Type:
Test Bank
Resource:
Fundamentals of Taxation for Individuals A Practical Approach
Edition:
2024 Edition
Author(s):
Gregory A. Carnes
Fundamentals of Taxation for Individuals, 1e (Carnes) Chapter 1 The Professional Practice of Taxation 1) Which of the following is false about tax planning? A) The appropriate goal for tax planning is to maximize after-tax income. B) The appropriate goal for tax planning is to minimize a taxpayer's tax liability for the year. C) Once a taxpayer understands the tax consequences of a particular transaction, they can move on to the tax planning stage. D) Tax evasion is not a tax planning strategy. Answer: B Explanation: Minimizing a taxpayer's liability is not the appropriate goal for tax planning because if that were the goal, then the ultimate success would be to reduce a taxpayer's tax liability to zero–actually an easy goal to meet. If a taxpayer has no income for the year, then there would be no tax liability, and you will have minimized their taxes. But your client will also be a very poor and hungry person, so this cannot be the proper goal. Diff: 1 Learning Objective: LO 1.1 AACSB / AICPA: Knowledge / Accounting Competencies Bloom's: Knowledge Section Reference: Sec. 1.1 Time on Task: 5 min
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2) Jessica has received several job offers from various accounting firms located in 4 different states. She has performed an analysis to determine her income, her non-income tax costs (e.g. cost of living, etc.) and income tax. Jessica is trying to make a decision on which offer to accept, and she has asked for your advice. Based on the appropriate goal of tax planning, which of the following states would you advise Jessica to choose?
California New York Virginia Texas
Gross Wages 120,000 100,000 70,000 50,000
Non-Income Tax Costs 52,000 37,000 10,800 6,000
Income Tax 24,000 20,000 10,500 5,000
A) Texas B) California C) Virginia D) New York Answer: C Explanation: The appropriate goal for tax planning is to maximize after-tax income. After-tax income is net income after reducing revenue for all expenses, including federal income taxes. See table below for calculation of after-tax income for each state. With that in mind, you should advise Jessica to choose Virginia because doing so maximizes her after-tax income. The state with the lowest income tax (i.e., Texas) is not the right answer because minimizing a taxpayer's liability is not the appropriate goal for tax planning because if that were the goal, then the ultimate success would be to reduce a taxpayer's tax liability to zero–an easy goal to meet. If a taxpayer has no income for the year, then there would be no tax liability, and you will have minimized their taxes. But your client will also be a very poor and hungry person, so this cannot be the proper goal.
California New York Virginia Texas
Gross Wages (A) 20,000 100,000 70,000 50,000
Non-Income After-Tax Tax Costs Income Tax Income (B) (C) (D) = (A) - (B) - (C) 52,000 24,000 44,000 37,000 20,000 43,000 10,800 10,500 48,700 6,000 5,000 39,000
Diff: 2 Learning Objective: LO 1.1 AACSB / AICPA: Analytic / Accounting Competencies Bloom's: Application Section Reference: Sec. 1.1 Time on Task: 8 min
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3) Which of the following is not correct regarding tax and non-tax costs? A) Both tax and non-tax costs must be considered when making financial and investment decisions. B) Tax costs include any type of tax paid to a local, state, federal, or foreign government. C) Non-tax costs are all costs other than tax costs. D) Effective tax planning requires prioritizing tax costs. Answer: D Explanation: Effective tax planning requires consideration of both tax and non-tax costs. Diff: 1 Learning Objective: LO 1.1 AACSB / AICPA: Knowledge / Accounting Competencies Bloom's: Knowledge Section Reference: Sec. 1.1 Time on Task: 5 min 4) Samson's wages are $100,000. He lives in Maryland and his expenses include $25,000 rent, $12,000 other living expenses, $27,000 income tax, $6,200 payroll tax and $5,500 property tax. What are Samson's tax costs? A) $27,000 B) $33,200 C) $61,300 D) $38,700 Answer: D Explanation: $38,700 = $27,000 + $6,200 + $5,500. Tax costs include any type of tax paid to a local, state, federal, or foreign government. Diff: 1 Learning Objective: LO 1.1 AACSB / AICPA: Analytic / Accounting Competencies Bloom's: Application Section Reference: Sec. 1.1 Time on Task: 5 min 5) Samson's wages are $100,000. He lives in Maryland and his expenses include $25,000 mortgage interest, $12,000 other living expenses, $27,000 income tax, $6,200 payroll tax and $5,500 property tax. What is Samson's non-tax costs? A) $37,000 B) $12,000 C) $61,300 D) $38,700 Answer: A Explanation: $37,000 = $25,000 + $12,000. Non-tax costs are all costs other than tax costs. Tax costs include any type of tax paid to a local, state, federal, or foreign government. Diff: 1 Learning Objective: LO 1.1 AACSB / AICPA: Analytic / Accounting Competencies Bloom's: Application Section Reference: Sec. 1.1 Time on Task: 5 min 3
