Personal Income Tax Accounting Exam Review
Course Introduction
Personal Income Tax Accounting is a comprehensive course designed to introduce students to the fundamental principles and practices of individual income taxation. The course covers the calculation of taxable income, the identification of allowable deductions and credits, and the proper reporting of income for federal tax purposes. Students will explore the legal and ethical responsibilities of tax compliance, the procedures for preparing individual tax returns, and the practical application of tax law through case studies and scenario analysis. Emphasis is placed on current tax regulations, the use of tax preparation software, and the impact of tax planning on personal financial decision-making.
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) Some states use their state income tax return as a means of collecting unpaid sales and use taxes.
A)True
B)False Answer: True
Q3) For omissions from gross income in excess of 25% of that reported,there is no statute of limitations on additional income tax assessments by the IRS.
A)True
B)False
Answer: False
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Page 3
Chapter 2: Working With the Tax Law
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Q1) The U.S.Tax Court meets most often in Washington, D.C.
A)True
B)False
Answer: False
Q2) A Temporary Regulation under § 173 of the Code would be cited as follows: Temp.Reg.§ 173.
A)True
B)False
Answer: False
Q3) Tax research involves which of the following procedures:
A) Identifying and refining the problem.
B) Locating the appropriate tax law sources.
C) Assessing the validity of the tax law sources.
D) Follow-up.
E) All of the above.
Answer: E
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Chapter 3: Tax Formula and Tax Determination: an
Overview of Property Transactions
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Sample Questions
Q1) Homer (age 68)and his wife Jean (age 70)file a joint return.They furnish all of the support of Luther (Homer's 90-year old father),who lives with them.For 2012,they received $6,000 of interest income on city of Chicago bonds and interest income on corporate bonds of $48,000.Compute Homer and Jean's taxable income for 2012.
Answer: $22,400.Their gross income is $48,000 since the $6,000 interest on municipal bonds is an exclusion.They are entitled to a basic standard deduction of $11,900 and additional standard deductions of $1,150 each for being age 65 or older.They can claim a dependency exemption of $3,800 for Luther and two personal exemptions for themselves.Thus,$48,000 - $11,900 - $2,300 (2 ´ $1,150)- $11,400 (3 ´ $3,800)= $22,400.
Q2) A decrease in a taxpayer's AGI could decrease the amount of charitable contribution that can be claimed.
A)True
B)False
Answer: True
Q3) A child who is married can be subject to the kiddie tax.
A)True
B)False
Answer: True
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Chapter 4: Gross Income: Concepts and Inclusions
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Q1) When stock is sold after the record date for a dividend that has been declared,the seller must recognize as income the dividend received.
A)True
B)False
Q2) Jake is the sole shareholder of an S corporation that earned $50,000 in 2012.The corporation was short on cash and therefore distributed only $15,000 to Jake in 2012.Jake is required to recognize $15,000 of income from the S corporation in 2012.
A)True
B)False
Q3) In some community property states,the income from property that was inherited by a spouse after the marriage is treated as all earned by the spouse who inherited the property.
A)True
B)False
Q4) The financial accounting principle of conservatism is not well-suited to the task of measuring taxable income.
A)True
B)False
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Chapter 5: Gross Income: Exclusions
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Q1) Sharon had some insider information about a corporate takeover.She unintentionally informed a friend,who immediately bought the stock in the target corporation.The takeover occurred and the friend made a substantial profit from buying and selling the stock.The friend told Sharon about his stock dealings,and gave her a pearl necklace because she "made it all possible." The necklace was worth $10,000,but she already owned more jewelry than she desired.
A) The necklace is a nontaxable gift received by Sharon because the friend was not legally required to make the gift.
B) The value of the necklace is not included in Sharon's gross income unless she sells it.
C) The value of the necklace is not included in Sharon's gross income because passing the information was an illegal act and the SEC can confiscate the necklace.
D) The value of the necklace must be included in Sharon's gross income for the tax year it was received by her.
E) None of the above.
Q2) 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.)
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Chapter 6: Deductions and Losses: in General
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Q1) Iris,a calendar year cash basis taxpayer,owns and operates several TV rental outlets in Florida,and wants to expand to other states.During 2012,she spends $14,000 to investigate TV rental stores in South Carolina and $9,000 to investigate TV rental stores in Georgia.She acquires the South Carolina operations,but not the outlets in Georgia.As to these expenses,Iris should:
A) Capitalize $14,000 and not deduct $9,000.
