Individual Income Taxation Test Questions
Course Introduction
This course provides an in-depth exploration of the fundamentals of individual income taxation in the United States. Topics include the structure and application of the federal tax system, determination of gross income, exclusions, deductions, and credits, as well as filing status and tax computation. Students will learn to analyze tax law, interpret Internal Revenue Code provisions, and prepare individual tax returns. Practical emphasis is placed on problem-solving, case studies, and understanding the impact of tax policy on individual financial decisions. The course is designed to build foundational knowledge for students considering careers in accounting, financial planning, or law.
Recommended Textbook
South Western Federal Taxation 2013 Individual Income Taxes 36th Edition by William H
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Chapter 1: An Introduction to Taxation and Understanding
the Federal Tax Law
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Q1) Tracy has just been audited and the IRS agent has issued an RAR that assesses a large deficiency.Since Tracy disagrees with the result,her next step is to go to court.Do you agree?
Answer: Tracy might save herself time and expense by going to the Appeals Division of the IRS.Here,the IRS has the authority to negotiate a settlement based on the "hazards of litigation" (i.e.,the probabilities of winning or losing).If a settlement is reached,resort to the courts is avoided.
Q2) Ava,an estate planner,is advising her wealthier clients to make any large gifts to family members before 2013.Why?
Answer: Under existing law,the exemption equivalent for gift tax purposes is scheduled to decrease from $5.12 million to $1 million after 2012.Thus,an extra $4.12 million in value can be transferred without any tax if the gifts occur before 2013.
Q3) A safe and easy way for a taxpayer to avoid local and state sales taxes is to have the purchase sent to an address in another state that levies no such taxes.
A)True
B)False
Answer: False
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Page 3
Chapter 2: Working With the Tax Law
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Q1) Explain the tax appeals process from trial courts.
Answer: Appeals from a District Court or a Tax Court decision are to the U.S.Court of Appeals for the circuit in which the taxpayer resides.Appeals from the Court of Federal Claims go to the U.S.Court of Appeals for the Federal Circuit.Few Tax Court cases are appealed,and when appeals are made,most are filed by the taxpayer rather than the IRS.There is no appeal from the Small Cases Division.
Q2) The research process should begin with a tax service.
A)True
B)False
Answer: False
Q3) Proposed Regulations are binding on IRS agents.
A)True
B)False Answer: False
Q4) There is a direct conflict between a Code section adopted in 2004 and a treaty with France (signed in 2008).The Code section controls.
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) In which,if any,of the following situations may the individual not be claimed as a dependent of the taxpayer?
A) A former spouse who lives with the taxpayer (divorce took place last year).
B) A stepmother who does not live with the taxpayer.
C) A married daughter who lives with the taxpayer.
D) A half brother who does not live with the taxpayer and is a citizen and resident of Costa Rica.
E) A cousin who lives with the taxpayer.
Answer: D
Q2) The kiddie tax does not apply as to a child whose earned income is more than one-half of his or her support.
A)True
B)False
Answer: True
Q3) The basic and additional standard deductions are not subject to an annual adjustment for inflation.
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 29,2012.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 18,2012.
A) Darryl must recognize the $2,000 dividend as his income because he knew the dividend would be paid.
B) Darryl must recognize the income of $2,000 because he constructively received the $2,000.
C) Darryl must recognize $1,500 of the dividend because he owned the stock for three-fourths of the year.
D) The daughter must recognize the income because she owned the stock when the dividend was declared and she received the $2,000.
E) None of the above.
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Page 6
Chapter 5: Gross Income: Exclusions
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Q1) 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.)
Q2) Kristen's employer owns its building and provides parking space for its employees.The value of the free parking is $150 per month.Karen's employer does not have parking facilities,but reimburses its employee for the cost of parking in a nearby garage,up to $150 per month.
A) Kristen and Karen must recognize gross income from the parking services.
B) Kristen can exclude the employer provided parking from gross income, but Karen must include her reimbursement in gross income.
C) Kristen must include the value of the employer provided parking from her gross income, but Karen can exclude her reimbursement from gross income.
D) Neither Kristen nor Karen is required to include the cost of parking in gross income.
E) None of the above.
