Personal Income Tax
Exam Answer Key
Course Introduction
This course provides a comprehensive introduction to the principles and practices of personal income taxation. Students will explore the foundations of income tax law, including the identification of taxable and non-taxable income, allowable deductions, tax credits, and the mechanics of computing taxable income for individuals. The course examines the implications of tax regulations on various forms of income such as employment earnings, investments, and self-employment, and highlights tax planning strategies for individuals. Emphasis is placed on current tax laws and regulations, compliance requirements, tax filing procedures, and ethical considerations in personal income tax reporting.
Recommended Textbook
South Western Federal Taxation 2018 Individual Income Taxes 41st Edition by William H. Hoffman
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Chapter 1: An Introduction to Taxation and Understanding
Federal Tax Law
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Sample Questions
Q1) If more IRS audits are producing a greater number of no change results, this indicates increased compliance on the part of taxpayers.
A)True
B)False
Answer: False
Q2) Tax fraud suspected
Answer: e
Q3) Under state amnesty programs, all delinquent and unpaid income taxes are forgiven.
A)True
B)False Answer: False
Q4) A VAT (value added tax):
A)Is regressive in its effect.
B)Has not proved popular outside of the U.S.
C)Is not a tax on consumption.
D)Is used exclusively by third world (less developed) countries.
E)None of these.
Answer: A
3
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Chapter 2: Working With the Tax Law
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Q1) Which company does not publish citators for tax purposes?
A)John Wiley & Sons
B)Commerce Clearing House
C)Thomson Reuters RIA
D)Westlaw
E)Shepard's
Answer: A
Q2) 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.
E)None of these.
Answer: D
Q3) Arizona is in the jurisdiction of the Eighth Circuit Court of Appeals.
A)True
B)False
Answer: False
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Chapter 3: Tax Formula and Tax Determination; an
Overview of Property Transactions
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Sample Questions
Q1) A son lives with taxpayer and earns $3,000.
Answer: c
Q2) Wilma, age 70 and single, is claimed as a dependent on her daughter's tax return. During 2017, she had interest income of $2,500 and $800 of earned income from babysitting. Wilma's taxable income is:
A)$700.
B)$900.
C)$1,750.
D)$2,250.
E)None of these.
Answer: E
Q3) After her divorce, Hope continues to support her ex-husband's sister, Cindy, who does not live with her. Hope can claim Cindy as a dependent. A)True
B)False
Answer: True
Q4) An ex-husband (divorce occurred last year) who lives with taxpayer. Answer: b
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Chapter 4: Gross Income: Concepts and Inclusions
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Sample Questions
Q1) On November 1, 2017, Bob, a cash basis taxpayer, gave Dave common stock. On October 30, 2017, the corporation had declared the dividend payable to shareholders of record as of November 22, 2017. The dividend was paid on December 15, 2017. The corporation has paid the $1,200 dividend once each year for the past ten years, during which Bob owned the stock. When Dave collected the dividend on December 15, 2017:
A)Bob must include $1,000 (10/12 x $1,200) of the dividend in his gross income.
B)Bob must include all of the dividend in his gross income.
C)Dave must include all of the dividend in his gross income.
D)Dave should treat the $1,200 as a recovery of capital.
E)None of these is correct.
Q2) Alvin is the sole shareholder of an S corporation that earned $200,000 in 2017 and distributed $75,000 to Alvin. Alvin must recognize $75,000 as income from the S corporation in 2017.
A)True
B)False
Q3) Alimony recapture may occur if there is a substantial decrease in the amount of the alimony payments in the second year.
A)True
B)False
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Page 6
Chapter 5: Gross Income: Exclusions
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Q1) A cash basis taxpayer took an itemized deduction of $5,500 for state income tax paid in 2017. His total itemized deductions in 2017 were $18,000. In 2018, he received a $900 refund of his 2017 state income tax. The taxpayer must include the $900 refund in his 2018 Federal gross income in accordance with the tax benefit rule.
A)True
B)False
Q2) Sarah's employer pays the hospitalization insurance premiums for a policy that covers all employees and retired former employees. After Sarah retires, the hospital insurance premiums paid for her by her employer can be excluded from her gross income.
A)True
B)False
Q3) A scholarship recipient at State University may exclude from gross income the scholarship proceeds used to pay for:
A)Only tuition.
B)Tuition, books, and supplies.
C)Tuition, books, supplies, meals, and lodging.
D)Meals and lodging.
E)None of these.
