U.S. Tax System for Individuals Exam Solutions
Course Introduction
This course provides a comprehensive overview of the U.S. tax system as it applies to individuals, covering fundamental principles of federal income taxation. Students will learn about the structure of the tax code, determination of taxable income, and the various types of deductions, credits, and exemptions available. Key topics include income recognition, tax filing requirements, tax planning strategies, and compliance obligations. The course also explores current tax laws, recent reforms, and the role of the Internal Revenue Service (IRS), equipping students with practical skills for managing personal finances and understanding the broader implications of taxation in the United States.
Recommended Textbook
Prentice Halls Federal Taxation 2014 Individuals 27th Edition by Timothy J. Rupert
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Chapter 1: An Introduction to Taxation
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Q1) Generally,tax legislation is introduced first in the Senate and referred to the Senate Finance Committee.
A)True
B)False
Answer: False
Q2) Gifts made during a taxpayer's lifetime may affect the amount of estate tax paid by the taxpayer's estate.
A)True
B)False
Answer: True
Q3) The marginal tax rate is useful in tax planning because it measures the tax effect of a proposed transaction.
A)True
B)False
Answer: True
Q4) The primary liability for payment of the gift tax is imposed upon the donee.
A)True
B)False Answer: False
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Chapter 2: Determination of Tax
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Q1) Paul and Hannah,who are married and file a joint return,are in the process of adopting a child who is born in December 2013.The child,a son,comes to live with them a week after his birth on December 12.The adoption is not finalized until February of 2014.What tax issues are present in this situation?
Answer: Are Paul and Hannah able to claim the baby as a dependent on their 2013 tax return and claim a child tax credit?
Q2) Eliza Smith's father,Victor,lives with Eliza who is a single taxpayer.During the year,Eliza purchased clothing for her father costing $1,200 and provided him with a room that could have been rented for $6,000.In addition,Eliza spent $4,000 for groceries she shared with her father.Eliza purchased a new television for $900 which she placed in the living room for both her father and her use.
What is the amount of support provided by Eliza to her father?
Answer: 11ea8235_5904_4184_bbd8_032ed33776da_TB5379_00
Q3) An individual may not qualify for the dependency exemption as a qualifying child but may still qualify as a dependent.
A)True
B)False
Answer: True
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Chapter 3: Gross Income: Inclusions
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Q1) Interest on Series E and Series EE U.S.savings bonds need not be reported until the bonds mature.
A)True
B)False
Answer: True
Q2) Adanya's marginal tax rate is 39.6% and she is trying to decide whether to invest in tax-exempt bonds which pay 5% interest or taxable bonds paying 7% interest.The bonds have equivalent risk.Which of the bonds would yield the highest amount of income after taxes?
Answer: The taxable bonds yield 4.23% after-tax [.07 - (1-.396)],so she should invest in the tax-exempt bonds.
Q3) Natasha,age 58,purchases an annuity for $40,000.Natasha will receive $400 per month for the rest of her life.The expected return multiple is 20.0.At age 65,the amount that Natasha may exclude from income is A)$0.
B)$2,000.
C)$2,800.
D)$4,000.
Answer: B
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Page 5
Chapter 4: Gross Income: Exclusions
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Q1) Which of the following statements regarding the qualified tuition plans (QTP)is incorrect?
A)Distributions can be made tax-free to pay for room and board at college.
B)Distributions made from the QTP for college tuition will be tax-free in addition to qualifying for the American Opportunity credit or lifetime learning credit.
C)Katie's parents had established a QTP for Katie,but she has received a "full-ride" scholarship.Katie's parents can name her sister as a replacement beneficiary of the QTP.
D)Distributions of income not used for qualified higher education expenses are taxable and subject to a 10% penalty.
Q2) Daniel purchased qualified small business corporation stock for $200,000.After five years,he sells the stock for $2,200,000,realizing a $2,000,000 gain.Determine the taxes due under the following independent situations (apply current tax rates,but ignore any additional Medicare taxes on investment income):
(a)Daniel purchased the stock on February 1,2009.
