Deck 1: An Overview of Federal Taxation

Question 1

Congress has chosen to exclude many sources of income from taxation even though it has the authority to tax income from whatever source derived.

Answer 1

True

Question 2

An expenditure is deductible only when listed as a deduction in the Internal Revenue Code.

Answer 2

True

Question 3

A source of income is taxable only when listed as a taxable source of revenue in the Internal Revenue Code.

Answer 3

False

Question 4

Congress enacted wealth transfer taxes primarily to diversify the Federal government's sources of income.

Question 5

The estate tax applicable credit amount, generally available only to low income families filing joint income tax returns, reduces the federal income tax.

Question 6

By making the gift-splitting election, an unmarried donor can in effect make use of twice the annual exclusion to which she is normally entitled.

Question 7

If T is in the 35 percent tax rate bracket, then all of T's income is being taxed at 35 percent.

Question 8

The Federal income tax base is called "adjusted gross income."

Question 9

Unlike the unified transfer tax, the typical state inheritance tax imposes a tax on the right to receive property at death.

Question 10

Both FICA and FUTA impose a double tax on the employer and the employee.

Question 11

The unitary tax is a device that the Federal government has developed to tax corporations on income that they have earned outside the boundaries of the United States.

Question 12

The estate tax applicable credit amount is $5,120,000 million in 2012.

Question 13

Knowing his marginal tax rate allows a taxpayer to determine the tax impact of an additional dollar added to the tax base or an additional dollar of deduction.

Question 14

The gift tax and the estate tax provide a very significant portion of total Federal revenues.

Question 15

Self-employed individuals are required to pay self-employment taxes if self-employment income is $400 or more.

Question 16

As a source of revenue, the Federal corporate income tax is larger than the Federal individual income tax.

Question 17

A correlation exists between the amount of Federal tax an individual pays and the value of benefits an individual receives.

Question 18

Interest income earned on government obligations issued by a state or local government (e.g., the state of Ohio) is generally subject to Federal income taxation.

Question 19

The gift tax and the estate tax exempt the same amount from taxation in 2012.

Question 20

A credit is different from a deduction in that the credit reduces the base amount subject to the tax, whereas a deduction directly reduces the tax liability itself.

Question 21

Which one of the following statements is not true concerning lifetime gifts?

A)A taxpayer may make a $6 million gift to a state university free of the gift tax.
B)The annual gift exclusion of $13,000 is allowed in 2012 even if the donor had made gifts in prior years to the same donee.
C)For purposes of computing a Federal gift tax liability, gifts are valued at the fair market value of the object given at the time of the gift.
D)The election to split gifts that is available to a married donor requires only the consent of the spouse owning the property transferred.
E)The marital and charitable deductions for Federal gift tax purposes are the same as for the Federal estate tax.

Question 22

An excise tax is imposed on the profits of a business or profession, but not on an individual's income.

Question 23

Which one of the following statements is not true concerning the estate tax applicable credit amount?

A)The applicable estate tax credit amount can offset a tax up to $1,772,800 in 2012.
B)The applicable estate tax credit amount is a lifetime credit.
C)The applicable estate tax credit amount can be used to offset gift taxes and estate taxes.
D)Use of the applicable estate tax credit amount is mandatory if one makes a taxable gift.
E)The entire applicable estate tax credit amount can be used in more than one taxable year to offset additional tax.

Question 24

Which one of the following concerning a decedent's gross estate is not true?

A)The gross estate includes the value of all property owned at date of death, wherever located.
B)Property included in the gross estate generally is valued as of the date of death.
C)If the decedent's wife is the beneficiary, proceeds of an insurance policy on the life of the decedent are excludable from the decedent's gross estate.
D)The marital deduction in 2012 is currently set at $5,120,000 million, allowing for a joint marital deduction of $10,240,000.
E)Any of the unified credit not used by the first spouse to die can be used by the surviving spouse.

Question 25

T has a tax base of $30,000 and pays a tax of $2,500 on the first $25,000 and $750 on the next $5,000.T has an average tax rate of

A)10 percent
B)15 percent
C)20 percent
D)10.83 percent
E)None of the above

Question 26

A taxpayer is allowed to change the structure of a transaction for the sole purpose of avoiding taxes, even though the change in structure has no other economic effect.

Question 27

Which one of the following statements is true?

