Tax Planning for Individuals Review Questions
Course Introduction
Tax Planning for Individuals is designed to introduce students to the fundamental principles and strategies of personal income tax planning. The course covers key concepts such as income recognition, deductions, credits, tax deferral, and timing strategies that can help individuals minimize their tax liability within the legal framework. Students will explore current tax laws, learn how to analyze a variety of personal financial situations, and apply planning techniques that align with life events like marriage, home ownership, education, and retirement. Emphasis is placed on practical applications and ethical considerations to empower students with the skills needed for effective tax planning in both professional advisory contexts and personal financial management.
Recommended Textbook
Pearsons Federal Taxation 2018 Individuals 31st Edition by Timothy J. Rupert
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18 Chapters
2328 Verified Questions
2328 Flashcards
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Chapter 1: An Introduction to Taxation
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Sample Questions
Q1) Which of the following steps,related to a tax bill,occurs first?
A) signature or veto by the President of the United States
B) consideration by the Senate
C) consideration by the House Ways and Means Committee
D) consideration by the Joint Conference Committee
Answer: C
Q2) The various entities in the federal income tax system may be classified into two general categories,taxpaying entities (such as individuals and C [regular] corporations) and flow-through entities such as sole proprietorships,partnerships,S corporations,and limited liability companies.
A)True
B)False
Answer: True
Q3) In a limited liability partnership,a partner is not liable for his partner's acts of negligence or misconduct.
A)True
B)False
Answer: True
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Chapter 2: Determination of Tax
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Sample Questions
Q1) Husband and wife,who live in a common law state,are eligible to file a joint return for 2017,but elect to file separately.They do not have dependents.Wife has adjusted gross income of $25,000 and has $2,200 of expenditures which qualify as itemized deductions.She is entitled to one exemption.Husband deducts itemized deductions of $11,200.What is the taxable income for the wife?
A) $14,600
B) $18,750
C) $20,950
D) None of the above.
Answer: B
Q2) Edward,a widower whose wife died in 2014,maintains a household for himself and his 10-year-old daughter.Edward's most favorable filing status for 2017 is A) single.
B) surviving spouse.
C) head of household.
D) married filing jointly.
Answer: C
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4
Chapter 3: Gross Income: Inclusions
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Sample Questions
Q1) Alimony received is taxable to the recipient while child support payments are not.
A)True
B)False
Answer: True
Q2) A key factor in determining tax treatment of distributions from qualified retirement plans is whether the employee made pre-tax or after-tax contributions.
A)True
B)False
Answer: True
Q3) Carla redeemed EE bonds which qualify for the educational exclusion.The redemption consisted of $14,000 principal and $6,000 interest.The net qualifying educational expenses are $10,000.Her AGI is below the threshold for phase-out of the exclusion.The taxable interest is
A) $0.
B) $2,400.
C) $3,000.
D) $6,000.
Answer: C
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Chapter 4: Gross Income: Exclusions
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Sample Questions
Q1) Punitive damages are taxable unless they are awarded for physical injuries.
A)True
B)False
Q2) Adam purchased stock in 2006 for $100,000.He is considering selling it in 2017.It is currently worth $2,100,000 so he would realize a $2,000,000 gain.Adam is in the top tax bracket.Determine the taxes due under the following independent situations (ignore any additional Medicare taxes on investment income):
(a) Adam sells the stock,and no special circumstances apply.
(b) The stock is qualified small business corporation stock.
(c) The stock is qualified small business corporation stock.Within 60 days Adam invests $2,500,000 in new qualifying small business corporation stock.
(d) The stock is qualified small business corporation stock.Within 60 days Adam invests $2,000,000 in new qualifying small business corporation stock.
Q3) Discuss the requirements for meals provided by employers to be excluded from their employees' income.How is the de minimis rule distinguished from these requirements?
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Chapter 5: Property Transactions: Capital Gains and Losses
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Sample Questions
Q1) All of the following are capital assets with the exception of A) personal residence.
