Tax Planning and Compliance
Midterm Exam
Course Introduction
This course explores the principles and strategies of tax planning and compliance for individuals and businesses. Students will learn about current tax laws, regulations, and filing requirements, with an emphasis on maximizing tax efficiency while adhering to legal and ethical standards. Topics include income and expense recognition, tax deductions and credits, entity selection, timing strategies, and the use of tax planning tools. The course also covers tax implications for various transactions and the practical aspects of preparing and submitting accurate tax returns. Through case studies and real-world scenarios, students gain the analytical skills necessary to identify tax saving opportunities and ensure ongoing compliance with federal, state, and local tax authorities.
Recommended Textbook
Fundamentals of Taxation 2018 Edition 11th Edition by Ana M. Cruz Dr
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15 Chapters
1680 Verified Questions
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Page 2
Chapter 1: Introduction to Taxation, the Income Tax
Formula, and Form 1040EZ
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Q1) With respect to the income tax formula,which of the following statements is correct?
A)Taxable income is multiplied by a single tax rate to determine tax liability.
B)It is almost always the case that the tax return will either show a tax refund or an additional tax liability.
C)Total income and taxable income are the same number.
D)Tax credits are not used when making tax refund or tax due (with return)calculations.
Answer: B
Q2) With respect to the income tax formula,which of the following statements is incorrect?
A)The simplified income tax formula is only applicable to taxpayers with taxable income less than $100,000.
B)Taxpayers are allowed certain deductions from income.
C)For many taxpayers,the simple income tax formula is sufficient to determine tax liability.
D)When calculating the tax refund or tax due with the return,taxpayers need to subtract tax payments and tax credits from their tax liability.
Answer: A
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Page 3
Chapter
2:
Expanded Tax Formula, forms 1040A and 1040, and Basic Concepts
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Q1) What is the amount of the tax liability for a married couple filing jointly,having taxable income of $153,500? All answers should be rounded to the nearest dollar. Use the appropriate Tax Tables or Tax Rate Schedules.
A)$38,375.
B)$29,753.
C)$30,233.
D)$29,865.
Answer: D
Q2) The interest charged by the IRS for the first three months of 2017 was: A)3%.
B)5%.
C)4%.
D)6%.
Answer: C
Q3) A taxpayer who either is 65 or older or blind can claim an additional standard deduction.
A)True
B)False
Answer: True
Page 4
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Chapter 3: Gross Income: Inclusions and Exclusions
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Q1) When an individual's marginal ordinary income tax rate is 25% or more and less than 39.60%,the taxation rate on qualified dividends is 15%.
A)True
B)False
Answer: True
Q2) All federal and state unemployment compensation benefits are not subject to income tax.
A)True
B)False
Answer: False
Q3) Payments received by a taxpayer for unemployment compensation are not taxable. A)True
B)False Answer: False
Q4) Almost all individuals use the cash receipts and disbursements method of accounting.
A)True
B)False Answer: True
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Chapter 4: Adjustments for Adjusted Gross Income
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Q1) For 2017,eligible educators can deduct up to $250 of qualified educational expenses as an above-the-line deduction.
A)True
B)False
Q2) Professional development expenses related to the curriculum are eligible for the Educator Expenses deduction.
A)True
B)False
Q3) Distributions from Health Savings Accounts (HSAs)are subject to tax,if they are used to pay for qualified medical expenses.
A)True
B)False
Q4) In 2017,Rena accepted a new job and moved from Seattle to Pittsburgh to begin work.She incurred moving expenses for her household goods and furniture of $3,500.Prior to moving,Miguel flew to Pittsburgh to look for a new residence.The transportation and lodging for this trip to Pittsburgh was $900 and her meals were $250.The cost of her travel during the actual move to Boston was $500 which included $75 for meals.Calculate the amount of Rena's moving expense deduction for 2017.
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Page 6
Chapter 5: Itemized Deductions
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Q1) In 2016,Roxanne's nephew was her dependent.For 2017,he no longer qualifies as her dependent.However,she paid $650 in 2017 for medical expenses she incurred in 2016 when he was her dependent.Roxanne can include the $650 in figuring her medical expense deduction in 2017.
A)True
B)False
Q2) What is home equity indebtedness and how does it differ from acquisition indebtedness? Are there any limits to the deductibility of home equity loan interest?
