Deck 1: Introduction to Taxation

Question 1

A $100 tax deduction is more valuable to a taxpayer than a $100 tax credit.

Answer 1

False

Question 2

The lowest tax rate on the tax rate schedules for taxable incomes is the same for individuals and C corporations.

Answer 2

False

Question 3

A flat tax generally would be considered a regressive tax.

Answer 3

False

Question 4

Name and describe two types of taxes other than the income tax. Give example of each.

Question 5

Adam Smith's four canons of taxation are Equity, Certainty, Economy and Convenience.

Question 6

All interest paid to a taxpayer must be included in gross income.

Question 7

The 13^th Amendment to the US Constitution that provided for an income tax was ratified in 1916.

Question 8

There are three basic taxable entities: the individual, the fiduciary, and the C corporation.

Question 9

Any current changes to the tax laws are now amendments to the Internal Revenue Code of 2018.

Question 10

A hidden tax is one that is included with a payment but not specifically identified.

Question 11

Both sales and use taxes are collected in the state in which the sale takes place.

Question 12

Compare a sales tax to a use tax.

Question 13

The person receiving the gift pays the gift tax.

Question 14

Partnerships and S corporations are flow-through entities.

Question 15

A corporation incurring a net operating loss in 2018 can only carry that loss forward to offset profits in future years.

Question 16

The type and degree of connection between a business and a state necessary for a state to impose a tax is referred to as nexus.

Question 17

Differentiate a wealth tax from a wealth transfer tax and give an example of each.

Question 18

The value added tax is a type of consumption tax.

Question 19

Vertical equity asserts that persons in similar circumstances should face similar tax burdens.

Question 20

All limited liability companies (LLCs) can file their tax returns as partnerships.

Question 21

Why are S corporations and partnerships called flow-through entities?

Question 22

Harold is a 40 percent partner in HDT Partnership. At the beginning of the year, his partnership interest basis was $20,000. The partnership had net income of $58,000 for the year and it made an $8,000 distribution to Harold. What is Harold's basis at the end of the year?

Question 23

Which of the following types of taxes is not levied by the U.S. government?

A) Sales tax
B) Income tax
C) Gift tax
D) Estate tax

Question 24

Explain how horizontal equity differs from vertical equity.

Question 25

Which of the following is a tax?

A) Dog license
B) Parking fine
C) Water usage fee
D) Import duty

Question 26

Briefly compare a sole proprietorship to a corporation as a business entity.

Question 27

Darden Corporation has taxable income of $200,000. If it distributes 25 percent of its after-tax income to its sole shareholder who has other taxable income of $103,000, what is the total tax burden on this $200,000 of income?

Question 28

What tax provision encourages the fiduciary of an estate or a trust to distribute the income annually to the beneficiaries?

Question 29

What are Adam Smith's four canons of taxation? Briefly describe each.

Question 30

Walter is married and files a joint return. If his adjusted gross income is $64,000 and he has $32,850 of deductions in 2018. What is his taxable income? What is his income tax liability?

Question 31

Chloe and Bill, both single with no dependents, plan to marry either immediately before or immediately after year-end. Chloe's income for 2018 is $89,000 and Bill's is $86,000 before subtracting $12,000 for the standard deduction for each. Would they have a marriage penalty or a marriage benefit if they married at the end of 2018?

Question 32

Cragen Corporation has gross income of $625,000 and operating expenses of $418,000. What is its taxable income? What is its income tax liability in 2018?

Question 33

Karen, single with the standard deduction being the only deduction for her individual tax return, wants to set up a business. She will use either a sole proprietorship or incorporate as a regular corporation. She expects the business to earn $160,000 after all expenses and payments to Karen except for federal taxes. Karen will take $40,000 from the business for living expenses (as a distribution from a sole proprietorship or a salary from a corporation). Considering only income taxes for 2018, should she establish the business as a C corporation or as a sole proprietorship?

Question 34

Sylvester, single, has $12,000 in deductions when filing his income tax return. His sole proprietorship averages net income of $125,000 annually. He needs $50,000 per year to live on. If he incorporates his business, would he pay more or less in total income taxes if he takes a salary of $50,000 for his living expenses? (Consider only income taxes.)

Question 35

What is a tax?

A) a voluntary payment to the government for services received
B) a penalty
C) a fine
D) a forced payment to the government

Question 36

Identify the following with an E if all or part of the item could be an exclusion from gross income or D if all or part of the item could be a deduction.
Scholarship
f. State income taxes
b. Medical expense
g. Tax exempt interest
c. Charitable contribution
h. Student loan interest
d. Life insurance proceeds
i. Social Security benefits
e. Inheritances
j. The value of food stamps

Question 37

Compare progressive, proportional, and regressive taxes.