(b)Daniel purchased the stock on March 1,2009.
(c)Daniel purchased the stock on October 1,2010.
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Chapter 5: Property Transactions: Capital Gains and Losses
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Q1) Darla sold an antique clock in 2013 for $3,000.She had purchased the clock in 2009 for $2,000.If she is otherwise in the 35% marginal tax bracket,what is the maximum tax rate on the capital gain on the sale of the clock?
A)5%
B)15%
C)28%
D)20%
Q2) Olivia,a single taxpayer,has AGI of $280,000 which includes $220,000 of salary and $60,000 of investment income.She will pay Medicare tax on the $60,000 of investment income of
A)$-0-.
B)$2,280.
C)$9,000.
D)$870.
Q3) The holding period of property received from a decedent is based on the actual time the property is held by the decedent.
A)True
B)False
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) Losses incurred on wash sales of stock or securities are generally disallowed in the year of sale.
A)True
B)False
Q2) Generally,expenses incurred in an investment activity other than those incurred to produce rent and royalties are deductions from AGI.
A)True
B)False
Q3) Anita has decided to sell her stock in TOM,Inc.She purchased the stock 5 years ago for $1,000.The current fair market value is $600.Anita's sister,Kathy,is interested in buying the stock as is Anita's friend,Marcia.What tax issues should Anita consider when deciding to whom the stock should be sold?
Q4) In 2013,Sean,who is single and age 44,received $55,000 of gross income and had $5,000 of deductions for AGI and $4,600 of itemized deductions.Sean's taxable income is
A)$40,000.
B)$43,900.
C)$46,100.
D)$41,500.
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Page 8
Chapter 7: Itemized Deductions
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Q1) Patrick's records for the current year contain the following information.He donated stock having a fair market value of $5,000 to a qualified charitable organization.Patrick acquired the stock two years ago at a cost of $3,000.He paid $1,000 for membership in an athletic scholarship program maintained by the university.The only benefit of the membership is that Patrick is entitled to purchase a season ticket to the university's home football games.He also donated $7,500 cash to a qualified charitable organization.Patrick's adjusted gross income for the year is $100,000.What is the amount of his charitable contribution deduction?
A)$11,300
B)$11,500
C)$13,300
D)$13,500
Q2) Grace has AGI of $60,000 in 2012 and 2013.She makes cash contributions to public charities of $34,000 in 2012 and $31,000 in 2013.Grace's charitable contribution carryover to 2014 is
A)$0.
B)$1,000.
C)$4,000.
D)$5,000.
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Page 9
Chapter 8: Losses and Bad Debts
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Q1) The amount realized by Matt on the sale of property to Caitlin includes all of the following with the exception of A)cash received by Matt.
B)mortgage on the property that is assumed by Caitlin.
C)mortgage on the property paid off by Matt prior to the sale.
D)the FMV of any other property received by Matt in the transaction.
Q2) Lisa loans her friend,Grace,$10,000 to finance a new business.If Grace defaults on the loan,Lisa may take a deduction for a business bad debt in the year of total worthlessness.
A)True B)False
Q3) A theft loss is deducted in the year in which the theft is discovered.
A)True B)False
Q4) The amount of loss realized on the sale of property is computed by subtracting adjusted basis from amount realized.
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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Q1) Norman traveled to San Francisco for four days on vacation,and while there spent another two days conducting business for his employer.Norman's plane fare for the trip was $500; meals cost $150 per day; hotels cost $300 per day; and a rental car cost $150 per day that was used for all six days.Norman was not reimbursed by his employer for any expenses.Norman's AGI for the year is $40,000 and he did not have any other miscellaneous itemized deductions.Norman may deduct (after limitations)
A)$250.
B)$800.
C)$1,050.
D)$1,200.
Q2) Kim currently lives in Buffalo and works in Rochester,a 60-mile commute each way.Kim accepts a new job in a town outside of Rochester,and the new commute is 75-miles each way.Kim decides the commute for the new job is too long,and she moves to Rochester.Kim is eligible to deduct her moving expenses.
