Taxation C237 (Pre-assessment guide)

What year was the U.S. income tax on individuals permanently established?

A. 1861

B. 1894

C. 1913

D. 1924

C. 1913

What is the second-highest level of legislative authority of tax law in the United States?

A. American Institute of Certified Public Accountants (AICPA)

B. Journal of Taxation

C. Revenue procedures

D. Internal Revenue Code

D. Internal Revenue Code

In which publications does the IRS provide information on the tax consequences of specific transactions encountered in practice?

A. Technical advice memoranda

B. Information releases

C. Revenue rulings

D. Official announcements

C. Revenue rulings

What is an example of equity when evaluating a tax system?

A. Each taxpayer can choose the due date for their tax.

B. Each taxpayer pays a different amount based on their income level.

C. Individuals have designated amounts withheld from each paycheck.

D. Individuals may take a standard deduction to reduce record keeping.

B. Each taxpayer pays a different amount based on their income level.

What is true about horizontal equity?

A. Taxpayers with a greater ability to pay tax paying more tax

B. Two taxpayers in similar situations paying the same tax

C. Taxpayers with a lesser ability to pay tax paying more tax

D. Horizontal equity does not exist in a federal tax structure.

B. Two taxpayers in similar situations paying the same tax

What is the nature of a progressive tax rate structure?

A. Each taxpayer devotes the same percentage of income to pay the tax.

B. Lower-income taxpayers devote a greater percentage of income to pay the tax relative to higher-income individuals.

C. The rate of tax increases as the tax base increases.

D. The rate of tax decreases as the tax base increases.

C. The rate of tax increases as the tax base increases.

Which tax rate structure is exemplified by the FICA portion of Social Security taxes?

A. Effective

B. Regressive

C. Progressive

D. Proportional

B. Regressive

An individual is salaried, is not operating a business, is divorced with one child living at home, earned $93,000 in wages for 2021, and has $17,900 of itemized deductions.

What is this individual's tax liability?

A. $6,682

B. $10,620

C. $10,818

D. $14,889

D. $14,889

Which tax is based on the value of an individual's real estate?

A. Property tax

B. Franchise tax

C. Federal estate tax

D. Wealth transfer tax

A. Property tax

Which entities are considered flow-through entities in the U.S. tax system?

A. Individual taxpayers

B. Religious associations

C. Regular C corporations

D. Limited liability partnerships

D. Limited liability partnerships

A taxpayer fails to report income that exceeds 25% of reported gross income but files the return on time. How many years after a return was originally due might the statute of limitations expire?

A. 3 years

B. 4 years

C. 5 years

D. 6 years

D. 6 years

Which component of a tax practice focuses on minimizing taxes paid and maximizing after-tax cash flows while accommodating clients' other desires?

A. Tax planning

B. Tax research

C. Tax procedure

D. Tax compliance

A. Tax planning

Which tax term defines a personal expenditure, such as charitable contributions and medical expenses, which taxpayers may claim if they keep records?

A. Itemized deductions

B. Standard deductions

C. Personal exemptions

D. Dependency exemptions

A. Itemized deductions

A single individual earned wages of $50,000 working at a bank. The individual received a $6,000 gift from a parent to go to Europe, inherited $10,000 from a relative, and received $500 interest from a municipal bond. The individual has no dependents and has itemized deductions of $11,000. What is this individual's tax liability for 2021?

A. $4,295

B. $4,355

C. $6,298

D. $6,529

A. $4,295

A married couple, ages 29 and 32, have normal vision and one dependent daughter who is 14 years old. During 2021, one of the individuals earned taxable wages of $54,000, and the other earned $100,000. The couple also earned $400 of interest income from their joint savings account, $1,200 interest from a municipal bond, and incurred $23,590 of eligible itemized deductions. The couple will be filing a joint return. What is this couple's federal income tax?

