Tax - Final Exam Study Guide
Manny, a single taxpayer, earns $65,000 per year in taxable income and an additional $12,000 per year in city of Boston bonds. What is Manny's current marginal tax rate for 2019? 11.40 percent 12.00 percent 13.19 percent 15.63 percent 22.00 percent
22.00 percent (See IRS tax schedule for single filers; 22 percent.)
Leonardo, who is married but files separately, earns $80,000 of taxable income. He also has $15,000 in city of Tulsa bonds. His wife, Theresa, earns $50,000 of taxable income. If Leonardo earned an additional $30,000 of taxable income this year, what would be the marginal tax rate (rounded) on the extra income for 2019? (Use tax rate schedule.) 22.00 percent 18.81 percent 24.00 percent 23.72 percent None of the choices are correct
23.72 percent ( [$20,575 − $13,459] / [$110,000 − $80,000] = 23.72%)
If Susie earns $750,000 in taxable income and files as head of household for year 2019, what is Susie's average tax rate (rounded)? (Use tax rate schedule.) 32.14 percent 33.85 percent 35.00 percent 37.00 percent
32.14 percent ([$153,380 + 0.37($750,000 − $510,300)] / $750,000 = 32.14%)
Campbell, a single taxpayer, has $95,000 of profits from her general store, which she operates as a sole proprietorship. She has no employees, $40,000 of qualified property, and $50,000 of taxable income before the deduction for qualified business income. How much is Campbell's deduction for qualified business income? A) $95,000. B) $19,000. C) $10,000. D) $8,000. E) $0.
C) $10,000. (50000 x 20% = 10000; she makes less than $160700 so she is not subject to the wage limit and thus we can just multiply her taxable income by 20%)
Max, a single taxpayer, has a $270,000 loss from his sole proprietorship. How much of this loss is not deductible after considering the excess business loss rules? A) $270,000. B) $255,000. C) $15,000. D) $0. E) None of the choices are correct.
C) $15,000. ($270000 - $255000 = $15000)
Madison's gross tax liability is $9,000. Madison had $3,000 of tax credits available and she had $8,000 of taxes withheld by her employer. What are Madison's taxes due (or taxes refunded) with her tax return? A) $0 taxes due and $0 tax refund. B) $6,000 taxes due. C) $2,000 tax refund. D) $1,000 taxes due.
C) $2,000 tax refund.
Larry recorded the following donations this year: $500 cash to a family in need $2,400 to a church $500 cash to a political campaign To the Salvation Army household items that originally cost $1,200 but are worth $300. What is Larry's maximum allowable charitable contribution if his AGI is $60,000? A) $2,900. B) $1,000. C) $2,700. D) $4,600. E) None of the choices are correct.
C) $2,700. ($2,400 to church + $300 FMV of household items.)
Opal fell on the ice and injured her hip this winter. As a result she paid $3,000 for a visit to the hospital emergency room and $750 for follow-up visits with her doctor. While she recuperated, Opal paid $500 for prescription medicine and $600 to a therapist for rehabilitation. Insurance reimbursed Opal $1,200 for these expenses. What is the amount of Opal's qualifying medical expense? A) $3,000. B) $3,750. C) $3,650. D) $4,850. E) All of these choices are correct.
C) $3,650. (3000 + 750 + 500 + 600 - 1200 = 3650)
Campbell, a single taxpayer, has $400,000 of profits from her general store, which she operates as a sole proprietorship. She has $100,000 of employee wages, $40,000 of qualified property, and $500,000 of taxable income before the deduction for qualified business income. How much is Campbell's deduction for qualified business income? A) $100,000. B) $80,000. C) $50,000. D) $26,000. E) $0.
C) $50,000. (Her deduction for qualified business income is limited to 50 percent of her wages [$100,000 × 50% = $50,000].)
If Joel earns a 10 percent after-tax rate of return, $10,000 received in two years is worth how much today? Use Exhibit 3.1. (See Screenshot for Exhibit) (Round discount factor(s) to three decimal places.) A) $10,000. B) $9,090. C) $8,260. D) $11,000. E) None of the choices are correct.
C) $8,260. ($10,000 × 0.826 [discount factor, two years, 10 percent] = $8,260.)
Which of the following is an example of the conversion strategy? A) Accelerating deductions. B) Deferring income. C) An employer providing tax free benefits to employees instead of salary. D) A high-tax rate parent employing her low-tax-rate son in the family business.
C) An employer providing tax free benefits to employees instead of salary.
Lydia and John Wickham filed jointly in Year 1. They divorced in Year 2. Late in Year 2, the IRS discovered that the Wickhams underpaid their Year 1 taxes by $2,000. Both Lydia and John worked in Year 1 and received equal income but John had $2,000 less tax withheld than Lydia did. Who is legally liable for the tax underpayment? A) Lydia. B) John. C) Both Lydia and John. D) Neither Lydia nor John.
C) Both Lydia and John.
