Income Tax for Individuals Exam Review
Course Introduction
This course provides an in-depth exploration of income tax principles and regulations as they apply to individual taxpayers. Students will learn about the structure of the income tax system, sources of taxable income, allowable deductions and credits, filing requirements, and legal responsibilities. Attention is given to the preparation of individual tax returns, the tax implications of different types of income and investments, and strategies for tax planning and compliance. Through case studies and practical exercises, students will gain essential skills to understand and apply tax laws relevant to individuals, ensuring they are well-equipped for both personal financial management and professional advisory roles.
Recommended Textbook
South Western Federal Taxation 2015 Individual Income Taxes 38th Edition by William H. Hoffman
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Chapter 1: An Introduction to Taxation and Understanding
the Federal Tax Law
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Q1) More than 25% gross income omission and statute of limitations
A)3 years from date return is filed
B)3 years from due date of return
C)20% of underpayment
D)5% per month (25% limit)
E)0.5% per month (25% limit)
F)Conducted at IRS office
G)Conducted at taxpayer's office
H)6 years
I)45-day grace period allowed to IRS
J)No statute of limitations (period remains open)
K)75% of underpayment
L)No correct match provided
Answer: H
Q2) The FICA tax (Medicare component)on wages is progressive since the tax due increases as wages increase.
A)True
B)False
Answer: False
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Chapter 2: Working With the Tax Law
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Q1) Discuss the advantages and disadvantages of the Small Cases Division of the U.S.Tax Court.
Answer: There is no appeal from the Small Cases Division.The jurisdiction of the Small Cases Division is limited to cases involving amounts of $50,000 or less.The proceedings of the Small Cases Division are informal (e.g. ,no necessity for the taxpayer to be represented by a lawyer or other tax adviser).Special trial judges rather than Tax Court judges preside over these proceedings.The decisions of the Small Cases Division are not precedents for any other court decision and are not reviewable by any higher court. Proceedings can be more timely and less expensive in the Small Cases Division.Some of these cases can now be found on the U.S.Tax Court Internet Website.
Q2) Which publisher offers the United States Tax Reporter?
A)Research Institute of America
B)Commerce Clearing House
C)LexisNexis
D)Tax Analysts
E)None of these Answer: A
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Page 4
Chapter 3: Tax Formula and Tax Determination;an
Overview of Property Transactions
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Q1) For dependents who have income,special filing requirements apply.
A)True
B)False
Answer: True
Q2) Sylvia,age 17,is claimed by her parents as a dependent.During 2014,she had interest income from a bank savings account of $2,000 and income from a parttime job of $4,200.Sylvia's taxable income is:
A)$4,200 - $4,550 = $0.
B)$6,200 - $5,700 = $500.
C)$6,200 - $4,550 = $1,650.
D)$6,200 - $1,000 = $5,200.
E)None of these.
Answer: C
Q3) Which,if any,of the following is a deduction for AGI?
A)Contributions to a traditional Individual Retirement Account.
B)Child support payments.
C)Funeral expenses.
D)Loss on the sale of a personal residence.
E)Medical expenses.
Answer: A
Page 5
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Chapter 4: Gross Income: Concepts and Inclusions
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Q1) José,a cash method taxpayer,is a partner in J&T Accounting Services,a calendar year partnership.Under the partnership agreement,José is to receive 20% of the partnership's profits or losses.Each partner is allowed to withdraw $10,000 each month for his or her living expenses.José withdrew $120,000 during the year as his monthly draw in 2013.However,in December the partnership was short on cash and José was required to invest an additional $10,000 in the partnership.In March 2013,José received $40,000 as his share of distributed 2012 profits.The partnership earnings before partners' withdrawals for 2013 totaled $1 million.Compute José's gross income from the partnership for 2013.
Q2) Rachel,who is in the 35% marginal tax bracket,is considering purchasing an annuity that will pay her $10,000 per year for the remainder of her life.Her life expectancy is 15 years.The cost of the annuity is $97,120,and the cost is calculated to yield her an expected 6% return on her investment.As an alternative,Rachel could place the $97,120 in a savings account yielding 6% and she could withdraw $10,000 each year for 15 years (reducing the value of the account to zero at the end of 15 years).How might the tax laws applicable to annuities affect Rachel's decision?
Q3) How does the taxation of Social Security benefits differ from the taxation of an annuity purchased by the taxpayer?
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Chapter 5: Gross Income: Exclusions
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Q1) In December 2014,Emily,a cash basis taxpayer,received a $2,500 cash scholarship for the Spring semester of 2015.However,she did not use the funds to pay the tuition until January 2015.Emily can exclude the $2,500 from her gross income in 2014.
