Taxation Chapters 1-3

Taxpayers have the choice of claiming either deductions for AGI or the standard deduction. True Your answer is not correct. False

False

Social Security benefits are excluded from taxation for all taxpayers. True False

False

The portion of a​ taxpayer's wages that are garnished by court order and forwarded to pay a delinquent bank loan are not taxable income to the taxpayer. True Your answer is not correct. False

False

The primary objective of the federal income tax law is to achieve various economic and social policy objectives. True Your answer is not correct. False

False

The terms​ "progressive tax" and​ "flat tax" are synonymous. True False

False

Unemployment compensation is exempt from federal income tax. True False

False

What recent change was made to the tax treatment of dividends received by U.S. corporations from foreign​ subsidiaries? A. A territorial system has been​ adopted, effective 2018. Dividends received by U.S. corporations from a​ 10% or greater foreign subsidiary are eligible for a dividend received deduction. The dividend received deduction is​ 100% if all of the​ subsidiary's accumulated earnings are from foreign​ sources, effectively exempting the income from the U.S. corporate income tax. The deduction is prorated if a portion of the​ subsidiary's earnings are from domestic sources. This recognizes that host countries tax locally earned income. Your answer is correct.B. The Tax Cut and Jobs Act fundamentally changes the treatment of foreign dividends effective 2018. Congress adopted a territorial tax system allowing domestic corporations to claim a​ 100% dividend received deduction for dividends received from a ​ 5% or greater foreign subsidiaries with only foreign earnings. This change recognizes that host countries tax income earned locally. C. The Tax Cut and Jobs Act fundamentally changes the treatment of foreign dividends effective 2018. Congress adopted a territorial tax system allowing domestic corporations to claim a​ 100% dividend received deduction for dividends received from a​ 10% or greater foreign subsidiaries with only foreign earnings. This change recognizes that host countries do not tax income earned locally. D. A territorial system has been​ adopted, effective 2018. Dividends received by U.S. corporations from a​ 20% or greater foreign subsidiary are eligible for a dividend received deduction. The dividend received deduction is​ 100% if all of the​ subsidiary's accumulated earnings are from foreign​ sources, effectively exempting the income from the U.S. corporate income tax. The deduction is prorated if a portion of the​ subsidiary's earnings are from domestic sources. This recognizes that host countries tax locally earned income.

A. A territorial system has been​ adopted, effective 2018. Dividends received by U.S. corporations from a​ 10% or greater foreign subsidiary are eligible for a dividend received deduction. The dividend received deduction is​ 100% if all of the​ subsidiary's accumulated earnings are from foreign​ sources, effectively exempting the income from the U.S. corporate income tax. The deduction is prorated if a portion of the​ subsidiary's earnings are from domestic sources. This recognizes that host countries tax locally earned income.

Taxable income for an individual is defined as A. AGI reduced by the greater of the standard deduction or itemized deductions. Your answer is correct.B. AGI reduced by itemized deductions and tax credits. C. gross income reduced by itemized deductions. D. AGI reduced by tax credits.

A. AGI reduced by the greater of the standard deduction or itemized deductions.

Why does the tax concept of income more closely resemble the accounting concept of income than the economic​ concept? A. Administering the tax law based on the accounting concept of income is easier and​ wherewithal-to-pay is greater when income is taxed as it is realized. This is the correct answer.B. The tax concept of income is based primarily on changes in an​ individual's wealth. The​ wherewithal-to-pay is not considered when determining when taxes should be assessed. C. Under the tax concept of​ income, unrealized​ gains, as well as gifts and inheritances are income. This is deemed the most objective measure of income and is consistent with the accounting concept of income. D. Both B​ & C are correct.

A. Administering the tax law based on the accounting concept of income is easier and​ wherewithal-to-pay is greater when income is taxed as it is realized.

Alan files his 2017 tax return on April​ 1, 2018, shortly before the April 17 due date. His return contains no misstatements or omissions of income. The statute of limitations for changes to the return expires A. April​ 17, 2021. Your answer is correct.B. April​ 1, 2022. C. April​ 17, 2022. D. The statute of limitations never expires.

A. April​ 17, 2021.

Which of the following statements is incorrect​? A. Gift taxes are imposed on the recipient of a gift. B. Excise taxes are assessed on items such as gasoline and telephone use. C. The estate tax is based on the fair market value of property at death or the alternate valuation date. D. Property taxes are levied on real estate.

