Individual Income Tax Solved Exam Questions
Course Introduction
This course provides an in-depth exploration of federal income taxation as it applies to individuals. Students will learn the fundamental concepts of gross income, deductions, exemptions, and tax credits, with a focus on understanding the statutes, regulations, and court cases that shape individual tax obligations. The course covers the preparation of individual tax returns, the tax treatment of various forms of income, and the impact of personal financial decisions on tax liability. By analyzing real-world scenarios and applying relevant tax principles, students gain practical skills necessary for tax planning and compliance.
Recommended Textbook
McGraw Hills Essentials of Federal Taxation 2019 Edition 10th Edition by Spilker Brian C
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Chapter 1: An Introduction to Tax
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Q1) Nick and Jessica are married taxpayers that file married filing separately.Jessica earns $250,000 of taxable income per year.Nick earns $130,000 of taxable income per year.Using the appropriate U.S.tax rate schedule for year 2018,how much tax does each of them pay? What are their marginal and average tax rates? How much tax would they save,if any,if they filed jointly? (Round the tax rates to 2 decimal places,e.g.,.12345 as 12.35%)(Use tax rate schedule)
Answer: Nick would owe $25,489.50 and Jessica would owe $63,189.50 computed as follows:Nick:$25,489.50 = $14,089.50 + (24% × ($130,000 $82,500)). Jessica:$63,189.50 = $45,689.50 + (35% × ($250,000 $200,000)). Nick's average tax rate is 19.61%. Average Tax Rate = Total Tax/Taxable Income = $25,489.50/$130,000 = 19.61% Jessica's average tax rate is 25.28%. Average Tax Rate = Total Tax/Taxable Income = $63,189.50/$250,000 = 25.28% Nick is in the 24% tax rate bracket,and Jessica is in the 35% tax rate bracket.Thus,their marginal tax rates are 24% and 35%,respectively,on small increases in income and deductions. If Nick and Jessica filed jointly,they would owe $84,979 in tax. $84,979 = $64,179+ (32% × ($380,000 $315,000)). Thus,filing jointly would save them $3,700 (($25,489.50 + $63,189.50) $84,979).
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Chapter 2: Tax Compliance, the Irs, and Tax Authorities
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Q1) Kim has decided to litigate a tax issue with the IRS.Describe the trial level courts that Kim may use to litigate the case.
Answer: There are three trial level courts that hear federal tax cases; The U.S.Tax Court,The U.S.District Court,and the U.S.Court of Federal Claims.The U.S.District Court is the only court that provides for a jury trial; the U.S.Tax Court is the only court that allows tax cases to be heard before the taxpayer pays the disputed liability and the only court with a small claims division (hearing claims involving disputed liabilities of $50,000 or less); the U.S.Tax Court judges are tax experts,whereas the U.S.District Court and U.S.Court of Federal Claims judges are generalists.Both the U.S.Tax Court and local U.S.District Court cases appeal to the specific Circuit Court based on the taxpayer's residence.In contrast,all U.S.Court of Federal Claims cases appeal to the U.S.Circuit Court of Appeals for the Federal Circuit.
Q2) If April 15 falls on a Saturday,the due date for individual tax returns will be on Monday,April 17 .
A)True
B)False
Answer: True
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Page 4
Chapter 3: Tax Planning Strategies and Related Limitations
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Q1) Assume that Larry's marginal tax rate is 25%.If corporate bonds pay 10% interest,what interest rate would a municipal bond have to offer for Larry to be indifferent between the two bonds?
A)25.00%.
B)12.50%.
C)10.00%.
D)7.50%.
E)None of the choices are correct.
Answer: D
Q2) The time value of money suggests that $1 in one year from now is worth less than $1 today.
A)True
B)False
Answer: True
Q3) The downside of tax avoidance includes the potential of stiff monetary penalties and imprisonment.
A)True
B)False
Answer: False
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Page 5
Chapter 4: Individual Income Tax Overview dependents and
Filing Status
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Sample Questions
Q1) Itemized deductions and the standard deduction are deductions from AGI but the deduction for qualified business income is a deduction for AGI.
