Income Tax Planning Exam Preparation Guide
Course Introduction
Income Tax Planning is a specialized course designed to provide students with a comprehensive understanding of federal income tax laws and effective tax planning strategies. The course covers key concepts such as gross income, deductions, credits, tax rates, and tax compliance for individuals, partnerships, and corporations. Students will learn to identify tax-saving opportunities, assess the tax implications of financial and business decisions, and apply planning techniques to minimize tax liabilities. Through case studies and practical examples, the course emphasizes ethical considerations, recent tax law changes, and the development of effective tax planning strategies aligned with current regulations.
Recommended Textbook
South Western Federal Taxation 2014 Individual Income Taxes 37th Edition by William Hoffman
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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) Scott files his tax return 65 days after the due date.Along with the return,Scott remits a check for $50,000 which is the balance of the tax owed.Disregarding the interest element,Scott's total failure to file and to pay penalties are:
A) $8,250.
B) $7,500.
C) $6,000.
D) $750.
E) None of the above.
Answer: B
Q3) The Federal excise tax on cigarettes is an example of a proportional tax.
A)True
B)False
Answer: True
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Chapter 2: Working With the Tax Law
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Q1) Subtitle A of the Internal Revenue Code covers which of the following taxes?
A) Income taxes.
B) Estate and gift taxes.
C) Excise taxes.
D) Employment taxes.
E) All of the above.
Answer: A
Q2) Federal tax legislation generally originates in the Senate Finance Committee.
A)True
B)False
Answer: False
Q3) The test for whether a child qualifies for dependency status is first conducted under the qualified child requirement.
A)True
B)False
Answer: True
Q4) Technical Advice Memoranda may not be cited as precedents by taxpayers.
A)True
B)False
Answer: True
Page 4
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Chapter 3: Tax Formula and Tax Determination; an
Overview of Property Transactions
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Q1) List at least three exceptions to the application of the kiddie tax.
Answer: · Unearned income of $1,900 or less.
· Age 19 (or age 24 if a full-time student)or older.
· Both parents deceased.
· Earned income in excess of 50% of support.
· Married and filing a joint return with spouse.
Q2) Which,if any,of the following is a deduction for AGI?
A) Alimony payments.
B) Child support payments.
C) Funeral expenses.
D) Loss on the sale of a personal residence.
E) Interest on home mortgage.
Answer: A
Q3) Dan and Donna are husband and wife and file separate returns for the year.If Dan itemizes his deductions from AGI,Donna still can claim the standard deduction.
A)True
B)False
Answer: False
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Chapter 4: Gross Income: Concepts and Inclusions
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Q1) In the case of a zero interest below-market loan by a corporation to a shareholder-employee,what difference does it make to the corporation and the shareholder whether the loan is characterized as a corporation's loan to its shareholder or a corporation's loan to its employee?
Q2) On January 1,Father (Dave)loaned Daughter (Debra)$100,000 to purchase a new car and to pay off college loans.There were no other loans outstanding between Dave and Debra.The relevant Federal rate on interest was 6 percent.The loan was outstanding for the entire year.
A) If Debra has $15,000 of investment income, Dave must recognize $6,090 of imputed interest income.
B) Dave must recognize $6,090 of imputed interest income regardless of the amount of Debra's investment income.
C) Debra must recognize $6,090 of imputed interest income.
D) Debra must recognize $6,090 of imputed interest income if Dave has at least $6,090 of investment income.
E) None of the above.
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Page 6
Chapter 5: Gross Income: Exclusions
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Q1) The Royal Motor Company manufactures automobiles.Employees of the company can buy a new automobile for Royal's cost plus 2%.The automobiles are sold to dealers at cost plus 20%.Generally,employees of Local Dealer,Inc.,are allowed to buy a new automobile from the company at the dealer's cost.Officers of Local Dealer are allowed to use a company vehicle (for personal use)at no cost.
A) None of the employees who take advantage of the fringe benefits described above are required to recognize income.
B) Employees of Royal are required to recognize as gross income 18% (20% - 2%) of the cost of the automobile purchased.