A. Gift taxes are imposed on the recipient of a gift.

​Dave, age 59 and​ divorced, is the sole support of his mother age​ 83, who is a resident of a local nursing home for the entire year.​ Dave's mother had no income for the year.​ Dave's filing status is A. head of household. Your answer is correct.B. married filing separately. C. married filing jointly. D. single.

A. head of household.

Which of the following is not included in gross income when​ received? A. refundable security deposit This is the correct answer.B. amounts received to cancel or modify a lease C. royalties paid to an author D. interest received on bank accounts

A. refundable security deposit

Norah, who gives music​ lessons, is a​ calendar-year taxpayer using the ​cash-basis method of accounting. On October 1 of this​ year, she received​ $1,200 for a​ one-year contract beginning on that date to provide 10 lessons. She gave 6 lessons this year. How much should Norah include in income this​ year? A. ​$1,200 Your answer is correct.B. ​$480 C. ​$360 D. ​$720

A. ​$1,200

CT Computer​ Corporation, an​ accrual-basis taxpayer, sells service contracts on the computers it sells. At the beginning of January of this​ year, CT Corporation sold contracts with service to begin​ immediately: One for three months ​$200 One for 20 months 800 One for 48 months ​4,000 The amount of income CT Corporation must report for this year is A. ​$1,680. Your answer is correct.B. ​$200. C. ​$5,000. D. ​$1,000.

A. ​$1,680.

The only business entity that pays federal income taxes is the C corporation. True Your answer is correct. False

True

Which of the following criteria is not required to be met under the tax concept of​ income? A. Income must be recognized. B. Cash must be received. This is the correct answer.C. There must be economic benefit. Your answer is not correct.D. Income must be realized.

B. Cash must be received.

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

B. Internal Revenue Code

When property is​ transferred, the gift tax is based on A. the​ transferor's depreciated cost of the transferred property. Your answer is not correct.B. fair market value on the date of transfer. This is the correct answer.C. the​ transferor's original cost of the transferred property. D. replacement cost of the transferred property.

B. fair market value on the date of transfer.

Which of the following is not a taxpaying​ entity? A. C corporation B. partnership C. individual D. All of the above are taxpayers.

B. partnership

Ricardo owns a small unincorporated business. His​ 15-year-old daughter Jane works in the business on a​ part-time basis and was paid wages of​ $3,000 during the current year. Who is taxed on the​ child's earnings: Jane or her​ father? Explain. A. Since Jane has earned income and her father is her​ employer, both Jane and father are taxed on​ $1,500 each. This is true since Jane is under age 18 and she is employed by a family member. B. Jane is taxed even if her father is the employer. Since Jane has earned​ income, the​ $3,000 of wages are not subject to the kiddie tax rules and are not included on the​ parent's return. This is true even though Jane is under age 18. This is the correct answer.C. Neither Jane nor her father are taxed on the​ $3,000, since Jane is under age 18 and this is earned income from a related party. D. Since Jane is under age 18 and has earned​ income, the​ $3,000 of wages are subject to the kiddie tax rules and are included on the​ parent's return.

B. Jane is taxed even if her father is the employer. Since Jane has earned​ income, the​ $3,000 of wages are not subject to the kiddie tax rules and are not included on the​ parent's return. This is true even though Jane is under age 18.

Office space is often rented without​ carpet, wall​ covering, or window covering.​ Furthermore, many rental agreements specify that these improvements cannot be removed by a tenant if removal causes any damage to the property. What issue does this​ raise? A. Such arrangements might cause the IRS to question whether the improvements are being made in lieu of rent. If such was the case the tenant would be required to include the value of the improvements in their taxable income. B. Such arrangements might cause the IRS to question whether the improvements are being made in lieu of rent. If such was the case then the owner of the property may be required to include the value of the improvements in gross income. Your answer is correct.C. Such arrangements might cause the IRS to question whether losses from the damages are deductible. In this case the owner would be responsible for including the value of the improvements in gross​ income, in addition to the rent that is collected from the tenant. D. This situation is normal and does not raise any issues.

B. Such arrangements might cause the IRS to question whether the improvements are being made in lieu of rent. If such was the case then the owner of the property may be required to include the value of the improvements in gross income.