A)Tax credits reduce tax liability at the marginal tax rate.
B)Both tax credits and tax deductions are offsets to taxable income.
C)Dollar for dollar, tax credits are more valuable than tax deductions.
D)The tax impact of an additional dollar of tax base is determined by multiplying by the average tax rate.
E)"I can't afford to earn more because it will throw me into a higher tax bracket and I will keep less than I do now after taxes."

Question 28

Which one of the following statements is not true concerning the Federal estate tax?

A)In computing the Federal estate tax liability, all gifts made after December 31, 1976 are added to the taxable estate.
B)The Federal estate tax is cumulatively computed on taxable gifts made during a donor's lifetime and taxable transfers made at the donor's death.
C)A decedent is entitled to an unlimited marital deduction for the value of property passing to a surviving spouse.
D)All gift taxes paid on post-1976 gifts are subtracted from the tentative tax on total transfers.
E)For most purposes, a decedent's taxable estate is treated as the decedent's last gift.

Question 29

FUTA tax revenues are used by the Federal government to augment unemployment-benefit programs of the various states.

Question 30

A husband gives his wife a total of $6 million in gifts for the year ended 2012.The taxable gift resulting from this transfer for the current year are

A)$0
B)$5,987,000
C)$1,000,000
D)$6,000,000
E)None of the above

Question 31

Which of the following characteristics would not be used to describe the generic nature of a "tax"?

A)Normally, there is a direct relationship between the exaction of revenue and the benefits received by the taxpayer.
B)A tax is levied on the basis of predetermined criteria.
C)A tax is levied on the basis of recurring periods.
D)A tax may be distinguished from a penalty because it is not specifically designed to control or stop a particular activity.
E)At least in the United States, taxes are often used to meet certain social as well as economic goals.

Question 32

A "tax expenditure" is the amount of tax revenue that Congress budgets for social programs.

Question 33

T has a tax base of $30,000 and pays a tax of $2,500 on the first $25,000 and $750 on the next $5,000.T has a marginal tax rate of

A)10 percent
B)15 percent
C)20 percent
D)10.83 percent
E)None of the above

Question 34

B, an unmarried taxpayer, knows that her last dollar of income in the current year will be taxed at 15 percent.D, an unmarried taxpayer, knows that his last dollar of current year income will be taxed at 28 percent.Which of the following statements is not true taking into account the above assumptions?

A)D's marginal tax rate is greater than B's.
B)The value of a $3,000 IRA deduction to D will be less than the same amount contributed by B to an IRA.
C)If both parties suffer a $100,000 business loss that is fully deductible, the impact of the deductible loss will be greater on D's return than on B's return.
D)B will pay 15 percent of her taxable income to the government.
E)D will not pay 28 percent of his taxable income to the government.

Question 35

Which of the following is not true concerning local transfer taxes?

A)A decedent's child will likely pay less inheritance tax than a decedent's nephew on the same size gift.
B)An inheritance tax is imposed on the right to receive property at death.
C)State estate taxes are often based on the credit allowed under Federal estate tax laws.
D)Some states will reduce the state estate tax by any inheritance tax imposed on the heir.
E)The federal credit for state estate and inheritance taxes reduces the state tax but not the federal tax.

Question 36

Which one of the following tax entities does not pay a Federal income tax?

A)Trust
B)Partnership
C)Individual
D)Corporation
E)Estate

Question 37

What type of tax rate do most excise taxes employ?

A)Proportional
B)Progressive
C)Regressive
D)Neutral
E)None of the above

Question 38

T has a tax base of $30,000 and pays a tax of $2,500 on the first $25,000 and $750 on the next $5,000.This is an example of what type of tax rate?

A)Proportional
B)Progressive
C)Regressive
D)Neutral
E)None of the above

Question 39

Which one of the following statements is not true concerning tax rates?

A)A proportional tax rate is one in which an increasing percentage rate is applied to increasing increments of the tax base.
B)The marginal tax rate of any rate structure is that percentage at which the next dollar added to the tax base will be taxed.
C)The average tax rate is the percentage of taxable income paid in tax.
D)The effective tax rate is the percentage of total income paid in tax.
E)An individual cannot pay more in Federal income taxes than he reports as taxable income unless his marginal tax rate exceeds 100 percent.

Question 40

The estate tax applicable credit amount effectively shields a maximum of in 2012 from estate tax

A)$155,800
B)$1,772,800
C)$1,000,000
D)$10,240,000
E)$5,120,000

Question 41

Which of the following transactions is not matched with a tax planning technique that will have the effect of minimizing or deferring taxes?