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Page 7
Chapter 6: Deductions and Losses: in General
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Sample Questions
Q1) Marge sells land to her adult son, Jason, for its $20,000 appraised value. Her adjusted basis for the land is $25,000. Marge's recognized loss is $5,000 and Jason's adjusted basis for the land is $25,000 ($20,000 cost + $5,000 recognized gain of Marge).
A)True
B)False
Q2) Nikeya sells land (adjusted basis of $120,000) to her adult son, Shamed, for its appraised value of $95,000. Which of the following statements is correct?
A) Nikeya's recognized loss is $25,000 ($95,000 amount realized - $120,000 adjusted basis).
B) Shamed's adjusted basis for the land is $120,000 ($95,000 cost + $25,000 disallowed loss for Nikeya).
C) If Shamed subsequently sells the land for $112,000, he has no recognized gain or loss.
D) Only a. and b. are correct.
E) a., b., and c. are correct.
Q3) In applying the $1 million limit on deducting executive compensation, what corporations are subject to the deduction limit? What executives are covered?
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Chapter 7: Deductions and Losses: Certain Business
Expenses and Losses
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Sample Questions
Q1) Losses on rental property are classified as deductions for AGI.
A)True
B)False
Q2) A theft loss is taken in the year of the theft.
A)True
B)False
Q3) If investment property is stolen, the amount of the loss is the adjusted basis of the property at the time of the theft reduced by $100 and 10% of AGI.
A)True
B)False
Q4) Research and experimental expenditures do not include the cost of consumer surveys.
A)True
B)False
Q5) A nonbusiness bad debt deduction can be taken any year after the debt becomes totally worthless.
A)True
B)False
Q6) Discuss the effect of alimony in computing a net operating loss.
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Chapter 8: Depreciation, Cost Recovery, Amortization, and Depletion
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Sample Questions
Q1) A used $35,000 automobile that is used 100% for business is placed in service in 2017. If the automobile fails the 50% business usage test in the second year, no cost recovery will be recaptured.
A)True
B)False
Q2) Joe purchased a new five-year class asset on June 1, 2017. The asset is listed property (not an automobile). It was used 55% for business and 45% for the production of income. The asset cost $1,000,000. Joe made the § 179 election. Joe's taxable income would not create a limitation for purposes of the § 179 deduction. Joe does not take additional first-year depreciation. Determine Joe's total cost recovery (including the § 179 deduction) for the year.
Q3) Nora purchased a new automobile on July 20, 2016, for $29,000. The car was used 60% for business and 40% for personal use. In 2017, the car was used 30% for business and 70% for personal use. Nora elects not to take additional first-year depreciation. Determine the cost recovery recapture and the cost recovery deduction for 2017.
Q4) Motel buildings have a cost recovery period of 27.5 years.
A)True B)False
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Chapter 9: Deductions: Employee and
Self-Employed-Related Expenses
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Sample Questions
Q1) Concerning the deduction for moving expenses, what circumstances, if any, will excuse a taxpayer from meeting the time test of 39 or 78 weeks?
Q2) Which, if any, of the following is an advantage of using the simplified method for determining the office in the home deduction?
A)No depreciation on the personal residence has to be computed.
B)The exclusive use requirement does not have to be met.
C)Allows the expense to be classified as a deduction for AGI.
D)Can also be used for a residence that is rented (not owned) by the taxpayer.
E)None of these.
Q3) Actual cost method of determining auto expense
Q4) For self-employed taxpayers, travel expenses are not subject to the 2%-of-AGI floor.
A)True
B)False
Q5) Jacob is a landscape architect who works out of his home. He wonders whether or not he will have nondeductible commuting expenses when he drives to the locations of his clients. Please comment.
Q6) Sue files a Form 2106 with her Form 1040.
Q7) Actual cost method of determining car expense
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Chapter 10: Deductions and Losses: Certain Itemized
Deductions
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Sample Questions
Q1) Trent sells his personal residence to Chester on July 1, 2017. He had paid $7,000 in real property taxes on March 1, 2017, the due date for property taxes for 2017. Trent may not deduct the portion of the taxes he paid for the period the property was owned by Chester.
A)True
B)False
Q2) Linda is planning to buy Vicki's home. They want to keep the transaction simple, so the sales agreement will not apportion the property taxes that Vicki has already paid on the home. Comment on the tax implications for Linda and Vicki.
Q3) For the past several years, Jeanne and her two sisters have taken turns claiming a dependency exemption deduction for their mother under a multiple support agreement. This year Jeanne will be entitled to the exemption, and her mother needs money for surgery and new eyeglasses. Should Jeanne pay for the medical expenses as her share of her mother's expenses? How would this benefit Jeanne?