Q3) Ming earned net investment income of $11,000 during 2017 and incurred investment interest expense of $3,000 during the year related to a stock purchase.She incurred other investment interest expenses of $7,000 during the year.Ming is limited to a deduction of $3,000 of investment interest expense in 2017.
A)True
B)False
Q4) Taxes assessed for local benefits,such as repair of an existing sidewalk,are deductible as real property taxes.
A)True
B)False
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Page 7
Chapter 6: Self-Employed Business Income Line 12 of Form
1040 and Schedule C
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Sample Questions
Q1) List and define the criteria for an expenditure to be deductible on Schedule C.
Q2) Kiri acquires equipment (7-year property)on August 14,2017,for $80,000.She does not elect to expense the asset under Section 179 or the 50% bonus.She sells the asset on January 15,2021.
a.What is Kiri's cost recovery deduction related to the equipment in 2017 and 2021?
b.What is Kiri's cost recovery deduction related to the equipment in 2017 and 2021 if the 50% bonus is elected?
Q3) Under MACRS,the straight-line method is required for all depreciable real property. A)True B)False
Q4) For a cash-basis taxpayer,any account receivable that is not collected can be written off as a bad debt.
A)True
B)False
Q5) Lateefah purchased a new office building on April 1,2017,for $3,000,000.On August 20,2021,the building was sold.What is the cost recovery deduction for the year of purchase and the year of sale?
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Chapter 7: Capital Gains and Other Sales of Property
Schedule D and Form 4797
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Q1) To figure the gain or loss from the sale of property received as a gift,the donor's adjusted basis at the time of the gift is the basis to the donee.
A)True
B)False
Q2) Glenn sells a piece of equipment used in his business for $31,500.The equipment was purchased on July 1,2015,at a cost of $22,000.Glenn has taken $6,600 of depreciation on the equipment.What are the amount and classification of the gain on the sale by Glenn?
A)$6,600 ordinary income under Section 1245 and $9,500 Section 1231 gain.
B)$9,500 Section 1231 gain.
C)$16,100 ordinary income under Section 1245.
D)$16,100 Section 1231 gain.
Q3) Section 1202 allows for an exclusion of up to 50% of the eligible gain on the sale or exchange of qualified small business stock if held for more than one year.
A)True
B)False
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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 are the criteria that determine an amount as capital improvement rather than repair and maintenance expense? What is the proper tax treatment of a capital improvement for rental properties?
Q2) Rental properties that are also used as vacation homes fall under one of three categories: (1)primarily rental(2)primarily personal,and (3)personal/rental.
A)True
B)False
Q3) Meredith has a vacation rental house in the Sierra Mountains.During the year,she and her immediate family used the house for 12 days for a personal vacation.Meredith spent two more weekends (4 days in total)repairing the deck.The house was rented for 120 days.How should the cabin be categorized this year for tax purposes? Explain your answer.
Q4) Jennifer's beach house,rented for 175 days and used by her and her family for 15 days,is considered personal/rental property.
A)True
B)False
Q5) Define royalty income.What criteria determine which form is used and where the royalties are reported?
Page 10
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Chapter 9: Tax Credits Form
1040,lines 48 Through 54 and Lines 66A Through 73
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Sample Questions
Q1) Max paid $2,500 in foreign income taxes to Peru.His total income was $65,000,which included $9,000 of foreign income.His U.S.tax liability is $17,750.How much can Max claim as foreign tax credit? (Do not round interim calculations. )
A)$2,458.
B)$2,500.
C)$3,350.
D)$9,000.
Q2) Kylie is a single mom with two dependent children,Tanner,age 7 and Olivia,age 11.She has AGI of $36,000 and paid $5,300 to a qualified day care center for the two children.What amount of credit can Kylie receive for the child and dependent care credit?
A)$5,300.
B)$1,060.
C)$1,200.
D)$1,272.
Q3) There is no maximum amount for the adoption credit.
A)True
B)False
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Chapter 10: Payroll Taxes
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Q1) K.Kruse Designs has the following employees: \(\begin{array}{lc}
\text { Employee } & \text { Total Wages Paid } \\
\text { David } & \$ 5,000 \\
\text { Shannon } & \$ 15,000 \\
\text { Don } & \$ 37,500 \end{array}\) K.Kruse Designs receives the maximum credit for state unemployment taxes.Calculate the FUTA tax that the employer owes for the year.Assume the employees are paid a regular salary throughout the year.
