Name:
Class:
Date:
Chapter 01: An_Introduction_to_Taxation_and_Understanding_the_Federal_Tax_Law True / False 1. Because the law is complicated, most individual taxpayers are not able to complete their Federal income tax returns without outside assistance. a. True b. False 2. The ratification of the Sixteenth Amendment to the U.S. Constitution was necessary to validate the Federal income tax on corporations. a. True b. False 3. Before the Sixteenth Amendment to the Constitution was ratified, there was no valid Federal income tax on individuals. a. True b. False 4. The first income tax on individuals (after the ratification of the Sixteenth Amendment to the Constitution) levied tax rates from a low of 1% to a high of 6%. a. True b. False 5. The Federal income tax on individuals generates more revenue than the Federal income tax on corporations. a. True b. False 6. The pay-as-you-go feature of the Federal income tax on individuals conforms to Adam Smith’s canon (principle) of certainty. a. True b. False 7. The Medicare component of the FICA tax (1.45% on wages) is progressive as the tax due increases as wages increase. a. True b. False 8. The Federal estate and gift taxes are examples of progressive rate taxes. a. True b. False 9. The Federal excise tax on gasoline has a proportional effect on all taxpayers (that is, neither progressive or regressive). a. True b. False 10. Currently, the Federal corporate income tax is less progressive than the individual income tax. a. True b. False Powered by Cognero
Page 1
Name:
Class:
Date:
Chapter 01: An_Introduction_to_Taxation_and_Understanding_the_Federal_Tax_Law 11. Mona inherits her mother’s personal residence, which she converts to a furnished rental house. These changes should affect the amount of ad valorem property taxes levied on the properties. a. True b. False 12. A fixture will be subject to the ad valorem tax on personalty rather than the ad valorem tax on realty. a. True b. False 13. Even if property tax rates are not changed, the amount of ad valorem taxes imposed on realty may not remain the same. a. True b. False 14. The ad valorem tax on personal use personalty is more often avoided by taxpayers than the ad valorem tax on business use personalty. a. True b. False 15. An excise tax is often used to try to influence behavior. a. True b. False 16. There is a Federal excise tax on hotel occupancy. a. True b. False 17. The Federal gas-guzzler tax applies only to automobiles manufactured overseas and imported into the United States. a. True b. False 18. The amount of the state excise taxes on gasoline varies from state to state. a. True b. False 19. Not all of the states that impose a general sales tax also have a use tax. a. True b. False 20. Sales made over the internet are not exempt from the application of a general sales (or use) tax. a. True b. False 21. Two persons who live in the same state but in different counties may not be subject to the same general sales tax rate. a. True b. False Powered by Cognero
Page 2
Name:
Class:
Date:
Chapter 01: An_Introduction_to_Taxation_and_Understanding_the_Federal_Tax_Law 22. States impose either a state income tax or a general sales tax, but not both types of taxes. a. True b. False 23. A safe and easy way for a taxpayer to avoid local and state sales taxes is to make the purchase in a state that levies no such taxes. a. True b. False 24. On transfers by death, the Federal government relies on an estate tax, while states may impose an estate tax, an inheritance tax, both taxes, or neither tax. a. True b. False 25. An inheritance tax is a tax on a decedent’s right to pass property at death. a. True b. False 26. One of the major reasons for the enactment of the Federal estate tax was to prevent large amounts of wealth from being accumulated within a family unit. a. True b. False 27. Under Clint’s will, all of his property passes to either the Lutheran Church or to his spouse. No Federal estate tax will be due on Clint’s death. a. True b. False 28. Under the usual state inheritance tax, two heirs, a cousin and a son of the deceased, would not be taxed at the same rate. a. True b. False 29. The annual exclusion, currently $18,000, is available for gift and estate tax purposes. a. True b. False 30. In 2024, José, a widower, sells land (fair market value of $100,000) to his daughter, Linda, for $50,000. José has not made a taxable gift. a. True b. False 31. Julius, a married taxpayer, makes gifts to each of his six children. A maximum of twelve annual exclusions could be allowed as to these gifts. a. True Powered by Cognero
Page 3
Name:
Class:
Date:
Chapter 01: An_Introduction_to_Taxation_and_Understanding_the_Federal_Tax_Law b. False 32. One of the motivations for making a gift is to save on income taxes. a. True b. False 33. The formula for the Federal income tax on corporations is the same as that applicable to individuals. a. True b. False 34. A state income tax can be imposed on nonresident taxpayers who earn income within the state on an itinerant basis. a. True b. False 35. For state income tax purposes, some states allow a credit for dependents rather than a deduction. a. True b. False 36. Some states use their state income tax return as a means of collecting unpaid use tax. a. True b. False 37. No state may offer an income tax amnesty program more than once. a. True b. False 38. For Federal income tax purposes, there never has been a general amnesty period. a. True b. False 39. Under state amnesty programs, all delinquent and unpaid income taxes are forgiven. a. True b. False 40. When a state decouples from a Federal tax provision, it means that this provision will not apply for state income tax purposes. a. True b. False 41. The principal objective of the FUTA tax is to provide some measure of retirement security. a. True b. False 42. Currently, the tax base for the Social Security component of the FICA is not limited to a dollar amount. a. True b. False Powered by Cognero
Page 4
Name:
Class:
Date:
Chapter 01: An_Introduction_to_Taxation_and_Understanding_the_Federal_Tax_Law 43. A parent employs her twin daughters, age 17, in her sole proprietorship. The daughters are not subject to FICA coverage. a. True b. False 44. Unlike FICA, FUTA requires that employers comply with state as well as Federal rules. a. True b. False 45. A major advantage of a flat tax type of income tax is its simplicity. a. True b. False 46. The value added tax (VAT) has not had wide acceptance in the international community. a. True b. False 47. If more IRS audits are producing a higher number of no change results, this indicates increased compliance on the part of taxpayers. a. True b. False 48. The amount of a taxpayer’s itemized deductions will increase the chance of being audited by the IRS. a. True b. False 49. An office audit by the IRS takes place at the office of the taxpayer. a. True b. False 50. The IRS agent auditing the return will issue an RAR even if the taxpayer owes no additional taxes. a. True b. False 51. If a special agent becomes involved in the audit of a return, this indicates that the IRS suspects that fraud is involved. a. True b. False 52. If a taxpayer files early (i.e., before the due date of the return), the statute of limitations on assessments begins on the date the return is filed. a. True b. False 53. For omissions from gross income in excess of 25% of that reported, there is no statute of limitations on additional income tax assessments by the IRS. Powered by Cognero
Page 5
Name:
Class:
Date:
Chapter 01: An_Introduction_to_Taxation_and_Understanding_the_Federal_Tax_Law a. True b. False 54. If an income tax return is not filed by a taxpayer, there is no statute of limitations on assessments of tax by the IRS. a. True b. False 55. If fraud is involved, there is no time limit on the assessment of a deficiency by the IRS. a. True b. False 56. The IRS is required to redetermine the interest rate on underpayments and overpayments once a year. a. True b. False 57. A calendar year taxpayer files his 2023 Federal income tax return on March 4, 2024. The return reflects an overpayment of $6,000, and the taxpayer requests a refund of this amount. The refund is paid on May 16, 2024. The refund need not include interest. a. True b. False 58. For individual taxpayers, the interest rate for income tax refunds (overpayments) is the same as that applicable to assessments (underpayments). a. True b. False 59. During any month in which both the failure to file penalty and the failure to pay penalty apply, the failure to file penalty is increased by the amount of the failure to pay penalty. a. True b. False 60. When interest is charged on a deficiency, any part of a month counts as a full month. a. True b. False 61. For the negligence penalty to apply, the underpayment must be caused by intentional disregard of rules and regulations without intent to defraud. a. True b. False 62. Upon audit by the IRS, Faith is assessed a deficiency of $40,000 of which $25,000 is attributable to negligence. The 20% negligence penalty will apply to $25,000. a. True b. False 63. If a tax deficiency is attributable to fraud, the negligence penalty will not be imposed. Powered by Cognero
Page 6
Name:
Class:
Date:
Chapter 01: An_Introduction_to_Taxation_and_Understanding_the_Federal_Tax_Law a. True b. False 64. The civil fraud penalty can entail large fines and possible incarceration. a. True b. False 65. Even though a client refuses to correct an error on a past return, it may be possible for a practitioner to continue to prepare returns for the client. a. True b. False 66. In preparing an income tax return, the use of a client’s estimates is not permitted. a. True b. False 67. In preparing a tax return, all questions on the return must be answered. a. True b. False 68. A CPA firm in California sends many of its less complex tax returns to be prepared by a group of accountants in India. If certain procedures are followed, this outsourcing of tax return preparation is proper. a. True b. False 69. The objective of pay-as-you-go (paygo) is to improve administrative feasibility. a. True b. False 70. When Congress enacts a tax cut that is phased in over a period of years, revenue neutrality is achieved. a. True b. False 71. A tax cut enacted by Congress that contains a sunset provision will make the tax cut temporary. a. True b. False 72. The tax law provides various tax credits, deductions, and exclusions that are designed to encourage taxpayers to obtain additional education. These provisions can be justified on both economic and equity grounds. a. True b. False 73. Various tax provisions encourage the creation of certain types of retirement plans. Such provisions can be justified on both economic and social grounds. a. True b. False Powered by Cognero
Page 7
Name:
Class:
Date:
Chapter 01: An_Introduction_to_Taxation_and_Understanding_the_Federal_Tax_Law 74. To lessen or eliminate the effect of multiple taxation, a taxpayer who is subject to both foreign and U.S. income taxes on the same income is allowed either a deduction or a credit for the foreign tax paid. a. True b. False 75. To mitigate the effect of the annual accounting period concept, the tax law permits the carryforward of excess charitable contributions of a particular year to other years. a. True b. False 76. Jason’s business warehouse is destroyed by fire. Because the insurance proceeds exceed the basis of the property, a gain results. If Jason shortly reinvests the proceeds in a new warehouse, no gain is recognized due to the application of the wherewithal to pay concept. a. True b. False 77. Because it is consistent with the wherewithal to pay concept, the tax law requires a seller to recognize a gain in the year the installment sale occurs. a. True b. False 78. Stealth taxes have the effect of generating additional taxes from all taxpayers. a. True b. False 79. A provision in the law that compels accrual basis taxpayers to pay a tax on prepaid income in the year received and not when earned is consistent with generally accepted accounting principles. a. True b. False 80. As a matter of administrative convenience, the IRS would prefer to have Congress decrease (rather than increase) the amount of the standard deduction allowed to individual taxpayers. a. True b. False 81. In cases of doubt, courts have held that tax relief provisions should be broadly construed in favor of taxpayers. a. True b. False 82. On occasion, Congress has to enact legislation that clarifies the tax law in order to change a result reached by the U.S. Supreme Court. a. True b. False 83. Ultimately, most taxes are paid by individuals. a. True Powered by Cognero
Page 8
Name:
Class:
Date:
Chapter 01: An_Introduction_to_Taxation_and_Understanding_the_Federal_Tax_Law b. False 84. The majority of IRS audits are handled by correspondence. a. True b. False 85. Sally’s neighbor often brags that his employer often pays him in cash “off the books” to save him taxes. Sally is tired of hearing this and contacts the IRS to report the neighbor. If this tip results in taxes collected by the IRS, Sally will likely receive an award of a portion of the tax and penalties collected. a. True b. False 86. Bracket creep will not exist if there is only a single (flat) tax rate for the income tax. a. True b. False Multiple Choice 87. Which, if any, of the following statements best describes the history of the Federal income tax? a. It did not exist during the Civil War. b. The Federal income tax on corporations was held by the U.S. Supreme Court to be allowable under the U.S. Constitution. c. The Federal income tax on individuals was held by the U.S. Supreme Court to be allowable under the U.S. Constitution. d. Both the Federal income tax on individuals and on corporations was held by the U.S. Supreme Court to be contrary to the U.S. Constitution. 88. Which, if any, is not one of Adam Smith’s canons (principles) of taxation? a. Economy in collection b. Certainty c. Convenience of payment d. Simplicity 89. Which, if any, of the following taxes are regressive (rather than progressive)? a. State general sales tax b. Federal individual income tax c. Federal estate tax d. Federal gift tax 90. Which, if any, of the following transactions will increase a taxing jurisdiction’s revenue from the ad valorem tax imposed on real estate? a. A resident dies and leaves his farm to his church. b. A large property owner issues a conservation easement as to some of her land. c. A tax holiday issued 10 years ago has expired. d. A bankrupt motel is acquired by the Red Cross and is to be used to provide housing for homeless persons. Powered by Cognero
Page 9
Name:
Class:
Date:
Chapter 01: An_Introduction_to_Taxation_and_Understanding_the_Federal_Tax_Law e. None of these choices are correct. 91. Which, if any, of the following transactions will decrease a taxing jurisdiction’s ad valorem tax revenue imposed on real estate? a. A tax holiday is granted to an out-of-state business that is searching for a new factory site. b. An abandoned church is converted to a restaurant. c. A public school is razed and turned into a city park. d. A local university sells a dormitory that will be converted for use as an apartment building. 92. Which, if any, of the following is a typical characteristic of an ad valorem tax on personalty? a. Taxpayer compliance is greater for personal use property than for business use property. b. The tax on automobiles sometimes considers the age of the vehicle. c. Most states impose a tax on intangibles. d. The tax on intangibles generates considerable revenue as it is difficult for taxpayers to avoid. 93. Federal excise taxes that are no longer imposed include: a. Tax on air travel. b. Tax on wagering. c. Tax on alcohol. d. None of these choices are correct. 94. Taxes not imposed by the Federal government include: a. Tobacco excise tax. b. Customs duties (tariffs on imports). c. Tax on rental cars. d. Gas guzzler tax. 95. Taxes levied by both states and the Federal government include: a. General sales tax. b. Customs duties. c. Hotel occupancy tax. d. None of these choices are correct. 96. Taxes levied by all states include: a. Tobacco excise tax. b. Individual income tax. c. Inheritance tax. d. General sales tax. 97. A use tax is imposed by: a. The Federal government and all states. b. The Federal government and a majority of the states. c. All states but not the Federal government. d. Most of the states but not the Federal government. Powered by Cognero