B) Expense $23,000 for 2012.
C) Expense $9,000 for 2012 and capitalize $14,000.
D) Capitalize $23,000.
E) None of the above.
Q2) Which of the following is not deductible?
A) Moving expenses in excess of reimbursement.
B) Tax return preparation fees of an individual.
C) Expenses incurred associated with investments in stocks and bonds.
D) Allowable hobby expenses in excess of hobby income.
E) None of the above.
Q3) Legal expenses incurred in connection with rental property are deductions from AGI. A)True B)False
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Page 8
Chapter 7: Deductions and Losses: Certain Business
Expenses and Losses
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Q1) When a net operating loss is carried back to a non-loss year,the net operating loss will affect the charitable contribution deduction of the carryback year.
A)True
B)False
Q2) An individual taxpayer who does not itemize deductions uses the standard deduction to compute the excess of nonbusiness deductions over the sum of nonbusiness income and net nonbusiness capital gains for purposes of computing net operating loss.
A)True
B)False
Q3) The amount of a loss on insured business use property is reduced by the insurance coverage if no claim is made against the insurer.
A)True
B)False
Q4) How is qualified production activities income (QPAI)calculated?
Q5) A nonbusiness bad debt deduction can be taken any year after the debt becomes totally worthless.
A)True
B)False
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Chapter 8: Depreciation, cost Recovery, amortization, and Depletion
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Sample Questions
Q1) 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
Q2) Rick purchased a uranium interest for $10,000,000 on January 3,2012,when recoverable reserves were estimated at 200,000 units.A total of 10,000 units were extracted in 2012 and 7,000 units were sold in 2012.Gross income from the property was $2,800,000 and taxable income without the allowance for depletion was $1,000,000.Determine the depletion deduction for 2012.
Q3) On July 10,2012,Ariff places in service a new sports utility vehicle that cost $70,000 and weighed 6,300 pounds.The SUV is used 100% for business.Determine Ariff's maximum deduction for 2012,assuming Ariff's § 179 business income is $110,000.Ariff does not take additional first-year depreciation.
A) $2,960.
B) $25,000.
C) $34,000.
D) $70,000.
E) None of the above.
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Chapter 9: Deductions: Employee and
Self-Employed-Related Expenses
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Sample Questions
Q1) Under the automatic mileage method,one rate does not cover every type of expense.For 2012,what are the rates for business use,education,moving,charitable,and medical?
Q2) Elaine,the regional sales director for a manufacturer of exercise equipment,pays $2,500 to rent a skybox for a visiting performance of the Harlem Globetrotters.The skybox holds 10 seats,and Elaine invites 7 clients to the event.Nonluxury seats range in price from $80 to $120.The refreshments provided during the event cost $600.If Elaine meets all of the requirements for deductibility (i.e.,business discussion,substantiation),she may deduct:
A) $1,550.
B) $1,500.
C) $1,260.
D) $1,100.
E) $900.
Q3) How are combined business/pleasure trips treated for travel within the United States as opposed to foreign travel?
Q4) For tax purposes,"travel" is a broader classification than "transportation." A)True B)False
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Chapter 10: Deductions and Losses: Certain Itemized
Deductions
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Q1) In 2012,Shirley sold her personal residence to Mike for $400,000.Before the sale,Shirley paid the real estate taxes of $7,030 for the calendar year.For income tax purposes,the deduction is apportioned as follows: $4,000 to Shirley and $3,030 to Mike.
a. What is Mike's basis in the residence?
b. What is Shirley's amount realized from the sale of the residence?
c. What amount of real estate taxes can Mike deduct?
d. What amount of real estate taxes can Shirley deduct?
Q2) Harry and Sally were divorced three years ago.In July of the current year,their son,Joe,broke his arm falling out of a tree.Joe lives with Sally and Sally claims him as a dependent on her tax return.Harry paid for the medical expenses related to Joe's injury.Can Harry claim the medical expenses he paid for Joe on his tax return?
