Chapter 4 Tax Accounting

61) 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.

66) Which of the following is not an itemized deduction? A) Alimony Paid B) Medical expenses. C) Real estate taxes. D) Charitable contributions.

A) Alimony Paid

84) Catherine de Bourgh has one child, Anne, who is 18 years old at the end of the year. Anne lived at home for seven months during the year before leaving home to attend State University for the remaining five months of the year. During the year, Anne earned $6,000 while working part time. Catherine provided 80 percent of Anne's support and Anne provided the rest. Which of the following statements regarding whether Anne is Catherine's qualifying child for the current year is correct?A) Anne is a qualifying child of Catherine. B) Anne is not a qualifying child of Catherine because she fails the gross income test. C) Anne is not a qualifying child of Catherine because she fails the residence test. D) Anne is not a qualifying child of Catherine because she fails the support test.

A) Anne is a qualifying child of Catherine.

56) Which of the following series of inequalities is generally most accurate? A) Gross income ≥ adjusted gross income ≥ taxable income B) Adjusted gross income ≥ gross income ≥ taxable income C) Adjusted gross income ≥ taxable income ≥ gross income D) Gross income ≥ taxable income ≥ adjusted gross income

A) Gross income ≥ adjusted gross income ≥ taxable income

94) In June of Year 1, Edgar's wife, Cathy, died, and Edgar did not remarry during the year. What is his filing status for Year 1 (assuming they did not have any dependents)? A) Married filing jointly. B) Single. C) Qualifying widower. D) Head of household.

A) Married filing jointly.

99) 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.

63) Which of the following statements regarding for AGI tax deductions is true? A) Taxpayers subtract for AGI deductions from gross income to determine AGI. B) A taxpayer may deduct for AGI deductions only if the deductions exceed the taxpayer's standard deduction amount. C) The deduction for qualified business income is a for AGI deduction. D) A taxpayer may deduct for AGI deductions only if the deductions exceed the taxpayer's itemized deductions.

A) Taxpayers subtract for AGI deductions from gross income to determine AGI.

81) Sheri and Jake Woodhouse have one daughter, Emma, who is 16 years old. They also have taken in Emma's friend, Harriet, who has lived with them since February of the current year and is also 16 years of age. The Woodhouses have not legally adopted Harriet but Emma often refers to Harriet as her sister The Woodhouses provide all of the support for both girls, and both girls live at the Woodhouse residence. Which of the following statements is true regarding whom Sheri and Jake may claim as dependents for the current year? A) They may claim Emma as a dependent qualifying child but may not claim Harriet as a dependent. B) They may claim Emma as a dependent qualifying child and they may claim Harriet as a dependent qualifying child. C) They may claim Emma as a dependent qualifying child and they may claim Harriet as a dependent qualifying relative. D) None of these statements are true.

A) They may claim Emma as a dependent qualifying child but may not claim Harriet as a dependent.

79) 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.

72) Jamison's gross tax liability is $7,000. Jamison had $2,000 of available credits and he had $4,000 of taxes withheld by his employer. What are Jamison's taxes due (or taxes refunded) with his tax return? A) $5,000 taxes due. B) $1,000 taxes due. C) $1,000 tax refund. D) $3,000 taxes due.

B) $1,000 taxes due.

89) Earl and Lawanda Jackson have been married for 15 years. They have no children. Ned, who is an old friend from high school, has been living with the Jacksons during the current year. Which of the following is a true statement regarding whether the Jacksons can claim Ned as a dependent for the current year? A) If Ned moved into the Jackson's home in June and he lived there for the remainder of the year, he may qualify as the Jackson's qualifying relative. B) Assume that Ned originally moved into the Jackson's home two years ago and he has lived there ever since. If this year Ned earned $3,000 at a part-time job and he received $5,000 in municipal bond interest, he may qualify as the Jackson's dependent so long as the Jacksons provided more than half his support. C) If Ned lived in the Jackson's home for the entire year, he will qualify as their dependent no matter who provided his support. D) If Ned is over 19 or he is not a full-time student, he cannot qualify as the Jackson's dependent.

B) Assume that Ned originally moved into the Jackson's home two years ago and he has lived there ever since. If this year Ned earned $3,000 at a part-time job and he received $5,000 in municipal bond interest, he may qualify as the Jackson's dependent so long as the Jacksons provided more than half his support.

98) Jan is unmarried and has no children, but she provides all of the financial support for her mother, who lives in an apartment across town. Jan's mother qualifies as Jan's dependent. Which is the most advantageous filing status available to Jan? A) Single. B) Head of household. C) Qualifying individual. D) Surviving single.

