Individual Income Taxation
Mock Exam
Course Introduction
This course provides an in-depth examination of federal individual income tax laws, principles, and policies in the United States. Students will explore the framework used to determine taxable income, including gross income, deductions, exemptions, and credits, as well as the computation of tax liability. The curriculum covers tax compliance and planning strategies, the tax treatment of various types of income and property transactions, and special issues such as filing status, dependents, and alternative minimum tax. Emphasis is placed on real-world scenarios, practical application, ethical considerations, and the impact of recent legislative changes. This course is ideal for students pursuing careers in accounting, law, financial planning, or business.
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) For state income tax purposes,a majority of states allow a deduction for Federal income taxes.
A)True
B)False
Answer: False
Q2) Like the Federal counterpart,the amount of the state excise taxes on gasoline varies from state to state.
A)True
B)False
Answer: False
Q3) In terms of Adam Smith's canons of taxation,how does the Federal income tax fare as far as economy is concerned?
Answer: Economy is present only if the collection procedure of the IRS is considered.Economy is not present,however,if the focus is on taxpayer compliance effort and costs.
Q4) One of the motivations for making a gift is to save on income taxes.
A)True
B)False
Answer: True
Page 3
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Chapter 2: Working With the Tax Law
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Q1) In § 212(1),the number (1)stands for the:
A)Section number.
B)Subsection number.
C)Paragraph designation.
D)Subparagraph designation.
E)None of these.
Answer: C
Q2) The IRS will not acquiesce to the following tax decisions:
A)U.S.District Court.
B)U.S.Tax Court.
C)U.S.Court of Federal Claims.
D)Small Case Division of the U.S.Tax Court.
E)All of these.
Answer: D
Q3) Rules of tax law do not include Revenue Rulings and Revenue Procedures.
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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Q1) Sarah furnishes more than 50% of the support of her son and daughter-in-law who live with her.If the son and daughter-in-law file a joint return,Sarah cannot claim them as dependents.
A)True
B)False
Answer: False
Q2) After Ellie moves out of the apartment she had rented as her personal residence,she recovers her damage deposit of $1,000.The $1,000 is not income to Ellie.
A)True
B)False
Answer: True
Q3) When the kiddie tax applies,the child need not file an income tax return because the child's income will be reported on the parents' return.
A)True
B)False
Answer: False
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Chapter 4: Gross Income: Concepts and Inclusions
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Q1) Darryl,a cash basis taxpayer,gave 1,000 shares of Copper Company common stock to his daughter on September 29,2014.Copper Company is a publicly held company that has declared a $2.00 per share dividend on September 30th every year for the last 20 years.Just as Darryl had expected,Copper Company declared a $2.00 per share dividend on September 30th,payable on October 15th,to stockholders of record as of October 10th.The daughter received the $2,000 dividend on October 18,2014.
A)The daughter must recognize the income because she owned the stock when the dividend was declared and she received the $2,000.
B)Darryl must recognize the income of $2,000 because the purpose of the gift was to avoid taxes.
C)Darryl must recognize $1,500 of the dividend because he owned the stock for three-fourths of the year.
D)Darryl must recognize the $2,000 dividend as his income because he constructively received the dividend.
E)None of these.
Q2) 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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Q1) If an employer pays for the employee's longterm care insurance premiums,the employee can exclude from gross income the premiums but all of the benefits collected must be included in gross income.
A)True
B)False
Q2) A U.S.citizen who works in France from February 1,2014 until January 31,2015 is eligible for the foreign earned income exclusion in 2014 and 2015.
A)True
B)False
Q3) Bob had a terminal illness and realized that he "can't take it with him." Therefore,he cashed in his insurance policy and received $120,000.He had paid $50,000 in premiums on the policy.He used the money to fulfill his lifelong ambitions of going to the Super Bowl,driving an expensive sports car,and vacationing in Bermuda. Was Bob's behavior consistent with the Congressional intent in providing the tax exemption he was permitted to use?