A. $19,943

B. $20,207

C. $20,275

D. $20,539

A. $19,943

Which scenario represents a realization of income?

A. A bank loan of $2,000

B. A payment of $2,000 for stocks sold

C. An offer to buy a boat for $2,000

D. An increase in stock value of $2,000

B. A payment of $2,000 for stocks sold

Which type of income satisfies all three requirements for the income to be taxable?

A. Receiving a $5,000 gift

B. Renting out a condo for $5,000

C. Inheriting $5,000 in gold coins

D. Obtaining a $5,000 loan from the bank

B. Renting out a condo for $5,000

In which situation has a taxpayer actually or constructively received income that should be included in gross income for the current year?

A. The taxpayer purchased and is holding stock that increased in value by $1,000 during the year.

B. In December the taxpayer negotiates the sale of his stamp collection for a profit of $2,400, but the contract states he will not receive payment from the buyer until the following February.

C. The taxpayer went on vacation the last two weeks of the year, and he instructed his employer to put the year-end paycheck in his locked desk drawer at the office. The taxpayer does not return and deposit the paycheck until the following January.

D. On December 28 the taxpayer sells his coworker a used car. The buyer gives the taxpayer a check-in payment, asking him to wait two weeks before depositing the check because there will be insufficient funds in the account until that time.

C. The taxpayer went on vacation the last two weeks of the year, and he instructed his employer to put the year-end paycheck in his locked desk drawer at the office. The taxpayer does not return and deposit the paycheck until the following January.

Which receipt is included in gross income for 2021?

A. Royalties

B. Alimony

C. Child support

D. Qualified Roth IRA

A. Royalties

Which source of income is included in gross income?

A. Rental

B. Inheritance received

C. Life insurance proceeds

D. Personal injury compensation

A. Rental

What is it called when a person attempts to not pay federal income taxes by willfully excluding taxable income?

A. Tax evasion

B. Tax avoidance

C. Tax dodging

D. Tax prevention

A. Tax evasion

Which item is excluded from gross income by the Internal Revenue Code?

A. A $200 gift from a relative

B. A radio call-in prize of $200

C. $200 won at a church bingo game

D. $200 earned painting a neighbor's fence

A. A $200 gift from a relative

What must be included in gross income?

A. Receipt of a cash dividend

B. Interest received on government bonds

C. Child support payments received

D. Roth IRA distributions

A. Receipt of a cash dividend

Which two expenses are a tax-free use of a qualified tuition plan (QTP) distribution?

A. Rent

B. Textbooks

C. Travel expenses

D. Student health insurance deductible

A. Rent

B. Textbooks

Which event would result in taxable income?

A. Cancellation of debt while the taxpayer is insolvent

B. Forgiveness of mortgage debt on rental property

C. Discharge of debt in bankruptcy

D. Forgiveness of student loan debt after the individual's public service

B. Forgiveness of mortgage debt on rental property

Which type of gain does a taxpayer have if the taxpayer owns stock that has appreciated in value?

A. A capital gain

B. An unrealized gain

C. A realized and recognized gain

D. A realized and unrecognized gain

B. An unrealized gain

What is true about realized and recognized gains and losses?

A. Realized gains may be less than recognized gains.

B. Realized losses and recognized losses on personal use items are deductible.

C. Realized losses may be more than recognized losses.

D. Realized losses may be less than recognized losses on items of personal use.

C. Realized losses may be more than recognized losses.

An individual purchases a piece of property with a fair market value of $30,000 for $28,000. The individual takes out a loan for $14,000 and pays the other $14,000 in cash. In addition, the individual pays $500 in transactions costs to purchase the property and $200 of delivery costs. What is the basis for the property?

A. $28,500

B. $28,700

C. $30,500

D. $30,700

B. $28,700

An individual purchases a piece of property with a fair market value of $50,000 for $54,000. The individual uses a loan for $44,000 and pays the other $10,000 in cash. In addition, the individual pays $1,000 in transactions costs to purchase the property and expects to earn $5,000 per year from renting the property to others. What is the basis for this property?