Q3) 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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Page 7
Chapter 6: Deductions and Losses: in General
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Q1) Benita incurred a business expense on December 10,2012,which she charged on her bank credit card.She paid the credit card statement which included the charge on January 5,2013.Which of the following is correct?
A) If Benita is a cash method taxpayer, she cannot deduct the expense until 2013.
B) If Benita is an accrual method taxpayer, she can deduct the expense in 2012.
C) If Benita uses the accrual method, she can choose to deduct the expense in either 2012 or 2013.
D) Only b. and c. are correct.
E) a., b., and c. are correct.
Q2) Which of the following expenses associated with the illegal sale of whiskey (i.e.,bootlegging)can be deducted?
A) Cost of goods sold.
B) Advertising.
C) Cost of delivery.
D) Only a. and c.
E) a., b., and c.
Q3) For a vacation home to be classified in the primarily rental use category,what attributes must be present?
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Page 8
Chapter 7: Deductions and Losses: Certain Business
Expenses and Losses
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Sample Questions
Q1) An NOL carryforward is not used in determining the current year's NOL.
A)True
B)False
Q2) A taxpayer who sustains a casualty loss in an area designated by the President of the United States as a disaster area may take the loss in the year in which the loss occurred or elect to take the loss in the previous year.Identify factors that should be considered in deciding in which year to take the loss.
Q3) A personal casualty loss deduction may be allowed for losses resulting from termites.
A)True B)False
Q4) If an account receivable written off during the current year is subsequently collected during the current year,the write-off entry is reversed. A)True B)False
Q5) A bona fide debt cannot arise on a loan between father and son. A)True
B)False
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Q6) Why was the domestic production activities deduction (DPAD)enacted by Congress?
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Page 10
Chapter 8: Depreciation, cost Recovery, amortization, and Depletion
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Sample Questions
Q1) The cost recovery basis for property converted from personal use to business use may be the fair market value of the property at the time of the conversion.
A)True
B)False
Q2) The basis of an asset on which $139,000 has been expensed under § 179 will be reduced by $139,000,even if $139,000 cannot be expensed in the current year because of the taxable income limitation.
A)True
B)False
Q3) When lessor owned leasehold improvements are abandoned because of the termination of the lease,a loss can be taken for the unrecovered basis.
A)True
B)False
Q4) Discuss the reason for the inclusion amount with respect to leased automobiles.
Q5) The § 179 deduction can exceed $139,000 in 2012 if the taxpayer had a § 179 amount which exceeded the taxable income limitation in the prior year.
A)True
B)False
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Chapter 9: Deductions: Employee and
Self-Employed-Related Expenses
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Sample Questions
Q1) Elsie lives and works in Detroit.She is the regional sales manager for a national fast-food chain.Due to unusual developments,she is compelled to work six straight weeks in the Cleveland area.Instead of spending the weekend there,she flies home every Friday night and returns early Monday morning.The cost of coming home for the weekend approximates $600.Had she stayed in Cleveland,deductible meals and lodging would have been $700.How much,if any,may Elsie deduct as to each weekend?
Q2) Bob lives and works in Newark,NJ.He travels to London for a three-day business meeting,after which he spends three days touring Scotland.All of his air fare is deductible.
A)True
B)False
Q3) Logan,Caden,and Olivia are three unrelated parties who claim the standard deduction.All are married and attend Citron University and each pays tuition of $6,100.Of this payment,Logan can claim a deduction of $4,000; Caden a deduction of $2,000; and Olivia no deduction at all.Explain.
Q4) Ashley and Matthew are husband and wife and both are practicing CPAs.On a joint return,Ashley gets to deduct her professional dues but Matthew does not.Explain.
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Chapter 10: Deductions and Losses: Certain Itemized
Deductions
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Q1) Chad pays the medical expenses of his son,James.James would qualify as Chad's dependent except that he earns $7,500 during the year.Chad may not claim James' medical expenses because he is not a dependent.
A)True
B)False
Q2) Maria traveled to Rochester,Minnesota,with her son,who was operated on at the Mayo Clinic.Her son stayed at the clinic for the duration of his treatment.She paid airfare of $300 and $50 per night for lodging.The cost of Maria's airfare and lodging cannot be included in determining her medical expense deduction.
