Personal Income Tax Preparation
Final Exam
Course Introduction
This course provides an in-depth introduction to the principles and practical applications of personal income tax preparation in accordance with current tax laws and regulations. Students will learn to analyze individual income sources, identify allowable deductions and credits, and accurately complete federal and state tax returns using tax preparation software. Emphasis is placed on understanding filing requirements, tax forms, recordkeeping, and the ethical responsibilities of tax preparers. By the end of the course, students will be capable of preparing basic personal income tax filings and advising individuals on strategies to optimize their tax positions.
Recommended Textbook Income Tax Fundamentals 2019 37th Edition by Gerald E. Whittenburg
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Chapter 1: The Individual Income Tax Return
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Sample Questions
Q1) All of the following factors are important in determining whether an individual is required to file an income tax return, except:
A)The taxpayer's filing status.
B)The taxpayer's gross income.
C)The taxpayer's total itemized deductions.
D)The availability of the additional standard deduction for taxpayers who are elderly.
E)None of the above.
Answer: C
Q2) If an unmarried taxpayer paid more than half the cost of keeping a home which is the principal place of residence of a nephew, who is not her dependent, she may use the head of household filing status.
A)True
B)False
Answer: False
Q3) All taxpayers may use the tax rate schedule to determine their tax liability.
A)True
B)False
Answer: False
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Chapter 2: Gross Income and Exclusions
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Sample Questions
Q1) Tracy transfers to Glen a life insurance policy with a face value of $40,000 and a cash value of $8,000 in payment of a personal debt.Glen continues to make premium payments on the policy until Tracy's death.At that time, Glen had paid $3,500 in premiums.
a.How much income must Glen report when he receives the $40,000 in proceeds?
b.Would your answer be different if Tracy were a shareholder and CEO of a corporation to which the policy was transferred? Why?
Answer: a.$28,500 = $40,000 $8,000 $3,500
b.Yes.Transfers to corporation by a shareholder and officer of a corporation, even if for valuable consideration, result in nontaxable proceeds.
Q2) All of the following amounts are excluded from gross income, except:
A)Tips and gratuities
B)Child support payments
C)Scholarship grants for tuition
D)Gifts
E)Veterans' benefits
Answer: A
Q3) Alimony from a 2016 divorce
Answer: a
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Page 4
Chapter 3: Additional Income Part 1
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Sample Questions
Q1) A deduction for a business bad debt is allowed to the extent that income related to the debt was previously included in taxable income.
A)True
B)False
Answer: True
Q2) The cost of transportation from New York to London for a trip that is for both business and pleasure may be deducted in full as a travel expense.
A)True
B)False
Answer: False
Q3) Ruth is a self-employed surgeon and is required to take a week of continuing medical education every year to keep her license.This year she paid $2,000 in course fees for her continuing medical education in Honolulu.She also paid $1,500 for airfare and a hotel room and $400 for meals.What is the total amount she can deduct on her Schedule C related to these expenses?
Answer: Ruth may deduct 100 percent of the medical education fees and travel and 50 percent of the meals, a total of $3,700.
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Chapter 4: Additional Income Part 2
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Sample Questions
Q1) If a taxpayer sells his personal residence and purchases a new residence, realized gain may be recognized.
A)True
B)False
Q2) In 2018, Paul, a single taxpayer, has taxable income of $30,000 exclusive of capital gains and losses.Paul incurred a $1,000 short-term capital loss and a $4,000 long-term capital loss.What is the amount of his long-term capital loss carryover to 2019?
A)$0
B)$2,000
C)$3,000
D)$5,000
E)None of the above
Q3) Which of the following is a capital asset?
A)Inventory held by a manufacturer
B)Accounts receivable held by a dentist
C)All property owned by a taxpayer other than property specifically noted in the law as an exception
D)Depreciable property and real estate used in a trade or business
Q4) What are capital assets?
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Chapter 5: Deductions and Adjustments to Income
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Sample Questions
Q1) Ellen supports her family as a self-employed attorney.She reports $90,000 of income on her Schedule C and pays $8,000 for health insurance for her family, $2,500 for dental insurance, $4,000 for health insurance for her 23-year-old daughter who is no longer a dependent, and $3,000 for disability insurance for herself.What is Ellen's self-employed health insurance deduction?
A)$8,000
B)$10,500
C)$12,000
D)$14,500
E)$13,500
Q2) Brittany determined that she paid $450 in gasoline excise taxes during the year when she bought gas for her commute to and from work.Brittany's gas excise taxes are deductible as an itemized deduction.
A)True
B)False
Q3) Debbie is 63 years old and retired in 2016.She receives Social Security payments of $12,000 a year and interest income of $30,000.She wishes to put the maximum allowed into an IRA.How much can she contribute to her IRA?
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Chapter 6: Accounting Methods and Taxes
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Sample Questions
Q1) If a cash basis business owner pays 18 months of rent expense in advance during the last month of the tax year, how is this treated on the tax return? What is the reason tax law requires this treatment?
Q2) Which of the following types of income is subject to the self-employment tax?
