Course Introduction
Individual Taxation Exam
Answer Key
Individual Taxation is a comprehensive course that examines the principles and practices governing the federal income taxation of individuals. Topics covered include gross income, exclusions, deductions, credits, filing status, and the computation of taxable income and tax liability. The course explores the application of current tax laws and regulations, the preparation and analysis of individual tax returns, and the impact of taxation on personal financial planning. Additionally, relevant ethical considerations and recent legislative changes impacting individual taxpayers are discussed, equipping students with practical skills and foundational knowledge essential for future tax professionals.
Recommended Textbook Concepts in Federal Taxation 2018 25th Edition by
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16 Chapters
2096 Verified Questions
2096 Flashcards
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Kevin E. Murphy
Page 2
Chapter 1: Conceptual Foundations of Tax Law
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Sample Questions
Q1) Horizontal equity exists when two similarly situated taxpayers are taxed the same.
A)True
B)False
Answer: True
Q2) Marie earns $80,000 as a sales manager for Household Books.How much Social Security and medicare tax does Marie have to pay for 2017?
A)$4,960.00
B)$6,120.00
C)$6,400.00
D)$2,240.00
Answer: B
Q3) The marginal tax rate is the rate of tax that will be paid on the next dollar of income or the rate of tax that will be saved by the next dollar of deduction. A)True
B)False
Answer: True
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Chapter 2: Income Tax Concepts
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Q1) In which of the following situations does the taxpayer have a claim of right to the payment received?
I.Ellen is on the Carlyle city council.She accepts $5,000 from a contractor who is seeking rezoning of his land before the commission on the condition that Ellen supports the rezoning.The payment is illegal under state law and Ellen will have to repay the $5,000 if the arrangement with the contractor is discovered.
II.Alan's automobile is damaged in an automobile accident.Because he uses the automobile in his job,his employer gives him $4,000 to have the car repaired.The employer will withhold $100 per paycheck until the $4,000 is repaid.
A)Only statement I is correct.
B)Only statement II is correct.
C)Both statements are correct.
D)Neither statement is correct.
Answer: A
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Chapter 3: Income Sources
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Q1) Julian is operating an illegal gambling operation.Even though the income is not legal,it is classified as earned.
A)True
B)False
Answer: True
Q2) Helena and Irwin are married taxpayers who file jointly.Their taxable income before considering capital gains and losses is $120,000.They have long-term capital gains of $8,000,short-term capital losses of $4,000,and short-term capital gains of $5,000.What are the tax effects of these events?
I.The short-term capital losses can offset only $3,000 of the short-term capital gains. II.The net capital gains will add $1,450 to the couple's tax liability.
A)Only statement I is correct.
B)Only statement II is correct.
C)Both statements are correct.
D)Neither statement is correct.
Answer: B
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Chapter 4: Income Exclusions
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Q1) David owes $120,000 to Second National Bank.David is having financial difficulties during the current year and Second National agrees to reduce David's debt to $80,000 to help him get his financial affairs in order and avoid bankruptcy.
I.If David's assets were $300,000 and his liabilities were $290,000 before the discharge,he is taxed on $10,000 of the $40,000 debt reduction.
II.If David's assets were $300,000 and his liabilities were $400,000 before the discharge,he is not taxed on any of the $40,000 debt reduction.
A)Only statement I is correct.
B)Only statement II is correct.
C)Both statements are correct.
D)Neither statement is correct.
Q2) David's employer laid him off for three months during the slow winter season.He collects $4,375 in unemployment compensation.
A)Fully excluded from gross income.
B)Fully included in gross income.
C)Partially excluded from gross income.
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Page 6
Chapter 5: Introduction to Business Expenses
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Sample Questions
Q1) Which of the following payments are currently deductible?
I.Sweeney Corporation pays tuition to an MBA program for Phyllis,the controller.
II.Amber's Construction Company pays the tuition for Karl's son.Karl is a local building inspector and has no other relationship with the company.
A)Only statement I is correct.
B)Only statement II is correct.
C)Both statements are correct.
D)Neither statement is correct.
Q2) Charlotte traveled to Annapolis to attend a three-day business conference.After her meetings concluded,she stays 2 additional days sightseeing.Charlotte's airfare is $400 and pays $110 per night for lodging,$60 a day for meals,and $20 a day for incidentals.How much of Charlotte's costs can be deducted as a business expense?
