Taxation of Individuals Chapter Exam Questions
Course Introduction
This course provides a comprehensive overview of the principles and applications of federal income taxation as it pertains to individual taxpayers. Students will learn about the U.S. tax system, gross income inclusions and exclusions, deductions, tax credits, and tax computation methods for individuals. The course emphasizes tax planning strategies, filing requirements, and ethical considerations, with real-world examples and case studies to illustrate the impact of tax law on personal financial decisions. Upon completion, students will be equipped to prepare individual tax returns and understand the role of taxation in personal and professional contexts.
Recommended Textbook Pearsons Federal Taxation 2018 Individuals 31st Edition by Timothy J. Rupert
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Chapter 1: An Introduction to Taxation
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Q1) The Sixteenth Amendment to the U.S.Constitution permits the passage of a federal income tax law.
A)True
B)False
Answer: True
Q2) Which of the following taxes is proportional?
A) gift tax
B) income tax
C) sales tax
D) Federal Insurance Contributions Act (FICA) Answer: C
Q3) Flow-through entities do not have to file tax returns since they are not taxable entities.
A)True
B)False
Answer: False
Q4) Adam Smith's canons of taxation are equity,certainty,convenience and economy.
A)True
B)False
Answer: True
Page 3
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Chapter 2: Determination of Tax
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Q1) The annual tax reporting form filed with the IRS by C corporations is the Schedule C.
A)True
B)False
Answer: False
Q2) The person claiming a dependency exemption under a multiple support declaration must provide more than 25% of the dependent's support.
A)True
B)False
Answer: False
Q3) Hannah is single with no dependents and has a salary of $102,000 for 2017,along with tax exempt interest income of $3,000 from a municipality.Her itemized deductions total $6,600.
Required: Compute her taxable income.
Answer: 11ea7e84_1f21_7380_9a0a_23e0280c43c4_TB1260_00
Q4) A married couple need not live together to file a joint return.
A)True
B)False
Answer: True
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4
Chapter 3: Gross Income: Inclusions
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Q1) A cash-basis taxpayer can defer income recognition by refusing to accept payment.
A)True
B)False
Answer: False
Q2) Carolyn,who earns $400,000,is required to pay John,her ex-husband,$200,000 as part of the property settlement as a result of their divorce.In turn,John transfers stock worth $50,000 to Carolyn.What is the amount of Carolyn's adjusted gross income for the year?
A) $200,000
B) $250,000
C) $400,000
D) $450,000
Answer: C
Q3) Gross income is limited to amounts received in the form of cash.
A)True
B)False Answer: False
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Chapter 4: Gross Income: Exclusions
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Q1) Ming,who has been employed by the Frostine Corporation for five years,receives a $400 Amazon.com gift card for his years of hard work.The employee service award is taxable.
A)True
B)False
Q2) In the case of foreign-earned income,U.S.citizens may avoid double taxation of income by both the United States and the host country by utilizing a foreign tax credit or by electing the foreign earned income exclusion.
A)True
B)False
Q3) Benedict serves in the U.S.Congress.In the current year,a lobbyist paid for Benedict to take a one-week vacation to Bermuda.Benedict did not incur any expense for the trip.What income tax issues should Benedict consider?
Q4) Upon the sale of property,a portion of the selling price equal to the basis in the property is considered a return of capital to the seller and is,therefore,not taxable.
A)True
B)False
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Chapter 5: Property Transactions: Capital Gains and Losses
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Sample Questions
Q1) Empire Corporation purchased an office building for $500,000 cash on April 1.Prior to renting it out to tenants on July 1,Empire spent $200,000 on materials and labor to renovate the property.It funded $50,000 of the renovation cost with its own funds and borrowed the remaining $150,000.As of July 1,$2,000 of interest had been paid to the bank,but none of the principal had been repaid.The basis of the building on July 1 is
A) $500,000.
B) $700,000.
C) $702,000.
D) $502,000.
