Income Tax Fundamentals
Study Guide Questions
Course Introduction
Income Tax Fundamentals introduces students to the foundational principles and practices of income taxation, focusing primarily on individual taxation in accordance with current laws and regulations. The course covers key concepts such as gross income, taxable income, deductions, credits, exemptions, and the filing requirements for federal income tax. Students will explore income tax calculations, tax planning strategies, and compliance with legal and ethical standards. Through case studies, practical examples, and hands-on exercises, students gain the knowledge and skills necessary to understand and apply basic tax rules, preparing them for more advanced study or professional practice in accounting and finance.
Recommended Textbook
McGraw Hills Taxation of Individuals 2017 8th Edition By
Brian C. Spilker
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14 Chapters
1609 Verified Questions
1609 Flashcards
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Chapter 1: An Introduction to Tax
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Sample Questions
Q1) The two components of the tax calculation are the tax rate and the taxpayer's status.
A)True
B)False
Answer: False
Q2) Estimated tax payments are one way the federal income tax system addresses the "certainty" criterion in evaluating tax systems.
A)True
B)False
Answer: False
Q3) Which of the following principles encourages a vertically equitable tax system?
A) Pay as you go
B) Economy
C) Income effects
D) Ability to pay principle
E) None of these
Answer: D
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Page 3
Chapter 2: Tax Compliance, the Irs, and Tax Authorities
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Sample Questions
Q1) Edie would like to better understand a new code section enacted four weeks ago. Which of the following authorities will help Edie understand the newly enacted code section?
A) IRS regulations
B) U.S. Tax Court cases
C) Committee reports
D) IRS revenue rulings
E) None of these.
Answer: C
Q2) For fraudulent tax returns, the statute of limitations for IRS assessment is ten years.
A)True
B)False
Answer: False
Q3) Corporations are required to file a tax return annually regardless of their taxable income.
A)True
B)False
Answer: True
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Chapter 3: Tax Planning Strategies and Related Limitations
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110 Verified Questions
110 Flashcards
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Sample Questions
Q1) Troy is not a very astute investor. He has a knack for investing in losing stocks. In his latest investment move, he has realized a loss of about $40,000 (original basis of $50,000; current fair market value of $10,000) in High Tech, Inc. The good news is that unlike prior years, he actually has $45,000 of gains that he can use to offset the loss. Troy is considering either selling the High Tech, Inc. stock to his sister, Louise, or on the stock market. Which should he choose and why? Please explain why the IRS may treat the two transactions differently.
Answer: If Troy sells the stock to his sister, by tax law, he will not be able to deduct the loss. Thus, he should sell the stock on the stock market. The two transactions are treated differently because the sale on the stock market is considered an arms length transaction whereas the sale to Louise is considered a related-party transaction. In arms-length transactions, each transacting party negotiates for his or her own benefit. In contrast, taxpayers engaged in related-party transactions are much more willing to negotiate for the common good of the related parties and to the detriment of the IRS. Accordingly, the IRS pays special attention to related party transactions (and even disallows losses in transactions involving related parties).
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Chapter 4: Individual Income Tax Overview, Exemptions, and Filing Status
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126 Verified Questions
126 Flashcards
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Sample Questions
Q1) A child who is her parents' qualifying child can claim a personal exemption for herself as long as her parents choose not to claim her as a dependent.
A)True
B)False
Q2) Which of the following series of inequalities is generally most accurate?
A) Gross income adjusted gross income taxable income
B) Adjusted gross income gross income taxable income
C) Adjusted gross income taxable income gross income
D) Gross income taxable income adjusted gross income
Q3) In year 1, Harold Weston's wife died. Since her death, he has maintained a household for their son Frank (age 3), his qualifying child. Which is the most advantageous filing status available to Harold in year 4?
A) Married filing joint
B) Surviving spouse
C) Qualifying widower
D) Head of household
Q4) What is the couple's taxable income?
Q5) What is the couple's adjusted gross income?
Q6) What is the couple's gross income?
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Chapter 5: Gross Income and Exclusions
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Sample Questions
Q1) Interest income is earned in the year in which it is received by the taxpayer or credited to the bank account.