Page 10
Name:
Class:
Date:
Chapter 01: An_Introduction_to_Taxation_and_Understanding_the_Federal_Tax_Law 98. Gabriele and Lisa are married and live in a common law state. They want to make gifts to their four children in 2024. What is the maximum amount of the annual exclusion they will be allowed for these gifts? a. $18,000. b. $36,000. c. $72,000. d. $144,000. 99. Property can be transferred within the family group by gift or at death. One motivation for preferring the gift approach is: a. To take advantage of the higher unified transfer tax credit available under the gift tax. b. To avoid a future decline in value of the property transferred. c. To take advantage of the per donee annual exclusion. d. To shift income to higher bracket donees. 100. Indicate which, if any, statement is incorrect. State income taxes: a. Can piggyback to the Federal version. b. Cannot apply to visiting nonresidents. c. Can decouple from the Federal version. d. Can provide occasional amnesty programs. 101. State income taxes generally can be characterized by: a. The same date for filing as the Federal income tax. b. No provision for withholding procedures. c. Allowance of a deduction for Federal income taxes paid. d. Applying only to individuals but not to corporations. 102. A characteristic of FICA tax is that: a. It does not apply when one spouse works for the other spouse. b. It is imposed only on the employer. c. It provides a modest source of income in the event of loss of employment. d. None of these choices are correct. 103. A characteristic of FUTA is that: a. It is imposed on both employer and employee. b. It is imposed solely on the employee. c. Compliance requires following guidelines issued by both state and Federal regulatory authorities. d. It is applicable to spouses of employees but not to any children under age 18. 104. The United States (either Federal, state, or local) does not impose: a. Franchise taxes. b. Severance taxes. c. Custom duties. d. Export duties. 105. The proposed flat tax: Powered by Cognero
Page 11
Name:
Class:
Date:
Chapter 01: An_Introduction_to_Taxation_and_Understanding_the_Federal_Tax_Law a. Would increase the number of deductions available to individuals. b. Would not require individuals to file returns. c. Would tax the increment in value as goods move through the production and manufacturing stages to the marketplace. d. Is a type of consumption tax. 106. A VAT (value added tax): a. Is regressive in its effect. b. Has not proved popular outside of the United States. c. Is not a tax on consumption. d. Is used exclusively by third world (less developed) countries. 107. Characteristics of the “fair tax” (i.e., national sales tax) include which, if any, of the following: a. Abolition of the Federal individual (but not the corporate) income tax. b. Abolition of all Federal income taxes but retention of payroll taxes (including the self-employment tax). c. Abolition of all Federal income taxes and payroll taxes but retention of the Federal estate and gift taxes. d. Abolition of all Federal income and payroll taxes as well as the Federal estate and gift taxes. 108. In terms of probability, which of the following taxpayers would be least likely to be audited by the IRS? a. Taxpayer owns and operates a check-cashing service. b. Taxpayer is an employed electrician. c. Taxpayer just received a $3 million personal injury award as a result of a lawsuit. d. Taxpayer just won a $1 million slot machine jackpot at a Las Vegas casino. 109. Which of the following is a characteristic of the audit process? a. Most taxpayer audits involve “special” agents. b. Self-employed taxpayers are less likely to be selected for audit than employed taxpayers. c. Less important issues are handled by means of a correspondence audit. d. If a taxpayer disagrees with the IRS auditor’s finding, the only resort is to the courts. 110. David files his tax return 45 days after the due date. Along with the return, David remits a check for $40,000. Which is the balance of the tax owed. Disregarding the interest element, David’s total failure to file and to pay penalties are: a. $400. b. $3,600. c. $4,000. d. $4,400. 111. A characteristic of the fraud penalties is: a. When negligence and civil fraud apply to a deficiency, the negligence penalty predominates. b. When criminal fraud can result in a fine and a prison sentence. c. When the criminal fraud penalty is 75% of the deficiency attributable to the fraud. d. When the IRS has the same burden of proof in the case of criminal fraud as with civil fraud. 112. Regarding proper ethical accounting guidelines, which, if any, of the following is correct? Powered by Cognero
Page 12
Name:
Class:
Date:
Chapter 01: An_Introduction_to_Taxation_and_Understanding_the_Federal_Tax_Law a. The use of client estimates in preparing a return may be acceptable. b. Under no circumstances should a question on a tax return be left unanswered. c. If a client has made a mistake in a prior year’s return and refuses to correct it, the accountant should withdraw from the engagement. d. If the exact amount of a deduction is not certain (e.g., around mid-$600s), it should be recorded as an odd amount (i.e., $649) so as to increase the appearance of greater certainty. 113. Both economic and social considerations can be used to justify: a. Favorable tax treatment for accident and health plans provided for employees and financed by employers. b. Disallowance of any deduction for expenditures deemed to be contrary to public policy (e.g., fines, penalties, illegal kickbacks, bribes to government officials). c. Various tax credits, deductions, and exclusions that are designed to encourage taxpayers to obtain additional education. d. Allowance of a deduction for state and local income taxes paid. 114. Social considerations can be used to justify: a. Allowance of a credit for child care expenses. b. Allowing excess capital losses to be carried over to other years. c. Allowing accelerated amortization for the cost of installing pollution control facilities. d. Allowing a Federal income tax deduction for state and local sales taxes. 115. Allowing a tax credit for certain solar energy property can be justified: a. As helping small businesses. b. As promoting administrative feasibility. c. As promoting a government policy to use alternative energy sources. d. Based on the wherewithal to pay concept. 116. Provisions in the tax law that promote energy conservation and more use of alternative (nonfossil) fuels can be justified by: a. Political considerations. b. Economic and social considerations. c. Promoting administrative feasibility. d. Encouragement of small business. 117. Which, if any, of the following provisions cannot be justified as mitigating the effect of the annual accounting period concept? a. Nonrecognition of gain allowed for involuntary conversions. b. Net operating loss carryover provisions. c. Use of the installment method to recognize gain. d. Carryover of excess capital losses. 118. Which, if any, of the following provisions of the tax law cannot be justified as promoting administrative feasibility (simplifying the task of the IRS)? a. Penalties are imposed for failure to file a return or pay a tax on time. b. Annual adjustments for indexation increases the amount of the standard deduction allowed. Powered by Cognero
Page 13
Name:
Class:
Date:
Chapter 01: An_Introduction_to_Taxation_and_Understanding_the_Federal_Tax_Law c. Personal casualty losses in Federally declared disaster areas must exceed 10% of AGI to be deductible. d. A deduction is allowed for charitable contributions. 119. A landlord leases property upon which the tenant makes improvements. The improvements are significant and are not made in lieu of rent. At the end of the lease, the value of the improvements is not income to the landlord. This rule is an example of: a. A clear reflection of income result. b. The tax benefit rule. c. The arm’s length concept. d. The wherewithal to pay concept. 120. Before proposing that the state’s sales tax be expanded to include food, a legislator should ask whether: a. The state tax agency will allow this expansion. b. A majority of his constituents agree. c. Grocery stores will be able to collect the tax. d. The state’s constitution allows for this tax. 121. Jane is the tax director for Tangent Software Corporation. She is unsure whether Tangent is required to charge sales tax when software is provided to customers in State X via the “cloud.” This indicates that the sales tax does not meet the principle of: a. Equity. b. Certainty. c. Neutrality. d. Economic growth and efficiency. 122. Two years ago, State Y enacted a new income tax credit for college prep materials. The credit is available to individuals and is equal to 40% of the cost of the items. The credit may not exceed $50 in any year. State Y's director of finance has discovered this year that the amount of credit claimed is far higher than expected. Which principle of good tax policy might not have been considered in designing this tax that caused the original cost estimate to be too low? a. Equity. b. Simplicity. c. Economy in collection. d. Minimum tax gap. 123. Which of the following statements about a value added tax (VAT) is false? a. Many countries use a VAT. b. The United States has imposed a VAT since 1913. c. A VAT has been proposed in the United States to replace part of the income tax. d. A VAT operates similarly to a sales tax. 124. The quote engraved on the IRS building in Washington, DC, at the entrance states: a. Nothing is certain, except death and taxes. b. Taxes are what we pay for civilized society. c. Everyone welcome. d. Taxes are the most difficult thing in the world to understand. Powered by Cognero
Page 14
Name:
Class:
Date:
Chapter 01: An_Introduction_to_Taxation_and_Understanding_the_Federal_Tax_Law 125. Tax functions that accounting and finance professionals may assist clients with include all but the following: a. Tax compliance. b. ESG reporting of certain tax information. c. Cash management to ensure timely payment of taxes. d. Tax evasion. 126. Who among the following individuals does not need to have a PTIN? a. Sally, a paid intern at a CPA firm, who helps prepare simple returns but does not sign them. b. Tam who reviews and signs returns for paying clients. c. Jeff who mostly does data entry at the CPA firm where he works but also occasionally handles interview with clients to obtain their tax information. d. Pooja who volunteers at an IRS tax preparation site to prepare simple returns for individuals eligible for the free assistance. 127. A rationale for the installment sale method tax rule is: a. Ability to pay. b. Equity and fairness. c. Simplicity. d. Revenue neutrality. 128. The AICPA Statements on Standards for Tax Services are: a. Enforceable. b. Educational. c. Out of date. d. Do not exist. 129. “Bracket creep” is avoided by: a. Using sunset provisions. b. Providing special tax rules for small businesses. c. The statute of limitations. d. Adjusting the rate brackets for inflation annually. 130. A CPA assisting a client with an IRS examination is subject to the following requirement. a. The Taxpayer Bill of Rights. b. Circular 230. c. The Safeguards Rule. d. Completion of the IRS Enrolled Agent exam. Matching Match the statements that relate to each other. Note: Some choices may be used more than once or not at all. a. Deferral of gains from involuntary conversions b. Carryforward of net operating losses Powered by Cognero
Page 15
Name:
Class:
Date:
Chapter 01: An_Introduction_to_Taxation_and_Understanding_the_Federal_Tax_Law c. “No change” is a possible result d. State income tax applied to a visiting nonresident e. IRS special agent f. Undoing the “piggyback” result g. Ideal budget goal as to new tax legislation h. Every state that has a general sales tax has one i. Imposed by all states and the Federal government j. Imposed by some states but not the Federal government k. Imposed only by the Federal government l. No correct match provided 131. Employee temporarily working in another state for two months 132. Decoupling 133. Discriminant Function (DIF) 134. Tax fraud suspected 135. Revenue neutrality 136. Revenue Agent's Report (RAR) 137. Wherewithal to pay concept 138. Mitigation of the annual accounting period concept 139. Tax on transfers at death (inheritance type) 140. Excise tax on tobacco 141. Use tax 142. Income tax amnesty 143. Import taxes (customs duties) 144. “Pay as you go” (paygo) 145. Export taxes Using the following choices, show the justification for each provision of the tax law listed. a. Economic considerations b. Social considerations c. Equity considerations d. Both a. and b. 146. A tax credit for amounts spent to furnish care for children while the parent is at work. Powered by Cognero
Page 16
Name:
Class:
Date:
Chapter 01: An_Introduction_to_Taxation_and_Understanding_the_Federal_Tax_Law 147. Additional depreciation deduction allowed for the year the asset is acquired. 148. Tax brackets are increased for inflation. 149. A small business corporation can elect to avoid the corporate income tax. 150. A deduction for contributions by an employee to certain retirement plans. 151. A deduction for qualified tuition paid to obtain higher education. 152. A deduction for certain expenses (interest and taxes) incident to home ownership. 153. A Federal deduction for state and local income taxes paid. 154. A deduction for interest on student loans. 155. A bribe to the local sheriff, although business related, is not deductible. 156. Contributions to charitable organizations are deductible. 157. A Federal deduction for state and local sales taxes paid. 158. Tax credits available for the purchase of a vehicle that uses alternative (nonfossil) fuels. 159. Tax credits for home improvements that conserve energy. 160. More rapid expensing for tax purposes of the costs of installing pollution control devices. Match the statements that relate to each other. Note: Some choices may be used more than once. a. Three years from date return is filed b. Three years from due date of return c. 20% of underpayment d. 5% per month (25% limit) e. 0.5% per month (25% limit) f. Conducted at IRS office g. Conducted at taxpayer’s office h. Six years i. 45-day grace period allowed to IRS j. No statute of limitations (period remains open) k. 75% of underpayment l. No correct match provided 161. Office audit 162. Field audit 163. Failure to file penalty Powered by Cognero
Page 17
Name:
Class:
Date:
Chapter 01: An_Introduction_to_Taxation_and_Understanding_the_Federal_Tax_Law 164. Failure to pay penalty 165. Negligence penalty 166. Criminal fraud penalty 167. Fraud and statute of limitations 168. Early filing and statute of limitations (deficiency situations) 169. Late filing and statute limitations (deficiency situations) 170. No return and statute limitations 171. More than 25% gross income omission and statute of limitations 172. Interest due on refund Subjective Short Answer 173. Taylor, a widow, makes cash gifts to her five married children (including their spouses) and to her seven grandchildren. What is the maximum amount Taylor can give for calendar year 2024 without using her unified transfer tax credit? 174. For the tax year 2023, Noah reported gross income of $300,000 on his timely filed Federal income tax return. a. b. c.