A)True
B)False
Q2) The taxpayer was in the 35% marginal tax bracket in 2013 and deducted $15,000 in state income taxes as an itemized deduction that year.In 2014,he filed his 2013 state income tax return and received a $5,000 refund of state income taxes paid in 2013.His marginal tax rate in 2014 was 15%.What was the taxpayer's Federal tax benefit from the overpayment of his 2013 state income tax?
Q3) Generally,a U.S.citizen is required to include in gross income the salary and wages earned while working in a foreign country even if the foreign country taxes the income.
A)True
B)False
Q4) What Federal income tax benefits are provided for college students?
Q5) 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. )
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Page 7
Chapter 6: Deductions and Losses: in General
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Sample Questions
Q1) Briefly explain why interest on money borrowed to buy tax-exempt municipal bonds is disallowed as a deduction.
Q2) Which of the following is not a related party for constructive ownership purposes under § 267?
A)The taxpayer's aunt.
B)The taxpayer's brother.
C)The taxpayer's grandmother.
D)A corporation owned more than 50% by the taxpayer.
E)None of these.
Q3) Discuss the application of the "oneyear rule" on prepayments by a cash basis taxpayer.
Q4) Agnes operates a Christmas Shop in Atlantic City,NJ.She makes a weekend trip to Vero Beach,FL,for the purpose of determining the feasibility of opening another shop.Her travel expenses are $2,000 (includes $500 for meals).In addition,she pays $5,000 to a market research firm in Vero Beach to prepare a feasibility study.Determine the amount of the expenses that Agnes can deduct if:
a.She opens a new shop in Vero Beach.
b.She decides not to open a new shop in Vero Beach.
Q5) What losses are deductible by an individual taxpayer?
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Chapter 7: Deductions and Losses: Certain Business
Expenses and Losses
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Sample Questions
Q1) A business bad debt is a debt unrelated to the taxpayer's trade or business either when it was created or when it became worthless.
A)True
B)False
Q2) The cost of depreciable property is not a research and experimental expenditure.
A)True
B)False
Q3) Alicia was involved in an automobile accident in 2014.Her car was used 60% for business and 40% for personal use.The car had originally cost $40,000.At the time of the accident,the car was worth $20,000 and Alicia had taken $8,000 of depreciation.The car was totally destroyed and Alicia had let her car insurance expire.If Alicia's AGI is $50,000 (before considering the loss),determine her itemized deduction for the casualty loss.
A)$4,500
B)$6,100
C)$8,000
D)$24,000
E)None of these
Q4) Discuss the effect of alimony in computing a net operating loss.
Page 9
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Chapter 8: Depreciation, cost Recovery, amortization, and Depletion
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Q1) Taxpayers may elect to use the straight-line method under MACRS for personalty.
A)True
B)False
Q2) On June 1,2014,Norm leases a taxi and places it in service.The lease payments are $1,000 per month.Assuming the dollar amount from the IRS table is $241,determine Norm's inclusion amount.
A)$0
B)$241
C)$907
D)$1,687
E)None of these
Q3) Carlos purchased an apartment building on November 16,2014,for $3,000,000.Determine the cost recovery for 2015.
A)$9,630
B)$11,910
C)$13,950
D)$22,740
E)None of these
Q4) Discuss the beneficial tax consequences of an SUV not being classified as a passenger automobile.
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Chapter 9: Deductions: Employee and
Self-Employed-Related Expenses
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Q1) Dave is the regional manager for a national chain of auto-parts stores and is based in Salt Lake City.When the company opens new stores in Boise,Dave is given the task of supervising their initial operation.For three months,he works weekdays in Boise and returns home on weekends.He spends $350 returning to Salt Lake City but would have spent $410 had he stayed in Boise for the weekend.As to the weekend trips,how much,if any,qualifies as a deduction?
A)$0,since the trips are personal and not work related.
B)$0,since Dave's tax home has changed from Salt Lake City to Boise.
C)$60
D)$350
E)$410
Q2) Madison and Christopher are staff accountants at a major public accounting firm.Both are pursuing a law degree in a night program at local law school.Madison contends that the cost of the program is a deduction for income tax purposes,while Christopher maintains that it is not.Who is correct and why?
Q3) Lynn determines when the services are to be performed.
A)Indicates employee status.
B)Indicates independent contractor status.
