year 6 when the outstanding balance of her mortgage was $85,000 and her home was valued at $300,000,she refinanced her home for $250,000.With the $250,000 loan,she paid off the remaining $85,000 balance of her original mortgage,she used $70,000 to substantially improve her home and she used the remaining $95,000 for purposes unrelated to her home.During year 6,Robin made interest only payments of $12,500 on the loan.What amount of the $12,500 interest expense is Robin allowed to deduct in year 6?
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