Introduction to Taxation
Exam Answer Key
Course Introduction
Introduction to Taxation provides students with a foundational understanding of the principles, concepts, and practices of taxation. The course covers the rationale for taxation, types of taxes, and the role of taxation in economic and social policy. Students explore the structure of tax systems, taxpayer responsibilities, the process of tax compliance, and the ethical considerations in tax practice. While focusing primarily on individual and business taxation, the course also introduces tax administration, reporting requirements, filing procedures, and the impact of taxes on decision-making for individuals and organizations.
Recommended Textbook
McGraw Hills Taxation of Individuals 2018 Edition 9th Edition by Spilker Brian C
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14 Chapters
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Page 2
Chapter 1: An Introduction to Tax
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Sample Questions
Q1) The tax base for the federal income tax is taxable income.
A)True
B)False
Answer: True
Q2) Which of the following statements is true?
A) Municipal bond interest is subject to explicit federal tax.
B) Municipal bond interest is subject to implicit tax.
C) Municipal bonds typically pay a higher interest rate than corporate bonds with similar risk.
D) All of the choices are correct.
E) None of the choices are correct.
Answer: B
Q3) The 9 Amendment to the U.S.Constitution removed all doubt that a federal income tax was allowed under the U.S.Constitution.
A)True
B)False
Answer: False
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Chapter 2: Tax Compliance, The IRS and Tax Authorities
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Sample Questions
Q1) Which of the following audits is the least common,broadest in scope,and typically most complex?
A) Correspondence.
B) Targeted.
C) Office.
D) Field.
E) None of the choices are correct.
Answer: D
Q2) An extension to file a tax return does not extend the due date for tax payments.
A)True
B)False
Answer: True
Q3) Circular 230 was issued by:
A) AICPA.
B) State Boards of Accountancy.
C) American Bar Association.
D) IRS.
E) None of the choices are correct.
Answer: D
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Page 4
Chapter 3: Tax Planning Strategies and Related Limitations
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Sample Questions
Q1) If tax rates will be higher next year,taxpayers should accelerate their deductions regardless of their after-tax rate of return.
A)True
B)False
Answer: False
Q2) Tax savings generated from deductions are considered cash inflows.
A)True
B)False
Answer: True
Q3) When considering cash outflows,higher present values are preferred.
A)True
B)False
Answer: False
Q4) If tax rates are decreasing:
A) taxpayers should accelerate income.
B) taxpayers should defer deductions.
C) taxpayers should defer income.
D) taxpayers should defer deductions and accelerate income.
E) None of the choices are correct.
Answer: C
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Chapter 4: Individual Income Tax Overview, Exemptions, and Filing Status
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Sample Questions
Q1) For purposes of the qualifying child residence test,a child's temporary absence from the taxpayer's home for attending school full-time is counted as though the child lived in the taxpayer's home during the absence.
A)True
B)False
Q2) It is generally more advantageous from a nontax perspective for a married couple to file separately than it is for them to file jointly.
A)True
B)False
Q3) When determining whether a child meets the qualifying child support test for the child's grandparents,scholarships earned by the child do not count as self-support provided by the child.
A)True
B)False
Q4) Which of the following is NOT a from AGI deduction?
A) Standard deduction.
B) Itemized deduction.
C) Personal exemption.
D) None of these. All of these are from AGI deductions.
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Chapter 5: Gross Income and Exclusions
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Sample Questions
Q1) In January of the current year,Dora made a gift of stock to her granddaughter.At the time of the gift,the stock was worth $15,000.Several months later in the same year after the gift,a $500 dividend was declared on the stock and paid to Dora's granddaughter.What amount must Dora's granddaughter include in her gross income for the current year?
A) $2,000
B) $15,000
C) $15,500
D) $2,500
E) None of the choices are correct.
Q2) Taxpayers meeting certain home ownership and use requirements can permanently exclude up to $1,000,000 of realized gain on the sale of their principal residence.
