Chapter 6 - Income Tax

4. Which of the following children would have income taxed at the trust and estate tax rate? a. A child, 13 years old, who has unearned income of $2,300 b. A child, 19 years old and not a full-time student, who has unearned income of $20,000 c. A child, 9 years old, who has unearned income of $750 d. A child, 12 years old, who has earned income of $2,000

a. A child, 13 years old, who has unearned income of $2,300

1. Which of the following usually file tax returns on a calendar-year basis? a. Individuals, partnerships, and S corporations b. Individuals and partnerships, but not S corporations c. Individuals, but not partnerships or S corporations d. S corporations and individuals, but not partnerships

a. Individuals, partnerships, and S corporations

1. Which of the following statements is correct? a. Once the tax on the annualized income is calculated, the tax must be prorated back to the short period. b. The tax liability for a short period is calculated by applying the tax rates to the income from the short period. c. The tax rates are applied to the income from a corporation's short period and then the tax is annualized. d. The income from the short period is annualized and the corporation's tax liability is the full amount calculated on the annualized income.

a. Once the tax on the annualized income is calculated, the tax must be prorated back to the short period.

4. Which of the following individuals would be subject to the kiddie tax in 2019? a. Scott is 18 years old, a full-time student, and claimed as a dependent by his parents. Scott generated $2,400 of income from his summer job and $2,400 of interest income from his investments. b. Steven is 22 years old and is not claimed as a dependent by his parents. He generated $24,300 of earned income from his full-time job and $2,250 of interest and dividend income from his investments. c. Josh is 13 years old and claimed as a dependent by his parents. Josh has $437 of interest income from a savings account. d. Edward is 16 years old and claimed as a dependent by his parents. Edward generated $2,300 of earned income from working as a soccer referee during the year.

a. Scott is 18 years old, a full-time student, and claimed as a dependent by his parents. Scott generated $2,400 of income from his summer job and $2,400 of interest income from his investments.

7. Which of the following is a true statement regarding a taxpayer who employs household employees? a. The taxpayer is required to pay federal unemployment taxes if he or she pays more than $1,000 in cash wages to household employees during any calendar quarter. b. The taxpayer must pay FICA taxes on cash payments of $1,000 or more during a calendar year. c. The taxpayer must report the employment taxes every quarter. d. The taxpayer must withhold federal income taxes from the employee's wages.

a. The taxpayer is required to pay federal unemployment taxes if he or she pays more than $1,000 in cash wages to household employees during any calendar quarter.

7. John arranges through Merry Maids, Inc. to have Teresa come to his house to do the cleaning every week for the entire year. He pays Merry Maids, Inc. $50 every week. At the end of the year, what is John's liability for FICA and FUTA on Teresa's wages? Assume he paid no state unemployment tax and he did not withhold anything from the $50 a week he pays. a.$0 b.$270 c.$502 d.$346

a.$0

8. Roy and Sylvia are married and file a joint return. Roy coaches basketball at a medium size college and earns $240,000 a year. Sylvia is an elementary school teacher earning $50,000 annually. What is Roy and Sylvia's tax due, or refund from, the 0.9% Medicare tax after considering withholding of the tax, if any? a.$0 tax due or refund b.$90 refund c.$360 tax due d.$360 refund

a.$0 tax due or refund

8. Joyce is married and files a joint return with her husband. She works for a large corporation and earns $300,000 for 2019. What is Joyce's 0.9% Medicare tax for 2019? a.$450 b.$1,900 c.$3,800 d.$900

a.$450

3. The shareholders of the Cat Corporation are: Ashley25 percent Cassie25 percent Marie40 percent M Corporation10 percent Ashley and Cassie are sisters. Marie is not related to Ashley and Cassie. The M Corporation is owned 50 percent by Ashley and 50 percent by Tim, an unrelated party. What is Ashley's deemed ownership percentage in the Cat Corporation? a.55 percent b.50 percent c.25 percent d.30 percent

a.55 percent

2. Which of the following entities is restricted from using cash basis accounting in 2019? a. A physician practicing as a personal service corporation b. A manufacturing corporation with average annual gross receipts of $26,500,000 c. A farming business d. A transportation corporation with $4,000,000 in gross receipts e. An attorney operating as a sole proprietorship with gross receipts of $1,000,000