Presuming that the general rule applies, when does the statute of limitations on assessments normally expire? Suppose that Noah inadvertently omitted gross income of $76,000. When does the statute of limitations on assessments expire? Suppose the omission was deliberate, not inadvertent. When does the statute of limitations on assessments expire?
175. Without obtaining an extension, Pam files her income tax return 55 days after the due date. With her return, she pays an additional tax of $60,000. Disregarding any interest element, what is Pam’s penalty for failure to pay and to file? 176. On his 2024 income tax return, Andrew omitted income and overstated deductions to the extent that his income tax was understated by $500,000. Disregarding any interest element, what is Andrew’s penalty if the understatement was due to: a. b. c.
Negligence. Civil fraud. Criminal fraud.
177. Several years ago, Logan purchased extra grazing land for his ranch at a cost of $240,000. In 2024, the land is condemned by the state for development as a highway maintenance depot. Under the condemnation award, Logan receives $600,000 for the land. Within the same year, he replaces the property with other grazing land. What is Logan’s tax situation if the replacement land cost: Powered by Cognero
Page 18
Name:
Class:
Date:
Chapter 01: An_Introduction_to_Taxation_and_Understanding_the_Federal_Tax_Law a. b. c. d.
$210,000? $360,000? $630,000? Why?
178. Paige is the sole shareholder of Citron Corporation. During the year, she leases a building to Citron for a monthly rental of $80,000. If the fair rental value of the building is $60,000, what are the income tax consequences to the parties involved? 179. In 1993, Martina leased real estate to Drab Corporation for 20 years. Drab Corporation made significant capital improvements to the property. In 2012, Drab decided not to renew the lease and vacated the property. At that time, the value of the improvements was $800,000. Martina sells the real estate in 2024 for $1,200,000 of which $900,000 is attributable to the improvements. When is Martina taxed on the improvements made by Drab Corporation? Essay 180. The Federal income tax is based on a pay-as-you-go system and has become a “mass tax.” Explain this statement. 181. In terms of Adam Smith’s canons of taxation, how do state sales taxes fare as far as convenience of payment is concerned? 182. Due to population change, Goose Creek School District has decided to close one of its high schools. Since it has no further need of the property, the school is listed for sale. The two bids it receives are as follows: United Methodist Church $1,700,000 Planet Motors 1,600,000 The United Methodist Church would use the property to establish a sectarian middle school. Planet, a well-known car dealership, would revamp the property and operate it as a branch location. If you were a member of the School District board, what factors would you consider in evaluating the two bids? 183. Morgan inherits her father’s personal residence including all of the furnishings. She plans to add a swimming pool and sauna to the property and rent it as a furnished house. What are some of the ad valorem property tax issues Morgan can anticipate? 184. In 2022, Deborah became 65 years old. In 2023 she added a swimming pool and in 2024 she converted the residence to rental property and moved into an assisted living facility. Since 2021, Deborah’s ad valorem property taxes have decreased once and increased twice. Explain. 185. A lack of compliance in the payment of use taxes can be resolved by several means. In this regard, comment on the following: a. b.
Registration of automobiles. Reporting of Internet purchases on state income tax returns.
186. What are the pros and cons of the following state and local tax provisions? a. b. c.
An ad valorem property tax holiday made available to a manufacturing plant that is relocating. Hotel occupancy tax and a rental car surcharge. A back-to-school sales tax holiday.
Powered by Cognero
Page 19
Name:
Class:
Date:
Chapter 01: An_Introduction_to_Taxation_and_Understanding_the_Federal_Tax_Law 187. What is a severance tax? How productive can it be in terms of generating revenue? 188. What is the difference between an inheritance tax and an estate tax? Who imposes these taxes? 189. Antonio dies with an estate worth $20 million. Under his will, $10 million passes to his spouse and $10 million goes to his church. What is Antonio’s Federal estate tax result? 190. What might cause an individual to owe income taxes in more than one state? 191. Virtually all state income tax returns contain checkoff boxes for donations to various causes. On what grounds has this procedure been criticized? 192. State and local governments are sometimes forced to find ways to generate additional revenue. Comment on the pros and cons of the following procedures: a. b. c.
Decouple what would be part of the piggyback format of the state income tax. Tax amnesty provisions. Internet shaming.
193. Briana lives in one state and works in the adjoining state. Both states tax the income she earns from her job. Does Briana have any relief from this apparent double taxation of the same income? 194. In late June 2024, Art is audited by the state and a large deficiency is assessed. In November of the same year, his Federal income tax return is audited by the IRS. What has probably happened? 195. Two months after the burglary of his personal residence, Eric is audited by the IRS. Among the items taken in the burglary was a shoe box containing approximately $50,000 in cash. Eric is the owner and operator of a cash-and-carry liquor store. Eric wonders why he was audited. Can you help explain? 196. Rick, the sole proprietor of an adult entertainment club, is audited by the IRS. On the third day of the field audit, the regular IRS agent is accompanied by a special agent. Should Rick be concerned by this new development? Explain. 197. Tracy has just been audited and the IRS agent has issued an RAR that assesses a large deficiency. Since Tracy disagrees with the result, her next step is to go to court. Do you agree? 198. Brayden files his Federal income tax return by April 15 but does not pay the tax. Although he expects to pay interest on the large amount of tax he still owes, he feels that the timely filing has avoided any penalties. Is Brayden’s assumption correct? 199. Melinda has been referred to you by one of your clients. In the past, she has prepared her own income tax returns, but she has become overwhelmed by the increased complexity of the tax law. Consequently, Melinda wants you to prepare her return for calendar year 2024. In reviewing her 2023 return, you note that she has claimed as a deduction the entire cost of a business building that should have been capitalized and depreciated. What course of action should you follow? 200. Your client, Connie, won $12,000 in a football office pool. She sees no reason to include it in her income for several reasons. First, the amount won will not be reported to the IRS. Second, as an average income employee, she is unlikely to be audited by the IRS. Third, she feels that she has probably lost this much in other past office pools. How do you respond? 201. Under what conditions is it permissible, from an ethical standpoint, for a CPA firm to outsource tax return Powered by Cognero
Page 20
Name:
Class:
Date:
Chapter 01: An_Introduction_to_Taxation_and_Understanding_the_Federal_Tax_Law preparation to a third party? 202. In terms of revenue neutrality, comment on a tax cut enacted by Congress that: a. b.
Contains revenue offsets. Includes a sunset provision.
203. The tax law contains various tax credits, deductions, and exclusions that are designed to encourage taxpayers to obtain additional education. On what grounds can these provisions be justified? 204. The tax law contains various provisions that encourage home ownership. a. b.
On what basis can this objective be justified? Are there any negative considerations? Explain.
205. The tax law allows an income tax deduction (or a credit) for foreign income taxes. Explain why. 206. The tax law allows, under certain conditions, deferral of gain recognition for involuntary conversions. a. b.
What is the justification for this relief measure? What happens if the proceeds are not entirely reinvested?
207. How do the net operating loss provisions in the tax law mitigate the effect of the annual accounting concept? 208. In connection with facilitating the function of the IRS in the administration of the tax laws, comment on the utility of the following: a. b. c.
An increase in the amount of the standard deduction. Dollar and percentage limitations on the deduction of personal casualty losses in Federally declared disaster areas. Availability of interest and penalties for taxpayer noncompliance.
209. Congress reacts to judicial decisions that interpret the tax law in different ways. When it approves of a decision, Congress may act to amend the Code to incorporate the holding. When it disapproves, Congress may amend the Code to nullify its effect. Give an example of each one of these congressional reactions. 210. Can a taxpayer start the three-year statute of limitations on additional assessments by the IRS by filing his income tax return early (i.e., before the due date)? Can the period be shortened by filing late (i.e., after the due date)? 211. Congressman Smith wants to impose a new tax on sugar drinks. Analyze this proposal against the principles of equity, simplicity, and neutrality. 212. Ultimately, most taxes are paid by individuals. Explain what this means in terms of income and payroll taxes paid by a corporation.
Powered by Cognero
Page 21
Name:
Class:
Date:
Chapter 01: An_Introduction_to_Taxation_and_Understanding_the_Federal_Tax_Law Answer Key 1. True 2. False 3. False 4. True 5. True 6. False 7. False 8. True 9. False 10. True 11. True 12. False 13. True 14. True 15. True 16. False 17. False 18. True 19. False 20. True 21. True 22. False 23. False 24. True 25. False Powered by Cognero
Page 22
Name:
Class:
Date:
Chapter 01: An_Introduction_to_Taxation_and_Understanding_the_Federal_Tax_Law 26. True 27. True 28. True 29. False 30. False 31. True 32. True 33. False 34. True 35. True 36. True 37. False 38. True 39. False 40. True 41. False 42. False 43. True 44. True 45. True 46. False 47. False 48. True 49. False 50. True Powered by Cognero
Page 23
Name:
Class:
Date:
Chapter 01: An_Introduction_to_Taxation_and_Understanding_the_Federal_Tax_Law 51. True 52. False 53. False 54. True 55. True 56. False 57. True 58. True 59. False 60. False 61. True 62. True 63. True 64. False 65. True 66. False 67. False 68. True 69. True 70. False 71. True 72. False 73. True 74. True 75. True 76. True Powered by Cognero
Page 24
Name:
Class:
Date:
Chapter 01: An_Introduction_to_Taxation_and_Understanding_the_Federal_Tax_Law 77. False 78. False 79. False 80. False 81. False 82. True 83. True 84. True 85. True 86. True 87. b 88. d 89. a 90. c 91. a 92. b 93. d 94. c 95. d 96. a 97. d 98. d 99. c 100. b 101. a Powered by Cognero
Page 25
Name:
Class:
Date:
Chapter 01: An_Introduction_to_Taxation_and_Understanding_the_Federal_Tax_Law 102. d 103. c 104. d 105. d 106. a 107. d 108. b 109. c 110. c 111. b 112. a 113. c 114. a 115. c 116. b 117. a 118. d 119. d 120. d 121. b 122. d 123. b 124. b 125. d 126. d 127. a Powered by Cognero
Page 26
Name:
Class:
Date:
Chapter 01: An_Introduction_to_Taxation_and_Understanding_the_Federal_Tax_Law 128. a 129. d 130. b 131. d 132. f 133. l 134. e 135. g 136. c 137. a 138. b 139. j 140. i 141. h 142. j 143. k 144. g 145. l 146. b 147. a 148. c 149. a 150. d 151. d 152. d Powered by Cognero
Page 27
Name:
Class:
Date:
Chapter 01: An_Introduction_to_Taxation_and_Understanding_the_Federal_Tax_Law 153. c 154. d 155. b 156. b 157. c 158. a 159. a 160. a 161. f 162. g 163. d 164. e 165. c 166. l 167. j 168. b 169. a 170. j 171. h 172. i 173. $306,000 [$18,000 (annual exclusion) × 17 donees]. 174. a. Three years from April 15, 2024. If more than 25% of gross income is omitted, a six-year statute applies (i.e., six years from b. April 15, 2024). In this case, it does because $76,000 is more than $75,000 (25% × $300,000). c. If fraud is involved, the statute never expires.