B) Head of household.

95) 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

106) Miguel, a widower whose wife died in Year 1, maintains a household for himself and his daughter, who qualifies as his dependent. Miguel did not remarry. What is the most favorable filing status that Miguel qualifies for in Year 3? A) Single. B) Qualifying widower. C) Head of household. D) Married filing separately.

B) Qualifying widower.

57) 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.

74) Which of the following statements regarding dependents is false? A) A taxpayer may be allowed to claim another as a dependent even if the taxpayer has no family relationship with the other person. B) To qualify as a dependent of another, an individual must be a resident of the United States. C) An individual who qualifies as a dependent of another taxpayer may not claim any dependents. D) An individual cannot qualify as a dependent of another as a qualifying relative taxpayer if the individual's gross income exceeds a certain amount.

B) To qualify as a dependent of another, an individual must be a resident of the United States.

92) Which of the following is not a filing status? A) Head of household. B) Unmarried. C) Qualifying widow or widower. D) Married filing jointly.

B) Unmarried.

83) In order to be a qualifying relative of another, an individual's gross income must be less than ________. A) the applicable standard deduction amount B) a fixed amount specified for the particular tax year C) one-half of the individual's support D) None of the choices are correct.

B) a fixed amount specified for the particular tax year

103) 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

73) Madisons 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.

60) Lebron received $50,000 of compensation from his employer and he received $400 of interest from a municipal bond. What is the amount of Lebron's gross income from these items? A) $0. B) $400. C) $50,000. D) $50,400.

C) $50,000.

93) 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.

77) 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.

62) Which of the following statements regarding tax deductions is false? A) Taxpayers are not entitled to any deductions unless specific provisions in the tax code allow the deductions. B) Deductions can be labeled as deductions above the line or deductions below the line. C) From AGI deductions tend to be associated with business activities while for AGI deductions tend to be associated with personal activities. D) The standard deduction is a from AGI deduction.

C) From AGI deductions tend to be associated with business activities while for AGI deductions tend to be associated with personal activities.

90) Michael, Diane, Karen, and Kenny provide support for their mother, Janet, who is 75 years old. Janet lives by herself in an apartment in Los Angeles. Janet's gross income for the year is $3,000. Janet provides 10 percent of her own support, Michael provides 40 percent of Janet's support, Diane provides 8 percent of Janet's support, Karen provides 10 percent of Janet's support, and Kenny provides the remaining 32 percent of Janet's support. Under a multiple support agreement, who is eligible to claim Janet as a dependent as a qualifying relative? A) Michael, Diane, Karen, and Kenny. B) Michael, Karen, and Kenny. C) Michael and Kenny. D) Michael.

C) Michael and Kenny.

70) Which of the following statements is true? A) Income character determines the tax year in which the income is taxed. B) Income character depends on the taxpayer's filing status. C) Qualified dividend income is taxed at a lower rate than an equal amount of ordinary income. D) A taxpayer selling a capital asset at a gain recognizes ordinary income.

C) Qualified dividend income is taxed at a lower rate than an equal amount of ordinary income

71) 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

88) Which of the following statements regarding the difference between the requirements for a qualifying child and the requirements for a qualifying relative is false? A) The relationship requirement is more broadly defined (more inclusive) for qualifying relatives than for qualifying children. B) Qualifying children are subject to age restrictions while qualifying relatives are not. C) The support test for qualifying relatives focuses on the support the potential dependent self provides while the support test for qualifying children focuses on the support the taxpayer provides D) Qualifying relatives are subject to a gross income restriction while qualifying children are not.

C) The support test for qualifying relatives focuses on the support the potential dependent self provides while the support test for qualifying children focuses on the support the taxpayer provides

91) Filing status determines all of the following except ________. A) the applicable standard deduction amount B) the appropriate tax rate schedule or tax table C) the top-stated marginal rate in the tax rate schedule D) the AGI threshold for reductions in certain tax benefits

C) the top-stated marginal rate in the tax rate schedule

59) 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.

55) 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.

58) Which of the following statements regarding exclusions and/or deferrals is false? A) Exclusions are favorable because taxpayers never pay tax on income that is excluded. B) Interest income from municipal bonds is excluded from gross income. C) Deferrals are income items taxpayers realize in one year but include in gross income in a subsequent year. D) An income item need not be realized in order to qualify as an exclusion item.

D) An income item need not be realized in order to qualify as an exclusion item.

