Personal Income Tax
Test Questions
Course Introduction
Personal Income Tax is a comprehensive course that introduces students to the principles and practices governing the taxation of individual income in a given jurisdiction. The course covers topics such as the determination of taxable income, allowable deductions, tax credits, filing requirements, and the calculation of tax liabilities. Students will learn about tax compliance, reporting obligations, tax planning strategies, and the ethical responsibilities of taxpayers. The course also explores recent legislative changes and judicial interpretations affecting personal income tax, providing practical skills needed to accurately prepare tax returns and advise on tax matters.
Recommended Textbook
South Western Federal Taxation 2017 Individual Income Taxes 40th Edition by William
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Page 2
H. Hoffman
Chapter 1: An Introduction to Taxation and Understanding
the Federal Law
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Sample Questions
Q1) A VAT (value added tax):
A)Is regressive in its effect.
B)Has not proved popular outside of the U.S.
C)Is not a tax on consumption.
D)Is used exclusively by third world (less developed)countries.
E)None of these.
Answer: A
Q2) Late filing and statute limitations (deficiency situations)
Answer: a
Q3) Can a taxpayer start the 3-year statute of limitations on additional assessments by the IRS by filing his income tax return early (i.e. ,before the due date)? Can the period be shortened by filing late (i.e. ,after the due date)?
Answer: The answer is no in both cases.When filing early,the statute starts to run on the due date of the return.When filing late however,the filing date controls.
Q4) A deduction for certain income from manufacturing activities.
Answer: a
Q5) Negligence penalty
Answer: c
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Chapter 2: Working With the Tax Law
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Sample Questions
Q1) Electronic databases are most frequently searched by the keyword approach.
A)True
B)False
Answer: True
Q2) Revenue Rulings issued by the National Office of the IRS carry the same legal force and effect as Regulations.
A)True
B)False
Answer: False
Q3) Which statement is not true with respect to a Regulation that interprets the tax law?
A)Issued by the U.S.Congress.
B)Issued by the U.S.Treasury Department.
C)Designed to provide an interpretation of the tax law.
D)Carries more legal force than a Revenue Ruling.
E)All of these statements are true.
Answer: A
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Chapter 3: Tax Formula and Tax Determination an
Overview of Property Transactions
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Sample Questions
Q1) Albert buys his mother a TV.For purposes of meeting the support test,Albert cannot include the cost of the TV.
A)True
B)False
Answer: False
Q2) The additional standard deduction for age and blindness is greater for married taxpayers than for single taxpayers.
A)True
B)False
Answer: False
Q3) Once they reach age 65,many taxpayers will switch from itemizing their deductions from AGI and start claiming the standard deduction.
A)True
B)False
Answer: True
Q4) Global system of taxation
Answer: l
Q5) A nephew who lives with taxpayer. Answer: c
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Chapter 4: Gross Income Concepts and Inclusions
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Sample Questions
Q1) Jacob and Emily were co-owners of a personal residence.As part of their divorce agreement,Emily paid Jacob cash for his interest in the personal residence.This cash payment results in a taxable gain to Jacob if he receives more cash than his share of the cost of the residence.
A)True
B)False
Q2) The taxable portion of Social Security benefits may be affected by:
A)The taxpayer's itemized deductions.
B)The individual's tax-exempt interest income.
C)The number of quarters the individual worked.
D)The individual's standard deduction.
E)None of these.
Q3) Ralph purchased his first Series EE bond during the year.He paid $709 for a 10-year bond with a $1,000 maturity value.The yield to maturity on the bonds was 3.5%.Ralph is not required to recognize the $291 ($1,000 - $709)original issue discount until the bond matures.However,Ralph can elect to amortize the discount over the ten-year period.
A)True
B)False
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Chapter 5: Gross Income Exclusions
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Sample Questions
Q1) During the current year,Khalid was in an automobile accident and suffered physical injuries.The accident was caused by Rashad's negligence.Khalid threatened to file a lawsuit against Amber Trucking Company,Rashad's employer,claiming $50,000 for pain and suffering,$90,000 for loss of income,and $70,000 in punitive damages.Amber's insurance company will not pay punitive damages;therefore,Amber has offered to settle the case for $100,000 for pain and suffering,$90,000 for loss of income,and nothing for punitive damages.Khalid is in the 35% marginal tax bracket.What is the after-tax difference to Khalid between Khalid's original claim and Amber's offer?
