Introduction to Taxation
Textbook Exam Questions
Course Introduction
Introduction to Taxation provides students with a foundational understanding of tax systems, principles, and policies as they apply to individuals, businesses, and governments. The course covers key topics such as the purpose and structure of taxation, types of taxes, tax compliance requirements, and governing tax authorities at local, national, and international levels. Students will gain insight into income taxation, tax planning, and the ethical considerations involved in tax practice. Emphasis is placed on understanding how taxation influences financial decision-making and public policy, preparing students for further studies in accounting, finance, or law.
Recommended Textbook
McGraw Hills Taxation of Individuals 2019 Edition 10th Edition by Brian Spilker
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14 Chapters
1576 Verified Questions
1576 Flashcards
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Chapter 1: An Introduction to Tax
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Sample Questions
Q1) The effective tax rate, in general, provides a better depiction of a taxpayer's tax burden than the average tax rate.
A)True
B)False
Answer: True
Q2) The income and substitution effects are two opposing effects that one could consider in static forecasting.
A)True
B)False
Answer: False
Q3) Marc, a single taxpayer, earns $60,000 in taxable income and $5,000 in interest from an investment in city of Birmingham Bonds. Using the U.S. tax rate schedule for year 2018, how much federal tax will he owe? (Use tax rate schedule)
A) $13,200.00
B) $10,239.50
C) $9,139.50
D) $4,453.50
E) None of the choices are correct
Answer: C
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Page 3
Chapter 2: Tax Compliance, the IRS, and Tax Authorities
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Sample Questions
Q1) The Senate Ways and Means Committee is in charge of drafting tax bills in the U.S. Senate.
A)True
B)False
Answer: False
Q2) Allen filed his 2018 tax return on May 15 , 2019 and underreported his gross income by 30 percent. Assuming Allen's underreporting is not due to fraud, the statute of limitations for IRS assessment on Allen's 2018 tax return should end:
A) May 15 , 2021.
B) April 15 , 2021.
C) May 15 , 2022.
D) April 15 , 2022.
E) None of the choices are correct.
Answer: E
Q3) The Internal Revenue Code of 1986 is the name of the current income tax code of the United States of America.
A)True
B)False
Answer: True
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Page 4
Chapter 3: Tax Planning Strategies and Related Limitations
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Sample Questions
Q1) Which of the following is an example of the timing strategy?
A) A corporation paying its shareholders a $20,000 dividend.
B) A parent employing her child in the family business.
C) A taxpayer gifting stock to his children.
D) A cash-basis business delaying billing its customers until after year end.
E) None of the choices are correct.
Answer: D
Q2) The timing strategy is based on the idea that the location of where the income is taxed affects the tax costs of the income.
A)True
B)False
Answer: False
Q3) The present value concept becomes more important as interest rates increase. A)True
B)False
Answer: True
Q4) Tax savings generated from deductions are considered cash inflows.
A)True
B)False
Answer: True
Page 5
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Chapter 4: Individual Income Tax Overview, Dependents, and Filing Status
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Sample Questions
Q1) Which of the following types of income are not considered ordinary income?
A) Compensation income.
B) Net long-term capital gains (in excess of short-term capital losses).
C) Qualified dividend income.
D) Both compensation income and qualified dividend income.
E) Both net long-term capital gains (in excess of short-term capital losses) and qualified dividend income.
Q2) 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
Q3) Miguel, a widower whose wife died in year 1, maintains a household for himself and his daughter who qualifies as his dependent. Miguel did not remarry. What is the most favorable filing status that Miguel qualifies for in year 3?
A) Single.
B) Qualifying widower.
C) Head household.
D) Married, filing separately.
Page 6
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Chapter 5: Gross Income and Exclusions
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Sample Questions
Q1) Interest income is taxed in the year in which it is received by the taxpayer or credited to the bank account.
A)True B)False
Q2) The cash method of accounting requires taxpayers to recognize income only when income is received as cash.
A)True B)False
Q3) To provide relief from double taxation, Congress allows a foreign-unearned income exclusion for interest and dividends earned in foreign countries.
