Principles of Taxation Question
Bank
Course Introduction
Principles of Taxation provides an introduction to the fundamental concepts and frameworks governing tax systems, with a primary focus on the structure, administration, and significance of taxes in modern economies. This course explores key topics such as tax policy, classifications of taxes (direct and indirect), principles of equity and efficiency, and the economic and social impacts of taxation. Students will gain insight into the legal basis of taxation, methods of tax assessment, and compliance requirements, preparing them for more advanced studies in tax law, accounting, and public finance.
Recommended Textbook
Fundamentals of Taxation 2017 Edition 10th Edition by Ana Cruz
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Chapter 1: Introduction to Taxation, the Income Tax
Formula, and Form 1040ez
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Q1) The average tax rate is the taxable income divided by the total tax liability.
A)True
B)False
Answer: False
Q2) Horace properly completed his Form 1040EZ tax return and received a refund from the IRS of $649.Horace had income tax withholding during the year of $2,985.His tax liability for the year was:
A)$2,985
B)$3,634
C)$2,336
D)$649
Answer: C
Q3) One major disadvantage the taxpayer has when filing a petition with the Tax Court is that the IRS's proposed tax assessment must be paid prior to trial.
A)True
B)False
Answer: False
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Page 3
Chapter 2: Expanded Tax Formula, forms 1040a and 1040, and Basic Concepts
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Q1) What qualifications are necessary to file as qualifying widower)?
Answer: The qualifications necessary to file as qualifying widower)are: 1.Taxpayer was eligible to file a joint return in the year the spouse died. 2.Taxpayer did not remarry before the end of the tax year in question. 3.Taxpayer paid more than half the cost of keeping up a household. 4.The household was the principal place of abode for the entire year except for temporary absences)of both the taxpayer and a child,stepchild,or adopted child who can be claimed as a dependent by the taxpayer.
Q2) What is the amount of the tax liability for a married couple having taxable income of $96,843? All answers should be rounded to the nearest dollar. Use the appropriate <sup>Tax</sup><sup> </sup><sup>Tables</sup><sup> </sup>or <sup>Tax</sup><sup> </sup><sup>Rate</sup><sup> </sup><sup>Schedules</sup>.
A)$15,749.
B)$14,526.
C)$15,923.
D)$13,604.
Answer: A
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Page 4
Chapter 3: Gross Income: Inclusions and Exclusions
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Q1) Items that must be reported on line 21 Other Income)of the Form 1040 include:
A)Jury duty pay.
B)Wages.
C)Capital gains.
D)Tax-exempt dividends.
Answer: A
Q2) Working condition fringes include:
A)Bonus earned by the employee.
B)The use of an employer-provided vehicle for business purposes.
C)Professional organization dues paid by the employer.
D)Professional organization dues paid by the employer and the use of an employer-provided vehicle for business purposes.
Answer: D
Q3) Taxpayers are not required to "impute interest" on a deferred payment contract for which no interest,or a low rate of interest,is stated.
A)True
B)False
Answer: False
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Chapter 4: Adjustments for Adjusted Gross Income
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Q1) For the interest on a student loan to qualify for the student loan interest deduction,the student must be enrolled full-time.
A)True
B)False
Q2) The goal of the alimony recapture rules is to properly define the substance of payments made to a former spouse in order to ensure proper tax treatment.These rules "lookback" to the following years for the calculation:
A)Years 3 and 4.
B)Years 4 through 6.
C)Years 1 and 2.
D)Years 1 through 3.
Q3) Which of the following expenses does not qualify as a moving expense?
A)Transportation of household goods.
B)House hunting expenses.
C)Travel expenses.
D)Lodging.
Q4) Is the self-employed health insurance deduction available to individuals other than self-employed taxpayers? If so,to whom is it available?
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6
Chapter 5: Itemized Deductions
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Q1) Which of the following items would be an itemized deduction on Schedule A of Form 1040 subject to the 2% of AGI floor?
A)Professional dues to membership organizations.
B)Job-hunting costs.
C)Work uniforms that cannot be used for normal wear.
D)All of these.
Q2) What is qualified residence interest? Are there any limits to the deductibility of qualified residence interest?
Q3) Taxes deductible as an itemized deduction include all of the following except:
A)Taxes that the taxpayer paid on property owned by his/her parents or children.
B)State and local income taxes.
