Federal Income Tax (Individual) Exam 1

Sue owns land that she rents for $500 per month to a farmer. She received the monthly rental of $500 for each of the first ten months of the year. She assigned the income for the last two months to her mother, and instructed the farmer to send the last two month's rent to her mother. How much rental income should Sue report for the year? a. $5,000 b.$6,000 c. Other

B)

The concept of diminishing marginal utility is associated with A) Horizontal Equity B) Vertical Equity C) Both D) Neither

B)

Vertical equity means that A) taxpayers with the same amount of income pay the same amount of tax. B) taxpayers with larger amounts of income should pay more tax than taxpayers with lower amounts of income. C) all taxpayers should pay the same tax. D) none of the above

B)

Which of the following individuals is most likely to be audited? A) Lola has AGI of $35,000 from wages and uses the standard deduction .B) Marvella has a $145,000 net loss from her unincorporated business (a horse farm). She also received $950,000 salary as a CEO of a corporation. C) Melvin is retired and receives Social Security benefits. D) Jerry is a school teacher with two children earning $55,000 a year. He also receives $200 in interest income on a bank account

B)

Which of the following is not an objective of the federal income tax law? A) Stimulate private investment. B) Reduce employment. C) Encourage research and development activities .D) Prevent taxpayers from paying a higher percentage of their income in personal incometaxes due to inflation

B)

Which relative does not have to live in the same household as the taxpayer claiming head of household filing status? a. Aunt b. Son c. Granddaughter * d. Father

D)

Elise, age 20, is a full-time college student with earned income from wages of $4,400 and interest income of $500. Elise's parents provide more than half of her support. Elise's taxable income is A) $0. B) $150. C) $500. D) $3,900

B)

Anne, who is single, has taxable income for the current year of $38,000 while total economic income is $43,000 resulting in a total tax of $5,356. Anne's average tax rate and effective tax rate are, respectively, A) 14.09% and 12.46% .B) 12.46% and 14.09%. C) 14.09% and 25%. D) 12.46% and 25%

: A) $5,356 ÷ $38,000 = 0.1409$5,356 ÷ $43,000 = 0.1246

Sarah contributes $25,000 to a church. Sarah's marginal tax rate is 35% while her average tax rate is 25%. What is Sarah tax savings because of her charitable contribution? A) $6,250. B) $8,750. C) $16,250. D) $18,750

: B) 25,000 × 35% = $8,750

All of the following are executive (administrative) sources of tax law except A) Internal Revenue Code. B) Income Tax Regulations. C) Revenue Rulings .D) Revenue Procedures

A)

In which of the following situations may taxpayers file as married filing jointly? a. Taxpayers who were married but lived apart during the year. b. Taxpayers who were married but lived with under a legal separation agreement at the end of the year. c. Taxpayers who were divorced during the year. d. Taxpayers who were legally separated but lived together for the entire year

A)

Julia owns 1,000 shares of Orange Corporation. This year, Orange declared a 10% stock dividend. There was no option for shareholders to receive cash. When Julia received 100 shares of Orange stock, it had a fair market value of $50 a share. How much income does Julia have from the stock dividend? A) $0 B) $50 C) $5,000 D) $50,00

A)

Kate is single and a homeowner. In the current year, she has property taxes on her home of $6,000, makes charitable contributions of $2,000, and pays home mortgage interest of $8,000. Her total itemized deductions are $16,000. Kate's adjusted gross income for the current year is $77,000. What is Kate's taxable income for the year? A) $61,000 B) $76,950 C) $64,950 D) $69,000

A)

Which of the following serves as the highest authority for tax research, planning, and compliance activities? A) Internal Revenue Code B) Income Tax Regulations C) Revenue Rulings D) Revenue Procedures

A)

Jenny is single and has a taxable income of $180,000. She also received $15,000 of tax-exempt income. Jenny's marginal tax rate in the current year is a. 32% b. 24.9% c. 25% d. 28%