Question 38

Susie is single, has salary income of $26,000, and $12,000 of deductions in 2018. What is her taxable income? What is her income tax liability?

Question 39

What are the fiduciary entities and how are they created?

Question 40

The Shoe Market Inc. (a regular corporation) had $1,875,000 of shoe sales and its cost for these shoes was $688,000. In addition, Shoe Market received $5,000 of corporate bond interest income and $6,000 interest income on State of California bonds. It paid $512,000 for salaries and had $552,000 of other operating expenses. What is Shoe Market's taxable income? What is its income tax liability for 2018?

Question 41

Which of the following is an objective of taxation?

A) Raise revenue
B) Foster social goals
C) Stimulate the economy
D) All of the above

Question 42

William is single and had salary income from his position as Chief Financial Officer of Zippy Bank of $450,000 putting him in the 37% marginal tax bracket. He also had $35,000 in income from the dividends on the stock of his previous employer. What tax rate will apply to William's dividend income?

A) 15%
B) 20%
C) 35%
D) 39.6%

Question 43

William lives in Delaware but works for a company that has offices in both Maryland and Pennsylvania. William spent four months working in Pennsylvania and 8 months working in Maryland.

A) Only Delaware can impose a state income tax on his income.
B) Only Maryland can impose a state income tax on his income as he worked there the longer time period.
C) Only Pennsylvania and Maryland can impose state income taxes on his income.
D) Delaware, Pennsylvania, and Maryland can impose state income taxes on his income.

Question 44

Which type of tax is a real property tax?

A) Income tax
B) Consumption tax
C) Wealth tax
D) Use tax

Question 45

Which of the following statements describes the correct relationship between marginal and average tax rates in a progressive tax system?

A) The marginal tax rate is higher than the average tax rate.
B) The average tax rate is higher than the marginal tax rate.
C) The marginal and average tax rates are the same.
D) The average tax rate will always be half of the marginal tax rate.

Question 46

Which of the following types of taxes is levied by almost all states on some or all goods purchased?

A) Sales tax
B) Income tax
C) Property tax
D) Wealth transfer tax

Question 47

When appreciated property is transferred, the gift tax is based on

A) replacement cost of the property
B) fair market value of the property on the date of the gift
C) the donor's original cost of the property
D) the donor's original cost increased by half of the appreciation

Question 48

By what right does the U.S. levy an income tax on individuals?

A) The 13^th Amendment to the Constitution
B) Public Law 1913
C) The 16^th Amendment to the Constitution
D) An Act of Congress ratified by the states

Question 49

Alexander received $80,000 in salary in 2018. What is his FICA tax if the Medicare rate is 1.45%, the Social Security rate is 6.2% on the 2018 maximum of $128,400, and the FUTA rate is 6% on a $7,000 maximum?

A) $4,960
B) $6,120
C) $6,540
D) $10,920

Question 50

Which of the following types of taxes is not levied by the U.S. government?

A) Excise tax
B) Income tax
C) Value added tax
D) Gift tax

Question 51

Which of the following types of taxes is a consumption tax?

A) Estate tax
B) Income tax
C) Gift tax
D) Use tax

Question 52

Current changes to the federal tax law are amendments to which of the following?

A) The Internal Revenue Code of 1913
B) The Internal Revenue Code of 1954
C) The Internal Revenue Code of 1986
D) The Internal Revenue Code of 2018

Question 53

Which of the following is a type of wealth tax?

A) A tax on a person's salary
B) A tax on stocks owned by the taxpayer
C) A tax on purchases made at a department store
D) A tax on property given to a grandchild

Question 54

Which of the following federal income tax rates applies to a C corporation in 2018?

A) 15%
B) 21%
C) 25%
D) 35%

Question 55

Ethan received $135,000 in salary in 2018. What is his FICA tax if the Medicare rate is 1.45%, the Social Security rate is 6.2% on the 2018 maximum of $128,400, and the FUTA rate is 6% on a $7,000 maximum?

A) $9,823
B) $9,918
C) $10,243
D) $10,328

Question 56

John earns $25,000 and pays $2,000 in taxes. Marcy earns $60,000 and pays $4,000 in taxes. How would you characterize this tax system?

A) A flat tax system
B) A proportional system
C) A regressive system
D) A progressive system

Question 57

Which of the following statements is false?

A) Use taxes are assessed on out-of-state purchases used in the purchaser's state.
B) The estate tax is based on the fair market value of property transferred at the owner's death.
C) Tariffs are taxes levied on goods and materials brought into a country.
D) Gift taxes are imposed on the recipient of the gift.

Question 58

Kate received $130,000 in salary in 2018. What is her FICA tax if the Medicare rate is 1.45% and the Social Security rate is 6.2% on a maximum of $128,400 in 2018?