Q3) For purposes of computing the deduction for qualified residence interest,a qualified residence includes the taxpayer's principal residence and two other residences of the taxpayer or spouse.
A)True
B)False
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Chapter 11: Investor Losses
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Q1) Stuart is the sole owner and a material participant in a business in which he has $50,000 at risk.If the business incurs a loss of $80,000 from operations,Stuart can deduct the full amount.
A)True
B)False
Q2) In the current year,Spring Corporation,a closely held personal service corporation,has $120,000 of passive losses,$70,000 of active business income,and $50,000 of portfolio income.How much of the passive loss may Spring deduct in the current year?
A) $120,000.
B) $70,000.
C) $50,000.
D) $0.
E) None of the above.
Q3) Eric makes an installment sale of a passive activity having suspended losses of $40,000.He collects 25% of the sales price in the current year,and will collect 25% in each of the next three years.Eric can deduct $10,000 of the passive loss this year.
A)True
B)False
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Page 13
Chapter 12: Alternative Minimum Tax
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Q1) Akeem,who does not itemize,incurred a net operating loss (NOL)of $50,000 in 2012.His deductions in 2012 included AMT tax preference items of $20,000,and he had no AMT adjustments.Assuming the NOL is not carried back,what is Akeem's ATNOLD carryover to 2013?
A) $50,000.
B) $30,000.
C) $20,000.
D) $40,000.
E) None of the above.
Q2) Which of the following statements is correct?
A) If the tentative AMT is $10,000 and the regular income tax liability is $12,000, the AMT is $2,000.
B) If the tentative AMT is $12,000 and the regular income tax liability is $10,000, the AMT is $12,000.
C) If the tentative AMT is $10,000 and the regular income tax liability is $12,000, the AMT is a negative $2,000.
D) If the tentative AMT is $12,000, and the regular income tax liability is $10,000, the AMT is $2,000.
E) None of the above.
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Chapter 13: Tax Credits and Payment Procedures
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Q1) The child tax credit is based on the number of the taxpayer's qualifying children under age 17.
A)True
B)False
Q2) For purposes of computing the credit for child and dependent care expenses,the qualifying employment-related expenses are limited to an individual's actual or deemed earned income.
A)True
B)False
Q3) Kevin and Sue have two children,ages 8 and 14.They spend $6,200 per year on eligible employment related expenses for the care of their children after school.Kevin earned a salary of $20,000 and Sue earned a salary of $18,000.What is the amount of the credit for child and dependent care expenses?
A) $690.
B) $713.
C) $1,380.
D) $1,426.
E) None of the above.
Q4) Describe the withholding requirements applicable to employers.
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Chapter 14: Property Transactions: Determination of Gain or
Loss and Basis Considerations
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Sample Questions
Q1) On the sale of property between related parties,realized gains are recognized whereas realized losses are disallowed.
A)True
B)False
Q2) Lynn transfers her personal use automobile to her business (a sole proprietorship).The car's adjusted basis is $35,000 and the fair market value is $12,000.No cost recovery had been deducted by Lynn,since she held the car for personal use.Determine the adjusted basis of the car to Lynn's sole proprietorship including the basis for cost recovery.
Q3) If the fair market value of the property on the date of death is greater than on the alternate valuation date,the use of the alternate valuation amount is mandatory.
A)True
B)False
Q4) If the amount of a corporate distribution is less than the amount of the corporate earnings and profits,the return of capital concept does not apply and the shareholders' adjusted basis for the stock remains unchanged.
A)True
B)False
Page 16
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Chapter 15: Property Transactions: Nontaxable Exchanges
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Q1) Taxpayer owns a home in Atlanta.His company transfers him to Chicago on January 2,2012,and he sells the Atlanta house in early February.He purchases a residence in Chicago on February 3,2012.On December 15,2012,taxpayer's company transfers him to Los Angeles.In January 2013,he sells the Chicago residence and purchases a residence in Los Angeles.Because multiple sales have occurred within a two-year period,§ 121 treatment does not apply to the sale of the second home.
A)True
B)False
Q2) Sam's office building with an adjusted basis of $750,000 and a fair market value of $900,000 is condemned on November 30,2012.Sam is a calendar year taxpayer.He receives a condemnation award of $875,000 on March 1,2013.He builds a new office building at a cost of $845,000 which is completed and paid for on December 31,2015.What is Sam's recognized gain on receipt of the condemnation award and basis for the new office building assuming his objective is to minimize gain recognition?
