Question 1

Sonya owes a deductible expense that she can pay either and deduct) this year or next year. She is in the 25% marginal tax rate bracket. Which of the following statements about this payment is/are correct? I. Deductions should always be taken as soon as possible. Sonya should pay the expense this year. II. If Sonya expects to be in the 28% marginal tax rate bracket next year, she should pay the expense this year. III. If Sonya expects to be in the 15% marginal tax rate bracket next year, she should pay the expense this year. IV. If Sonya expects to be in the 25% marginal tax rate bracket next year, she should pay the expense this year.

Accepted Answer

The answer of Sonya owes a deductible expense that she...

Question 2

Glenna put money in savings accounts in 50 different banks. She knows a bank is not required to report to the IRS any interest it pays her that totals less than $10. Because the banks do not report the payments to the IRS, Glenna does not report the interest received as taxable income. Which of the following is are) true? I. Glenna's actions are tax evasion because she intentionally misrepresented facts on a tax return to avoid paying tax. II. Glenna's actions are tax avoidance because the IRS will never know about the interest income. III. Glenna's actions are tax evasion because she took steps to conceal the income.

Accepted Answer

Glenna's actions are considered tax evasion because she intentionally misrepresented facts on a tax return to avoid paying tax, which is stated in statement I. Additionally, statement III is also correct because she intentionally took steps to conceal the income by spreading it across multiple banks. However, statement II is not entirely accurate because while the IRS may not initially know about the interest income, they may still discover it through other means, such as an audit or information provided by the banks. Therefore, the best choice is C because only statements I and III are completely accurate.

Question 3

Tax planning involves the timing of income and deductions. General rules of thumb to follow when planning include I. deferring recognition of income. II. putting deductions into the year with highest marginal tax rate.

Accepted Answer

Deferring recognition of income means delaying receipt of income until the following year, which can lower one's current year tax liability. Putting deductions into the year with the highest marginal tax rate can increase the tax benefit of those deductions. Both of these strategies are commonly used in tax planning to minimize overall taxes paid.

Question 4

Betty hires Sam to prepare her federal income tax return. In preparing the return, Sam erroneously decided to exclude consulting fees because he estimated that Betty's expenses should have exceeded the income she received. If the IRS detects Betty's underpayment of tax, what is the likely result? I. Betty is liable for payment of the tax due plus interest and a negligence penalty. II. Sam is liable for payment of Betty's negligence penalty. Betty is liable for the payment of the tax due plus interest.

Accepted Answer

Statement I is correct because ultimately, Betty is responsible for the accuracy of her tax return and any underpayment of tax. Sam's mistake does not excuse her from that responsibility. She will owe the tax due plus interest and potentially a negligence penalty.

Statement II is not correct because Sam cannot be held responsible for Betty's negligence penalty. Only the taxpayer can be penalized for negligence on their tax return. However, Sam could potentially face other penalties or disciplinary action from professional organizations for his mistake.

Question 5

Betty hires Sam to prepare her federal income tax return. In preparing the return, Sam erroneously decided to exclude consulting fees because he estimated that Betty's expenses should have exceeded the income she received. If the IRS detects Betty's underpayment of tax, what is the likely result? I. Betty is not subject to the negligence penalty since she relied on a professional tax preparer and reported her income in good faith. II. Sam is liable for payment of Betty's tax due plus interest and negligence penalty.

Accepted Answer

The answer of Betty hires Sam to prepare her federal...

Question 6

Which of the following is/are categorized as itemized deductions)? I. Trade or business expenses. II. Rental expenses. III. Property taxes on personal residence. IV. Investment interest expense.

Accepted Answer

I. Trade or business expenses and II. Rental expenses are categorized as miscellaneous itemized deductions, which are no longer deductible beginning in 2018 due to tax reform. III. Property taxes on personal residence and IV. Investment interest expense are still categorized as itemized deductions.

Question 7

Carolyn and Craig are married. They have two children 8 years old and 13 years old) living with them. How many dependency exemptions are claimed on Carolyn and Craig's 2014 tax return?

Accepted Answer

Carolyn and Craig can claim two dependency exemptions for their two children who are under the age of 19 and living with them.

Question 8

Based on the following information, what is the 2014 taxable income for a married couple with two children?

Accepted Answer

The answer of Based on the following information, what is...

Question 9

Tax evasion usually involves certain elements. Which of the following are elements necessary for tax evasion to occur? I. Nondisclosure of the relevant facts on the taxpayer's tax return. II. Underpayment of tax. III. Avoiding detection by the IRS. IV. Willfulness on the part of the taxpayer. V. An affirmative act by the taxpayer to misrepresent.

Accepted Answer

In order for tax evasion to occur, the taxpayer must engage in an affirmative act (V) to misrepresent, fail to disclose relevant facts (I), willfully engage in these actions (IV), and underpay their tax liability (II). Avoiding detection by the IRS (III) is not necessary for tax evasion to occur, but it would likely be a goal of someone committing tax evasion. Therefore, statements I, II, IV, and V are correct.

Question 10

For 2014, Nigel and Lola, married taxpayers without children, calculated their total allowable itemized deductions to be $17,100. Accordingly, Nigel and Lola file jointly and should deduct from adjusted gross income I. the standard deduction amount of $12,200 II. total itemized deductions equal to $17,100. III. one personal and one dependency exemption amount. IV. exemption amounts totaling $7,900.

Accepted Answer

Nigel and Lola should deduct their total itemized deductions of $17,100 since it is greater than the standard deduction of $12,200. They also have two personal exemptions, which total $7,900.