Powered by Cognero
Page 28
Name:
Class:
Date:
Chapter 01: An_Introduction_to_Taxation_and_Understanding_the_Federal_Tax_Law
175. $6,000. Disregarding the interest element, Pam’s total penalties are as follows: Failure to pay penalty (0.5% × $60,000 × 2 months) Plus: Failure to file penalty (5% × $60,000 × 2 months) Less failure to pay penalty for same period Total penalties
$ $6,000 (600)
600
5,400 $6,000
176. a. $100,000 (20% × $500,000). b. $375,000 (75% × $500,000). c. Various fines and/or prison sentence. 177. a. The full realized gain of $360,000 [$600,000 (condemnation proceeds) – $240,000 (cost of land)] must be recognized, because only $210,000 was reinvested. The condemnation proceeds of $600,000 exceed the amount reinvested by more than $360,000. b. Because only $360,000 was reinvested in replacement property, $240,000 ($600,000 – $360,000) of the gain must be recognized. c. Because the full $600,000 was reinvested, no realized gain need be recognized. If some of the gain is not reinvested, consistent with the wherewithal to pay concept, there d. exists the ability to pay the tax. Thus, gain is recognized to the extent the proceeds are not reinvested.
178. The rent charged by Paige is not “arms length”; as such, Citron Corporation’s rent deduction is $60,000 (not $80,000). The $20,000 difference is a nondeductible dividend distribution. For Paige, the change merely requires reclassification. Instead of $80,000 of rent income, she has $60,000 of rent income and $20,000 of dividend income. 179. Martina is not subject to taxation on the improvements until she disposes of the property (i.e., 2024). After a controversial Supreme Court decision years ago, Congress clarified the tax law to make it more consistent with the wherewithal to pay concept. 180. The pay-as-you-go system is present in the wage and other withholding procedures. In the case of self-employed persons, it is manifested in the required quarterly payments for estimated taxes. The income tax became a mass tax during World War II when its coverage was extended to 74% of the population (from less than 6% in 1939). 181. Because the sales tax is owed at the time of purchase, the taxpayer is able to determine if they can afford to pay the tax and it is collected at that time rather than say, for example, at the end of the buyer's tax year.. 182. Although the bid from the United Methodist Church is higher, several other factors need to be considered. Does, for example, Goose Creek School District exempt property owned by churches from its ad valorem taxes? If so, losing this property from the tax base could prove very costly over the long run. Also, it is probable that income-producing property (such as a car dealership) would be taxed at a higher rate than that owned by a nonprofit organization (a school operated by a church). This assumes, of course, that the school would be taxed at all. The auto dealership also would generate sales Powered by Cognero
Page 29
Name:
Class:
Date:
Chapter 01: An_Introduction_to_Taxation_and_Understanding_the_Federal_Tax_Law tax. 183. The real estate taxes probably will increase for several reasons. The capital improvements and the conversion from residential to rental will trigger the increase. Furthermore, the furnishings may generate an ad valorem tax on personalty. (Depending on applicable law, furniture might not be subject to tax unless used for business purposes—such as in this case.) 184. The decrease probably came in 2022 when Deborah reached age 65. The increases probably occurred in 2023 when she added the pool and in 2024 when the residence was converted to rental property with the property reassessed due to the change in use and/or removal of the homestead exemption. 185. a. As reflected in Example 5, re-registration of a car purchased out of state is the occasion for the owner’s home state to collect the use tax. b. Completing the state income tax return reminds (or forces) the taxpayer to pay use tax on out of state purchases.
186. a.
b.
c.
Such a holiday is designed to attract new industry to the area. This will bring more jobs and growth in consumption. On the other hand, if the tax holiday is too generous, this places a strain on available public revenue. The result could be that schools and capital maintenance (roads, public services) will suffer. The hotel occupancy tax and car rental surcharges are popular because they mainly impact visitors. Also, they can generate considerable revenue to finance major capital improvements. If these taxes become excessive, however, they could discourage major events (such as conventions). Such holidays are popular with both merchants and consumers and serve the social need of defraying some of the costs of sending children to school. Once established, however, they are difficult to get rid of. Thus, they become an annual drain on sales tax revenue. In addition, since they are available to buyers at all income levels, they provide tax savings to taxpayers who do not need them and who might obtain greater tax breaks than others, as they have more funds to spend on the tax free items.
187. A severance tax is one imposed when natural resources (e.g., oil, gas, iron ore, coal) are extracted. It is based on the notion that the state has an interest in such resources. For some states, the revenue from severance taxes can be significant. Alaska, for example, relies heavily on its severance taxes and has been able to avoid both a state income tax and a general sales tax. 188. An inheritance tax is a tax on the right to receive property from a decedent. An estate tax is imposed on the right to pass property at death. The Federal government imposes estate taxes and states impose inheritance taxes. Some states impose both, whereas others impose neither. 189. None. After a marital deduction of $10 million and a charitable deduction of $10 million, Antonio’s taxable estate is Powered by Cognero
Page 30
Name:
Class:
Date:
Chapter 01: An_Introduction_to_Taxation_and_Understanding_the_Federal_Tax_Law $0. 190. Working in more than one state or owning income-generating property in more than one state can cause this. 191. In many cases, the procedure is overused (i.e., a multiplicity of boxes). This overuse adds complexity to the return. Also, in most cases, the donation is being drawn from any income tax refund that might be due. Thus, taxpayers may not fully appreciate that they are paying for such checkoffs. 192. a. The decoupling process is easily accomplished regarding new Federal tax changes that have never taken effect at the state level. Taxpayers are not apt to miss what they never have enjoyed. b. Tax amnesty provisions generate considerable revenue. It also unmasks many taxpayers who have not previously paid taxes. Now that the taxing jurisdiction is aware of their existence, they will tend to pay taxes in the future. c. By use of a public internet site, the taxing authority posts the names of those taxpayers that are delinquent as to various taxes (e.g., sales, income). This public humiliation (or threat of) very often results in compliance.
193. Most states allow their residents some form of tax credit for the income taxes paid to other states. In Briana’s case, the credit would be allowed by the state where she lives for the taxes paid to the state where she works. 194. The IRS has been notified by the state concerning the results of the June audit. 195. Although Eric’s audit by the IRS could be the result of sheer chance, this appears unlikely. Press coverage of the burglary, particularly if the items stolen were enumerated, could have put the IRS on notice. Why would anyone keep such a large amount of cash at his personal residence? Also, Eric is in a business where tax evasion is easily accomplished. 196. Yes, he should. Special agents rarely appear during an audit unless the regular agent suspects that fraud may be involved. Considering the type of business Rick conducts, the heavy use of cash probably exists. With cash involved, tax evasion is easier to carry out. 197. Tracy might save herself time and expense by going to the Independent Office of Appeals of the IRS. Here, the IRS has the authority to negotiate a settlement based on the “hazards of litigation” (i.e., the probabilities of winning or losing). If a settlement is reached, resorting to the courts is avoided. 198. Although Brayden has avoided the failure to file penalty, the failure to pay penalty will apply. It is 0.5% per month up to a maximum of 25% of the tax due as shown on the return. 199. You should recommend to Melinda that an amended return be filed for 2023 correcting the error. If she refuses, you should assess the gravity of the error and how it impacts on your ability to file an accurate return for 2024. If you cannot do so, then you must decline the engagement. 200. As a practitioner, you cannot play the audit lottery. You must prepare a proper return for her. Although the use of estimates is allowed, Connie’s assumptions as to her losses are not realistic. Even if they were reliable, gambling losses cannot be offset against gambling winnings but must be separately deducted. Thus, the $12,000 must be reported as income or you cannot prepare Connie’s return. Powered by Cognero
Page 31
Name:
Class:
Date:
Chapter 01: An_Introduction_to_Taxation_and_Understanding_the_Federal_Tax_Law 201. First, the clients’ confidentiality must be preserved. Second, the CPA firm must verify the accuracy of the work. Third, the clients must be advised as to the practice. 202. a. Ideally, to achieve revenue neutrality, all tax cuts should be accompanied by revenue offsets. b.
A sunset provision does not account for the immediate revenue losses generated by a tax cut. It merely provides that such losses will not continue beyond a specified date when the tax cut expires and the former tax law is reinstated.
203. Social and economic considerations are the justification. As to the latter, a better educated workforce carries a positive economic impact. 204. a. Home ownership can be justified on economic and social grounds. b. Granting tax advantages to persons who are purchasing their homes places the taxpayers who rent at a disadvantage. The result is inequality in treatment. 205. The deduction (or a credit) for foreign income taxes can be justified on the grounds that it mitigates the double tax imposed on the same income. 206. a. By recognizing that the taxpayer’s relative economic situation has not changed and that they lack the wherewithal to pay a tax, any recognition of realized gain is deferred. b. If the proceeds from an involuntary conversion are not fully reinvested in property that is similar or related in service or use, recognized gain results. Such recognized gain cannot exceed realized gain and will be limited to the amount of the proceeds not reinvested. Recognition is based on the notion that the taxpayer now has the wherewithal to pay the tax that results. 207. Without the allowance of a loss carryforward, the losses would disappear. As shown by Example 27, this result places a business with profit and loss fluctuations on a more level playing field with one that maintains a stable income pattern. 208. a. An increase in the amount of the standard deduction reduces the number of taxpayers who choose to itemize their personal deductions. This, in turn, reduces the deductions the IRS has to check. b. Limitations placed on casualty and theft losses curtail the number of taxpayers who can claim the deduction. c. The imposition of extra penalties, in addition to the tax owed, definitely deters taxpayer noncompliance. 209. Congress approved of the judicial conclusion that most stock dividends should be nontaxable and amended the Code to this effect. However, it disagreed as to when leasehold improvements should be taxed to a lessor. Consistent with the wherewithal to pay concept, the improvements are to be taxed on the termination of the lease. Thus, Congress overturned a judicial holding that would have taxed such improvements in the year they are made by the lessee. 210. The answer is no in both cases. When filing early, the statute starts to run on the due date of the return. When filing late however, the filing date controls. Powered by Cognero
Page 32
Name:
Class:
Date:
Chapter 01: An_Introduction_to_Taxation_and_Understanding_the_Federal_Tax_Law 211. •
Equity – The tax is regressive in that it will represent a larger portion of a low-income individual’s income relative to a higher-income individual.
•
Simplicity – While it sounds simple because the ingredients on a container should indicate if there is sugar, issues might arise as to how other forms of sugar, such as corn syrup, affect application of the tax. Also, the amount of sugar in beverages can vary, so some might argue that the tax should not apply if the sugar level is minimal. Will the tax apply to drinks already subject to the alcohol taxes? (Include some discussion of problems of defining sugar drink in the answer.)
•
Neutrality – The tax will likely reduce sales of sugar drinks.
212. A corporation pays many types of taxes, but like any other expenditure, some of these taxes are ultimately paid by an individual. Income taxes are included in the price the corporation charges for goods and services. Or all or part might result in reduced earnings affecting investors or through reduced wages affecting employees. The payroll taxes paid by the corporate employer are likely borne by workers in the form of lower wages. That is, if the employer did not have to pay the taxes, it could pay higher wages to employees. These taxes might also be borne by customers and investors.
