Income Taxation Test Questions
Course Introduction
Income Taxation provides a comprehensive overview of the principles, laws, and regulations governing the taxation of individual and corporate income. The course covers the determination of taxable income, tax rates and brackets, allowable exemptions and deductions, calculation of tax liabilities, and the processes involved in filing tax returns. Students learn to analyze key issues such as tax compliance, tax planning, and the impact of taxation on personal and business financial decisions. Emphasis is placed on understanding pertinent tax codes, current legislation, and the ethical responsibilities of taxpayers and tax practitioners.
Recommended Textbook Fundamentals of Taxation 9th Edition 2016 by Ana Cruz
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Page 2
Chapter 1: Introduction to Taxation, the Income Tax
Formula, and Form 1040ez
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Sample Questions
Q1) Which of the following is correct with respect to Private Letter Rulings?
A) Issued when a taxpayer wants to know the tax treatment of a specific tax situation.
B) Can be relied upon by all taxpayers in a similar tax situation.
C) Provides tax authority only to the taxpayer to whom it is issued.
D)Both issued when a taxpayer wants to know the tax treatment of a specific tax situation and provides tax authority only to the taxpayer to whom it is issued.
Answer: D
Q2) Which of the following would disqualify a taxpayer from filing a Form 1040EZ?
A) Has total taxable income under $100,000.
B) Has no dependents.
C) Be age 68 and not blind.
D)Has interest income less than $1,500.
Answer: C
Q3) All individual income tax returns follow the structure of the simplified tax formula.
A)True
B)False
Answer: True
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Page 3
Chapter
2:
Expanded Tax Formula, Forms 1040a and 1040, and Basic Concepts
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120 Verified Questions
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Sample Questions
Q1) What is the amount of the personal and dependency exemption for 2015?
A) $3,950.
B) $6,300.
C) $4,000.
D)$3,975.
Answer: C
Q2) What is the amount of the tax liability for a head of household person having taxable income of $122,500? All answers should be rounded to the nearest dollar.
A) $30,625.
B) $27,796.
C) $34,300.
D)$24,948.
Answer: D
Q3) Personal exemptions are for the taxpayer and spouse.
A)True
B)False
Answer: True
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Page 4
Chapter 3: Gross Income: Inclusions and Exclusions
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Q1) If Alex, an attorney, agrees to provide legal services to a friend in exchange for the friend agreeing to fix his car, Alex and his friend will have to report income on this transaction at fair market value.
A)True
B)False Answer: True
Q2) If a person sells his or her car to a friend for a note receivable, this person has income that needs to be reported.
A)True
B)False Answer: True
Q3) Joel purchased $125,000 of A and D Corporation's newly issued bonds for $114,500. The bonds carry an interest rate of 8% and mature in 5 years. What is the initial OID on these bonds?
A) $2,000.
B) $2,100.
C) $10,500.
D)$10,000.
Answer: C
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Page 5
Chapter 4: Adjustments for Adjusted Gross Income
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Sample Questions
Q1) Books purchased for courses at the campus bookstore, independent of tuition charges, are eligible expenses for the tuition and fees deduction.
A)True
B)False
Q2) For the interest on a student loan to qualify for the student loan interest deduction, the student must be enrolled full-time.
A)True B)False
Q3) What is an "eligible educational institution" as it relates to the deductibility of student loan interest?
Q4) In order to meet the distance test criteria for qualifying moving expenses, the new job location must be:
A) 100 miles from the old residence.
B) 100 miles from the old job location.
C) at least 50 miles farther than the old residence was from the old job location.
D)at least 50 miles farther than the new residence from the old job location.
Q5) Define each of the following: alimony, child support, and a property settlement.
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Chapter 5: Itemized Deductions
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Sample Questions
Q1) The adjusted gross income limitation on casualty losses is 7.5 percent.
A)True
B)False
Q2) Some charitable contributions are limited to 50% of the taxpayer's AGI, others may be limited to a lower % of AGI. Deductions to which of the following organizations are subject to the 50% limitation on deductible contributions?
A) Churches and conventions of organizations of churches and educational organizations.
B) Hospitals and certain medical research organizations associated with these hospitals.
C) Rotary, Elks, and Lions Clubs who raise money for public causes.
D)Both churches and conventions of organizations of churches and educational organizations and hospitals and certain medical research organizations associated with these hospitals.
