Taxation of Individuals Test Questions
Course Introduction
This course provides a comprehensive overview of the federal income tax system as it applies to individuals. Topics include the determination of gross income, deductions, exemptions, credits, capital gains and losses, and tax rates. Students will also examine filing requirements, tax planning strategies, and the role of tax law in financial decision-making. The course emphasizes practical application through case studies and problem-solving exercises, preparing students to understand and manage personal tax obligations within the legal framework.
Recommended Textbook
McGraw Hills Taxation of Individuals 2017 8th Edition By
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14 Chapters
1609 Verified Questions
1609 Flashcards
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Brian C. Spilker
Page 2
Chapter 1: An Introduction to Tax
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Sample Questions
Q1) Which of the following is false?
A) A proportional tax rate structure imposes a constant tax rate while a progressive tax rate structure imposes an increasing marginal rate related to the tax base
B) The average tax rate changes under a proportional tax rate structure, but it is static for a progressive tax rate system
C) An example of a proportional tax is the tax on gasoline
D) An example of a progressive tax is the federal tax on gifts
E) None of these
Answer: B
Q2) The substitution effect:
A) Predicts that taxpayers will work harder to pay for consumer products when tax rates increase
B) Is one of the effects considered in static forecasting
C) Results in the government collecting more aggregate tax revenue than under the income effect
D) Is typically more descriptive for taxpayers with lower disposable income
E) None of these
Answer: E
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Chapter 2: Tax Compliance, the Irs, and Tax Authorities
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Sample Questions
Q1) If a taxpayer loses a case at the Circuit Court level, he is granted an automatic appeal hearing with the Supreme Court.
A)True
B)False
Answer: False
Q2) For fraudulent tax returns, the statute of limitations for IRS assessment is ten years.
A)True
B)False
Answer: False
Q3) The "30-day" letter gives the taxpayer the opportunity to request an appeals conference or agree to the proposed IRS adjustment.
A)True
B)False
Answer: True
Q4) If a taxpayer is due a refund, she does not have to file a tax return.
A)True
B)False
Answer: False
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Chapter 3: Tax Planning Strategies and Related Limitations
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Sample Questions
Q1) If tax rates are increasing:
A) taxpayers should accelerate income
B) taxpayers should defer deductions
C) taxpayers should defer income
D) you need more information to make a recommendation
E) None of these
Answer: D
Q2) Which of the following does not limit the income shifting strategy?
A) assignment of income doctrine
B) business purpose doctrine
C) substance-over-form doctrine
D) step-transaction doctrine
E) None of these
Answer: E
Q3) When considering cash outflows, higher present values are preferred.
A)True
B)False
Answer: False
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Chapter 4: Individual Income Tax Overview, Exemptions, and Filing Status
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Sample Questions
Q1) Which of the following statements regarding tax deductions is false?
A) Taxpayers are not entitled to any deductions unless specific provisions in the tax code allow the deductions.
B) Deductions can be labeled as deductions above the line or deductions below the line.
C) From AGI deductions tend to be associated with business activities while for AGI deductions tend to be associated with personal activities.
D) The standard deduction is a from AGI deduction.
Q2) The relationship requirement is more broadly defined (includes more relationships) for a qualifying relative than it is for a qualifying child.
A)True
B)False
Q3) An individual may be considered as a qualifying child of her parents and a qualifying child of her grandparents in the same year.
A)True
B)False
Q4) What is the couple's gross income?
Q5) What is the couple's adjusted gross income?
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Chapter 5: Gross Income and Exclusions
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Sample Questions
Q1) Constructive receipt represents the principle that cash basis taxpayers should be taxed on income when it is made available to them without substantial restrictions.
A)True
B)False
Q2) Charles purchased an annuity from an insurance company that promised to pay him $20,000 per year for the next 12 years. Charles paid $180,000 for the annuity. How much of the first $20,000 payment should Charles include in gross income?
Q3) Nate is a partner in a partnership that received $5,000 of interest income this year. Nate's share of the interest is $1,000, and he should report this income on his individual return as:
A) business income
B) income from a partnership
C) interest income
D) dividend income because the partnership intends to organize next year as a limited liability company
E) All of these
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Chapter 6: Individual Deductions
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Sample Questions
Q1) Rental or royalty expenses are deductible "for" AGI.