Powered by Cognero
Page 33
Name:
Class:
Date:
Chapter 02: Working With the Tax Law True / False 1. A tax professional need not worry about the relative weight of authority within the various tax law sources. a. True b. False 2. Rules of tax law do not include Revenue Rulings and Revenue Procedures. a. True b. False 3. In recent years, Congress has been relatively successful in simplifying the Internal Revenue Code. a. True b. False 4. A taxpayer should always minimize their tax liability. a. True b. False 5. The first codification of the tax law occurred in 1954. a. True b. False 6. This Internal Revenue Code section citation is correct: § 212(1). a. True b. False 7. Subchapter D refers to the “Corporate Distributions and Adjustments” section of the Internal Revenue Code. a. True b. False 8. In general, Regulations are issued immediately after a statute is enacted. a. True b. False 9. Temporary Regulations are only published in the Internal Revenue Bulletin. a. True b. False 10. Revenue Rulings issued by the National Office of the IRS carry the same legal force and effect as Regulations. a. True b. False 11. A Revenue Ruling is an administrative source of Federal tax law. a. True b. False Powered by Cognero
Page 1
Name:
Class:
Date:
Chapter 02: Working With the Tax Law 12. The following citation could be a correct citation: Rev. Rul. 2021-42, 2021-64 I.R.B. 982. a. True b. False 13. Revenue Procedures deal with the internal management practices and procedures of the IRS. a. True b. False 14. Post-1984 letter rulings may be substantial authority for purposes of the accuracy-related penalty in § 6662. a. True b. False 15. A letter ruling applies only to the taxpayer who asks for and obtains a letter ruling. a. True b. False 16. The IRS is not required to make a letter ruling public. a. True b. False 17. Determination letters usually involve completed transactions. a. True b. False 18. Technical Advice Memoranda deal with completed transactions. a. True b. False 19. Technical Advice Memoranda may not be cited as precedents by taxpayers. a. True b. False 20. A taxpayer must pay any tax deficiency assessed by the IRS and sue for a refund to bring suit in the U.S. Court of Federal Claims. Only in the Tax Court can jurisdiction be obtained without first paying the assessed tax deficiency. a. True b. False 21. In a U.S. District Court, a jury can decide both questions of fact and questions of law. a. True b. False 22. Three judges will normally hear each U.S. Tax Court case. a. True b. False 23. A taxpayer can obtain a jury trial in the U.S. Tax Court. Powered by Cognero
Page 2
Name:
Class:
Date:
Chapter 02: Working With the Tax Law a. True b. False 24. A taxpayer must pay any tax deficiency assessed by the IRS and sue for a refund to bring suit in the U.S. District Court. a. True b. False 25. Arizona is in the jurisdiction of the Eighth Circuit Court of Appeals. a. True b. False 26. Texas is in the jurisdiction of the Second Circuit Court of Appeals. a. True b. False 27. The Golsen rule has been overturned by the U.S. Supreme Court. a. True b. False 28. The granting of a Writ of Certiorari indicates that at least four members of the Supreme Court believe that an issue is of sufficient importance to be heard by the full court. a. True b. False 29. The petitioner refers to the party against whom a suit is brought. a. True b. False 30. The term petitioner is a synonym for defendant. a. True b. False 31. The U.S. Tax Court meets most often in Washington, D.C. a. True b. False 32. There are 11 geographic U.S. Circuit Court of Appeals. a. True b. False 33. The following citation is correct: Larry G. Mitchell, 131 T.C. 215 (2008). a. True b. False 34. The IRS issues an acquiescence or nonacquiescence only for regular Tax Court decisions. Powered by Cognero
Page 3
Name:
Class:
Date:
Chapter 02: Working With the Tax Law a. True b. False 35. There is a direct conflict between an Internal Revenue Code section adopted in 2017 and a treaty with France (signed in 2016). The Internal Revenue Code section controls. a. True b. False 36. The Small Cases Division of the U.S. Tax Court will hear only those cases involving amounts of $100,000 or less. a. True b. False 37. A U.S. District Court is considered the lowest trial court. a. True b. False 38. The research process should always begin with a tax service. a. True b. False 39. Electronic (online) databases are most frequently searched by the keyword approach. a. True b. False 40. A treasure trove is taxable when sold or exchanged. a. True b. False 41. A Bluebook is substantial authority for purposes of the accuracy related penalty. a. True b. False 42. The primary purpose of effective tax planning is to reduce or defer the tax in the current tax year. a. True b. False 43. Deferring income to a subsequent year is considered to be tax avoidance. a. True b. False 44. Tax planning usually involves a completed transaction. a. True b. False 45. On the redesigned 2024 CPA exam, Business Law is allocated 15% to 25% of the REG section. a. True Powered by Cognero
Page 4
Name:
Class:
Date:
Chapter 02: Working With the Tax Law b. False 46. Tax changes passed as part of the Inflation Reduction Act of 2022 became part of the Internal Revenue Code of 1986. a. True b. False 47. Revenue tax measures typically originate in the Senate Finance Committee of the U.S. Congress. a. True b. False 48. Currently, the Internal Revenue Code of 1986 does not contain §§ 308, 309, and 310. This absence means these sections were repealed by Congress. a. True b. False 49. Before a tax bill can become a law, it must be approved (signed) by the President of the United States. a. True b. False 50. Normally, when the Senate version of a tax bill differs from that passed by the House, a Joint Conference Committee drafts a compromise tax bill. a. True b. False 51. Subchapter C refers to the subchapter in the Internal Revenue Code that deals with partnerships and partners. a. True b. False 52. Revenue Rulings issued by the National Office of the IRS carry the same legal force and effect as Regulations. a. True b. False 53. Revenue Rulings are first published in the Internal Revenue Bulletin. a. True b. False 54. A Temporary Regulation under § 303 of the Code would be cited as follows: Temp. Reg. § 303. a. True b. False Multiple Choice 55. The Internal Revenue Code was first codified in what year? a. 1913 b. 1923 c. 1939 Powered by Cognero
Page 5
Name:
Class:
Date:
Chapter 02: Working With the Tax Law d. 1954 56. Tax bills are handled by which committee in the U.S. House of Representatives? a. Taxation Committee b. Ways and Means Committee c. Finance Committee d. Budget Committee 57. Federal tax legislation generally originates in which of the following? a. Internal Revenue Service b. Senate Finance Committee c. House Ways and Means Committee d. Senate Floor 58. Subtitle A of the Internal Revenue Code covers which of the following taxes? a. Income taxes b. Estate and gift taxes c. Excise taxes d. Employment taxes 59. In § 212(1), the number (1) stands for the: a. Section number. b. Subsection number. c. Paragraph designation. d. Subparagraph designation. 60. Which of these is not a correct citation to the Internal Revenue Code? a. Section 211 b. Section 1222(1) c. Section 2(a)(1)(A) d. All of these choices are correct cites. 61. Which of the following is not an administrative source of tax law? a. Chief Counsel Advice (CCA) b. Notice c. Code § 199A d. General Counsel Memorandum 62. Which of the following sources has the highest tax authority? a. Revenue Ruling b. Revenue Procedure c. Regulations d. Internal Revenue Code section Powered by Cognero
Page 6
Name:
Class:
Date:
Chapter 02: Working With the Tax Law 63. Which of the following types of Regulations has the highest tax validity? a. Temporary b. Legislative c. Interpretive d. Proposed 64. Which statement is not true with respect to a Regulation that interprets the tax law? a. Issued by the U.S. Congress. b. Issued by the U.S. Treasury Department. c. Designed to provide an interpretation of the tax law. d. Carries more legal force than a Revenue Ruling. 65. In addressing the importance of a Regulation, an IRS agent must: a. Give equal weight to the Internal Revenue Code and the Regulations. b. Give more weight to the Internal Revenue Code rather than to a Regulation. c. Give more weight to the Regulation rather than to the Internal Revenue Code. d. Give less weight to the Internal Revenue Code rather than to a Regulation. 66. Which item may not be cited as a precedent? a. Regulations b. Temporary Regulations c. Technical Advice Memoranda d. U.S. District Court decision 67. What statement is not true with respect to Temporary Regulations? a. May not be cited as precedent. b. Issued with Proposed Regulations. c. Automatically expire within three years after the date of issuance. d. Found in the Federal Register. 68. What administrative release deals with a proposed transaction rather than a completed transaction? a. Letter Ruling b. Technical Advice Memorandum c. Determination Letter d. Field Service Advice 69. Which of the following indicates that a decision has precedential value for future cases? a. Stare decisis b. Golsen doctrine c. En banc d. Reenactment doctrine 70. A taxpayer who loses in a U.S. District Court may appeal to the: a. U.S. Supreme Court. Powered by Cognero
Page 7
Name:
Class:
Date:
Chapter 02: Working With the Tax Law b. U.S. Tax Court. c. U.S. Court of Federal Claims. d. Appropriate U.S. Circuit Court of Appeals. 71. A taxpayer who decides not to pay a tax deficiency, must litigate in which court? a. Appropriate U.S. Circuit Court of Appeals b. U.S. District Court c. U.S. Tax Court d. U.S. Court of Federal Claims 72. A jury trial is available in the following trial court: a. U.S. Tax Court. b. U.S. Court of Federal Claims. c. U.S. District Court. d. U.S. Circuit Court of Appeals. 73. A taxpayer may not appeal a case from which court: a. U.S. District Court. b. U.S. Circuit Court of Appeals. c. U.S. Court of Federal Claims. d. Small Case Division of the U.S. Tax Court. 74. The IRS will not acquiesce to the following tax decisions: a. U.S. District Court. b. U.S. Tax Court. c. U.S. Court of Federal Claims. d. Small Case Division of the U.S. Tax Court. 75. Which publisher offers the Standard Federal Tax Reporter? a. Thomson Reuters Checkpoint (Research Institute of America) b. Wolters Kluwer (Commerce Clearing House) c. Bloomberg BNA d. LexisNexis 76. Which is presently not a commercial tax service? a. CCH Intelliconnect b. Federal Taxes c. Thomson Reuters Checkpoint d. Tax Management Portfolios 77. Which publisher offers the United States Tax Reporter? a. Thomson Reuters Checkpoint (Research Institute of America) b. Wolters Kluwer (Commerce Clearing House) c. LexisNexis Powered by Cognero
Page 8
Name:
Class:
Date:
Chapter 02: Working With the Tax Law d. Tax Analysts 78. When searching on an electronic (online) tax service, which approach is more frequently used? a. Internal Revenue Code section approach b. Keyword approach c. Table of contents approach d. Index 79. Which is not a judicial citation? a. CCA 200909002. b. T.C. Memo 2008-289. c. 39 TCM 32 (1979). d. 592 F.Supp.18. 80. Which of the following is the lowest authority in the Federal tax law system? a. Revenue Ruling. b. Proposed Regulation. c. Interpretive Regulation. d. Revenue Procedure. 81. Which tax-related website probably gives the best policy-orientation results? a. taxalmanac.org b. irs.gov c. EY.com d. taxanalysts.com 82. Which court decision would probably carry more weight? a. Regular U.S. Tax Court decision b. Reviewed U.S. Tax Court decision c. U.S. District Court decision d. Tax Court Memorandum decision 83. Which Regulations have the force and effect of law? a. Procedural Regulations b. Finalized Regulations c. Legislative Regulations d. Interpretive Regulations 84. Which items tell taxpayers the IRS’s reaction to certain court decisions? a. Notices b. Revenue Procedures c. Revenue Rulings d. Actions on Decisions Powered by Cognero
Page 9
Name:
Class:
Date:
Chapter 02: Working With the Tax Law 85. Which is not a primary source of tax law? a. Notice 89-99, 1989-2 C.B. 422. b. Estate of Harry Holmes v. Comm., 326 U.S. 480 (1946). c. Rev. Rul. 79-353, 1979-2 C.B. 325. d. Prop. Reg. § 1.752-4T(f). 86. Which of the following statements is incorrect as it relates to the redesigned 2024 CPA exam? a. The redesigned 2024 CPA exam now has three Core sections and three Discipline sections. b. There are no longer task-based simulations on the exam. c. A candidate must select a Discipline section. d. The previous BEC section material has been spread over other sections. 87. Which of the following court decisions carries more weight? a. Federal District Court b. Second Circuit Court of Appeals c. U.S. Tax Court decision d. Small Cases Division of U.S. Tax Court 88. Which company does not publish citators for tax purposes? a. John Wiley & Sons b. Wolters Kluwer (Commerce Clearing House) c. Thomson Reuters (RIA) d. Westlaw 89. Interpret the following citation: 64-1 USTC ¶9618, aff’d in 344 F.2d 966. a. A U.S. Tax Court Small Cases Division decision that was affirmed on appeal. b. A U.S. Tax Court decision that was affirmed on appeal. c. A U.S. District Court decision that was affirmed on appeal. d. A U.S. Circuit Court of Appeals decision that was affirmed on appeal. 90. Which citation refers to a Second Circuit Court of Appeals decision? a. 40 T.C. 1018. b. 159 F.2d 848 (CA-2, 1947). c. 354 F. Supp. 1003 (D.Ct. GA. 1972). d. 914 F.2d 396 (CA-3, 1990). 91. Which citation refers to a U.S. Tax Court decision? a. Apollo Computer, Inc. v. U.S., 95-1 (USTC ¶50,015 (Fed.Cl., 1994) b. Westreco, Inc., T.C. Memo. 1992-561 (1992). c. Bausch & Lomb, Inc. v. Comm., 933 F.2d 1084 (CA-2, 1991). d. Portland Manufacturing Co. v. Comm., 35 AFTR2d 1439 (CA-9, 1975). 92. If these citations appeared after a trial court decision, which one means that the decision was overruled? a. Aff’d 633 F.2d 512 (CA-7, 1980). Powered by Cognero
Page 10
Name:
Class:
Date:
Chapter 02: Working With the Tax Law b. Rem’d 399 F.2d 800 (CA-5, 1968). c. Aff’d 914 F.2d 396 (CA-3, 1990). d. Rev’d 935 F.2d 203 (CA-5, 1991). 93. Memorandum decision of the U.S. Tax Court could be cited as: a. T.C. Memo. 1990-650. b. 68-1 USTC ¶9200. c. 37 AFTR.2d 456. d. All of these choices are correct. 94. Which is a primary source of tax law? a. Serverino R. Nico, Jr., 67 T.C. 647 (1977). b. Article by a Federal judge in Tax Notes. c. An IRS publication. d. Written determination letter. 95. Which of the following statements about a nonacquiescence is correct? a. A nonacquiescence is issued in the Federal Registrar. b. Nonacquiescences are published only for certain regular decisions of the U.S. Tax Court. c. A nonacquiescence is published in the Internal Revenue Bulletin. d. The IRS does not issue nonacquiescences to adverse decisions that are not appealed. Essay 96. What are Treasury Department Regulations? 97. Compare Revenue Rulings with Revenue Procedures. 98. How can Congressional Committee Reports be used by a tax researcher? 99. What is a Technical Advice Memorandum? 100. Discuss the advantages and disadvantages of the Small Cases Division of the U.S. Tax Court. 101. Distinguish between the jurisdiction of the U.S. Tax Court and a U.S. District Court. 102. How do treaties fit within tax sources?