A) $0; $720,000.
B) $30,000; $750,000.
C) $30,000; $845,000.
D) $150,000; $750,000.
E) None of the above.
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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) Seamus had $16,000 of net short-term capital loss in 2011.In 2012,Seamus has $17,000 of long-term capital loss and $26,000 of long-term capital gain.Which of the following statements is correct?
A) Seamus had a $13,000 short-term capital loss carryover to 2012.
B) Seamus has an $9,000 2012 net long-term capital gain.
C) Seamus has a $4,000 2012 net short-term capital loss.
D) a. and c.
E) None of the above.
Q3) What characteristics must the seller of a patent have in order to be classified as a holder?
Q4) All collectibles long-term gain is subject to a potential alternative tax rate of 28%.
A)True B)False
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Chapter 17: Property Transactions: Section 1231 and Recapture Provisions
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Q1) Rental use depreciable machinery held more than 12 months is an example of a § 1231 asset.
A)True
B)False
Q2) Which of the following assets held by a retail business is a § 1231 asset?
A) Inventory.
B) A machine used in the business and held less than one year.
C) A factory building used in the business and held more than one year.
D) Accounts receivable.
E) All of the above.
Q3) Which of the following creates potential § 1245 depreciation recapture and potential § 1231 gain?
A) Depreciable equipment held more than one year and sold for more than its original cost.
B) Amortizable goodwill held more than one year and disposed of for less than its adjusted basis.
C) Land held more than one year and sold for more than was paid for it.
D) Inventory held more than one year and sold for more than was paid for it.
E) None of the above.
Page 19
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Chapter 18: Accounting Periods and Methods
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Q1) Walter sold land (a capital asset)to an unrelated party for $50,000 cash and a 5% note for $150,000 due in three years.His basis in the land was $40,000.Walter and the purchaser are cash basis taxpayers.Which of the following statements is correct?
A) If the Federal rate is 6%, interest will be imputed at that rate.
B) If the Federal rate is 7.5%, interest will be imputed at that rate.
C) If the Federal rate is 4.5%, interest will not be imputed.
D) All of the above.
E) None of the above.
Q2) In 2012,T Corporation changed its tax year from ending each September 30th to ending each December 31st.The corporation earned $25,000 during the period October 1,2012 through December 31,2012.The tax on the annualized income for the short period will be greater than the tax on $25,000 when the tax rates are progressive.
A)True
B)False
Q3) A doctor's incorporated medical practice may end the last day of any month of the year.
A)True
B)False
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Chapter 19: Deferred Compensation
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Q1) Danielle,who is retired,reaches age 70 1/2 in 2011,and she will also be age 71 in 2011.She has a $150,000 balance in her traditional IRA.If her life expectancy is 15.3 years,what distribution,if any,must be made by April 1,2012?
A) $0.
B) $9,804.
C) $19,608.
D) $150,000.
E) None of the above.
Q2) Contributions to a qualified pension plan are immediately deductible by the employer.
A)True
B)False
Q3) A qualified plan must provide,at a minimum,that all employees in the covered group who are 21 years of age are eligible to participate after completing one year of service. A)True B)False
Q4) What is a defined contribution plan?
Q5) What is a highly compensated employee?
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Chapter 20: Corporations and Partnerships
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Q1) 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
Q2) Hailey redeems some of the stock she holds in Mallard Corporation for $300,000.The stock has a basis to her of $100,000 and has been held by her as an investment for many years.Mallard Corporation has more than $2 million in earnings and profits.In the year of the redemption,Hailey is in the 33% income tax bracket.The redemption generates a tax of:
A) $99,000 if it does not qualify for sale or exchange treatment.
B) $45,000 if it does not qualify for sale or exchange treatment.
C) $45,000 if it does qualify for sale or exchange treatment.
D) $66,000 if it does qualify for sale or exchange treatment.
E) None of the above.
Q3) Currently all C corporations must file a Schedule M-3 with Form 1120.
A)True
B)False
Q4) The domestic production activities deduction (DPAD)is handled differently for a partnership than for a C corporation.Explain
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