Which of the following is a true statement? A) The standard deduction is increased for taxpayers who are blind or deaf at year-end. B) A married couple is only entitled to one addition to their standard deduction even if both spouses are both over age 65. C) Bunching itemized deductions is a legal method of tax avoidance. D) The standard deduction is subject to a phase-out based on AGI. E) All of these choices are true.
C) Bunching itemized deductions is a legal method of tax avoidance.
Which of the following relationships does NOT pass the relationship test for a qualifying child? A) Stepsister's daughter. B) Half-brother. C) Cousin. D) Stepsister.
C) Cousin.
The assignment of income doctrine most likely limits which of the following strategies? A) Conversion B) Timing C) Income shifting D) Tax minimization E) None of the choices are correct.
C) Income shifting
Which of the following statements regarding tax credits is true? A) Tax credits reduce taxable income dollar for dollar. B) Tax credits provide a greater tax benefit the greater the taxpayer's marginal tax rate. C) Tax credits reduce taxes due dollar for dollar. D) None of these statements are true.
C) Tax credits reduce taxes due dollar for dollar.
This year Riley files single and reports modified AGI of $76,000. Riley paid $1,200 of interest on a qualified education loan. What amounts can Riley deduct for qualifying education interest? A) The deduction for qualifying education interest is $1,200. B) The deduction for qualifying education interest is $1,000. C) The deduction for qualifying education interest is $720. D) The deduction for qualifying education interest is $200. E) None of the choices are correct.
C) The deduction for qualifying education interest is $720. [ This is subject to phase out ((AGI - 70000) / 15000 = ?) ((76000 - 70000) / 15000 = 40%) ((Interest Amount - (Interest Amount x Phase Out Percentage) = ?) ((1200 - (1200 x 40%) = $720) ]
If the president vetoes tax legislation, Congress: A) cannot override the president's veto. B) can override the president's veto with a 50 percent positive vote in the House and Senate. C) can override the president's veto with a two-thirds positive vote in the House and Senate. D) can override the president's veto with a 75 percent positive vote in the House and Senate. E) None of the choices are correct.
C) can override the president's veto with a two-thirds positive vote in the House and Senate.
A taxpayer can avoid a substantial understatement of tax penalty: A) if the position is frivolous and disclosed on the tax return. B) if the position has a realistic possibility of being sustained by the IRS or courts. C) if there is substantial authority to support the position. D) if the position has a reasonable basis and is not disclosed on the tax return. E) None of the choices are correct.
C) if there is substantial authority to support the position.
This year Norma, a single taxpayer, paid $11,200 of real estate taxes on her personal residence and $9,500 of state income taxes. Which of the following is true? A.) Norma can deduct $11,200 of real estate taxes as an itemized deduction. B.) Norma can deduct $9,500 of state income taxes as a for AGI deduction. C.) Norma can deduct $10,000 of taxes as an itemized deduction. D.) Even if Norma has no other itemized deductions, she should claim the standard deduction. E.) None of the choices are correct.
C.) Norma can deduct $10,000 of taxes as an itemized deduction. (The itemized deduction for taxes is limited to $10,000 for single taxpayers.)
If tax rates are decreasing: A.) taxpayers should accelerate income. B.) taxpayers should defer deductions. C.) taxpayers should defer income. D.) taxpayers should defer deductions and accelerate income. E.) None of the choices are correct.
C.) taxpayers should defer income.
Margaret Lindley paid $15,000 of interest on her $300,000 acquisition debt for her home (fair market value of $500,000), $4,000 of interest on her $30,000 home-equity loan, $1,000 of credit card interest, and $3,000 of margin interest for the purchase of stock. Assume that Margaret Lindley has $10,000 of interest income this year and no investment expenses. How much of the interest expense may she deduct this year? A) $23,000. B) $22,000. C) $19,000. D) $18,000. E) None of the choices are correct.
D) $18,000. ($15000 + $3000 = $18000; The credit card interest is nondeductible personal interest and the home-equity interest is not deductible.)
Trudy and Ben file a joint return. Trudy's reported income creates $200 of income tax liability and Ben's reported income creates $180 of income tax liability. In addition to the reported income, Trudy has unreported income on which she owes $50 of income tax. How much of the $430 potential tax liability is Ben liable for? A) $50 B) $180 C) $380 D) $430
D) $430 (On joint returns, both spouses are jointly and severally liable for the entire tax liability.)
If Rudy has a 25 percent tax rate and a 6 percent after-tax rate of return, a $30,000 tax deduction in four years will save how much tax in today's dollars? Use Exhibit 3.1. (Round discount factor(s) to three decimal places.) A) $30,000. B) $7,500. C) $23,760. D) $5,940. E) None of the choices are correct.
D) $5,940. ($30,000 × 0.25 [tax rate] × 0.792 [discount factor, 6 percent, four years] = $5,940.)
Sally received $60,000 of compensation from her employer and she received $500 of interest from a corporate bond. What is the amount of Sally's gross income from these items? A) $0. B) $500. C) $60,000. D) $60,500.