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Chapter 10: Deductions and Losses: Certain Itemized
Deductions
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Q1) Rick and Carol Ryan,married taxpayers,took out a mortgage of $160,000 when purchasing their home ten years ago.In October of the current year,when the home had a fair market value of $200,000 and they owed $125,000 on the mortgage,the Ryans took out a home equity loan for $110,000.They used the funds to purchase a sailboat to be used for recreational purposes.The sailboat does not qualify as a residence.What is the maximum amount of debt on which the Ryans can deduct home equity interest?
A)$75,000
B)$90,000
C)$110,000
D)$125,000
E)None of these
Q2) In 2014,Dena traveled 600 miles for specialized medical treatment that was not available in her hometown.She paid $90 for meals during the trip,$145 for a hotel room on Tuesday night,and $15 in parking fees.She did not keep records of other out-of-pocket costs for transportation.Dena can include $206 in computing her medical expenses.
A)True
B)False
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Page 12
Chapter 11: Investor Losses
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Q1) A qualified real estate professional is allowed to treat income or loss from any real estate venture as active except for income or loss from a rental activity.
A)True
B)False
Q2) List the taxpayers that are subject to the passive loss rules and summarize the general impact of these rules on these taxpayers.
Q3) Describe the types of activities and taxpayers that are subject to the at-risk rules.
Q4) Treatment of a sale of a passive activity where all of the realized gain or loss is recognized currently.
A)The losses are allowed in the years in which gain is recognized.
B)Suspended losses are allowed to offset the income from the activity,other passive activities,or active income.
C)Suspended losses are allowed to the taxpayer to the extent they exceed the amount,if any,of the step-up in basis allowed.
D)Any suspended losses may be used in the current year.
E)The suspended losses are added to the basis of the property.
F)No correct choice is given.
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Chapter 12: Alternative Minimum Tax
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Sample Questions
Q1) 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
Q2) Eula owns a mineral property that had a basis of $23,000 at the beginning of the year.Cost depletion is $19,000.The property qualifies for a 15% depletion rate.Gross income from the property was $200,000 and net income before the percentage depletion deduction was $50,000.What is Eula's tax preference for excess depletion?
A)$15,000
B)$23,000
C)$25,000
D)$0
E)None of these
Q3) Because passive losses are not deductible in computing either taxable income or AMTI,no adjustment for passive losses is required for AMT purposes.
A)True
B)False
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Chapter 13: Tax Credits and Payment Procedures
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Q1) Both education tax credits are available for qualified tuition expenses,and in certain instances,also may be available for room and board.
A)True
B)False
Q2) Unused foreign tax credits can be carried back three years and forward fifteen years.
A)True
B)False
Q3) The low-income housing credit is available to low-income tenants who reside in qualifying low-income housing.
A)True
B)False
Q4) The tax benefits resulting from tax credits and tax deductions are affected by the tax rate bracket of the taxpayer.
A)True
B)False
Q5) Explain the purpose of the disabled access credit and describe the general characteristics of its computation.
Q6) Describe the withholding requirements applicable to employers.
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Chapter 14: Property Transactions: Determination of Gain or
Loss and Basis Considerations
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Q1) Boyd acquired tax-exempt bonds for $430,000 in December 2014.The bonds,which mature in December 2019,have a maturity value of $400,000.Boyd does not make any elections regarding the amortization of the bond premium.Determine the tax consequences to Boyd when he redeems the bonds in December 2019.
Q2) 51. Albert purchased a tract of land for $140,000 in 2011 when he heard that a new highway was going to be constructed through the property and that the land would soon be worth $200,000. Highway engineers surveyed the property and indicated that he would probably get $180,000. The highway project was abandoned in 2014 and the value of the land fell to $100,000. What is the amount of loss Albert can claim in 2014?
A) $40,000
B) $60,000
C) $80,000
D) $100,000
E) None of these
Q3) In a casualty or theft,the basis of property involved is reduced by the amount of insurance proceeds received and by any resulting recognized loss.
A)True
B)False
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Chapter 15: Property Transactions: Nontaxable Exchanges
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Q1) The maximum amount of the § 121 gain exclusion on sale of a principal residence is $250,000 for a single individual and $500,000 for a married couple.
A)True
B)False
Q2) A taxpayer who sells his or her principal residence at a realized loss can elect to recognize the loss even if a qualified residence is acquired during the statutory time period.
A)True
B)False
Q3) Patty's factory building,which has an adjusted basis of $475,000,is destroyed by fire on April 8,2014.Insurance proceeds of $500,000 are received on June 1,2014.She has a new factory building constructed for $490,000,which she occupies on October 1,2014.Assuming Patty's objective is to minimize the tax liability,calculate her recognized gain or loss and the basis of the new factory building.