What phrase is found in both the Sixteenth Amendment to the Constitution and Sec.​ 61(a)? Why does the phrase appear in both​ locations? A. The phrase​ "income from whatever source​ derived" appears in both the Sixteenth Amendment to the Constitution and Sec.​ 61(a). It appears in both documents since income from all sources are always taxable. B. The phrase​ "income from whatever source​ derived" appears in both the Sixteenth Amendment to the Constitution and Sec.​ 61(a). This overlapping terminology was adopted to assure the constitutionality of the income tax. Your answer is correct.C. The phrase​ "gross income means all​ income" appears in both the Sixteenth Amendment to the Constitution and Sec.​ 61(a). This overlapping terminology was adopted to assure the constitutionality of the income tax. D. The phrase​ "gross income means all​ income" appears in both the Sixteenth Amendment to the Constitution and Sec.​ 61(a). It appears in both documents since​ economists, accountants, tax​ specialists, and politicians universally accept this definition of income.

B. The phrase​ "income from whatever source​ derived" appears in both the Sixteenth Amendment to the Constitution and Sec.​ 61(a). This overlapping terminology was adopted to assure the constitutionality of the income tax.

Tobe is a​ 22-year-old college student with​ $5,000 of interest income and​ $6,000 of earned income. Kiddie tax will apply to him if A. he is a​ full-time student and the cost of his support is​ $12,000 or less. B. he is a​ full-time student and the cost of his support exceeds​ $12,000. This is the correct answer.C. he is a​ part-time student and the cost of his support exceeds​ $12,000. Your answer is not correct.D. he is a​ part-time student and the cost of his support is​ $12,000 or less.

B. he is a​ full-time student and the cost of his support exceeds​ $12,000.

When a spouse​ dies, the surviving spouse for the year of death A. must file a tax return using the single filing status. B. may file a married filing jointly return. Your answer is correct.C. must file a tax return using the head of household filing status. D. may file a married filing jointly return only if the death occurred in the last half of the year.

B. may file a married filing jointly return.

The IRS must pay interest on A. tax refunds paid later than 30 days after the due date. B. tax refunds paid later than 45 days after the due date. This is the correct answer.C. all tax refunds. Your answer is not correct.D. The IRS never pays interest on tax refunds.

B. tax refunds paid later than 45 days after the due date.

Vertical equity means that A. taxpayers with the same amount of income should pay the same amount of tax. B. taxpayers with larger amounts of income should pay more tax than taxpayers with lower amounts of income. This is the correct answer.C. all taxpayers should pay the same tax. Your answer is not correct.D. None of the above.

B. taxpayers with larger amounts of income should pay more tax than taxpayers with lower amounts of income.

Horizontal equity means that A. all taxpayers should pay the same tax. Your answer is not correct.B. taxpayers with the same amount of income should pay the same amount of tax. This is the correct answer.C. taxpayers with larger amounts of income should pay more tax than taxpayers with lower amounts of income. D. None of the above.

B. taxpayers with the same amount of income should pay the same amount of tax.

In order to shift the taxation of dividend income from a parent to a child A. the parent can deposit the dividend in the​ child's bank account. B. the parent must transfer ownership of the stock to the child. Your answer is correct.C. the parent must direct the corporation to pay the dividend to the child. D. all of the above will result in shifting the taxation to the child.

B. the parent must transfer ownership of the stock to the child.

Which of the following taxes is​ progressive? A. excise tax B. federal income tax Your answer is correct.C. property tax D. sales tax

B. Federal Income Tax

What is the significance of a constructive​ dividend? A. A constructive dividend is a distribution by a regulated investment company realized from the sale of investments. Such dividends also include any undistributed capital gains allocated to shareholders by such companies. B. Constructive dividends are distributions to shareholders that are taxable as dividends only to the extent they are made from either the​ corporation's current earnings and profits or accumulated earnings and profits. Distributions in excess of current and accumulated earnings and profits are treated as a taxable recovery of capital. Distributions in excess of the basis of stock are classified as ordinary income. Your answer is not correct.C. A constructive dividend is a dividend that is given some other label by the parties. For​ example, a dividend may be called compensation. Such amounts are reclassified as dividends for tax purposes.​ Thus, the deduction for compensation would be disallowed if a payment were reclassified as a dividend. This is the correct answer.D. A constructive dividend is a dividend that is given some other label by the parties. The only type of constructive dividends are payments involving​ shareholder-employee compensation payments. A corporation may not deduct dividends paid to​ shareholders, but is permitted to deduct reasonable compensation.

C. A constructive dividend is a dividend that is given some other label by the parties. For​ example, a dividend may be called compensation. Such amounts are reclassified as dividends for tax purposes.​ Thus, the deduction for compensation would be disallowed if a payment were reclassified as a dividend.