A)True
B)False
Q2) Lewis is an unmarried law student at State University, a qualified educational institution. Last year Lewis borrowed $30,000 and used the proceeds to pay his university tuition. This year Lewis paid $1,500 of interest on the loan. Which of the following is a true statement if Lewis reports $40,000 of salary and no other items of income or expense?
A) Lewis can deduct all the interest on his student loan for AGI.
B) Lewis can deduct all the interest on his student loan as an itemized deduction.
C) Lewis can only deduct $1,000 of the interest on his student loan for AGI.
D) Lewis can only deduct $1,000 of the interest on his student loan as an itemized deduction.
E) All of these are false.
Q3) An individual who is eligible to be claimed as a dependent on another's return and has $1,000 of earned income may claim a standard deduction of $1,350.
A)True
B)False
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Page 8
Chapter 7: Individual Income Tax Computation and Tax Credits
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Sample Questions
Q1) The alternative minimum tax is the AMT base multiplied by the AMT rate.
A)True
B)False
Q2) If an employer withholds taxes from an employee, in general, when are these taxes treated as paid to the IRS?
A) As withheld
B) As the employee requests on his/her W-4 form
C) Evenly throughout the year
D) On April 15
Q3) The AMT exemption amount is phased-out for high income taxpayers.
A)True
B)False
Q4) Candace is claimed as a dependent on her parent's tax return. Her parents' ordinary income marginal tax rate is 33%. In 2014, Candace received $5,000 of interest income from corporate bonds she obtained several years ago. This is her only source of income. She is 15 years old at year end. What is her gross tax liability?
Q5) Tax credits reduce a taxpayer's taxable income dollar for dollar.
A)True
B)False
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Chapter 8: Business Income, Deductions, and Accounting Methods
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Sample Questions
Q1) Blackwell Manufacturing uses the accrual method and reports on a calendar year. This year a customer was injured when visiting the Blackwell factory. The customer sued the company for $500,000, and the case is still being litigated. However, Blackwell's attorney expects that the company will pay at least $250,000 to settle the claim. What amount, if any, can Blackwell deduct for the expected claim settlement this year?
Q2) Which of the following is NOT considered a related party for the purpose of limitation on accruals to related parties?
A) Spouse when the taxpayer is an individual.
B) A partner when the taxpayer is a partnership.
C) Brother when the taxpayer is an individual.
D) A minority shareholder when the taxpayer is a corporation.
E) All of these are related parties.
Q3) Murphy uses the accrual method and reports on a calendar year. This year Murphy signed a binding contract to provide consulting services to Kirby beginning next year. Murphy incurred $15,000 to train his staff for this particular project. In addition, Murphy estimates that he will incur another $60,000 to complete the Kirby contract. What amount, if any, can Murphy deduct this year for the services expected to be rendered next year?
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Chapter 9: Property Acquisition and Cost Recovery
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Sample Questions
Q1) Tax cost recovery methods include depreciation, amortization, and depletion.
A)True
B)False
Q2) Clay LLC placed in service machinery and equipment (7-year property) with a basis of $2,450,000 on June 6, 2014. Assume that Clay has sufficient income to avoid any limitations. Calculate the maximum depreciation expense including §179 expensing (ignoring any possible bonus expensing), rounded to a whole number. Assume that the 2013 §179 limits are extended to 2014:
A) $350,105
B) $392,960
C) $778,070
D) $864,395
E) None of these
Q3) Olney LLC placed in service on July 19, 2014 machinery and equipment (7-year property) with a basis of $850,000. Assume that Olney has sufficient income to avoid any limitations. Calculate the maximum depreciation expense including §179 expensing, rounded to the nearest whole number (but ignoring bonus expensing). Assume the 2013 §179 limits are extended to 2014.
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11
Chapter 10: Property Dispositions
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Sample Questions
Q1) Winchester LLC sold the following business assets during the current year: (1) automobile, $30,000 cost basis, $12,000 depreciation, proceeds $20,000; (2) machinery, $25,000 cost basis, $20,000 depreciation, proceeds $10,000; (3) furniture, $15,000 cost basis, $10,000 depreciation, proceeds $4,000; (4) computer equipment, $25,000 cost basis, $6,000 depreciation, proceeds $10,000; (5) Winchester had unrecaptured §1231 losses of $3,000 in the prior 5 years. What is the amount and character of Winchester's gains and losses before the 1231 netting process?
