Income Tax Planning Exam Preparation Guide
Course Introduction
Income Tax Planning is a comprehensive course designed to equip students with the foundational principles and practical strategies for effective tax management. The course covers the structure of income tax laws, fundamental concepts of gross income, deductions, exemptions, and credits, as well as tax planning techniques for individuals and small businesses. Students analyze real-world scenarios to identify tax-saving opportunities while ensuring compliance with relevant legislation and ethical considerations. Emphasis is placed on recent updates in tax codes, the implications of tax planning decisions, and integrating tax planning into broader financial planning objectives.
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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Sample Questions
Q1) Contributions to charitable organizations are deductible.
A)Economic considerations
B)Social considerations
C)Equity considerations
Answer: B
Q2) Late filing and statute limitations (deficiency situations)
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: A
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Chapter 2: Working With the Tax Law
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Q1) Tax planning usually involves a completed transaction.
A)True
B)False Answer: False
Q2) The primary purpose of effective tax planning is to reduce or defer the tax in the current tax year.
A)True
B)False
Answer: False
Q3) Which items tell taxpayers the IRS's reaction to certain court decisions?
A)Notices
B)Revenue Procedures
C)Revenue Rulings
D)Actions on Decisions
E)Legislative Regulations
Answer: D
Q4) A taxpayer can obtain a jury trial in the U.S.Tax Court.
A)True
B)False
Answer: False
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Chapter 3: Tax Formula and Tax Determination;an
Overview of Property Transactions
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Sample Questions
Q1) Kyle,whose wife died in December 2011,filed a joint tax return for 2011.He did not remarry,but has continued to maintain his home in which his two dependent children live.What is Kyle's filing status as to 2014?
A)Head of household
B)Surviving spouse
C)Single
D)Married filing separately
E)None of these
Answer: A
Q2) Many taxpayers who previously itemized will start claiming the standard deduction when they purchase a home.
A)True
B)False
Answer: False
Q3) Married taxpayers who file a joint return cannot later (i.e. ,after the filing due date)switch to separate returns for that year.
A)True
B)False
Answer: True
Page 5
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Chapter 4: Gross Income: Concepts and Inclusions
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Q1) The fact that the accounting method the taxpayer uses to measure income is consistent with GAAP does not assure that the method will be acceptable for tax purposes.
A)True
B)False
Q2) As a general rule:
A)Only I and II are true.
B)Only III and IV are true.
C)I,II,and III are true,but IV is false.
D)I,II,III,and IV are true.
E)None of these is true.
Q3) The constructive receipt doctrine requires that income must be recognized when it is made available to the cash basis taxpayer,although it has not been actually received.The constructive receipt doctrine does not apply to accrual basis taxpayers.
A)True
B)False
Q4) 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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Sample Questions
Q1) Sharon had some insider information about a corporate takeover.She unintentionally informed a friend,who immediately bought the stock in the target corporation.The takeover occurred and the friend made a substantial profit from buying and selling the stock.The friend told Sharon about his stock dealings,and gave her a pearl necklace because she "made it all possible." The necklace was worth $10,000,but she already owned more jewelry than she desired.
A)The necklace is a nontaxable gift received by Sharon because the friend was not legally required to make the gift.
B)The value of the necklace is not included in Sharon's gross income unless she sells it.
C)The value of the necklace is not included in Sharon's gross income because passing the information was an illegal act and the SEC can confiscate the necklace.
D)The value of the necklace must be included in Sharon's gross income for the tax year it was received by her.
E)None of these.
Q2) 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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Chapter 6: Deductions and Losses: in General
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Sample Questions
Q1) If a taxpayer can satisfy the three-out-of-five year presumption test associated with hobby losses,then expenses from the activity can be deducted in excess of the gross income from the activity.
A)True
B)False
Q2) Bruce owns several sole proprietorships.Must Bruce use the same accounting method for each of these businesses?
Q3) During 2013,the first year of operations,Silver,Inc. ,pays salaries of $175,000.At the end of the year,employees have earned salaries of $20,000,which are not paid by Silver until early in 2014.What is the amount of the deduction for salary expense?
A)If Silver uses the cash method,$175,000 in 2013 and $0 in 2014.
B)If Silver uses the cash method,$0 in 2013 and $195,000 in 2014.
C)If Silver uses the accrual method,$175,000 in 2013 and $20,000 in 2014.
D)If Silver uses the accrual method,$195,000 in 2013 and $0 in 2014.
E)None of these is correct.
Q4) Can a trade or business expense be deductible if it is necessary but not ordinary?
Q5) What losses are deductible by an individual taxpayer?
Q6) Are there any circumstances under which lobbying expenditures are deductible?
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Chapter 7: Deductions and Losses: Certain Business
Expenses and Losses
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Sample Questions
Q1) Sally is an employee of Blue Corporation.Last year,she purchased a very expensive computer with her own funds.She used the computer 100% for business purposes.During the current year,the computer was completely destroyed in a fire.Blue Corporation did not reimburse her for her loss.Discuss whether Sally's loss will create or increase Sally's net operating loss.