A)Amber's offer is $20,000 less.($50,000 + $90,000 + $70,000 - $100,000 - $90,000).
B)Amber's offer is $7,000 less.[($50,000 + $90,000 + $70,000 - $100,000 - $90,000)× .35)].
C)Amber's offer is $4,500 more.{$190,000 - ($50,000 + $90,000)+ [$70,000 × (1 - .35)]}.
D)Amber's offer is $22,000 more.[($190,000 - $210,000)+ ($120,000 × .35)].
E)None of these.
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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Sample Questions
Q1) In distinguishing whether an activity is a hobby or a trade or business,discuss the presumptive rule.
Q2) Under the "one-year rule" for the current period deduction of prepaid expenses of cash basis taxpayers,the asset must expire or be consumed by the end of the tax year following the year of payment.
A)True
B)False
Q3) The period in which an accrual basis taxpayer can deduct an expense is determined by applying the economic performance and all events tests.
A)True
B)False
Q4) What is the appropriate tax treatment for expenditures paid by a taxpayer for another's benefit?
Q5) Graham,a CPA,has submitted a proposal to do the annual audit for a municipality.Owen,the city treasurer,tells Graham that for a $1,000 fee,he will use his influence to have the audit awarded to Graham.What factors are relevant in determining if Graham can deduct the $1,000 payment assuming he pays the fee to Owen?
Q6) What losses are deductible by an individual taxpayer?
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Chapter 7: Deductions and Losses Certain Business
Expenses and Losses
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Sample Questions
Q1) Last year,taxpayer had a $10,000 nonbusiness bad debt.Taxpayer also had an $8,000 short-term capital gain and taxable income of $35,000.If taxpayer collects the entire $10,000 during the current year,$8,000 needs to be included in gross income.
A)True
B)False
Q2) Which of the following is not a requirement for an alimony deduction?
A)The payments must be in cash.
B)The payments must cease upon the death of the payee.
C)The payments must extend over at least three years.
D)The payor and payee must not live in the same household at the time of the payments.
E)All of these are requirements for an alimony deduction.
Q3) The amount of loss for partial destruction of business property is the decline in fair market value of the business property.
A)True
B)False
Q4) A theft loss is taken in the year of the theft.
A)True
B)False
Page 9
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Chapter 8: Depreciation Cost Recovery Amortization and Depletion
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Sample Questions
Q1) Hazel purchased a new business asset (five-year asset)on September 30,2016,at a cost of $100,000.On October 4,2016,Hazel placed the asset in service.This was the only asset Hazel placed in service in 2016.Hazel did not elect § 179 or additional first-year depreciation if available.On August 20,2017,Hazel sold the asset.Determine the cost recovery for 2017 for the asset.
A)$14,250
B)$19,000
C)$23,750
D)$38,000
E)None of the above
Q2) Discuss the tax consequences of listed property being used for the production of income compared to being used in a trade or business.
Q3) A taxpayer may elect to use the alternative depreciation system (ADS)to compute depreciation for earnings and profits.
A)True
B)False
Q4) All listed property is subject to the substantiation requirements of § 274. A)True
B)False
Page 10
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Chapter 9: Deductions Employee and Self Employed
Related Expenses
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Sample Questions
Q1) Sue files a Schedule SE with her Form 1040.
Q2) Deductible moving expense
Q3) During the year,John went from Milwaukee to Alaska on business.Preceding a five-day business meeting,he spent four days vacationing at the beach.Excluding the vacation costs,his expenses for the trip are:
$3,200
Presuming no reimbursement,deductible expenses are:
A)$3,200.
B)$3,900.
C)$4,800.
D)$5,500.
E)None of these.
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Chapter 10: Deduction and Losses Certain Itemized
Deductions
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Sample Questions
Q1) Barry and Larry,who are brothers,are equal owners in Chickadee Corporation.On July 1,2016,each loans the corporation $10,000 at an annual interest rate of 10%.Both shareholders are on the cash method of accounting,while Chickadee Corporation is on the accrual method.All parties use the calendar year for tax purposes.On June 30,2017,Chickadee repays the loans of $20,000 together with the specified interest of $2,000.How much of the interest can Chickadee Corporation deduct in 2016?
