Introduction to Taxation Pre-Test
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Course Introduction
Introduction to Taxation provides students with a foundational understanding of tax systems and principles that govern income, corporate, and other forms of taxation. The course covers key concepts such as the purpose and objectives of taxation, the structure and application of tax laws, and the roles of various government agencies in tax administration. Topics include taxable entities, tax compliance, ethical considerations, and the socioeconomic impact of taxation on individuals and businesses. Through practical examples and case studies, students will develop the analytical skills required to navigate basic tax issues and appreciate the role of taxation in public policy and economics.
Recommended Textbook
McGraw Hills Taxation of Individuals 2018 Edition 9th Edition by Spilker Brian C
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Chapter 1: An Introduction to Tax
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Sample Questions
Q1) Nelson has the choice between investing in a city of Fruithurst bond at 4% or a J.B.Ribs,Inc.bond at 6.5%.Assuming that both bonds have the same non-tax characteristics and that Nelson has a 40% marginal tax rate,in which bond should he invest? What interest rate offered by J.B.Ribs,Inc.would make Nelson indifferent between investing in the two bonds?
Answer: Nelson's after tax rate of return on the tax exempt city of Fruithurst bond is 4%.The J.B.Ribs,Inc.bond pays taxable interest of 6.5%.Nelson's after tax rate of return on the J.B.Ribs,Inc.bond is 3.9% (i.e.,6.5% interest income - (6.5% × 40%)tax = 3.9%).Nelson should invest in the city of Fruithurst bond.
To be indifferent between investing in the two bonds,the J.B.Ribs,Inc.bond should provide Nelson the same after-tax rate of return as the city of Fruithurst bond (4%).To solve for the required pre-tax rate of return we can use the following formula: After-tax return = Pre-tax return × (1 - Marginal Tax Rate).
J.B.Ribs,Inc.needs to offer a 6.67% interest rate to generate a 4% after-tax return and make Nelson indifferent between investing in the two bonds. 4% = Pre-tax return × (1 - 40%); Pre-tax return = 4%/(1 - 40%)= 6.67%
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Page 3
Chapter 2: Tax Compliance, The IRS and Tax Authorities
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Sample Questions
Q1) Which of the following is a false statement? A taxpayer filing a fraudulent tax return:
A) is potentially subject to criminal penalties.
B) is potentially subject to civil penalties.
C) is potentially subject to fines and a prison sentence.
D) will have an unlimited statute of limitations for the fraudulent tax return.
E) None of the choices are correct.
Answer: E
Q2) Because the U.S.District Court hears a broader set of cases,decisions by the U.S.District Court may be considered to have more authoritative weight than the U.S.Court of Federal Claims.
A)True
B)False
Answer: False
Q3) Of the two basic types of tax services,beginning tax researchers often prefer topical tax services.
A)True
B)False
Answer: True
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4
Chapter 3: Tax Planning Strategies and Related Limitations
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Q1) Paying dividends to shareholders is one effective way of shifting income from a corporation to its shareholders.
A)True
B)False
Answer: False
Q2) If Rudy has a 25% tax rate and a 6% after-tax rate of return,a $30,000 tax deduction in four years will save how much tax in today's dollars? Use Exhibit 3.1 in the text.(Round present and future value amounts to 3 places)
A) $30,000.
B) $7,500.
C) $23,760.
D) $5,940.
E) None of the choices are correct.
Answer: D
Q3) The present value concept becomes more important as interest rates increase.
A)True
B)False
Answer: True
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Chapter 4: Individual Income Tax Overview, Exemptions, and Filing Status
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Sample Questions
Q1) An individual with gross income of $5,000 could qualify as a qualifying child of another taxpayer but could not qualify as a qualifying relative of another taxpayer.
A)True
B)False
Q2) Certain types of income are taxed at a lower rate than ordinary income.
A)True
B)False
Q3) All of the following represents a type or character of income except:
A) Tax exempt.
B) Capital.
C) Qualified dividend.
D) Normal.
Q4) Tom Suzuki's tax liability for the year is $2,450.He had $2,050 of federal income taxes withheld from his paycheck during the year by his employer and has $2,000 in tax credits.What are Tom's taxes due or tax refund for the year?