C)Real estate property taxes based on the assessed value of the property.
D)Personal property taxes based on the value of the property.
Q4) In 2016,Alan was required by his employer to use his car for work.His employer's mileage reimbursement was $0.25 per mile.If Alan's actual expenses are more than the reimbursement,he can deduct the excess amount on Schedule C.
A)True
B)False
Q5) How is the medical expense deduction calculated? How is it limited?
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Chapter 6: Self-Employed Business Income Line 12 of Form
1040 and Schedule C
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Q1) Alice is a high school teacher who enjoys knitting.She knits scarves and sweaters and sells them in a local boutique.Alice spends 10 to 15 hours a week knitting the scarves and sweaters.Alice had sales of $6,000 and expenses of $10,000 related to knitting and selling the goods.Alice's $10,000 of expenses consisted of $800 of interest expense and $1,600 in property taxes for her building and tools,$3,000 in supplies,and $4,600 in depreciation charges.How would Alice's income and expenses be reported on her tax return if her knitting activity is characterized as a hobby?
Q2) Marion drives 20 miles a day from his first job to his second job.He worked 125 days during 2016 on both jobs.What is Marion's mileage deduction rounded to the nearest dollar assuming he uses the standard mileage rate and mileage is incurred ratably throughout the year?
A)$1,400.
B)$1,350.
C)$1,438.
D)$70.
Q3) List and define the criteria for an expenditure to be deductible on Schedule C.
Q4) Lateefah purchased a new office building on April 1,2016,for $3,000,000.On August 20,2020,the building was sold.What is the cost recovery deduction for the year of purchase and the year of sale?
Page 8
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Chapter 7: Capital Gains and Other Sales of Property
Schedule D and Form 4797
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Q1) The 25% bracket is a special rate that relates to capital gains from Section 1250 property used in a trade or business.
A)True
B)False
Q2) Gabriella,a single taxpayer,has wage income of $160,000.In addition,she has $7,000 in long-term capital losses,$1,000 in long-term capital gains,$3,000 in short-term capital gains,and
$1,000 in short-term losses.What is Gabriella's AGI for 2016?
A)$161,000.
B)$157,000.
C)$156,000.
D)$160,000.
Q3) Yolanda,a single taxpayer,has W-2 income of $87,500.She also has a short-term capital loss of $7,000,a short-term capital gain of $1,000,and a long-term capital gain of $2,000.What is Yolanda's AGI for 2016?
A)$90,500.
B)$89,500.
C)$84,500.
D)$83,500.
Page 9
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Chapter 8: Rental Property, royalties, and Income From
Flow-Through Entities Line 17, form 1040, and Schedule E
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Q1) What is meant by ordinary rental expenses and what criteria must be met to be deductible? Provide some examples of deductible rental expenses.For this question,assume no personal use of the rental property.
Q2) A primarily rental property may report its income and expenses on a Schedule E.
A)True
B)False
Q3) In general,losses from passive activities may be deducted only to the extent that there is passive income.
A)True
B)False
Q4) Rental properties that are also used as vacation homes fall under one of two categories: 1)primarily rental; or 2)primarily personal.
A)True
B)False
Q5) If a tenant provides service for the rental property in lieu of rental payment,the fair market value of the service is considered rental income and must be reported as income.
A)True
B)False
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Chapter 9: Tax Credits Form 1040, lines 46 Through 54 and Lines 66a Through 73
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Q1) The main goal of Congress in offering tax credits is to collect additional revenues.
A)True
B)False
Q2) Waseem has $103,000 total taxable income,which includes $11,000 of taxable income from India.He paid $4,000 in foreign income taxes and his U.S.tax liability is $21,610.Waseem's foreign tax credit is: Do not round interim calculations)
A)$2,308.
B)$0.
C)$2,200.
D)$4,000.
Q3) The adoption credit is only available for domestic adoptions. A)True
B)False
Q4) The child tax credit is reduced if AGI exceeds $110,000 for married filing joint taxpayers.
A)True
B)False
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Chapter 10: Payroll Taxes
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Q1) The amount withheld from supplemental payments depends on whether the employer accounts for the payment separate from regular wages.
A)True
B)False
Q2) Daniel is a computer technical support representative earning $95,000 per year and also has a sole proprietor consulting business where he earned $28,000 for 2016.How much of his total earnings are subject to self-employment tax for 2016?