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) Are there any exceptions to the rule that personal expenditures cannot be deducted?
Q2) Arnold and Beth file a joint return.Use the following data to calculate their deduction for AGI.
\(\begin{array} { l }
\text {Mortgage interest on personal residence }&\$6,000\\
\text {Property taxes on personal residence }&2,500\\
\text {Alimony payments }&12,000\\
\text { Moving expenses}&7,000\\
\text {Charitable contributions }&1,500\\
\text { State income taxes}&5,000\\
\text {Investment interest ( \( \$ 8,000 \) of expenses limited to net investment income of \( \$ 7,500) \) }&7,500\\
\text {Unreimbursed employee expenses}&2,500\\
\text { Sales taxes}&2,600\\
\end{array}\)
Q3) Are all personal expenses disallowed as deductions?
Q4) What is the appropriate tax treatment for expenditures paid by a taxpayer for another's benefit?
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Chapter 7: Deductions and Losses: Certain Business
Expenses and Losses
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Sample Questions
Q1) Losses on rental property are classified as deductions for AGI.
A)True
B)False
Q2) If the amount of the insurance recovery for a theft of business property is greater than the asset's fair market value but less than its adjusted basis,a gain is recognized.
A)True
B)False
Q3) John files a return as a single taxpayer.In 2014,he had the following items: -Salary of $40,000.
-Loss of $65,000 on the sale of § 1244 stock acquired two years ago.
-Interest income of $6,000.
Determine John's AGI for 2014.
A)($5,000).
B)$0.
C)$45,000.
D)$51,000.
E)None of these.
Q4) 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) 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.
Q2) Land improvements are generally not eligible for cost recovery.
A)True
B)False
Q3) All listed property is subject to the substantiation requirements of § 274.
A)True
B)False
Q4) Percentage depletion enables the taxpayer to recover more than the cost of an asset.
A)True
B)False
Q5) Antiques may be eligible for cost recovery if they are used in a trade or business.
A)True
B)False
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Chapter 9: Deductions: Employee and
Self-Employed-Related Expenses
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Q1) Kelly,an unemployed architect,moves from Boston to Phoenix to accept a job as a chef at a restaurant.Kelly's moving expenses are not deductible because her new job is in a different trade or business.
A)True
B)False
Q2) Tax home has changed
A)Must involve the same trade or business
B)Must be for the convenience of the employer
C)Meals while in route
D)Lodging while in route
E)Out-of-town job assignment lasts for more than one year
F)Can include actual cost of parking
G)Payment for services rendered based on tasks performed
H)Excludes use of MACRS depreciation
I)Taxpayer has tools and helper provided for him
J)Transportation must be allocated if taxpayer spends two weeks on business and one week sightseeing
K)Paralegal obtains a law degree
L)Correct match not provided
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Chapter 10: Deductions and Losses: Certain Itemized
Deductions
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Sample Questions
Q1) Mason,age 70,a physically handicapped individual,pays $10,000 in 2014 for the installation of wheelchair ramps,support bars,and railings in his personal residence.These improvements increase the value of his personal residence by $2,000.Only $8,000 of the expenditure qualifies as a medical deduction (subject to the AGI floor).
A)True
B)False
Q2) Pat died this year.Before she died,Pat gave 5,000 shares of stock in Coyote Corporation (a publicly traded corporation)to her church (a qualified charitable organization).The stock was worth $180,000 and she had acquired it as an investment four years ago at a cost of $150,000.In the year of her death,Pat had AGI of $300,000.In completing her final income tax return,how much of the charitable contribution should Pat's executor deduct?
A)$90,000
B)$150,000
C)$180,000
D)$210,000
E)None of these
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Chapter 11: Investor Losses
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Sample Questions
Q1) In 2014,Arnold invests $80,000 for a 20% interest in a partnership in which he is a material participant.The partnership incurs a loss with $100,000 being Arnold's share.Which of the following statements is incorrect?
