Concepts of Federal Income Tax Practice Exam

Exam 1

Al believes that SUVs have negative social and environmental effects because of their increased carbon monoxide emissions. He proposes eliminating sales taxes on smaller automobiles in favor of higher sales taxes levied on SUVs. Al performs some calculations and comes to the conclusion that based on the current number of SUVs owned in the U.S., exactly the same amount of total sales tax will be collected under his reformed system. Which of the following concepts explains why Al's idea may not work?

Substitution effect

The state of Georgia recently increased its tax on a carton of cigarettes by $2.00. What type of tax is this?

A sin tax and an excise tax are correct.

A common example of an employment-related tax is the Medicare tax.

True

Tax policy rarely plays an important part in presidential campaigns.

False

Margaret recently received a parking ticket. This is a common example of a local tax.

False

Marc, a single taxpayer, earns $61,200 in taxable income and $5,120 in interest from an investment in city of Birmingham bonds. Using the U.S. tax rate schedule for 2026, how much federal tax will he owe? (Use tax rate schedule (opens in a new tab).)

$8,176

Leonardo, who is married but files separately, earns $64,500 of taxable income. He also has $17,000 in city of Tulsa bonds. His wife, Theresa, earns $52,000 of taxable income.

If Leonardo and his wife are married filing jointly in 2026, what is Leonardo and Theresa's effective tax rate for 2026? (Use tax rate schedule (opens in a new tab).)

None of these choices are correct

The difficulty in calculating a tax is typically in the determination of:

the tax base

A sales tax is a common example of a progressive tax rate structure.

False

In a proportional (flat) tax rate system, the marginal tax rate will always equal the average tax rate.

True

Which of the following taxes represents the largest portion of U.S. federal tax revenues?

Individual income taxes

The substitution effect:

None of these choices are correct

Which of the following is true regarding use taxes?

Use taxes attempt to eliminate any tax advantage of purchasing goods out of state.

Curtis invests $700,000 in a city of Athens bond that pays 9.25 percent interest. Alternatively, Curtis could have invested the $700,000 in a bond recently issued by Initech, Incorporated that pays 11.00 percent interest with similar risk as the city of Athens bond. Assume that Curtis's marginal tax rate is 24 percent.

If Curtis invested in the Initech, Incorporated bonds, what would be his after-tax rate of return from this investment?

8.36 percent

One must consider the "economy" criterion in evaluating tax systems from both the taxpayer's and the government's perspective.

True

Curtis invests $425,000 in a city of Athens bond that pays 6.25 percent interest. Alternatively, Curtis could have invested the $425,000 in a bond recently issued by Initech, Incorporated that pays 7.25 percent interest with similar risk as the city of Athens bond. Assume that Curtis's marginal tax rate is 24 percent.

What is Curtis's after-tax rate of return on the city of Athens bond?

6.25 percent

Which of the following is not an example of a graduated tax rate structure?

Proportional tax rate structure

If Susie earns $762,000 in taxable income, how much tax will she pay as a single taxpayer for 2026? (Use tax rate schedule (opens in a new tab).)

237,897.25

The effective tax rate, in general, provides a better depiction of a taxpayer's tax burden than the average tax rate.

True

Which of the following is a tax?

1. A 1 percent special sales tax for funding local road construction.

2. A fee paid to the state for a license to practice as an attorney.

3. An income tax imposed by Philadelphia on persons working within the city limits.

4. A special property assessment for installing a new water system in the taxpayer's neighborhood.

1 and 3 are correct

Leonardo, who is married but files separately, earns $81,000 of taxable income. He also has $16,000 in city of Tulsa bonds. His wife, Theresa, earns $51,000 of taxable income.

If Leonardo earned an additional $31,000 of taxable income this year, what would be the marginal tax rate on the extra income for 2026? (Use tax rate schedule (opens in a new tab).)

Note: Do not round intermediate calculations. Round your final answer to two decimal places.

22.41 percent

Which of the following would not be a failure of the horizontal equity concept?

Two taxpayers pay different amounts of estate tax because one taxpayer's estate is worth significantly more.

Which of the following is not one of the basic tax rate structures?

Equitable

Curtis invests $425,000 in a city of Athens bond that pays 6.25 percent interest. Alternatively, Curtis could have invested the $425,000 in a bond recently issued by Initech, Incorporated that pays 7.25 percent interest with similar risk as the city of Athens bond. Assume that Curtis's marginal tax rate is 24 percent.

How much implicit tax would Curtis pay on the city of Athens bond?

$4,250.00

Implicit taxes are indirect taxes on tax-favored assets.

True

The ultimate economic burden of a tax is best captured by:

the effective tax rate

In a regressive tax rate system, the marginal tax rate will often be greater than the average tax rate.

False

Excise taxes are typically levied on the value of a good purchased.

False

A taxpayer's average tax rate is the most appropriate tax rate to use in tax planning.

False

The two components of the tax calculation are the tax rate and the taxpayer's status.

False

Jackson has the choice to invest in city of Mitchell bonds or Sundial, Incorporated corporate bonds that pay 6 percent interest. Jackson is a single taxpayer who earns $56,000 annually. Assume that the city of Mitchell bonds and the Sundial, Incorporated bonds have similar risk.

What interest rate would the city of Mitchell have to pay in order to make Jackson indifferent between investing in the city of Mitchell and the Sundial, Incorporated bonds for 2025? (Use tax rate schedule (opens in a new tab).

4.68 percent

If Susie earns $776,000 in taxable income and files as a single taxpayer for year 2026, what is Susie's average tax rate? (Use tax rate schedule (opens in a new tab).)

Note: Do not round intermediate calculations. Round your final answer to two decimal places.

31.32 percent

The main difficulty in calculating an income tax is determining the correct amount of the tax base.

True

Relative to explicit taxes, implicit taxes are much easier to estimate.

False

Which of the following federal government actions would make sense if a tax system fails to provide sufficient tax revenue?

Issue treasury bonds and cut funding to various federal projects but not increase federal spending

Which of the following is true regarding tax-advantaged assets?

They are often subject to implicit taxes.

Regressive tax rate structures are typically considered to be vertically equitable.

False

The effective tax rate expresses the taxpayer's total tax as a percentage of the taxpayer's taxable and nontaxable income.

True

Margaret was issued a $150 speeding ticket. This is:

not a tax because it is considered a fine intended to punish illegal behavior.

Which of the following is true?

In terms of effective tax rates, a sales tax can be viewed as a regressive tax.