Personal Tax Planning
Textbook Exam Questions
Course Introduction
Personal Tax Planning provides students with an in-depth understanding of the principles and practices involved in managing individual tax responsibilities. The course covers key topics such as income taxation, tax deductions and credits, investment and retirement planning, tax implications of major life events, and strategic methods to minimize personal tax liabilities while remaining compliant with legal requirements. Emphasizing real-world application, students analyze tax scenarios, utilize tax software, and develop effective tax planning strategies that align with individual financial goals and current tax legislation.
Recommended Textbook
South Western Federal Taxation 2013 Individual Income Taxes 36th Edition by William H
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Page 2
Chapter 1: An Introduction to Taxation and Understanding
the Federal Tax Law
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Q1) Your client,Connie,won $12,000 in a football office pool.She sees no reason to include it in her income for several reasons.First,the amount won will not be reported to the IRS.Second,as an average income employee,she is unlikely to be audited by the IRS.Third,she feels that she has probably lost this much in other past office pools.How do you respond?
Answer: As a practitioner,you cannot play the audit lottery.You must presume she will be audited irrespective of the probabilities.Although the use of estimates is allowed,Connie's assumptions as to her losses are not realistic.Even if they were reliable,gambling losses cannot be offset against gambling winnings but must be separately deducted.Thus,the $12,000 must be reported as income or you cannot prepare Connie's return.
Q2) The proposed flat tax:
A) Would eliminate the income tax.
B) Would simplify the income tax.
C) Would tax the increment in value as goods move through the production and manufacturing stages to the marketplace.
D) Is a tax on consumption.
E) None of the above.
Answer: B
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Chapter 2: Working With the Tax Law
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Q1) A Revenue Ruling is a judicial source of Federal tax law.
A)True
B)False Answer: False
Q2) There are 11 geographic U.S.Circuit Court of Appeals.
A)True
B)False Answer: True
Q3) The IRS is required to make a letter ruling public.
A)True
B)False Answer: True
Q4) The Internal Revenue Code of 1986 was substantially a re-codification of the existing Code.
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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Q1) Regarding the Tax Tables applicable to the Federal income tax,which of the following statements is correct?
A) For any one year, the Tax Tables are issued by the IRS after the Tax Rate Schedules.
B) The Tax Tables will yield the same amount of tax as the Tax Rate Schedules.
C) Taxpayers can elect as to whether the use the Tax Tables or the Tax Rate Schedules.
D) The Tax Tables can be used by an estate but not by a trust.
E) No correct answer given.
Answer: A
Q2) In which,if any,of the following situations will the kiddie tax not apply?
A) The child is married but does not file a joint return.
B) The child has unearned income of $1,900 or less.
C) The child has unearned income that exceeds more than half of his (or her) support.
D) The child is under age 24 and a full-time student.
E) None of the above.
Answer: B
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Page 5
Chapter 4: Gross Income: Concepts and Inclusions
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Q1) 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
Q2) Melissa is a compulsive coupon clipper.She often brags about the time she purchased a cart full of groceries for $5.00,when the cost without coupons would have been $50.Discuss whether Melissa realizes gross income from her coupon clipping.
Q3) Debbie is age 67 and unmarried and her only sources of income are $200,000 in taxable interest and $20,000 of Social Security benefits.Debbie's adjusted gross income for the year is:
A) $220,000.
B) $217,000.
C) $203,000.
D) $200,000.
E) None of the above.
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Chapter 5: Gross Income: Exclusions
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Q1) A cash basis taxpayer took an itemized deduction of $5,500 for state income tax paid in 2012.His total itemized deductions in 2012 were $18,000.In 2013,he received a $900 refund of his 2012 state income tax.The taxpayer must include the $900 refund in his 2013 Federal gross income in accordance with the tax benefit rule.
A)True
B)False
Q2) In 2012,Bob's unincorporated business has a net loss of $30,000.Bob has investment income of $40,000.Itemized deductions and personal exemptions total $26,000.Thus,on his 2012 tax return,his taxable income was a negative $16,000.In 2012,Bob discovered that an employee has stolen $25,000 (pocketing the proceeds from unrecorded sales)from the business.This $25,000 theft loss is included in calculating the net loss of Bob's business of $30,000.In 2013,Bob recovers the $25,000 from the former employee.How can the tax benefit rule assist Bob in 2013?