A)$0
B)$500
C)$1,000
D)$2,000
E)None of the above
Q2) Sergio was required by the city to pay $2,000 for the cost of new curbing installed by the city in front of his personal residence.The new curbing was installed throughout Sergio's neighborhood as part of a street upgrade project.Sergio may not deduct $2,000 as a tax,but he may add the $2,000 to the basis of his property.
A)True
B)False
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Chapter 11: Investor Losses
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Sample Questions
Q1) Judy owns a 20% interest in a partnership (not real estate)in which her at-risk amount was $35,000 at the beginning of the year.The partnership borrowed $50,000 on a recourse note and made a $40,000 profit during the year.Her at-risk amount at the end of the year is $43,000.
A)True
B)False
Q2) In the current year,Lucile,who has AGI of $70,000 before considering rental activities,is active in three separate real estate rental activities and is in the 28% tax bracket.She had $15,000 of losses from Activity A,$25,000 of losses from Activity B,and income of $20,000 from Activity C.She also had $3,100 of tax credits from Activity A.Calculate her deductions and credits currently allowed and the suspended losses and credits.
Q3) Significant participation activity.
Q4) Joyce owns an activity (not real estate)in which she participates for 100 hours a year;her husband participates for 450 hours.Joyce qualifies as a material participant.
A)True
B)False
Q5) Treatment of an installment sale of a passive activity.
Q6) Treatment of a disposition of a passive activity at death.
Page 13
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Chapter 12: Alternative Minimum Tax
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Sample Questions
Q1) Under what circumstances are C corporations exempt from the AMT?
Q2) Business tax credits reduce the AMT and the regular income tax in the same way. A)True B)False
Q3) Use the following data to calculate Jolene's AMTI.Jolene does not itemize deductions.
$190,000
Q4) How can an AMT adjustment be avoided by a taxpayer who incurs circulation expenditures in the current tax year?
Q5) If a taxpayer deducts the standard deduction in calculating regular taxable income,what effect does this have in calculating AMTI?
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Chapter 13: Tax Credits and Payment Procedures
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Sample Questions
Q1) Cardinal Corporation hires two persons certified to be eligible employees for the work opportunity tax credit under the general rules (e.g. ,food stamp recipients),each of whom is paid $9,000 during the year.As a result of this event,Cardinal Corporation may claim a work opportunity credit of:
A)$1,440.
B)$2,880.
C)$4,800.
D)$7,200.
E)None of the above.
Q2) If an employee holds two jobs during the year,an overwithholding of FICA tax will result.
A)True
B)False
Q3) Refundable tax credits include the:
A)Foreign tax credit.
B)Tax credit for rehabilitation expenses.
C)Credit for certain retirement plan contributions.
D)Earned income credit.
E)None of the above.
Q4) Discuss the treatment of unused general business credits.
Page 15
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Chapter 14: Property Transactions Determination of Gain and
Loss and Basic Considerations
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Sample Questions
Q1) Monroe's delivery truck is damaged in an accident.Monroe's adjusted basis for the delivery truck prior to the accident is $20,000.If Monroe receives insurance proceeds of $21,000 and recognizes a casualty gain of $1,000,his adjusted basis for the delivery truck after the accident is $21,000.
A)True
B)False
Q2) Helen purchases a $10,000 corporate bond at a premium of $1,000 and elects to amortize the premium.On the later sale of the bond for $10,800,she has amortized $300 of the premium.Helen has a recognized gain of $800 ($10,800 amount realized - $10,000 adjusted basis).
A)True
B)False
Q3) Gene purchased an SUV for $45,000 which he uses 100% for personal purposes.When the SUV is worth $30,000,he contributes it to his business.The gain basis is $45,000,the loss basis is $30,000,and the basis for cost recovery is $45,000.
A)True
B)False
Q4) Define fair market value as it relates to property transactions.
Q5) What is the general formula for calculating the adjusted basis of property?
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Chapter 15: Property Transactions Nontaxable Exchanges
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Sample Questions
Q1) Under what circumstances may a partial § 121 exclusion be available even though the taxpayer has used the § 121 exclusion within the two-year period preceding the sale of the current residence?
Q2) Lola owns land as an investor.She exchanges the land for a warehouse which she leases to a tenant who uses it to store his business inventory.The exchange does qualify for like-kind exchange treatment.