D) $60,500. ($60,000 compensation + $500 interest from a corporate bond [as opposed to interest from municipal bonds].)
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 the choices are correct.
E.) None of the choices are correct.
Corporations are required to file a tax return only if their taxable income is greater than: A.) $0. B.) $1,000. C.) $600. D.) $750. E.) None of the choices are correct. Corporations are always required to file a tax return.
E.) None of the choices are correct. Corporations are always required to file a tax return.
Marc, a single taxpayer, earns $60,000 in taxable income and $5,000 in interest from an investment in city of Birmingham bonds. Using the U.S. tax rate schedule for 2019, how much federal tax will he owe? (Use tax rate schedule) $13,200 $9,059 $7,638 $6,812
$9059 ($9,059 = $4,543 + 0.22 ($60,000 − $39,575)—rounded to the nearest dollar.)
Marc, a single taxpayer, earns $60,000 in taxable income and $5,000 in interest from an investment in city of Birmingham bonds. Using the U.S. tax rate schedule for year 2019, what is his effective tax rate (rounded)? 20.31 percent 13.94 percent 11.75 percent 10.48 percent
13.94 percent ( 13.94% = $9,059 / [$60,000 + $5,000] )
Curtis invests $250,000 in a city of Athens bond that pays 7 percent interest. Alternatively, Curtis could have invested the $250,000 in a bond recently issued by Initech, Inc. that pays 9 percent interest with similar risk as the city of Athens bond. Assume that Curtis's marginal tax rate is 24 percent. What is Curtis's after-tax rate of return on the city of Athens bond? 5.32 percent 6.84 percent 7.00 percent 9.00 percent None of the choices are correct
7.00 percent (The after-tax rate of return is the same as the pretax rate because the interest from municipal bonds is tax-exempt.)
This year, Barney and Betty sold their home (sales price $750,000; cost $200,000). All closing costs were paid by the buyer. Barney and Betty owned and lived in their home for 18 months. Assuming no unusual or hardship circumstances apply, how much of the gain is included in gross income? A) $550,000 B) $300,000 C) $250,000 D) $50,000 E) None of the choices are correct.
A) $550,000 (All of the gain is included in gross income because Barney and Betty do not meet the two-year ownership and use tests.)
Joanna received $60,000 compensation from her employer, the value of her stock in ABC company appreciated by $5,000 during the year (but she did not sell any of the stock), and she received $30,000 of life insurance proceeds from the death of her husband. What is the amount of Joanna's gross income from these items? A) $60,000. B) $65,000. C) $95,000. D) $90,000.
A) $60,000. ($60,000 compensation is included in gross income, the increase in the value of her stock is not realized income so it is not included in gross income, and the life insurance proceeds are excluded from gross income.)
For filing status purposes, the taxpayer's marital status is determined at what point during the year? A) the beginning of the year B) the end of the year C) the middle of the year D) None of the choices are correct.
B) the end of the year (Marital status is established as of the end of the year.)
Ophra is a cash-basis taxpayer who is employed in the publishing industry. This year her employer informed her that because of her outstanding performance she is entitled to a free world cruise. Ophra asked her employer to issue the cruise tickets to her parents, and he complied with this request. Identify the principle that will determine whether Ophra or her parents are taxed on the value of the cruise tickets. A) Assignment of income B) Constructive receipt C) Return of capital principle D) Wherewithal to pay E) All of these choices are correct.
A) Assignment of income
Which of the following is a true statement? A) Congress allows self-employed taxpayers to deduct the employer portion of their self-employment tax. B) To deduct expenses associated with any profit-motivated activity, taxpayers must maintain a high level of involvement or effort in the activity throughout the year. C) Business activities never require a relatively high level of involvement or effort from the taxpayer. D) All business expenses are deducted for AGI. E) All of these choices are correct.
A) Congress allows self-employed taxpayers to deduct the employer portion of their self-employment tax.
Dave is a plumber who uses the cash method of accounting. This year Dave requested that his clients make their checks payable to his son, Steve. This year Steve received checks in the amount of $62,000 for Dave's plumbing services. Which of the following is a true statement? A) Dave is taxed on $62,000 of plumbing income this year. B) Steve is taxed on $62,000 of plumbing income this year. C) Steve is taxed on $62,000 of income from gifts received this year. D) Dave may deduct the $62,000 received by Steve. E) None of the choices are correct.
A) Dave is taxed on $62,000 of plumbing income this year.
In May of year 1, David left his wife Juliette. While the couple was apart, they were not legally divorced. Juliette found herself having to financially provide for the couple's only child (6 years of age) and to pay all the costs of maintaining the household. When Juliette filed her tax return for year 1, she filed a return separate from David. What is Juliette's most favorable filing status for year 1? A) Head of household B) Single C) Married filing separately D) Qualifying widow
A) Head of household (Because she has not lived with David for the last six months of the year, she is still legally married as of the end of the year, she provided more than half the costs of maintaining a household for her dependent child, and she filed separately from her husband, she can file using the head of household status under the abandoned spouse provision.)
