Personal Income Tax
Final Test Solutions
Course Introduction
This course provides a comprehensive examination of personal income taxation, focusing on the principles, rules, and regulations that govern how individuals are taxed on their income. Students will explore topics such as income types, allowable deductions, tax credits, tax planning strategies, and the preparation and filing of individual tax returns. Emphasis is placed on understanding current tax laws, interpreting tax forms, and recognizing the practical implications of tax policy changes for individuals. The course also introduces students to ethical considerations and the role of tax professionals in supporting compliance and financial decision-making.
Recommended Textbook
South Western Federal Taxation 2014 Individual Income Taxes 37th Edition by William Hoffman
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20 Chapters
2434 Verified Questions
2434 Flashcards
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Page 2
Chapter 1: An Introduction to Taxation and Understanding
the Federal Tax Law
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Sample Questions
Q1) Federal excise taxes that are no longer imposed include:
A) Tax on air travel.
B) Tax on wagering.
C) Tax on the manufacture of sporting equipment.
D) Tax on theatre admissions.
E) None of the above.
Answer: D
Q2) Two months after the burglary of his personal residence,Eric is audited by the IRS.Among the items taken in the burglary was a shoe box containing approximately $50,000 in cash.Eric is the owner and operator of a cash-and-carry liquor store.Eric wonders why he was audited.Can you help explain?
Answer: Although Eric's audit by the IRS could be the result of sheer chance,this appears unlikely.Press coverage of the burglary,particularly if the items stolen were enumerated,could have put the IRS on notice.Why would anyone keep such a large amount of cash at his personal residence? Also,Eric is in a business where tax evasion is easily accomplished.
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Page 3
Chapter 2: Working With the Tax Law
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Sample Questions
Q1) Which items tell taxpayers the IRS's reaction to certain court decisions?
A) Notices.
B) Revenue Procedures.
C) Revenue Rulings.
D) Actions on Decisions.
E) Procedural Regulations.
Answer: D
Q2) What is the role of the Joint Conference Committee in the legislative process?
Answer: When the Senate version of a bill differs from that passed by the House,the Joint Conference Committee,which includes members of both the House Ways and Means Committee and the Senate Finance Committee,is called upon to resolve the differences.The deliberations of the Joint Conference Committee usually produce a compromise between the two versions,which is then voted on by both the House and the Senate.If both bodies accept the bill,it is referred to the President for approval or veto.
Q3) A General Counsel Memorandum is a primary source of tax law.
A)True
B)False
Answer: False
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Chapter 3: Tax Formula and Tax Determination; an
Overview of Property Transactions
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Sample Questions
Q1) In early 2012,Ben sold a yacht,held for 9 months and for pleasure,for a $5,000 gain.Concerned about offsetting the gain before year-end,Ben is considering selling one of the following-each of which would yield a $5,000 loss:
· Houseboat used for recreation.
· Truck used in business.
· Stock investment held for 13 months. Evaluate each choice.
Answer: The sale of the houseboat produces no benefit since losses on personal use property are not deductible.The sale of the truck yields an ordinary loss of $5,000.The ordinary loss result offsets the ordinary income caused by a short-term capital gain.The best choice,however,is the stock investment.A net long-term capital loss can neutralize a net short-term capital gain and prevent ordinary income from materializing.By itself,a net long-term capital loss can only be offset against regular income to the extent of $3,000.Also,it might obviate long-term capital gains which are taxed at preferential tax rates.
Q2) Currently,the top income tax rate in effect is not the highest it has ever been.
A)True
B)False
Answer: True
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Chapter 4: Gross Income: Concepts and Inclusions
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Sample Questions
Q1) Turner,a successful executive,is negotiating a compensation plan with his potential employer.The employer has offered to pay Turner a $600,000 annual salary,payable at the rate of $50,000 per month.Turner counteroffers to receive a monthly salary of $40,000 ($480,000 annually)and a $180,000 bonus in 5 years when Turner will be age 65.
A) If the employer accepts Turner's counteroffer, Turner will recognize $55,000 ($660,000 \(\div\) 12) each month.
B) If the employer accepts Turner's counteroffer, Turner will recognize as gross income $40,000 per month and $180,000 in year 5.
C) If the employer accepts Turner's counteroffer, Turner will be in constructive receipt of $50,000 per month.
D) If the employer accepts Turner's counteroffer, Turner will be in constructive receipt of $50,000 per month and the $180,000 bonus.
E) None of the above.
Q2) Sarah,a widow,is retired and receives $20,000 interest income and dividends and $10,000 in Social Security benefits.Sarah is considering selling a stock at a $8,000 gain.What will be the increase in Sarah's gross income as a result of the sale of the stock?