Powered by Cognero
Page 11
Name:
Class:
Date:
Chapter 02: Working With the Tax Law Answer Key 1. False 2. False 3. False 4. False 5. False 6. True 7. False 8. False 9. False 10. False 11. True 12. False 13. True 14. True 15. True 16. False 17. True 18. True 19. True 20. True 21. False 22. False 23. False 24. True 25. False Powered by Cognero
Page 12
Name:
Class:
Date:
Chapter 02: Working With the Tax Law 26. False 27. False 28. True 29. False 30. False 31. False 32. True 33. True 34. False 35. True 36. False 37. True 38. False 39. True 40. False 41. True 42. False 43. True 44. False 45. True 46. True 47. False 48. False 49. False 50. True Powered by Cognero
Page 13
Name:
Class:
Date:
Chapter 02: Working With the Tax Law 51. False 52. False 53. True 54. False 55. c 56. b 57. c 58. a 59. c 60. d 61. c 62. d 63. b 64. a 65. a 66. c 67. a 68. a 69. a 70. d 71. c 72. c 73. d 74. d 75. b 76. b Powered by Cognero
Page 14
Name:
Class:
Date:
Chapter 02: Working With the Tax Law 77. a 78. b 79. a 80. b 81. d 82. b 83. c 84. d 85. d 86. b 87. b 88. a 89. c 90. b 91. b 92. d 93. a 94. a 95. c 96. Regulations are issued by the U.S. Treasury Department under authority granted by Congress. Interpretive by nature, they provide taxpayers with considerable guidance on the meaning and application of the Internal Revenue Code. Regulations may be issued in proposed, temporary, or final form. Regulations carry considerable authority as the official interpretation of tax statutes. They are an important factor to consider in complying with the tax law. Courts generally ignore Proposed Regulations. 97. Revenue Rulings are official pronouncements of the National Office of the IRS. They typically provide one or more examples of how the IRS would apply a law to specific fact situations. Like Regulations, Revenue Rulings are designed to provide interpretation of the tax law. However, they do not carry the same legal force and effect as Regulations and usually deal with more restricted problems. Regulations are approved by the Secretary of the Treasury, whereas Revenue Rulings generally are not. Powered by Cognero
Page 15
Name:
Class:
Date:
Chapter 02: Working With the Tax Law Revenue Procedures are issued in the same manner as Revenue Rulings, but deal with the internal management practices and procedures of the IRS. Familiarity with these procedures can increase taxpayer compliance and help the IRS administer the tax laws more efficiently. A taxpayer’s failure to follow a Revenue Procedure can result in unnecessary delay or, in a discretionary situation, can cause the IRS to decline to act on behalf of the taxpayer.
98. Congressional Committee Reports often explain the provisions of proposed legislation and are a valuable source of ascertaining the intent of Congress. The intent of Congress is the key to interpreting new legislation by taxpayers, especially before Regulations are published. 99. The National Office of the IRS releases Technical Advice Memoranda (TAMs) weekly. TAMs resemble letter rulings in that they give the IRS’s determination of an issue. However, they differ in several respects. Letter rulings deal with proposed transactions and are issued to taxpayers at their request. In contrast, TAMs deal with completed transactions. Furthermore, TAMs arise from questions raised by IRS personnel during audits and are issued by the National Office of the IRS to its field personnel. TAMs are often requested for questions relating to exempt organizations and employee plans. TAMs are not officially published and may not be cited or used as precedent. 100. There is no appeal from the Small Cases Division. The jurisdiction of the Small Cases Division is limited to cases involving amounts of $50,000 or less. The proceedings of the Small Cases Division are informal (e.g., no necessity for the taxpayer to be represented by a lawyer or other tax adviser). Often, special trial judges rather than Tax Court judges preside over these proceedings. The decisions of the Small Cases Division are not precedents for any other court decision and are not reviewable by any higher court. Proceedings can be more timely and less expensive in the Small Cases Division. Some of these cases can now be found on the U.S. Tax Court Internet Website. 101. The U.S. Tax Court hears only tax cases and is the most popular tax forum. The U.S. District Court hears a wide variety of nontax cases, including drug crimes and other Federal violations, as well as tax cases. Some Tax Court justices have been appointed from IRS or Treasury Department positions. For these reasons, some people suggest that the U.S. Tax Court has more expertise in tax matters. 102. The U.S signs certain tax treaties (sometimes called tax conventions) with foreign countries to render mutual assistance in tax enforcement and to avoid double taxation. Tax legislation enacted in 1988 provided that neither a tax law nor a tax treaty takes general precedence. Thus, when there is a direct conflict with the Internal Revenue Code and a treaty, the most recent item will take precedence. A taxpayer must disclose on the tax return any position where a treaty overrides a tax law. There is a $1,000 penalty per failure to disclose for individuals and a $10,000 per failure to disclose penalty for corporations.
Powered by Cognero
Page 16
Name:
Class:
Date:
Chapter 03 Tax Formula and Tax Determination An Overview of Property Transactions True / False 1. Under the Federal income tax formula for individuals, a choice must be made between claiming deductions for AGI and itemized deductions. a. True b. False 2. Under the Federal income tax formula for individuals, the determination of adjusted gross income (AGI) precedes that of taxable income (TI). a. True b. False 3. Under the income tax formula, a taxpayer must choose between deductions for AGI and the standard deduction. a. True b. False 4. After Ellie moves out of the apartment she had rented as her personal residence, she recovers her damage deposit of $1,000. The $1,000 is not income to Ellie. a. True b. False 5. An above-the-line deduction refers to a deduction for AGI. a. True b. False 6. Because they appear on Schedule 1 of Form 1040, itemized deductions are also referred to as “Schedule 1 deductions.” a. True b. False 7. A decrease in a taxpayer’s AGI could increase the amount of medical expenses that can be deducted. a. True b. False 8. An increase in a taxpayer’s AGI could decrease the amount of charitable contribution that can be claimed. a. True b. False 9. Adjusted gross income (AGI) appears on page 1 of Form 1040. a. True b. False 10. All exclusions from gross income are reported on Form 1040. a. True b. False 11. The filing status of a taxpayer (e.g., single, head of household) must be identified before the applicable standard Powered by Cognero
Page 1
Name:
Class:
Date:
Chapter 03 Tax Formula and Tax Determination An Overview of Property Transactions deduction is determined. a. True b. False 12. The additional standard deduction for age and blindness is greater for married taxpayers than for single taxpayers. a. True b. False 13. The basic and additional standard deductions both are subject to an annual adjustment for inflation. a. True b. False 14. Many taxpayers who previously itemized will start claiming the standard deduction when they purchase a home. a. True b. False 15. Once they reach age 65, many taxpayers will switch from itemizing their deductions from AGI and start claiming the standard deduction. a. True b. False 16. Claude’s itemized deductions exceed the standard deduction allowed for the current year. Under these circumstances, Claude cannot claim the standard deduction. a. True b. False 17. As opposed to itemizing deductions from AGI, the majority of individual taxpayers choose the standard deduction. a. True b. False 18. Howard, age 82, died on January 2, 2024. On his final income tax return, the full amount of the basic and additional standard deductions will be allowed, even though Howard lived for only two days during the year. a. True b. False 19. In 2024, Ed is 66 and single. If he has itemized deductions of $15,000, he should not claim the standard deduction. a. True b. False 20. Jason and Peg are married and file a joint return. Both are over 65 years of age and Jason is blind. Their standard deduction for 2024 is $32,300. a. True b. False 21. Derek, age 46, is a surviving spouse. If he has itemized deductions of $30,250 for 2024, Derek should not claim the standard deduction. Powered by Cognero
Page 2
Name:
Class:
Date:
Chapter 03 Tax Formula and Tax Determination An Overview of Property Transactions a. True b. False 22. Buddy and Hazel are ages 72 and 71, respectively, and file a joint return. If they have itemized deductions of $30,000 for 2024, they should not claim the standard deduction. a. True b. False 23. Clara, age 68, claims head of household filing status. If she has itemized deductions of $22,000 for 2024, she should claim the standard deduction. a. True b. False 24. Monique is a resident of the United States and a citizen of France. If she files a U.S. income tax return, Monique cannot claim the standard deduction. a. True b. False 25. Dan and Donna are married and file separate returns for the year. If Dan itemizes his deductions from AGI, Donna cannot claim the standard deduction. a. True b. False 26. Benjamin, age 16, is claimed as a dependent by his parents. During 2024, he earned $1,100 at a car wash. Benjamin’s standard deduction is $1,750 ($1,300 + $450). a. True b. False 27. Debby, age 18, is claimed as a dependent by her mother. During 2024, Debby earned $1,200 in interest income on a savings account. Her standard deduction is $1,750 ($1,300 + $450). a. True b. False 28. Katrina, age 16, is claimed as a dependent by her parents. During 2024, she earned $5,600 as a checker at a grocery store. Her standard deduction is $6,050 ($5,600 earned income + $450). a. True b. False 29. When separate income tax returns are filed by married taxpayers, one spouse cannot claim the other spouse as a dependent. a. True b. False 30. The deduction for personal and dependency exemptions has been suspended from 2018 through 2025. a. True b. False Powered by Cognero
Page 3
Name:
Class:
Date:
Chapter 03 Tax Formula and Tax Determination An Overview of Property Transactions 31. For the year a spouse dies, the surviving spouse is considered married for the entire year for income tax purposes. a. True b. False 32. In determining whether the gross income test is met for determining dependency status, only the taxable portion of a scholarship is considered. a. True b. False 33. Francisco and Maria divorced in December 2024. As they were married for more than one-half of the year, they are considered as married for 2024. a. True b. False 34. Albert buys his mother a TV. For purposes of meeting the support test, Albert cannot include the cost of the TV. a. True b. False 35. If an individual does not spend funds that have been received from another source (e.g., interest on municipal bonds), the unexpended amounts are not considered for purposes of the support test. a. True b. False 36. Using borrowed funds from a mortgage on her home, Leah provides 52% of her own support, and her sons furnished the rest. Leah can be claimed as a dependent under a multiple support agreement. a. True b. False 37. Roy and Linda divorced in 2023. The divorce decree awards custody of their children (all under age 17) to Linda but is silent as to who is entitled to treat them as dependents for purposes of claiming the child tax credit. If Roy furnished more than half of their support, he can claim the child tax credit for them in 2024. a. True b. False 38. In 2024, Hal furnishes more than half of the support of his ex-spouse and her father, both of whom live with him. The divorce occurred in 2023. Hal may claim the father-in-law and the ex-spouse as dependents. a. True b. False 39. After her divorce, Hope continues to support her ex-spouse’s sister, Cindy, who does not live with her. Hope can claim Cindy as a dependent. a. True b. False 40. Darren, age 20 and not disabled, earns $5,100 during 2024. Darren’s parents cannot claim him as a dependent unless he is a full-time student. a. True Powered by Cognero
Page 4
Name:
Class:
Date:
Chapter 03 Tax Formula and Tax Determination An Overview of Property Transactions b. False 41. Lucas, age 17 and single, earns $6,000 during 2024. His parents cannot claim him as a dependent if he does not live with them. a. True b. False 42. Sarah furnishes more than 50% of the support of her son and daughter-in-law who live with her. If the son and daughter-in-law file a joint return, Sarah cannot claim them as dependents. a. True b. False 43. Kim, a resident of Oregon, supports his parents who are residents of Canada but citizens of Korea. Kim can claim a dependent tax credit for his parents. a. True b. False 44. In determining the filing requirement based on gross income received, both additional standard deductions (i.e., age and blindness) are taken into account. a. True b. False 45. For dependents who have income, special filing requirements apply. a. True b. False 46. A taxpayer who itemizes completes Schedule A (Form 1040). a. True b. False 47. An individual taxpayer uses a fiscal year of March 1 to February 28. The due date of this taxpayer’s Federal income tax return is May 15 of each tax year. a. True b. False 48. Married taxpayers who file a joint return cannot later (i.e., after the filing due date) switch to separate returns for that year. a. True b. False 49. Married taxpayers who file separately cannot later (i.e., after the due date for filing) change to a joint return. a. True b. False 50. Surviving spouse filing status begins in the year in which the deceased spouse died. a. True Powered by Cognero