A)Since Arnold has only $80,000 of capital at risk,he cannot deduct any more than this amount against his other income.
B)Arnold's nondeductible loss of $20,000 can be carried over and used in future years (subject to the atrisk provisions).
C)If Arnold has taxable income of $40,000 from the partnership in 2015 and there are no other transactions that affect his at-risk amount,he can use all of the $20,000 loss carried over from 2014.
D)Arnold's $100,000 loss is nondeductible in 2014 and 2015 under the passive loss provisions.
E)All of the statements are correct.
Q2) Kim dies owning a passive activity with a basis of $75,000,a fair market value of $140,000,and suspended losses of $80,000.All of the $80,000 passive loss can be deducted on Kim's final income tax return.
A)True
B)False
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Chapter 12: Alternative Minimum Tax
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Q1) Income from some long-term contracts can be reported using the completed contract method for regular income tax purposes,but the percentage of completion method is required for AMT purposes for all long-term contracts.
A)True
B)False
Q2) Evan is a contractor who constructs both commercial and residential buildings.Even though some of the contracts could qualify for the use of the completed contract method,Evan decides to use the percentage of the completion method for all of his contracts.Unfortunately,this will have the effect of increasing Evan's AMT adjustment associated with long-term contracts for the current year.
A)True
B)False
Q3) The AMT adjustment for mining exploration and development costs can be avoided if the taxpayer elects to write off the expenditures in the year incurred for regular income tax purposes,rather than writing off the expenditures over a 10-year period for regular income tax purposes.
A)True
B)False
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Chapter 13: Tax Credits and Payment Procedures
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Q1) Which,if any,of the following correctly describes the research activities credit?
A)The research activities credit is the greater of the incremental research credit,the basic research credit,or the energy research credit.
B)If the research activities credit is claimed,no deduction is allowed for research and experimentation expenditures.
C)The credit is not available for research conducted outside the United States.
D)All corporations qualify for the basic research credit.
E)None of these.
Q2) 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
Q3) If the cost of a building constructed and placed into service by an eligible small business in the current year includes the cost of a wheelchair ramp,the cost of the ramp qualifies for the disabled access credit.
A)True
B)False
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Chapter 14: Property Transactions: Determination of Gain or
Loss and Basis Considerations
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Q1) Lump-sum purchases of land and a building are allocated on the basis of the relative fair market values of the individual assets acquired.
A)True
B)False
Q2) Annette purchased stock on March 1,2014,for $200,000.At December 31,2014,it was worth $210,000.She also purchased a bond on September 1,2014,for $20,000.At year end,it was worth $15,000.Determine Annette's realized and recognized gain or loss.
Q3) Jan purchases taxable bonds with a face value of $250,000 for $265,000.The annual interest paid on the bonds is $10,000.Assume Jan elects to amortize the bond premium.The total premium amortization for the first year is $1,600.
a.What is Jan's interest income for the first year?
b.What is Jan's interest deduction for the first year?
c.What is Jan's adjusted basis for the bonds at the end of the first year?
Q4) For a corporate distribution of cash or other property to a shareholder,when does dividend income or a return of capital result?
Q5) Why is it generally undesirable to pass property by death when its fair market value is less than basis?
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Chapter 15: Property Transactions: Nontaxable Exchanges
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Sample Questions
Q1) Myrna's personal residence (adjusted basis of $100,000)was condemned,and she received a condemnation award of $80,000.Myrna used the condemnation proceeds to purchase a new residence for $90,000.What is her recognized gain or loss and her basis in the new residence?
A)$0;$70,000.
B)$0;$90,000.
C)($20,000);$90,000.
D)($20,000);$70,000.
E)None of these.
Q2) In a nontaxable exchange,the replacement property is assigned a carryover basis if there is a realized gain,but receives a new basis if there is a realized loss.
A)True
B)False
Q3) Define an involuntary conversion.