A)True
B)False
Q2) Kathryn is employed by Acme and they have been very pleased with her performance this year. In December Kathryn was granted an extra week off with pay (pay for the week totaled $2,000). In addition, Kathryn was given tickets to a football bowl game worth $800 (Kathryn didn't use the tickets - she hates football). At year-end Kathryn was allowed to order new office furniture and Acme told her to take the old office furniture home. The office furniture was originally purchased for $7,000, but it was fully depreciated and only worth about $1,000. Determine the amount Kathryn should include in her gross income.
Q3) Loretta received $6,200 from disability insurance that she purchased directly this year. Loretta must include all $6,200 in her gross income.
A)True
B)False
Q4) For tax purposes, unearned income means income that has not yet been realized.
A)True
B)False
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Chapter 6: Individual Deductions
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Sample Questions
Q1) Casey currently commutes 35 miles to work in the city. He is considering a new assignment in the suburbs on the other side of the city that would increase his commute considerably. He would like to accept the assignment, but he thinks it might require that he move to the other side of the city. Which of the following is a true statement?
A) Casey can deduct moving expenses if the distance between his current residence and his new assignment is at least 50 miles.
B) If Casey's move qualifies for the moving expense deduction, he can deduct the cost of meals while en route to his new residence.
C) To qualify for a moving expense deduction the new commute from Casey's current residence would need to be a minimum of 85 miles.
D) If Casey's move qualifies for the moving expense deduction, he can deduct half the cost of meals while en route to his new residence.
E) All of these are false.
Q2) Last year Henry borrowed $15,000 to help pay for his dependent daughter's college tuition. This year Henry paid $2,800 of interest on the loan. How much, if any, interest can Henry deduct if he files single with AGI of $72,500?
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Chapter 7: Individual Income Tax Computation and Tax Credits
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156 Verified Questions
156 Flashcards
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Sample Questions
Q1) The child and dependent care credit entitles qualifying taxpayers to a credit equal to the full amount of qualified expenses.
A)True
B)False
Q2) Sheryl's AGI is $250,000. Her current tax liability is $52,068. Last year, her tax liability was $48,722. She will not owe underpayment penalties if her total estimated tax payments are at least which of the following (rounded) amounts (assume she makes the required payments each quarter)?
A) $46,861
B) $48,722
C) $51,547
D) $53,594
Q3) Long-term capital gains are taxed at the stated AMT rate for purposes of the alternative minimum tax.
A)True
B)False
Q4) Jack paid $5,000 in daycare expenses for his five-year-old daughter so he could work. His AGI for the year was $37,500 (all earned income). What is the amount of his child and dependent care credit?
Page 9
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Chapter 8: Business Income, Deductions, and Accounting Methods
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99 Flashcards
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Sample Questions
Q1) Ranger Athletic Equipment uses the accrual method and reports on a calendar year. Ranger provides two-year warranties on all sales of equipment. This year Ranger estimated warranty expense for book purposes, and he accrued $1 million of warranty expenses. However, during the year Ranger only spent $400,000 repairing equipment under the warranty. What can Ranger deduct for warranty expense on the tax return for this year?
Q2) The 12-month rule allows taxpayers to deduct the entire amount of certain prepaid business expenses.
A)True
B)False
Q3) Illegal bribes and kickbacks are not deductible as business expenses but fines imposed by a governmental unit are deductible as long as the fines are incurred in the ordinary course of business.
A)True
B)False
Q4) Taffy Products uses the accrual method and reports on a calendar year. On July 1st of this year Taffy paid $48,000 for warehouse rent and $18,000 for insurance on the contents of their warehouse. The rent and insurance covers the next 12 months. What amount, if any, can Taffy deduct for rent and insurance this year?
Page 10
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Chapter 9: Property Acquisition and Cost Recovery
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105 Flashcards
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Sample Questions
Q1) The 200 percent or double declining balance method is allowable for five and seven year property.