Do you agree or disagree with the following​ statement: A taxpayer should not have to report income when debt is forgiven because the taxpayer receives nothing. Explain. A. Disagree. The forgiveness of debt does result in an economic benefit as the debtor is relieved of the obligation but this is only allowed once in a lifetime. B. Disagree. The forgiveness of debt does result in an indirect economic benefit as the debtor is only allowed to be relieved of​ 50% of the total obligation. C. Disagree. The forgiveness of debt does result in an economic benefit as the debtor is relieved of the obligation to make future payments. Your answer is correct.D. Agree. The forgiveness of debt does not result in an indirect economic benefit as the debtor receives no financial benefit for the obligation.

C. Disagree. The forgiveness of debt does result in an economic benefit as the debtor is relieved of the obligation to make future payments.

Contrast the accounting and economic concepts of income. A. Accountants define income as the amount that an individual could consume during a period and remain as well off at the end of the period as he or she was at the beginning of the period. Economists measure income when it is realized in a completed transaction. B. Economists traditionally use historical costs to measure income. Accountants adjust for inflation when measuring income. C. Economists define income as the amount that an individual could consume during a period and remain as well off at the end of the period as he or she was at the beginning of the period. In​ accounting, income is measured by a transactions approach. Accountants measure income when it is realized in a completed transaction. Your answer is correct.D. Accountants include unrealized​ gains, as well as gifts and​ inheritances, as income. Economists only include amounts that have been realized as income.

C. Economists define income as the amount that an individual could consume during a period and remain as well off at the end of the period as he or she was at the beginning of the period. In​ accounting, income is measured by a transactions approach. Accountants measure income when it is realized in a completed transaction.

Which of the following statements is false​? A. Under the cash​ method, prepaid income such as rent is usually taxed when received rather than when earned. Your answer is not correct.B. Alimony received by the taxpayer under a 2018 divorce agreement is taxable. C. Municipal bond interest is taxable. This is the correct answer.D. Income earned by selling goods on the Internet is taxable.

C. Municipal bond interest is taxable.

Does the fact that an item of income is paid in a form other than cash mean it is​ nontaxable? Explain. A. Yes. Gross income is limited to amounts received in the form of​ cash, not property or services. B. No. The main issue is whether the taxpayer receives any form of a personal benefit. Such as a grandfather transferring stocks and bonds to his grandson for a college​ education; this transaction is taxable. C. No. The form of payment is usually unimportant. The important question is whether the taxpayer receives economic benefit. This is the correct answer.D. No. The general rule is the method of payment does not matter. For barter transactions which are direct exchanges of property and​ services, only one party to the transaction is taxed on the value of the property or services received in the exchange.

C. No. The form of payment is usually unimportant. The important question is whether the taxpayer receives economic benefit.

Which of the following is not an objective of the federal income tax​ law? A. Prevent taxpayers from paying a higher percentage of their income in personal income taxes due to inflation. B. Encourage research and development activities. C. Redistribution of wealth. Your answer is correct.D. Stimulate private investment.

C. Redistribution of wealth.

Which of the following bonds do not generate​ tax-exempt federal​ income? A. school district bonds B. bonds issued by cities C. U.S. Treasury bonds Your answer is correct.D. bonds issued by fire districts

C. U.S. Treasury bonds

All of the following items are included in gross income except A. rent income. B. interest earned on a bank account. C. child support payments received. This is the correct answer.D. pension benefits received.

C. child support payments received.

Which of the following credits is considered a refundable​ credit? A. adoption expense credit B. credit for elderly and disabled C. earned income credit Your answer is correct.D. lifetime learning credit

C. earned income credit

The corporate tax rate is A. regressive. B. progressive. Your answer is not correct.C. proportional. This is the correct answer.D. none of the above.

C. proportional.

Which of the following is not considered support for the dependent support​ test? A. food B. rental value of lodging C. value of services rendered by the taxpayer for the dependent Your answer is correct.D. clothing

C. value of services rendered by the taxpayer for the dependent

Do you agree or disagree with the following​ statement: A taxpayer should not have to report income when debt is forgiven because the taxpayer receives nothing. Explain. A. Disagree. The forgiveness of debt does result in an economic benefit as the debtor is relieved of the obligation but this is only allowed once in a lifetime. B. Disagree. The forgiveness of debt does result in an indirect economic benefit as the debtor is only allowed to be relieved of​ 50% of the total obligation. C. Disagree. The forgiveness of debt does result in an economic benefit as the debtor is relieved of the obligation to make future payments. Your answer is correct.D. Agree. The forgiveness of debt does not result in an indirect economic benefit as the debtor receives no financial benefit for the obligation.