A)True
B)False
Q2) For purposes of determining filing status,which of the following is not a requirement for a married taxpayer to be treated as unmarried at the end of the year?
A)The taxpayer claims a child as a dependent.
B)The taxpayer pays more than half the costs of maintaining his or her home for the entire year and the home is the principal residence for a dependent qualifying child for more than half the year.
C)The taxpayer files a tax return separate from the other spouse.
D)The spouse does not live in the taxpayer's home at all during the year.
Q3) From AGI deductions are commonly referred to as deductions "below the line."
A)True
B)False
Q4) For AGI deductions are commonly referred to as deductions "below the line."
A)True
B)False
Page 6
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Chapter 5: Gross Income and Exclusions
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Q1) The all-inclusive definition of income means that gross income is defined very broadly.
A)True B)False
Q2) Bad Brad received 20 NQOs (each option gives him the right to purchase 30 shares of stock for $10 per share)from his employer.At the time he started working the stock price was $11 per share.Now that the share price is $25 per share,he exercises all of the options.Two years later Bad Brad sells the stock for $27 per share,what is Bad Brad's basis in his stock for purposes of calculating the gain or loss?
A)$6,000.
B)$9,000.
C)$15,000.
D)$16,200.
Q3) Retired taxpayers over 59½ years of age at the end of the year must receive minimum distributions from defined contribution plans or they are subject to a penalty.
A)True B)False
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Chapter 6: Individual for Agi Deductions
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Q1) Compared to the Tax Court method of allocating expenses between rental use and personal use,the IRS method tends to allocate more expenses to personal use than does the Tax Court method.
A)True
B)False
Q2) Harriet owns a second home that she rents to others.During the year,she used the second home for 10 personal days and for 200 rental days.Which of the following statements regarding the manner in which she should account for her income and/or expenses associated with the home is incorrect?
A)Harriet's deductible expenses are not limited to the amount of gross rental income from the property.
B)Harriet will be allowed to deduct all of the mortgage interest on the loan secured by the property.
C)Harriet is required to include all of the rental receipts in gross income.
D)Harriet is required to allocate all expenses associated with the home to rental use or personal use.
Q3) Rental or royalty expenses are deductible "for" AGI.
A)True
B)False
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Page 8
Chapter 7: Individual Income Tax Computation and Tax
Credits
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Q1) For taxpayers who receive both salary as an employee and self-employment income as an independent contractor in the same year,which of the following statements regarding FICA and self-employment taxes is most accurate?
A)The Social Security limit applies to the salary but not to the self-employment income.
B)The Social Security limit applies to the self-employment income but not to the salary.
C)Salary is first applied against the Social Security limit and then self-employment income is applied against the Social Security limit.
D)Self-employment income is first applied against the Social Security limit and then salary is applied against the Social Security limit.
Q2) The child tax credit is subject to phase-out based on the taxpayer's AGI.
A)True B)False
Q3) Generally,income from an active trade or business is subject to the 3.8% net investment income tax.
A)True
B)False
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Chapter 8: Business Income, deductions, and Accounting Methods
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Q1) A short tax year can end on any day of any month other than December.
A)True
B)False
Q2) Although expenses associated with illegal activities are not deductible,political contributions can be deducted as long as the donation is not made to a candidate for public office.
A)True
B)False
Q3) A fiscal tax year can end on the last day of any month other than December.
A)True
B)False
Q4) Which of the following is a true statement about impermissible accounting methods?
A)An impermissible method is adopted by using the method to report results for two consecutive years.
B)An impermissible method may never be used by a taxpayer.
C)Cash method accounting is an impermissible method for partnerships and Subchapter S electing corporations.
D)There is no accounting method that is impermissible.
E)None of the choices are true.
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Chapter 9: Property Acquisition and Cost Recovery
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Q1) Columbia LLC only purchased one asset this year.Columbia LLC placed in service on July 9,2018 machinery and equipment (7-year property)with a basis of $2,750,000.Assume that Columbia has sufficient income to avoid any limitations.Calculate the maximum depreciation expense including §179 expensing (but ignoring bonus expensing)for the year.(Use MACRS Table 2)(Round final answer to the nearest whole number.)