A)True
B)False
Q3) During 2012,Kathy,who is self-employed,paid $650 per month for an HSA contract that provides medical insurance coverage with a $3,000 deductible.The plan covers Kathy,her husband,and their three children.Of the $650 monthly fee,$300 was for the high-deductible policy,and $350 was deposited into an HSA.How much of the amount paid for the high-deductible policy can Kathy deduct as a deduction for AGI?
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Chapter 11: Investor Losses
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Sample Questions
Q1) Sarah,who owns a 50% interest in a grocery store,was a material participant in the activity for the last 25 years.She retired from the grocery store at the end of last year and will not participate in the activity in the future.However,she continues to be a material participant in an office supply store in which she is a 50% partner.The operations of the grocery store resulted in a loss for the current year and Sarah's share of the loss is $40,000.Sarah's share of the income from the office supply store is $75,000.She does not own interests in any other activities.
A) Sarah cannot deduct the $40,000 loss from the grocery store because she is not a material participant.
B) Sarah will not be able to deduct any losses from the grocery store until future years.
C) Sarah can offset the $40,000 loss from the grocery store against the $75,000 of income from the office supply store.
D) Sarah will not be able to deduct any losses from the grocery store until she has been retired for at least four years.
E) None of the above.
Q2) Describe the general rules that limit the deduction of investment interest expense.
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Chapter 12: Alternative Minimum Tax
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Sample Questions
Q1) Why is there a need for a second tax system called the alternative minimum tax?
Q2) Omar acquires used 7-year personal property for $100,000 to use in his business in February 2012.Omar does not elect § 179 expensing,but does take the maximum regular cost recovery deduction.He elects not to take additional first-year depreciation.As a result,Omar will have a positive AMT adjustment in 2012 of what amount?
A) $0.
B) $3,580.
C) $10,710.
D) $14,290.
E) None of the above.
Q3) Moore incurred circulation expenditures of $300,000 in 2012 and deducted that amount for regular income tax purposes.Moore has a $100,000 negative AMT adjustment for 2013,for 2014,and for 2015.
A)True
B)False
Q4) Discuss the tax year in which an AMT adjustment is first required for an ISO.
Q5) Can AMT adjustments and preferences be both positive and negative?
Q6) What is the relationship between the regular income tax liability and the tentative AMT?
Page 15
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Chapter 13: Tax Credits and Payment Procedures
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Sample Questions
Q1) Amber is in the process this year of renovating the office building (originally placed in service in 1976)used by her business.Because of current Federal Regulations that require the structure to be accessible to handicapped individuals,she incurs an additional $11,000 for various features,such as ramps and widened doorways,to make her office building more accessible.The $11,000 incurred will produce a disabled access credit of what amount?
A) $0.
B) $5,000.
C) $5,125.
D) $5,500.
E) None of the above.
Q2) The earned income credit is available only if the taxpayer has at least one qualifying child in the household.
A)True
B)False
Q3) Certain situations exist where the wage-bracket table method of determining income tax withholdings cannot be used.
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) The fair market value of property received in a sale or other disposition is the price at which property will change hands between a willing seller and a willing buyer when neither is compelled to sell or buy.
A)True
B)False
Q2) Broker's commissions,legal fees,and points paid by the seller reduce the seller's amount realized.
A)True B)False
Q3) The basis of property acquired in a wash sale is its cost plus the loss recognized on the wash sale.
A)True B)False
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
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Chapter 15: Property Transactions: Nontaxable Exchanges
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Q1) Pierce exchanges an asset (adjusted basis of $14,000; fair market value of $18,000)for another asset (fair market value of $15,000).In addition,he receives cash of $3,000.If the exchange qualifies as a like-kind exchange,his recognized gain is $3,000 and his adjusted basis for the property received is $17,000 ($14,000 + $3,000 recognized gain).
A)True
B)False
Q2) Terry exchanges real estate (acquired on August 25,2006)held for investment for other real estate to be held for investment on September 1,2012.None of the realized gain of $10,000 is recognized,and Terry's adjusted basis for the new real estate is a carryover basis of $80,000.Consequently,Terry's holding period for the new real estate begins on August 25,2006.