A)True B)False
Q3) Leonore exchanges 5,000 shares of Pelican,Inc. ,stock for 2,000 shares of Blue Heron,Inc. ,stock.Leonore's adjusted basis for the Pelican stock is $300,000 and the fair market value of the Blue Heron stock is $350,000.Leonore's recognized gain is $0 and her adjusted basis for the Blue Heron stock is $300,000.
A)True B)False
Q4) What types of exchanges of insurance contracts are eligible for nonrecognition treatment under § 1035?
Q5) Define an involuntary conversion.
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Chapter 16: Property Transactions Capital Gains and Losses
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Sample Questions
Q1) Larry was the holder of a patent on a video game.During 2016,he sold all substantial rights in the patent for $365,000 in cash and a 3% royalty on the purchaser's first $10,200,000 of sales each year related to the product in which the patent is incorporated.Larry had not reduced the patent to practice.He had a $86,000 basis for the patent.During 2016,he received $30,000 in royalties.What is the nature and amount of Larry's gain?
Q2) Harold is a head of household,has $27,000 of taxable income in 2016 from non-capital gain or loss sources,and has the following capital gains and losses:
28% long-term capital gain
$ 4,300
28% long-term capital loss (2,000)
0%/15%/20% long-term capital gain
19,000
Short-term capital loss (1,700)
Ignore standard deductions and exemptions.What is Harold's taxable income and the tax on that taxable income?
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Chapter 17: Property Transactions Section 1231 and Recapture Provisions
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Sample Questions
Q1) Betty,a single taxpayer with no dependents,has the gains and losses shown below.Before considering these transactions,Betty has $45,000 of other taxable income.What is the treatment of the gains and losses and what is Betty's taxable income?
§ 1245 gain #1
$18,000
§ 1245 gain #2
5,000
Business equipment long-term casualty loss (8,000)
Business real property long-term casualty gain
12,000
§ 1231 gain
13,000
§ 1231 lookback loss (2,000)
Q2) Section 1231 property generally does not include artistic compositions. A)True B)False
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Chapter 18: Accounting Periods and Methods
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Sample Questions
Q1) The company has consistently used the LIFO inventory method and has deferred over $1 million of income from using that method.However,in the last two years,the prices it pays for goods has been decreasing.Therefore,the company is considering changing to the FIFO inventory method.What would be some tax consequences of the change?
Q2) The taxpayer had consistently used the cash method of accounting even though inventories were a material income-producing factor to its business.The taxpayer decided to voluntarily change to the accrual method of accounting.The adjustment to income due to the change was that the correct beginning balances for the year of the change as follows: $60,000 for inventories,$30,000 for accounts receivable,and $12,000 for accounts payable.The adjustment due to the change in accounting method is:
A)A positive adjustment for $102,000.
B)A positive adjustment for $90,000.
C)A positive adjustment for $78,000.
D)A positive adjustment for $60,000.
E)None of the above.
Q3) Using your knowledge of GAAP and financial reporting,list and explain one good reason why GAAP should not be used for tax purposes and one good reason why it should be used.
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Chapter 19: Deferred Compensation
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Q1) The $1 million deduction limitation on executive compensation is decreased by any nondeductible golden parachute payments made to an employee.
A)True
B)False
Q2) Danielle,who is retired,reaches age 70 1/2 in 2015,and she will also be age 71 in 2015.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 1,2016?
A)$0
B)$9,804
C)$19,608
D)$150,000
E)None of the above
Q3) Traditional IRA contributions made after an individual reaches the age of 65 are treated as excess contributions and are subject to a nondeductible 6% excise penalty tax.
A)True B)False
Q4) Compare a § 401(k)plan with an IRA.
Q5) What is a highly compensated employee?
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Chapter 20: Corporations and Partnerships
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Q1) In order to obtain limited liability,a sole proprietor incorporates his business.Under the check-the-box Regulations,the entity can elect to be treated as a partnership.
A)True
B)False
Q2) Amount the corporation borrows from a bank increases the basis its shareholders have in their stock.
Q3) The holding period to the partnership of property contributed by a partner includes the period during which the property was held by the contributing partner.
A)True
B)False
Q4) Corporate taxpayers lose the benefits of lower tax brackets and the rates cease to be progressive once taxable income reaches a certain level.Explain this statement.
Q5) In determining whether an entity is to be recognized as a corporation for Federal income tax purposes,classification under state law is not conclusive.
A)True
B)False
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