Page 5
Name:
Class:
Date:
Chapter 03 Tax Formula and Tax Determination An Overview of Property Transactions b. False 51. In January 2024, Jake’s spouse dies and he does not remarry. For tax year 2024, Jake may not be able to use the filing status available to married persons filing joint returns. a. True b. False 52. For tax purposes, married persons filing separate returns are treated the same as single taxpayers. a. True b. False 53. Katelyn is divorced and maintains a household in which she and her daughter, Crissa, live. Crissa, age 22, earns $11,000 during 2024 as a model. Katelyn does not qualify for head of household filing status. a. True b. False 54. Ed is divorced and maintains a home in which he and a dependent friend live. Ed does not qualify for head of household filing status. a. True b. False 55. In terms of income tax consequences, abandoned spouses are treated the same way as married persons filing separate returns. a. True b. False 56. As an abandoned spouse is treated as not married and has one or more dependent children, the abandoned spouse qualifies for the standard deduction available to head of household. a. True b. False 57. Currently, the top income tax rate in effect is not the highest it has ever been. a. True b. False 58. In any given year, that year's Tax Tables are released by the IRS before the Tax Rate Schedules for that year. a. True b. False 59. The kiddie tax does not apply to a child whose earned income is more than one-half of the child's support. a. True b. False 60. When the kiddie tax applies, the child need not file an income tax return because the child's income will be reported on the parents’ return. a. True Powered by Cognero
Page 6
Name:
Class:
Date:
Chapter 03 Tax Formula and Tax Determination An Overview of Property Transactions b. False 61. Once a child reaches age 19, the kiddie tax no longer applies. a. True b. False 62. In 2024, a child who has unearned income of $2,600 or less cannot be subject to the kiddie tax. a. True b. False 63. A child who is married cannot be subject to the kiddie tax. a. True b. False Multiple Choice 64. In terms of the tax formula applicable to individual taxpayers, which of the following statements is correct? a. In arriving at taxable income, a taxpayer must choose between the standard deduction and itemized deductions. b. In arriving at AGI, personal and dependency exemptions are subtracted from gross income. c. In arriving at taxable income, a taxpayer must choose between the standard deduction and the deduction for qualified business income. d. The tax formula does not apply if a taxpayer elects to claim the standard deduction. 65. Regarding the tax formula and its relationship to Form 1040, which of the following statements is correct? a. Most exclusions from gross income are reported on Schedule 2 of Form 1040. b. An above-the-line deduction refers to a deduction from AGI. c. A “Schedule 1 deduction” refers to a deduction for AGI. d. A taxpayer's AGI amount appears both at the bottom of page 1 and at the top of page 2 of Form 1040. 66. Which of the following items is deductible? a. Substantiated gambling losses (not in excess of gambling winnings) from state lottery. b. Contributions to mayor’s reelection campaign. c. Speeding ticket incurred while on business. d. Premiums paid on personal life insurance policy. 67. Which of the following is a deduction for AGI? a. State and local sales taxes. b. Interest on home mortgage. c. Charitable contributions. d. Unreimbursed moving expenses of an employee (who is in the military). 68. Which of the statements regarding the standard deduction is correct? a. Some taxpayers may qualify for two types of standard deductions. b. The standard deduction is not available to taxpayers who are dependents. Powered by Cognero
Page 7
Name:
Class:
Date:
Chapter 03 Tax Formula and Tax Determination An Overview of Property Transactions c. The standard deduction may be taken as a for AGI deduction. d. The basic standard deduction is indexed for inflation but the additional standard deduction is not. 69. Which of the following is a deduction for AGI? a. Contributions to a traditional Individual Retirement Account. b. Child support payments. c. State income tax payments. d. Medical expenses. 70. Which of the following statements relating to the standard deduction is correct? a. If a taxpayer dies during the year, the standard deduction must be prorated. b. If a taxpayer is claimed as a dependent of another, the additional standard deduction is allowed in full (i.e., no adjustment is necessary). c. If spouses file separate returns, both must claim the standard deduction (rather than itemize their deductions from AGI). d. If a taxpayer is claimed as a dependent of another, no basic standard deduction is allowed. 71. During 2024, Hiroto had the following transactions: Salary Bank loan (proceeds used to buy personal auto) Alimony paid (divorce was finalized in 2010). Child support paid Gift from aunt
$50,000 10,000 12,000 6,000 20,000
Hiroto’s AGI is: a. $32,000. b. $38,000. c. $44,000. d. $56,000. 72. During 2024, Enrique had the following transactions: Salary Interest income on Xerox bonds Inheritance from uncle Contribution to traditional IRA Loss on sale of stock
$70,000 3,000 40,000 6,500 2,500
Enrique’s AGI is: a. $64,000. b. $66,500. c. $70,500. d. $104,000. Powered by Cognero
Page 8
Name:
Class:
Date:
Chapter 03 Tax Formula and Tax Determination An Overview of Property Transactions 73. During 2024, Sandeep had the following transactions: Salary Interest income on City of Baltimore bonds Damages for personal injury (car accident) Punitive damages (same car accident) Cash dividends from Chevron Corporation stock
$ 80,000 1,000 100,000 200,000 7,000
Sandeep’s AGI is: a. $187,000. b. $285,000. c. $287,000. d. $387,000. 74. In 2024, Nai-Yu had the following transactions: Salary Gain from a stock investment Moving expense to change jobs Receipt of repayment of $20,000 loan she made to her sister in 2015 (includes no interest) State income taxes
$90,000 4,000 (11,000) 20,000 (5,000)
Nai-Yu’s AGI is: a. $103,000. b. $98,000. c. $94,000. d. $83,000. 75. Ayla, age 17, is claimed by her parents as a dependent. During 2024, she had interest income from a bank savings account of $2,000 and income from a part-time job of $4,200. Ayla’s taxable income is: a. $4,200 – $4,600 = $0. b. $6,200 – $14,600 = $0. c. $6,200 – $4,650 = $1,550. d. $6,200 – $4,200 = $2,000. 76. Tony, age 15, is claimed as a dependent by his grandmother. During 2024, he had interest income from Boeing Corporation bonds of $1,000 and earnings from a part-time job of $900. Tony’s taxable income is: a. $1,900. b. $1,900 – $14,600 = $0. c. $1,900 – $1,350 = $550. d. $1,900 – $1,300 = $600. 77. Hannah, age 70 and single, is claimed as a dependent by her daughter. During 2024, Hannah had interest income of $2,650 and $950 of earned income from babysitting. Hannah’s taxable income is: a. $0. Powered by Cognero
Page 9
Name:
Class:
Date:
Chapter 03 Tax Formula and Tax Determination An Overview of Property Transactions b. $250. c. $2,200. d. $2,300. 78. Kyle and Liza are married and under 65 years of age. During 2024, they furnish more than half of the support of their 19-year old daughter, Kendra, who lives with them. She graduated from high school in May 2023. Kendra earns $15,000 from a part-time job, most of which she sets aside for future college expenses. Kyle and Liza also provide more than half of the support of Kyle’s cousin, who lives with them. Liza’s father, who died on January 3, 2024, at age 90, has for many years qualified as their dependent. How many dependents can Kyle and Liza claim? a. None b. One c. Two d. Three 79. Evan and Eileen Carter are married and file a joint return for 2024. Both are under 65 years of age. They provide more than half of the support of their daughter, Pamela (age 25), who is a full-time medical student. Pamela receives a $5,000 scholarship covering her tuition at college. Evan and Eileen furnish all of the support of Belinda (Evan’s grandmother), who is age 80 and lives in a nursing home. They also support Peggy (age 66), who is a friend of the family and lives with them. How many dependents may the Carters claim? a. None b. One c. Two d. Three 80. In which of the following situations may the individual not be claimed as a dependent of the taxpayer? a. A former spouse who lives with the taxpayer (divorce took place last year). b. A stepmother who does not live with the taxpayer. c. A married daughter who lives with the taxpayer. d. A half-brother who does not live with the taxpayer and is a citizen and resident of Honduras. 81. A qualifying child cannot include: a. A married son who files a joint return. b. A daughter who is away at college. c. A brother who is 28 years of age and disabled. d. A grandmother. 82. Ellen, age 12, lives in the same household with her father, grandfather, and uncle. The cost of maintaining the household is provided by her grandfather (40%) and her uncle (60%). Disregarding tie-breaker rules, Ellen is a qualifying child as to: a. Only her father. b. Only her grandfather and uncle. c. Only her uncle. d. All parties involved (i.e., father, grandfather, and uncle). 83. Millie, age 80, is supported during the current year as follows: Powered by Cognero
Page 10
Name:
Class:
Date:
Chapter 03 Tax Formula and Tax Determination An Overview of Property Transactions
Weston (a son) Faith (a daughter) Jake (a cousin) Brayden (unrelated close family friend)
Percent of Support 20% 35% 25% 20%
During the year, Millie lives in an assisted living facility. Under a multiple support agreement, indicate which parties can qualify to claim Millie as a dependent. a. Weston and Faith. b. Faith. c. Weston, Faith, Jake, and Brayden. d. Faith, Jake, and Brayden. 84. The Hutters filed a joint return for 2024. They provide more than 50% of the support of Carla, Ellie, and Aaron. Carla (age 18) is a cousin and earns $2,800 from a part-time job. Ellie (age 25) is their daughter and is a full-time law student. She received a $7,500 scholarship for tuition from her law school. Aaron is a brother who is a citizen of Israel but resides in France. Carla and Ellie live with the Hutters. How many dependents can the Hutters claim? a. None b. One c. Two d. Three 85. Regarding the rules applicable to filing of income tax returns, which of the following is an incorrect statement: a. Married persons who file joint returns cannot later (after the due date of the return) substitute separate returns. b. Married persons who file separate returns can later (after the due date of the return) substitute a joint return. c. The usual test as to when a taxpayer must file a return is based on the total of the following: personal exemption + basic standard deduction + both additional standard deductions. d. Special filing requirement rules exist for taxpayers who are claimed as dependents of another. 86. Kyle, whose spouse died in December 2021, filed a joint tax return for 2021. He did not remarry but has continued to maintain his home in which his two dependent children live. What is Kyle’s filing status in 2024? a. Head of household b. Surviving spouse c. Single d. Married filing separately 87. Kiran, whose spouse died in December 2023, maintains a household in which her dependent mother lives. Which of the following is her filing status for the tax year 2024? (Note: Kiran is the executor of her spouse’s estate.) a. Single b. Married, filing separately c. Surviving spouse d. Head of household 88. Which of the following taxpayers may file as a head of household in 2024? •
Marco provides all of the support for his mother, Sienna, who lives by herself in an apartment in Fort Lauderdale.
Powered by Cognero
Page 11
Name:
Class:
Date:
Chapter 03 Tax Formula and Tax Determination An Overview of Property Transactions Marco pays the rent and other expenses for the apartment and properly claims his mother as a dependent. •
Tammy provides over one-half the support for her 18-year old brother, Dan. He earned $5,200 in 2024 working at a fast-food restaurant and is saving his money to attend college in 2025. Dan lives in Tammy’s home.
•
Juan’s spouse left him late in December 2023. No legal action was taken, and Juan has not heard from his spouse in 2024. Juan supported his 6-year-old son, who lived with him throughout 2024.