Question 11

Tax planning involves the timing of income and deductions. General rules of thumb to follow when planning include I. putting income into the year with the lowest marginal tax rate. II. deferring recognition of income.

Accepted Answer

Both statements are correct. Tax planning involves strategically timing income and deductions to minimize the amount of taxes owed. By putting income into the year with the lowest marginal tax rate, you can potentially pay less in taxes. Additionally, deferring recognition of income can also help reduce your tax liability by pushing that income into a later year when you may be in a lower tax bracket.

Question 12

Tax planning involves the timing of income and deductions. General rules of thumb to follow when planning include I. putting income into the year with the lowest marginal tax rate. II. deferring deductions.

Accepted Answer

The answer of Tax planning involves the timing of income...

Question 13

Alice is a plumber and collector of rare stamps. Instead of always receiving cash payments for her work, she occasionally has her customers send their payments to a stamp broker. The broker then makes stamp purchases on Alice's behalf and mails the stamps to her. Alice never reports the value of the stamps received as income on her tax return. I. Alice's actions are a form of tax evasion. II. Alice's actions are subject to payment of tax, interest, and penalty if detected by the IRS.

Accepted Answer

Statement I is correct because Alice is intentionally not reporting the value of the stamps received, which is a form of tax evasion. Statement II is correct because if Alice's actions are detected by the IRS, she would owe taxes on the value of the stamps received along with interest and penalty for underreporting income.

Question 14

Trang is in the 15% marginal tax bracket in the current year. She owes a $10,000 bill for business expenses. Since she reports taxable income on a cash basis, she can deduct the $10,000 in either this year or next year, depending on when she makes the payment. She can pay the bill at any time before January 31 of next year, without incurring the normal 12% interest charge. She expects to be in the 25% marginal bracket next year. Without considering the time value of money, what are her tax savings if she pays the bill after January 1?

Accepted Answer

The answer of Trang is in the 15% marginal tax...

Question 15

Exemption amounts and itemized deductions are two types of reductions used to calculate taxable income. Which of the following are characteristics of these types of deductions? I. Taxpayers deduct the larger of itemized deductions or the standard deduction. II. Exemption amounts are dependent on amounts of expenditures for dependents. Deductions for adjusted gross income are limited to those incurred in a trade or III. business, incurred in the earning of income, and certain specifically allowed personal expenses of individuals.

Accepted Answer

Statement I is correct because taxpayers can choose between itemized deductions and the standard deduction, opting for whichever is larger. Statement III is correct as deductions for adjusted gross income include those related to business and income-earning activities. Statement II is incorrect because exemption amounts are not directly dependent on expenditures for dependents.

Question 16

Which of the following is an example of tax evasion?

Accepted Answer

Tax evasion is defined as the illegal or fraudulent act of intentionally not reporting or underreporting income or assets to the government in order to avoid paying taxes owed. Therefore, Bertha not reporting her cash prize from the mud-wrestling contest is an example of tax evasion. Options A, B, and C are legal ways to minimize taxes and are not considered tax evasion.

Question 17

Sarah owes a deductible expense that she can either pay and deduct) this year or next year. She is in the 25% marginal tax rate bracket. Which of the following statements about this payment is/are correct? I. Deductions should always be taken in the current year. Sarah should pay the expense this year. II. If Sarah expects to be in the 28% marginal tax rate bracket next year, she should pay the expense next year.

Accepted Answer

Statement I is incorrect as deductions do not always have to be taken in the current year. Statement II is correct because if Sarah expects to be in a higher marginal tax bracket next year, it would be beneficial to defer the payment until next year when the deduction would have a greater tax benefit.

Question 18

Which of the following statements is/are correct? I. There is a minimum allowable standard deduction from adjusted gross income of individuals. II. Corporations are allowed deductions from adjusted gross income. III. Corporations are allowed a standard deduction. IV. Personal exemptions of individuals are deductible for adjusted gross income.

Accepted Answer

Statement I is correct because there is indeed a minimum standard deduction that individuals can claim on their tax returns, which reduces their adjusted gross income. Corporations, on the other hand, do not get a standard deduction (making statement III incorrect) but can deduct business expenses from their gross income (making statement II incorrect in this context as it might imply a similarity to individual deductions which is not accurate). Personal exemptions were eliminated for individuals under the Tax Cuts and Jobs Act of 2017, making statement IV incorrect.

Question 19

Betty hires Sam to prepare her federal income tax return. In preparing the return, Sam erroneously decided to exclude consulting fees because he estimated that Betty's expenses should have exceeded the income she received. If the IRS detects Betty's underpayment of tax, what is the likely result? I. Betty is not subject to the negligence penalty since she relied on a professional tax preparer and reported her income in good faith. II. Betty is liable for payment of the tax due plus interest and a negligence penalty. III. Sam is liable for payment of Betty's tax due plus interest and negligence penalty. IV. Sam is liable for payment of Betty's negligence penalty. Betty is liable for the payment of the tax due plus interest.

Accepted Answer

The answer of Betty hires Sam to prepare her federal...

Question 20

Adjusted gross income AGI) I. is used to provide limitations on certain deductions from AGI. II. is unique to the individual income tax formula. III. is the result before subtracting certain allowable personal expenditures from gross income.

Accepted Answer

All three statements are correct. AGI is used to determine limitations on deductions, it is unique to each individual, and it is calculated before subtracting certain personal expenditures from gross income.

Quiz 1: Federal Income Taxation-An Overview