Which of the following committees typically initiates tax legislation? A) House Ways and Means Committee. B) Joint Conference Committee. C) Senate Finance Committee. D) Senate Tax Committee. E) None of the choices are correct.
A) House Ways and Means Committee.
Which of the following has the highest authoritative weight? A) Legislative regulation. B) Private letter ruling. C) Revenue ruling. D) Action on decision. E) Revenue procedure.
A) Legislative regulation.
Leonardo, who is married but files separately, earns $80,000 of taxable income. He also has $15,000 in city of Tulsa bonds. His wife, Theresa, earns $50,000 of taxable income. How much money would Leonardo and Theresa save if they file jointly instead of separately for 2019? (Use tax rate schedule.) A) Nothing B) $103.50 C) $309.75 D) $5,932.50 E) None of the choices are correct.
A) Nothing
Which of the following represents the largest percentage of average state tax revenue? A) Sales tax B) Individual income tax C) Other D) Property tax E) None of the choices are correct
A) Sales tax
Jasmine and her husband, Arty, have been married for 25 years. In May of this year, the couple divorced. During the year, Jasmine provided all the support for herself and her 22-year-old child, Dexter, who lived in the same home as Jasmine for the entire year. Dexter is employed full time, earning $29,000 this year. What is Jasmine's most favorable filing status for the year? A) Single. B) Married filing separately. C) Surviving spouse. D) Head of household.
A) Single. (Dexter does not qualify as Jasmine's dependent due to his age and his income, so Jasmine must file single for the year.)
Jane is unmarried and has no children, but provides more than half of her mother's financial support. Jane's mother lives in an apartment across town and has a part-time job earning $5,000 a year. Which is the most advantageous filing status available to Jane? A) Single. B) Head of household. C) Qualifying individual. D) Surviving single.
A) Single. (Jane's mother is not Jane's dependent because she fails the qualifying relative gross income test. Consequently, Jane may not file as a head of household.)
Which of the following is a true statement? A) The deduction for interest on educational loans is subject to a phase-out limitation. B) The deduction for moving expenses is subject to a phase-out limitation. C) Self-employed taxpayers are allowed to deduct health care premiums even if the taxpayer is eligible to participate in an employer-provided health plan. D) Excess business losses are deductible up to $100,000. E) All of these choices are false.
A) The deduction for interest on educational loans is subject to a phase-out limitation. (Self-employed taxpayers are not allowed to deduct health care premiums if they are eligible to participate in an employer-provided health plan.)
Wilma has a $25,000 certificate of deposit (CD) at the local bank. The interest on this certificate, $1,000, was credited to her account this year, but she must pay an early withdrawal penalty if she cashes in the CD before next year. Which of the following is a true statement? A) Wilma must include the $1,000 of interest in her income this year. B) Wilma must include the $1,000 of interest in her income when she cashes the CD. C) Wilma must include the $1,000 of interest in her income this year only if the bank waives the early withdrawal penalty. D) Wilma must include the $1,000 of interest in her income next year if she does not pay the early withdrawal penalty. E) All of the choices are correct.
A) Wilma must include the $1,000 of interest in her income this year.
Charlotte is the Lucas family's 22-year-old daughter. She is a full-time student at an out-of-state university but plans to return home when the school year ends. During the year, Charlotte earned $4,000 of income working part time. Her support totaled $30,000 for the year. Of this amount, Charlotte paid $7,000 with her own funds, her parents paid $14,000, and Charlotte's grandparents paid $9,000. Which of the following statements most accurately describes whether Charlotte's parents can claim Charlotte as a dependent? A) Yes, Charlotte is a qualifying child of her parents. B) No, Charlotte fails the support test for both qualifying children and qualifying relatives. C) No, Charlotte does not pass the gross income test. D) Yes, Charlotte is a qualifying relative of her parents.
A) Yes, Charlotte is a qualifying child of her parents.
Glenn is an accountant who races stock cars as a hobby. This year Glenn was paid a salary of $80,000 from his employer and won $2,000 in various races. What is the effect of the racing activities on Glenn's taxable income if Glenn has also incurred $4,200 of hobby expenses this year? Assume that Glenn itemizes his deductions but has no other miscellaneous itemized deductions. A) increase in taxable income of $2,000. B) increase in taxable income of $1,640. C) no change in taxable income. D) decrease in taxable income of $560. E) decrease in taxable income of $2,200.
A) increase in taxable income of $2,000. (Hobby expenses are not deductible but you have to report hobby revenue)
Which of the following tax planning strategies is based on the present value of money? A) timing. B) tax avoidance. C) income shifting. D) conversion. E) None of the choices are correct.
A) timing.
Andres and Lakeisha are married and file jointly. Andres is 72 years old and in good health. Lakeisha is 62 years old and blind. What amount of standard deduction can Andres and Lakeisha claim in 2019? A) $27,000. B) $27,700. C) $25,850. D) $25,700. E) None of the choices are correct.