A)True
B)False
Q4) Community property laws dictate that income earned by one spouse is treated as though it was earned equally by both spouses.
A)True B)False
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Page 7
Chapter 6: Individual Deductions
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Sample Questions
Q1) This year Riley files single and reports modified AGI of $71,000. Riley paid $1,200 of interest on a qualified education loan. What amounts can Riley deduct for qualifying education interest?
A) The deduction for qualifying education interest is $1,200.
B) The deduction for qualifying education interest is $1,000.
C) The deduction for qualifying education interest is $720.
D) The deduction for qualifying education interest is $200.
E) None of the choices are correct.
Q2) This year Norma, a single taxpayer, paid $11,200 of real estate taxes on her personal residence and 9,500 of state income taxes. Which of the following is a True?
A) Norma can deduct $11,200 of real estate taxes as an itemized deduction.
B) Norma can deduct $9,500 of state income taxes as a for AGI deduction.
C) Norma can deduct $10,000 of taxes as an itemized deduction.
D) Even if Norma has no other itemized deductions, she should claim the standard deduction.
E) None of the choices are correct.
Q3) All business expense deductions are claimed as "below the line" deductions.
A)True
B)False
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Page 8
Chapter 7: Investments
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Sample Questions
Q1) The amount of interest income a taxpayer recognizes when he redeems a U.S. savings bond is:
A) the excess of the taxpayer's basis in the bonds over the bond proceeds.
B) the bond proceeds.
C) the excess of the bond proceeds over the taxpayer's basis in the bonds.
D) the taxpayer's basis in the bonds.
E) None of the choices are correct.
Q2) One primary difference between corporate and U.S. Treasury bonds is:
A) Treasury bonds always pay interest periodically.
B) Corporate bonds always pay interest periodically.
C) Interest from Treasury bonds is exempt from federal taxation.
D) Interest from corporate bonds is exempt from state taxation.
E) None of the choices are correct.
Q3) Losses associated with personal-use assets, sales to related parties, and wash sales are not currently deductible.
A)True
B)False
Q4) How are individual taxpayers' investment expenses and investment interest expense treated for tax purposes?
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Chapter 8: Individual Income Tax Computation and Tax Credits
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Sample Questions
Q1) What happens if the taxpayer owes an underpayment penalty, but does not compute it on Form 2210?
A) Nothing, unless the taxpayer is audited.
B) The taxpayer is immediately sent to the Tax Court.
C) The IRS will compute and assess the penalty.
D) The penalty is increased by five percentage points.
Q2) Long-term capital gains are taxed at the stated AMT rate for purposes of the alternative minimum tax.
A)True
B)False
Q3) If there is not enough gross tax liability to use the foreign tax credit, ________.
A) it expires unused
B) it is carried back 2 years or forward 20 years
C) it is carried back 3 years or forward 5 years
D) it is carried back 1 year or forward 10 years
Q4) Jerusha is married and she files a separate tax return in 2018. She claimed the standard deduction for regular tax purposes ($12,000). She had no other adjustments. Her regular taxable income was $67,800. What is Jerusha's AMTI?
Page 10
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Chapter 9: Business Income, Deductions, and Accounting Methods
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Sample Questions
Q1) Ralph borrowed $4 million and used the proceeds in his internet business. The interest on this debt is not subject to an interest limitation if Ralph's business has average annual gross receipts of $25 million or less for the prior three taxable years.
A)True B)False
Q2) Ranger Athletic Equipment uses the accrual method and reports on a calendar year. Ranger provides two-year warranties on all sales of equipment. This year Ranger estimated warranty expense for book purposes, and he accrued $1 million of warranty expenses. However, during the year Ranger only spent $400,000 repairing equipment under the warranty. What can Ranger deduct for warranty expense on the tax return for this year?
Q3) A loss deduction from a casualty of a business asset is only available if the asset is completely destroyed.