A) $7,961
B) $8,060
C) $9,846
D) $9,945

Question 59

What is the marginal tax rate for a single individual with $110,000 of taxable income?

A) 10%
B) 12%
C) 22%
D) 24%

Question 60

The Mercury Corporation must decide whether to invest in some new machinery for its business. Which tax rate is the most relevant for making this decision?

A) The average tax rate
B) The marginal tax rate
C) The nominal tax rate
D) The effective tax rate

Question 61

Charlotte is a head of household with taxable income of $40,000 in 2018. What is her marginal tax rate?

A) 10%
B) 12%
C) 22%
D) 24%

Question 62

What is George's gross income if he has the following: $78,000 salary, $4,000 dividend income, $2,000 interest income on city of San Francisco bonds, a gain of $14,000 on a stock sale, and a $4,000 operating loss on a small sole proprietorship that he owns?

A) $78,000
B) $84,000
C) $92,000
D) $96,000

Question 63

Which of these persons never pays taxes directly?

A) Individual
B) Partnership
C) C corporation
D) Fiduciary

Question 64

Harold has a 50% interest in a general partnership that has a $14,000 loss for the year. He materially participates in the partnership, his basis in the partnership is $10,000 at the beginning of the year. He also has salary from other employment of $46,000. If he is single and claims the standard deduction, what are his taxable income and tax liability, respectively, in 2018?

A) $27,000; $3,050
B) $39,000; $4,490
C) $46,000; $5,330
D) None; $0

Question 65

Which of these entities is taxed directly on its income?

A) Limited Liability Company
B) C Corporation
C) Partnership
D) Sole Proprietorship

Question 66

Which of the following is never included in computing gross income?

A) Loss on stock sale
B) Social security benefits
C) Unemployment benefits
D) Gifts

Question 67

What is the earliest year to which a corporation can utilize a net operating loss realized in 2018?

A) 2016
B) The first year after 2018 the corporation's gross income exceeds its tax deductions for the year.
C) The first year the corporation earns any revenues
D) 2019

Question 68

Abigail is married filing separately with taxable income of $175,000. What is her marginal tax rate?

A) 37%
B) 35%
C) 32%
D) 24%

Question 69

Ethan and Mia are married and file a joint tax return. Their taxable income is $200,000 in 2018. What is their marginal tax rate?

A) 10%
B) 12%
C) 22%
D) 24%

Question 70

Ted owns 20% of Genco (a C corporation) that had taxable income of $100,000 and paid a total of $50,000 in dividends to its shareholders. Ted also owns 10% of Subco (an S corporation) that had $100,000 of taxable income and distributed a total of $60,000 to its shareholders. How much must Ted include in his gross income as a result of being a shareholder in these two corporations?

A) $16,000
B) $20,000
C) $26,000
D) $30,000

Question 71

What is an individual's maximum annual deduction for capital losses?

A) $3,000
B) An amount equal to capital gains only
C) An amount equal to capital gains plus $3,000
D) Individuals cannot deduct capital losses

Question 72

What is a corporation's annual deduction for capital losses?

A) $3,000
B) An amount equal to capital gains only
C) An amount equal to capital gains plus $3,000
D) Corporations cannot deduct capital losses

Question 73

Which of the following are included in Adam Smith's characteristics of a good tax?

A) Certainty
B) Economy
C) Convenience
D) All are included
E) None are included

Question 74

Daniel is a single with taxable income of $40,000 in 2018. What is his marginal tax rate?

A) 10%
B) 12%
C) 22%
D) 24%

Question 75

Which of the following best describes horizontal equity?

A) All taxpayers should pay some taxes on their incomes
B) As income increases, taxes should increase
C) Persons with equal incomes should pay the same amount of taxes
D) A person with capital gains should pay less tax than a person with the same amount of salary income

Question 76

Which of the following is normally not included in gross income?

A) Cash dividend
B) Corporate bond interest income
C) Stock dividend
D) All are included in gross income
E) None are included in gross income

Question 77

Two married persons with moderately high incomes will pay more taxes than two single persons with the same income. This is commonly called:

A) vertical equity.
B) horizontal equity.
C) a marriage bonus.
D) a marriage penalty.

Question 78

How much income tax must the Benton Trust pay in 2018 if its taxable income (after all deductions) is $4,600?

A) $460
B) $690
C) $747
D) $1,240

Question 79

Which of the following is not a tax credit allowed a corporation?

A) Foreign tax credit
B) Education credit
C) Investment tax credit
D) Alternative minimum tax credit

Question 80

Which of the following best describes vertical equity?

A) All taxpayers should pay some taxes on their incomes
B) As income increases, taxes should increase
C) Persons with equal incomes should pay the same amount of taxes
D) A person with capital gains should pay less tax than a person with the same amount of salary income