A)True
B)False
Q3) This fall Angelina,age 35,plans to attend college.To fund her tuition she cashed in Series EE savings bonds with a redemption value of $24,000 and an original cost of $16,800.Angelina plans on spending $7,200 of the proceeds to pay tuition.The redemption proceeds are Angelina's only source of income.What amount of interest must Angelina include in gross income this year?
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Page 7
Chapter 6: Individual Deductions
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Sample Questions
Q1) To qualify as a charitable deduction the donation must be made by cash or by check.
A)True
B)False
Q2) Which of the following is a true statement?
A) A taxpayer can deduct medical expenses incurred for members of his family who are dependents.
B) A taxpayer can deduct medical expenses incurred for a qualified relative even if the relative does not meet the gross income test.
C) A divorced taxpayer can deduct medical expenses incurred for a child even if the child is claimed as a dependent by the former spouse.
D) Deductible medical expenses include long-term care services for disabled spouses and dependents.
E) All of the choices are true.
Q3) To deduct a moving expense,the taxpayer must be employed or self-employed for a specific amount of time after the move.
A)True
B)False
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8
Chapter 7: Investments
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Sample Questions
Q1) When the wash sale rules apply,the realized loss is:
A) recognized at time of sale.
B) not recognized at time of sale and does not affect basis of newly acquired stock.
C) recognized at time of sale and added to basis of the newly acquired stock.
D) not recognized at time of sale and added to basis of the newly acquired stock.
E) not recognized at time of sale and subtracted from the basis of the newly acquired stock.
Q2) Which taxpayer would not be considered a material participant of an activity?
A) taxpayer materially participated in the activity for any five of the preceding ten years
B) taxpayer participated on a regular, continuous, and substantial basis last year
C) taxpayer participated 95 hours last year and participation is not less than any other participants for the year
D) taxpayer participated in the activity for 995 hours last year
E) None of the choices are correct.
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9
Chapter 8: Individual Income Tax Computation and Tax Credits
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Sample Questions
Q1) Which of the following statements regarding the child tax credit is false?
A) The child for whom the credit is claimed must be under the age of 15 at the end of the year.
B) The credit is subject to phase-out based on the taxpayer's AGI.
C) The full credit for a child who qualifies is $1,000.
D) The child for whom the credit is claimed must meet the definition of a qualifying child.
Q2) The computation of the alternative minimum tax base begins with regular taxable income.Which of the following is not part of the formula for computing the alternative minimum tax base?
A) Subtract personal exemptions.
B) Add the standard deduction amount if used for regular tax.
C) Subtract the AMT exemption amount (if any).
D) Add back tax exempt interest from a private activity bond not issued in 2009 or 2010.
Q3) Jackson earned a salary of $254,000 in 2017.What amount of FICA taxes should Jackson's employer withhold from his paycheck?
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Chapter 9: Business Income, Deductions, and Accounting Methods
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Sample Questions
Q1) Which of the following is a true statement about the domestic production activities deduction?
A) This deduction is determined by the amount of goods manufactured in the United States for export abroad.
B) The deduction is calculated as a percentage of the cost of goods manufactured in the United States.
C) This deduction represents a subsidy to taxpayers who manufacture or construct goods in the United States.
D) The domestic production activities deduction is not affected by the cost of labor.
E) All of the choices are true.
Q2) Reasonable in amount means that expenditures can be exorbitant as long as the activity is motivated by profit.
A)True
B)False
Q3) A loss deduction from a casualty of a business asset is only available if the asset is completely destroyed.
A)True
B)False
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Chapter 10: Property Acquisition and Cost Recovery
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Sample Questions
Q1) If a taxpayer places only one asset (a building)in service during the fourth quarter of the year,the mid-quarter convention must be used.
A)True
B)False
Q2) Arlington LLC purchased an automobile for $40,000 on July 5,2017.What is Arlington's depreciation expense for 2017 if its business use percentage is 75 percent (ignore any possible bonus depreciation)? Exhibit 10-8 in the text
A) $2,370
B) $3,160
C) $6,000
D) $8,000
E) None of the choices are correct.