a. Marco only b. Tammy only c. Marco and Juan only d. Marco, Tammy, and Juan 89. Natalie is married to Chad, who abandoned her in early June of 2024. She has not seen or communicated with him since then. She maintains a household in which she and her two dependent children live. Which of the following statements about Natalie’s filing status in 2024 is correct? a. Natalie can use the rates for single taxpayers. b. Natalie can file a joint return with Chad. c. Natalie can file as a surviving spouse. d. Natalie can file as a head of household. 90. Jeremy is married to Amy, who abandoned him in 2023. He has not seen or communicated with her since April of that year. He maintains a household in which their son, Evan, lives. Evan is age 25 and earns over $6,000 each year. For tax year 2024, Jeremy’s filing status is: a. Married, filing jointly. b. Head of household. c. Married, filing separately. d. Surviving spouse. 91. Regarding the Tax Tables related to the Federal income tax, which of the following statements is correct? a. For any one year, the Tax Tables are issued by the IRS after the Tax Rate Schedules. b. The Tax Tables will always yield the same amount of tax as the Tax Rate Schedules. c. Taxpayers can elect as to whether they use the Tax Tables or the Tax Rate Schedules. d. The Tax Tables can be used by an estate but not by a trust. 92. In which of the following situations will the kiddie tax not apply in 2024? a. The child is married but does not file a joint return. b. The child has unearned income of $2,600 or less. c. The child has unearned income that exceeds more than half of his (or her) support. d. The child is under age 24 and a full-time student. 93. Which the following is a correct statement relating to the kiddie tax in 2024? a. If the parents are divorced, the income of the noncustodial parent is used to determine the allocable parental tax. b. The components for the application of the kiddie tax are not subject to adjustment for inflation. Powered by Cognero
Page 12
Name:
Class:
Date:
Chapter 03 Tax Formula and Tax Determination An Overview of Property Transactions c. If the kiddie tax applies, the parents must include the income of the child on their own income tax return. d. The kiddie tax does not apply if both parents of the child are deceased. Matching Regarding classification as a dependent, classify each statement in one of the four categories: a. Could be a qualifying child. b. Could be a qualifying relative. c. Could be either a qualifying child or a qualifying relative. d. Could be neither a qualifying child nor a qualifying relative. 94. A son lives with taxpayer and earns $3,000. 95. A daughter who does not live with taxpayer. 96. A granddaughter, who lives with taxpayer, is 19 years old, earns $6,000, and is not a full-time student. 97. An uncle who lives with taxpayer. 98. A nephew who lives with taxpayer. 99. A niece who lives with taxpayer, is 20 years old, earns $6,000, and is a full-time student. 100. A half-brother who lives with taxpayer. 101. A cousin who does not live with taxpayer. 102. A stepdaughter who does not live with taxpayer. 103. A daughter-in-law who lives with taxpayer. 104. A family friend who is supported by and lives with the taxpayer. 105. An ex-spouse (divorce occurred last year) who lives with taxpayer. Match the statements that relate to each other. Note: Some choices may be used more than once. a. Not available to 65-year old taxpayer who itemizes. b. Exception for U.S. citizenship or residency test (for dependency exemption purposes). c. Largest basic standard deduction available to a dependent who has no earned income in 2024. d. Considered for dependency purposes. e. Qualifies for head of household filing status. f. A child (age 15) who is a dependent and has only earned income. g. Considered in applying gross income test (for dependency exemption purposes). h. Not considered in applying the gross income test (for dependency exemption purposes). i. Unmarried taxpayer who can use the same tax rates as married persons filing jointly. j. Exception to the support test (for dependency exemption purposes). k. A child (age 16) who is a dependent and has only unearned income of $4,500. Powered by Cognero
Page 13
Name:
Class:
Date:
Chapter 03 Tax Formula and Tax Determination An Overview of Property Transactions l. No correct match provided. 106. Surviving spouse 107. Scholarship funds for tuition 108. Additional standard deduction 109. Scholarship funds for room and board 110. Abandoned spouse 111. Basic standard deduction 112. Resident of Canada or Mexico 113. Age of a qualifying child 114. $1,300 115. Kiddie tax applies 116. Kiddie tax does not apply 117. Multiple support agreement Match the statements that relate to each other. Note: Choice i. may be used more than once. a. Available to a 70-year-old father claimed as a dependent by his son. b. Equal to tax liability divided by taxable income. c. The highest income tax rate applicable to a taxpayer. d. Not eligible for the standard deduction. e. No one qualified taxpayer meets the support test. f. Taxpayer’s ex-spouse does not qualify. g. A dependent child (age 18) who has only unearned income. h. Highest applicable rate is 37%. i. No correct match provided. 118. Multiple support agreement 119. Kiddie tax may be imposed 120. Nonresident alien 121. Tax Rate Schedule 122. Average income tax rate 123. Marginal income tax rate Powered by Cognero
Page 14
Name:
Class:
Date:
Chapter 03 Tax Formula and Tax Determination An Overview of Property Transactions 124. Additional standard deduction 125. Relationship test (for dependency exemption purposes) Subjective Short Answer 126. Ashley had the following transactions during 2024: Salary Interest income on bonds— Issued by City of Nashville Issued by Chevron Corporation Alimony received (divorce finalized in 2015) Child support received (divorce finalized in 2015) City and state income taxes paid Bank loan obtained to pay for car purchase
$90,000 $4,000 5,000
9,000 5,000 20,000 (5,000) 28,000
What is Ashley’s AGI for 2024? 127. Kohsei had the following transactions for 2024: Salary Alimony paid (divorce finalized in 2016) Recovery from car accident— Personal injury damages Punitive damages Gift from parents Property sales— Loss on sale of boat (used for pleasure and owned 4 years) Gain on sale of ADM stock (held for 10 months as an investment)
$ 80,000 (4,000) $40,000 70,000
($4,000) 4,000
110,000 20,000
(–0–)
What is Kohsei’s AGI for 2024?
128. In 2024 Tom is single and has AGI of $50,000. He is age 70, has no dependents, and has itemized deductions (i.e., from AGI) of $7,000. Determine Tom’s taxable income for 2024. 129. Taylor, who works for a public accounting firm, had the following transactions for 2024: Salary Moving expenses incurred to change jobs Inheritance received from deceased uncle Life insurance proceeds from policy on uncle’s life (Taylor was named the beneficiary) Cash prize from church raffle Payment of church pledge Powered by Cognero
$ 85,000 (12,000) 300,000 200,000 3,000 (4,500) Page 15
Name:
Class:
Date:
Chapter 03 Tax Formula and Tax Determination An Overview of Property Transactions What is Taylor’s AGI for 2024? 130. Michaella, age 23, is a full-time law student and is claimed by her parents as a dependent. During 2024, she received $1,500 interest income from a bank savings account and $14,450 from a part-time job. What is Michaella’s taxable income for 2024? 131. Warren, age 17, is claimed as a dependent by his father. In 2024, Warren has dividend income of $1,500 and earns $400 from a part-time job. a.
What is Warren’s taxable income for 2024?
b.
Suppose that Warren earned $1,200 (not $400) from the part-time job. What is his taxable income for 2024?
132. Helen, age 74 and a widow, is claimed as a dependent by her daughter. For 2024, Helen had income as follows: $2,500 interest on municipal bonds; $14,000 Social Security benefits; $3,000 income from a part-time job; and $2,800 dividends on stock investments. What is Helen’s taxable income for 2024? 133. Pedro is married to Consuela who lives with him. Both are U.S. citizens and residents of Nebraska. Pedro furnishes all of the support of his parents who are citizens and residents of the United States. He also furnishes all of the support of Consuela’s parents who are citizens and residents of El Salvador. Consuela has no gross income for the year. If Pedro and Consuela file as married persons filing jointly, how many dependents can they claim? 134. Hunter (age 68) and his wife Jenelle (age 70) file a joint return. They furnish all of the support of Luther (Hunter’s 90-year old father) who lives with them. In 2024, the couple received $6,000 of interest income on City of Chicago bonds and interest and dividend income on corporate stocks and bonds of $55,000. Compute Hunter and Jenelle’s taxable income for 2024. 135. In 2024, Ashley earns a salary of $63,000, has a gain on the sale of stock of $3,000, and receives interest income of $5,000. Her spouse died in 2023. Ashley has a dependent son, Tyrone, who is age eight. Her itemized deductions are $9,000. a. b.
What is her filing status? Calculate Ashley’s taxable income for 2024.
136. Black, Inc., is a domestic corporation with the following balance sheets for book and tax purposes at the end of the year. Assume a 21% corporate tax rate and no need for a valuation allowance. Tax Debit/(Credit) Assets Cash Accounts Receivable Buildings Accumulated Depreciation Furniture & Fixtures Accumulated Depreciation Total Assets Powered by Cognero
$
300 5,000 300,000 (150,000) 40,000 (21,000) $174,300
Book Debit/(Credit) $ 300 5,000 300,000 (80,000) 40,000 (15,000) $250,300 Page 16
Name:
Class:
Date:
Chapter 03 Tax Formula and Tax Determination An Overview of Property Transactions
Liabilities Accrued Litigation Expense Note Payable Total Liabilities Stockholders’ Equity Paid in Capital Retained Earnings Total Liabilities and Stockholders’ Equity
$ –0– (116,000) ($116,000)
($ 27,000) (116,000) ($143,000)
($ 1,000) (57,300)
($ 1,000) (106,300)
($174,300)
($250,300)
Black, Inc.’s, gross deferred tax assets and liabilities at the beginning of Black’s year are as follows: Accrued litigation expense Subtotal Applicable tax rate Gross deferred tax asset Building – Accumulated depreciation Furniture & fixtures – Accumulated depreciation Subtotal Applicable tax rate Gross deferred tax liability
Beginning of Year $20,000 $20,000 × 21% $ 4,200 ($61,000) (3,000) ($64,000) × 21% ($13,440)
Black, Inc.’s, book income before tax is $6,000. Black records two permanent book-tax differences. It earned $250 in tax-exempt municipal bond interest, and it incurred $500 in nondeductible entertainment expense. Determine the change in Black’s deferred tax assets for the current year. Essay 137. The Deweys are expecting to save on their taxes for 2024. Not only have both incurred large medical expenses, but both reached age 65. During the year, they also recognized a $30,000 loss on stock they sold which was purchased as an investment several years ago. Are the Deweys under a mistaken understanding regarding their tax position? Explain. 138. Deductions for AGI are often referred to as “above-the-line” or “Schedule 1” deductions. Explain. 139. Adjusted gross income (AGI) sets the ceiling or the floor for certain deductions. Explain and illustrate what this statement means. 140. During the current year, Doris received a large gift from her parents and a sizeable inheritance from an uncle. She also paid premiums on an insurance policy on her life. Doris is confused because she cannot find any place on Form 1040 to report these items. Explain. Powered by Cognero
Page 17
Name:
Class:
Date:
Chapter 03 Tax Formula and Tax Determination An Overview of Property Transactions 141. Mel is not quite sure whether an expenditure he made is a deduction for AGI or a deduction from AGI. Since he plans to choose the standard deduction option for the year, does the distinction matter? Explain. 142. When filing their Federal income tax returns, the Youngs always claimed the standard deduction. After they purchased a home, however, they started to itemize their deductions from AGI. a.
Explain the reason for the change.
b.
Suppose they purchased the home in November 2023, but did not start itemizing until tax year 2024. Why the delay as to itemizing?
143. The Dargers have itemized deductions that exceed the standard deduction. However, when they file their joint return, they choose the standard deduction option. a.
Is this proper procedure?
b.
Aside from a possible misunderstanding as to the tax law, what might be the reason for the Darger’s choice?
144. Under what circumstances, if any, may an ex-spouse be claimed as a dependent? 145. In resolving qualified child status for dependency purposes, why are tiebreaker rules necessary? Can these rules be waived? 146. In satisfying the support test and the gross income test for claiming someone as a dependent, a scholarship received by the person being claimed is handled the same way for each test. Do you agree or disagree with this statement? Why? 147. In order to claim someone other than a qualifying child as a dependent, a taxpayer must meet the support test. Generally, this is done by furnishing more than 50% of a dependent’s support. What exceptions exist, if any, where the support furnished need not be more than 50%? 148. In applying the gross income test in the case of dependents that are married, could the application of community property laws have any effect? Explain. 149. In meeting the criteria of a qualifying child for dependency purposes, when if ever, might the child’s income become relevant? 150. Lena is 66 years of age, single, and blind and is not claimed as a dependent. How much gross income must she have before she is required to file a Federal income tax return for 2024? 151. Contrast the tax consequences resulting from the following filing status situations: a.
Married filing jointly versus married filing separately.
b.
Married filing separately versus single.
c.
Married filing separately versus abandoned spouse status.
Powered by Cognero
Page 18
Name:
Class:
Date:
Chapter 03 Tax Formula and Tax Determination An Overview of Property Transactions 152. Jayden and Dean Harper are married and use the calendar year for tax purposes. a.
If the Harpers file a joint return for 2024, can they later switch to separate returns for 2024?
b.
If the Harpers file separate returns for 2024, can they later switch to a joint return for 2024?
153. When married persons file a joint return, joint and several liability results. What does this mean? 154. Regarding head of household filing status, comment on the following: a.
A taxpayer qualifies even though he maintains a household which he and the dependent do not share.
b.
A taxpayer does not qualify even though the person sharing the household is a dependent.
c.
The usual eventual filing status of a surviving spouse.
155. The major advantage of being classified as an abandoned spouse is that the taxpayer is treated for tax purposes as being single and not married. This means that an abandoned spouse can use the more favorable tax rates available to single persons than those available to married persons filing separately. Comment on the accuracy of this conclusion. 156. For the past few years, Corey’s filing status has been as follows: 2020 (married/joint); 2021 (married/separate); 2022 (surviving spouse); 2023 (surviving spouse); and 2024 (head of household). Explain what probably has happened. 157. For 2024, Tom has taxable income of $48,005. When he uses the Tax Tables, Tom finds that his tax liability is higher than under the Tax Rate Schedules. a.
Why is there a difference?
b.
Can Tom use the Tax Rate Schedules?
158. List at least three exceptions to the application of the kiddie tax. 159. The Martins have a teenage son who has become an accomplished bagpiper. With proper promotion and scheduling, the son has good income potential by charging for his services at special events (particularly funerals). However, the Martins are fearful that the income could generate a kiddie tax and cause them the loss of a dependent tax credit. Are the Martins’ concerns justified? Explain. 160. After paying down the mortgage on their personal residence, the Hills have found that their itemized deductions for each year are always slightly less than the standard deduction option. a.
Explain what has happened.
b.
What remedy do you suggest?
161. Mandeep’s parents live in another state and she cannot claim them as her dependents. If Mandeep pays their medical expenses, can she derive any tax benefit from doing so? Explain.
Powered by Cognero
Page 19