Income Tax for Individuals
Test Questions
Course Introduction
This course provides an in-depth understanding of the principles and practices of income taxation as applied to individuals. Topics include the computation of taxable income, identification of different sources of income, allowable deductions and exemptions, tax rates, and the preparation and filing of personal income tax returns. Students will also learn about tax planning strategies, compliance requirements, and recent developments in tax laws relevant to individuals. The course emphasizes practical application through case studies and real-life scenarios to equip students with the necessary skills for accurate and efficient tax preparation and planning.
Recommended Textbook
South Western Federal Taxation 2013 Individual Income Taxes 36th Edition by William H
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Page 2
Chapter 1: An Introduction to Taxation and Understanding
the Federal Tax Law
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Q1) On transfers by death,the Federal government relies on an estate tax,while states impose an estate tax,an inheritance tax,both taxes,or neither tax.
A)True
B)False
Answer: True
Q2) Ava,an estate planner,is advising her wealthier clients to make any large gifts to family members before 2013.Why?
Answer: Under existing law,the exemption equivalent for gift tax purposes is scheduled to decrease from $5.12 million to $1 million after 2012.Thus,an extra $4.12 million in value can be transferred without any tax if the gifts occur before 2013.
Q3) The objective of pay-as-you-go (paygo)is to achieve revenue neutrality.
A)True
B)False
Answer: True
Q4) A major disadvantage of a flat tax type of income tax is its complexity.
A)True
B)False
Answer: False
Page 3
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Chapter 2: Working With the Tax Law
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Sample Questions
Q1) Which court decision would probably carry more weight?
A) Regular U.S. Tax Court decision.
B) Reviewed U.S. Tax Court decision.
C) U.S. District Court decision.
D) Memorandum Tax Court decision.
E) U.S. Court of Federal Claims.
Answer: B
Q2) Before a tax bill can become law,it must be approved by the President.
A)True
B)False
Answer: False
Q3) Which is presently not a major tax service?
A) Standard Federal Tax Reporter.
B) Federal Taxes.
C) United States Tax Reporter.
D) Tax Management Portfolios.
E) All of the above are major tax services.
Answer: B
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Chapter 3: Tax Formula and Tax Determination: an
Overview of Property Transactions
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Q1) Since an abandoned spouse is treated as single 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
Q2) In January 2012,Jake's wife dies and he does not remarry.For tax year 2012,Jake may not be able to use the filing status available to married persons filing joint returns.
A)True
B)False
Answer: True
Q3) Gain on the sale of collectibles held for more than 12 months could be subject to tax at a rate lower than 28%.
A)True
B)False
Answer: True
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Chapter 4: Gross Income: Concepts and Inclusions
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Q1) In some foreign countries,the tax law specifically designates the types of income items that are includible in gross income.How does this approach compare with the U.S.Internal Revenue Code (§ 61)? What is a major advantage to the approach used in the U.S.tax law?
Q2) Turner,Inc.,provides group term life insurance to the officers of the corporation only.Janet,a vice-president,received $400,000 of coverage for the year at a cost to Turner,Inc.of $5,600.The Uniform Premiums (based on Janet's age)are $15 a year for $1,000 protection.How much of this must Janet include in gross income this year?
A) $0.
B) $2,700.
C) $5,600.
D) $6,000.
E) None of the above.
Q3) Alimony recapture may occur if there is a substantial decrease in the amount of the alimony payments in the second year.
A)True
B)False
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Chapter 5: Gross Income: Exclusions
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Q1) Carla is a deputy sheriff.Her employer requires that she live in the county where she is employed.Housing is very expensive; so the county agreed to pay her $4,800 per year to cover the higher cost of housing.Carla must include the housing supplement in her gross income.
A)True
B)False
Q2) Sarah's employer pays the hospitalization insurance premiums for a policy that covers all employees and retired former employees.After Sarah retires,the hospital insurance premiums paid for her by her employer can be excluded from her gross income.
A)True B)False
Q3) Juan,was considering purchasing an interest in a tax-exempt bond fund for $100,000,when he discovered that the interest must be included on his state income tax return.The interest rate is 5%.His marginal Federal tax rate is 35%,and his marginal state income tax rate is 10%.Juan itemizes his deductions on his Federal income tax return.As an alternative,Juan can purchase a state bond (a "double-exempt bond")yielding 4.9% interest that is exempt from both Federal and state income tax.Which investment would yield the greater after-tax return?