B) corporate stock held for investment.
C) equipment used in a trade or business.
D) a Rembrandt painting held in a private collection.
Q2) Douglas and Julie are a married couple who live in Louisiana,a community property state.They jointly own property with an adjusted basis of $140,000.On December 2 of this year,Julie died when the property had a fair market value of $160,000.Douglas's basis in the property after Julie's death is
A) $0.
B) $140,000.
C) $150,000.
D) $160,000.
Q3) Taxpayers who own mutual funds recognize their share of capital gains even if no distributions are received.
A)True
B)False
Q4) Distinguish between the Corn Products doctrine and the ruling in the Arkansas Best Corporation case.
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Chapter 6: Deductions and Losses
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Sample Questions
Q1) Emeril borrows $340,000 to finance taxable and tax-exempt investments.He incurs $18,000 investment interest expense,allocated equally between the taxable and tax-exempt investments.Ignore any possible investment interest expense limitation.How much of the interest expense is deductible,and where is it deductible?
A) $18,000 for AGI
B) $18,000 from AGI
C) $9,000 for AGI
D) $9,000 from AGI
Q2) Various criteria will disqualify the deduction of a business or investment related expenditure.Which of the following criteria will not disqualify a business or investment expenditure?
A) capital expenditure
B) expenses related to tax-exempt income
C) expenses are not incurred annually
D) expenses are illegal or in violation of public policy
Q3) Eugene,a hardware store owner in Detroit,incurs $7,000 in an attempt to influence the Detroit City Council on the matter of a new tax assessment on hardware stores in Detroit.Explain what amount Eugene can deduct.
Q4) Discuss when expenses are deductible under the accrual method of accounting.
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Chapter 7: Itemized Deductions
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Sample Questions
Q1) Valeria owns a home worth $1,400,000,with a mortgage balance of $1,050,000.She borrows $200,000 to purchase a speedboat,using a home equity loan.What is the total amount of debt on which Valeria can deduct interest in the current year?
A) $1,000,000
B) $1,150,000
C) $1,050,000
D) $1,100,000
Q2) Carl purchased a machine for use in his trade or business two years ago for $30,000.During the current year,Carl donates the machine to the local community college.At the time of the contribution,the machine's adjusted basis is $10,000 and its FMV is $15,000.Carl's AGI for the year is $48,000.What is the amount of his charitable contribution deduction?
A) $10,000
B) $14,000
C) $15,000
D) $25,000
Q3) Explain under what circumstances meals and lodging en route to a medical facility may be deductible.
Q4) Explain why interest expense on investments is limited to net investment income.
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Chapter 8: Losses and Bad Debts
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Sample Questions
Q1) Brandon,a single taxpayer,had a loss of $48,000 from a rental real estate activity in which he actively participated.He also had $27,000 of income from another rental real estate activity in which he actively participated.He acquired both investments in the current year.If Brandon has no other passive income or losses and has adjusted gross income of $84,000 before considering passive activities,how much loss from rental activities can he use to offset his nonpassive income?
A) $21,000
B) $24,000
C) $25,000
D) $45,000
Q2) The sale of inventory at a loss results in an ordinary loss.
A)True
B)False
Q3) Losses incurred in the sale or exchange of personal-use property are deductible as capital losses.
A)True
B)False
Q4) Why did Congress enact restrictions and limitations on losses from passive activities?
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Chapter 9: Employee Expenses and Deferred Compensation
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Sample Questions
Q1) Angie starts a new job and becomes covered under the employer's health insurance plan which has an annual deductible of $2,400.Angie contributes the maximum amount into a Health Savings Account.Which of the following statements regarding Angie's Health Savings Account is correct?
A) Angie can contribute and deduct $1,200 for AGI.
B) Angie's contribution will be deductible if she itemizes, and the contribution along with her out-of-pocket medical expenses exceed 10% of AGI.
C) If Angie withdraws $500 to pay for X-rays, the $500 is taxable.
D) Interest income earned on the HCA is taxable.