A) 32%

Horizontal equity means that A) taxpayers with the same amount of income pay the same amount of tax. B) taxpayers with larger amounts of income should pay more tax than taxpayer's with lower amounts of income .C) all taxpayers should pay the same tax. D) none of the above

A) Horizontal equity means that taxpayers with the same amount of income pay the same amount of tax

A single, wealthy investor earns net rental income of about $400,000 per year. She does not have significant itemized deductions. She is considering giving some rental property (that generates net rental income of $20,000 per year) to her elderly mother so that her mother will have income she needs for her living expenses. The investor expects that federal income taxes will be saved with this plan. Which of the following tax planning concepts applies here? a. timing of income. b.Income shifting c.Changing character of income d.Step transaction doctrine

B)

Alan files his Year 2 tax return on April 1, Year 3. His return contains no misstatements or omissions of income. The statute of limitations for changes to the return expires A) April 1, Year 6. B) April 15, Year 6. C) April 15, Year 5. D) The statute of limitations never expires

B)

Arthur pays tax of $5,000 on taxable income of $50,000 while taxpayer Barbara pays tax of $12,000 on $120,000. The tax is? A) progressive tax.B) proportional tax.C) regressive tax.D) None of the above

B)

Ben, age 67, and Karla, age 58, married file jointly, have two children who live with them and for whom they provide total support. Their daughter is 21 years old, is not a full-time student and has no income. Her twin brother is 21 years old, is a full-time student and has earned income of $3,900. Ben and Karla can claim how many dependent(s) on their tax return? A) 1 B) 2 C) 3 D)

B)

Jim and Kay Ross contributed to the support of their two children, Dale and Kim, and Jim's widowed mother, Grant. For Year 1, Dale, a 19-year old full-time college student, earned $4500 as a baby-sitter. Kim, a 23-year old bank teller, earned $12,000. Grant received $5000 in dividend income and $4000 in nontaxable Social Security benefits. Grant and Kim are U.S. citizens and were over one-half supported by Jim and Kay, but neither of the two currently reside with Jim and Kay. Dale's main place of residence is with Jim and Kay, and he is currently on a temporary absence to attend school. How many dependent(s) can Jim and Kay claim on their Year 1 joint income tax return? a .0 b .1 c. 2 d. 3

B) Dale

A calendar-year taxpayer files an individual tax return for Year 2 on March 20, Year 3. The taxpayer neither committed fraud nor omitted amounts in excess of 25% of gross income on the tax return. What is the latest date that the Internal Revenue Service can assess tax and assert a notice of deficiency? A) March 20, Year 6. B) March 20, Year 5. C) April 15, Year 6. D) April 15, Year 5.

C)

During the year, Minerva Malcolm was entirely supported by her three sons, Alfred, Bill, and Charles, who provided support in the following percentages: Alfred8% Bill45% Charles47% Which of the brothers is entitled to claim his mother as a dependent, assuming a multiple supportagreement exists? a. Alfred b. Alfred or Charles * c. Bill or Charles d. Alfred, Bill, or Charles

C)

In Year 1, Leo's wife died. Leo has two small children, ages 2 and 4, living at home whom he supports entirely. Leo does not remarry and is not claimed as a dependent on another's return during any of this period. In Year 2, Year 3, and Year 4, Leo's most advantageous filing status is,respectively A) single for all three years. B) head of household for all three years. C) surviving spouse, surviving spouse, head of household D) surviving spouse, surviving spouse, singl

C)

Planning the timing or revenue recognition can yield benefits because of: a.Time value of money b.Changing marginal tax rates c.Both

C)

The regular standard deduction is available to which one of the following taxpayers? A) Married taxpayer filing a separate return where the other spouse itemizes. B) A person who has only unearned income and is a dependent of another. C) A surviving spouse. D) None of the above.