Q4) Contributions to public charities in excess of 50% of AGI may be carried back 3 years or forward for up to 5 years.
A)True
B)False
Page 12
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Chapter 11: Investor Losses
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Q1) A qualified real estate professional is allowed to treat income or loss from any real estate venture as active except for income or loss from a rental activity.
A)True
B)False
Q2) Charles owns a business with two separate departments. Department A produces $100,000 of income and Department B incurs a $60,000 loss. Charles participates for 550 hours in Department A and 100 hours in Department B. He has full-time employees in both departments.
A)If Charles elects to treat both departments as a single activity, he cannot offset the $60,000 loss against the $100,000 income.
B)Charles may not treat Department A and Department B as separate activities because they are parts of one business.
C)If Charles elects to treat the two departments as separate activities, he can offset the $60,000 loss against the $100,000 income.
D)If Charles elects to treat both departments as a single activity, he can offset the $60,000 loss against the $100,000 income.
E)None of the above.
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Page 13
Chapter 12: Alternative Minimum Tax
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Sample Questions
Q1) What is the relationship between the regular income tax liability and the TMT?
Q2) 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
Q3) If the AMT base is greater than $187,800, the AMT rate for an individual taxpayer is the same as the AMT rate for a C corporation.
A)True
B)False
Q4) The required adjustment for AMT purposes for pollution control facilities placed in service this year is equal to the difference between the amortization deduction allowed for regular income tax purposes and the depreciation deduction computed under ADS.
A)True
B)False
Q5) Why is there a need for a second tax system called the alternative minimum tax?
Q6) Under what circumstances are C corporations exempt from the AMT?
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Chapter 13: Tax Credits and Payment Procedures
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Q1) Which of the following issues does not need resolution in an employer's effort to comply with employment tax payment requirements?
A)Ascertaining which employees and wages are covered by employment taxes and are subject to withholding for income taxes.
B)Arriving at the amount to be paid and/or withheld.
C)Reporting and paying employment taxes and income taxes withheld to the IRS on a timely basis through the use of proper forms.
D)Each of the above issues needs to be resolved.
E)None of the above is relevant to the employer.
Q2) In March 2017, Gray Corporation hired two individuals, both of whom were certified as long-term recipients of family assistance benefits. Each employee was paid $11,000 during 2017. Gray Corporation's work opportunity tax credit amounts for 2016 is:
A)$4,000.
B)$8,000.
C)$10,000.
D)$11,000.
Q3) Discuss the treatment of unused general business credits.
Q4) Describe the withholding requirements applicable to employers.
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Page 15
Chapter 14: Property Transactions: Determination of Gain or
Loss and Basis Considerations
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Q1) Define fair market value as it relates to property transactions.
Q2) The basis of inherited property usually is its fair market value on the date of the decedent's death.
A)True
B)False
Q3) Capital recoveries include:
A)The cost of capital improvements.
B)Ordinary repair and maintenance expenditures.
C)Payments made on the principal of a mortgage on taxpayer's building.
D)Amortization of bond premium.
E)All of the above.
Q4) Maurice sells his personal use automobile at a realized loss. Under what circumstances can Maurice deduct the loss? What if the personal use asset was sold at a realized gain?
Q5) Reggie owns all the stock of Amethyst, Inc. (adjusted basis of $100,000). If he receives a distribution from Amethyst of $90,000 and corporate earnings and profits are $15,000, Reggie has a capital gain of $5,000 and an adjusted basis for his Amethyst stock of $0.
A)True
B)False
Page 16
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Chapter 15: Property Transactions: Nontaxable Exchanges
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Q1) Latisha owns a warehouse with an adjusted basis of $200,000. She exchanges it for a strip mall building worth $225,000. Which of the following statements is correct?
A) If the warehouse was used in Latisha's business to store inventory and the strip mall building is to be rented to tenants, her recognized gain is $25,000 and her basis for the strip mall building is $225,000.
B) If the warehouse was used in Latisha's business to store inventory and the strip mall building is to be used as a retail outlet for her business, her recognized gain is $0 and her basis for the strip mall building is $200,000.
C) If the warehouse is used by Latisha to store personal use items such as excess furniture and the strip mall building is to be rented to tenants, her recognized gain is $25,000 and her basis for the strip mall building is $225,000.
D) Only b. and c. are correct.
E) a., b., and c. are correct.
Q2) Ramon sells land with an adjusted basis of $120,000 and a fair market value of $175,000 to Pauline, his wife, for $175,000. Discuss how the tax consequences would differ if Ramon and Pauline had never been married.