Q2) Daniel has accepted a new job and is reviewing the retirement plan information.He has a choice of participating in the company's conventional Sec.401(k) plan or a Roth 401(k) plan.Explain the difference between the two plans in terms of employee contributions and retirement distributions from the plan.
Q3) If an individual is not "away from home," expenses related to local transportation are never deductible.
A)True
B)False
Q4) What two conditions are necessary for moving expenses to be deductible?
Page 11
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Chapter 10: Depreciation, cost Recovery, amortization, and Depletion
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Sample Questions
Q1) Taxpayers are entitled to a depletion deduction if they have an economic interest in the natural resource property.
A)True
B)False
Q2) A large SUV is placed in service in 2017.MACRS depreciation on an SUV weighing over 6,000 pounds is limited to $11,160 for the first year placed in service.
A)True
B)False
Q3) Galaxy Corporation purchases specialty software from a software development firm for use in its business as of January 1 of the current year at a cost of $90,000.No hardware was acquired.How much of the cost can Galaxy deduct this year?
A) $18,000
B) $15,000
C) $30,000
D) $90,000
Q4) Why would a taxpayer elect to use the alternative depreciation system rather than the MACRS rules?
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Chapter 11: Accounting Periods and Methods
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Sample Questions
Q1) For tax purposes,the lower of cost or market method must ordinarily be applied to each separate inventory item.
A)True
B)False
Q2) Emma,a single taxpayer,obtains permission to change from a calendar year to a fiscal year ending June 30,2017.During the six months ending June 30,2017,she earns $40,000 and has $8,000 of itemized deductions.What is the amount of her annualized income?
A) $29,975
B) $64,000
C) $59,950
D) $55,900
Q3) If the majority of the partners do not have the same tax year,the partnership must use the tax year of its principal partners.
A)True
B)False
Q4) Under the cash method of accounting,all expenses are deductible when paid.
A)True
B)False
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Chapter 12: Property Transactions: Nontaxable Exchanges
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Sample Questions
Q1) Which of the following statements with respect to a like-kind exchange is false?
A) Property of one class must be exchanged for property of the same class.
B) An exchange of inventory does not qualify as a like-kind exchange.
C) Personal property must be exchanged for personal property.
D) A sale of property and subsequent purchase of like-kind property will always qualify as a like-kind exchange.
Q2) Lana owned a house used as a rental property for three years.During this rental period,she took $60,000 of depreciation deductions.Lana moved into the house and has used it as her principal residence for the past two years.Lana has just sold the house and realized a $200,000 gain.She will recognize gain of A) $0.
B) $60,000.
C) $200,000.
D) $144,000.
Q3) A loss on the sale of a taxpayer's personal residence is deductible if the taxpayer owned and lived in the home for two of five years.
A)True
B)False
Q4) Discuss the basis rules of property received in a nontaxable like-kind exchange.
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Chapter 13: Property Transactions: Sec1231 and Recapture
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Sample Questions
Q1) The amount recaptured as ordinary income under either Sec.1245 or Sec.1250 can never exceed the realized gain.
A)True
B)False
Q2) Sec.1245 ordinary income recapture can apply to buildings placed in service prior to 1987.
A)True
B)False
Q3) Octet Corporation placed a small storage building in service in 2001.Octet's original cost for the building is $800,000 and the cost recovery deductions are $300,000.This year the building is sold for $1,100,000.The amount and character of the gain are
A) ordinary gain of $60,000 and Sec. 1231 gain of $540,000.
B) ordinary gain of $300,000 and Sec. 1231 gain of $300,000.
C) ordinary gain of $600,000.
D) Sec. 1231 gain of $600,000.
Q4) Sec.1245 can increase the amount of gain recognized on an asset.
A)True
B)False
Q5) What is the purpose of Sec.1245 and what is its significance?
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Chapter 14: Special Tax Computation Methods, tax Credits, and Payment of Tax
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Sample Questions
Q1) A taxpayer will be ineligible for the earned income credit if he or she has disqualified investment income of more than $3,450 in 2017.Disqualified income includes all the following except
A) net capital gains.