C) Employees of Local Dealer are required to recognize as gross income the gross profit Local Dealer loses as a result of the sale to the employees.
D) Local Dealer officers must recognize gross income from the personal use of the company vehicles.
E) None of the above.
Q2) If a tax-exempt bond will yield approximately .65 (1 - .35)times the yield on a taxable bond of equal risk,who benefits from the tax exemption: the Federal government,the state and local governments who issue the bonds,or the investors?
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Chapter 6: Deductions and Losses: in General
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Q1) The period in which an accrual basis taxpayer can deduct an expense is determined by applying the economic performance and all events tests.
A)True
B)False
Q2) 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
Q3) Are there any exceptions to the rule that personal expenditures cannot be deducted?
Q4) Under what circumstance can a bribe be deducted?
Q5) Beulah's personal residence has an adjusted basis of $450,000 and a fair market value of $390,000.Beulah converts the property to rental use on November 1,2012.The vacation home rules that limit the amount of the deduction to the rental income will apply and the adjusted basis for depreciation is $390,000.
A)True
B)False
Q6) Are all personal expenses disallowed as deductions?
Page 8
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Chapter 7: Deductions and Losses: Certain Business
Expenses and Losses
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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 amount of a farming loss cannot exceed the amount of the taxpayer's NOL for the taxable year.
A)True
B)False
Q3) Discuss the effect of alimony in computing a net operating loss.
Q4) What are the three methods of handling research and experimental expenditures incurred in a trade or business? Under what circumstances would you choose each?
Page 9
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Chapter 8: Depreciation, cost Recovery, amortization, and Depletion
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Q1) George purchases used seven-year class property at a cost of $200,000 on April 20,2012.Determine George's cost recovery deduction for 2012 for alternative minimum tax purposes,assuming George does not elect § 179.
A) $2,500.
B) $10,000.
C) $14,280.
D) $28,580.
E) None of the above.
Q2) Cost depletion is determined by multiplying the depletion cost per unit by the number of units sold.
A)True
B)False
Q3) Residential rental real estate includes property where 80% or more of the net rental revenues are from nontransient dwelling units.
A)True
B)False
Q4) Goodwill associated with the acquisition of a business cannot be amortized.
A)True
B)False
10
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Chapter 9: Deductions: Employee and
Self-Employed-Related Expenses
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Q1) Meg teaches the fifth grade at a local school.During the year,she spends $1,200 for school supplies for use in her classroom.On her income tax return,some of this expense is not reported and the balance is deducted in two different places.Explain what has probably happened.
Q2) When is a taxpayer's work assignment in a new locale temporary? Permanent? What difference does it make?
Q3) Qualified moving expenses of an employee that are not reimbursed are a deduction for AGI.
A)True
B)False
Q4) Under the actual cost method,which,if any,of the following expenses will not be allowed?
A) Car registration fees.
B) Auto insurance.
C) Interest expense on a car loan (taxpayer is an employee).
D) Dues to auto clubs.
E) None of the above.
Q5) In terms of income tax treatment,what is the difference between common law and statutory employees?
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Chapter 10: Deductions and Losses: Certain Itemized
Deductions
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Q1) Leona borrows $100,000 from First National Bank and uses the proceeds to purchase City of Houston bonds.The interest Leona pays on this loan is deductible as investment interest subject to the investment interest limits.
A)True B)False
Q2) Taxes assessed for local benefits,such as a new sidewalk,are not deductible as real property taxes.
A)True B)False
Q3) Warren sold his personal residence to Alicia on July 1,2012.He had paid $4,200 in real property taxes on March 1,2012,the due date for property taxes for 2012.Warren must increase the amount realized for his property by the portion of the $4,200 allocable to Alicia.
A)True B)False
Q4) Judy paid $40 for Girl Scout cookies and $40 for Boy Scout popcorn.Judy may claim an $80 charitable contribution deduction.
A)True B)False
Page 12
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Chapter 11: Investor Losses
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Q1) Ned,a college professor,owns a separate business (not real estate)in which he participates in the current year.He has one employee who works part-time in the business.
