Principles of Taxation Exam Preparation Guide
Course Introduction
Principles of Taxation provides an overview of the foundational concepts, frameworks, and applications of taxation in both domestic and international contexts. The course explores the rationale behind taxation, the classification and roles of different taxes, tax policy objectives, and the impact of taxation on individuals, businesses, and the economy. Topics include the legal basis of tax systems, tax administration, tax planning, tax avoidance and evasion, ethical considerations, and recent trends in tax reform. By the end, students will have a solid understanding of the principles guiding tax design and implementation, equipping them for advanced study or a career in finance, accounting, or public policy.
Recommended Textbook
McGraw Hills Taxation of Individuals 2018 Edition 9th Edition by Spilker Brian C
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14 Chapters
1589 Verified Questions
1589 Flashcards
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Page 2
Chapter 1: An Introduction to Tax
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Sample Questions
Q1) The effective tax rate,in general,provides a better depiction of a taxpayer's tax burden than the average tax rate.
A)True
B)False
Answer: True
Q2) Excise taxes are typically levied on the value of a good purchased.
A)True
B)False
Answer: False
Q3) A common example of an employment related tax is the Medicare tax.
A)True
B)False
Answer: True
Q4) Which of the following is not an example of a graduated tax rate structure?
A) Progressive tax rate structure
B) Proportional tax rate structure
C) U.S. Federal Income Tax
D) Regressive tax rate structure
E) None of the choices are correct
Answer: B
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Chapter 2: Tax Compliance, The IRS and Tax Authorities
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Sample Questions
Q1) Corporations are required to file a tax return annually regardless of their taxable income.
A)True
B)False
Answer: True
Q2) Rowanda could not settle her tax dispute with the IRS at the appeals conference.If she wants to litigate the issue but does not have sufficient funds to pay the proposed tax deficiency,Rowanda should litigate in the:
A) U.S. District Court.
B) U.S. Circuit Court of Appeals.
C) U.S. Court of Federal Claims.
D) Tax Court.
E) None of the choices are correct.
Answer: D
Q3) Proposed and Temporary Regulations have the same authoritative weight.
A)True
B)False
Answer: False
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4
Chapter 3: Tax Planning Strategies and Related Limitations
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Sample Questions
Q1) The business purpose,step-transaction,and substance-over-form doctrines may limit the income shifting strategy.
A)True
B)False
Answer: True
Q2) The income shifting strategy requires taxpayers with varying tax rates.
A)True
B)False
Answer: True
Q3) The present value concept becomes more important as interest rates increase. A)True
B)False
Answer: True
Q4) Assuming an after-tax rate of return of 10%,John should prefer to pay an expense of $85 today instead of an expense of $100 in one year.Use Exhibit 3.1 in the text. A)True
B)False
Answer: True
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Page 5
Chapter 4: Individual Income Tax Overview, Exemptions, and Filing Status
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126 Verified Questions
126 Flashcards
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Sample Questions
Q1) All of the following are tests for determining qualifying relative status except
A) relationship test
B) gross income test
C) support test
D) residence test
Q2) It is generally more advantageous from a tax perspective for a married couple to file separately than it is for them to file jointly.
A)True
B)False
Q3) Itemized deductions and the standard deduction are deductions from AGI but deductions for personal and dependency exemptions are deductions for AGI.
A)True
B)False
Q4) Which of the following series of inequalities is generally most accurate?
A) Gross income adjusted gross income taxable income
B) Adjusted gross income gross income taxable income
C) Adjusted gross income taxable income gross income
D) Gross income taxable income adjusted gross income
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Chapter 5: Gross Income and Exclusions
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Sample Questions
Q1) Fred must include in gross income a $7,500 payment received from his neighbor to compensate Fred for the emotional distress he suffered when his neighbor accidentally ran over his dog.
A)True
B)False
Q2) George purchased a life annuity for $3,200 that will provide him $80 monthly payments for as long as he lives.Based on IRS tables,George's life expectancy is 100 months.How much of the first $80 payment will George include in his gross income?
A) $80
B) $72
C) $48
D) $32
E) None of the choices are correct.