Q2) What type of property should be transferred to heirs at a decedent's death and why? Should estate planning also mean that some property is transferred prior to death? Why?
Q3) Jade is a single taxpayer in the top tax bracket,with salary of $450,000 and investment income of $100,000.She is considering the sale of some shares of stock which will result in a $50,000 gain.She purchased the shares three years ago.Taking all taxes into account,how much tax will she pay due to this gain?
Q4) What are arguments for and against preferential treatment of capital gains?
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Chapter 6: Deductions and Losses
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Q1) The term "principal place of business" includes a home office used by a taxpayer for administrative or management activities of the business if no fixed location exists where the taxpayer conducts these activities.
A)True
B)False
Q2) A sole proprietor paid legal fees in connection with the acquisition of a building that he uses in his business.The sole proprietor can deduct the legal fees for AGI.
A)True
B)False
Q3) Diane,a successful accountant with an annual income of $150,000,also enjoys raising and training race horses,an activity in which she spends about 10 hours per week.Over the past five years her winnings from races have amounted to $20,000.She employs neighborhood children to feed the horses but has a professional trainer who works with the horses about 5 hours per week.Discuss some of the factors that might enter into the determination of whether or not this activity is a hobby or a trade/business.
Q4) Discuss when expenses are deductible under the accrual method of accounting.
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8
Chapter 7: Itemized Deductions
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Sample Questions
Q1) Jill is considering making a donation to her church.She wants to give $50,000 for the new church building.She has some stock with a FMV of $50,000 and an adjusted basis of $10,000 that she has held for 3 years.She is planning to sell the stock and donate the $50,000 proceeds to the church.What should she consider before taking that action?
Q2) Acquisition indebtedness for a personal residence includes debt incurred to substantially improve the residence.
A)True
B)False
Q3) In 2016,Mario earned $9,000 in net investment income and incurred $14,000 of investment interest expense.Mario paid off the loan in early 2017,so he only paid $2,000 of investment interest expense in 2017.He earned $10,000 of net investment income in 2017.How much investment interest expense can Mario deduct in 2017?
A) $2,000
B) $10,000
C) $7,000
D) $0
Q4) What is the treatment of charitable contributions in excess of the applicable limits for the current year?
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Page 9
Chapter 8: Losses and Bad Debts
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Sample Questions
Q1) Due to an unusual event,a taxpayer has a large loss in the current year,resulting in an NOL.The taxpayer expects next year's taxable income to return to the same approximate amount he reported in last few years,however he expects his income tax rate to decrease due to the recent election results.The taxpayer should elect to forego the carryback period.
A)True
B)False
Q2) A loss incurred on the sale or exchange of property is deductible only if the property is used in a trade or business or held for investment.
A)True
B)False
Q3) Individuals who actively participate in the management of rental real property may deduct up to $25,000 in losses,subject to AGI limitations.
A)True
B)False
Q4) A theft loss is deducted in the year in which the theft is discovered.
A)True
B)False
Q5) What are some factors which indicate that a debt may be worthless?
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Chapter 9: Employee Expenses and Deferred Compensation
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Sample Questions
Q1) Clarissa is a very successful real estate agent.She spends $5,000 per year taking her clients out to dinner upon completion of a sale.Unfortunately,Clarissa is not a good recordkeeper and does not maintain receipts.However,such entertainment is standard practice in her field,and trade journals indicate that $5,000 is a reasonable amount for a successful high-end agent.Before consideration of the 2% of AGI floor,Clarissa will be allowed to deduct $2,500.
A)True
B)False
Q2) Hunter retired last year and will receive annuity payments for life from his employer's qualified retirement plan of $30,000 per year starting this year.During his years of employment,Hunter contributed $130,000 to the plan.Based on IRS tables,his life expectancy is 260 months.All of the contributions were on a pre-tax basis.This year,Hunter will include what amount in income?