Q4) Livestock of different sexes can qualify for like-kind exchange treatment if the livestock has been held for over 24 months.
A)True
B)False
Q5) Discuss the treatment of losses from involuntary conversions.
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Chapter 16: Property Transactions: Capital Gains and Losses
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Q1) Judith (now 37 years old)owns a collection of porcelain dolls that she acquired when she was a grade schooler.She had forgotten about them until her mother sent them to her.Her mother had discovered them in a box in her attic while she was cleaning out her house before selling it.Judith had originally acquired all the dolls as gifts from her parents,so she has no way to establish a basis for the dolls.Using information from the Internet,she prepares a careful inventory of the dolls that includes their name,when they were first available for sale,their current value,and other pertinent information.She then lists them for sale on the Internet.To her surprise,she quickly gets an offer of $5,000 for all of them and sells them.Judith has no other gain or loss transactions for the year and is in the 28% marginal tax bracket.What issues do these facts create?
Q2) To compute the holding period,start counting on the day after the property was acquired and include the day of disposition.
A)True
B)False
Q3) 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?
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Chapter 17: Property Transactions: 1231 and Recapture
Provisions
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Q1) Section 1231 property generally includes certain purchased intangible assets (such as patents and goodwill)that are eligible for amortization and held for more than one year.
A)True
B)False
Q2) 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.
Q3) The § 1245 depreciation recapture potential does not reduce the amount of the charitable contribution deduction under § 170.
A)True
B)False
Q4) Depreciable personal property was sold at a gain in 2013.On what 2013 form would this transaction be reported,where initially in that form,and what will the form most likely do with the gain?
Page 19
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Chapter 18: Accounting Periods and Methods
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Q1) When an accrual basis taxpayer finances the construction of its building by borrowing,the interest is added to the cost of the building.
A)True
B)False
Q2) Gold Corporation sold its 40% of the Ruby Corporation common stock.Gold received $10 million in the year of the sale and a note for $15 million,payable in three years with interest at the Federal rate.Gold's basis in the stock was $5 million.Assume that Gold Corporation will report the gain by the installment method where the method is permitted.
A)The installment method is never permitted on the sale of stock.
B)If Ruby Corporation stock is traded on an established securities market,Gold must recognize a $20 million gain in the year of sale.
C)If the Ruby Corporation stock is not traded on a national exchange,Gold must recognize a $20 million gain.
D)All of these are true.
E)None of these is true.
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Chapter 19: Deferred Compensation
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Q1) 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.
Q2) Which of the following characteristics is not a characteristic of a stock bonus plan?
A)Can be in the form of a defined benefit plan.
B)Contributions need not be dependent on employer's profits.
C)Exempt from funding requirements.
D)Not subject to plan termination insurance.
E)None of these.
Q3) A participant who is at least age 59 1/2 can make a tax-free qualified withdrawal from a Roth IRA after a five- year holding period.
A)True
B)False
Q4) What is a defined contribution plan?
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Chapter 20: Corporations and Partnerships
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Q1) Kestrel is a C corporation that is engaged solely in buying and reselling goods it acquires from Skimmer,another C corporation.Although Kestrel conducts no manufacturing activity and is exclusively involved in a marketing function,it may still be entitled to a domestic production activities deduction (DPAD).Explain how this could be possible.
Q2) In 2013,Creeper Corporation had a $4,000 net long-term capital loss which it could not carry back.For 2014,it had the following capital transactions: Long-term capital gain
$2,000
Short-term capital gain 3,000
As a result of these transactions,for 2014 Creeper has a:
A)Net short-term capital gain of $1,000.
B)Net short-term capital gain of $3,000.
C)Net long-term capital gain of $1,000.
D)Carryover to 2015 of $2,000 long-term capital loss.
E)None of these.
Q3) In a § 351 transfer to a controlled corporation,the corporation's basis for the property it receives is the shareholder's basis increased by any boot given by the corporation.
A)True
B)False
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