Federal Tax Exam 1

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%

Answer: A Explanation: Average tax rate = $5,356 / $43,000 = .1409 (14.09%) Effective tax rate = $5,356 / $43,000 = .1246 (12.46%) Page Ref.: I:1-5 and I:1-6; Example I:1-5

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 income taxes due to inflation

Answer: B Page Ref.: I:1-16; Topic Review I:1-2

Jillian, a single individual, earns $230,000 in 2014 through her job as an accounting manager. What is her FICA tax? A) $10,859 B) $17,595 C) $10,589 D) $8,951

Answer: A Explanation: [($200,000 * .062) + ($200,000 * .0145) + ($30,000 * .0235)] = $10,859 Page Ref.: I:1-11

Helen, who is single, is considering purchasing a residence that will provide a $28,000 tax deduction for property taxes and mortgage interest. If her marginal tax rate is 25% and her effective tax rate is 20%, what is the amount of Helen's tax savings from purchasing the residence? A) $5,600 B) $7,000 C) $21,000 D) $22,400

Answer: B Explanation: $28,000 * .25 = $7,000 Page Ref.: I:1-5 Example I:1-4

Charlie makes the following gifts in the current year: $40,000 to his spouse, $30,000 to his church, $18,000 to his nephew, and $25,000 to a friend. Assuming Charlie does not elect gift splitting with his wife, his taxable gifts in the current year will be A) $13,000 B) $15,000 C) $25,000 D) $41,000

Answer: B Explanation: [($18,000 - $14,000) + ($25,000 - $14,000)] = $15,000 Page Ref.: I:1-8; Example I:1-6

Thomas dies in the current year and has a gross estate valued at $3,000,000. During his lifetime (but after 1976) Thomas made taxable gifts of $400,000. The estate incurs funeral and administrative expenses of $100,000 and also pays off Thomas's debts which amount to $300,000. Thomas bequeaths $500,000 to his wife. What is the amount of Thomas's tax base, the amount on which the estate is computed? A) $2,100,000 B) $2,500,000 C) $2,600,000 D) $3,400,000

Answer: B Explanation: [($3,000,000 - $100,000 - $300,000 - $500,000) = $2,100,000 + $400,000 = $2,500,000 Page Ref.: I:1-9 Example I:1-7

All of the following items are included in gross income except A) alimony received B) rent income C) interest earned on a bank account D) child support payments received

Answer: D Page Ref.: I:2-3; Table I:2-2

The unified transfer tax system A) imposes a single tax upon transfers of property during an individual's lifetime only. B) imposes a single tax upon the transfers of property during an individual's life and at death. C) imposes a single tax upon transfers of property only at an individual's death. D) none of the above.

Answer: B Page Ref.: I:1-7

Anita, who is divorced, maintains a home in which she and her 16-year-old daughter live. Anita provides the majority of the support for her daughter and for a son, age 23, who is enrolled part-time at the university and lives in the dorm. The son also works in the campus bookstore and earns spending money of $4,500. How many personal and dependency exemptions may Anita claim? A) 1 B) 2 C) 3 D) 4

Answer: B Page Ref.: I:2-13

All of the following items are deductions for (not from) adjusted gross income except A) moving expenses B) unreimbursed employee business expenses C) qualifying contributions to individual retirement accounts D) one-half of self-employment taxes paid

Answer: B Page Ref.: I:2-5; Table I:2-4

Charlotte pays $16,000 in tax deductible property taxes. Charlotte's marginal tax rate is 28%, the effective tax rate is 22%, and the average rate is 25%. Charlotte's tax savings from paying the property tax is A) $3,520 B) $4,000 C) $4,480 D) $11, 520

Answer: C Explanation: $16,000 * .28 = $4,480 Page Ref.: I:1-5; Example I:1-4

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

Answer: C Explanation: $25,000 - (.35 * $25,000) = $16,250 Page Ref.: I:1-15; Example I:1-11

Cheryl is claimed as a dependent on her parents' tax return. She had a part-time job during 2014 and earned $4,900 during the year, in addition to $600 of interest income. What is her standard deduction? A) $1,000 B) $4,900 C) $5,250 D) $6,120

Answer: C Explanation: $4,900 + $350 = $5,250 Page Ref.: I:2-12

All of the following items are deductions for adjusted gross income except A) alimony paid. B) trade or business expenses. C) rent and royalty expenses. D) state and local income taxes.

Answer: D Page Ref.: I:2-4 & I:2-5; Table I:2-4

On June 1, 2014, Ellen turned 65. Ellen has been a widow for 5 years and has no dependents. Her standard deduction is A) $3,950 B) $6,200 C) $7,750 D) $12,400

Answer: C Page Ref.: I:2-11

John supports Kevin, his cousin, who lived with him throughout 2014. John also supports three other individuals who do not live with him: Donna, who is John's mother Melissa, who is John's stepsister Morris, who is Kevin's brother Assume that Donna, Melissa, Morris, and Kevin each earn less than $3,950. How many personal and dependency exemptions may John claim? A) 2 B) 3 C) 4 D) 5

Answer: C Page Ref.: I:2-14; Example I:2-9

Ben, age 67, and Karla, age 58, have two children who live with them and for whom they provide total support. Their daughter is 21 year old, blind, is not a full-time student and has not income. Her twin brother is 21 years old, has good sight, is a full-time student, and has income of $4,500. Ben and Karla can claim how many personal and dependency exemptions on their tax return? A) 2 B) 3 C) 4 D) 5

Answer: C Page Ref.: I:2-13

Which of the following is not one of Adam Smith's canons of taxation? A) Equity B) Convenience C) Certainty D) Paid by all citizens

Answer: D Page Ref.: I:1-12

Which of the following taxes is progressive? A) Sales tax B) Excise tax C) Property tax D) Federal income tax

Answer: D Page Ref.: I:1-12; Topic Review I:1-1

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

Answer: D Page Ref.: I:1-7