A)True
B)False
Q2) Sairra, LLC purchased only one asset during the current year. Sairra placed in service furniture (7-year property) on April 16 with a basis of $25,000. Calculate the maximum depreciation expense for the current year, rounding to a whole number (ignoring §179 and bonus depreciation):
A) $1,786
B) $3,573
C) $4,463
D) $5,000
E) None of these
Q3) Real property is always depreciated using the straight-line method.
A)True
B)False
Q4) Occasionally bonus depreciation is used as a stimulus tool by tax policy makers.
A)True
B)False
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Chapter 10: Property Dispositions
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Sample Questions
Q1) The amount realized is the sale proceeds less the adjusted basis.
A)True
B)False
Q2) Generally, the amount realized is everything of value received in a sale less selling expenses.
A)True
B)False
Q3) Sadie sold 10 shares of stock to her brother, George, for $500 six months ago. Sadie had purchased the stock for $600 two years earlier. If George sells the stock for $700, what is the amount and character of his recognized gain or loss in the current year?
A) $0.
B) $100 short-term capital gain.
C) $100 long-term capital gain.
D) $200 short-term capital gain.
E) None of these.
Q4) Manassas purchased a computer several years ago for $2,200. On November 10th of the current year, the computer was worth $800. If $1,000 of depreciation deductions had been taken, what is Manassas' tax adjusted basis for the computer?
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Page 12
Chapter 11: Investments
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Sample Questions
Q1) Life insurance policies have nontax factors that limit their desirability as an investment vehicle. Some of these factors include:
A) waiting for the insured individual's death
B) low expense to return ratios
C) high commission costs
D) waiting for the insured individual's death and low expense to return ratios
E) waiting for the insured individual's death and high commission costs
Q2) A passive activity is any activity that involves a trade or business or rental activity in which the taxpayer does not materially participate.
A)True
B)False
Q3) What rate should be used when calculating the after-tax future value of investments with a constant rate of return that is taxed annually?
A) annual before-tax rate of return
B) annual after-tax rate of return
C) marginal tax rate
D) preferential tax rate
E) average tax rate
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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?
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) Which of the following statements regarding compensation is false?
A) Wages are usually paid by the hour.
B) Salary is usually a form of fixed compensation.
C) Bonuses are a form of compensation obtained if certain criteria are met.
D) Bonuses paid within 2½ months of year end are included in employee's compensation in the year they were earned.
Q3) Health insurance is an example of a nontaxable fringe benefit.
A)True
B)False
Q4) Big Bucks paid its CEO $1,500,000 of compensation for the year. What is the after-tax cost of paying the salary assuming a 30 percent marginal tax rate?
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Page 14
Chapter 13: Retirement Savings and Deferred Compensation
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Sample Questions
Q1) Lisa, age 45, needed some cash so she received a $50,000 distribution from her Roth IRA. At the time of the distribution, the balance in the Roth IRA was $200,000. Lisa established the Roth IRA 10 years ago. Over the years, she has contributed $20,000 to her account. What amount of the distribution is taxable and subject to early distribution penalty?
A) $0
B) $5,000
C) $30,000
D) $50,000
Q2) An employer may contribute to an employee's traditional 401(k) account but the employer may not contribute to an employee's Roth 401(k) account.
A)True
B)False
Q3) High-income taxpayers are not allowed to receive the saver's credit.
A)True
B)False
Q4) A SEP IRA is an example of a self-employed retirement account.
A)True
B)False
Page 15
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Chapter 14: Tax Consequences of Home Ownership
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Sample Questions
Q1) Harvey rents his second home. During 2014, Harvey reported a net loss of $35,000 from the rental. If Harvey is an active participant in the rental and his AGI is $80,000, how much of the loss can he deduct against ordinary income in 2014?
A) $35,000
B) $25,000
C) $5,000
D) $0
Q2) When allocating expenses of a vacation home between personal use and rental use, the amount of depreciation expense allocated to the rental use is based on the number of rental days over rental days plus personal use days.
A)True
B)False
Q3) A self-employed taxpayer reports home office expenses as for AGI deductions while employees report home office expenses as from AGI deductions.
A)True
B)False
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