B) tax-exempt interest.
C) net rental income.
D) self-employment income.
Q2) Mark and Stacy are married,file a joint return,and have one child,age 3.Their combined AGI is $55,000.Mark and Stacy incur $3,500 of child care expenses during the current year.Mark's employer reimburses him $1,500 under a qualified dependent care assistance plan.The child and dependent care credit is
A) $300.
B) $600.
C) $700.
D) $1,200.
Q3) For purposes of the child and dependent care credit,qualifying employment-related expenses cannot include payments to a relative.
A)True
B)False
Page 16
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Chapter 15: Tax Research
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Sample Questions
Q1) Appeals from the Court of Appeals go to the Supreme Court under a writ of certiorari.The Supreme Court decides whether or not they will hear the case.
A)True
B)False
Q2) Explain the legislative reenactment doctrine.
Q3) In which courts may litigation dealing with tax matters begin? Discuss the factors that might be considered in deciding where to begin litigation.
Q4) What is an information release?
Q5) A jury trial is permitted in the
A) U.S. District Court.
B) U.S. Tax Court.
C) U.S. Court of Federal Claims.
D) U.S. Tax Court when the small case procedures are used.
Q6) A revenue ruling is issued by the Internal Revenue Service only in response to a verbal inquiry by a taxpayer.
A)True
B)False
Q7) Where must a tax researcher look to access all Tax Court cases?
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Chapter 16: Corporations
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Sample Questions
Q1) Chocolat Inc.is a U.S.chocolate manufacturer.Its domestic production income is $2,000,000.Taxable income before the domestic production deduction is $3,000,000.What is the amount of the production activities deduction?
A) $270,000
B) $180,000
C) $90,000
D) $60,000
Q2) Partnerships,limited liability partnerships,limited liability companies,and C corporations are considered flow-through entities for tax purposes.
A)True
B)False
Q3) A corporation redeems 10 percent of the stock of each shareholder in a family-owned corporation.The shareholders will recognize capital gains on the sale of their stock back to the corporation.
A)True
B)False
Q4) Johnson Corporation has $300,000 of AMTI before the exemption.What is the tax base for AMT?
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Chapter 17: Partnerships and S Corporations
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Sample Questions
Q1) Which of the following statements regarding voluntary revocation of the S election is incorrect?
A) In order for the revocation to be effective retroactively to the first day of the tax year, the revocation must be filed by March 15 of the affected year.
B) All of the shareholders must consent to the revocation.
C) The corporation cannot reelect S corporation status for five years.
D) The revocation can provide a specified effective date to occur mid-year, requiring two tax returns to be filed for the year.
Q2) An S corporation distributes land with a basis of $60,000 and a FMV of $90,000 to its shareholder.The tax results of the distribution will be
A) no gain to the corporation or to the shareholder.
B) $30,000 of gain recognized by the S corporation and no pass-through to the shareholder.
C) no gain recognized by the corporation but $30,000 of gain recognized by the shareholder.
D) $30,000 of gain recognized by the S corporation which is passed through to the shareholder.
Q3) What are special allocations of partnership items and when are they permitted?
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Chapter 18: Taxes and Investment Planning
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Sample Questions
Q1) Flow-through entities include partnerships,limited liability companies,limited liability partnerships,and C corporations.
A)True
B)False
Q2) An investment in a growth stock which does not pay dividends is an example of the Exempt Model.
A)True B)False
Q3) The Roth IRA is an example of the Pension Model.
A)True
B)False
Q4) Nolan earns a salary of $80,000 and has a flat tax rate of 28%.The amount of after-tax dollars he has to invest is
A) $22,400.
B) $57,600.
C) $56,000.
D) $80,000.
Q5) Compare the characteristics of the Current and Deferred Models.
Q6) Discuss the decision rules for current salary versus deferred compensation.
Page 20
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