A)True
B)False
Q3) Explain when educational expenses are deductible for an employee.
Q4) When are home-office expenses deductible?
Q5) Discuss the tax treatment of a nonqualified stock option plan.
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Chapter 10: Depreciation, cost Recovery, amortization, and Depletion
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Q1) In May 2013,Cassie acquired a machine for $30,000 to use in her business.The machine is classified as 5-year property.Cassie does not expense the property under Sec.179,and the property does not qualify for bonus depreciation.Cassie's depreciation on the machine this year is
A)$3,000.
B)$6,000.
C)$12,000.
D)$15,000.
Q2) In August of 2013,David acquires and places into service business equipment costing $550,000.The equipment is classified as 5-year recovery property.No other acquisitions are made during the year.The property is not eligible for bonus depreciation.David elects to expense the maximum amount under Sec.179.David's total deductions for the year (including Sec.179 and depreciation)are
A)$110,000.
B)$550,000.
C)$500,000.
D)$510,000.
Q3) Why would a taxpayer elect to use the alternative depreciation system rather than the MACRS rules?
Page 12
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Chapter 11: Accounting Periods and Methods
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Q1) All of the following statements are true except:
A)once adopted,an accounting period normally cannot be changed without approval by the IRS.
B)taxpayers who change from one accounting period to another must annualize their income for the resulting short period.
C)taxpayers filing an initial tax return are required to annualize the year's income and prorate exemptions and credits.
D)an existing partnership can change its tax year without prior approval if the partners with a majority interest have the same tax year to which the partnership changes.
Q2) Nick sells land with a $7,000 adjusted basis for $10,000.Nick receives a $2,000 down payment with the balance of $8,000 due the following year.Nick is unable to collect the remaining $8,000 and,after incurring legal fees of $500,he repossesses the land when it has a fair market value of $9,000.
a.What is the amount of gain that Nick must report in the first year?
b.What is the amount of gain that Nick must report in the second year?
c.What is the basis in the repossessed stock?
Q3) Discuss the purpose of the imputed interest rules.
Q4) What is the significance of the Thor Power Tool Co.case?
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Page 13
Chapter 12: Property Transactions: Nontaxable Exchanges
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Q1) Indicate with a "yes" or a "no" which of the following are like-kind exchanges (assume all assets are held for business or investment purposes).
a.Exchange of common stock held as an investment for land held as an investment.
b.Exchange of farmland for an apartment building.
c.Exchange of office furniture used in trade or business for computer used in a trade or business
d.Exchange of unimproved real estate for improved real estate.
e.Exchange of automobile used in trade or business for office building used in trade or business
Q2) Pamela owns land for investment purposes.The land is worth $300,000 (basis of $260,000 to Pamela).Pamela exchanges the land,plus $20,000 cash,for a warehouse to be used in her business.The FMV of the warehouse is $400,000,but the warehouse is subject to a mortgage of $80,000,which is assumed by Pamela.Pamela must recognize a gain of
A)$ -0-.
B)$ 40,000.
C)$ 120,000.
D)$ 140,000.
Q3) Discuss the basis rules of property received in a nontaxable like-kind exchange.
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Page 14
Chapter 13: Property Transactions: Section 1231 and Recapture
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Q1) Mark owns an unincorporated business and has $20,000 of Section 1231 gains and $22,000 of Section 1231 losses.He must report a capital loss of $2,000 on his tax return.
A)True
B)False
Q2) Brian purchased some equipment in 2013 which he intends to use in his trade or business.He approaches you to assist him in planning for the ultimate disposal of the asset-whether it be by sale,charitable contribution to the local university,gift to his sister for use in her business,or some other means.Discuss the tax considerations.
Q3) Gain recognized on the sale or exchange of property between related parties is capital if the property is subject to depreciation in the hands of the transferee.
A)True
B)False
Q4) If realized gain from disposition of business equipment exceeds total depreciation or cost recovery,a portion of the gain will receive Sec.1231 treatment if the equipment's holding period is more than one year.