A)$- 0 -
B)$400
C)$880
D)$970
E)$1,200
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Page 7
Chapter 6: Business Expenses
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Sample Questions
Q1) Walter is a cash basis taxpayer with a drapery cleaning business.In the current year he determines he will never receive payment from Davis for cleaning services provided to Davis.Can Walter record a deduction for the bad debt? Explain.
Q2) Homer and Marge are married and have an adjusted gross income of $186,000.Currently,neither is covered by an employer sponsored pension plan.They have never established an Individual Retirement Account until this year,when they opened a Roth IRA.What is the maximum amount they can each contribute to Roth IRAs?
A)$1,000
B)$2,000
C)$2,750
D)$4,950
E)$5,500
Q3) For moving expenses to be deductible the distance test must be met,which requires that the commuting distance from the old residence to the new job must be 50 miles further than the commuting distance was to the old job.
A)True
B)False
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Chapter 7: Losses -- Deductions and Limitations
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Q1) In addition to his salary,Peter realizes a $1,000 short-term capital gain and a $5,000 long-term capital loss.The net effect of the capital asset transactions on Peter's adjusted gross income is
A)$-0-
B)$1,000
C)$(3,000)
D)$(4,000)
E)$(5,000)
Q2) Why did Congress enact the at-risk rules?
Q3) Dwight owns an apartment complex that has a $30,000 loss.His adjusted gross income is $85,000 before the loss.Since he qualifies as an active participant he may deduct $25,000.
A)True
B)False
Q4) Lu-Yin purchased her consulting business with $75,000 of her own funds and she borrowed $125,000 from the local bank.If she is personally responsible for the loan,she is at risk only for $50,000.
A)True
B)False
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Chapter 8: Taxation of Individuals
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Sample Questions
Q1) Robbie is 18,and a dependent on his parent's return.His income consists of interest of $1,300,and $2,500 from being a lifeguard.If his parent's taxable income is $75,000,what is Robbie's 2017 tax liability?
A)$-0-
B)$95
C)$130
D)$250
E)$295
Q2) Dorchester purchased investment realty in 2001 for $25,000.During the current year he contributes it to the American Heart Association to use as the site for its new local headquarters.The realty has a value of $52,000 on the contribution date,and Dorchester's AGI is $100,000.Dorchester's maximum current year contribution deduction is
A)$- 0 -
B)$25,000
C)$30,000
D)$50,000
E)$52,000
Q3) Explain the support test and the gross income test to be a qualifying relative.
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Page 10
Chapter 9: Acquisitions of Property
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Q1) Pedro purchased all of the stock of Regis Corporation.Since he purchased all of the stock the basis in all of the corporation's assets must be restated to fair market value.
A)True
B)False
Q2) Brad,an engineering consultant,was given stock valued at $3,000 for services rendered.His basis in the stock he received for the services is zero since he received no cash.
A)True
B)False
Q3) When a security is sold at a loss and and a substantially identical security has been purchased within 30 days before the sale date the loss is disallowed because it is classified as a wash sale.
A)True B)False
Q4) Perry inherits stock from his Aunt Margaret that had a basis of $40,000 to Margaret and a fair market value of $54,000 on May 20,2017,the date of her death.Paul sells the stock on June 21,2017 for $65,000.What is the amount and character of the gain or loss on the sale?
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Page 11
Chapter 10: Cost Recovery on Property: Depreciation, depletion,
and Amortization
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Q1) In May 2017,Preston purchases 5-year MACRS property costing $150,000 and 7-year MACRS property costing $60,000.Preston's income is $100,000.If Preston wishes to maximize his total 2017 cost recovery deduction,what will his total cost recovery deduction be on the properties purchased in 2017?
A)$100,000
B)$122,000
C)$210,000
D)$42,000
E)$34,430
Q2) On June 1,2017,AZ Construction Corporation places a $500,000 crane (7 year life)in service.It placed no other assets in service during the year.What is the amount of AZ Construction's maximum depreciation deduction for the crane for 2017?
A)$-0-
B)$100,000
C)$250,000
D)$450,000
E)$500,000
Q3) Discuss why listed property gets special attention.
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Chapter 11: Property Dispositions
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Q1) Long-term capital gain classification is advantageous to taxpayers because of which of the following?
I.Long-term capital gains are generally taxed at a lower rate than ordinary income.
II.Part of a long-term capital game is excluded from income.
A)Only statement I is correct.
B)Only statement II is correct.
C)Both statements are correct.
D)Neither statement is correct.