A) If Ned participates for 120 hours and the employee participates for 120 hours during the year, Ned does not qualify as a material participant.
B) If Ned participates for 95 hours and the employee participates for 5 hours during the year, Ned probably does not qualify as material participant.
C) If Ned participates for 500 hours and the employee participates for 520 hours during the year, Ned qualifies as material participant.
D) If Ned participates for 600 hours and the employee participates for 2,000 hours during the year, Ned qualifies as a material participant.
E) None of the above.
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
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Chapter 12: Alternative Minimum Tax
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Q1) Kay had percentage depletion of $119,000 for the current year for regular income tax purposes.Cost depletion was $60,000.Her basis in the property was $90,000 at the beginning of the current year.Kay must treat the percentage depletion deducted in excess of cost depletion,or $59,000,as a tax preference in computing AMTI.
A)True
B)False
Q2) Ashlyn is subject to the AMT in 2012.She calculates her AMT base to be $200,000.What are the AMT rates that apply for Ashlyn?
Q3) Why is there no AMT adjustment for charitable contributions?
Q4) In 2012,Ben exercised an incentive stock option (ISO),acquiring stock with a fair market value of $190,000 for $170,000.His AMT basis for the stock is $170,000,his regular income tax basis for the stock is $170,000,and his AMT adjustment is $0 ($170,000$170,000).
A)True
B)False
Q5) What itemized deductions are allowed for both regular income tax purposes and for AMT purposes?
Q6) Discuss the tax year in which an AMT adjustment is first required for an ISO.
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Chapter 13: Tax Credits and Payment Procedures
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Q1) Child and dependent care expenses do not include amounts paid for general household services.
A)True
B)False
Q2) In 2011,Juan and Juanita incur $9,800 in legal and adoption fees directly related to the adoption of an infant son born in a nearby state.Over the next year,they incur another $4,500 of adoption expenses.The adoption becomes final in 2012.Which of the following choices properly reflects the amounts and years in which the adoption expenses credit is available. 2011 2012
A) $9,800 $ 4,500
B) None $12,650
C) None $14,300
D) $9,800 $ 2,850
E) None of the above.
Q3) If a taxpayer chooses to claim a foreign tax credit,part of the foreign income taxes paid can also be claimed as a deduction.
A)True
B)False
Q4) 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) Since wash sales do not apply to gains,it may be desirable to engage in this type of transaction before the end of the tax year.
A)True
B)False
Q2) The basis for gain and loss of personal use property converted to business use is the lower of the adjusted basis or the fair market value on the date of conversion.
A)True
B)False
Q3) What is the difference between the depreciation (or cost recovery)allowed and the depreciation (or cost recovery)allowable and what effect does each have on the adjusted basis of property?
Q4) This year,Fran receives a birthday gift of stock worth $75,000 from her aunt.The aunt has owned the stock (adjusted basis $50,000)for 10 years and pays gift tax of $27,000 on the transfer.Fran's basis in the stock is $75,000-the lesser of $77,000 ($50,000 + $27,000)or $75,000.
A)True
B)False
Q5) Define a bargain purchase of property and discuss the related tax consequences.
Page 16
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Chapter 15: Property Transactions: Nontaxable Exchanges
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Q1) In order to qualify for like-kind exchange treatment under § 1031,which of the following requirements must be satisfied?
A) The form of the transaction is an exchange.
B) Both the property transferred and the property received are held either for productive use in a trade or business or for investment.
C) The exchange must be completed by the end of the second tax year following the tax year in which the taxpayer relinquishes his or her like-kind property.
D) Only a. and b.
E) a., b., and c.
Q2) Libby's principal residence is destroyed by a tornado.She is single and her realized gain is $360,000.Is it possible for Libby's recognized gain to be $0?
Q3) Janet,age 68,sells her principal residence for $500,000.She purchased it twenty-two years ago for $150,000.Selling expenses are $30,000 and repair expenses to get the house in a marketable condition to sell are $15,000.Janet's objective is to minimize the taxes she must pay associated with the sale.Calculate her recognized gain.
Q4) Define qualified small business stock under § 1045.