Q3) The CEO of Cirtronics Inc.,discovered that the company's competitor had adopted a cafeteria plan for its employees.The CEO is concerned about retaining his talented employees and would like you to provide a brief explanation as to why a cafeteria plan may be attractive to the company's employees.
Q4) What Federal income tax benefits are provided for college students?
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Chapter 6: Deductions and Losses: in General
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Q1) Discuss the application of the "one-year rule" on prepayments by a cash basis taxpayer.
Q2) Salaries are considered an ordinary and necessary expense of a trade or business if they meet what other requirement? What are the tax consequences if this requirement is not met?
Q3) If a vacation home is classified as primarily personal use,part of the maintenance and utility expenses can be allocated and deducted as a rental expense.
A)True
B)False
Q4) Bruce owns several sole proprietorships.Must Bruce use the same accounting method for each of these businesses?
Q5) Are there any exceptions to the rule that personal expenditures cannot be deducted?
Q6) 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
Q7) Are all personal expenses disallowed as deductions?
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Chapter 7: Deductions and Losses: Certain Business
Expenses and Losses
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Q1) Discuss the computation of NOL remaining to be carried forward after the NOL has been applied in a carryback year.
Q2) Discuss the treatment,including the carryback and carryforward periods,of casualty losses incurred with personal use property.
Q3) The amount of partial worthlessness on a nonbusiness bad debt is deducted in the year partial worthlessness is determined.
A)True
B)False
Q4) A personal casualty loss deduction may be allowed for losses resulting from termites.
A)True
B)False
Q5) 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
Q6) Why was the domestic production activities deduction (DPAD)enacted by Congress?
Page 9
Q7) Discuss the effect of alimony in computing a net operating loss.
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Chapter 8: Depreciation, cost Recovery, amortization, and Depletion
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Q1) On March 3,2012,Sally purchased and placed in service a building costing $12,000,000.The building has 10 floors.The bottom three floors are rented out to businesses.The top seven floors are residential apartments.The gross rents from the businesses are $60,000 and the gross rents from the apartments are $110,000.Determine Sally's cost recovery for the building in 2012.
Q2) James purchased a new business asset (three-year personalty)on July 23,2012,at a cost of $40,000.James takes additional first-year depreciation Determine the cost recovery deduction for 2012.
A) $8,333.
B) $26,666.
C) $33,333.
D) $41,665.
E) None of the above.
Q3) Discuss the reason for the inclusion amount with respect to leased automobiles.
Q4) If an automobile is placed in service in 2012,the limitation for cost recovery in 2014 will be based on the cost recovery limits for the year 2012.
A)True
B)False
Page 10
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Chapter 9: Deductions: Employee and
Self-Employed-Related Expenses
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Q1) At age 65,Camilla retires from her job in Boston and moves to Florida.As a retiree,she is not subject to the time test in deducting her moving expenses.
A)True
B)False
Q2) In choosing between the actual expense method and the automatic mileage method, a taxpayer should consider the cost of insurance on the automobile.
A)True
B)False
Q3) Once set for a year,when might the IRS change the rate for the automatic mileage method?
Q4) When is a taxpayer's work assignment in a new locale temporary? Permanent? What difference does it make?
Q5) In November 2012,Katie incurs unreimbursed moving expenses to accept a new job.Katie cannot deduct any of these expenses when she timely files her 2012 income tax return since she has not yet satisfied the 39-week time test.
A)True
B)False
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Chapter 10: Deductions and Losses: Certain Itemized
Deductions
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Q1) During the year,Victor spent $300 on bingo games sponsored by his church.If all profits went to the church,Victor has a charitable contribution deduction of $300.
A)True
B)False
Q2) Brad,who uses the cash method of accounting,lives in a state that imposes an income tax (including withholding from wages).On April 14,2012,he files his state return for 2011,paying an additional $600 in state income taxes.During 2012,his withholdings for state income tax purposes amount to $3,550.On April 13,2013,he files his state return for 2012 claiming a refund of $800.Brad receives the refund on June 3,2013.If he itemizes deductions,how much may Brad claim as a deduction for state income taxes on his Federal income tax return for calendar year 2012 (filed in April 2013)?
A) $3,350.
B) $3,550.
C) $4,150.
D) $5,150.
E) None of the above.
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Page 12
Chapter 11: Investor Losses
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Q1) Lucy dies owning a passive activity with an adjusted basis of $90,000.Its fair market value at that date is $145,000.Suspended losses relating to the property were $75,000.Which of the following statements is true?