A. $50,000

B. $51,000

C. $54,000

D. $55,000

D. $55,000

What is an example of an ordinary asset?

A. Inventory

B. A personal residence

C. Furniture in a taxpayer's personal residence

D. Shares of stock a taxpayer has owned for two years

A. Inventory

Which item is a capital asset?

A. A personal residence

B. A business warehouse

C. Business inventory held for sale

D. Supplies used when conducting business

A. A personal residence

An individual with a taxable income of $100,000 sells 200 shares of stock at a market price of $60 per share. One hundred shares of the stock were acquired 2 years earlier at a price of $90 per share, and 100 shares were acquired five years earlier at a price of $40 per share. What is the effect of the transaction on the individual's tax circumstances?

A. A net long-term capital loss of $1,000

B. A net long-term capital gain of $3,000

C. A net long-term capital loss of $6,000

D. A net long-term capital gain of $4,000

A. A net long-term capital loss of $1,000

An individual sells 200 shares of stock at a market price of $50 per share. He acquired 100 shares of the stock two months earlier at a price of $55 per share, and he also acquired 100 shares two years earlier at a price of $30 per share.

What is the net effect of these transactions on this individual's gross income?

A. A net capital loss of $500

B. A net capital gain of $500

C. A net capital gain of $1,500

D. A net capital loss of $2,000

C. A net capital gain of $1,500

Individual A originally acquired stock on January 6, year 1. On March 8, year 2, Individual B received the stock as a gift from Individual A and sold it on April 15, year 2 for fair market value.

When does Individual B's holding period begin?

A. January 6, year 1

B. March 8, year 2

C. March 9, year 2

D. April 15, year 2

A. January 6, year 1

Which mortgage interest expense is a reduction for adjusted gross income?

A. Rental home

B. Vacation home

C. Personal hobby

D. Personal residence

A. Rental home

What is a role of deductions from adjusted gross income, excluding the qualified business income deduction?

A. It allows deduction of retirement contributions.

B. It allows deduction of medical expenses.

C. It allows deduction of most self-employed expenses.

D. It allows deduction of many rental property expenses.

B. It allows deduction of medical expenses.

What is deductible as an investment expense?

A. Purchase of a car to drive to a broker's office

B. Lobby expenses to obtain permits on investment land

C. Travel expenses to attend an annual company stockholder meeting

D. Interest on a loan to purchase land for an investment

D. Interest on a loan to purchase land for an investment

Which item is deductible as a business expense if a doctor invests personal money in various properties?

A. A fine paid for not listing the medical office as a place of business with the local authorities

B. Property taxes paid on a medical office

C. Membership dues to the local Kiwanis club used for business networking

D. The penalty for filing the medical office's quarterly tax return late

B. Property taxes paid on a medical office

A taxpayer runs an automotive repair business in a building he owns. The income and expenses are reported on Form 1040, Schedule C. There was no section 179 election made. Which action represents a deductible business expense for the current tax year, and is therefore not subject to capitalization and depreciation?

A. Purchasing new car lifts

B. Expanding building area by adding a service bay

C. Repairing a leak in the roof of the building

D. Installing a new air conditioning and heating system

C. Repairing a leak in the roof of the building

Which item is a deductible business expense?

A. Purchase of a 12-month liability insurance policy

B. Replacement of a machine with a newer, faster model

C. Installation of a fire suppression system in the computer room

D. Conversion of part of the warehouse to office space for the manager

A. Purchase of a 12-month liability insurance policy

A small-business owner contracts a painting company to paint her building. The small-business owner gives the painting company a $2,000 down payment against the total contract price of $10,000. The painting company starts the job in November of year 1 and completes the job in January of year 2. How will the small-business owner deduct this expense, given that she is a cash method taxpayer?