A)Interest income
B)Gain on sale of real estate
C)Income from a sole proprietor's law practice
D)Dividends from stock
E)None of the above
Q3) Unearned income of a 16-year-old child may be taxed at trust and estate rates.
A)True
B)False
Q4) The 3.8 percent ACA Medicare tax does not apply to:
A)Interest
B)Dividends
C)Capital gains
D)Wages
Q5) All S corporations must use the accrual basis of accounting.
A)True
B)False
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Chapter 7: Tax Credits
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Sample Questions
Q1) Edward takes a job in Canada working for an automobile manufacturer.He spends all of 2018 in Canada, earns $130,000 in wages, and is a bona fide resident of that country.How much foreign income exclusion can Edward claim?
Q2) Margo and her spouse have health insurance for the entire year through the state health care exchange.Margo will need to pay her spouse's individual shared responsibility.
A)True
B)False
Q3) In determining the amount of the child and dependent care credit, there is a limit of $2,000 on the amount of qualified expenses for one dependent.
A)True
B)False
Q4) Martin and Rachel are married and have a 3-year-old child.Martin is going to medical school full-time for 12 months of the year and Rachel earns $45,000.Their child is in day care so Martin can go to school while Rachel is at work.The cost of their day care is $10,000.What is their child and dependent care credit? Please show your calculations and explain.
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Chapter 8: Depreciation and Sale of Business Property
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Sample Questions
Q1) An asset (not an automobile)put in service in June 2018 has a depreciable basis of $1,035,000, a recovery period of 5 years, and is the only asset placed in service during the year.Assuming bonus depreciation is used, a half-year convention, and the expensing election is made, what is the maximum amount of cost that can be deducted in 2018 (assume no income limitation)?
A)$207,000
B)$500,000
C)$1,017,500
D)$1,000,000
E)$1,035,000
Q2) An asset is placed in service on May 15, 2018 and has a depreciable basis of $40,000.The asset is in the 7-year recovery class and the half-year convention applies.What is the maximum depreciation deduction that may be claimed for 2018, excluding the election to expense and bonus depreciation?
A)$2,572
B)$5,144
C)$5,716
D)$25,000
E)None of the above
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Chapter 9: Payroll, Estimated Payments, and Retirement Plans
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Sample Questions
Q1) Mark the correct answer.FICA taxes are:
A)7.65 percent of all earned income with no limitations.
B)7.65 percent of earned income up to $150,000.
C)Paid by the employee and by the employer.
D)Not subject to cost of living adjustments each year.
Q2) The FUTA tax is paid by:
A)Employees only.
B)Employers only.
C)Employers and employees.
D)Neither employers nor employees.
E)The federal government.
Q3) Which one of the following forms must an employer provide to his employee by January 31 of the following year?
A)W-3
B)W-2
C)W-4
D)941
E)1040
Q4) What is the purpose of backup withholding?
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Chapter 10: Partnership Taxation
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Sample
Questions
Q1) Jamie decides to contribute cash and property to a partnership she and her friends started.She contributes a building worth $260,000 that has an adjusted basis of $100,000 and she also contributes $40,000 in cash.What is her basis in the partnership?
A)$100,000
B)$140,000
C)$260,000
D)$300,000
E)None of the above is correct
Q2) Losses are disallowed for transactions between a partnership and a partner who has a 50 percent interest in the partnership.
A)True
B)False
Q3) A partner contributes assets with a basis of $50,000 and a fair market value of $80,000 to a partnership.What is the basis of the property to the partnership and what is the general rule for the basis of appreciated property contributed to a partnership?
Q4) List three benefits of an LLC.
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Chapter 11: The Corporate Income Tax
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Sample Questions
Q1) Corporations are granted favorable tax treatment for short-term capital losses.
A)True
B)False
Q2) The Nandina Corporation was formed and began operations on July 1, 2018, and incurred the following expenses during the year: \(\begin{array}{llcc}
\text { State fees for incorporation } &\$800 \\
\text { Legal and accounting fees incident to organization} &1,700\\
\text {Legal fees for the issuance of stock } &600\\
\text { Temporaty directors' fees } &1,100\\
\end{array}\)
If the corporation chooses not to expense but rather amortizes organizational costs over 180 months, what is the amount of its amortization expense for 2018?
A)$20
B)$120
C)$240
D)$3,600
E)None of the above
Q3) What is the purpose of Schedule M-1?
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Chapter 12: Tax Administration and Tax Planning
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Sample Questions
Q1) Which of the following is not a possible result of an audit by the IRS?
A)Payment of a refund to the taxpayer
B)Payment of a deficiency by the taxpayer
C)An appeal
D)No change in the liability
E)All of the above are possible results
Q2) Tax return preparers must enter the annual filing season program (AFSP).
A)True
B)False
Q3) Tax returns are processed at the IRS national office in Washington, DC.
A)True
B)False
Q4) As a result of an IRS audit, a taxpayer may be required to pay additional taxes, but he or she is never paid a refund.
A)True
B)False
Q5) What is the difference between tax avoidance and tax evasion?
Q6) The tax law contains a penalty for filing a "frivolous" tax return.
A)True
B)False
Page 14
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