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Chapter 6: Deductions and Losses: in General
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Q1) Mitch is in the 28% tax bracket.He may receive a different tax benefit for a $2,000 expenditure that is classified as a deduction from AGI than he will receive for a $1,000 expenditure that is classified as a deduction for AGI.
A)True
B)False
Q2) Beige,Inc.,an airline manufacturer,is conducting negotiations for the sale of military aircraft.One negotiation is with a U.S.assistant secretary of defense.She can close the deal on the purchase of 50 attack helicopters if she is paid $750,000 under the table.Another negotiation is with the minister of defense of a third world country.To complete the sale of 20 jet fighters to his government,he demands that he be paid a $1 million grease payment.Beige makes the payments and closes the deals.How much of these payments are deductible by Beige,Inc.?
Q3) Brenda invested in the following stocks and bonds during 2012.
Q4) During the year,Jim rented his vacation home for 200 days and lived in it for 19 days.During the remaining days,the vacation home was available for rental use.Is the vacation home subject to the limitation on the deductions of a personal/rental vacation home?
Q5) Briefly discuss the disallowance of deductions for capital expenditures.
Q6) What losses are deductible by an individual taxpayer?
Page 8
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Chapter 7: Deductions and Losses: Certain Business
Expenses and Losses
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Sample Questions
Q1) Jed is an electrician.Jed and his wife are accrual basis taxpayers and file a joint return.Jed wired a new house for Alison and billed her $15,000.Alison paid Jed $10,000 and refused to pay the remainder of the bill,claiming the fee to be exorbitant.Jed took Alison to Small Claims Court for the unpaid amount and was awarded a $2,000 judgement.Jed was never able to collect the judgement nor the remainder of the bill from Alison.What amount of loss may Jed deduct in the current year?
A) $0.
B) $2,000.
C) $3,000.
D) $5,000.
E) None of the above.
Q2) The domestic production activities deduction (DPAD)for 2012 cannot exceed 50% of all W-2 wages paid to employees by the taxpayer during the tax year.
A)True
B)False
Q3) Identify the factors that should be considered in determining whether a transaction is a bona fide loan or a gift.
Q4) Why was the domestic production activities deduction (DPAD)enacted by Congress?
Page 9
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Chapter 8: Depreciation, cost Recovery, amortization, and Depletion
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Sample Questions
Q1) Residential rental real estate includes property where 80% or more of the net rental revenues are from nontransient dwelling units.
A)True B)False
Q2) Property used for the production of income is not eligible for § 179 expensing. A)True B)False
Q3) The concept of depreciation assumes that the asset has a determinable useful life. A)True
B)False
Q4) Pat purchased a used five-year class asset on March 15,2012,for $60,000.He did not elect § 179 expensing.Determine the cost recovery deduction for 2012 for earnings and profits purposes.
A) $2,000.
B) $3,000.
C) $6,000.
D) $12,000.
E) None of the above.
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Q5) Discuss the reason for the inclusion amount with respect to leased automobiles.
Chapter 9: Deductions: Employee and
Self-Employed-Related Expenses
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Q1) Jake performs services for Maude. If Jake provides his own helper and tools, this is indicative of independent contractor (rather than employee) status.
A)True
B)False
Q2) Amy lives and works in St.Louis.In the morning she flies to Boston,has a three-hour business meeting,and returns to St.Louis that evening.For tax purposes,Amy was away from home.
A)True
B)False
Q3) In May 2012,after 11 months on a new job,Ken is fired after he assaults a customer.Ken must include in his gross income for 2012 any deduction for moving expenses he may have claimed on his 2011 tax return.
A)True
B)False
Q4) Frank,a recently retired FBI agent,pays job search expenses to obtain a position with a city police department.Frank's job search expenses do not qualify as deductions.
A)True
B)False
Page 11
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Chapter 10: Deductions and Losses: Certain Itemized
Deductions
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Q1) Chad pays the medical expenses of his son,James.James would qualify as Chad's dependent except that he earns $7,500 during the year.Chad may not claim James' medical expenses because he is not a dependent.
A)True
B)False
Q2) Donald owns a principal residence in Chicago,a vacation lodge in New Mexico,and a yacht (with living quarters)on Lake Michigan.All three properties have mortgages on which Donald pays interest.Discuss any limitations that apply to Donald's mortgage interest deduction,and suggest any strategy Donald should consider to maximize his deduction.
Q3) Linda borrowed $60,000 from her parents for a down payment on a condominium.She paid interest of $5,500 in 2010,$0 in 2011,and $9,000 in 2012.The IRS disallowed the deduction.Can you offer any explanation for the disallowance?