Q5) From AGI deductions are commonly referred to as deductions "below the line."
A)True
B)False
6
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Chapter 5: Gross Income and Exclusions
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Sample Questions
Q1) This year,Fred and Wilma,married filing joint,sold their home (sales price $750,000; cost $200,000).All closing costs were paid by the buyer.Fred and Wilma owned and lived in their home for 20 years.How much of the gain is included in gross income?
A) $550,000
B) $300,000
C) $250,000
D) $50,000
E) None of the choices are correct.
Q2) Aubrey and Justin divorced on June 30 of this year.Through June 30 Aubrey earned $62,000 of salary,and Justin earned $45,000.For the year Aubrey reported a total salary of $130,000,and Justin earned a total salary of $88,000.Aubrey and Justin live in a community property state.How much income earned will Justin report on his tax return for this year?
Q3) The cash method of accounting requires taxpayers to recognize income only when income is received as cash.
A)True
B)False
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Page 7
Chapter 6: Individual Deductions
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Q1) This year,Benjamin Hassell paid $20,000 of interest on a mortgage on his home (Benjamin borrowed $600,000 to buy the residence and it is currently worth $1,000,000),$12,000 on a $150,000 home equity loan on his home,and $10,000 of interest on a mortgage on his vacation home (loan of $300,000; home purchased for $400,000).How much interest expense can Benjamin deduct as an itemized deduction?
Q2) Congress allows self-employed taxpayers to deduct the cost of health insurance above the line (for AGI)because:
A) employers are allowed to deduct social security (FICA) taxes as a business expense.
B) self-employed taxpayers need an alternate mechanism for reducing the cost of health care.
C) this deduction provides a measure of equity between employees and the self-employed.
D) health insurance premiums cannot be deducted otherwise.
E) None of the choices are correct.
Q3) Taxpayers may elect to deduct state and local sales taxes instead of deducting state and local income taxes.
A)True
B)False
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Chapter 7: Investments
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Sample Questions
Q1) Bill would like some tax benefits for his investment expenses incurred this year.His AGI is $190,000.Currently,his expenses consist of: (1)$1,000 investment advice fees,(2)$1,500 unreimbursed employee business expenses (a miscellaneous itemized deduction),and (3)$600 tax return preparation fees.How much more,if any,must Bill spend for investment expenses this year before he receives any tax benefit?
A) Zero, Bill is already receiving a benefit.
B) More than $500.
C) More than $700.
D) More than $900.
E) None of the choices are correct.
Q2) How are individual taxpayers' investment expenses and investment interest expense treated for tax purposes?
Q3) Nontax factor(s)investors should consider when choosing between investments include:
A) before-tax rates of return.
B) after-tax rates of return.
C) liquidity needs.
D) before-tax rates of return and after-tax rates of return.
E) before-tax rates of return and liquidity needs.
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Page 9
Chapter 8: Individual Income Tax Computation and Tax Credits
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Sample Questions
Q1) Due to the alternative minimum tax rate structure,timing tax planning strategies are not effective under the alternative minimum tax system.
A)True
B)False
Q2) Miley,a single taxpayer,plans on reporting $28,950 of taxable income this year (all of her income is from a part-time job).She is considering applying for a second part-time job that would give her an additional $10,000 of taxable income.By how much will the income from the second job increase her tax liability? (use the tax rate schedules in the text)
A) $1,000
B) $1,500
C) $1,600
D) $2,500
Q3) Max is a 14-year-old dependent of his parents.During 2017,Max earned $1,800 working part time jobs and he received $1,500 of interest income from corporate bonds that were given to him last year.What is Max's 2017 taxable income?
Q4) Atlas earned $17,300 from his sole proprietorship in 2017.This was his only source of income.How much in self-employment taxes will Atlas be able to deduct?
Page 10
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Chapter 9: Business Income, Deductions, and Accounting Methods
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Q1) Ed is a self-employed heart surgeon who has incurred the following reasonable expenses.How much can Ed deduct? $1,000 in airfare to repair investment rental property in Colorado.
$500 in meals while attending a medical convention in New York.
$300 for tuition for an investment seminar "How to pick stocks."
$100 for tickets to a football game with hospital administrators to celebrate successful negotiation of a surgical contract earlier in the day. The correct answer is ________.
