Chapter 1 Review - Introduction to Taxation, the Income Tax Formula, & Form 1040EZ

In 2017, Ryan files as single and has taxable income of $75,673. Using the tax tables in Appendix D, his tax liability totals $

$12,588 Rationale: Use Tax Charts on IRS.gov

Cathy purchases a new computer for $500 in a state where the sales tax rate is 5%. The amount of sales tax that will be added to the purchase is $____.

$25

Roger purchased a new suit for $350. The sales tax rate was 6%. What is the total cost of the suit to Roger?

$371

Amy and Ethan are married and file a joint return for 2017. Using the tax tables in Appendix D, their taxable income is $95,300. What is the amount of their tax liability?

$12851 Rationale: Round up

Arlene is single and has taxable income of $18,000. Her tax liability is currently $1,970 She has the opportunity to earn an additional $5,000 if she accepts and completes a special project at work. There are no additional expenses to offset the $5,000 income. Consequently, Arlene will have a tax liability of $2,570 if she accepts the special project. Arlene has a marginal tax rate of _____.

12% Because marginal tax rate takes the highest tax rate bracket.

Arlene is single and has taxable income of $34,000. Her tax liability is currently $3,890. She has the opportunity to earn an additional $5,000 this year. Her tax liability will grow to $4,520 if she receives the additional income. What is Arlene's marginal tax rate?

12.6% Rationale: Change in tax/change in taxable income: (4520-3890)/5000 = .126 or 12.6%

Steven and Sally have income from all sources (taxable and nontaxable) totaling $139,286. Their taxable income is $114,706. Their tax liability is $17,114. Their average tax rate is _______.

15% Rationale: 17,114/ 114,706 = 0.149 = 15%

Randall is single and has total income from all sources (taxable and nontaxable) of $83,000. His taxable income is $62,000. Randall's tax liability is $9,580. What is Randall's average tax rate?

15.45% Rationale: 9,580/62,000=15.45%

A _____ tax structure applies the same tax rate to all levels of income, while a _____ tax structure applies higher tax rates as the tax base increases and a _____ tax structure applies lower tax rates as the tax base increases.

A proportional tax structure applies the same tax rate to all levels of income, while a progressive tax structure applies higher tax rates as the tax base increases and a regressive tax structure applies lower tax rates as the tax base increases.

Sales tax is an example of what tax rate structure?

A sales tax is an example of a tax that uses a proportional tax rate structure when compared to its tax base.

Put the following items in the order in which they are found in the individual income tax formula. A. Taxable Income B. Minus Tax Credits and Prepayments C. Equals Tax Due or Refunded D. Equals Income Tax Liability E. Times Tax Rates

Answers: A, E, D, B, C

Which of the following statements are correct regarding the history of the U.S. personal income tax? A. The first personal income tax contained a very high marginal tax rate. B. The first personal income tax was enacted to fund the Spanish-American War. C. The income tax was once ruled unconstitutional. D. The 16th Amendment to the U.S. Constitution gives Congress the power to assess income tax on individuals.

Answers: C & D

Put the following items in the order in which they are found in the individual income tax formula. A. Minus Tax Credits and Prepayments B. Times Tax Rate C. Equals Income Tax Liability D. Equals Tax Due or Refunded E. Taxable Income

Answers: E, B, C, A, D

Which of the following taxes uses a progressive tax rate structure? A. Excise tax B. Federal individual income tax C. Sales Tax D. Social Security Tax

B. Federal Individual Income Tax

Starting with the highest authoritative weight, rank the authorities in descending order. A. Revenue Rulings and Revenue Procedures B. Internal Revenue Code C. Treasury Regulations D. Private Letter Rulings

B. Internal Revenue Code C. Treasury Regulations A. Revenue Rulings and Revenue Procedures D. Private Letter Rulings

The federal income tax system is an example of what tax structure?

The federal income tax system is an example of a progressive tax structure.

Which of the following taxes uses a proportional tax rate structure? A. Social Security Tax B. Federal Individual Income Tax C. State Sales Tax D. Federal Estate Tax

C. State Sales Tax

Which of the following statements is incorrect regarding Treasury regulations? A. Proposed regulations do not carry the same authoritative weight as final regulations. B. Final regulations represent the Treasury's interpretation of the Code. C. Temporary regulations carry less authoritative weight than final regulations. D. Proposed regulations allow public comment on them.

