Tax Compliance and Planning Test Questions
Course Introduction
This course examines the principles and practices of tax compliance and strategic tax planning for individuals and businesses. Students will gain a comprehensive understanding of tax laws, regulations, and reporting requirements, with a focus on both federal and state tax systems. Emphasis will be placed on ethical responsibilities, risk management, and best practices in fulfilling tax obligations. The course also explores techniques and strategies for effective tax planning, helping students identify legal avenues to minimize tax liabilities and optimize after-tax financial outcomes. Practical case studies and real-world scenarios are used to reinforce key concepts and prepare students for roles in accounting, finance, and taxation.
Recommended Textbook
McGraw Hills Taxation of Individuals 2017 8th Edition By
Brian C. Spilker
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14 Chapters
1609 Verified Questions
1609 Flashcards
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Chapter 1: An Introduction to Tax
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Sample Questions
Q1) Which of the following taxes represents the largest portion of U.S. Federal Tax revenues?
A) Employment taxes
B) Corporate income taxes
C) Individual income taxes
D) Estate and gift taxes
E) None of these
Answer: C
Q2) Taxes influence which of the following decisions?
A) business decisions
B) personal decisions
C) political decisions
D) investment decisions
E) All of these
Answer: E
Q3) George recently paid $50 to renew his driver's license. The $50 payment is considered a tax.
A)True
B)False
Answer: False
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Chapter 2: Tax Compliance, the Irs, and Tax Authorities
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Sample Questions
Q1) Andy filed a fraudulent 2014 tax return on May 1, 2015. The statute of limitations for IRS assessment on Andy's 2014 tax return should end:
A) May 1st, 2017.
B) April 15th, 2017.
C) May 1st, 2018.
D) April 15th, 2018.
E) None of these.
Answer: E
Q2) Ramon's tax return was randomly selected for audit. Which IRS program likely selected Ramon's return for audit?
A) DIF system.
B) National Research Program.
C) Document perfection.
D) Information matching.
E) None of these.
Answer: B
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Chapter 3: Tax Planning Strategies and Related Limitations
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Sample Questions
Q1) Based only on the information provided for each scenario, determine whether Eddy or Scott will benefit more from using the timing strategy and why there will be a benefit to that person.
a. Eddy has a 40% tax rate. Scott has a 30% tax rate.
b. Eddy and Scott each have a 40% tax rate. Eddy has $10,000 of income that could be deferred; Scott has $20,000 of income that could be shifted.
c. Eddy and Scott each have a 40% tax rate and $20,000 of income that could be deferred. Eddy's after-tax rate of return is 8%. Scott's after-tax rate of return is 10%.
d. Eddy and Scott each have a 40% tax rate, $20,000 of income that could be deferred, and an after-tax rate of return of 10%. Eddy can defer income up to 3 years. Scott can defer income up to 2 years.
Answer: (a) Eddy, because the benefits of the timing strategy increase with tax rates. (b) Scott, because the benefits of the timing strategy increase with the magnitude of the transaction. (c) Scott, because the benefits of the timing strategy increase with the after-tax rate of return. (d) Eddy, because the benefits of the timing strategy increase with the deferral period.
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Chapter 4: Individual Income Tax Overview, Exemptions, and Filing Status
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Sample Questions
Q1) The Tanakas filed jointly in 2014. Their AGI is $120,000. They reported $10,000 of itemized deductions and they have two dependent children. The 2014 standard deduction amount is $12,400 and each exemption is $3,950. What is the total amount of from AGI deductions they are allowed to claim on their 2014 tax return?
Q2) Taxpayers may prepay their tax liability through withholdings and through estimated tax payments.
A)True
B)False
Q3) A taxpayer may qualify for the head of household filing status even if she does not have any dependent children.
A)True
B)False
Q4) Hannah, who is single, received a qualified dividend of $1,000. Hannah's marginal ordinary income tax rate is 28%. What amount of tax must she pay on the $1,000 dividend?
Q5) Tax credits reduce taxable income dollar for dollar.
A)True
B)False
Q6) What is the couple's gross income?
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Chapter 5: Gross Income and Exclusions
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Sample Questions
Q1) When a carpenter provides $100 of services in exchange for $100 of groceries, the carpenter has realized $100 of income.
