Income Tax Planning Exam Practice Tests
Course Introduction
Income Tax Planning focuses on the principles, strategies, and practical applications of managing individual and business income tax obligations. The course explores key aspects of federal and state tax laws, tax computation, deductions, credits, and the timing of income and expenses to minimize liability. Students will learn how to analyze tax situations, interpret relevant regulations, and implement effective planning techniques to reduce tax burdens both for individuals and various types of business entities. Real-life scenarios and case studies are used to develop skills in identifying tax-saving opportunities, addressing compliance issues, and making strategic financial decisions within the framework of current tax legislation.
Recommended Textbook
South Western Federal Taxation 2015 Individual Income Taxes 38th Edition by William H. Hoffman
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2539 Flashcards
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Chapter 1: An Introduction to Taxation and Understanding
the Federal Tax Law
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195 Verified Questions
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Sample Questions
Q1) Because the law is complicated,most individual taxpayers are not able to complete their Federal income tax returns without outside assistance.
A)True
B)False
Answer: True
Q2) 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
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Chapter 2: Working With the Tax Law
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Sample Questions
Q1) Subchapter D refers to the "Corporate Distributions and Adjustments" section of the Internal Revenue Code.
A)True
B)False
Answer: False
Q2) Electronic databases are most frequently searched by the keyword approach.
A)True
B)False
Answer: True
Q3) There is a direct conflict between a Code section adopted in 2008 and a treaty with France (signed in 2012).The Code section controls.
A)True
B)False Answer: False
Q4) Temporary Regulations are only published in the Internal Revenue Bulletin.
A)True
B)False
Answer: False
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Page 4
Chapter 3: Tax Formula and Tax Determination;an
Overview of Property Transactions
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Sample Questions
Q1) Once they reach age 65,many taxpayers will switch from itemizing their deductions from AGI and start claiming the standard deduction.
A)True
B)False
Answer: True
Q2) In which,if any,of the following situations will the kiddie tax not apply?
A)The child is married but does not file a joint return.
B)The child has unearned income of $2,000 or less.
C)The child has unearned income that exceeds more than half of his (or her)support.
D)The child is under age 24 and a full-time student.
E)None of these.
Answer: B
Q3) When can a taxpayer not use Form 1040EZ? Form 1040A?
Answer: Form 1040EZ cannot be used when the taxpayer claims any dependents;is age 65 or older (or blind);or,has taxable income of $100,000 or more.Form 1040A cannot be used if the taxpayer itemizes deductions from AGI.
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Page 5
Chapter 4: Gross Income: Concepts and Inclusions
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Sample Questions
Q1) Barney painted his house which saved him $3,000.According to the realization requirement,Barney must recognize $3,000 of income.
A)True
B)False
Q2) Under the alimony rules:
A)To determine whether a cash payment is alimony,one must consult the state laws that define alimony.
B)A person who receives a property division has experienced an increase in wealth and thus should be subject to tax.
C)The income is included in the gross income of the recipient of the payments.
D)A person who earns $90,000 and pays $20,000 in alimony is taxed on $90,000 because the $20,000 alimony is income assigned to the former spouse.
E)None of these.
Q3) 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?
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Page 6
Chapter 5: Gross Income: Exclusions
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Sample Questions
Q1) The de minimis fringe benefit:
A)Exclusion applies only to property received by the employee.
B)Can be provided on a discriminatory basis.
C)Exclusion is limited to $250 per year.
D)Exclusion applies to employee discounts.
E)None of these.
Q2) If a scholarship does not satisfy the requirements for a gift,the scholarship must be included in gross income.
A)True
B)False
Q3) Sam was unemployed for the first two months of 2014.During that time,he received $4,000 of state unemployment benefits.He worked for the next six months and earned $14,000.In September,he was injured on the job and collected $5,000 of workers' compensation benefits.Sam's Federal gross income from the above is $18,000 ($4,000 + $14,000).
A)True
B)False
Q4) 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) The amount of the addition to the reserve for bad debts for an accrual method taxpayer is allowed as a deduction for tax purposes,but is not allowed for a cash method taxpayer.
A)True
B)False
Q2) The portion of property tax on a vacation home that is attributable to personal use is an itemized deduction.