68) Which of the following types of income are not considered ordinary income? A) Compensation income. B) Net long-term capital gains (in excess of short-term capital losses). C) Qualified dividend income. D) Both compensation income and qualified dividend income. E) Both net long-term capital gains (in excess of short-term capital losses) and qualified dividend income.

D) Both compensation income and qualified dividend income.

64) All of the following are for AGI deductions except: A) Contributions to qualified retirement accounts. B) Rental and royalty expenses. C) Business expenses for a self-employed taxpayer. D) Charitable contributions.

D) Charitable contributions.

85) Katy has one child, Dustin, who is 18 years old at the end of the year. Dustin lived at home for three months during the year before leaving home to work full time in another city. During the year, Dustin earned $15,000. Katy provided more than half of Dustin's support for the year. Which of the following statements regarding whether Katy may claim Dustin as a dependent for the current year is accurate? A) Dustin is a qualifying child of Katy. B) Dustin fails the residence test for a qualifying child but he is considered a qualifying relative of Katy. C) Dustin fails the support test for a qualifying relative. D) Dustin fails the gross income test for a qualifying relative.

D) Dustin fails the gross income test for a qualifying relative

104) In Year 1, Harold Weston's wife died. Since her death, he has maintained a household for their son, Frank (age 3), his qualifying child. Which is the most advantageous filing status available to Harold in Year 4? A) Married filing jointly. B) Surviving spouse. C) Qualifying widower. D) Head of household.

D) Head of household.

65) 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.

18) Tax credits reduce taxable income dollar for dollar.

False

41) It is generally more advantageous from a tax perspective for a married couple to file separately than it is for them to file jointly.

False

76) All of the following are tests for determining qualifying child status except the ________. A) gross income test B) age test C) support test D) residence test

Gross income test

75) Which of the following statements regarding dependents is true? A) To qualify as a dependent of another, an individual must be a resident of the United States. B) To qualify as a dependent of another, an individual may not file a joint return with the individual's spouse under any circumstance. C) To qualify as a dependent of another, an individual must have a family relationship with the other person. D) To qualify as a dependent of another, an individual must be either a qualifying child or a qualifying relative of the other person.

To qualify as a dependent of another, an individual must be either a qualifying child or a qualifying relative of the other person.

10) The standard deduction amount varies by filing status.

True

13) The character of income is a factor in determining the rate at which the income is taxed.

True

16) Certain types of income are taxed at a lower rate than ordinary income.

True

19) Tax credits are generally more valuable than tax deductions because tax credits reduce a taxpayer's gross tax liability dollar for dollar while tax deductions do not.

True

20) Taxpayers may prepay their tax liability through withholdings and through estimated tax payments.

True

22) In certain circumstances, a taxpayer who provides less than half the support of another may still be able to claim that person as a dependent as a qualifying relative.

True

23) A taxpayer who is claimed as a dependent on another's tax return may not claim any dependents on his or her tax return.

True

26) For purposes of the qualifying child residence test, a child's temporary absence from the taxpayer's home to attend school full time is counted as though the child lived in the taxpayer's home during the absence.

True

28) An individual may be considered as a qualifying child of her parents and a qualifying child of her grandparents in the same year.

True

30) When determining whether a child meets the qualifying child support test for the parents, scholarships earned by the child do not count as self-support provided by the child.

True

37) The test for qualifying child includes an age restriction but the test for qualifying relative does not.

True

42) It is generally more advantageous for liability protection purposes for a married couple to file separately than it is for them to file jointly.

True

43) Jeremy and Annie are married. During the year Jeremy dies. When Annie files her tax return for the year in which her husband dies, she may file under the married filing jointly filing status even if she does not remarry.

True

45) Bonnie and Ernie file a joint return. Bonnie works and receives income during the year but Ernie does not. If the couple files a joint tax return, Ernie is responsible for paying any taxes due if Bonnie is unable to pay the taxes.

True

8) For AGI deductions are commonly referred to as deductions "above the line"

True

1) The only from AGI deductions are the standard deduction and itemized deductions.

false

15) Qualified dividends are taxed the at the same rate as ordinary income

false

2) Taxpayers need not include an income item in gross income unless there is a specific tax provision requiring the taxpayer to include the income item in gross income.

false

4) Taxpayers are generally allowed to claim deductions for expenditures unless a specific tax provision indicates the expenditure is not deductible.

false

6) From AGI deductions are commonly referred to as deductions &"below the line"

false

7) For AGI deductions are commonly referred to as deductions & below the line."

false