Q2) Tory sells General Electric stock (owned 10 years)for a $40,000 gain in the current year.In addition,she had a loss of $20,000 on the sale of one acre of land used in her trade or business.The land was purchased five years ago.Tory's net Section 1231 gain (loss)for the current year is:
A)$- 0 -
B)$20,000
C)$(20,000)
D)$40,000
Q3) Discuss the general differences between Section 1245 and Section 1250 property.
Q4) What incentive provisions or preferential treatments exist for capital gains?
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Chapter 12: Nonrecognition Transactions
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Q1) The holding period of an asset received in a like-kind exchange includes the holding period of the transferred asset.
A)True
B)False
Q2) For a transaction to qualify as a third-party exchange,
I.The exchange must be completed within 1 year of the first exchange.
II.The property exchanged must be identified within 45 days of the first exchange.
A)Only statement I is correct.
B)Only statement II is correct.
C)Both statements are correct.
D)Neither statement is correct.
Q3) Compare the deferral of recognition of losses resulting from an involuntary conversion with the deferrals for like-kind exchanges.
Q4) Classification of a nonrecognition transaction as a continuation of an investment requires a qualified replacement asset.
A)True
B)False
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Chapter 13: Choice of Business Entity -- General Tax and
Nontax Factorsformation
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Q1) A fiscal year can be
I.a period of 12 months ending on any day during the month other than a Sunday.
II.a period of 12 months ending on the last day of any month other than January
A)Only statement I is correct.
B)Only statement II is correct.
C)Both statements are correct.
D)Neither statement is correct.
Q2) Milo contributes a building with a fair market value of $400,000 to a new partnership in exchange for a 25% interest.His adjusted basis in the building is $125,000,which is subject to a $100,000 mortgage.The partnership assumes the mortgage.What is Milo's basis in his partnership interest?
A)$50,000
B)$75,000
C)$100,000
D)$125,000
E)$400,000
Q3) Discuss what limited liability means.What type of entity (or entities)offers this characteristic to its owners? What type(s)of entity (or entities)do not provide this characteristic?
Page 15
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Chapter 14: Choice of Business Entity -- Operations and Distributions
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Q1) Ed's adjusted basis in his partnership interest at the beginning of the tax year is $35,000.The partnership has operating income of $20,000 for the current year.Ed is a 50% partner,and he receives a current distribution of $40,000 cash this year.What is (are)the tax effect of these events?
I.Ed recognizes $10,000 of ordinary income from the partnership for the year.
II.Ed recognizes $40,000 of ordinary income due to the distribution.
III.Ed's adjusted basis in his partnership interest at the close of the tax year is zero.
A)Statements II and III are correct.
B)Only statement I is correct.
C)Statements I,II,and III are correct.
D)Only statement III is correct.
E)Statements I and III are correct.
Q2) Not a separate entity
A)Sole Proprietorship.
B)Partnership.
C)Corporation.
D)S Corporation.
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Chapter 15: Choice of Business Entity -- Other
Considerations
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Q1) Which of the following credits can not be used to reduce the alternative minimum tax?
A)Adoption credit
B)Foreign tax credit
C)Child-and dependent-Care credit
D)Lifetime Learning credit
E)Research and experimental credit
Q2) To obtain the rehabilitation expenditures tax credit certain criteria must be satisfied.Which of the following are correct statements about the credit?
I.If the rehabilitated structure is sold before the end of the ten-year period following the year of the tax credit,recapture occurs.
II.The amount of the credit can be either 10% or 20% of qualified expenditures,depending on the classification of the building.
A)Only statement I is correct.
B)Only statement II is correct.
C)Both statements are correct.
D)Neither statement is correct.
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Chapter 16: Tax Research
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Q1) If the IRS loses a case in a court proceeding,they may issue an acquiescence that means they will not follow the decision in similar cases.
A)True
B)False
Q2) Joint Conference Committee
A)Where federal tax legislation generally originates.
B)Has jurisdiction over all tax matters in the U.S.Senate.
C)The committee responsible for initial hearings and deliberations on a tax bill.
D)Responsible for negotiating a resolution of the differences in the House and Senate versions of a tax bill.
E)The agency within the administrative branch of government with overall responsibility for administration of tax law.
F)Oversees the operation and administration of the tax system as a whole,and prepares a general explanation of any tax bill signed by the President.
Q3) Taxpayers may choose one of several different courts in which to initiate litigation.Discuss the pros and cons of the different trial level courts.
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