Tax Exam

If a loan is​ repaid, the lender does not have to include the principal portion of the payment in gross income. There is no exclusion in the tax law that permits taxpayers to omit such amounts from gross income. How can this be​ explained?

A loan repayment is not consistent with the normal meaning given to the word income. A taxpayer is no better off because a loan is repaid. There has been no economic benefit. As a result the repayment of a loan is not taxable simply because it is not income.

Under what​ circumstances, if​ any, can a married person file as a head of​ household?

A married​ person, if otherwise​ qualified, can claim head of household status if he or she is married to a nonresident alien or if he or she qualifies as an abandoned spouse. To be an abandoned​ spouse, the person must have lived apart from his or spouse for the last six months of the year and maintain a household for a qualifying child in which they both live

Sometimes taxpayers may not be able to file their tax returns by the normal due date. Are extensions​ available? How long are the​ extensions? Do extensions enable taxpayers to delay paying the tax they​ owe?

Automatic extensions of six months are generally available. For a C​ corporation, the extension is six or seven​ months, depending on fiscal​ year-end. Any tax that may be owed must be paid with the application for an extension.

What determines if an individual must file a tax​ return?

In​ general, it is an​ individual's gross income that determines whether he or she must file a return when their gross income is in excess of the filing requirement amounts. Certain individuals must file even if they have less than the specified gross income​ amounts: (1) taxpayers with $400 or more of the​ self-employment income,​ (2) dependent individuals whose unearned income exceeds ​$1,100 or whose total gross income exceeds the standard​ deduction, and​ (3) taxpayers who owe the​ 0.9% Additional Medicare Tax or the 3.8​% Net Investment Income Tax.

Summarize the rules that explain which parent claims their children as dependents in cases of divorce.

In​ general, the parent with custody for the greater part of the year may claim the children as dependents. The noncustodial parent may claim them as dependents only if required documentation provides for it.

Why is this the​ case?

Most estates are not subject to the federal estate tax because of generous credit and deduction​ provisions, such as the unified tax credit and the unlimited marital deduction. The unified tax credit equivalent for 2020 is $11,580,000. This means​ that, at a​ minimum, for decedents dying in 2020​, no estate of $11,580,000 or less will be subject to the federal estate tax.

Most exclusions exist for one of two reasons. What are those​ reasons? Give examples of exclusions that exist for each.

Most exclusions exist for either reasons of benevolence or incentive. Exclusions for employee death​ benefits, life insurance​ benefits, and public assistance exist because of reasons of benevolence while the foreign earned income exclusions and the exclusions for certain employee benefits are intended to be economic incentives.

If a taxpayer files his or her tax return and receives a tax refund from the​ IRS, does this mean that the IRS believes the return is correct and will not be subject to a future​ audit?

No. It only means the taxpayer has filed a return and received a​ refund, the IRS may still audit a taxpayer.

Does the fact that an item of income is paid in a form other than cash mean it is​ nontaxable? Explain

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

If a gift of property is​ made, who is taxed on income produced by the​ property?

Income earned prior to the gift is taxable to the donor. Income earned after the gift is taxable to the donee.

Explain the distinction between income and gross income.

Income includes all income from whatever source derived based on principles of economics​ and/or accounting. Gross income refers only to income from taxable sources.

Is an individual required to file a tax return if he or she owes no​ tax?

Individuals who owe no tax because of deductions or other reasons must still file a return if they have gross income in excess of the filing requirement amounts.

Why does the tax concept of income more closely resemble the accounting concept of income than the economic​ concept?

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.

A landlord who receives prepaid rent is required to report that amount as gross income when the payment is received. Why would Congress choose to do​ this? What problem does this create for the​ taxpayer?

Congress taxes prepaid rental income due to the concern that taxpayers who spend the money will be unable to pay the tax when it comes due. The problem created for taxpayers is that they are taxed before they incur related​ expenses, such as​ repairs, insurance, and depreciation.​ Therefore, there is a mismatching of revenue and expense.