Q2) What form is given to an employee to correct incorrect payroll information?
A)W-2C.
B)W-4.
C)W-9.
D)None.The employee notifies the IRS directly when he or she files a Form 1040.
Q3) Form 1040-ES is filed along with the Form 1040 when a taxpayer makes estimated payments during the year.
A)True
B)False
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Page 12
Chapter 11: Retirement and Other Tax-Deferred Plans and Annuities
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Q1) In 2017,a 48-year-old participant in a 401(k)plan may contribute a maximum of:
A)$5,500.
B)$12,500.
C)$18,000.
D)$24,000.
Q2) Under a qualified profit-sharing plan,contributions must be made at least annually whether or not the employer has positive net income for the year.
A)True
B)False
Q3) The expected return on an annuity contract that will last for a specified amount of time is determined with reference to the life expectancy tables published by the IRS.
A)True
B)False
Q4) Annual contributions to a Keogh plan cannot exceed the greater of $54,000 or 100% of compensation.
A)True
B)False
Q5) What is an annuity contract? Who are the parties to an annuity contract?
Page 13
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Chapter 12: Special Property Transactions
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Q1) The election to defer a gain under the involuntary conversion rules is reported on:
A)Form 4797.
B)Form 1040,Schedule A.
C)Form 1040,Schedule D.
D)No form is used.An election is attached to the tax return.
Q2) On December 28,2017,Misty sold 300 shares of Low Grade,Inc.(a publicly traded company)at a loss of $8,500.On January 5,2018,thinking that the stock price would rebound,Misty purchased 200 shares of Low Grade,Inc.for $7,000.What is the amount of the recognized loss on the December 28,2017 sale and what is Misty's basis in the 200 shares she purchased on January 5,2018?
Q3) An involuntary conversion results in money received.If the replacement property is purchased within the two-year period,the basis of the new property is its cost less the deferred gain.
A)True
B)False
Q4) The like-kind exchange provisions are elective provisions.
A)True
B)False
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Page 14
Chapter 13: At-Riskpassive Activity Loss Rules and the
Individual Alternative Minimum Tax
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Sample Questions
Q1) Cal reported the following itemized deductions on his 2017 tax return.His AGI for 2017 was $85,000.The mortgage interest is all qualified mortgage interest to purchase his personal residence.For AMT,compute his total itemized deductions. \(\begin{array}{lr} \text { Medical expenses (after the 10.0\% of AGI floor) } & 8,000 \\
\text { State income taxes } & 5,100 \\
\text { Home mortgage interest } & 13,500 \\
\text { Charitable contributions } & 4,200 \\
\text { Miscellaneous itemized deductions (after the 2\% of AGI floor) } & 2,800 \end{array}\)
A)$0.
B)$17,700.
C)$25,700.
D)$33,600.
Q2) Libby owns and operates Mountain View Inn,a bed and breakfast.Libby's inn is not considered a passive activity.
A)True
B)False
Q3) Identify factors that increase or decrease the at-risk amount.
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Chapter 14: Partnership Taxation
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Q1) A partner's basis in his or her partnership interest (outside basis)is the sum of the money contributed plus the adjusted basis of property contributed.
A)True
B)False
Q2) 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)$0.
B)$2,000.
C)$5,000.
D)$6,000.
Q3) Miguel contributes land to a partnership with a basis of $12,000 and a FMV of $18,000.How much gain will Miguel recognize?
A)$0.
B)$6,000.
C)$12,000.
D)$18,000.
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16
Chapter 15: Corporate Taxation
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Q1) Which of the following statements is incorrect?
A)A distribution from earnings and profits in excess of stockholder basis is a nontaxable return of capital.
B)Distributions paid in excess of earnings and profits are nontaxable to the extent of stockholder basis.
C)A distribution of appreciated property creates a gain to the corporation.
D)Earnings and profits are conceptually similar to retained earnings.
Q2) On Schedule M-1,federal income tax must be added back to taxable income.
A)True
B)False
Q3) Which of the following items decrease basis for a stockholder of a Subchapter S corporation?
A)Capital contributions.
B)Charitable contributions.
C)Loans from the shareholder to the corporation.
D)Net income.
Q4) When a corporation is formed,the transaction is always tax-free.
A)True
B)False
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