C. Temporary regulations carry less authoritative weight than final regulations.

What type of tax structure does the federal individual income tax system in the United States use?

The federal individual income tax system in the United States uses a progressive tax structure.

Proportional Tax Rate Structure

Imposes a constant tax rate across the tax base.

Regressive Tax Rate Structure

Imposes a decreasing marginal tax rate as the tax base increases.

Progressive Tax Rate Structure

Imposes an increasing marginal rate as the tax base increases.

Administrative and judicial tax authorities are interpretations of which statutory authority?

Internal Revenue Code

What is a statutory tax authority?

Internal Revenue Code

What type of tax authority is the U.S. Constitution, the Internal Revenue Code, and tax treaties?

Legislative

Which type of tax authority is the Internal Revenue Code of 1986?

Legislative

Mary Beth is considering accepting some additional contract work. She is trying to evaluate whether the compensation for the job is worth the effort. Which tax rate should she use to calculate her after-tax proceeds of accepting the job?

Marginal Tax Rate

What are private letter rulings?

Private letter rulings are less authoritative and more specific than revenue rulings and regulations.

What do revenue rulings address?

Revenue rulings address the application of the Code and regulations to a specific factual situation. They provide a much more detailed interpretation of the Code than the regulations as it applies to a specific transaction.

Which of the following taxes uses a regressive tax rate structure?

Social Security Tax.

Which type of tax authority is the Internal Revenue Code of 1986?

Statutory/ Legislative

The Treasury Department is charged with ______ and ______ the tax laws of the United States.

The Treasury Department is charged with administering and interpreting the tax laws of the United States.

Which of the following sentences describes the average tax rate?

The average level of taxation on each dollar of the taxpayer's taxable income.

The _____ tax rate measures the average percentage of tax on only taxable income.

The average tax rate measures the average percentage of tax on only taxable income.

Why was the first personal income tax enacted in 1861?

The first personal income tax was enacted in 1861 to fund the civil war.

Who has the ultimate authority to interpret the IRC and settle tax disputes?

The judicial system

The _____ tax rate indicates the rate of tax on the next additional increment of income.

The marginal tax rate indicates the rate of tax on the next additional increment of income.

Social security is an example of what type of tax structure?

The social security tax is an example of a regressive tax structure because individuals do NOT incur this tax on earnings in excess of $128,400 (for 2018).

Which tax rate structure for the tax rate remains the same for all levels of the tax base?

The tax rate structure for which the tax rate remains the same for all levels of the tax base is the proportional rate structure.

What are the three types of tax rate structures?

The three types of tax rate structures are progressive, proportional, and regressive.

The _____ _____ is charged with administering and interpreting the tax laws.

The treasury department is charged with administering and interpreting the tax laws.

The _____ amount is credited to the account of the taxpayer and reduces the amount of tax otherwise due to the government on the due date of the return.

The withholding amount is credited to the account of the taxpayer and reduces the amount of tax otherwise due to the government on the due date of the return.

What is the purpose of Circular 230?

To provide regulations governing tax practice and applies to all persons practicing before the IRS.

Which of the following primary authorities is not a legislative source of authority?

Treasury Regulations

Treasury regulations come in four forms: _____ regulations have been issued in their final form and represent the Treasury's interpretations of the Code; _____ regulations have a limited life but carry high authoritative weight; _____ regulations, which have the lowest authority; and _____ regulations are written under a direct mandate by Congress, take the place of the IRC, and have full effect of the law.

Treasury regulations come in four forms: final regulations have been issued in their final form and represent the Treasury's interpretations of the Code; temporary regulations have a limited life but carry high authoritative weight; proposed regulations, which have the lowest authority; and legislative regulations are written under a direct mandate by Congress, take the place of the IRC, and have full effect of the law.

True or false: Taxpayers pay most of their tax liability prior to the due date of their tax returns.

True

True or false: Unemployment benefits are taxable.

True