Q2) 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
Q3) If an election is made to defer deduction of research expenditures,the amortization period is based on the expected life of the research project if less than 60 months. A)True
B)False
Q4) A nonbusiness bad debt can offset an unlimited amount of long-term capital gain. A)True
B)False
Q5) Discuss the tax treatment of non-reimbursed losses of an employee in connection with a trade or business.
Page 9
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Chapter 8: Depreciation, cost Recovery, amortization, and Depletion
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Sample Questions
Q1) Jim acquires a new seven-year class asset on September 20,2013,for $80,000.He placed the asset in service on October 5,2013.He does not elect to expense any of the asset under § 179 or elect straightline,cost recovery.He takes additional first-year depreciation.He sells the asset on August 25,2014.This is the only asset he acquires in 2013.Determine Jim's cost recovery in 2013 and 2014.
Q2) The maximum cost recovery method for all personal property under MACRS is 150% declining balance.
A)True
B)False
Q3) On July 17,2014,Kevin places in service a used automobile that cost $25,000.The car is used 80% for business and 20% for personal use.In 2015,he used the automobile 40% for business and 60% for personal use.Determine the cost recovery recapture for 2015.
A)$0
B)$528
C)$2,000
D)$2,500
E)None of these
Q4) Discuss the reason for the inclusion amount with respect to leased automobiles.
Page 10
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Chapter 9: Deductions: Employee and
Self-Employed-Related Expenses
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Sample Questions
Q1) A taxpayer who lives and works in Tulsa travels to Buffalo for five days.If three days are spent on business and two days are spent on visiting relatives,only 60% of the airfare is deductible.
A)True
B)False
Q2) If a business retains someone to provide services,that person may either be an employee or be self-employed (i.e. ,independent contractor).
a.What are the tax advantages to the business of having the service provider classified as self-employed?
b.What are the advantages and disadvantages to the service provider of self-employed status?
Q3) After she finishes working at her main job,Ann returns home,has dinner,then drives to her second job.Ann may deduct the mileage between her first and second job.
A)True
B)False
Q4) Sue does not work for other parties.
A)Indicates employee status.
B)Indicates independent contractor status.
Page 11
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Chapter 10: Deductions and Losses: Certain Itemized
Deductions
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Sample Questions
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,Allison drove 800 miles to volunteer in a project sponsored by a qualified charitable organization in Utah.In addition,she spent $250 for meals while away from home.In total,Allison may take a charitable contribution deduction of $112 (800 miles × $.14).
A)True
B)False
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Page 12
Chapter 11: Investor Losses
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Sample Questions
Q1) Art's atrisk amount in a passive activity was $60,000 at the beginning of 2013.His loss from the activity in 2013 is $80,000,and he had no passive activity income during the year.Art had $20,000 of passive income from the activity in 2014.Under the passive loss rules,Art's suspended loss at the end of 2014 is:
A)$15,000.
B)$20,000.
C)$45,000.
D)$60,000.
E)None of these.
Q2) When a taxpayer disposes of a passive activity by gift,what happens to any unused passive losses?
Q3) In the current year,Lucile,who has AGI of $70,000 before considering rental activities,is active in three separate real estate rental activities and is in the 28% tax bracket.She had $15,000 of losses from Activity A,$25,000 of losses from Activity B,and income of $20,000 from Activity C.She also had $3,100 of tax credits from Activity A.Calculate her deductions and credits currently allowed and the suspended losses and credits.
Q4) Describe the types of activities and taxpayers that are subject to the at-risk rules.
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Page 13
Chapter 12: Alternative Minimum Tax
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Sample Questions
Q1) Keosha acquires 10-year personal property to use in her business in 2014 and takes the maximum cost recovery deduction for regular income tax purposes.As a result of this,Keosha will have a positive AMT adjustment in 2014.
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) Unless circulation expenditures are amortized over a three-year period for regular income tax purposes,there will be an AMT adjustment.
A)True
B)False
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Chapter 13: Tax Credits and Payment Procedures
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Q1) If an employee holds two jobs during the year,an overwithholding of FICA tax will result.
A)True
B)False
Q2) Jermaine and Kesha are married,file a joint tax return,have AGI of $82,500,and have two children.Devona is beginning her freshman year at State University during Fall 2014,and Arethia is beginning her senior year at Northeast University during Fall 2014 after having completed her junior year during the spring of that year.Both Devona and Arethia are claimed as dependents on their parents' tax return.Devona's qualifying tuition expenses and fees total $4,000 for the fall semester,while Arethia's qualifying tuition expenses and fees total $6,200 for each semester during 2014.Full payment is made for the tuition and related expenses for both children during each semester.The American Opportunity credit available to Jermaine and Kesha for 2014 is:
A)$2,500.
B)$3,000.
C)$5,000.
D)$6,000.
E)None of these.
Q3) Describe the withholding requirements applicable to employers.