b. A manufacturing corporation with average annual gross receipts of $26,500,000

3. The Big Bang Corporation is owned 25 percent by Bill, 30 percent by Anthony, 20 percent by Neville, and 25 percent by George Corporation. George Corporation is owned 80 percent by Bill and 20 percent by Neville. Bill and Anthony are brothers. If Bill, Anthony, and Neville each sell property to Big Bang Corporation at a $7,500 loss, how much may each recognize on his tax return? a. Bill $0, Anthony $0, Neville $0 b. Bill $0, Anthony $0, Neville $7,500 c. Bill $7,500, Anthony $7,500, Neville $7,500 d. None of these responses listed are correct.

b. Bill $0, Anthony $0, Neville $7,500

2. Tim owns and operates a corner newspaper and candy store. He reports income when received, makes no sales on credit, and deducts expenses when he pays them. However, when accounting for inventory and cost of sales he uses an accrual method. On his first tax return, Tim should indicate what accounting method? a. First in, first out b. Hybrid c. Accrual d. Cash

b. Hybrid

8. The Affordable Care Act (ACA) imposes a 3.8% Medicare tax on which of the following? a. Pensions and IRAs b. Interest and dividends c. Wages d. Self-employment income

b. Interest and dividends

4. Which of the following individuals could have their income included on their parent's return? a. Steven is 22 years old and is not claimed as a dependent by his parents. He generated $24,300 of earned income from his full-time job and $2,250 of interest and dividend income from his investments. b. Josh is 13 years old and claimed as a dependent by his parents. Josh has $437 of interest income from a savings account. c. Scott is 18 years old, a full-time student, and claimed as a dependent by his parents. Scott generated $2,400 of income from his summer job and $2,400 of interest income from his investments. d. Edward is 16 years old and claimed as a dependent by his parents. Edward generated $2,300 of earned income from working as a soccer referee during the year.

b. Josh is 13 years old and claimed as a dependent by his parents. Josh has $437 of interest income from a savings account.

8. Which of the following types of income is subject to the Affordable Care Act (ACA) 3.8 percent Medicare tax on net investment income? a. Wages earned by an investment manager. b. Long-term capital gains. c. Gain on the sale of a principal residence which is otherwise excluded from tax. d. Retirement plan distributions.

b. Long-term capital gains.

6. Which of the following items may not be subject to the self-employment tax? a. Amounts paid to an independent contractor who is the sole proprietor of his company. b. Rental income from apartments owned by an individual whose regular source of income is wages and salaries. c. Amounts paid to a consultant who is the sole proprietor of his company. d. A partner's distributive share of partnership business income from a law partnership. e. Amounts received by an author as royalties from a book he wrote.

b. Rental income from apartments owned by an individual whose regular source of income is wages and salaries.

6. Which of the following is true regarding self-employment taxes? a. Self-employment taxes are limited to 2.90 percent of $132,900 for 2019 for the Medicare portion. b. Self-employment taxes result in a partial deduction for adjusted gross income. c. Self-employment taxes are not imposed if self-employment income is less than $1,000. d. Self-employment taxes are imposed on all self-employment income regardless of the amount of wages earned.

b. Self-employment taxes result in a partial deduction for adjusted gross income.

7. Which of the following individuals is subject to FICA taxes for work done in the home? a. The employer/taxpayer's child under age 21 b. The employer/taxpayer's next-door neighbor, age 20, hired as a full-time nanny c. The employer/taxpayer's parents d. The employer/taxpayer's spouse

b. The employer/taxpayer's next-door neighbor, age 20, hired as a full-time nanny

3. Jane sells to her brother, John, her shares in ABC Corporation for $55,000. She had purchased the shares several years ago for $80,000. How much loss can Jane claim on her tax return? a.$55,000 b.$0 c.$25,000 d.$80,000 e. None of these responses listed are correct.