A)True
B)False
Q3) Under the "oneyear rule" for the current period deduction of prepaid expenses of cash basis taxpayers,the asset must expire or be consumed by the end of the tax year following the year of payment.
A)True
B)False
Q4) If an item such as property taxes and home mortgage interest exceed the income from a hobby,the excess amount of this item over the hobby income can be deducted if the taxpayer itemizes deductions.
A)True
B)False
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Chapter 7: Deductions and Losses: Certain Business
Expenses and Losses
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Sample Questions
Q1) In determining whether a debt is a business or nonbusiness bad debt,the debtor's use of the borrowed funds is important.
A)True
B)False
Q2) In 2014,Grant's personal residence was completely destroyed by fire.Grant was insured for 100% of his actual loss,and he received the insurance settlement.Grant had adjusted gross income,before considering the casualty item,of $30,000.Pertinent data with respect to the residence follows: <sup>Cost basis</sup><sup> </sup>$280,000 <sup>Value before casualty</sup><sup> </sup>250,000 <sup>Value after casualty</sup><sup> </sup>-0-
What is Grant's allowable casualty loss deduction?
A)$0
B)$6,500
C)$6,900
D)$10,000
E)$80,000
Q3) A loss is not allowed for a security that declines in value.
A)True
B)False
Page 9
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Chapter 8: Depreciation, cost Recovery, amortization, and Depletion
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Sample Questions
Q1) When lessor owned leasehold improvements are abandoned because of the termination of the lease,a loss can be taken for the unrecovered basis.
A)True
B)False
Q2) Discuss the effect on the cost recovery method of a taxpayer election if the uniform capitalization rules apply to a farming business.
Q3) Joe purchased a new five-year class asset on June 1,2014.The asset is listed property (not an automobile).It was used 55% for business and 45% for the production of income.The asset cost $100,000.Joe made the § 179 election.Joe's taxable income would not create a limitation for purposes of the § 179 deduction.Joe does not take additional firstyear depreciation (if available).Determine Joe's total cost recovery (including the § 179 deduction)for the year.
Q4) On July 15,2014,Mavis paid $275,000 for leasehold improvements on a commercial building she was leasing.Determine the maximum total cost recovery from the improvements in 2014.
Q5) Discuss the requirements in order for startup expenditures to be amortized under § 195.
Page 10
Q6) Discuss the reason for the inclusion amount with respect to leased automobiles.
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Chapter 9: Deductions: Employee and
Self-Employed-Related Expenses
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Sample Questions
Q1) For tax purposes,a statutory employee is treated the same as a common law employee.
A)True
B)False
Q2) Travel status requires that the taxpayer be away from home overnight.
a.What does "away from home overnight" mean?
b.What tax advantages result from being in travel status?
Q3) How are combined business/pleasure trips treated for travel within the United States as opposed to foreign travel?
Q4) In which,if any,of the following situations is the automatic mileage available?
A)A limousine to be rented by the owner for special occasions (e.g. ,weddings,high school proms).
B)The auto belongs to taxpayer's mother.
C)One of seven cars used to deliver pizzas.
D)MACRS statutory percentage method has been claimed on the automobile.
E)None of these.
Q5) Concerning the deduction for moving expenses,what circumstances,if any,will excuse a taxpayer from meeting the time test of 39 or 78 weeks?
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Chapter 10: Deductions and Losses: Certain Itemized
Deductions
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Sample Questions
Q1) Joe,a cash basis taxpayer,took out a 12-month business loan on December 1,2014.He prepaid all $3,600 of the interest on the loan on December 1,2014.Joe can deduct only $300 of the prepaid interest in 2014.
A)True
B)False
Q2) Joe,who is in the 33% tax bracket this year,expects to retire next year and be in the 25% tax bracket.He plans to donate $50,000 to his church.Because he will not have the cash available until next year,Joe donates land (long-term capital gain property)with a basis of $10,000 and fair market value of $50,000 to the church in December of the current year.He reacquires the land for $50,000 in February of next year.Discuss Joe's tax objectives and all tax issues related to his actions.