C)

Which of the following steps, related to a tax bill, occurs first? A) signature or veto by the President of the United States B) consideration by the Senate C) consideration by the House Ways and Means Committee D) consideration by the Joint Conference Committee

C)

Charlotte pays $10,000 in tax deductible property taxes. Charlotte's marginal tax rate is 28%, effective tax rate is 22% and average rate is 25%. Charlotte's tax savings from paying the property tax is A) $2,500. B) $2,200. C) $2,800. D) $10,00

C) $10,000 × 0.28 = $2,800

Mr. and Ms. Jones have combined salaries of $60,400. Their only expenditures affecting the tax return are state income taxes of $6,000, mortgage interest of $7,000 and real estate taxes amounting to $2,000. So their itemized deductions are 15,000. They have two small children whom they support, and file a joint return. What is their taxable income? a. $31,200 b. $30,250 c. $36,000 d. $32,790

C) 60,400-24,400=36,00

Which of the following is not a social objective of the tax law? A) prohibition of a deduction for illegal bribes, fines and penalties B) a deduction for charitable contributions C) an exclusion for interest earned by large businesses D) creation of tax-favored pension plan

C) There is no exclusion for interest income earned by large busine

A taxpayer's spouse dies in August of the current year. Which of the following is the taxpayer's filing status for the current year? a. Single b. Qualified widow(er) c. Head of household d. Married filing jointly

D)

Carolyn and Craig are married. They have two children (8 years old and 13 years old) living with them. How much child tax credits are claimed on the family's tax return? (Ignore phase-out rule) a.0 b.1000 c.2000 d. 4000

D)

Frank, age 17, received $4,000 of dividends and $1,500 from a part-time job. Frank is a dependent of his parents. Frank's taxable income is A) $0. B) $4,000. C) $4,500. D) $3,650

D)

Parker, whose spouse died during the preceding year, has not remarried. Parker maintains a home for a dependent child. What is Parker's most advantageous filing status? a. Single. b. Head of household. c. Married filing separately. d. Qualifying widow(er) with dependent child

D)

Porter was unemployed for part of the year. Porter received $35,000 of wages, $6,400 from a state unemployment compensation plan, and $2,000 from his former employer's company-paid supplemental unemployment benefit plan. What is the amount of Porter's gross income? a. $35,000 b. $37,000 c. $41,400 d. $43,400

D)

Taxable income for an individual is defined as: A) AGI reduced by itemized deductions. B) AGI reduced by personal and dependency exemptions. C) total income reduced by the standard deduction. D) AGI reduced by deductions from AGI

D)

The term "tax law" includes A) Internal Revenue Code B) Treasury Regulation .C) judicial decisions D) all of the above

D)

Which of the following is not one of Adam Smith's canons of taxation? A) equity B) convenience C) certainty D) paid by all citizen

D)

Which of the following taxes is progressive? A) sales tax B) excise tax C) property tax D) federal income tax

D)

A 33-year-old taxpayer withdrew $30,000 (pretax) from a traditional IRA. The taxpayer has a 33% effective tax rate and a 35%marginal tax rate. What is the total tax liability associated with the withdrawal including the 10% penalty tax? a. $10,000 b. $10,500 c. $13,000 d. $13,500

D) In this case, the taxpayer would have to pay the regular tax on the distribution at the 35%effective rate PLUS the 10% penalty on early distribution without an exception.

Which of the following is not a requirement to qualify as a surviving spouse? a. Have not remarried b. Have a child or stepchild who qualifies as a dependent c. Have been entitled to file a joint return with your spouse for the year of death d. Own your home e. Husband or wife must have died within the two preceding tax year

D) home ownership is not a requirement of surviving spouse status

A cash basis taxpayer is in the 15% tax bracket in Year 1 and expects to be in the 35% bracket in Year 2. If certain bills are paid in Year 1, a current tax deduction will be allowed for those payments. If customers are billed for services (provided in November) in early December, many of those customers will make their payments before December 31, Year 1. If billing is delayed a couple of weeks, collections will be in January, Year 2. How should the taxpayer manage its Year 1: (1) end-of-year payments of accounts payable and (2) end-of-year billing and collection of accounts receivable?

Defer Payment - Accelerate Billing and Collection