A.) $27,000. (($24,400 + ($1,300 × 2) = $27000)
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 choices are false.
A.) Lewis can deduct all the interest on his student loan for AGI. (Up to $2,500 of interest on student loans is deductible for AGI. The interest deduction is phased out for single taxpayers with AGI exceeding $70,000.)
Which of the following is not a tax advantage of a Series EE savings bond? A) Taxes are paid as the original issue discount on the bond is amortized. B) Interest earned is exempt from state taxation. C) Taxes are deferred until the bond is cashed in at maturity. D) Interest is exempt from federal taxation when used for qualifying educational expenses. E) None of the choices are correct.
A.) Taxes are paid as the original issue discount on the bond is amortized.
One primary difference between corporate and U.S. Treasury bonds is: A.) Treasury bonds always pay interest periodically. B.) Corporate bonds always pay interest periodically. C.) Interest from Treasury bonds is exempt from federal taxation. D.) Interest from corporate bonds is exempt from state taxation. E.) None of the choices are correct.
A.) Treasury bonds always pay interest periodically.
What is the after tax rate of return formula?
Amount - ( 1 - Marginal Tax Rate)
Helen is a U.S. citizen and a CPA who moved to London, England, three years ago to work for a British company. This year, she spent the entire year in London and earned a salary of $110,000. How much of her salary will she be allowed to exclude from gross income in the United States? A) $82,000. B) $105,900. C) $105,500. D) $108,000. E) All of her salary is included in gross income.
B) $105,900.
This year Mary received a $200 refund of state income taxes that she deducted on her tax return last year. Mary included a total of $4,000 of state income taxes when she itemized deductions last year. What amount of the refund, if any, should Mary include in her gross income this year? A) $200 is included because Mary itemized her deductions last year. B) $200 is included if itemized deductions exceeded the standard deduction by $200. C) $200 is included because itemized deductions exceeded the standard deduction. D) $200 is included even if Mary claimed the standard deduction. E) None of the choices are correct - refunds of state income taxes are not included in gross income.
B) $200 is included if itemized deductions exceeded the standard deduction by $200. (Refund amounts are included in gross income only to the extent that the original deduction provided a tax benefit. The $4,000 of deduction produced a tax benefit of $200 if itemized deductions exceeded the standard deduction by $200.)
Barney and Betty got divorced in 2018. In the divorce decree Betty agreed to pay Barney $24,000 per year for five years (or until Barney's death or remarriage) and $10,000 per year until their daughter, Pebbles, turns 19 years old. What amount (if any) is included in Barney's gross income in 2019? A) $10,000 B) $24,000 C) $34,000 D) $39,000 E) None of the payments are included in gross income
B) $24,000 (Alimony payments are in cash pursuant to a divorce and do not survive the death of the recipient.)
Fran purchased an annuity that provides $12,000 quarterly payments for the next 10 years. The annuity was purchased at a cost of $300,000. How much of the first quarterly payment will Fran include in her gross income? A) $7,500 B) $4,500 C) $12,000 D) $32,400 E) None of the choices are correct.
B) $4,500 (The annuity exclusion ratio is [$300,000/(4 × 10)] = $7,500 return of capital per payment. Hence, $4,500 of each $12,000 payment is included in gross income.)
Hal Gore won a $1 million prize for special contributions to environmental research. This prize is awarded for public achievement, and Hal directed the awarding organization to transfer $400,000 of the award to the Environmental Protection Agency. How much of the prize should Hal include in his gross income? A) $400,000 B) $600,000 C) $1,000,000 D) None of the choices are correct because all prizes are excludable E) None of the choices are correct because prizes from charities are excludable
B) $600,000 (Awards for scientific or public achievement are excluded only if the payer of the award transfers the award to a governmental unit [e.g., EPA] or a public charity.)
A taxpayer earning income in "cash" and not reporting it as taxable income is an example of: A) tax avoidance. B) tax evasion. C) conversion. D) income shifting. E) None of the choices are correct.
B) tax evasion.
Emily is a cash-basis taxpayer, and she was an especially productive salesperson last year. In December of last year her supervisor told Emily she had earned a $5,000 bonus. However, Emily received the bonus check after year-end. Identify the principle that will determine when Emily is taxed on the bonus. A) Assignment of income B) Constructive receipt C) Return of capital principle D)Wherewithal to pay E) All of these choices are correct.
B) Constructive receipt
This fall Millie finally repaid her student loan. She originally borrowed the money to pay tuition several years ago, when she attended State University (a qualified educational institution). This year Millie paid a total of $2,400 of interest on the loan. If Millie files single and reports $75,000 of income and no other items of income or expense, how much of the interest can she deduct? A) Millie can deduct $2,400 for AGI. B) Millie can deduct $1,600 for AGI. C) Millie can deduct $2,400 as an itemized deduction. D) Millie can deduct $800 for AGI. E) None—the tuition is not deductible.