A) $0
B) $6,000
C) $24,000
D) $30,000
Q3) What factors are considered in determining whether an expense is a deductible travel expense?
Page 11
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Chapter 10: Depreciation, cost Recovery, amortization, and Depletion
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Sample Questions
Q1) On October 2,2017,Dave acquired and placed into service 5-year business equipment costing $70,000.No other acquisitions were made during the year.Dave does not use Sec.179 expensing,and the property does not qualify for bonus depreciation.The depreciation for this year,using the most accelerated method possible,is A) $0.
B) $3,500.
C) $7,000.
D) $14,000.
Q2) MACRS recovery property includes tangible personal and real property that is used in a trade or business.
A)True
B)False
Q3) Maria,a sole proprietor,has several items of office furniture and equipment which are depreciable.All were acquired before this year.She is not required to report her depreciation deduction on Form 4562.
A)True
B)False
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Chapter 11: Accounting Periods and Methods
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Q1) In 2016 Anika Co.adopted the simplified dollar-value LIFO method.Inventory under FIFO in 2016 and 2017 is $400,000 and $600,000,respectively.The Consumer Price Index for 2016 is 115 and the Consumer Price Index in 2017 is 125 percent.How much is Anika's inventory at the end of year 2017 under simplified LIFO?
Q2) In order to avoid the imputation of interest,the stated interest on a transaction must be at least equal to 100% of the Federal Reserve funds rate.
A)True
B)False
Q3) Andrew sold land to Becca,Andrew's daughter.The fair market value of the land was $300,000 (basis $250,000).Becca agreed to pay Andrew $300,000 over 8 years.Becca immediately sold the land to Olga for $300,000 cash.The gain of $50,000 must be recognized
A) by Becca in installments.
B) by Becca when Becca sells to Olga.
C) by Andrew when Andrew sells to Becca.
D) by Andrew when Becca sells to Olga.
Q4) All C corporations can elect a tax year other than a calendar year.
A)True B)False
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Chapter 12: Property Transactions: Nontaxable Exchanges
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Q1) Jenna,who is single,sold her principal residence on December 1,2016,and excluded the $150,000 gain because she met the ownership and usage requirements under Sec.121.Jenna purchased another residence in Pensacola on January 1,2017,that she occupied until July 1,2017,when she received a new job offer from an employer in Miami.She sells the Pensacola residence on October 1,2017,and realizes a gain of $40,000.Jenna may exclude what amount of the gain from the sale on October 1,2017?
A) $0
B) $10,000
C) $20,000
D) $40,000
Q2) Nana is a self-employed consultant.For the past five years,she has used an extra bedroom (15% of the house) in her home as a qualifying home office and deducted $9,000 of depreciation expense.This year she sells the house for $740,000.The house cost $500,000.Nana is single.She will recognize gain on the sale of the house of A) $0.
B) $9,000.
C) $45,000.
D) $249,000.
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Chapter 13: Property Transactions: Sec1231 and Recapture
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Sample Questions
Q1) If the recognized losses resulting from involuntary conversions arising from casualty or theft exceed the recognized gains from such events (i.e.a net loss from the casualty),all of the involuntary conversions are treated as ordinary gains and losses.
A)True
B)False
Q2) Why did Congress establish favorable treatment for 1231 assets?
A) to encourage the mobility of capital
B) to allow a larger deduction for losses
C) to help business owners replace assets which had declined in value
D) All of the above.
Q3) Maura makes a gift of a van to a local food bank run by a charity.Maura had used the van in her trade or business.The van has a FMV of $6,500; a cost of $31,000; and $27,000 depreciation claimed.What is the amount of Maura's charitable contribution deduction?
A) $6,500
B) $31,000
C) $4,000
D) $2,500
Q4) 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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Q1) Discuss tax-planning options available for expenses incurred for child and dependent care.
Q2) For purposes of the limitation on qualifying expenses for the child and dependent care credit,a spouse who is either a full-time student or is incapacitated is deemed to have earned income of $250 per month,or $500 per month if there are two or more qualifying individuals in the household.