A) The heir's adjusted basis is $145,000, and Lucy's final deduction is $20,000.
B) The heir's adjusted basis is $145,000, and Lucy's final deduction is $75,000.
C) The heir's adjusted basis is $90,000, and Lucy's final deduction is $75,000.
D) The heir's adjusted basis is $220,000, and Lucy has no final deduction.
E) None of the above.
Q2) Investment income can include gross income from interest,dividends,annuities,and royalties not derived in the ordinary course of a trade or business; income from a passive activity; and income from a real estate activity in which the taxpayer actively participates.
A)True
B)False
Q3) Joyce,an attorney,earns $100,000 from her law practice in the current year.In addition,she receives $35,000 in dividends and interest during the year.Further,she incurs a loss of $35,000 from an investment in a passive activity.What is Joyce's AGI for the year after considering the passive investment?
Q4) What special passive loss treatment is available to real estate activities?
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Chapter 12: Alternative Minimum Tax
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Q1) Danica owned a car that she used exclusively for business.The car was purchased in 2010 and sold in 2012 for a recognized gain of $9,000.However,the sale resulted in no AMT.Why?
Q2) If the taxpayer elects to capitalize intangible drilling costs and to amortize them over a 10-year period for regular income tax purposes,there is no adjustment or preference for AMT purposes.
A)True B)False
Q3) Keosha acquires 10-year personal property to use in her business in 2012 and takes the maximum cost recovery deduction for regular income tax purposes.As a result of this,Keosha will have a positive AMT adjustment in 2012.
A)True
B)False
Q4) If Jessica exercises an ISO and disposes of the option in the same tax year,are any AMT adjustments required?
Q5) Andrea,who is single,has a personal exemption deduction in calculating her 2012 taxable income.She has no dependency deductions.What is the amount of the AMT adjustment in calculating AMTI?
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Chapter 13: Tax Credits and Payment Procedures
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Q1) In computing the foreign tax credit,the greater of the foreign income taxes paid or the overall limitation is allowed.
A)True
B)False
Q2) Pat generated self-employment income in 2012 of $76,000.The self-employment tax is:
A) $0.
B) $9,334.74.
C) $10,108.00.
D) $10,738.46.
E) None of the above.
Q3) Only self-employed individuals are required to make estimated tax payments.
A)True
B)False
Q4) Any unused general business credit must be carried back 1 year and then forward for 20 years.
A)True
B)False
Q5) Describe the withholding requirements applicable to employers.
Q6) Discuss the treatment of unused general business credits.
Page 15
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Chapter 14: Property Transactions: Determination of Gain or
Loss and Basis Considerations
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Q1) Ollie owns a personal use car for which he originally paid $42,000.He trades the car in on a sports utility vehicle (SUV)paying the automobile dealer cash of $24,000.If the negotiated price of the SUV is $45,000,what is Ollie's recognized gain or loss and his adjusted basis for the SUV?
Q2) Noelle received dining room furniture as a gift from her friend,Jane.Jane's adjusted basis was $9,200 and the fair market value on the date of the gift was $7,000.Noelle decided she did not need the furniture and sold it to a neighbor six months later for $6,500.What is her recognized gain or loss?
A) $0.
B) ($500).
C) ($2,700).
D) $6,500.
E) None of the above.
Q3) Maurice sells his personal use automobile at a realized loss.Under what circumstances can Maurice deduct the loss? What if the personal use asset was sold at a realized gain?
Q4) How is the donee's basis calculated for the gift of appreciated property for a gift made before 1977? Assume the donor pays gift tax.
Page 16
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Chapter 15: Property Transactions: Nontaxable Exchanges
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Q1) Ross lives in a house he received as a gift from his father.His father had lived in the house for 12 years.The adjusted basis of the house to his father was $160,000 and the fair market value at the time of the gift was $140,000.Ross sells this residence after living in it for 18 months for $150,000 and purchases a new home for $125,000.He incurs selling expenses of $7,000.What is Ross' recognized gain or loss and basis for the new residence?
A) ($17,000); $125,000.
B) ($17,000); $142,000.
C) $3,000; $125,000.
D) $3,000; $128,000.
E) None of the above.
Q2) Janet,age 68,sells her principal residence for $500,000.She purchased it twenty-two years ago for $150,000.Selling expenses are $30,000 and repair expenses to get the house in a marketable condition to sell are $15,000.Janet's objective is to minimize the taxes she must pay associated with the sale.Calculate her recognized gain.