A)True
B)False
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Chapter 14: Special Tax Computation Methods, tax Credits, and Payment of Tax
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Q1) Carlotta,Inc.has $50,000 foreign-source income and $150,000 worldwide income.Its U.S.tax on its worldwide income is $42,000 and it paid foreign taxes of $12,000.What is the corporation's foreign tax credit?
A)$4,000
B)$12,000
C)$14,000
D)$42,000
Q2) Evan and Barbara incurred qualified adoption expenses in 2012 of $6,000,and then incurred $7,500 more in 2013 when the adoption of their child became final.Their 2012 AGI was $110,000 and their 2013 AGI was $100,000.The allowable adoption credit is
A)$12,970 in 2013.
B)$13,500 in 2013.
C)$6,000 in 2012 and $6,970 in 2013.
D)$6,000 in 2012 and $7,500 in 2013.
Q3) The earned income credit is available only to taxpayers with qualifying children.
A)True
B)False
Q4) Discuss when Form 6251,Alternative Minimum Tax,must be filed.
Page 16
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Chapter 15: Tax Research
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Q1) Identify which of the following statements is false.
A)When a court opinion discusses facts and issues on which the court does not rule,the comments are called dicta.
B)Dicta in a court opinion has no influence on other tax proceedings.
C)Published articles and tax services are examples of secondary sources of authority. D)Dicta are not authoritative.
Q2) Which regulation deals with Code Section 165?
A)Reg.Sec.1.165-5
B)Reg.Sec.165.183-5
C)Reg.Sec.1.5-165
D)Reg.Sec.165-5
Q3) The number appearing immediately following the decimal place in a regulation citation refers to the
A)general subject matter of the regulation.
B)code section being interpreted.
C)sequential number of the regulation.
D)subsection of the Code section being interpreted.
Q4) What is an information release?
Q5) Is it possible for the Tax Court to intentionally issue conflicting decisions?
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Chapter 16: Corporations
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Q1) The computation of adjusted gross income (AGI)does not apply to corporations.
A)True
B)False
Q2) A corporation has regular taxable income of $90,000 and its gross receipts have never exceeded $5,000,000.Tax preference items and positive adjustments total $70,000.Its regular tax liability is $15,450.The alternative minimum tax is
A)$0.
B)$9,050.
C)$24,000.
D)$24,500.
Q3) Corporations may be taxed on less than 100% of dividends received due to the dividends-received deduction while individuals are taxed on all of their dividend income.
A)True
B)False
Q4) If a corporation receives dividends from an 80% or more owned affiliated corporation,the dividends-received deduction is 100%.
A)True
B)False
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Chapter 17: Partnerships and S Corporations
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Q1) An accounting partnership can become an electing large partnership as long as it has at least 100 partners and files the appropriate election.
A)True
B)False
Q2) Which of the following characteristics can disqualify a corporation from S Corporation status?
A)A corporation has nonresident aliens as shareholders.
B)One of the corporation's shareholders is a qualifying trust.
C)A corporation has 101 shareholders including a husband and wife.
D)A corporation has voting and nonvoting stock,but both types of stock confer identical rights to distribution and liquidation proceeds.
Q3) The corporate built-in gains tax does not apply to a corporation that has always been taxed as an S corporation.
A)True
B)False
Q4) What is the primary purpose of Form 1065,Partnership Tax Return?
Q5) Discuss how the partnership form of organization or the S corporation form may be used to shift income.
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Chapter 18: Taxes and Investment Planning
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Q1) The Deferred Model offers two levels of tax deferral-the original contribution escapes current taxation as do the earnings on the underlying investment.
A)True
B)False
Q2) When evaluating current salary versus deferred compensation,an employer considers the fact that a current salary is deducted in the current year and obtains an immediate tax benefit.
A)True
B)False
Q3) The Current Model provides the future value of an investment having which of the following characteristics?
A)only after-tax dollars are invested
B)only before-tax dollars are invested
C)the earnings on the investment are taxed at the end of the investment period
D)investment earnings are exempt from taxation
Q4) Investments conforming to the Current Model provide no deferral advantages because earnings are taxed currently.
A)True
B)False
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