Why is a thorough knowledge of sources of tax law so important for a professional person who works in the tax​ area?

Due to the vast volume of tax law​ sources, it is impossible for any person to have recall knowledge of the entire tax law.​ Thus, the ability to understand what the relevant sources of tax law​ are, their relative​ importance, and where to find the sources are vital to a person working in the tax area.

Why is it so difficult to design a​ "fair" tax​ structure?

Fairness is relative in nature and is extremely difficult to measure. What one person may conclude is fair in a particular situation may be considered totally unfair by another person.

Discuss what is meant by horizontal equity and vertical equity as it pertains to the income tax.

Horizontal equity refers to the concept that similarly situated taxpayers should pay approximately the same amount of tax. Vertical equity refers to the concept that higher income tax payers should pay a higher amount of tax and a higher percentage of tax. Vertical equity is based on the notion that taxpayers who have the​"ability to​pay" should pay more tax than lower income taxpyers.

What recent change has been made to the tax treatment of​ alimony?

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.

Distinguish between taxpaying entities and ​flow-through entities from the standpoint of the federal income tax law.

Taxpaying ​entities, such as individuals and C corporations, are required to pay income taxes on their taxable income. Flow-through ​entities, such as sole proprietorships, partnerships, S corporations, LLCs, LLPs, and certain trusts, generally do not directly pay income taxes on their taxable income but merely pass the income on to a taxpaying entity.

The Internal Revenue Code is the most authoritative source of income tax law. In trying to resolve an income tax​ question, however, a tax researcher also consults administrative rulings​ (Treasury Regulations, Revenue​ Rulings, etc.) and court decisions. Why​ wouldn't the tax researcher just consult the IRC since it is the highest​ authority? Similarly, why is there a need for administrative rulings and court​ decisions?

The Code contains general language and does not address the many specific situations and transactions that occur. To resolve tax questions concerning specific​ situations, administrative rulings and court decisions are an integral part of the income tax law.

Because there is no specific exclusion for unrealized​ income, why is it not​ taxable?

The Supreme Court has held that unrealized amounts are not income, and therefore are not taxable under the sixteenth amendment to the Constitution.

Should most estates be subject to the federal estate​ tax? Why or why​ not?

This is controversial and has proponents on both sides. Some people say​ "no" because it is considered a double tax. Others say​ "yes" because they believe in the​ "ability to​ pay" principle, based on income or wealth.

Explain the meaning of the term wherewithal to pay as it applies to taxation.

The concept of​ wherewithal-to-pay means that a tax should be imposed when the taxpayer can most easily pay. A taxpayer who owns property that has increased in value does not necessarily have the funds needed to pay any tax. Taxing the gain when it is realized often means that the tax becomes due at the same time the taxpayer collects the sales price.

What is the normal due date for the tax return of calendar year​ taxpayers? What happens to the due date if it falls on a​ Saturday, Sunday, or​ holiday?

The normal due date for calendar year individuals and C corporations is April 15. The normal due date for calendar year partnerships and S corporations is March 15. If the normal due date is a​ Saturday, Sunday, or​ holiday, the normal due date is delayed to the next day that is not a​ Saturday, Sunday, or holiday.

How can interfamily gifts reduce a​ family's total tax​ liability?

The total tax liability can be reduced if the donee is in a lower income tax bracket than the donor.

Define the term constructive receipt. Explain its importance.

Under the concept of constructive​ receipt, income is taxed when it becomes available to the taxpayer. The taxpayer cannot defer the tax by refusing to accept payment.

Are items of income not listed in Sec. 61​ taxable? Explain.

Yes. Although Sec. 61 lists several different types of taxable​ income, it also says any item of income not listed is taxable unless it is specifically excluded.​ Therefore, a taxpayer must be able to identify a specific exclusion in order to avoid being taxed on an item of income.

Income is not constructively received if:

the receipt is subject to substantial limitations or restrictions. the amount is unavailable to the taxpayer. the payor does not have the funds necessary to make payment.