Q4) During the year,Victor spent $300 on bingo games sponsored by his church.If all profits went to the church,Victor has a charitable contribution deduction of $300.
A)True
B)False
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Chapter 11: Investor Losses
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Sample Questions
Q1) Art owns significant interests in a hardware store and a bookstore at a mall in Washington,D.C.He also owns a hardware store and a bookstore at a mall in San Francisco.Which of the following is not a way in which the interests may be grouped?
A)One activity.
B)A hardware activity and a bookstore activity.
C)A Washington,D.C.activity and a San Francisco activity.
D)Four separate activities.
E)Any of the above may be the basis for grouping.
Q2) Kathy is a full-time educator,but she owns an apartment building and devotes 550 hours to managing the activity.All losses from the rental activity will be considered nonpassive and deductible against active income because she is a real estate professional.
A)True
B)False
Q3) Identify the types of income that are classified as investment income.Discuss the flexibility that a taxpayer has with respect to certain types of income that may potentially be considered investment income.
Q4) What special passive loss treatment is available to real estate activities?
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Page 13
Chapter 12: Alternative Minimum Tax
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Sample Questions
Q1) How can interest on a private activity bond issued in 2008 result in both an AMT adjustment that decreases AMTI and an AMT preference that increases AMTI?
Q2) If a gambling loss itemized deduction is permitted for regular income tax purposes,there will be no AMT adjustment associated with the gambling loss.
A)True
B)False
Q3) Vinny's AGI is $220,000.He contributed $130,000 in cash to the Boy Scouts,a public charity.What is Vinny's charitable contribution deduction for AMT purposes?
A) $0.
B) $66,000.
C) $110,000.
D) $130,000.
E) None of the above.
Q4) Negative AMT adjustments for the current year caused by timing differences are offset by the positive AMT adjustments for prior tax years also caused by timing differences.
A)True
B)False
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Chapter 13: Tax Credits and Payment Procedures
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Q1) Explain the purpose of the tax credit for rehabilitation expenditures and describe the general characteristics of its computation.
Q2) George and Martha are married and file a joint tax return claiming their two children,ages 10 and 8 as dependents.Assuming their AGI is $119,650,George and Martha's child tax credit is:
A) $0.
B) $1,000.
C) $1,500.
D) $2,000.
E) None of the above.
Q3) Qualified research and experimentation expenditures are not only eligible for the 20% tax credit,but also can be expensed in the year incurred.
A)True
B)False
Q4) The tax benefits resulting from tax credits and tax deductions are never affected by the tax rate bracket of the taxpayer.
A)True
B)False
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Chapter 14: Property Transactions: Determination of Gain or
Loss and Basis Considerations
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Sample Questions
Q1) For disallowed losses on related-party transactions,who has the right of offset?
Q2) Which of the following statements correctly reflects the rules regarding inherited property in 2012?
A) A particular beneficiary's basis can be greater than, equal to, or less than the decedent's basis.
B) A particular beneficiary's holding period includes the donor's holding period.
C) The alternate valuation date election only applies to those assets which have declined in value (i.e., does not cover assets that have increased in value).
D) Only a. and b. are correct.
E) a., b., and c. are correct.
Q3) Parker bought a brand new Ferrari on January 1,2012,for $125,000.Parker was fatally injured in an auto accident on June 23,2012,when the fair market value of the car was $105,000.Parker was driving a loaner car from the Ferrari dealership while his car was being serviced.In his will,Parker left the Ferrari to his best friend,Ryan.Ryan's holding period for the Ferrari begins on June 23,2012.
A)True
B)False
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Page 16
Chapter 15: Property Transactions: Nontaxable Exchanges
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Q1) 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
Q2) Abby exchanges 3,000 shares of Osprey,Inc.,stock for 1,500 shares of Blue Heron,Inc.,stock.Abby's adjusted basis for the Osprey stock is $270,000 and the fair market value of the Blue Heron stock is $300,000.Abby's recognized gain is $0 and her adjusted basis for the Blue Heron stock is $270,000.
A)True
B)False
Q3) The taxpayer can elect to have the exclusion of gain under § 121 (sale of principal residence)not apply.