A)True B)False
Q4) Sole proprietorships must use the same tax year as the proprietor of the business. A)True B)False
Page 11
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Chapter 10: Property Acquisition and Cost Recovery
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Sample Questions
Q1) Daschle LLC completed some research and development during June of the current year. The related costs were $60,000. If Daschle wants to capitalize and amortize the costs as quickly as possible, what is the total amortization expense Daschle may deduct during the current year?
A) $0.
B) $6,500.
C) $7,000.
D) $12,000.
E) None of the choices are correct.
Q2) Which of the following assets are eligible for §179 expensing?
A) Used office machinery.
B) Qualified improvement property.
C) A new delivery truck.
D) Used office furniture.
E) All of the choices are correct.
Q3) The alternative depreciation system requires both a slower method of recovery and longer recovery periods.
A)True
B)False
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Page 12
Chapter 11: Property Dispositions
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Sample Questions
Q1) Generally, the amount realized is everything of value received in a sale less selling expenses.
A)True
B)False
Q2) The general rule regarding the exchanged basis in the new property received in a like-kind exchange is:
A) The basis is equal to the fair market value of the new property.
B) The basis is equal to the fair market value of the old property.
C) The basis is equal to the adjusted basis of the old property.
D) The basis is equal to the cost basis of the old property.
E) All of the choices are correct.
Q3) The sale of machinery for more than the original cost basis (before depreciation), used in a trade or business, and held for more than one year results in the following types of gain or loss?
A) Capital and Ordinary.
B) Ordinary only.
C) Capital and §1231.
D) §1245 and §1231.
E) None of the choices are correct.
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Page 13
Chapter 12: Compensation
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Sample Questions
Q1) Hazel received 20 NQOs (each option gives her the right to purchase 10 shares of stock for $7 per share) at the time she started working when the stock price was $14 per share. Now that the share price is $20 per share, she intends to exercise all of her options. How much income will Hazel recognize on the exercise date and how much tax will she pay assuming her marginal tax rate is 24 percent?
Q2) The use of restricted stock is increasing relative to the use of stock options.
A)True
B)False
Q3) Which of the following is True regarding stock options?
A) A loss is realized when stock options lapse.
B) There is typically no tax effect on the grant date.
C) Income recognized on the exercise date is greater for incentive stock options than nonqualified options.
D) The bargain element on a nonqualified option is taxed to employees at capital gain rates.
Q4) Employees complete a Form W-2 to specify their income tax withholding.
A)True
B)False
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Page 14
Chapter 13: Retirement Savings and Deferred Compensation
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Sample Questions
Q1) Which of the following best describes distributions from a traditional defined contribution plan?
A) Distributions from defined contribution plans are fully taxable to the recipient as ordinary income.
B) Distributions from defined contribution plans are partially taxable to the recipient as ordinary income and partially nontaxable as a return of capital.
C) Distributions from defined contribution plans are fully taxable to the recipient as long-term capital gains.
D) Distributions from defined contribution plans are partially taxable to the recipient as capital gains and partially nontaxable as a return of capital.
Q2) Just like distributions from qualified retirement plans, distributions from nonqualified deferred compensation plans are taxed as ordinary income to the recipient.
A)True
B)False
Q3) A SEP IRA is an example of a self-employed retirement account.
A)True
B)False
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Page 15
Chapter 14: Tax Consequences of Home Ownership
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Sample Questions
Q1) A personal residence is not a capital asset.
A)True
B)False
Q2) A married couple filing a joint tax return is eligible to exclude up to $500,000 of gain realized on the sale of a personal residence if both spouses meet the ownership test and at least one spouse meets the use test.
A)True
B)False
Q3) Lebron Taylor purchased a home on July 1, 2018 for $500,000. Lebron paid for the entire purchase price with cash. On January 1, 2019, Lebron needed additional cash for purposes unrelated to his home so he took out a loan secured by the residence for $150,000. During 2019, he made interest only payments of $4,500 on the loan. What amount of the $4,500 interest expense can Lebron deduct in 2019?
Q4) Under the tax law, a taxpayer's itemized deduction for home mortgage interest in any one particular year is limited to $10,000.
A)True
B)False
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