Q2) Which of the following assets is not eligible for bonus depreciation?
A)Used office machinery
B)Qualified improvement property
C)A new delivery truck
D)Used office furniture
E)All of the choices are correct.
Q3) Janey purchased machinery on April 8 of the current year.The relevant costs for the year are as follows: machinery for $10,000,$800 shipping,$50 for delivery insurance,$500 for installation,$750 for sales tax,$150 for the annual tune up,and $200 of property taxes (an annual tax on business property).What is Janey's tax basis for the machinery?
Q4) 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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Q1) Foreaker LLC sold a piece of land that it uses in its business for $52,000.Foreaker bought the land two years ago for $42,500.What is the amount and character of Foreaker's gain?
A)$9,500 §1221.
B)$9,500 §1231.
C)$9,500 §1245.
D)$9,500 §1250.
E)None of the choices are correct.
Q2) Which of the following is not usually included in an asset's tax basis?
A)Purchase price
B)Sales tax
C)Shipping costs
D)Installation costs
E)None of the choices are correct.
Q3) Sunshine LLC sold furniture for $75,000.Sunshine bought the furniture for $90,000 several years ago and has claimed $25,000 of depreciation expense on the machine.What is the amount and character of Sunshine's gain or loss?
Q4) Explain whether the sale of a machine used in a trade or business that is sold at a loss generates an ordinary or capital loss?
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Chapter 11: Entities Overview
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Q1) Logan,a 50 percent shareholder in Military Gear Inc.(MG),is comparing the tax consequences of losses from C corporations with losses from S corporations.Assume MG has a $100,000 tax loss for the year,Logan's tax basis in his MG stock was $150,000 at the beginning of the year,and he received $75,000 ordinary income from other sources during the year.Assuming Logan's marginal tax rate is 24%,how much more tax will Logan pay currently if MG is a C corporation compared to the tax he would pay if it were an S corporation?
A)$0
B)$6,000
C)$12,000
D)$18,000
Q2) Jorge is a 60 percent owner of JJ LLC (taxed as a partnership).He is a passive investor in JJ (he doesn't perform any work for JJ)and his marginal ordinary tax rate is 37 percent.Which of the following statements is true regarding Jorge's tax treatment of business income allocated to him from JJ?
A)Business income allocations are not subject to self-employment tax.
B)Business income allocations are not subject to the net investment income tax.
C)Business income allocations are subject to the additional Medicare tax.
D)Business income allocations are taxed at a maximum 23.8 percent tax rate.
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Chapter 12: Corporate Formations and Operations
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Q1) Volos Company (a calendar-year corporation)began operations in March of 2016 and was not profitable through December of 2017.Volos has been profitable for the first quarter of 2018 and is trying to determine its first quarter estimated tax payment (it expects a tax liability for the year of over $30,000).It will have no estimated tax payment requirement in 2018 because it had no tax liability for the 2017 tax year and has been in business for at least 12 months.
A)True
B)False
Q2) Most corporations use the annualized income method to determine their required annual payment for purposes of making quarterly estimated payments.
A)True
B)False
Q3) Carbonfab Manufacturers Inc.expensed $125,000 of depreciation for book purposes,but for tax purposes,it deducted $179,000.Carbonfab also sold equipment for $500,000.The book adjusted basis of the equipment sold was $350,000,while the adjusted basis for tax purposes was $210,000.What is the total book-tax difference associated with depreciation and the gain on sale? Is it favorable or unfavorable? What amount of the book-tax difference is permanent and what amount is temporary?
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Chapter 13: Corporate Nonliquidating and Liquidating
Distributions
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Q1) Which of the following statements best describes current earnings and profits?
A)Current earnings and profits is another name for a corporation's retained earnings on its balance sheet.
B)Current earnings and profits is a precisely defined tax term in the Internal Revenue Code and represents a corporation's economic income for the year.