A)True
B)False
Q2) Sam, age 45, saved diligently for his college education by putting part of his pay into U.S. Series EE saving bonds. Sam purchased the bonds for $6,500, and this year he redeemed the bonds for $7,200. He has no other income this year. What amount must Sam include in his gross income?
A) $7,200.
B) $6,500.
C) a maximum of $350 if Sam uses the proceeds to pay for his college tuition and fees.
D) $700 unless Sam uses the proceeds to pay for his college tuition and fees.
E) Zero - proceeds from cashing bonds sold at a discount is not realized income.
Q3) In April of this year Victoria received a $1,400 refund of state income taxes that she paid last year. Last year Victoria claimed itemized deductions of $8,690. Victoria's itemized deductions included state income taxes paid of $3,750. How much of the refund, if any, must Victoria include in gross income if the standard deduction last year was $6,100?
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Chapter 6: Individual Deductions
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Sample Questions
Q1) Hector is a married self-employed taxpayer, and this year he paid $3,000 for his health insurance premiums (not through an exchange). Under which of the following alternative conditions can Hector deduct the cost of the premiums for AGI?
A) Hector chose not to participate in the employer-sponsored plan of his spouse.
B) Hector's spouse participates in an employer-sponsored plan but Hector is not eligible to participate in this plan.
C) Neither Hector nor his spouse participates in an employer-sponsored plan although both are eligible to participate in a plan.
D) Hector can deduct the health insurance premiums regardless of the insurance status of his spouse.
E) None of these - health insurance premiums can only be deducted as an itemized deduction.
Q2) The itemized deduction for taxes includes all types of state, local, and foreign taxes.
A)True
B)False
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Chapter 7: Individual Income Tax Computation and Tax Credits
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156 Verified Questions
156 Flashcards
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Sample Questions
Q1) During 2014, 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) $1,800
Q2) Assume Georgianne underpaid her estimated tax liability by $150 in the first quarter, $500 in the second quarter, $400 in the third quarter, and $200 in the fourth quarter. Calculate her underpayment penalty for the year, assuming the federal short-term interest rate is five percent.
Q3) Asteria earned a $25,500 salary as an employee in 2014. How much should her employer have withheld from her paycheck for FICA taxes (rounded to the nearest whole dollar amount)?
A) $370
B) $1,581
C) $1,951
D) $3,902
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Chapter 8: Business Income, Deductions, and Accounting Methods
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Sample Questions
Q1) Which of the following is a true statement?
A) Interest expense is not deductible if the loan is used to purchase municipal bonds.
B) Insurance premiums are not deductible if paid for "key man" life insurance.
C) One half of the cost of business meals is not deductible.
D) All of these are true.
E) None of these is true.
Q2) Judy is a self employed musician who performs for a variety of events. This year Judy was fined $250 by the city for violating the city's noise ordinance with a relatively loud performance. As a consequence Judy contributed $1,000 to a campaign committee formed to recall the city's mayor. Judy normally hires three part-time employees to help her schedule events and transport equipment. Judy paid a total of $33,000 to her employees through June of this year. In June Judy fired her part-time employees and hired her husband to replace them. However, Judy paid him $55,000 rather than $33,000.
Judy is on the cash method and calendar year, and she wants to know what amount of these expenditures is deductible as business expenses.
Q3) A short tax year can end on any day of any month other than December.
A)True
B)False
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Chapter 9: Property Acquisition and Cost Recovery
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Sample Questions
Q1) All assets subject to amortization have the same recovery period.
A)True
B)False
Q2) Bonnie Jo purchased a used computer (5-year property) for use in her sole proprietorship. The basis of the computer was $2,400. Bonnie Jo used the computer in her business 60 percent of the time and used it for personal purposes the rest of the time during the first year. Calculate Bonnie Jo's depreciation expense during the first year assuming the sole proprietorship had a loss during the year (Bonnie did not place the property in service in the last quarter):
A) $240
B) $288
C) $480
D) $2,400
E) None of these
Q3) The 200 percent or double declining balance method is allowable for five and seven year property.
A)True
B)False
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Chapter 10: Property Dispositions
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Sample Questions
Q1) What is the character of land used in an active trade or business for two years?
A) Capital.
B) Ordinary.
C) §1231.