Q3) Gross income includes all income realized during the year.
A)True
B)False
Q4) Unemployment benefits are excluded from gross income.
A)True
B)False
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Chapter 6: Individual Deductions
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Sample Questions
Q1) Which of the following is a true statement?
A) All business expenses are deducted for AGI.
B) Investment expenses are typically deducted for AGI.
C) Tax preparation fees are deducted for AGI.
D) Rental and royalty expenses are deducted for AGI.
E) All of the choices are true.
Q2) All business expense deductions are claimed as "above the line" deductions.
A)True
B)False
Q3) Taxpayers are allowed to deduct all ordinary and necessary expenses incurred in connection with determining their tax obligations imposed by federal authorities.
A)True
B)False
Q4) Which of the following costs are NOT deductible as an itemized medical expense?
A) The cost of eyeglasses.
B) Payments to a hospital.
C) Transportation for medical purposes.
D) The cost of insurance for long-term care services.
E) All of the choices are deductible as medical expenses.
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Chapter 7: Investments
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Sample Questions
Q1) If an individual taxpayer's marginal tax rate is 35 percent and he holds the following assets for more than one year,which gain will be taxed at the highest rate at the time of sale?
A) gain from investment land
B) gain from personal-use property
C) gain from a coin collection
D) gain from the sale of qualified small business stock held for 3 years
E) gain attributable to tax depreciation taken on real property
Q2) When the wash sale rules apply,the realized loss is:
A) recognized at time of sale.
B) not recognized at time of sale and does not affect basis of newly acquired stock.
C) recognized at time of sale and added to basis of the newly acquired stock.
D) not recognized at time of sale and added to basis of the newly acquired stock.
E) not recognized at time of sale and subtracted from the basis of the newly acquired stock.
Q3) Generally,losses from rental activities are considered to be active losses.
A)True
B)False
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9
Chapter 8: Individual Income Tax Computation and Tax
Credits
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Sample Questions
Q1) The taxable income levels in the married filing jointly tax rate schedule are ________ those in the married filing separately schedule.
A) the same as
B) double
C) half the amount of
D) None of the choices are correct.
Q2) During 2017,Montoya (age 15)received $2,200 from a corporate bond. He also received $600 from a savings account established for him by his parents.Montoya lives with his parents and he is their dependent.What is Montoya's taxable income?
A) $0
B) $2,200
C) $2,800
D) $1,750
Q3) Max is a 14-year-old dependent of his parents.During 2017,Max earned $1,800 working part time jobs and he received $1,500 of interest income from corporate bonds that were given to him last year.What is Max's 2017 taxable income?
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Chapter 9: Business Income, Deductions, and Accounting Methods
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Sample Questions
Q1) Gabby operates a pizza delivery service.This year she paid delivery personnel $18,000 in salary.She carefully documented the business use of the auto (11,700 miles this year)and her $7,350 of vehicle expenses (for gas,oil,repairs,and auto lease payments).What amount of these expenses may Gabby deduct as business expenses? Gabby is on the cash method and calendar year.
Q2) The Internal Revenue Code authorizes deductions for trade or business activities if the expenditure is "ordinary and necessary."
A)True B)False
Q3) Employees cannot deduct the cost of uniforms if the uniforms are also appropriate for normal wear.
A)True B)False
Q4) Although expenses associated with illegal activities are not deductible,political contributions can be deducted as long as the donation is not made to a candidate for public office.
A)True B)False
11
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Chapter 10: Property Acquisition and Cost Recovery
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Sample Questions
Q1) Daschle LLC completed some research and development during June of the current year.The related costs were $60,000.If Daschle wants to capitalize and amortize the costs as quickly as possible,what is the total amortization expense Daschle may deduct during the current year?
A) $0
B) $6,500
C) $7,000
D) $12,000
E) None of the choices are correct.
Q2) Oksana started an LLC on November 2 of the current year.She incurred $30,000 of start-up costs.How much of the start-up costs can be immediately expensed for the year? How much amortization may Oksana deduct in the first year?