Q3) Trent sells his personal residence to Chester on July 1,2014.He had paid $7,000 in real property taxes on March 1,2014,the due date for property taxes for 2014.Trent may not deduct the portion of the taxes he paid for the period the property was owned by Chester.
A)True
B)False
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Page 12
Chapter 11: Investor Losses
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Sample Questions
Q1) Gray Company,a closely held C corporation,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 Gray is not a personal service corporation,it may deduct $34,000 of the passive loss.
A)True
B)False
Q2) Linda owns investments that produce portfolio income and Activity A that produces losses.From a tax perspective,Linda will be better off if Activity A is not passive.
A)True
B)False
Q3) Dick participates in an activity for 90 hours during the year.He has no employees and there are no other participants.Dick is a material participant.
A)True
B)False
Q4) Anne sells a rental house for $100,000 (adjusted basis of $55,000).During her ownership,$60,000 of losses have been suspended under the passive activity loss rules.Determine the tax treatment to Anne on the disposition of the property.
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Chapter 12: Alternative Minimum Tax
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Sample Questions
Q1) AMT adjustments can be positive or negative,whereas AMT preferences are always positive.
A)True
B)False
Q2) Elmer exercises an incentive stock option (ISO)in 2014 for $6,000 (fair market value of the stock on the exercise date is $7,600).If Elmer sells the stock later in 2014 for $8,000,the AMT positive adjustment is $1,600 and the AMT negative adjustment is $2,000.
A)True
B)False
Q3) If Abby's alternative minimum taxable income exceeds her regular taxable income,she will have an alternative minimum tax.
A)True
B)False
Q4) Frederick sells land and building 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.
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Page 14
Chapter 13: Tax Credits and Payment Procedures
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Sample Questions
Q1) Nonrefundable credits are those that reduce the taxpayer's tax liability but are not paid when the amount of the credit (or credits)exceeds the taxpayer's tax liability.
A)True
B)False
Q2) Black Company paid wages of $180,000,of which $40,000 was qualified wages for the work opportunity tax credit under the general rules.Black Company's deduction for wages for the year is:
A)$140,000.
B)$164,000.
C)$166,000.
D)$180,000.
E)None of these.
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) Describe the withholding requirements applicable to employers.
Q5) Discuss the treatment of unused general business credits.
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Chapter 14: Property Transactions: Determination of Gain or
Loss and Basis Considerations
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Sample Questions
Q1) Marilyn owns 100% of the stock of Lilac,Inc. ,with an adjusted basis of $45,000.She receives a cash distribution of $160,000 from Lilac when its earnings and profits are $90,000.
a.What is Marilyn's dividend income?
b.What is Marilyn's recognized gain or loss?
c.What is Marilyn's adjusted basis for her stock after the distribution?
Q2) Wade is a salesman for a real estate development company.Because he is the "salesperson of the year," he is permitted to purchase a lot from the developer for $90,000.The fair market value of the lot is $150,000 and the developer's adjusted basis is $100,000.Wade must recognize a gain of $10,000 ($100,000 developer's adjusted basis$90,000 cost to Wade),and his adjusted basis for the lot is $100,000 ($90,000 cost + $10,000 recognized gain).
A)True
B)False
Q3) The amount of a corporate distribution qualifying for capital recovery treatment which exceeds the shareholder-recipient's basis in the stock investment is treated as a capital gain.
A)True
B)False
Page 16
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Chapter 15: Property Transactions: Nontaxable Exchanges
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Sample Questions
Q1) If a taxpayer exchanges likekind property under § 1031 and assumes a liability associated with the property received,the taxpayer is considered to have received boot in the transaction.
A)True
B)False
Q2) As part of the divorce agreement,Tyler transfers his ownership interest in their personal residence to Lupe.The house had been jointly owned by Tyler and Lupe and the adjusted basis is $520,000.At the time of the transfer to Lupe,the fair market value is $800,000.What is the recognized gain to Tyler,and what is Lupe's basis for the house?
A)$0 and $520,000.
B)$0 and $800,000.
C)$140,000 and $520,000.
D)$280,000 and $800,000.
E)None of these.
Q3) The basis of boot received in a like-kind exchange is its fair market value,unless the realized gain is a smaller amount.