Q3) Discuss the treatment of realized gains from involuntary conversions.
Q4) Discuss the logic for mandatory deferral of realized gain or loss for a § 1031 like-kind exchange.
Q5) Define an involuntary conversion.
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Chapter 16: Property Transactions: Capital Gains and Losses
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Q1) Tan,Inc.,has a 2012 $50,000 long-term capital gain included in its $185,000 taxable income.Which of the following is correct?
A) Tan will benefit from an alternative tax on net capital gains computation.
B) Tan's regular tax on taxable income will be the same as its tax using an alternative tax on net capital gains approach.
C) Tan's $50,000 net capital gain is not taxable.
D) Tan's regular tax on taxable income will be greater than its tax using an alternative tax on net capital gain approach.
E) None of the above.
Q2) The subdivision of real property into lots for resale when no substantial physical improvements have been made to the property never causes the gain from sale of the lots to be treated as ordinary income.
A)True
B)False
Q3) All collectibles long-term gain is subject to a potential alternative tax rate of 28%.
A)True
B)False
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Page 18
Chapter 17: Property Transactions: Section 1231 and Recapture Provisions
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Q1) A business machine purchased April 10,2010,for $202,000 was fully depreciated in 2010 using § 179 immediate expensing.On August 15,2012,the machine was sold for $67,000.What is the amount and nature of the gain or loss from disposition of the machine?
Q2) Section 1231 property includes nonpersonal use property where casualty losses exceed casualty gains for the taxable year.
A)True
B)False
Q3) If there is a net § 1231 loss,it is treated as a long-term capital loss.
A)True
B)False
Q4) Blue Company sold machinery for $45,000 on December 23,2012.The machinery had been acquired on April 1,2010,for $49,000 and its adjusted basis was $14,200.The § 1231 gain,§ 1245 recapture gain,and § 1231 loss from this transaction are:
A) $0 § 1231 gain, $30,800 § 1245 recapture gain, $0 § 1231 loss.
B) $0 § 1231 gain, $0 § 1245 recapture gain, $34,800 § 1231 loss.
C) $4,000 § 1231 gain, $34,800 § 1245 recapture gain, $0 § 1231 loss.
D) $0 § 1231 gain, $34,800 § 1245 recapture gain, $14,200 § 1231 loss.
E) None of the above.
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Chapter 18: Accounting Periods and Methods
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Q1) Father sold land to Son for $150,000 in 2012.Father's basis in the land was $60,000.Son paid Father $25,000 and gave Father a note for $125,000 due in 2015.In 2013,Son sold the land for $200,000 cash.The note bore interest at the appropriate Federal rate and both Father and Son held the land as an investment.
A) Father must recognize $90,000 of income in 2012.
B) Father must recognize a $75,000 gain in 2013.
C) Father's gain is all ordinary income.
D) Son is not permitted to use the installment method to report his gain.
E) None of the above.
Q2) The installment method can be used for which of the following sales with payments being made in the year following the year of sale?
A) A department store's credit card sales.
B) An individual's sale of common stock in a family owned business.
C) An individual's sale of General Electric common.
D) Depreciable equipment sold for less than its original cost.
E) All of the above.
Q3) What incentives do the tax accounting rules provide for taxpayers to voluntarily change from an incorrect method of accounting that has reduced the company's tax liability in prior years?
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Page 20
Chapter 19: Deferred Compensation
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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) Defined contribution plans are generally more favorable to older employees.
A)True
B)False
Q3) An individual is considered an active participant in an employer-sponsored retirement plan merely because an individual's spouse is an active participant for any part of a plan year in applying the IRA phase-out provision.
A)True
B)False
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Page 21
Chapter 20: Corporations and Partnerships
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Q1) Which of the following statements,if any,is characteristic of constructive dividends?
A) They must be available to the shareholders on a pro rata basis.
B) They can occur even if the corporation has no earnings and profits.
C) They must be formally declared and paid (i.e., declaration date, record date, payment date).
D) They are not deductible by the corporation.
E) None of the above.
Q2) For corporations and individuals,net short-term capital gains are taxed at ordinary income rates.
A)True
B)False
Q3) In determining which organizational expenditures can be amortized,it is the year incurred (and not paid)that controls if the corporation uses the cash method of accounting.
A)True
B)False
Q4) Is there a logical explanation why S corporations are not allowed a dividends received deduction when computing taxable income?
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