A. Year 1: $2,000, year 2: $8,000

B. Year 1: $12,000, year 2: $0

C. The cost of the job is expensed entirely in year 2.

D. The painting costs are capitalized and depreciated.

A. Year 1: $2,000, year 2: $8,000

In September of year 1, Jason agreed to a contract in which he agreed to redo the floors in an office building and be paid $15,000 for the job. The owner of the office building gave Jason the first $5,000 payment toward the contract on the day the contract was signed. Jason started and completed the work in November of year 1. Upon completion of the project, Jason's bookkeeper mailed an invoice to the building owner for the balance owed, with a due date of February 15th of year 2. Jason received payment in full from the building owner in January of year 2. Jason uses the accrual basis method of accounting for both financial and tax reporting purposes. Which amounts should Jason report as income from this job when filing taxes in year 1 and year 2?

A. $15,000 in year 1, and $0 in year 2

B. $5,000 in year 1, and $10,000 in year 2

C. $0 in year 1, and $15,000 in year 2

D. $10,000 in year 1, and $5,000 in year 2

A. $15,000 in year 1, and $0 in year 2

A 33-year-old commercial airline pilot is trying to decide whether to claim a standard tax deduction or itemize their deductions for 2021. The taxpayer calculates $11,500 of itemized deductions. This individual is single with no children. Which deduction should this individual claim?

A. $11,500 of itemized deductions

B. A $12,550 standard deduction

C. An $18,800 standard deduction

D. $24,050 of itemized and standard deductions

B. A $12,550 standard deduction

A 50-year old individual is calculating his deductions for a given year. The individual examines his records and finds that in the last calendar year he donated $500 to charity, paid state income taxes of $600, received a local tax refund of $100, spent $5,600 on medical expenses, paid $1,250 for tax preparation services, and spent $50 on professional publications last year.

What would be his itemized deductions total if this individual's adjusted gross income is $50,000?

A. $1,850

B. $2,000

C. $6,200

D. $2,950

D. $2,950

What is the cost per mile on travel that qualifies as an itemized deductible medical expenditure?

A. $0.15 per mile

B. $0.16 per mile

C. $0.20 per mile

D. $0.22 per mile

B. $0.16 per mile

What is the floor limitation for medical expense deductions?

A. 5.0%

B. 7.5%

C. 10.5%

D. 12.0%

B. 7.5%

Which tax qualifies as an itemized deduction?

A. State income tax

B. Unemployment tax

C. Social Security tax

D. Gambling income tax

A. State income tax

Which type of interest qualifies as an itemized deduction?

A. Home mortgage interest

B. Interest for a vacation loan

C. Rental house mortgage interest

D. Interest on a flat screen television

A. Home mortgage interest

What is an example of a deductible charitable contribution?

A. Donations to a movie theater for renovations

B. Cash given to neighbors who lost their home in a flood

C. Contributions equal to 25% of the taxpayer's adjusted gross income given to a local church

D. The cash equivalent of time given serving in a local homeless shelter based at a local church

C. Contributions equal to 25% of the taxpayer's adjusted gross income given to a local church

What is the allowable charitable contribution deduction when an individual donates intangible capital gain property, such as stock, to a public charity?

A. Fair market value of the property, limited to 20% of adjusted gross income

B. Fair market value of the property, limited to 30% of adjusted gross income

C. Fair market value of the property, less long-term capital gain recognized if sold, limited to 20% of adjusted gross income

D. Fair market value of the property, less long-term capital gain recognized if sold, limited to 30% of adjusted gross income

B. Fair market value of the property, limited to 30% of adjusted gross income

Which item qualifies as a miscellaneous itemized deduction?

A. Gambling expenses

B. Property taxes

C. Moving expenses

D. Medical insurance premiums

A. Gambling expenses

An individual bought 200 shares of stock in a company for $80 per share in January. By September of that year, the stock had declined to $50 per share, whereupon the individual sold 100 shares and held the other 100 shares. In November of that year, the stock returned to $78 per share, and the individual sold the remaining 100 shares. Assume the shares paid no dividends during the course of the year.