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Chapter 5: Gross Income: Exclusions
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Sample Questions
Q1) Swan Finance Company,an accrual method taxpayer,requires all of its customers to carry credit life insurance.If a customer dies,the company receives from the insurance company the balance due on the customer's loan.Ali,a customer,died owing Swan $1,500.The balance due included $200 accrued interest that Swan has included in income.When Swan collects $1,500 from the insurance company,Swan:
A) Must recognize $1,500 income from the life insurance proceeds.
B) Must recognize $1,300 income from the life insurance proceeds.
C) Does not recognize income because life insurance proceeds are tax-exempt.
D) Does not recognize income from the life insurance because the entire amount is a recovery of capital.
E) None of the above.
Q2) Mother participated in a qualified state tuition program for the benefit of her son.She contributed $15,000.When the son entered college,the balance in the fund satisfied the tuition charge of $20,000.When the funds were withdrawn to pay the college tuition for her son,Mother must include $5,000 ($20,000 - $15,000)in her gross income.
A)True
B)False
Q3) What Federal income tax benefits are provided for college students?
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7
Chapter 6: Deductions and Losses: in General
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Sample Questions
Q1) Bobby operates a drug trafficking business.Because he has an accounting background,he keeps detailed financial records.What expenses can Bobby deduct on his Federal income tax return?
Q2) Under no circumstance can a loss on the sale of a personal use asset be deducted.
A)True
B)False
Q3) Are there any circumstances under which lobbying expenditures are deductible?
Q4) If a vacation home is rented for less than 15 days during a year,the only expenses that can be deducted are mortgage interest,property taxes,and personal casualty losses.
A)True
B)False
Q5) Briefly explain the provisions regarding the deductibility of expenditures paid for another's benefit or obligation.
Q6) Emelie and Taylor are employed by the Federal government and own their home in Washington,
Q7) Briefly explain why interest on money borrowed to buy tax-exempt municipal bonds is disallowed as a deduction.
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Chapter 7: Deductions and Losses: Certain Business
Expenses and Losses
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Sample Questions
Q1) For tax years beginning in 2012,the domestic production activities deduction (DPAD)for a sole proprietor is calculated by multiplying 9% times adjusted gross income.
A)True
B)False
Q2) Peggy is in the business of factoring accounts receivable.Last year,she purchased a $30,000 account receivable for $25,000.This year,the account was settled for $25,000.How much loss can Peggy deduct and in which year?
A) $5,000 for the current year.
B) $5,000 for the prior year and $5,000 for the current year.
C) $5,000 for the prior year.
D) $10,000 for the current year.
E) None of the above.
Q3) The amount of a farming loss cannot exceed the amount of the taxpayer's NOL for the taxable year.
A)True
B)False
Q4) What are the three methods of handling research and experimental expenditures incurred in a trade or business? Under what circumstances would you choose each?
Page 9
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Chapter 8: Depreciation, cost Recovery, amortization, and Depletion
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Sample Questions
Q1) On May 30,2012,Jane signed a 20-year lease on a factory building to use for her business.The lease begins on June 1,2012.In August 2012,Jane paid $300,000 for qualified leasehold improvements to the building.Jane takes additional first-year depreciation.Determine Jane's total deduction with respect to the leasehold improvements for 2012.
A) $2,890.
B) $150,000.
C) $151,445.
D) $300,000.
E) None of the above.
Q2) Howard's business is raising and harvesting peaches.On March 10,2012,Howard purchased 10,000 new peach trees at a cost of $60,000.Howard does not elect to expense assets under § 179.If eligible,Howard takes additional first-year depreciation.Determine the cost recovery deduction for 2012.
A) $0.
B) $3,000.
C) $31,500.
D) $60,000.
E) None of the above.
Q3) Discuss the reason for the inclusion amount with respect to leased automobiles.
Page 10
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Chapter 9: Deductions: Employee and
Self-Employed-Related Expenses
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Sample Questions
Q1) Which of the following expenses,if any,qualify as deductible?
A) Contributions to a Coverdell Education Savings Account (CESA).
B) Contributions to a qualified tuition program (§ 529 plan).
C) Job hunting expense of FBI agent who applies for the job of city manager of Beaumont (TX).
D) Contribution to a traditional IRA.
E) None of the above.
Q2) A taxpayer who maintains an office in the home to conduct his only business will not have nondeductible commuting expense.
A)True
B)False
Q3) Lloyd,a practicing CPA,pays tuition to attend law school.Since a law degree involves education leading to a new trade or business,the tuition is not deductible.
A)True
B)False
Q4) Qualified moving expenses include the cost of lodging but not meals during the move.