C)Current earnings and profits is a partially defined tax concept in the Internal Revenue Code and represents a corporation's economic income for the year.
D)Current earnings and profits is a conceptual tax concept with no definition in the Internal Revenue Code.
Q2) Panda Company is owned equally by Min,her husband Bin,her sister Xiao,and her grandson,Han,each of whom hold 100 shares in the company.Under the family attribution rules,how many shares of Panda stock is Min deemed to own?
A)100.
B)200.
C)300.
D)400.
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Chapter 14: Forming and Operating Partnerships
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Q1) Which of the following statements regarding the rationale for adjusting a partner's basis is false?
A)To prevent partners from being double taxed when they sell their partnership interests.
B)To ensure that partnership tax-exempt income is not ultimately taxed.
C)To prevent partners from being double taxed when they receive cash distributions.
D)To ensure that partnership non-deductible expenses are never deductible.
E)None of these rationales are false.
Q2) Actual or deemed cash distributions in excess of a partner's outside basis are generally taxable as capital gains.
A)True B)False
Q3) Income earned by flow-through entities is usually taxed only once at the entity level. A)True B)False
Q4) The character of each separately stated item is determined at the partner level. A)True B)False
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Chapter 15: Dispositions of Partnership Interests and Partnership Distributions
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Q1) Which of the following statements is true regarding partnership operating distributions?
A)Partners will never recognize a gain on an operating distribution.
B)Partners receiving a distribution of property other than money will take a basis in the property equal to its fair market value.
C)Partners will never recognize a loss on an operating distribution.
D)None of the statements are true.
Q2) Lola is a 35% partner in the LW Partnership.On January 1,LW distributes $39,000 cash to Lola in complete liquidation of her partnership interest.LW has only capital assets and no liabilities at the date of the distribution.Lola's basis in LW is $30,000.What is the amount and character of Lola's gain or loss?
Q3) If the partnership has hot assets at the time a partnership interest is sold,the selling partner must allocate a portion of the sale proceeds to these assets and recognize ordinary income (loss).
A)True
B)False
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Chapter 16: S Corporations
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Questions
Q1) Hazel is the sole shareholder of Maple Corp.In 2018 Maple operated as a C corporation and reported $15,000 of taxable income (and earnings and profits).In 2018,Maple elected S corporation status.During 2019 Maple reported $12,000 of ordinary business income and no separately stated items.It also distributed $25,000 to Hazel.What is the amount and character of income Hazel must recognize on the distribution? What is Hazel's stock basis at the end of 2019 (after accounting for the distribution)if her basis at the beginning of the year was $5,000?
Q2) At the beginning of the year,Clampett,Inc.had $100,000 in its AAA,$60,000 of earnings and profits from prior C corporation years.During the year,Clampett,Inc.earned $50,000 of ordinary income and paid $200,000 in distributions to its shareholders.Assume that J.D.owns 25% of Clampett,Inc.,his basis in Clampett,Inc.at the beginning of the year is $30,000,and his share of the distribution was $50,000.What is J.D.'s basis in the Clampett,Inc.stock after these transactions?
A)$0.
B)$5,000.
C)$12,500.
D)$15,000.
E)None of the choices are correct.
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Chapter 17: Individual From Agi Deductions
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Q1) Don's personal auto was damaged in a wind storm this year. Don purchased the auto several years ago for $32,000 and it was worth $18,000 at the time of the storm. The damage was superficial, so Don decided not to repair the auto. Although Don collected $750 from his insurance company, the value of the auto dropped after the storm to $15,000. What is Don's tax deduction related to the damage?
Q2) The deduction for medical expenses is limited to the amount of unreimbursed qualifying medical expenses paid during the year reduced by two percent of the taxpayer's AGI.
A)True
B)False
Q3) Taxpayers are allowed to deduct mortgage interest on up to $1,000,000 of acquisition debt for their qualified residence for acquisition debt incurred after December 15, 2017.
A)True
B)False
Q4) Taxpayers traveling for the primary purpose of receiving essential and deductible medical care may deduct the cost of travel.
A)True
B)False
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