A)$28,000.00.
B)$17,269.45.
C)$18,700.00.
D)$25,858.00.
Q3) Self-employed taxpayers who also receive wages from an employer are not subject to FICA or federal withholding taxes.
A)True
B)False
Q4) Employers are not required to withhold any federal taxes on allocated tips.
A)True
B)False
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Chapter 11: Retirement and Other Tax-Deferred Plans and Annuities
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Q1) Distributions from a retirement plan are not subject to a 10% additional tax in each of the following instances except when
A)The distribution is used to pay for medical expenses above the 10% AGI threshold.
B)The distribution is made to pay an IRS tax levy on the plan.
C)The distribution is made to an employee or retiree on or after age 59½.
D)The distribution is paid to an employee to be used to pay health insurance premiums.
Q2) Patrick is age 30,single,and has AGI of $101,000.He would like to contribute to a Coverdell Education Savings Account CESA)for his niece,Eileen.What is the maximum CESA contribution Patrick can make for Eileen in 2016?
A)$2,000.
B)$1,500.
C)$0.
D)$1,200.
Q3) SIMPLE plans are not subject to the nondiscrimination rules for other qualified plans.
A)True
B)False
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Page 13
Chapter 12: Special Property Transactions
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Q1) On June 15,2016,Roco sold land held for investment to Scotty for $100,000 cash and an installment note of $500,000 payable in five equal annual installments beginning on June 15,2017,plus interest at 10%.Roco's basis in the land is $300,000.What amount of gain is recognized in 2016 under the installment method?
Q2) The time period to replace property destroyed in an involuntary conversion is two years from the event.
A)True B)False
Q3) The contract price in an installment sale is:
A)The gross profit divided by the selling price.
B)The selling price less the basis in the property.
C)The selling price or the selling price reduced by any debt assumed by the buyer.
D)The selling price less any selling expenses.
Q4) The like-kind exchange provisions are elective provisions.
A)True B)False
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Chapter 13: At-Riskpassive Activity Loss Rules and the
Individual Alternative Minimum Tax
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Q1) Tax preference items can be either positive or negative.
A)True
B)False
Q2) Heather purchased furniture and fixtures 7-year property)for her retail shop for $50,000.What is the AMT depreciation adjustment required in 2016 if the property was purchased in May 2016,assuming no bonus depreciation was taken?
A)$1,790.
B)$7,145.
C)$0.
D)$5,355.
Q3) Identify factors that increase or decrease the at-risk amount.
Q4) Cory sells his entire interest in a rental property in which he actively participated at a gain of $12,000.The activity has a current year loss of $4,800 and $16,000 in prior year suspended losses.During the year,Cory has $80,000 in salary.What is Cory's AGI for the year?
Q5) Gifts to charity are not allowed for AMT purposes.
A)True
B)False
Page 15
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Chapter 14: Partnership Taxation
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Q1) Sabrina has a $12,000 basis in her S&B partnership interest.Sabrina receives a current cash distribution of $10,000 and equipment with a $5,000 basis FMV $6,000).What is Sabrina's basis in the equipment received?
A)$2,000.
B)$5,000.
C)$6,000.
D)$0.
Q2) When a partner increases his or her share of the partnership's liabilities,the liability increase is treated as a:
A)Money contribution.
B)Money distribution.
C)Recognition of income.
D)Has no effect on the partner.
Q3) How does a partner treat premiums on health insurance provided by the partnership?
A)As a separately stated item.
B)As a guaranteed payment.
C)As an ordinary income item reported on a W-2.
D)As a capital gain item.
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Page 16
Chapter 15: Corporate Taxation
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Questions
Q1) MMM Company has taxable income of $300,000.The company received a dividend of $50,000 from a domestic corporation in which it holds a 60% ownership interest.It also has tax depreciation that is $20,000 greater than financial statement depreciation.These items were properly accounted for in determining taxable income.Without regard to tax expense,what is financial statement income of MMM Company?
A)$330,000.
B)$360,000.
C)$340,000.
D)Some other number.
Q2) The corporate alternative minimum tax exemption amount is $150,000.
A)True
B)False
Q3) When a corporation is formed,if the sole shareholder contributes property and receives,in return,stock plus property,the individual will report a taxable gain equal to the FMV of the property received.
A)True
B)False
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