Individual Taxation Practice Questions
Course Introduction
Individual Taxation is a comprehensive course that explores the principles and applications of federal income tax laws as they pertain to individuals. Students will examine topics such as gross income, deductions, exemptions, credits, and the filing status of taxpayers. The course emphasizes tax planning strategies, compliance requirements, and the practical aspects of preparing individual tax returns. Through case studies, current tax code analysis, and real-world scenarios, students develop a foundational understanding of how tax regulations impact individuals, equipping them with the skills necessary for personal financial management and future professional roles in accounting or finance.
Recommended Textbook
South Western Federal Taxation 2015 Individual Income Taxes 38th Edition by William H. Hoffman
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Chapter 1: An Introduction to Taxation and Understanding
the Federal Tax Law
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Sample Questions
Q1) 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.
E)None of these.
Answer: C
Q2) 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
Answer: True
Q3) A deduction for qualified tuition paid to obtain higher education.
A)Economic considerations
B)Social considerations
C)Equity considerations
Answer: A
Page 3
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Chapter 2: Working With the Tax Law
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Sample Questions
Q1) Federal tax legislation generally originates in what body?
A)Internal Revenue Service
B)Senate Finance Committee
C)House Ways and Means Committee
D)Senate Floor
E)None of these
Answer: C
Q2) Which of the following types of Regulations has the highest tax validity?
A)Temporary
B)Legislative
C)Interpretive
D)Procedural
E)None of these
Answer: B
Q3) The primary purpose of effective tax planning is to reduce or defer the tax in the current tax year.
A)True
B)False
Answer: False
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Page 4
Chapter 3: Tax Formula and Tax Determination;an
Overview of Property Transactions
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Sample Questions
Q1) 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.
Answer: a.If the household is that of a dependent parent,it need not be taxpayer's household.
b.If the household does not include a dependent that meets the relationship test,head of household filing status is unavailable.An example would be a taxpayer who maintains a household for a cousin who lives with her.Even if the cousin is a dependent under the member of the household test,taxpayer does not qualify for head of household filing status.A cousin does not satisfy the relationship test.
c.Once the two-year surviving spouse period terminates,the taxpayer usually will qualify for head of household filing status.
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Chapter 4: Gross Income: Concepts and Inclusions
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Sample Questions
Q1) Norma's income for 2014 is $27,000 from part-time work and $9,000 of Social Security benefits.Norma is not married.A portion of her Social Security benefits must be included in her gross income.
A)True
B)False
Q2) Paula transfers stock to her former spouse,Fred.The transfer is pursuant to a divorce agreement.Paula's cost of the stock was $75,000 and its fair market value on the date of the transfer is $95,000.Fred later sells the stock for $100,000.Fred's recognized gain from the sale of the stock is $5,000.
A)True
B)False
Q3) In 2005,Terry purchased land for $150,000.In 2014,Terry received $10,000 from a local cable television company in exchange for Terry allowing the company to run an underground cable across Terry's property.Terry is not required to recognize income from receiving the $10,000 because it was a return of his capital invested in the land.
A)True
B)False
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Page 6
Chapter 5: Gross Income: Exclusions
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Sample Questions
Q1) When Betty was diagnosed as having a terminal illness,she sold her life insurance policy to Insurance Purchase,Inc. ,a company that is licensed to invest in these types of contracts.Betty sold the policy for $32,000 and Insurance Purchase,Inc. ,became the beneficiary.She had paid total premiums of $19,000.Betty died 8 months after the sale.Insurance Purchase,Inc. ,collected $50,000 on the policy.The company had paid additional premiums of $4,000 on the policy.Betty is not required to recognize a $13,000 gain from the sale of her life insurance policy and Insurance Purchase,Inc. ,is required to recognize a $14,000 gain from the insurance policy.
A)True
B)False
Q2) Mel was the beneficiary of a $45,000 group term life insurance policy on his wife.His wife's employer paid all of the premiums on the policy.Mel used the life insurance proceeds to purchase a United States Government bond,which paid him $2,500 interest during the current year.Mel's Federal gross income from the above is $2,500.
A)True
B)False
Q3) What Federal income tax benefits are provided for college students?
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Page 7
Chapter 6: Deductions and Losses: in General
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Sample Questions
Q1) Which of the following is not deductible?
A)Moving expenses in excess of reimbursement.
B)Tax return preparation fees of an individual.
