Exam 1 Tax
What are Adam Smith's four requirements for for a good tax system
1. Equality 2. Certainty 3. Convenience 4. Economy
What 2 steps were taken to make the income tax acceptable
1. Marketing 2. Withholding (pay-as-you-go)
What is a tax credit
A tax credit is an incentive put into the tax law by congress to encourage taxpayers to enter into specific types of transactions or to provide relief from double taxation
Why is a tax credit treated like a prepayment
A tax credit is treated like a prepayment because it reduces the amount due by the full amount of the credit (dollar for dollar reduction in tax liability)
How is a tax credit different form a tax deduction
A tax deduction results in a reduction of taxable income (the tax base)
Equality
A tax should be imposed based on the taxpayer's ability to pay
What is an exclusion
An exclusion is an increase in the taxpayer's wealth that Congress has determined should not be subject to tax or it is a recovery of the taxpayer's capital (i.e. investment in an asset)
How is an exclusion different from a deferral
An exclusion is income that is never subject to tax. Whereas a deferral is income that is not taxed in the current period, but will be taxed in a future period
T/F: During 2019, taxpayer receives a Form 1099-G from the state indicating a state income tax refund of $300 for 2018. Taxpayer did not itemize deductions in 2018. The state income tax refund is included in gross income in 2019.
False
T/F: Individual tax payers are required to electronically file tax returns
False
T/F: Tax expenditures generally decrease the complexity of the tax system
False
T/F: The purpose of good tax planning is minimize the tax liability paid to the IRS
False, the purpose of good tax planning is to maximize after-tax income
What was the purpose of the income tax during WW2
Help finance the war (mass tax) and limit inflation
Explain the pay as you go system
Income taxes are paid on income as close to the time it is received by the taxpayer as possible
T/F: Withholding was implemented during WW2 to establish the pay-as-we-system. This helped to make the tax acceptable and improved the likelihood of collections
True
Economy
The cost of taxpayer compliance and administering the tax system should be small in relation to the revenue generated
Explain how the pay as you go system is accomplished
The pay as you go system is accomplished through income tax withholding on wages and other types of income (e.g. gambling winnings) and through quarterly estimated tax payments on income that is not subject to withholding (e.g. self-employment income, investment income)
Conveinence
The tax should be levied as close as possible to the time the taxpayer receives the amount subject to tax
Certainty
The taxpayer should be able to determine the amount of tax and how to make the required payment
What were the objectives of the income tax prior to WW2? And who was subject to the income tax
They implemented a class tax, that taxed the wealthiest 5%
T/F: A deduction for AGI will produce a tax benefit that is greater than the stated tax rate (i.e. rate from the tax rate schedule) in cases where the taxpayer's deductions from AGI and tax credits are subject to phase outs or other limitations
True
T/F: Exclusions and deductions have the same effect on taxable income, but they have different causes. Exclusions are income items received that are not taxable, whereas deductions are expenses or set amounts used in place of the actual expenses
True
T/F: For 2019, the exemption amount would have been $4,200 for a dependent child. This deduction amount is replaced by a $1,000 tax credit. The use of the credit instead of the exemption deduction will create a tax savings for a taxpayer whose tax rate is 12%
True
T/F: The effective rate is understated because it does not consider the implicit tax associated with the excluded income
True
T/F: The first contact that the IRS has with a taxpayer regarding a potential tax return issue is by U.S. Postal Service
True
What is the line of demarcation
WW2, and the 16th amendment created income tax
The tax benefit of a dollar of exclusion or deduction (select all that are correct) a.) Depends on the tax rate b.) Is more valuable than a dollar of credit c.) Is greater when the tax rate is higher than when it is lower d.) Is the same for all taxpayers
a.) depends on the tax rate c.) Is greater when the tax rate is higher than when it is lower
Which of the following is used to implement the ability to pay concept (select all that apply) a.) progressive rate structure b.) phase outs based on AGI c.) child tax credit d.) withholding and estimated payments
a.) progressive rate structure b.) phase outs based on AGI c.) child tax credit
Frank, age 20, earned $5,000 in wages and had taxable interest income of $4,000. He uses the standard deduction and is not allowable as a dependent on his parents' tax return. The amount of Frank's income taxed at using the trust rates is a.) 0 b.) $1,800 c.) $2,200 d.) $4,000 e.) $5,350