Q3) Significant limits are placed on the depreciation of luxury automobiles.
A)True
B)False
Q4) In general,major integrated oil and gas producers may take the greater of cost or percentage depletion.
A)True
B)False
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Chapter 11: Property Dispositions
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Sample Questions
Q1) Brad sold a rental house that he owned for $250,000.Brad bought the rental house five years ago for $225,000 and has claimed $50,000 of depreciation expense.What is the amount and character of Brad's gain or loss?
A) $25,000 ordinary and $50,000 unrecaptured §1250 gain.
B) $25,000 §1231 gain and $50,000 unrecaptured §1250 gain.
C) $75,000 ordinary gain.
D) $75,000 capital gain.
E) None of the choices are correct.
Q2) The §1231 look-back rule recharacterizes §1231 gains if §1231 losses have created ordinary losses in the last 5 years.
A)True
B)False
Q3) Manassas purchased a computer several years ago for $2,200.On November 10 of the current year,the computer was worth $800.If $1,000 of depreciation deductions had been taken,what is Manassas' tax adjusted basis for the computer?
Q4) Boot is not like-kind property involved in a like-kind exchange. A)True B)False
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Page 13
Chapter 12: Compensation
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Sample Questions
Q1) Which of the items is not correct regarding withholding?
A) Employees that also have self-employment income can have additional amounts of federal tax withheld to avoid estimated tax payments.
B) Employees cannot claim an allowance for a child unless they are entitled to claim the child as a dependent.
C) Employees can claim exempt status and avoid withholding.
D) Married employees can choose to have income tax withholding on wages withheld at the higher single rates.
Q2) Frederique works for a furniture retailer.The shop allows all employees to purchase 10 pieces of furniture per year at a discount.This year Frederique purchased eight pieces.She gave three pieces as a gift to her brother as a wedding present.Her employer's average gross profit percentage is 25 percent.Each piece was 20 percent off of normal retail prices and in all cases the employee price exceeded the employer's cost.What amount of the discount must be included in Frederique's income?
Q3) The use of restricted stock is increasing relative to the use of stock options.
A)True
B)False
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Chapter 13: Retirement Savings and Deferred Compensation
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Sample Questions
Q1) Dean has earned $70,000 annually for the past five years working as an architect for WCC Inc.Under WCC's defined benefit plan (which uses a 7-year graded vesting schedule)employees earn a benefit equal to 3.5% of the average of their three highest annual salaries for every full year of service with WCC.Dean has worked for five full years for WCC and his vesting percentage is 60%.What is Dean's vested benefit (or annual retirement benefit he has earned so far)?
A) $12,250.
B) $42,000.
C) $7,350.
D) $0.
Q2) Yvette is a 44-year-old self-employed contractor (no employees).During 2017,her Schedule C net income was 500,000.Assuming Yvette has no contributions to other retirement plans.What is the maximum amount that Yvette can contribute to (1)a SEP IRA and (2)an individual 401(k)? (Round your answers to the nearest whole number).
Q3) A taxpayer can only receive a saver's credit if she contributes to a qualified retirement account.
A)True B)False
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Chapter 14: Tax Consequences of Home Ownership
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Sample Questions
Q1) Which of the following statements regarding the home office expense deduction is correct?
A) For home offices that are at least 300 square feet, the amount of home office expense allowed under the simplified method of computing home office expenses is limited to a fixed amount no matter how much the income from the business.
B) Taxpayers may choose to use the actual expense method for determining home office expenses in one year and choose the simplified method in a different year.
C) Under the simplified method of computing home office expenses, a taxpayer is not allowed to deduct any depreciation associated with a home as a home office expense.
D) All of the above statements are correct.
Q2) In order to be eligible to exclude gain on the sale of a principal residence,the taxpayer must meet which of the following test(s)?
A) Rental test.
B) Use test.
C) Ownership test.
D) Business use test.
E) Ownership and use test.
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Page 16