Q3) When are travel costs deductible as medical costs? How are medical travel costs calculated?
Q4) How is the medical expense deduction calculated? How is it limited?
Q5) What is qualified residence interest? Are there any limits to the deductibility of qualified residence interest?
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Chapter 6: Self-Employed Business Income
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Sample Questions
Q1) Paola purchased an office building on January 5, 2013, for $450,000. $30,000 of the price was for the land. On September 25, 2015, he sold the office building. What is the cost recovery deduction for 2015 rounded to the nearest dollar?
A) $0.
B) $7,321.
C) $7,628.
D)$10,769.
Q2) Under MACRS, 5-year property includes:
A) Warehouse.
B) Apartment complex.
C) Automobiles and light trucks used in a trade or business.
D)Fruit-bearing trees.
Q3) If an activity is characterized as a hobby, expenses are deductible only to the extent of income from the hobby, subject to certain ordering rules.
A)True
B)False
Q4) Meals and entertainment expenses are limited to 50%.
A)True
B)False
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Chapter 7: Capital Gains and Other Sales of Property
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Q1) The holding period of an asset starts on the date acquired and ends on the day the asset is sold.
A)True
B)False
Q2) Glenn sells a piece of equipment used in his business for $31,500. The equipment was purchased on July 1, 2013, at a cost of $22,000. Glenn has taken $6,600 of depreciation on the equipment. What are the amount and classification of the gain on the sale by Glenn?
A) $6,600 ordinary income under Section 1245 and $9,500 Section 1231 gain.
B) $9,500 Section 1231 gain.
C) $16,100 ordinary income under Section 1245.
D)$16,100 Section 1231 gain.
Q3) If a taxpayer cannot specifically identify which shares of stock were sold, the average cost of all shares held is used as the adjusted basis of the shares that were sold.
A)True
B)False
Q4) Section 1221 assets are any asset used in a trade or business.
A)True
B)False
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Chapter 8: Rental Property, Royalties, Income From
Flow-Through Entities
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Sample Questions
Q1) What is meant by ordinary rental expenses and what criteria must be met to be deductible? Provide some examples of deductible rental expenses. For this question, assume no personal use of the rental property.
Q2) On June 1<sup>st</sup> of the current year, Nancy and Dean purchased a rental beach house for $1,200,000. Of that amount, $800,000 was for the land value. How much depreciation deduction can Nancy and Dean take in the current year? (You may need to refer to the depreciation tables.)
A) $7,880.
B) $14,545.
C) $15,760.
D)$23,640.
Q3) From which of the following flow-through entities is the ordinary income (K-1) considered self-employment income?
A) S corporations
B) Estates
C) Trusts
D)Partnerships
Q4) Define royalty income. What criteria determine which form is used and where the royalties are reported?
Page 10
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Chapter 9: Tax Credits
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Sample Questions
Q1) Andy and Delilah both work and have one qualifying child. They had AGI of $21,000. What is their EIC?
A) $0.
B) $503.
C) $3,359.
D)$5,548.
Q2) Discuss the limitations of the lifetime learning credit. Briefly explain how AGI affects the amount of credit available.
Q3) Briefly explain how to calculate the child and dependent care credit and how the calculation for the credit is affected if the taxpayer's spouse does not work but is a full-time student instead.
Q4) The Affordable Care Act requires all individuals to have health care coverage. A)True B)False
Q5) The maximum child tax credit is $1,000 per child. A)True B)False
Q6) What are the requirements that the taxpayer must meet to receive a tax credit for child and dependent care expenses? Briefly discuss.
Page 11
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Chapter 10: Payroll Taxes
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Sample Questions
Q1) Employers withhold income tax only on tips claimed by employees who are tipped.
A)True
B)False
Q2) Form W-4 is used by employees to indicate the filing status and number of withholding allowances claimed on Form 1040.
A)True
B)False
Q3) Mahmet earned wages of $118,650 during 2015. He is single and claims two withholding allowances. How much will Mahmet's employer withhold in social security taxes for the year?
A) $7,347.00.
B) $7,356.30.
C) $9,027.00.
D)$9,065.25.
Q4) A taxpayer pays 6.2% of taxable wages for both social security and Medicare taxes.