6) Samson's wages are $100,000. He lives in Maryland and his non-tax costs include $25,000 rent and $12,000 other living expenses. His tax costs include $27,000 income tax, $6,200 payroll tax and $5,500 property tax. What is Samson's after-tax income? A) $73,000 B) $24,300 C) $61,300 D) $29,000 Answer: B Explanation: $24,300 = $100,000 - $25,000 - $12,000 - $27,000 - $6,200 - $5,500. After-tax income is net income after reducing revenue for all expenses, including federal income taxes. Diff: 2 Learning Objective: LO 1.1 AACSB / AICPA: Analytic / Accounting Competencies Bloom's: Application Section Reference: Sec. 1.1 Time on Task: 8 min 7) Which of the following statements is false? A) Individuals file their individual income taxes on Form 1040. B) Income lines on the Form 1040 are Line 1 - 9 C) Deduction lines on Form 1040 are Line 10, 12 - 13 D) Demographic information is included on the second page of the Form 1040 Answer: D Explanation: The top half of page 1 of Form 1040 is for demographic information. Diff: 1 Learning Objective: LO 1.2 AACSB / AICPA: Analytic / Accounting Competencies Bloom's: Application Section Reference: Sec. 1.2 Time on Task: 5 min 8) Which of the following can be found on Schedule 1 of the 1040? A) Student loan interest deduction B) Self-employment tax C) Repayment of first-time homebuyer credit D) Foreign tax credit Answer: A Explanation: Schedule 1 is used to report additional income and adjustments to income. Student loan interest deduction can be found on Schedule 1. Foreign tax credits can be found on Schedule 3. Self-employment tax and repayment of first-time homebuyer credit can be found on Schedule 2. Diff: 2 Learning Objective: LO 1.2 AACSB / AICPA: Knowledge / Accounting Competencies Bloom's: Knowledge Section Reference: Sec. 1.2 Time on Task: 5 min 4
9) Which of the following can be found on Schedule 2 of the 1040? A) Student loan interest deduction B) Taxable refunds or credits C) Repayment of first-time homebuyer credit D) Foreign tax credit Answer: C Explanation: Schedule 2 is used to report additional taxes. Repayment of first-time homebuyer credit can be found on Schedule 2. Student loan interest deduction and Taxable refunds or credits can be found on Schedule 1. Foreign tax credits can be found on Schedule 3. Diff: 2 Learning Objective: LO 1.2 AACSB / AICPA: Knowledge / Accounting Competencies Bloom's: Knowledge Section Reference: Sec. 1.2 Time on Task: 5 min 10) Which of the following can be found on Schedule 3 of the 1040? A) Student loan interest deduction B) Self-employment tax C) Repayment of first-time homebuyer credit D) Foreign tax credit Answer: D Explanation: Schedule 3 is used to report additional payments and credits. Foreign tax credits can be found on Schedule 3. Student loan interest deduction can be found on Schedule 1. Selfemployment tax and repayment of first-time homebuyer credit can be found on Schedule 2. Diff: 2 Learning Objective: LO 1.2 AACSB / AICPA: Knowledge / Accounting Competencies Bloom's: Knowledge Section Reference: Sec. 1.2 Time on Task: 5 min 11) Which of the following is false? A) Schedule 2 is used to report additional taxes. B) Repayment of first-time homebuyer credit is reported on Schedule 3. C) The Schedule 3 is used to report additional payments and credits. D) Adoption credit is reported on Schedule 3. Answer: B Explanation: Repayment of first-time homebuyer credit can be found on Schedule 2. Diff: 2 Learning Objective: LO 1.2 AACSB / AICPA: Knowledge / Accounting Competencies Bloom's: Knowledge Section Reference: Sec. 1.2 Time on Task: 5 min
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12) Tariq has a mortgage interest credit of $7,000 and taxable state refund of $3,000. On what schedules of the 1040 should Tariq report the mortgage interest credit and the taxable state refund? A) Both the mortgage interest credit and the Taxable state refund should be reported on Schedule 2. B) The mortgage interest credit is reported on Schedule 3 while the Taxable State refund is reported on Schedule 1. C) The mortgage interest credit is reported on Schedule 1 while the Taxable State refund is reported on Schedule 2. D) Both the mortgage interest credit and the Taxable state refund should be reported on Schedule 3. Answer: B Explanation: The mortgage interest credit is reported on Schedule 3 while the Taxable State refund is reported on Schedule 1. Schedule 1 is used to report additional income and adjustments to income. Schedule 2 is used to report additional taxes. Schedule 3 is used to report additional payments and credits. Diff: 2 Learning Objective: LO 1.2 AACSB / AICPA: Knowledge / Accounting Competencies Bloom's: Knowledge Section Reference: Sec. 1.2 Time on Task: 5 min 13) Tariq has a mortgage interest credit of $1,400, unemployment compensation of $400, and taxable state refund of $3,000. What is the total amount to be reported on schedule 1 of the 1040? A) $400 B) $2,000 C) $3,000 D) $3,400 Answer: D Explanation: $3,400 = $3,000 + $400. The mortgage interest credit is reported on Schedule 3 while the Taxable State refund and unemployment compensation are reported on Schedule 1. Schedule 1 is used to report additional income and adjustments to income. Schedule 2 is used to report additional taxes. Schedule 3 is used to report additional payments and credits. Diff: 2 Learning Objective: LO 1.2 AACSB / AICPA: Knowledge / Accounting Competencies Bloom's: Knowledge Section Reference: Sec. 1.2 Time on Task: 5 min
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