D) Investment.
E) None of these.
Q2) In the current year, Raven sold machinery with a fair market value of $200,000. The machinery's original basis was $190,000 and Raven's accumulated depreciation on the machinery was $40,000, so its adjusted basis to Raven was $150,000. Raven received $50,000 in the current year and a note paying Raven $75,000 a year for two years beginning in next year. What is the amount and character of the gain that Raven will recognize in the current year?
Q3) Collins Corporation, of Camden, Maine, wants to exchange its manufacturing equipment for Rockland Company's equipment. Both parties agree that Collins's machinery is worth $200,000 and that Rockland's machinery is worth $175,000. Collins will not enter into the transaction unless it qualifies as a like-kind exchange. If Collins wants to avoid gain, what could the parties do to equalize the value exchanged but still allow the exchange to qualify as a like-kind exchange?
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Chapter 11: Investments
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Sample Questions
Q1) Compare and contrast the advantages and disadvantages of Coverdell Educational Savings Plans and 529 Plans.
Q2) Which of the following is not an example of the conversion tax planning strategy?
A) selling corporate bonds to purchase growth stocks
B) selling U.S. Treasury bonds to purchase municipal bonds
C) cashing in a certificate of deposit to purchase a stock paying qualified dividends
D) withdrawing funds from a savings account to purchase a qualified small business stock
E) None of these
Q3) The longer the holding period on growth stocks, ____________ the after-tax rate of return.
A) the lesser
B) the greater
C) there is no difference between
Q4) Unrecaptured §1250 gain is taxed at the 28 percent preferential capital gains rate. A)True
B)False
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Chapter 12: Compensation
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Sample Questions
Q1) Annika's employer provides each employee with up to $200 of monthly vouchers for public transportation. What is the amount that Annika must include into income with respect to her benefit in 2014?
Q2) Which of the following statements is true regarding the $1,000,000 limit on covered employees?
A) The limitation applies to all employees.
B) The limitation applies to all officers.
C) The limitation applies only to the CEO and three other highest compensated officers.
D) The limitation applies only to the CEO and three other highest compensated officers, not including the CFO.
Q3) Group-term life insurance is a fringe benefit that can be partially taxable and partially tax free.
A)True B)False
Q4) Employers cannot discriminate between highly and non-highly compensated employees when providing taxable fringe benefits.
A)True
B)False
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Chapter 13: Retirement Savings and Deferred Compensation
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Sample Questions
Q1) Kim (50 years of age) is considering whether to participate in her company's Roth 401(k) or traditional 401(k). This year, she plans to invest either $4,000 in a Roth 401(k) or $5,000 in a traditional 401(k). Kim plans on leaving the contribution in the retirement account for 20 years when she will receive a distribution of the entire balance in the account. Her employer does not have a matching program for employee contributions to retirement accounts. Assume Kim can earn a 6 percent before tax return in either account and that she anticipates that in 20 years her tax rate will be 30%.
1) What would be Kim's after-tax accumulation in 20 years if she contributes $4,000 to a Roth 401(k) account? 2) What would be her after-tax accumulation in 20 years if she contributes $5,000 to a traditional 401(k) account?
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) Deborah (single, age 29) earned $25,000 in 2014. Deborah was able to contribute $1,800 ($150/month) to her employer sponsored 401(k). What is the total saver's credit that Deborah can claim for 2014?
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Chapter 14: Tax Consequences of Home Ownership
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Sample Questions
Q1) At most, a taxpayer is allowed to exclude gain on the sale of a principal residence once every five years no matter the circumstances.
A)True
B)False
Q2) Which of the following statements regarding deductions for real property taxes is incorrect?
A) A taxpayer is not allowed to deduct property taxes as the taxpayer makes monthly mortgage payments to an escrow account held by her mortgage company.
B) Taxpayers are not allowed to deduct payments made for setting up water and sewer services.
C) An individual deducts real property taxes on her principal residence as a for AGI deduction.
D) Taxpayers are not allowed to deduct payments made for neighborhood sidewalks.
Q3) Jacoby purchases a home for $1,500,000 by making a $150,000 down payment and by borrowing the remaining $1,350,000 with a loan secured by the home. Jacoby can deduct interest expense on $1,100,000 of the loan principal.
A)True
B)False
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