Q3) Flax,LLC purchased only one asset this year.Flax placed in service a computer (5-year property)on January 16 with a basis of $14,000.Calculate the maximum depreciation expense (ignoring §179 and bonus depreciation).(Use MACRS Table 1 in the text)
Q4) Tax cost recovery methods include depreciation,amortization,and depletion. A)True B)False
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Chapter 11: Property Dispositions
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Sample Questions
Q1) Which of the following realized gains results in a recognized gain?
A) Farm machinery traded for farm machinery.
B) Sale to a related party.
C) Involuntary conversion.
D) Iowa cropland exchanged for a Minnesota warehouse.
Q2) Manassas purchased a computer several years ago for $2,200.On November 10 of the current year,the computer was worth $800.If $1,000 of depreciation deductions had been taken,what is Manassas' tax adjusted basis for the computer?
Q3) Brad sold a rental house that he owned for $250,000.Brad bought the rental house five years ago for $225,000 and has claimed $50,000 of depreciation expense.What is the amount and character of Brad's gain or loss?
A) $25,000 ordinary and $50,000 unrecaptured §1250 gain.
B) $25,000 §1231 gain and $50,000 unrecaptured §1250 gain.
C) $75,000 ordinary gain.
D) $75,000 capital gain.
E) None of the choices are correct.
Q4) Jessie sold a piece of land held for investment for $250,000.Jessie bought the land two years ago for $195,000.What is the amount and character of Jessie's gain?
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Page 13
Chapter 12: Compensation
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Sample Questions
Q1) Which of the following statements regarding compensation is false?
A) Wages are usually paid by the hour.
B) Salary is usually a form of fixed compensation.
C) Bonuses are a form of compensation obtained if certain criteria are met.
D) Bonuses paid within 2½ months of year-end are included in employee's compensation in the year they were earned.
Q2) Frederique works for a furniture retailer.The shop allows all employees to purchase 10 pieces of furniture per year at a discount.This year Frederique purchased eight pieces.She gave three pieces as a gift to her brother as a wedding present.Her employer's average gross profit percentage is 25 percent.Each piece was 20 percent off of normal retail prices and in all cases the employee price exceeded the employer's cost.What amount of the discount must be included in Frederique's income?
Q3) When a publicly-traded CEO's salary exceeds $1,000,000,the employee ________ taxed on the entire amount,and the employer ________ allowed a deduction on the entire amount.
A) is; is
B) is; is not
C) is not; is
D) is not; is not
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Page 14
Chapter 13: Retirement Savings and Deferred Compensation
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Sample Questions
Q1) Taxpayers who participate in an employer-sponsored retirement plan are not allowed to contribute to individual retirement accounts (IRAs).
A)True
B)False
Q2) Which of the following is true concerning SEP IRAs?
A) SEP IRAs are difficult to set up and have high administrative costs.
B) Taxpayers may contribute unlimited amounts to SEP IRAs.
C) Employees of the taxpayer cannot be included in SEP IRAs.
D) Taxpayers with a SEP IRA must contribute for their employees.
Q3) On December 1,2017 Irene turned 71 years old.She is still working for her employer and she participates in her employer's 401(k)plan.Irene is not required to receive a minimum distribution for 2017 from her 401(k)account because she has not yet retired.
A)True
B)False
Q4) Qualified distributions from traditional IRAs are nontaxable while qualified distributions from Roth IRAs are fully taxable as ordinary income.
A)True
B)False
Page 15
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Chapter 14: Tax Consequences of Home Ownership
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Sample Questions
Q1) A taxpayer who purchases real property during the year is allowed to deduct the property taxes on that property for the entire year in which the property was purchased.
A)True
B)False
Q2) Serena is single.She purchased her principal residence three years ago.She lived in the home until she sold it at a $300,000 gain this year.Serena was allowed to exclude $250,000 of the $300,000 gain.What is the character of the $50,000 gain she was not able to exclude?
A) Ordinary income/gain.
B) Short-term capital gain.
C) Long-term capital gain.
D) Personal gain.
E) None of the choices are correct.
Q3) In terms of allocating expenses between rental use and personal use,the IRS method of allocation tends to allocate more expenses to personal use than does the Tax Court method of allocation.
A)True
B)False
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