C)Expenses incurred associated with investments in stocks and bonds.
D)Allowable hobby expenses in excess of hobby income.
E)None of these.
Q2) Martha rents part of her personal residence in the summer for 3 weeks for $3,000.Anne rents all of her personal residence for one week in December for $2,500.Anne is not required to include the $2,500 in her gross income whereas Martha is required to include the $3,000 in her gross income.
A)True
B)False
Q3) For a vacation home to be classified in the personal/rental use category,what attributes must be present?
Q4) How can an individual's consultation with a lawyer be classified as a deduction for AGI in some cases and a deduction from AGI in other instances?
Q5) Under what circumstance can a bribe be deducted?
Q6) Are there any circumstances under which lobbying expenditures are deductible?
Q7) What losses are deductible by an individual taxpayer?
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Chapter 7: Deductions and Losses: Certain Business
Expenses and Losses
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Sample Questions
Q1) A cash basis taxpayer must include as income the proceeds from the sale of an account receivable to a collection agency.
A)True
B)False
Q2) Research and experimental expenditures do not include the cost of consumer surveys.
A)True
B)False
Q3) Jed is an electrician.Jed and his wife are accrual basis taxpayers and file a joint return.Jed wired a new house for Alison and billed her $15,000.Alison paid Jed $10,000 and refused to pay the remainder of the bill,claiming the fee to be exorbitant.Jed took Alison to Small Claims Court for the unpaid amount and was awarded a $2,000 judgment.Jed was able to collect the judgment but not the remainder of the bill from Alison.What amount of loss may Jed deduct in the current year?
A)$0
B)$2,000
C)$3,000
D)$5,000
E)None of these
Page 9
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Chapter 8: Depreciation, cost Recovery, amortization, and Depletion
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Sample Questions
Q1) The statutory dollar cost recovery limits under § 280F for passenger automobiles are changed if midquarter cost recovery is used.
A)True
B)False
Q2) On June 1,2014,Red Corporation purchased an existing business.With respect to the acquired assets of the business,Red allocated $300,000 of the purchase price to a patent.The patent will expire in 20 years.Determine the total amount that Red may amortize for 2014 for the patent.
A)$0
B)$1,667
C)$11,667
D)$35,000
E)None of these
Q3) Cost depletion is determined by multiplying the depletion cost per unit by the number of units sold.
A)True
B)False
Q4) Discuss the difference between the half-year convention and the mid-quarter convention.
To
Chapter 9: Deductions: Employee and
Self-Employed-Related Expenses
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Sample Questions
Q1) The work-related expenses of an independent contractor will be subject to the 2%-of-AGI floor.
A)True
B)False
Q2) When using the automatic mileage method,which,if any,of the following expenses also can be claimed?
A)Engine tune-up.
B)Parking.
C)Interest on automobile loan.
D)MACRS depreciation.
E)None of these.
Q3) After the automatic mileage rate has been set by the IRS for a year,it cannot later be changed by the IRS.
A)True
B)False
Q4) Tickets to a theater performance or sporting event can be treated as either business entertainment or a business gift if the taxpayer does not accompany the client to the event.
A)True B)False
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Chapter 10: Deductions and Losses: Certain Itemized
Deductions
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Sample Questions
Q1) Emily,who lives in Indiana,volunteered to travel to Louisiana in March to work on a home-building project for Habitat for Humanity (a qualified charitable organization).She was in Louisiana for three weeks.She normally makes $500 per week as a carpenter's assistant and plans to deduct $1,500 as a charitable contribution.In addition,she incurred the following costs in connection with the trip: $600 for transportation,$1,200 for lodging,and $400 for meals.What is Emily's deduction associated with this charitable activity?
A)$600
B)$1,200
C)$1,800
D)$2,200
E)$3,700
Q2) Shirley pays FICA (employer's share)on the wages she pays her maid to clean and maintain Shirley's personal residence.The FICA payment is not deductible as an itemized deduction.
A)True
B)False
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Page 12
Chapter 11: Investor Losses
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Sample Questions
Q1) Matt has three passive activities and has at-risk amounts in excess of $100,000 for each.During the year,the activities produced the following income (losses).