D. Agree. The forgiveness of debt does not result in an indirect economic benefit as the debtor receives no financial benefit for the obligation.

The term​ "tax law" includes A. Internal Revenue Code. B. judicial decisions. C. Treasury Regulations. D. All of the above.

D. All of the above.

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

D. Internal Revenue Code.

What recent change has been made to the tax treatment of​ alimony? A. Prior law applies to divorces and separations executed on or before December​ 31, 2018. Alimony payments covered by prior law are neither taxable to the recipient nor deductible by the payor. Alimony payments covered by the new law are deductible for AGI by the payor and are included in the gross income of the recipient. B. Prior law applies to divorces and separations executed on or before December​ 31, 2018. Alimony payments covered by prior law are deductible for AGI by the payor and are included in the gross income of the recipient. Alimony payments covered by the new law are taxable to the recipient but are not deductible by the payor. Your answer is not correct.C. Prior law applies to divorces and separations executed on or before December​ 31, 2018. Alimony payments covered by prior law are neither taxable to the recipient nor deductible by the payor. Alimony payments covered by the new law are deductible for AGI by the payor but are not included in the gross income of the recipient. D. Prior law applies to divorces and separations executed on or before December​ 31, 2018. Alimony payments covered by prior law are deductible for AGI by the payor and are included in the gross income of the recipient. Alimony payments covered by the new law are neither taxable to the recipient nor deductible by the payor.

D. Prior law applies to divorces and separations executed on or before December​ 31, 2018. Alimony payments covered by prior law are deductible for AGI by the payor and are included in the gross income of the recipient. Alimony payments covered by the new law are neither taxable to the recipient nor deductible by the payor.

Until about 100 years​ ago, attempts to impose a federal income tax were ruled unconstitutional. The amendment to the U.S. Constitution allowing the imposition of a federal income tax is the A. Nineteenth Amendment. B. Second Amendment. C. Thirteenth Amendment. D. Sixteenth Amendment.

D. Sixteenth Amendment.

The largest source of revenues for the federal government comes from A. Social Security and Medicare taxes​ (FICA). B. estate and gift taxes. C. corporate income taxes. D. individual income taxes.

D. individual income taxes.

Which is not a component of tax​ practice? A. compliance Your answer is not correct.B. tax planning and consulting C. tax research D. providing clients tax refund advance loans

D. providing clients tax refund advance loans

Ms.​ Marple's books and records for 2018 reflect the following​ information: Salary earned this year ​$65,000 Interest on savings account​ (credited to her account in​ 2018, withdrawn in​ 2019) ​1,000 Interest on county bonds earned and collected in 2018 ​2,000 What is the amount Ms. Marple should include in her gross income in​ 2018? A. ​$67,000 B. ​$68,000 C. ​$65,000 D. ​$66,000

D. ​$66,000

A qualifying child of the taxpayer must meet the gross income test. True Your answer is not correct. False

False

The marginal tax rate is useful in tax planning because it measures the tax effect of a proposed transaction. True Your answer is correct. False

True

A married couple separates in late​ 2018, but the related legal documents are not drafted and finalized until 2019. The alimony payments will be taxable to the recipient and deductible by the​ payor, but the property settlement and child support will have no tax impact.

True

A progressive tax rate structure is one where the rate of tax increases as the tax base increases. True Your answer is correct. False

True

A taxpayer may not avoid responsibility for payment of income taxes by assigning the income to a third party. True Your answer is correct. False

True

For purposes of the dependency​ exemption, a qualifying child must be under age​ 19, a​ full-time student under age​ 24, or a permanently and totally disabled child. True Your answer is correct. False

True

Gains realized from property transactions are included in gross income unless a nonrecognition rule applies. True Your answer is correct. False

True

Generally, itemized deductions are personal expenses specifically allowed by the tax law. True Your answer is correct. False

True

Gifts between spouses are generally exempt from transfer taxes. True Your answer is correct. False

True

In order to be treated as alimony for tax​ purposes, payments must be made in cash. True Your answer is correct. False

True

The Sixteenth Amendment to the U.S. Constitution permits the passage of a federal income tax law. True Your answer is correct. False

True

The federal income tax is the dominant form of taxation by the federal government. True Your answer is correct. False

True

The various entities in the federal income tax system may be classified into two general​ categories, taxpaying entities ​(such as individuals and C​ [regular] corporations) and ​flow-through entities such as sole​ proprietorships, partnerships, S​ corporations, and limited liability companies. True Your answer is correct. False

True