A)True
B)False
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Chapter 16: Property Transactions: Capital Gains and Losses
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Sample Questions
Q1) Martha is unmarried with one dependent and files as head of household.She had 2014 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?
Q2) Ryan has the following capital gains and losses for 2014: $6,000 STCL,$5,000 28% gain,$2,000 25% gain,and $6,000 0%/15%/20% gain.Which of the following is correct:
A)The net capital gain is composed of $1,000 25% gain and $6,000 0%/15%/20% gain.
B)The net capital gain is composed of $5,000 28% gain and $2,000 0%/15%/20% gain.
C)The net capital gain is composed of $3,000 28% gain,$2,000 25% gain,and $2,000 0%/15%/20% gain.
D)The net capital gain is composed of $1,000 28% gain and $6,000 0%/15%/20% gain. E)None of these.
Q3) If a capital asset is sold at a gain,the holding period is important.
A)True B)False
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Page 18
Chapter 17: Property Transactions: 1231 and Recapture
Provisions
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Q1) For § 1245 recapture to apply,accelerated depreciation must have been taken on the property.
A)True
B)False
Q2) Nonrecaptured § 1231 losses from the six prior tax years may cause current year net § 1231 gain to be treated as ordinary income.
A)True
B)False
Q3) An individual had the following gains and losses during 2014 on property held for the long-term holding period: sale of Orange common stock ($8,000 gain);sale of real property used in the taxpayer's business ($1,800 loss);destruction of real property used in the taxpayer's business by fire ($1,000 loss).Which of the following statements is correct?
A)The fire loss would reduce the real property sale loss.
B)The fire loss would reduce the stock sale gain.
C)The sale of real property loss would be netted against the stock sale gain.
D)The sale of real property is a § 1231 loss.
E)None of these.
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Page 19
Chapter 18: Accounting Periods and Methods
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Sample Questions
Q1) The accrual basis taxpayer sold land for $100,000 on December 31,2014.He did not collect the $100,000 until January 2,2015.The land was held as an investment.
A)If the accrual basis taxpayer's basis in the land was $110,000,the loss would be recognized in 2015.
B)If the accrual basis taxpayer's basis in the land was $60,000,the gain must be reported in 2014.
C)If the accrual basis taxpayer's basis in the land was $60,000,the gain must be reported in 2015,unless the taxpayer elects to not use the installment method.
D)The accrual basis taxpayer must recognize the gain or loss in the year of sale.
E)None of these.
Q2) A C corporation's selection of a tax year,generally,is independent of the tax year of its principal shareholders.
A)True
B)False
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Page 20
Chapter 19: Deferred Compensation
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Q1) A company is denied a deduction for a golden parachute payment to an employee,but not for a golden parachute payment to an independent contractor.
A)True
B)False
Q2) If a NQSO has a readily ascertainable value,an employee recognizes income on the grant date.
A)True
B)False
Q3) Which of the following characteristics is not a characteristic of a cash balance plan?
A)Similar in many aspects to a defined benefit plan.
B)Employee bears the investment risk and rewards.
C)Establishes allocations to individual employee accounts.
D)Payout depends on how much builds up over time in the employee's individual account.
E)None of these.
Q4) What is a highly compensated employee?
Q5) Explain to a small business owner some advantages and disadvantages of a simplified employee pension plan (SEP).
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Chapter 20: Corporations and Partnerships
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Q1) Under certain circumstances,an S corporation can have more than 100 shareholders.
A)True
B)False
Q2) Could be exempt from the AMT.
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
Q3) As of January 1,2014,Crimson Corporation,a calendar year C corporation,has a deficit of $300,000 in accumulated E & P.For 2014,it has current E & P of $100,000,and during the year distributes $120,000 as a dividend to the shareholders.Comment on the following assumptions.
a.The shareholders recognize no dividend income as Crimson still has negative E & P for the year of the distribution [($300,000)beginning deficit + $100,000 current E & P = ($200,000)ending deficit].
b.Crimson's accumulated E & P on January 1,2015,is ($320,000).
Q4) In completing a Schedule M-1 of Form 1120,the Federal income tax per books is added to net income per books to arrive at taxable income.Why?
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