Q4) Distinguish between a direct involuntary conversion and an indirect involuntary conversion.
Q5) Discuss the relationship between realized gain and boot received in a § 1031 likekind exchange.
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Chapter 16: Property Transactions: Capital Gains and Losses
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Q1) Gold Company signs a 13-year franchise agreement with Silver.Silver retained significant powers,rights,and a continuing interest.Gold Company (the franchisee)makes noncontingent payments of $18,000 per year for the first four years of the franchise.Gold Company also pays a contingent fee of 2% of gross sales every month.Which of the following statements is correct?
A)Gold Company may deduct the $18,000 per year noncontingent payments in full as they are made.
B)Gold Company may deduct the monthly contingent fee as it is paid.
C)Gold Company may deduct both the noncontingent annual fee and the contingent monthly fees as they are paid.
D)Gold Company may not deduct either the noncontingent annual fee or the contingent monthly fees as they are paid.
E)None of these.
Q2) "Collectibles" held longterm and sold at a gain are subject to maximum tax rate of 28%.An individual taxpayer recently sold an antique car for $40,000.The car had been held for several years and $30,000 was originally paid for it.Explain why the car is or is not a collectible.
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Chapter 17: Property Transactions: 1231 and Recapture
Provisions
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Q1) Which of the following statements is correct?
A)When depreciable property is gifted to another individual taxpayer,the depreciation recapture potential is extinguished.
B)When depreciable property is inherited by a taxpayer,the depreciation recapture potential is extinguished.
C)When corporate depreciable property is distributed as a dividend,the depreciation recapture potential is generally not recognized.
D)When depreciable property is contributed to charity,the depreciation recapture potential has no effect on the amount of the charitable contribution deduction.
E)All of these are correct.
Q2) Vanna owned an office building that had been held more than one year when it was sold for $567,000.The real estate had an adjusted basis of $45,000 for the land and $233,000 for the building.Straight-line depreciation of $162,000 had been taken on the building.What is the amount and initial character of the gain or loss from disposition of the real estate? Is any of the gain unrecaptured § 1250 (25%)gain?
Q3) Describe the circumstances in which the potential § 1245 depreciation recapture is extinguished.
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Chapter 18: Accounting Periods and Methods
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Q1) A doctor's incorporated medical practice may end the last day of any month of the year.
A)True
B)False
Q2) Color,Inc. ,is an accrual basis taxpayer.In December 2014,the company received from a customer a $500 claim for defective merchandise.Color paid the customer in January 2015.Also,in December 2014,the company received a bill of $800 for office supplies that had been purchased and used in November 2014.The bill was not paid until January 2015.In January 2015,the company received a claim for $600 for defective merchandise purchased in 2014.Color paid the customer the $600 in February 2014.Assuming Color uses the recurring item exception to economic performance,the company's deductions for 2014 as a result of the above are:
A)$500.
B)$600.
C)$800.
D)$1,300.
E)$1,900.
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Chapter 19: Deferred Compensation
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Q1) For the spousal IRA provision to apply,a joint return must be filed.
A)True
B)False
Q2) Deidre has five years of service completed as of February 5,2014,her employment anniversary date.If the defined benefit plan [not a § 401(m)arrangement] uses the cliff vesting schedule,determine Deidre's nonforfeitable percentage.
A)0%
B)60%
C)80%
D)100%
E)None of these
Q3) If an individual is ineligible to make a deductible contribution to a traditional IRA,nondeductible contributions of any amount can be made to a traditional IRA.
A)True
B)False
Q4) Explain to a small business owner some advantages and disadvantages of a simplified employee pension plan (SEP).
Q5) What is a profit sharing plan?
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Chapter 20: Corporations and Partnerships
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Q1) If a corporation does not elect to amortize its organizational expenditures,such expenses can never be deducted.
A)True
B)False
Q2) Which of the following rules are the same as to the income taxation of individuals and C corporations?
A)Recapture of depreciation on real property (§ 1250).
B)Excess short-term capital losses are carried over as short-term capital losses.
C)Dividends received deduction.
D)Due date for filing the Federal income tax return.
E)None of these.
Q3) Interest on municipal bonds is excluded from gross income.
A)Applies only to the income taxation of individuals
B)Applies only to the income taxation of C corporations
C)Applies to both the income taxation of individuals and of C corporations
D)Applies to neither the income taxation of individuals nor of C corporations
Q4) Describe how a Subchapter S election can be lost.
a.Voluntarily.
b.Involuntarily.
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