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Page 15
Chapter 14: Property Transactions: Determination of Gain or
Loss and Basis Considerations
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Sample Questions
Q1) Gift property (disregarding any adjustment for gift tax paid by the donor):
A)Has no basis to the donee because he or she did not pay anything for the property.
B)Has the same basis to the donee as the donor's adjusted basis if the donee disposes of the property at a gain.
C)Has the same basis to the donee as the donor's adjusted basis if the donee disposes of the property at a loss,and the fair market value on the date of gift was less than the donor's adjusted basis.
D)Has no basis to the donee if the fair market value on the date of gift is less than the donor's adjusted basis.
E)None of these.
Q2) 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.
Q3) What is the easiest way for a taxpayer who is going to sell property that has declined in value to avoid the § 267 loss disallowance provision?
Q4) What is the general formula for calculating the adjusted basis of property?
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Chapter 15: Property Transactions: Nontaxable Exchanges
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Q1) An exchange of two items of personal property (personalty)that belong to different general business asset classes qualifies for nonrecognition under § 1031 as long as both properties are used in the taxpayer's trade or business.
A)True
B)False
Q2) Cole exchanges an asset (adjusted basis of $15,000;fair market value of $25,000)for another asset (fair market value of $19,000).In addition,he receives cash of $6,000.If the exchange qualifies as a like-kind exchange,his recognized gain is $6,000 and his adjusted basis for the property received is $21,000 ($15,000 + $6,000 recognized gain).
A)True
B)False
Q3) Under what circumstances may a partial § 121 exclusion be available even though the taxpayer has used the § 121 exclusion within the two-year period preceding the sale of the current residence?
Q4) Under what circumstance is there recognition of some or all of the realized gain associated with the giving of boot by the taxpayer in a like-kind exchange?
Q5) Define an involuntary conversion.
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Page 17
Chapter 16: Property Transactions: Capital Gains and Losses
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Q1) Since the Code section that defines "capital asset" says what is not a capital asset,other Code sections have to help determine what is and what is not a capital gain or loss.
A)True
B)False
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.
Q3) When an individual taxpayer has a net long-term capital gain that includes both 28% gain and 0%/15%/20% gain,which of these gains will be taxed first when the alternative tax on net long-term capital gain method is used and what difference does it make?
Q4) Short-term capital gain is eligible for a special tax rate only when it exceeds long-term capital gain.
A)True
B)False
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Chapter 17: Property Transactions: 1231 and Recapture
Provisions
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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 these.
Q2) Rental use depreciable machinery held more than 12 months is an example of a § 1231 asset.
A)True
B)False
Q3) A business machine purchased April 10,2013,for $62,000 was fully depreciated in 2013 using § 179 immediate expensing.On August 15,2014,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 22,2014,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?
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Page 19
Chapter 18: Accounting Periods and Methods
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Q1) Which of the following statements regarding a 52-53 week tax year is not correct?
A)Some tax years will include more than 366 calendar days.
B)Whether the particular tax year includes 52 weeks or 53 weeks is not elective.
C)The year-end must be the same day of the week in all years.
D)All of the above are correct.
E)None of the above is correct.
Q2) Crow Corporation has used the LIFO inventory method for the past 10 years.During that time,the prices Crow pays for the inventory have increased by 50%.Its inventory value when it first adopted LIFO was $5,000,000.The company began using a just-in-time inventory system the same year it adopted LIFO,and although sales have increased,the quantities of goods on hand at year end has not changed in the past ten years.The corporation's marginal tax rate has been 35% in all of the years.As a result of the LIFO election:
A)The company has deferred $5,000,000 of income tax.
B)The company has deferred $1,750,000 ($5,000,000 × .35)of income tax.
C)The LIFO election did not defer any income tax because the quantity of goods on hand has not changed.
D)The company has deferred $875,000 [(.50)($5,000,000)(.35)] of income tax.
E)None of these.
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Chapter 19: Deferred Compensation
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Q1) Income is taxed if a taxpayer's control over the amount earned is subject to substantial restrictions.
A)True
B)False
Q2) What is a defined contribution plan?
Q3) Heather,age 48,is the sole remaining participant of a money purchase pension plan.The plan is terminated and a $240,000 taxable distribution is made to Heather.The early distribution penalty tax,if any,for 2014 is:
A)$0.
B)$12,000.
C)$24,000.
D)$30,000.
E)None of these.
Q4) A defined benefit plan must reduce the $210,000 (in 2014)maximum benefits payable by one-tenth for each year of participation under 10 years that an employee has performed.
A)True
B)False
Q5) Compare a § 401(k)plan with an IRA.
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Chapter 20: Corporations and Partnerships
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Q1) Concept of itemized deductions is not relevant.
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
Q2) If property contributed to a partnership is subject to a liability (assumed by the partnership),gain is recognized to the contributing partner to the extent of the liability.
A)True
B)False
Q3) Once taxable income reaches a certain level,the benefits of the lower tax brackets phase out.
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) Guaranteed payments are deductible by the partnership and are taxable to the partner receiving the payments.
A)True
B)False
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