A)True
B)False
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Chapter 10: Deductions and Losses: Certain Itemized
Deductions
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Sample Questions
Q1) In January 2013,Pam,a calendar year cash basis taxpayer,made an estimated state income tax payment for 2012.The payment is deductible in 2012.
A)True
B)False
Q2) The election to itemize is appropriate when total itemized deductions are less than the standard deduction based on the taxpayer's filing status.
A)True
B)False
Q3) Fees for automobile inspections,automobile titles and registration,bridge and highway tolls,parking meter deposits,and postage are not deductible if incurred for personal reasons,but they are deductible as deductions for AGI if incurred as a business expense by a self-employed taxpayer.
A)True
B)False
Q4) Taxes assessed for local benefits,such as a new sidewalk,are not deductible as real property taxes.
A)True
B)False
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Chapter 11: Investor Losses
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Sample Questions
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) Bonnie owns and actively participates in the operations of an apartment building that produces a $40,000 loss during the year.In addition,she has AGI of $100,000 from an active business.Her at-risk amount in the apartment building is $200,000.She may deduct $25,000 of the loss in the current year,while the remaining $15,000 is a suspended passive loss.
A)True
B)False
Q3) Ken has a $40,000 loss from an investment in a partnership in which he does not materially participate.He paid $30,000 for his interest.How much of the loss is disallowed by the at-risk rules? How much is disallowed by the passive loss rules?
Q4) Describe the types of activities and taxpayers that are subject to the at-risk rules.
Q5) Describe the general rules that limit the deduction of investment interest expense.
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Page 13
Chapter 12: Alternative Minimum Tax
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Sample
Questions
Q1) Celia and Amos,who are married filing jointly,have one dependent and do not itemize deductions.They have taxable income of $82,000 and tax preferences of $53,000 in 2012.What is their AMT base for 2012?
A) $0.
B) $85,925.
C) $94,450.
D) $158,300.
E) None of the above.
Q2) In deciding to enact the alternative minimum tax,Congress was concerned about the inequity that resulted when taxpayers with substantial economic incomes could avoid paying regular income tax.
A)True
B)False
Q3) Interest on a home equity loan may be deductible for AMT purposes.
A)True
B)False
Q4) Can AMT adjustments and preferences be both positive and negative?
Q5) Ashlyn is subject to the AMT in 2012.She calculates her AMT base to be $200,000.What are the AMT rates that apply for Ashlyn?
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Chapter 13: Tax Credits and Payment Procedures
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Sample Questions
Q1) Explain the purpose of the tax credit for rehabilitation expenditures and describe the general characteristics of its computation.
Q2) Which,if any,of the following correctly describes the research activities credit?
A) The research activities credit is the greater of the incremental research credit, the basic research credit, or the energy research credit.
B) If the research activities credit is claimed, no deduction is allowed for research and experimentation expenditures.
C) The credit is not available for research conducted outside the United States.
D) All corporations qualify for the basic research credit.
E) None of the above.
Q3) The child tax credit is based on the number of the taxpayer's qualifying children under age 17.
A)True
B)False
Q4) Some foreign taxes do not qualify for the foreign tax credit.
A)True
B)False
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Chapter 14: Property Transactions: Determination of Gain or
Loss and Basis Considerations
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Sample
Questions
Q1) What is a deathbed gift and what tax consequences apply?
Q2) Why is it generally undesirable to pass property by death when its fair market value is less than basis?
Q3) If the alternate valuation date is elected by the executor in 2012,the total basis of inherited property will be more than what it would have been if the primary valuation date and amount had been used.
A)True
B)False
Q4) When a property transaction occurs,what four questions should be considered with respect to the sale or other disposition?
Q5) Bill is considering two options for selling land for which he has an adjusted basis of $80,000 and on which there is a mortgage of $75,000.Under the first option,Bill will sell the land for $170,000 with a stipulation in the sales contract that he liquidate the mortgage before the sale is complete.Under the second option,Bill will sell the land for $95,000 and the buyer will assume the mortgage.Calculate Bill's recognized gain under both options.
Q6) What is the easiest way for a taxpayer who is going to sell property that has declined in value to avoid the § 267 loss disallowance provision?
Page 16
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Chapter 15: Property Transactions: Nontaxable Exchanges
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Sample Questions
Q1) If the taxpayer qualifies under § 1033 (nonrecognition of gain from an involuntary conversion),makes the appropriate election,and the amount reinvested in replacement property is less than the amount realized,realized gain is:
A) Recognized to the extent of the deficiency (amount realized not reinvested).
B) Recognized to the extent of realized gain.