b.$0

4. Constantin is a single child under 18 with $12,500 of interest income and $12,800 of earned income. What is Constantin's net unearned income? a.$0 b.$10,300 c.$10,700 d.$2,200 e.$12,500

b.$10,300

7. In 2019, a household employer is required to withhold and pay FICA tax when the amount paid to any household worker is equal to or exceeds which of the following? a.$2,200 a year b.$2,100 a year c.$1,800 a year d.$1,900 a year

b.$2,100 a year

6. Lance, a single taxpayer, is a teaching assistant at Big State University and has W-2 income of $71,000 in 2019. He also works evenings and weekends as a computer consultant and over the course of the year earned $62,000 net self-employment income. What is Lance's self-employment (SE) tax? a.$8,636 b.$8,760 c.$9,212 d.$7,100

b.$8,760

1. ABC Corporation has been on a September 30 year-end and requests to change its year-end to December 31. The request is granted and ABC has net income for its short period, from October 1 through December 31, of $45,000. What is ABC's short period tax liability? a.$37,800 b.$9,450 c.$21,000 d.$12,600

b.$9,450

3. Under Section 267, which of the following would not be related parties? a. Partner B and the partnership in which he holds a 70 percent interest b. A grandfather and grandson c. A corporation and an individual who owns 10 percent of the stock d. A brother and sister e. All of these responses describe related parties.

c. A corporation and an individual who owns 10 percent of the stock

3. HIJ Corporation is owned 30 percent by Harry, 30 percent by Izzy, 20 percent by James, and 20 percent by Small Corporation. Small Corporation is owned 90 percent by James and 10 percent by an unrelated party. Harry and Izzy are brothers. What is James' constructive ownership of HIJ and what is Izzy's? a. James owns 90% and Izzy owns 30% b. James owns 40% and Izzy owns 60% c. James owns 38% and Izzy owns 60% d. James owns 38% and Izzy owns 30%

c. James owns 38% and Izzy owns 60%

5. Which of the following is a true statement concerning the alternative minimum tax (AMT)? a. A taxpayer may choose to calculate AMT instead of using the regular tax rates. b. The alternative minimum tax uses the same tax rates as the regular income taxes. c. State income tax refunds are not considered income since state income taxes are not allowed as a deduction for AMT. d. To calculate AMT, a taxpayer can only use the standard deduction.

c. State income tax refunds are not considered income since state income taxes are not allowed as a deduction for AMT.

6. Which of the following is a true statement concerning the alternative minimum tax (AMT)? a. A taxpayer may choose to calculate AMT instead of using the regular tax rates. b. The alternative minimum tax uses the same tax rates as the regular income taxes. c. State income tax refunds are not considered income since state income taxes are not allowed as a deduction for AMT. d. To calculate AMT, a taxpayer can only use the standard deduction.

c. State income tax refunds are not considered income since state income taxes are not allowed as a deduction for AMT.

7. Which one of the following employees who works at the taxpayer's house, must a taxpayer pay FICA and Medicare? a. The maid who is employed through the Molly Maid cleaning service. b. The Terminix exterminator who comes out monthly to spray for bugs. c. The au pair who takes care of the taxpayer's children. d. The neighbor's 15-year-old child who walks the taxpayer's dog after school.

c. The au pair who takes care of the taxpayer's children.

1. With regard to tax years, which statement is true? a. Partnerships and S corporations may choose any year-end since they are taxable entities. b. Deferring the payment of tax is a legitimate reason to change to a fiscal year-end. c. The choice to file on a fiscal-year basis must be made with an initial tax return or later requested and approved by the IRS. d. An individual does not need IRS approval to change tax year-end.

c. The choice to file on a fiscal-year basis must be made with an initial tax return or later requested and approved by the IRS.

7. Emily is an elderly retiree who hires a young person as a companion and for doing the house cleaning and other chores. Emily pays her $100 a week for an entire year. Is Emily required to pay FUTA tax and, if so, how does she remit the payment to the IRS? a. No. She does not need to make a payment. b. Yes. She files Form 941 by January 31 of the following year. c. Yes. She completes Schedule H and pays the tax with her Form 1040. d. Yes. She files Form 940 at the end of the year.

c. Yes. She completes Schedule H and pays the tax with her Form 1040.