\(\begin{array}{lr}
\text { Activity A } & (\$ 60,000) \\
\text { Activity B } & (40,000) \\
\text { Activity C } & 75,000 \\
\text { Net passive loss } & (\$ 25,000) \\
\text { Matt's suspended losses are as follows: } & \end{array}\)
A)\(\$ 25,000 \text { is allocated to } C \text {, } \$0\text { to } A \text { and } B\)
B)\(\$ 12,500 \text { is allocated to } A , \$ 12,500 \text { to } \mathrm { B } \text {. }\)
C)\(\$ 15,000 \text { is allocated to } A , \$ 10,000 \text { to } B \text {. }\)
D)\(\$ 8.333 \text { is allocated to } A , B \text {, and } C \text {. }\)
E)none of these
Q2) Describe the general rules that limit the deduction of investment interest expense.
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13
Chapter 12: Alternative Minimum Tax
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Sample Questions
Q1) Kay had percentage depletion of $119,000 for the current year for regular income tax purposes.Cost depletion was $60,000.Her basis in the property was $90,000 at the beginning of the current year.Kay must treat the percentage depletion deducted in excess of cost depletion,or $59,000,as a tax preference in computing AMTI.
A)True
B)False
Q2) Durell owns a construction company that builds residential housing.The company is eligible to use the completed contract method for regular income tax purposes.What can Durell do to minimize his AMT?
Q3) Vinny's AGI is $250,000.He contributed $200,000 in cash to the Boy Scouts,a public charity.What is Vinny's charitable contribution deduction for AMT purposes?
A)$0
B)$50,000
C)$75,000
D)$125,000
E)None of these
Q4) Will all AMT adjustments reverse? That is,do they relate to timing differences?
Q5) Discuss the tax year in which an AMT adjustment is first required for an ISO.
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Chapter 13: Tax Credits and Payment Procedures
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Sample Questions
Q1) Which of the following correctly reflects current rules regarding estimated tax payments for individuals?
A)Employees are not subject to the estimated tax payment provisions.
B)Any penalty imposed for underpayment is deductible for income tax purposes.
C)Married taxpayers may not make joint estimated tax payments unless they file a joint income tax return.
D)No quarterly payments are required if the taxpayer's estimated tax is under $1,000.
E)None of these.
Q2) Because current U.S.corporate income tax rates are higher than many foreign corporate income tax rates,the overall limitation does not yield a lower foreign tax credit than the amount of foreign taxes actually paid.
A)True
B)False
Q3) Steve has a tentative general business credit of $110,000 for the current year.His net regular tax liability before the general business credit is $125,000,and his tentative minimum tax is $100,000.Compute Steve's allowable general business credit for the year.
Q4) Discuss the treatment of unused general business credits.
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Chapter 14: Property Transactions: Determination of Gain or
Loss and Basis Considerations
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Sample Questions
Q1) What is the easiest way for a taxpayer who is going to sell property that has declined in value to avoid the § 267 loss disallowance provision?
Q2) Explain how the sale of investment property at a loss to a brother is treated differently from a sale to a niece.
Q3) Carlton purchases land for $550,000.He incurs legal fees of $10,000 and broker's commission of $28,000 associated with the purchase.He subsequently incurs additional legal fees of $25,000 in having the land rezoned from agricultural to residential.He subdivides the land and installs streets and sewers at a cost of $800,000.What is Carlton's basis for the land and the improvements?
A)$1,350,000
B)$1,378,000
C)$1,385,000
D)$1,413,000
E)None of these
Q4) For disallowed losses on related-party transactions,who has the right of offset?
Q5) Under what circumstances will a distribution by a corporation to its only shareholder result in a capital gain?
Q6) Define fair market value as it relates to property transactions.
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Chapter 15: Property Transactions: Nontaxable Exchanges
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Sample Questions
Q1) What types of exchanges of insurance contracts are eligible for nonrecognition treatment under § 1035?
Q2) Taxpayer owns a home in Atlanta.His company transfers him to Chicago on January 2,2014,and he sells the Atlanta house in early February 2014.He purchases a residence in Chicago on February 3,2014.On December 15,2014,taxpayer's company transfers him to Los Angeles.In January 2015,he sells the Chicago residence and purchases a residence in Los Angeles.Because multiple sales have occurred within a twoyear period,§ 121 treatment does not apply to the sale of the second home.
A)True
B)False
Q3) Owen and Polly have been married for five years.Owen sells investment property to Polly for a realized gain of $140,000.Owen's gain of $140,000 is not recognized and Polly's basis for the property she purchased is her cost.