What is the maximum amount this individual can deduct as a capital loss when preparing this year's tax return?

A. $200

B. $3,000

C. $3,200

D. $6,000

B. $3,000

An individual bought a piece of land for $50,000 as an investment. A few years later, the individual wants to sell the land. The individual has the land appraised and finds out it is only worth $45,000. The individual decides not to sell the land that year but paid $500 in appraisal fees. The land has a $15,000 mortgage on it, and the property tax bill is $250 for the year.

What capital losses may this individual deduct when preparing taxes?

A. $0

B. $500

C. $5,500

D. $5,750

A. $0

Which tax status provides the largest standard deduction for a divorced single parent with sole custody of a child?

A. Single

B. Married filing jointly

C. Qualifying widow(er)

D. Head of household

D. Head of household

A taxpayer is a 60-year-old widow whose widowed mother qualifies as the taxpayer's dependent. The taxpayer has a taxable income of $60,000.Which available filing status will provide the lowest tax liability for this taxpayer?

A. Single

B. Surviving spouse

C. Head of household

D. Married filing separately

C. Head of household

During the current year, a taxpayer married on January 6, gave birth to a child on April 15, and was divorced on July 3. The taxpayer retains sole custody of the child and has a taxable income of $60,000. Which filing status provides the lowest tax liability for this taxpayer?

A. Single

B. Married filing separately

C. Married filing jointly

D. Head of household

D. Head of household

An individual has an adjusted gross income (AGI) of $112,500 and has three qualifying children—ages 3, 13, and 17. What is the maximum Child Tax Credit that can be claimed for 2021?

A. $4,000

B. $6,000

C. $6,600

D. $9,600

D. $9,600

Which tax credit applies to individuals for 2021?

A. Alimony paid credit

B. Child support paid credit

C. Health savings account credit

D. Individual recovery credit

D. Individual recovery credit

Which credit is a refundable tax credit?

A. Earned income credit

B. Savers credit

C. Adoption tax credit

D. Foreign tax credit

A. Earned income credit

What are a taxpayer's self-employment taxes when the taxpayer has $24,000 net earnings from self-employment in 2021?

A. $696

B. $1,836

C. $2,976

D. $3,672

D. $3,672

A business buys a $10,000 computer in February. What is the Modified Accelerated Cost Recovery System (MACRS) recovery period if the computer was put into service after December 31, 1986?

A. $1,500

B. $2,000

C. $2,500

D. $3,500

B. $2,000

A business purchased commercial property (building and land) for a total of $2,400,000. The land value of the purchase was estimated to be $350,000. What is the Modified Accelerated Cost Recovery System (MACRS) depreciation deduction for the building for the second year?

A. $24,129

B. $52,562

C. $66,664

D. $75,638

B. $52,562

Which court's cases take precedence over all other court decisions?

A. U.S. Tax Court

B. U.S. District Court

C. U.S. Supreme Court

D. U.S. Circuit Court of Appeals

C. U.S. Supreme Court

Which item is a source of tax law from the judicial branch of government?

A. Letter rulings

B. Court decisions

C. Revenue rulings

D. Income tax regulations

B. Court decisions

Which item is a legislative source of tax law?

A. Judicial doctrines

B. U.S. Treasury Regulations

C. Judicial interpretations

D. Internal Revenue Code

D. Internal Revenue Code

What describes the authoritative weight carried by treasury regulations?

A. They have the highest authoritative weight of the administrative sources.

B. They are guidelines issued for the taxpayer and carry no authoritative weight.

C. They carry more authoritative weight than the revenue rulings.

D. They are considered a secondary source and do not carry as much authoritative weight as the Internal Revenue Code.

A. They have the highest authoritative weight of the administrative sources.