A)True
B)False
Q3) To be eligible to elect postponement of gain treatment for an involuntary conversion,what are the three tests for qualifying replacement property?
Q4) Define an involuntary conversion.
Q5) Discuss the treatment of losses from involuntary conversions.
Q6) What kinds of property do not qualify under the like-kind provisions?
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Chapter 16: Property Transactions: Capital Gains and Losses
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Q1) The only things that the grantee of an option may do with the option are exercise it or let it expire.
A)True
B)False
Q2) In 2012,Satesh has $5,000 short-term capital loss,$13,000 0%/15% long-term capital gain,and $7,000 qualified dividend income.Satesh is single and has other taxable income of $15,000.Which of the following statements is correct?
A) No more than $13,000 of Satesh's taxable income is taxed at 0%.
B) No more than $7,000 of Satesh's taxable income is taxed at 0%.
C) No more than $15,000 of Satesh's taxable income is taxed at 0%.
D) None of Satesh's taxable income is taxed at 0%.
E) All of Satesh's taxable income is taxed at 0%.
Q3) An individual taxpayer with 2012 net short-term capital loss of $5,000 generally can deduct up to $3,000 for AGI and carry the balance forward to 2013.
A)True
B)False
Q4) If a capital asset is sold at a loss,the holding period is important. A)True
B)False
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Chapter 17: Property Transactions: Section 1231 and Recapture Provisions
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Q1) Charmine,a single taxpayer with no dependents,has already incurred a $10,000 § 1231 gain in 2012 and has no § 1231 lookback losses.The taxpayer purchased a business machine for $100,000 five years ago,$70,000 of depreciation has been taken on it,and the machine is now worth $90,000.How will the net § 1231 gain or loss be affected if the taxpayer trades in the business machine for a like-kind business machine and pays an additional $12,000 in cash to obtain the replacement machine? If Charmine already has $322,000 of taxable income which does not include a $10,000 §1231 gain or any capital gains or losses,what is her taxable income?
Q2) Business equipment is purchased on March 10,2011,used in the business until September 29,2011,and sold at a $23,000 loss on October 10,2011.The equipment was not suitable for the work the business had purchased it for.The loss on the disposition should have been reported in the 2011 Form 4797,Part:
A) I.
B) II.
C) III.
D) IV.
E) This transaction would not be reported in the Form 4797.
Q3) Describe the circumstances in which the potential § 1245 depreciation recapture is extinguished.
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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) In 2012,Norma sold Zinc,Inc.,common stock for $100,000 cash and a note receivable for $900,000.The note was due in 2013 with accrued interest at the Federal rate.Norma's basis in the stock was $250,000.This was Norma's only installment sale transaction.Which of the following statements is correct?
A) Norma cannot use the installment method to report her gain if the stock is listed on the New York Stock Exchange.
B) Norma must recognize $75,000 gain in 2012 and she will be liable for interest on taxes deferred under the installment method.
C) Norma must recognize $75,000 gain in 2012 and she will not be liable for interest on the taxes deferred under the installment method if the stock is not publicly traded.
D) Norma should treat the $100,000 received as a recovery of capital.
E) None of the above.
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Chapter 19: Deferred Compensation
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Questions
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) Traditional IRA contributions made after an individual reaches the age of 59 1/2 are treated as excess contributions and are subject to a nondeductible 6% excise penalty tax.
A)True
B)False
Q3) A 20% excise tax is imposed on nondeductible contributions by an employer to a qualified plan.
A)True
B)False
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Chapter 20: Corporations and Partnerships
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Q1) In comparing regular (C)corporations with individuals,which of the following,if any,relate only to (C)corporations?
A) A net short-term capital gain is taxed as ordinary income.
B) An election can be made to defer recognition of gain on an involuntary conversion under § 1033.
C) The carryover period for excess capital losses is five years.
D) Excess capital losses cannot be carried back.
E) None of the above.
Q2) Regarding the tax treatment of charitable contributions,corporations enjoy two major advantages over individuals.Elaborate.
Q3) Examples of separately stated items of an S corporation include charitable contributions.
A)True
B)False
Q4) Taxpayers who want both limited liability and the passthrough of losses should choose either the Subchapter S or the LLC entity form of doing business.
A)True
B)False
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