A)True
B)False
Q4) Under what circumstance is there recognition of some or all of the realized gain associated with the giving of boot by the taxpayer in a like-kind exchange?
Q5) Discuss the treatment of realized gains from involuntary conversions.
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Chapter 16: Property Transactions: Capital Gains and Losses
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Sample Questions
Q1) When an individual taxpayer has a net long-term capital gain that includes both 28% gain and 0%/15%/20% gain,which of these gains will be taxed first when the alternative tax on net long-term capital gain method is used and what difference does it make?
Q2) The only things that the grantee of an option may do with the option are exercise it or let it expire.
A)True
B)False
Q3) Which of the following is correct concerning short sales of stock?
A)At the time the short sale is made,the taxpayer does not deliver to the purchaser the shares sold short.
B)At the time the short sale is made,the taxpayer delivers to the purchaser the shares sold short.
C)At the time the short sale is made,the taxpayer may already own the shares sold short.
D)At the time the short sale is made,the taxpayer always already owns the shares sold short.
E)None of these.
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Page 18
Chapter 17: Property Transactions: 1231 and Recapture
Provisions
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Sample Questions
Q1) A sheep must be held more than 18 months to qualify as a § 1231 asset.
A)True
B)False
Q2) A retail building used in the business of a sole proprietor is sold on March 10,2014,for $342,000.The building was acquired in 2004 for $400,000 and straight-line depreciation of $104,000 had been taken on the building.What is the maximum unrecaptured § 1250 gain from the disposition of this building?
A)$400,000
B)$322,000
C)$104,000
D)$26,000
E)None of these
Q3) An individual business taxpayer owns land on which he grows trees for logging.The land has been held more than 10 years and the trees growing on the land were planted eight years ago.Normally,the timber would be inventory for this taxpayer,but the tax law allows the taxpayer to elect to treat cutting the timber as the disposition of a § 1231 asset.
A)True
B)False
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Chapter 18: Accounting Periods and Methods
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Sample Questions
Q1) Gold Corporation sold its 40% of the Ruby Corporation common stock.Gold received $10 million in the year of the sale and a note for $15 million,payable in three years with interest at the Federal rate.Gold's basis in the stock was $5 million.Assume that Gold Corporation will report the gain by the installment method where the method is permitted.
A)The installment method is never permitted on the sale of stock.
B)If Ruby Corporation stock is traded on an established securities market,Gold must recognize a $20 million gain in the year of sale.
C)If the Ruby Corporation stock is not traded on a national exchange,Gold must recognize a $20 million gain.
D)All of these are true.
E)None of these is true.
Q2) What incentives do the tax accounting rules provide for taxpayers to voluntarily change from an incorrect method of accounting that has reduced the company's tax liability in prior years?
Q3) The lower of cost or market can be used in conjunction with both the FIFO and LIFO method.
A)True
B)False
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Page 20
Chapter 19: Deferred Compensation
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Q1) A direct transfer of funds from a qualified retirement plan to an IRA is subject to the withholding rules.
A)True
B)False
Q2) A participant,who is age 38,in a cash or deferred arrangement plan [§ 401(k)] may contribute up to what amount in 2014?
A)$12,000
B)$16,500
C)$17,000
D)$17,500
E)None of these
Q3) A taxpayer who receives a distribution can avoid current taxation by rolling the distribution into another qualified employer retirement plan or into an IRA.
A)True
B)False
Q4) A restricted property plan is considered a deferred compensation plan. A)True
B)False
Q5) Compare a § 401(k)plan with an IRA.
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Chapter 20: Corporations and Partnerships
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Q1) Under certain circumstances,an S corporation can have more than 100 shareholders.
A)True
B)False
Q2) An excess long-term capital loss carryover is first used to offset current short-term capital gains.
A)Applies only to the income taxation of individuals
B)Applies only to the income taxation of C corporations
C)Applies to both the income taxation of individuals and of C corporations
D)Applies to neither the income taxation of individuals nor of C corporations
Q3) In forming a corporation in 2014,organizational expenditures are incurred and paid.These expenditures must be amortized over a period of 180 months.
A)True
B)False
Q4) Net long-term capital gains are subject to a preferential alternative tax rate.
A)Applies only to the income taxation of individuals
B)Applies only to the income taxation of C corporations
C)Applies to both the income taxation of individuals and of C corporations
D)Applies to neither the income taxation of individuals nor of C corporations
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Page 22