B) Millie can deduct $1,600 for AGI. ( 2400 x [75000 - 70000] / 15000 = $800 ) ( 2400 - 800 = $1600 )
In June of Year 1, Eric's wife, Savannah, died. Eric did not remarry during Year 1, Year 2, or Year 3. Eric maintains the household for his dependent daughter, Catherine, in Year 1, Year 2, and Year 3. Which is the most advantageous filing status for Eric in Year 2? A) Head of household. B) Qualifying widower. C) Single. D) Married filing separately.
B) Qualifying widower. (Since he maintains a household for a dependent child and has not remarried as of the end of Year 2, Eric can file as a qualifying widower for Year 2.)
Which of the following statements regarding realized income is true? A) Taxpayers need not include realized income in gross income unless a specific provision of the tax code requires them to do so. B) Realized income requires some type of transaction or exchange with a second party. C) Once income is realized it cannot be excluded from gross income. D) None of these statements are true.
B) Realized income requires some type of transaction or exchange with a second party.
In June of Year 1, Jake's wife, Darla, died. The couple did not have any children and Jake did not remarry in Year 1 or Year 2. Which is the most favorable filing status for Jake in Year 2? A) Married filing separately. B) Single. C) Head of household. D) Qualifying widower.
B) Single. (Jake is not married and he does not maintain a household for a dependent in Year 2, so his most favorable filing status [in fact, his only filing status available] is single.)
Which of the following is not considered a primary authority? A) Supreme Court case B) Tax Law Review article C) Regulation D) Internal Revenue Code E) None of these choices is correct.
B) Tax Law Review article
Generally, code sections are arranged (grouped together): A) chronologically. B) by topic. C) randomly. D) by length. E) None of the choices are correct.
B) by topic.
The constructive receipt doctrine: A) is particularly restrictive for accrual-basis taxpayers. B) causes income to be recognized before it is actually received. C) causes income to be recognized after it is actually received. D) applies equally to income and expenses. E) None of the choices are correct.
B) causes income to be recognized before it is actually received.
Dominic earned $1,500 this year, and his employer withheld $200 of federal income tax from his salary. Assuming that Dominic is single, 30 years old, and will have zero tax liability this year, he: A) is required to file a tax return. B) is not required to file a tax return but should file a return anyway. C) is required to file a tax return but should not file because he owes no tax. D) is not required to file a tax return and should not file a return. E) None of the choices are correct.
B) is not required to file a tax return but should file a return anyway.
This year Ed celebrated his 25th year as an employee of Designer Jeans Company. In recognition of his long and loyal service, the company awarded Ed a gold watch worth $250 and a $2,000 cash bonus. What amount must Ed include in his gross income? A.) $2,250 B.) $2,000 C.) $250 D.) $0 if Ed offers to contribute his watch and bonus to a qualified charity E.) $0—all employee awards are excluded from gross income
B.) $2,000 (Cash bonus payments are includible in gross income but awards of tangible property to employees for length of service or safety achievement are excluded up to $400 of value.)
Which of the following is more likely to receive IRS scrutiny under the assignment of income doctrine? A.) A corporation paying its shareholders a $20,000 dividend. B.) A parent employing her child in the family business C.) A taxpayer gifting stock to his children. D.) A cash-basis business delaying billing its customers until after year-end. E.) None of the choices are correct.
B.) A parent employing her child in the family business
Jamarcus, a full-time student, earned $2,500 this year from a summer job. He had no other income this year and will have zero federal income tax liability this year. His employer withheld $300 of federal income tax from his summer pay. Is Jamarcus required to file a tax return? Should Jamarcus file a tax return? A.) Jamarcus is required to file an income tax return regardless of income and should file a tax return. B.) Jamarcus is not required to file an income tax return because his gross income of $2,500 is well below the gross income threshold for a single taxpayer. However, he should file a tax return to receive a refund of the $300 previously withheld. C.) Jamarcus is not required to file a tax return as the refund of $300 previously withheld will be automatically credited to his bank account. D.) Jamarcus should compulsorily file a tax return because his gross income of $2,500 is well below the gross income threshold for a single taxpayer.
B.) Jamarcus is not required to file an income tax return because his gross income of $2,500 is well below the gross income threshold for a single taxpayer. However, he should file a tax return to receive a refund of the $300 previously withheld.
The estate of Monique Chablis earned $450 of income this year. Is the estate required to file an income tax return? A.) Yes, the estate has to file an income tax return irrespective of its income. B.) No, because the estate's gross income is less than $600, the estate is not required to file an income tax return. C.) No, the estate is exempted from filing an income tax return. D.) Yes, because the estate's gross income is less than $600, the estate is required to file an income tax return.
B.) No, because the estate's gross income is less than $600, the estate is not required to file an income tax return.
If Paula requests an extension to file her individual tax return in a timely manner, the latest she could file her return without a failure-to-file penalty is: A.) September 15th. B.) October 15th. C.) August 15th. D.) November 15th. E.) None of the choices are correct.