C) Recognized to the extent of the amount reinvested in excess of the adjusted basis.
D) Permanently not subject to taxation.
E) None of the above.
Q2) Libby's principal residence is destroyed by a tornado.She is single and her realized gain is $360,000.Is it possible for Libby's recognized gain to be $0?
Q3) An exchange of business or investment property for like-kind property with a § 267 related party cannot qualify as a § 1031 like-kind exchange.
A)True B)False
Q4) In a nontaxable exchange,the replacement property is assigned a carryover basis. A)True B)False
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Chapter 16: Property Transactions: Capital Gains and Losses
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Sample Questions
Q1) A lessor is paid $45,000 by its commercial tenant as a lease cancellation fee.The tenant wanted to get out of its lease so it could move to a different building.The lessor had held the lease for three years before it was canceled.The lessor had a zero tax basis for the lease.The lessor has received:
A) Ordinary income of $45,000.
B) Long-term capital gain of $45,000.
C) Short-term capital gain of $45,000.
D) Neither gain nor loss.
E) None of the above.
Q2) A franchisor licenses its mode of business operation to a franchisee.
A)True
B)False
Q3) Original issue discount is amortized over the life of the bond.
A)True
B)False
Q4) The chart below details Sheen's 2010,2011,and 2012 stock transactions.What is the capital loss carryover to 2012 and what is the net capital gain or loss for 2012?
Q5) What characteristics must the seller of a patent have in order to be classified as a holder?
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Chapter 17: Property Transactions: Section 1231 and Recapture Provisions
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Q1) Depreciation recapture under § 1245 and § 1250 is reported on Form 4797.
A)True
B)False
Q2) Vertigo,Inc.,has a 2012 net § 1231 loss of $64,000 and had a $32,000 net § 1231 gain in 2011.For 2012,Vertigo's net § 1231 loss is treated as:
A) Ordinary loss.
B) Ordinary gain.
C) Capital loss.
D) Capital gain.
E) None of the above.
Q3) Personal use property casualty gains and losses are not subject to the § 1231 rules. A)True
B)False
Q4) Depreciable personal property was sold at a gain in 2011.On what 2011 form would this transaction be reported,where initially in that form,and what will the form most likely do with the gain?
Q5) Describe the circumstances in which the potential § 1245 depreciation recapture is extinguished.
Page 19
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Chapter 18: Accounting Periods and Methods
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Q1) In applying the lower of cost or market for tax purposes,the market price is the replacement cost of the goods,rather than their expected selling price.
A)True
B)False
Q2) In determining the cost of goods manufactured and thus the cost of the ending inventory:
A) A production supervisor's salary must be treated as a period cost (not added to production costs and inventory) because the salary is paid regardless of the amount produced.
B) The personnel department participates in hiring production workers, and therefore a portion of its costs must be allocated to production.
C) Property taxes on the factory building are treated as period costs because the same taxes are due regardless of the volume of production.
D) Only the costs of direct materials and direct labor must be capitalized.
E) None of the above is correct.
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Chapter 19: Deferred Compensation
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Questions
Q1) Pony,Inc.,issues restricted stock to employees in July 2012,with a two-year vesting period and an SRF.An employee must remain a full-time employee of Pony for two years after the restricted stock is issued.The stock is trading at $10 per share when the stock is issued.An employee,Sam,decides to make the § 83(b)election with his 1,000 shares.At the end of 2012,the stock is selling for $13 per share.What amount,if any,can Pony take as a compensation deduction?
A) $0.
B) $10,000 in 2012.
C) $13,000 in 2012.
D) $10,000 when stock is sold.
E) $13,000 when stock is sold.
Q2) For the spousal IRA provision to apply,a joint return must be filed.
A)True
B)False
Q3) Under what circumstances is it advantageous for an employee to elect to be taxed immediately as ordinary income on the FMV in excess of the amount paid for restricted property?
Q4) Higher compensation does not necessarily guarantee commensurate performance. A)True
B)False
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Chapter 20: Corporations and Partnerships
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Q1) The domestic production activities deduction (DPAD)is determined at the partnership level and then passed through to each individual partner based on his or her partnership interest.
A)True
B)False
Q2) Unlike individuals,corporations cannot take advantage of § 1033 to elect to defer recognizing gain on involuntary conversions.
A)True
B)False
Q3) Changes in the liabilities (trade accounts payable,bank loans,etc.)of a partnership will affect the basis of a partnership interest.
A)True
B)False
Q4) Emerald Corporation and Gold Corporation each own 500 shares of IBM Corporation common stock and each receives the same amount of cash dividends on their stock investment.The dividends received deduction each corporation can claim may not be the same.
A)True
B)False
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