a.) 0
Lucy is considering an investment in either a corporate bond with a pretax return of 4.0% or a municipal bond with a pretax return of 3.4%. The assets possess equal risk. Lucy has a marginal tax rate of 22% and an average tax rate of 13%. What is the implicit rate on the municipal bond and the asset that would give lucy the greatest after-tax return a.) 15%; municipal bond b.) 15%; corporate bond c.) 17.6%; municipal bond d.) 17.6% corporate bond e.) 13%; indifferent between the corporate bond and the municipal bond
a.) 15%; municipal bond
Which court does not require the disputed tax to be paid before a tax case is heard a.) Tax court b.) District court
a.) Tax court
In order to compute the tax when taking an exam or a quiz, we will use a.) Tax rate schedule b.) Tax table c.) Either the tax rate schedule or the tax table
a.) Tax rate schedule
Which concept justifies the phase-out of the child credit a.) ability to pay b.) pay as you go c.) tax benefit rule d.) related parties e.) assignment of income
a.) ability to pay
Which item in the tax equation is used to determine phase-outs and limitations (e.g. phase-out of the child credit) a.) Gross income b) Adjusted gross income c.) Itemized deductions d.) Standard deductions e.) Refundable tax credits f.) Taxable income
b) Adjusted gross income
Evan, age 18, has wages of $5,000, interest income of $7,000 and dividend income of $10,000. Evan uses the standard deduction and is allowable as a dependent on his parents' tax return. His parents have taxable income of $500,000. What is the MTR for the portion of the income taxed at Evan's (single) rate? a.) 0 b.) 10% c.) 12% d.) 22% e.) 24% f.) 32%
b.) 10%
Taxpayer files as single for 2019. She has taxable income of $100,000 with no preference income. Using the tax rate schedule, the tax for 2019 is a.) 24,000 b.) 18,175 c.) 14,383 d.) 3,792
b.) 18,175
Which of the following is (are) an itemized deduction(s) (select all that apply) a.) Alimony paid b.) Charitable contributions c.) Real estate taxes on a personal residence d.) Personal property taxes on autos e.) State income taxes paid f.) Home mortgage interest g.) Student loan interest
b.) Charitable contributions c.) Real estate taxes on a personal residence d.) Personal property taxes on autos e.) State income taxes paid f.) Home mortgage interest
Which of the following is (are) an administrative source of the tax law (select all that apply) a.) Internal revenue code b.) Treasury regulations c.) IRS revenue rulings d.) IRS revenue procedures e.) Private letter rulings
b.) Treasury regulations c.) IRS revenue rulings d.) IRS revenue procedures e.) Private letter rulings
Loss deductions from related party transactions are disallowed because they violate which concept a.) ability to pay b.) arm's length transaction c.) administrative convenience d.) assignment of income e.) pay as you go
b.) arm's length transaction
Taxpayers file a joint return with taxable income of $100,000. Their dividend preference rate is a.) 0% b.) 12% c.) 15% d.) 20% e.) 22%
c.) 15%
Taxpayer files as single. She has taxable income of $204,100 for 2019. The taxpayer's marginal tax rate is a.) 24% b.) 32% c.) 35% d.) 37% e.) 22.85%
c.) 35%
A taxpayer files as single for 2019 with the following information: Salary 70,000 Interest 2,000 Dividends 3,000 Dependents 1 (Child under 17) Municipal bond interest 1,000 Itemized deductions 5,000 IRA Contribution 2,000 Tax withholding 4,000 The taxpayers ADJUSTED GROSS INCOME is a.) 76,000 b.) 75,000 c.) 73,000 d.) 72,900
c.) 73,000
In the citation, §1.132-5(g), the (g) refers to a.) The fifth regulation issued for section 132 b.) A subsection c.) A paragraph d.) A subparagraph e.) A clause
c.) A paragraph
Which type of audit of a tax return is most likely to occur a.) Field exam b.) Office exam c.) Correspondence exam d.) Proctology exam
c.) Correspondence exam
When completing a tax return with taxable income under $100,000, the tax rate is determined using a.) Tax rate schedule b.) Tax table c.) Either the tax rate schedule or the tax table
c.) Either the tax rate schedule or the tax table
A progressive tax rate structure means that as income increases, the rate of tax a.) Decreases b.) Is constant c.) Increases
c.) Increases
Which of the following will reduce or eliminate bracket creep? (select all that are correct) a.) Increasing the number of tax credits available b.) Increasing the number of tax expenditures c.) Indexing the standard deductions for inflation d.) Reducing the number of tax brackets e.) Indexing the end points of the tax brackets for inflation
c.) Indexing the standard deductions for inflation d.) Reducing the number of tax brackets e.) Indexing the end points of the tax brackets for inflation
Withholding from wages is an example of which concept? a.) Ability to pay b.) Wherewithal to pay. c.) Pay as you go. d.) Substance over form.
c.) Pay as you go.