B.) October 15th.
Jack and Jill are married. This year Jack earned $72,000, Jill earned $80,000, and they received $4,000 of interest income from a joint savings account. How much gross income would Jack report if he files married filing separately from Jill? A) $72,000 if they reside in a common law state. B) $74,000 if they reside in a community property law state. C) $76,000 if they reside in a common law state. D) $78,000 if they reside in a community property law state. E) None of the choices are correct.
D) $78,000 if they reside in a community property law state. (In a community property state Jack is taxed on half of his separate income [$36,000] plus half of Jill's separate income [$40,000] plus half of joint income [$2,000]. In a common law state, Jack is taxed on his separate income [$72,000] plus half of joint income [$2,000].)
Shaun is a student who has received an academic scholarship to State University. The scholarship paid $14,000 for tuition, $2,500 for fees, and $1,000 for books. In addition, Shaun's dormitory fees of $8,500 were paid by the university when he agreed to counsel freshman on campus living. What amount must Shaun include in his gross income? A) $9,500 B) $11,000 C) $2,500 D) $8,500 E) $0—none of these benefits are included in gross income.
D) $8,500 (College students seeking a degree are allowed to exclude from gross income scholarships that pay for tuition, fees, books, supplies, and other equipment required for the student's courses. Any excess scholarship amounts [such as for room or meals] are fully taxable. The scholarship exclusion applies only if the recipient is not required to perform services in exchange for receiving the scholarship.)
The income tax base for an individual tax return is: A) Realized income from whatever source derived. B) Gross income. C) Adjusted gross income. D) Adjusted gross income minus from AGI deductions.
D) Adjusted gross income minus from AGI deductions.
Bill filed his 2019 tax return on March 15th, 2020. The statute of limitations for IRS assessment on Bill's 2019 tax return should end: A) March 15th, 2022. B) April 15th, 2022. C) March 15th, 2023. D) April 15th, 2023. E) None of the choices are correct.
D) April 15th, 2023. (The SOL ends three years from the later of (1) the date the tax return was filed or (2) the tax return's original due date.)
Which of the following is a from AGI deduction? A) Contributions to qualified retirement accounts. B) Rental and royalty expenses. C) Business expenses for a self-employed taxpayer. D) Home mortgage interest expense.
D) Home mortgage interest expense.
Which of the following is a true statement? A) Individuals qualify for the moving expense deduction only if they change employers. B) Individuals qualify for the moving expense deduction if their employer does not pay for the moving expenses. C) Moving expenses are deductible from AGI. D) Moving expenses are generally not deductible.
D) Moving expenses are generally not deductible.
Which of the following is NOT a from AGI deduction? A) Standard deduction. B) Itemized deduction. C) Deduction for qualified business income. D) None of these. All of these are from AGI deductions.
D) None of these. All of these are from AGI deductions.
All of the following represent a type or character of income except: A) Tax-exempt. B) Capital. C) Qualified dividend. D) Normal.
D) Normal.
Which judicial doctrine means that a court will rule consistently with its previous rulings and the rulings of higher courts with appellate jurisdiction? A) Judicial hierarchy. B) The Goldman rule. C) Judicial consistency. D) Stare decisis. E) None of the choices are correct.
D) Stare decisis.
Rowanda could not settle her tax dispute with the IRS at the appeals conference. If she wants to litigate the issue but does not have sufficient funds to pay the proposed tax deficiency, Rowanda should litigate in the: A) U.S. District Court. B) U.S. Circuit Court of Appeals. C) U.S. Court of Federal Claims. D) Tax Court. E) None of the choices are correct.
D) Tax Court.
To calculate a gain or loss on the sale of an asset, the proceeds from the sale are reduced by which of the following? A) Tax basis of the property B) Selling expenses C) Amount realized D) Tax basis of the property and selling expenses E) All of these choices are correct
D) Tax basis of the property and selling expenses
A tax practitioner can avoid IRS penalty relating to a tax return position: A) only if the position has a more likely than not chance of being sustained by the IRS or courts. B) if the position has a realistic possibility of being sustained by the IRS or courts. C) if there is not substantial authority to support the position. D) if the position has a reasonable basis and is disclosed on the tax return. E) None of the choices are correct.
D) if the position has a reasonable basis and is disclosed on the tax return.
All of the following are tests for determining qualifying relative status except _____. A) relationship test B) gross income test C) support test D) residence test
D) residence test
Campbell, a single taxpayer, has $400,000 of profits from her general store, which she operates as a sole proprietorship. She has no employees, $40,000 of qualified property, and $500,000 of taxable income before the deduction for qualified business income. How much is Campbell's deduction for qualified business income? A.) $100,000. B.) $80,000. C.) $20,000. D.) $1,000. E.) $0.
D.) $1,000. (She makes over $160700, so her deduction for qualified business income is limited to 25 percent of her wages ($0) plus 2.5 percent of her qualified property (2.5% × $40,000 = $1,000.)