A)True
B)False
Q3) Jorge has $150,000 of self-employment earnings from a sole proprietorship.Jorge's self-employment tax (rounded) for 2017 is A) $19,790.
B) $22,950.
C) $21,194.
D) $19,462.
Q4) The itemized deduction phase-out,which has the effect of increasing regular taxable income for high income taxpayers,will also raise AMTI.
A)True
B)False
Page 16
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Chapter 15: Tax Research
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Sample Questions
Q1) The term "tax law" includes
A) legislation.
B) treasury regulations.
C) judicial decisions.
D) All of the above.
Q2) According to the Statements on Standards for Tax Services,what belief should a CPA have before taking a pro-taxpayer position on a tax return?
Q3) Assume that you want to read a description of a particular area of the law,along with one or more illustrations of how that law is applied.You will not find that type of material in
A) a citator.
B) the Treasury Regulations.
C) the Cumulative Bulletin.
D) the Committee Reports.
Q4) 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
Q5) What are some of the consequences of the small cases procedure of the Tax Court?
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Chapter 16: Corporations
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Q1) In computing a corporation's NOL,the dividends-received deduction is allowed in full.
A)True
B)False
Q2) A corporation is classified as a personal holding company.Its taxable income is $300,000 and its regular federal income tax liability is $100,250.The company claims a $40,000 dividends-received deduction and pays $30,000 dividends to its shareholders.The personal holding company tax is
A) $41,950.
B) $29,963.
C) $31,463.
D) $65,053.
Q3) Atlantic Corporation,a calendar-year taxpayer,has $120,000 of accumulated E&P deficit as of January 1.Atlantic's current E&P is $40,000.The corporation makes a $50,000 distribution to its shareholders.Shareholders have stock basis of $60,000.What is the amount of Atlantic's E&P deficit at the end of the year?
Q4) Unused charitable contributions of a corporation are carried forward ten years.
A)True
B)False
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Chapter 17: Partnerships and S Corporations
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Q1) An S corporation distributes land to its shareholders.The land has a $60,000 basis and a $90,000 FMV.The basis of the land to the shareholder is
A) $0.
B) $30,000.
C) $60,000.
D) $90,000.
Q2) Richard has a 50% interest in a partnership,and he materially participates in the partnership's business.Richard's adjusted basis in the partnership was $60,000 at the beginning of the year,including his share of partnership liabilities.There were no distributions to Richard during the year.During the current year,the partnership borrowed $160,000 from a local bank to purchase equipment needed in the business.All of the partners are personally liable for all partnership debts.The partnership incurred a $320,000 loss this year.What amount can Richard claim as a loss from the partnership on his individual tax return this year?
A) $60,000
B) $80,000
C) $140,000
D) $160,000
Q3) What is the primary purpose of Form 1065,Partnership Tax Return?
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Chapter 18: Taxes and Investment Planning
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Q1) What are the characteristics of the Pension Model?
Q2) Kate can invest $4,000 of after-tax dollars (AT$) directly in a taxable bond outside an IRA,or she can contribute the $4,000 to a nondeductible IRA and invest in the same bond through the IRA vehicle.In either case the bond yields an annual 3% before-tax rate of return (BTROR).Kate's marginal tax rate is 15%,and she expects it to remain so for the entire investment horizon of 25 years.What is the after-tax accumulation for the "bond outside the IRA" after 25 years (assume that bond interest is reinvested at the same rate)?
A) $5,585
B) $7,507
C) $8,375
D) None of the above.
Q3) Compare the characteristics of the Current and Deferred Models.
Q4) Employer-sponsored qualified retirement plans and deductible IRAs fit the Pension Model.
A)True
B)False
Q5) Earl invests $7,000 in a tax-exempt bond yielding 4% which matures in 15 years.What is Earl's after-tax accumulation at maturity?
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