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Chapter 16: Property Transactions: Capital Gains and Losses
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Q1) Judith (now 37 years old) owns a collection of porcelain dolls that she acquired when she was a grade schooler. She had forgotten about them until her mother sent them to her. Her mother had discovered them in a box in her attic while she was cleaning out her house before selling it. Judith had originally acquired all the dolls as gifts from her parents, so she has no way to establish a basis for the dolls. Using information from the Internet, she prepares a careful inventory of the dolls that includes their name, when they were first available for sale, their current value, and other pertinent information. She then lists them for sale on the Internet. To her surprise, she quickly gets an offer of $5,000 for all of them and sells them. Judith has no other gain or loss transactions for the year and is in the 28% marginal tax bracket. What issues do these facts create?
Q2) Lease cancellation payments received by a lessor are always ordinary income because they are considered to be in lieu of rental payments.
A)True
B)False
Q3) If a capital asset is sold at a gain, the holding period is important.
A)True
B)False
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Page 18
Chapter 17: Property Transactions: 1231 and Recapture
Provisions
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Q1) In 2017 Angela, a single taxpayer with no dependents, disposed of for $44,000 a business building which cost $100,000. $60,000 of depreciation had been taken on the building. Angela has a short-term capital loss of $3,000 this year. She has taxable income (not related to property transactions) of $125,000. She has no § 1231 lookback loss. What is the amount and nature of the gain or loss, what is Angela's taxable income, and what is her tax on the taxable income?
Q2) Section 1231 gain that is treated as long-term capital gain carries from the 2016 Form 4797 to the 2016 Form 1040, Schedule D, line ____.
A)8
B)9
C)10
D)11
E)None of the above
Q3) A sheep must be held more than 18 months to qualify as a § 1231 asset.
A)True
B)False
Q4) Depreciation recapture under § 1245 and § 1250 is reported on Form 4797. A)True B)False
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Chapter 18: Accounting Periods and Methods
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Q1) Juan, not a dealer in real property, sold land that he owned. His adjusted basis in the land was $700,000 and it was encumbered by a mortgage for $100,000. The terms of the sale required the buyer to pay Juan $200,000 on the date of the sale. The buyer assumed Juan's mortgage and gave Juan a note for $900,000 (plus interest at the Federal rate) due in the following year. What is the gross profit percentage (gain ÷ contract price)?
A)$700/$1,100 = 63.64%.
B)$500/$1,200 = 41.67%.
C)$700/$1,200 = 58.33%.
D)$500/$1,100 = 45.45%.
E)None of the above.
Q2) Sandstone, Inc., has consistently included some factory overhead as a current expense, rather than as a cost of producing goods. As a result, the beginning inventory for 2017 is understated by $40,000. If Sandstone voluntarily changes accounting methods effective January 1, 2017, the positive adjustment to the inventory is a § 481 adjustment and $10,000 must be added to taxable income for each year 2017, 2018, 2019, and 2020.
A)True
B)False
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Page 20
Chapter 19: Deferred Compensation
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Q1) Deidre has five years of service completed as of February 5, 2017, her employment anniversary date. If the defined benefit plan [not a § 401(m) arrangement] uses the cliff vesting schedule, determine Deidre's nonforfeitable percentage.
A)0%
B)60%
C)80%
D)100%
E)None of the above
Q2) In a stock bonus plan, contributions are dependent on the employer's profits.
A)True
B)False
Q3) The minimum annual distributions must be made over the life of the participant or the life of the participant and a designated individual beneficiary.
A)True
B)False
Q4) What is a highly compensated employee?
Q5) Compare a § 401(k) plan with an IRA.
Q6) What is a profit sharing plan?
Q7) What is a defined contribution plan?
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Chapter 20: Corporations and Partnerships
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Q1) In order to get the Cardinal Corporation to build a plant in the area, Union County gives it land worth $900,000. The land was purchased by the county many years ago for $50,000.
a.How much income, if any, must Cardinal Corporation recognize for receiving the land?
b.What basis will Cardinal Corporation have in the land?
Q2) Schedule M-2 of Form 1120 reconciles unappropriated retained earnings at the beginning of the year with unappropriated retained earnings at year-end.
A)True
B)False
Q3) Excess capital losses can be carried over indefinitely.
Q4) For corporations and individuals, net short-term capital gains are taxed at ordinary income rates.
A)True
B)False
Q5) Property distributions to shareholders can result in the distributing corporation recognizing gains and losses.
A)True
B)False
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