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Chapter 16: Property Transactions: Capital Gains and Losses
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Q1) If a capital asset is sold at a loss,the holding period is important.
A)True
B)False
Q2) Samuel,head of household with two dependents,has 2012 wages of $26,000,paid alimony of $3,000,has taxable interest income of $2,000,and a $12,000 0%/15% net long-term capital gain.Samuel uses the standard deduction and is age 38.What is his 2012 taxable income and the tax on the taxable income?
Q3) Which of the following events causes the purchaser of an option to add the cost of the option to the basis of the property to which the option relates?
A) The option is exercised.
B) The option is sold.
C) The option lapses.
D) The option is rescinded.
E) None of the above.
Q4) 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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Q1) Which of the following events could result in § 1250 depreciation recapture?
A) Sale at a loss of a depreciable business building held more than one year.
B) Sale at a gain of a business building held more than a year on which straight-line depreciation was taken.
C) Sale at a gain of a depreciable business building held for 9 months.
D) Sale at a gain of depreciable equipment held more than a year on which straight-line depreciation was taken.
E) None of the above.
Q2) Which of the following real property could be subject to § 1250 depreciation recapture?
A) Leasehold improvements placed in service in 2012 on which § 168(k) additional first-year depreciation was taken.
B) A building acquired in 1997 on which straight-line depreciation was taken.
C) Equipment on which accelerated depreciation was taken.
D) Land which was not depreciated.
E) a. and b.
Q3) Why is it generally better to have a net § 1231 gain year followed by a net § 1231 loss year rather than a net § 1231 loss year followed by a net § 1231 gain year?
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Chapter 18: Accounting Periods and Methods
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Q1) A partnership cannot elect to use a tax year other than a calendar year merely because the partnership's CPA is too busy to prepare a calendar year return.
A)True
B)False
Q2) Todd,a CPA,sold land for $300,000 cash on the date of sale plus a note for $500,000 due in one year.The interest rate on the note was equal to the Federal rate.The fair market value of the note was $400,000.Todd's basis in the land was $80,000.
A) If Todd uses the cash basis to report the income from his practice, he cannot use the installment method to report the gain on the sale of the land.
B) If Todd uses the accrual basis to report the income from his practice, he cannot use the installment method to report the gain from the sale of the land.
C) If Todd uses the installment method to report the gain, the contract price is $800,000.
D) If Todd does not use the installment method, his gain in the year of sale is $620,000 ($700,000 - $80,000).
E) None of the above.
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Chapter 19: Deferred Compensation
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Q1) Dianna participates in a defined benefit plan that uses a fixed formula providing an employee with a benefit of 2% for each year of service,up to a maximum of 30 years.The total percentage accumulated before retirement is applied to the average of her three highest years of salary.Dianna works for 21 years,and the average of her three highest years of salary is $290,000.Calculate the amount of retirement benefits she will receive each year.
A) $0.
B) $102,800.
C) $110,000.
D) $250,000.
E) None of the above.
Q2) What is a defined contribution plan?
Q3) Low- and middle-income taxpayers may make nondeductible contributions up to $4,000 per child per year to a Coverdell Education Savings Account (CESA).
A)True
B)False
Q4) In a profit sharing plan,a separate account is maintained for each participant.
A)True
B)False
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Chapter 20: Corporations and Partnerships
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Q1) Because both are taxed at rates applicable to net long-term capital gain,it does not matter whether a stock redemption is treated as a sale or exchange or as a dividend.
A)True
B)False
Q2) Pete contributes land (basis of $80,000; fair market value of $300,000)for a 25% interest in a partnership.The land is subject to a mortgage of $40,000 which the partnership assumes.As a result of the transfer,Pete:
A) Has a basis in the partnership of $50,000.
B) Has a basis in the partnership of $70,000.
C) Has a basis in the partnership of $270,000.
D) Must recognize a gain of $30,000.
E) None of the above.
Q3) What causes a partner's basis in a partnership interest to fluctuate?
Q4) Even though partnerships are not subject to income tax,they are required to file income tax returns.
A)True
B)False
Q5) When might an NOL carryback to prior years be ill-advised?
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