5. Stan and Myra are married and file a joint return. They have no children. Their regular taxable income is $100,000. The deductions on their Schedule A are as follows: home mortgage interest $9,000; interest on a home equity loan used to purchase a car $2,000; state income tax $10,000; real estate tax $3,500; and charitable contributions $8,050. What is Stan and Myra's alternative minimum taxable income (AMTI) before the AMT exemption? a.$120,100 b.$111,600 c.$113,500 d.$121,600

c.$113,500

1. XYZ Corporation has a short period of 5 months. Its net income for that period is $60,000. What is XYZ's annualized income and tax liability for the short period? a.$120,000 and $25,200 b.$12,000 and $2,520 c.$144,000 and $12,600 d.$60,000 and $10,000

c.$144,000 and $12,600

2. Which of the following statements is correct regarding cash basis accounting for tax purposes? a. Very large corporations may use cash basis accounting. b. Income is recognized when it is received, and expenses are deductible when incurred, regardless of when paid. c. Income is recognized when it is earned regardless of when cash is received, and expenses are deductible when paid. d. Income is generally recognized when received or constructively received, and expenses are generally deductible when paid.

d. Income is generally recognized when received or constructively received, and expenses are generally deductible when paid.

2. Allison is a sole proprietor on a calendar year-end reporting on the cash basis. Which of the following should not be included in her return for 2019? a. On April 15, 2020, she deposits $6,000 into her traditional IRA and claims it as a 2019 deduction. b. She acquires $4,000 of office furniture for her business which she charges on her credit card and deducts, under the election to expense, in 2019. She will receive and pay the credit card bill in January 2020. c. She pays her state estimated tax and the second half of her property tax in December, and deducts them in 2019, even though they are not due until January, 2020. d. She pays January and February's 2020 interest on her mortgage in December, 2019, and deducts the interest in 2019.

d. She pays January and February's 2020 interest on her mortgage in December, 2019, and deducts the interest in 2019.

2. Which statement is correct regarding methods of accounting? a. The cash method requires the deduction of expenses when all activities related to the expense have been performed. b. The business may change accounting methods on its tax return anytime. c. The accrual method requires income to be recognized when money is received. d. The business must make an election for its overall method of accounting when filing its first tax return.

d. The business must make an election for its overall method of accounting when filing its first tax return.

6. Linda has a tax preparation practice which she conducts as a sole-proprietor. Her net income from her Schedule C in 2019 is $80,000. What is her self-employment tax? a.$12,240 b.$9,161 c.$5,652 d.$11,304

d.$11,304

2. MNO Corporation is an accrual basis taxpayer with a December 31 year-end. It has gross income of $200,000, general expenses of $100,000, and the following dealings in rent and interest: 6 months of rental income received on December 1, 2019, $12,000; prepaid interest income on a note receivable received on December 15, 2019, $6,000; and rent paid by MNO Corporation on December 31, 2019 for 2020 office rental, $14,000. What is MNO's taxable income for 2019? a.$104,000 b.$98,000 c.$100,000 d.$118,000

d.$118,000

4. Claire is a single child under 18 with $12,500 of interest income and $12,100 of earned income. What is Claire's earned taxable income? a.$10,300 b.$12,400 c.$2,200. d.$2,100

d.$2,100

5. Which of the following is not a common adjustment or preference item for alternative minimum tax (AMT)? a. State income tax deduction b. State income tax refunds c. Interest on private activity bonds d. The standard deduction e. Charitable contributions

e. Charitable contributions

6. Which of the following is not a common adjustment or preference item for alternative minimum tax (AMT)? a. State income tax deduction b. State income tax refunds c. Interest on private activity bonds d. The standard deduction e. Charitable contributions

e. Charitable contributions

3. Which of the following is true if a loss from sale or exchange of property between related parties is disallowed and the property is subsequently sold to an unrelated party? a. The disallowed loss is lost forever. b. The disallowed loss may be used if there is a further loss on the subsequent sale. c. An amended return may be filed to claim the loss previously disallowed. d. The original seller may claim the loss previously disallowed. e. The disallowed loss may be used to offset a gain on the subsequent sale.

e. The disallowed loss may be used to offset a gain on the subsequent sale.

2. From the records of Ted, a cash basis sole proprietor, the following information was available: Gross receipts $45,000 Interest income on personal investments $600 Cost of sales $25,000 Other operating expenses including rent on office $5,000 State business license $300 Property taxes on home $1,200 Ted keeps an inventory and reports on the accrual basis. What amount should Ted report as net earnings from self-employment? a.$15,000 b.$12,900 c.$13,500 d.$14,100 e.$14,700

e.$14,700