A) $3,000 ordinary loss, $0 §1231 loss.
B) $7,000 ordinary gain, $10,000 §1231 loss.
C) $7,000 ordinary loss, $4,000 §1231 gain.
D) $1,000 ordinary gain, $4,000 §1231 loss.
E) None of these.
Q2) Jessie sold a piece of land held for investment for $250,000. Jessie bought the land two years ago for $195,000. What is the amount and character of Jessie's gain?
Q3) Silver sold machinery to Gold, a related entity, which it used in its business for $55,000. Silver bought the equipment a few years ago for $50,000 and has claimed $15,000 of depreciation expense. What is the amount and character of Silver's gain?
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Page 12
Chapter 11: Investments
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Sample Questions
Q1) In X8, Erin had the following capital gains (losses) from the sale of her investments: $2,000 LTCG, $25,000 STCG, ($9,000) LTCL, and ($15,000) STCL. What is the amount and nature of Erin's capital gains and losses?
A) $3,000 net short-term capital gain
B) $3,000 net long-term capital loss
C) $4,000 net short-term capital gain
D) $4,000 net long-term capital loss
E) None of these
Q2) Passive losses that exceed passive income are deferred until the taxpayer generates passive income to offset these passive losses.
A)True
B)False
Q3) Nontax factor(s) investors should consider when choosing between investments include:
A) before-tax rates of return
B) after-tax rates of return
C) liquidity needs
D) before-tax rates of return and after-tax rates of return
E) before-tax rates of return and liquidity needs
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Page 13
Chapter 12: Compensation
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Sample Questions
Q1) Suzanne received 20 ISOs (each option gives her the right to purchase 20 shares of stock for $12 per share) at the time she started working when the stock price was $13 per share. Three years later, when the share price was $23 per share, she exercised all of her options. If Suzanne holds the shares for two additional years and sells them when the market price is $30, how much gain will Suzanne recognize on the sale and how much tax will she pay assuming her marginal tax rate is 35 percent?
Q2) Employers sometimes pay a gross-up to employees to cover taxes associated with taxable fringe benefits they provide.
A)True
B)False
Q3) A cafeteria plan provides employees discounted meals at a company sponsored dining room.
A)True B)False
Q4) Taxable fringe benefits include automobile allowances, gym memberships, and personal use tickets to the theater or sporting events.
A)True
B)False
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Page 14
Chapter 13: Retirement Savings and Deferred Compensation
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Sample Questions
Q1) Lisa, age 45, needed some cash so she received a $50,000 distribution from her Roth IRA. At the time of the distribution, the balance in the Roth IRA was $200,000. Lisa established the Roth IRA 8 years ago. Through a rollover and annual contributions, she has contributed $80,000 to her account. What amount of the distribution is taxable and subject to early distribution penalty?
A) $0
B) $20,000
C) $30,000
D) $50,000
Q2) Employers may choose whom they allow to participate and whom they do not allow to participate in their nonqualified deferred compensation plans.
A)True
B)False
Q3) If a taxpayer's marginal tax rate is decreasing, a taxpayer contributing to a traditional IRA can earn an after-tax rate of return greater than her before-tax rate of return.
A)True
B)False
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Chapter 14: Tax Consequences of Home Ownership
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Sample Questions
Q1) Careen owns a condominium near Newport Beach in California. This year, she incurs the following expenses in connection with her condo: \[\begin{array} { l r }
\text { Insurance } & \$ 1,500 \\
\text { Mortgage interest } & 8,500 \\
\text { Property taxes } & 4,000 \\
\text { Repairs and maintenance } & 950 \\
\text { Utilities } & 1,900 \\
\text { Depreciation } & 5,500
\end{array}\] During the year, Careen rented the condo for 90 days, receiving $20,000 of gross income. She personally used the condo for 50 days. Assuming Careen uses the IRS method of allocating expenses to rental use of the property. What is Careen's net rental income for the year?
Q2) In general, total deductible home office expenses are limited to the gross income derived from the business minus business expenses unrelated to the home (that is, they are limited to net Schedule C income before home office expenses).
A)True
B)False
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Page 16