A)True
B)False
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Chapter 16: Property Transactions: Capital Gains and Losses
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Sample Questions
Q1) Willie is the owner of vacant land that he purchased in 2008 for $1,400,000 and held for investment.On January 22,2011,he was paid $145,000 for a thirteen-month option on the land by Susan.Susan could buy the land for an additional $1,200,000 by exercising the option.Susan had hoped to build a luxury home on the land,but was unable to get approval to build a big enough home to satisfy her needs.Consequently,Susan did not exercise her option and the option expired on February 22,2012.(1)What is Willie's basis,gain or loss,and type of gain or loss from these events? (2)What is Susan's basis,gain or loss,and type of gain or loss from these events?
Q2) In 2012,Mark has $18,000 short-term capital loss,$7,000 28% gain,and $6,000 0%/15% gain.Which of the statements below is correct?
A) Mark has a $5,000 capital loss deduction.
B) Mark has a $3,000 capital loss deduction.
C) Mark has a $13,000 net capital gain.
D) Mark has a $5,000 net capital gain.
E) Mark has a $18,000 net capital loss.
Q3) All collectibles long-term gain is subject to a potential alternative tax rate of 28%.
A)True
B)False
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Chapter 17: Property Transactions: Section 1231 and Recapture Provisions
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Sample Questions
Q1) Section 1239 (relating to the sale of certain property between related taxpayers)does not apply unless the property:
A) Was depreciated by the transferor.
B) Is depreciable in the hands of the transferee.
C) Is a capital asset.
D) Is real property.
E) None of the above.
Q2) Which of the following assets held by a retail business is a § 1231 asset?
A) Inventory.
B) A machine used in the business and held less than one year.
C) A factory building used in the business and held more than one year.
D) Accounts receivable.
E) All of the above.
Q3) A business machine purchased April 10,2011,for $62,000 was fully depreciated in 2011 using § 179 immediate expensing.On August 15,2012,the sole proprietor who owned the machine gave it to his son.On that date,the machine's fair market value was $57,000.The son did not use the machine in business or hold it as inventory and the machine was sold on November 22,2012,for $53,000.What is the amount and nature of the gain or loss from disposition of the machine? Where is it reported in the son's tax return?
Page 19
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Chapter 18: Accounting Periods and Methods
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Q1) Which of the following taxpayers is required to use the accrual method of accounting?
A) A retail business with average annual gross receipts of $800,000.
B) A medical doctor with average annual gross receipts of $2 million.
C) An insurance agency with average annual gross receipts of $2 million.
D) All of the above are required to use the accrual method.
E) None of the above is required to use the accrual method.
Q2) The installment method applies where a payment will be received after the tax year of the sale:
A) By an investor who sold real estate at a gain.
B) By an investor who sold real estate at a loss.
C) By an appliance dealer who sold inventory at a gain.
D) By an investor who sold IBM Corporation common stock at a gain.
E) None of the above.
Q3) For a taxpayer who is required to use the percentage of completion method,the taxpayer can elect to defer the recognition of income and the related costs until the taxable year in which cumulative contract costs are at least 25 percent of the estimated contract costs.
A)True
B)False
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Chapter 19: Deferred Compensation
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Questions
Q1) An incentive stock option (ISO)plan is considered to be a deferred compensation arrangement.
A)True
B)False
Q2) A substantial risk of forfeiture exists if an employee's rights to full enjoyment of property are conditioned upon the future performance,or refraining from the performance,of substantial services of that individual.
A)True
B)False
Q3) An individual,age 40,who is not subject to the phase-out provision may contribute a deductible amount to a Roth IRA up to $5,000 per year in 2012.
A)True
B)False
Q4) A failure to make a minimum required distribution to a participant in any taxable year results in a 50% nondeductible excise tax on any excess of the amount that should have been distributed over the amount that actually was distributed.
A)True
B)False
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21
Chapter 20: Corporations and Partnerships
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Q1) On March 9,2012,all of the shareholders of Kingfisher Corporation (a calendar year entity)voluntarily revoke the S election (effective as soon as possible).For all of 2012,Kingfisher Corporation will be a C corporation.
A)True
B)False
Q2) Silver Corporation has held an S election since its formation five years ago.Which,if any,of the following will cause Silver to lose its election?
A) Silver buys stock in another corporation.
B) A shareholder sells her Silver stock to a partnership.
C) A shareholder sells his Silver stock to a citizen of Italy who is a resident of New York City.
D) A shareholder dies and the Silver stock passes to her estate.
E) None of the above.
Q3) Emerald Corporation and Gold Corporation each own 500 shares of IBM Corporation common stock and each receives the same amount of cash dividends on their stock investment.The dividends received deduction each corporation can claim may not be the same.
A)True
B)False
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