A)True
B)False
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Page 12
Chapter 11: Retirement and Other Tax-Deferred Plans and Annuities:
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Sample Questions
Q1) Employers with 200 or fewer employees who do not have a qualified pension or profit-sharing plan can establish a SIMPLE retirement plan for their employees.
A)True
B)False
Q2) Damian is age 77. He paid $600,000 for a single life annuity contract that will pay him $72,000 per year for life. The tax-free amount of the first $72,000 payment is
A) $18,429.
B) $28,302.
C) $49,587.
D)$53,571.
Q3) Keisha established a Roth IRA in 2005. She contributes the maximum amount each year for the next 20 years and retires when she is 65. At the time of her retirement, the account has a balance of $248,000, which is made up of $100,000 in contributions and the balance in earnings. What amount can Keisha withdraw tax-free from the Roth IRA each year during her retirement?
Q4) A stream of payments can be called an annuity.
A)True B)False
Page 13
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Chapter 12: Special Property Transactions
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Sample Questions
Q1) The installment method cannot be used to report the gain on which of the following assets?
A) Land used in a trade or business.
B) Stock traded on a securities market.
C) Building used in a trade or business.
D)Stock in a privately-held business.
Q2) A barn with an adjusted basis of $125,000 was destroyed by a tornado on March 5, 2015. On May 15, 2015, the insurance company paid the owner $150,000. The owner reinvested $170,000 in another barn. What is the basis of the new barn if non-recognition of gain from an involuntary conversion is elected?
A) $0.
B) $120,000.
C) $145,000.
D)$170,000.
Q3) On December 28, 2015, Misty sold 300 shares of Low Grade, Inc. (a publicly traded company) at a loss of $8,500. On January 5, 2016, thinking that the stock price would rebound, Misty purchased 200 shares of Low Grade, Inc. for $7,000. What is the amount of the recognized loss on the December 28, 2015 sale and what is Misty's basis in the 200 shares she purchased on January 5, 2016?
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Page 14
Chapter 13: At-Riskpassive Activity Loss Rules and the
Individual Alternative Minimum Tax
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Q1) Stuart owns a 20% interest in a partnership (not involved in real estate) in which his at-risk amount was $18,000 at the beginning of the year. The partnership produces a $50,000 loss for the year. What is Stuart's at-risk amount at the end of the year?
A) $0.
B) $8,000.
C) $10,000.
D)($32,000).
Q2) The AMT tax rate for individuals is 20%.
A)True
B)False
Q3) Denise's AGI is $145,000 before considering her single rental property. During the year, Denise had a rental loss of $13,000. What is Denise's AGI after considering the rental loss?
A) $122,500.
B) $132,000.
C) $142,500.
D)$145,000.
Q4) Identify factors that increase or decrease the at-risk amount.
Page 15
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Chapter 14: Partnership Taxation
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Q1) The term "step-into-the-shoes" means that the partnership starts a new depreciation period for any depreciable asset contributed to the partnership.
A)True
B)False
Q2) Upon the sale of a partnership interest, a partner must recognize ordinary income if the partnership has substantially appreciated inventory or unrealized receivables.
A)True
B)False
Q3) In 2014, Angel contributes land to a partnership with a basis of $12,000 and a FMV of $22,000. In 2015, when the FMV of the land is $28,000, the partnership distributes the land to Shelia, another partner. What is the basis of the land to Shelia assuming she has a $40,000 basis in her partnership interest?
A) $0.
B) $12,000.
C) $22,000.
D)$28,000.
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16
Chapter 15: Corporate Taxation
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Sample Questions
Q1) Which of the following will disqualify a corporation from electing Subchapter S status?
A) The corporation has 80 shareholders.
B) The corporation has one class of stock.
C) The election form is signed by 80% of the shareholders.
D)All shareholders are U.S. citizens except for 10% who are resident aliens.
Q2) Which of the following items decrease basis for a stockholder of a Subchapter S corporation?
A) Capital contributions.
B) Charitable contributions.
C) Loans from the shareholder to the corporation.
D)Net income.
Q3) Orange Corporation was formed in 2013. In that year it had a net capital loss of $2,000. In 2014, it had a net capital gain of $5,000. In 2015, the company reported a net capital loss of $9,000. What is the amount of capital loss carryforward to 2016, if any?
A) $0.
B) $4,000.
C) $6,000.
D)$9,000.
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Page 17