James invests $100,000 in a city of Athens bond that pays 8% interest. Alternatively, James could have invested the $100,000 in a bond recently issued by HighTech Inc. that pays 10% interest with similar risk as the city of Athens bond. Assume that James's marginal tax rate is 25%. Which bond should James should choose and why? A.) The HighTech Inc. bond because it earns a higher pre-tax rate of return. B.) The HighTech Inc. bond because it earns a higher after-tax rate of return. C.) The city of Athens bond because it earns a higher pre-tax rate of return. D.) The city of Athens bond because it earns a higher after-tax rate of return. E.) James should be indifferent between the two bonds.
D.) The city of Athens bond because it earns a higher after-tax rate of return.
If Jack earns an 8% after-tax rate of return, $10,000 received in three years is worth how much today (rounded)? (Exhibit 3-1) A) $10,000 B) $11,664 C) $9,260 D) $8,570 E) $7,940
E) $7,940 ($10,000 x 0.794 [Discount Factor, 3 years, 8%] = $7,940.)
Which of the following is considered a tax? A) Fees to register an automobile. B) Speeding ticket. C) Entrance fee for a national museum. D) Local surcharge for a homeowner to connect to city sewer service. E) 1% local surcharge on hotel rooms to pay for city government.
E) 1% local surcharge on hotel rooms to pay for city government.
Taxes influence which of the following decisions? A) Business decisions B) Personal decisions C) Political decisions D) Investment decisions E) All of the choices are correct.
E) All of the choices are correct
Long-term capital gains (depending on type) for individual taxpayers can be taxed at a maximum rate of: A) 20 percent. B) 25 percent. C) 28 percent. D) Both 20 percent and 28 percent. E) All of the choices are correct.
E) All of the choices are correct.
This year Kevin provided services to several clients, each of whom paid with different types of property. Which of the following payments is not included in Kevin's gross income? A) Cash B) Shares of stock listed on the New York Stock Exchange. C) A used car D) Gold coins E) All of these are included in gross income
E) All of these are included in gross income
Acme published a story about Paul, and as a result Paul sued Acme for damage to his reputation, emotional distress, and punitive damages. Paul won an award of $20,000 for damages, $5,500 for emotional distress, and $50,000 for punitive damages. What amount must Paul include in his gross income? A) $5,500 B) $20,000 C) $50,000 D) $70,000 E) All of these benefits are included in gross income.
E) All of these benefits are included in gross income. (The tax laws specify that only payments on account of a physical injury or physical sickness are nontaxable. Damages taxpayers receive for emotional distress that are not associated with a physical injury are taxable, as are punitive damages and damages to reputation.)
Which of the following is a tax? I. A 1 percent special sales tax for funding local road construction. II. A fee paid to the state for a license to practice as an attorney. III. An income tax imposed by Philadelphia on persons working within the city limits. IV. A special property assessment for installing a new water system in the taxpayer's neighborhood. A) Only I is correct. B) Only IV is correct. C) Only III is correct. D) III and IV are correct. E) I and III are correct.
E) I and III are correct
This year Barney purchased 500 shares of Bell common stock for $20 per share. At year-end the Bell shares were only worth $2 per share. What amount can Barney deduct as a loss this year? A) $10,000 B) $9,000 C) $1,000 D) Barney can deduct $10,000 only if he includes $1,000 in his taxable income. E) None of the choices are correct - Barney is not entitled to a loss deduction.
E) None of the choices are correct - Barney is not entitled to a loss deduction.
Cory recently sold his qualified small business stock for $90,000 after holding it for 10 years. His basis in the stock is $40,000. Applying the rules as if the stock were acquired in 2019 and assuming his marginal tax rate is 32 percent, how much tax will he owe on the sale? A) $3,750. B) $7,000. C) $7,500. D) $14,000. E) None of the choices are correct.
E) None of the choices are correct. ($-0-. $90,000 − $40,000 = $50,000 realized gain; 100 percent of the gain on qualified small business stock acquired in 2019 and held for more than five years is excluded.)
Allen filed his 2019 tax return on May 15th, 2020, and underreported his gross income by 30 percent. Assuming Allen's underreporting is not due to fraud, the statute of limitations for IRS assessment on Allen's 2019 tax return should end: A) March 15th, 2022. B) April 15th, 2022. C) March 15th, 2023. D) April 15th, 2023. E) None of the choices are correct.
E) None of the choices are correct. (Because Allen underreported his gross income by 30 percent, the SOL ends six years from the later of (1) the date the tax return was filed or (2) the tax return's original due date.)
Nontax factor(s) investors should consider when choosing among 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.
E) before-tax rates of return and liquidity needs.
To calculate a tax, you need to know: I. the tax base II. the taxing agency III. the tax rate IV. the purpose of the tax A.) Only I is correct. B.) Only IV is correct. C.) Only III is correct. D.) Items I through IV are correct. E.) I and III are correct.
E.) I and III are correct.