A)Parents transfer property to a trust.Income from property deposited in trust for their children who are at least 19 years of age is taxed at the children's rate, rather than at the parents' higher tax rate.
B)Corporation X pays no dividends this year.Income is deferred to the stockholders, since they do not pay tax until they receive the dividends.
C)J is in the 28 percent marginal tax bracket in 2012 and the 15 percent marginal tax bracket in 2013.J chooses to pay income tax on his Series EE Federal bonds annually rather than realizing all the interest income when the bonds mature in 2012.
D)J is in the 28 percent marginal tax bracket in 2012 and the 15 percent marginal tax bracket in 2013.J chooses to deduct certain discretionary expenses in 2012 rather than in 2013.
E)S, a heart surgeon, hires his two sons, ages 16 and 18, to clean his office four times a week.The two sons are legitimate employees and do the work they were hired to do.

Question 42

Which one of the following statements does not apply to the Federal Insurance Contribution Act (FICA)?

A)The proceeds raised from the FICA tax are used to finance old-age, survivors, and disability insurance payments (Social Security benefits).
B)Amounts withheld from an individual's paycheck for social security are not subject to income tax.
C)An employer is required to withhold both Federal income taxes and FICA taxes from each employee's wages paid during the year.
D)FICA taxes are imposed on each dollar of an employee's wages up to a fixed amount per year.
E)The employer is required to pay over to the Federal government both the employee's portion of FICA tax and his own portion of the FICA tax.

Question 43

Which one of the following miscellaneous types of taxes is not matched with the property or activity that is being taxed?

A)Tangible personal property tax covers land, buildings, and residences.
B)Intangible personal property tax covers stocks, bonds, and accounts and notes receivable.
C)Franchise tax covers the right to operate a business in the state of New York.
D)Sales tax covers gross receipts from the retail sale of clothing, automobiles, and equipment.
E)Use tax covers the possession and enjoyment of clothing, automobiles, and equipment.

Question 44

Which of the following is not an excise tax?

A)Use tax
B)Occupational tax
C)Retail sales or products and commodities taxes
D)Manufacturers' taxes
E)Windfall profit tax

Question 45

What principle is not a characteristic of a "good" tax?

A)The tax is certain and not arbitrary.
B)The tax is "hidden" (i.e., its burden on the public is not apparent).
C)The tax is convenient.
D)The tax is equitable.
E)The tax is economically efficient (i.e., advances an appropriate goal).

Question 46

Which of the following is not a social objective of the tax laws?

A)Fight unemployment problems of certain disadvantaged groups of citizens through the targeted jobs credit.
B)Place more after-tax income into the hands of taxpayers for their disposal.
C)Relieve the tax burdens of taxpayers who are 65 or over or are blind.
D)Subsidize the cost of a home, and thus encourage home ownership.
E)Encourage individuals to provide for their future needs by contributing to their retirement savings accounts.

Question 47

The FICA Tax rate is best considered:

A)Proportional
B)Progressive
C)Regressive
D)Neutral
E)None of the above

Question 48

A tax planner (for individual income taxation) does not need to understand which one of the following tax factors?

A)Amount of income, deduction, and credit
B)Character of income, deduction, and credit
C)Source of income, deduction, and credit
D)Timing of income, deduction, and credit
E)Recognition of income, deduction, and credit

Question 49

Which one of the following qualities of a "good tax" is not administrative in nature?

A)Certainty
B)Economical operation
C)Simplicity
D)Efficiency
E)All are administrative in nature.

Question 50

Which one of the following is not a type of excise tax?

A)A tax on retail sales of products and commodities
B)A tax on facilities and services
C)A tax on income from professional services of physicians, dentists, lawyers, and accountants
D)Occupational taxes
E)Manufacturers' taxes

Question 51

The equity principle does not help explain which one of the following?

A)Deduction of interest on a home
B)The progressive tax structure
C)Deduction of medical expenses
D)The timing of a tax
E)Deduction of casualty losses

Question 52

Which of the following is not a true statement?

A)The current FUTA tax rate is 6.2 percent of the first $7,000 of wages paid during the year to each covered employee.
B)Most states also impose an unemployment tax on employers.
C)A credit is allowed against an employer's FUTA tax liability: a maximum of 5.4 percent of the first $7,000 of wages paid during the year to each covered employee.
D)For an employee paid more than $7,000 during the year, FUTA tax paid by the employer is normally $434.
E)All of the above are true.