The citation, §35(c)(2)(B)(ii), is read as a.) Section 35, subsection c paragraph 2, subparagraph B clause eye eye b.) Section 35, subsection c, chapter 2, subchapter B, clause 2 c.) Section 35, subsection c paragraph 2, subparagraph B, clause 2 d.) Chapter 35, subchapter c, paragraph 2, subparagraph B, clause 2 e.) Title 35, subtitle c, section 2, subsection B, paragraph 2
c.) Section 35, subsection c paragraph 2, subparagraph B, clause 2
In general, how long is the statute of limitations for an income tax return a.) One year b.) Two years c.) Three years d.) Six years e.) Unlimited (i.e. never closes)
c.) Three years
Which tax rate is used for decision making a.) average rate b.) effective rate c.) marginal rate d.) progressive rate e.) regressive rate
c.) marginal rate
Erin, age 17, has wages of $3,000, interest from a savings account of $2,500, and municipal bond interest of $1,500. Erin uses the standard deduction and is allowable as a dependent on her parents' return. How much is Erin's taxable income? a.) 0 b.) $400 c.) $1,650 d.) $2,150 e.) $2.500 f.) $3,600
d.) $2,150
The most recent overall audit rate is a.) 2% b.) 1% c.) .75% d.) .59% e.) 59%
d.) .59%
Taxpayer has the potential for a $1,000 credit and tax rate of 32%. What amount of deduction would provide the same tax benefit as the $1,000 credit a.) 320 b.) 1,000 c.) 1,667 d.) 3,125 e.) 8,333 f.) 9,600
d.) 3,125
Tax expenditures a.) Are direct spending by the federal government to carryout social and economic objectives through government agencies b.) Have been used less by Congress since WW2 c) Improve horizontal and vertical equity d.) Are indirect spending by the federal government to carryout social and economic policy though preferences in the tax code
d.) Are indirect spending by the federal government to carryout social and economic policy though preferences in the tax code
Ben owns an apartment building. The lease agreements require that the payments be made to a partnership in which Ben's two children are the partners. Which concept applies to the treatment of the rental income? a.) Ability to pay. b.) Administrative convenience. c.) Pay as you go. d.) Assignment of income. e.) Tax benefit rule.
d.) Assignment of income.
Which audit method compares Form 1099-INT received from a bank to the interest income reported on a taxpayers return a.) Discriminant Function (DIF) b.) Taxpayer compliance measurement function (TCMP) c.) Document perfection program d.) Information matching program e.) Special audit functions
d.) Information matching program
Ability to pay, as currently defined, is implemented using a tax rate structure that is a.) Regressive b.) Proportional c.) Flat d.) Horizontal d.) Progressive
d.) Progressive
For 2018, Walter, a cash-method taxpayer, took a business deduction for $5000 of supplies purchased from Acme Co. After a dispute over the bill, Acme reimbursed Walter $100 in 2019 against the cost of the supplies. Which concept is used to determine the appropriate tax treatment? a.) Ability to pay. b.) Claim of right. c.) Assignment of income. d.) Tax benefit rule. e.) Pay as you go.
d.) Tax benefit rule.
The shift from a "class" tax to a "mass" tax was significant because it resulted in a.) Victory in WW1 b.) The indexation of amounts like the standard deduction and exemptions c.) The renumbering of the internal revenue code d.) Use of tax expenditures by Congress to influence social and economic behavior e.) A reduction in the number of tax expenditures
d.) Use of tax expenditures by Congress to influence social and economic behavior
In the kiddie tax calculation, section 1(g) allows the gross unearned income to be reduced by the allowable amounts of $2,200. Which concept justifies using the $2,200 amount? a.) Ability to pay. b.) Tax benefit rule. c.) Substance over form. d.) Related party transactions. e.) Administrative convenience
e.) Administrative convenience
Which of the following is (are) deductions from adjusted gross income (AGI) (Select all that apply) a.) Individual retirement account (IRA) contributions b.) Child tax credit c.) Student loan interest d.) Business expenses on Schedule C e.) Itemized deductions f.) Standard deduction
e.) Itemized deductions f.) Standard deduction
The implicit tax rate a.) is the rate of tax paid to the federal government b.) is the same as the average tax rate c.) is the same as the marginal tax rate d.) is the same as the effective tax rate e.) is a measure of how much higher the rate of return is for an asset that receives a tax preference
e.) is a measure of how much higher the rate of return is for an asset that receives a tax preference
Alexis, age 16, is allowable as a dependent on her parent's return. She has interest income of $20,000 and dividend income of $30,000. She paid state income taxes of $3,000 during the current year. Alexis's allowable amounts for 2019 are a.) 0 b.) $1,150. c.) $2,200. d.) $3,000. e.) $4,050. f.) $4,100 g.) $12,200
f.) $4,100
A taxpayer files as single for 2019 with the following information: Salary: 70,000 Interest: 2,000 Dividends: 3,000 Dependents 1 (Child under 17) Municipal bond interest: 1,000 Itemized deductions: 5,000 IRA contribution: 2,000 Tax withholding: 4,000 What is the taxpayer's TAXABLE INCOME a.) 76,000 b.) 75,000 c.) 73,000 d.) 72,000 e.) 69,000 f.) 68,000 g.) 64,000 h.) 60,800 i.) 53,000 j.) 51,000
h.) 60,800
In a deferral, the future period tax may result from inclusion of the income through either ....... and/or .......
lower depreciation/amortization deductions and/or by the inclusion of a larger gain than would have occurred without the deferral
Therefore, the tax savings from a deduction are equal to the taxpayer's
marginal tax rate multiplied by the amount of deduction.
In contrast, a tax credit is a direct dollar for dollar reduction in the tax liability. Therefore, one dollar of tax credit is worth less or more than one dollar of tax deduction
more than one dollar of tax deduction