A) $1,300 "for AGI"
B) $1,300 "for AGI" and $300 "from AGI"
C) $480 "for AGI"
D) $80 "for AGI" and $1,300 "from AGI"
E) None of the choices are correct.
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
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Chapter 10: Property Acquisition and Cost Recovery
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Q1) Wheeler LLC purchased two assets during the current year (a full 12-month tax year).Wheeler placed in service computer equipment (5-year property)on November 16 with a basis of $15,000 and furniture (7-year property)on April 20 with a basis of $11,000.Calculate the maximum depreciation expense (ignoring §179 and bonus depreciation).(Use MACRS Table 2 in the text)(Round final answer to the nearest whole number)
A) $1,285.
B) $2,714.
C) $4,572.
D) $5,200.
E) None of the choices are correct.
Q2) Tax cost recovery methods do not include:
A) Amortization.
B) Capitalization.
C) Depletion.
D) Depreciation.
E) All of the choices are tax cost recovery methods.
Q3) Tax cost recovery methods include depreciation,amortization,and depletion.
A)True
B)False
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Chapter 11: Property Dispositions
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Sample Questions
Q1) Pelosi Corporation sold a parcel of land valued at $300,000.Its basis in the land was $250,000.For the land,Pelosi received $150,000 in cash in the current year and a note providing Pelosi with $150,000 in the subsequent year.What is Pelosi's recognized gain in the current and subsequent year,respectively?
A) $0, $50,000.
B) $10,000, $40,000.
C) $25,000, $25,000.
D) $50,000, $0.
E) None of the choices are correct.
Q2) After application of the look-back rule,net §1231 gains become capital while net §1231 losses become ordinary.
A)True
B)False
Q3) Which of the following is not an involuntary conversion?
A) Destruction caused by a hurricane.
B) Imminent domain.
C) A foreclosure.
D) Fire damage.
E) All of the choices could be involuntary conversions.
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Page 13
Chapter 12: Compensation
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Q1) Employers cannot discriminate between highly and non-highly compensated employees when providing taxable fringe benefits.
A)True
B)False
Q2) An employee can indicate whether they want an additional amount withheld for payroll taxes on the Form W-4.
A)True
B)False
Q3) Rick recently received 500 shares of restricted stock from his employer,Crazy Corporation,when the share price was $5 per share.Rick's restricted shares vested three years later when the market price was $12.Rick held the shares for a little more than a year and sold them when the market price was $15.What is the amount of Rick's income on the vesting date? Assuming a marginal tax rate of 30 percent,what is Rick's tax on the restricted stock?
Q4) When stock options are exercised they are converted into actual employer stock.
A)True
B)False
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Chapter 13: Retirement Savings and Deferred Compensation
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Q1) Which of the following taxpayers is most likely to qualify for the saver's credit?
A) A low AGI taxpayer who does not contribute to any qualified retirement plan.
B) A low AGI taxpayer who contributes to her employer's 401(k) plan.
C) A high AGI self-employed taxpayer.
D) A high AGI employee who does not contribute to any qualified retirement plan.
Q2) 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.
Q3) Aiko (single,age 29)earned $40,000 in 2017.He was able to contribute $1,800 ($150/month)to his employer sponsored 401(k).What is the total saver's credit that Aiko can claim for 2017? Exhibit 13-9 in the text
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Chapter 14: Tax Consequences of Home Ownership
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Q1) Which of the following statements regarding the exclusion of gain on the sale of a principal residence is correct?
A) A taxpayer may not exclude gain if the taxpayer is renting the residence at the time of the sale.
B) A taxpayer may simultaneously own two homes that are eligible for the home sale exclusion.
C) A taxpayer must be living in a residence at the time it is sold to qualify for the exclusion.
D) For a married couple to qualify for the $500,000 exclusion, both spouses must meet the ownership and use tests.
Q2) On March 31,year 1,Mary borrowed $200,000 to buy her principal residence.Mary paid 3 points to reduce her interest rate from 6 percent to 5 percent.The loan is for a 30-year period.What is Mary's year 1 deduction for her points paid?
A) $50.
B) $150.
C) $4,500.
D) $6,000.
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