Deck 8: Tax Planning

Question 1

Your client informs you that he cheated on his income taxes by omitting 30 percent of his gross income and he's not really worried about being caught. You inform him that the IRS has many different systems at their disposal to catch cheaters and that the IRS has a statute of limitation for fraud detection. Under this scenario, how long is the statute of limitation?

A)3 years
B)6 years
C)9 years
D)There is no statute of limitation for the above scenario

Answer 1

6 years

Question 2

Your client informs you that he has not paid taxes for the last five years. You know this is a criminal fraud and inform your client that this crime is a ____?

A)Civil Fraud
B)Misdemeanor
C)Felony
D)Penalty Negligence

Answer 2

Felony

Question 3

Where do laws concerning taxes begin?

A)White House
B)Internal Revenue Service
C)Senate Finance Committee
D)House Ways and Means Committee

Answer 3

House Ways and Means Committee

Question 4

Which is not an individual having to file a tax return even if their gross income is below the required amount?

A)Individuals who has $400 or more net earnings from self-employment.
B)Individuals owing alternative minimum tax.
C)Individuals who have changed their country of residence.
D)Individuals who have $200 or more net earnings from self-employment.

Question 5

Your client has barter income, deductions for office-in-the-home expenses, and substantial business losses. At tax time you inform the client that the IRS may audit due to their use of what system?

A)Discriminate Functions System
B)Targeted Programs
C)Civil Fraud
D)Taxpayer Compliance Measurement Program

Question 6

Which is not a disadvantage for Married Filing Separately (MFS)?

A)Increase in taxable Social Security benefits
B)Credit losses
C)No joint liability
D)Loss of the special $25,000

Question 7

Which item below is not a test to file for Head of Household (HOH)?

A)The taxpayer is not married at end of year.
B)The taxpayer pays more than half the cost of the home.
C)The taxpayer is married living separately.
D)The taxpayer's home was the main home for more than half the year of stepchildren.

Question 8

Which of the following statement about adjusting the basis of S corporation stock is true?

A)The cash distribution is considered a taxable return of investment
B)Losses are non-deductible
C)K-1 Schedules are not used
D)Losses are deductible to the extent of the owner's equity investment and debt obligation.

Question 9

Bart owns a brewery that specializes in a beer containing caffeine. He recently purchased a $20,000 coffee maker to help add a kick to his brew. He expects the coffee maker to have a useful life of ten years and have a salvage value of $2,000. If Bart's brewery, Bart's Brewskies, is using the double declining depreciation method, how much would he depreciate in the first year?

A)$5,000
B)$1,000
C)$2,500
D)$4,000
E)$3,500

Question 10

What type of corporation is subject to flat tax?

A)S Corporation
B)Partnerships
C)Personal Service Corporation
D)Personal Holding Company

Question 11

What form is used when filing for trusts and estates in each calendar year that it has taxable income and to report income and distributions?

A)Form 1041
B)Form 1043
C)Form 1441
D)Form 1442

Question 12

Your client is considering becoming a trust grantor, but is concerned about tax obligations that they may face; what should the client be informed of?

A)A grantor trust is treated separately for tax purposes.
B)The beneficiary pays all tax issues.
C)A trust grantor may be taxed on its income as the owner of the trust.
D)There are no tax issues to be concerned with.

Question 13

What trust has the personal exemption amount of $300?

A)Complex Trusts
B)Simple Trusts
C)Both A and B
D)Neither A or B

Question 14

What trust has the personal exemption amount of $100?

A)Complex Trusts
B)Simple Trusts
C)Both A and B
D)Neither A or B

Question 15

What type of trust income must first be allowed by state law versus IRS statute?

A)Capital Gains
B)Rents
C)Royalties
D)Dividends

Question 16

What system is considered a parallel income tax system?

A)Alternative Minimum Tax (AMT)
B)Tax Exemption Preferences
C)Adjustable Exemption Tax
D)None of the above

Question 17

The acceleration of deductions reduces taxes in the current year; there are several strategies for accomplishment. What item below would be a strategy?

A)Purchasing supplies
B)Review of asset acquisitions
C)Early payment of state income or property taxes
D)All of the above

Question 18

Your client owns a company within a building he own on a piece of land that he also owns. He is concerned with deprecation issues for tax purposes. What cannot be depreciated for taxes?

A)Property used in a trade to produce income.
B)Property that has loss value over time.
C)Building expenditures.
D)Land

Question 19

What are assets placed in service between 1981 and 1986 for depreciation rules are often referred to?

A)Modified Accelerated Cost Recovery System
B)Accelerated Cost Recovery System
C)Accelerated Cost Basis
D)There is no correlation between asset placement and dates of service.

Question 20

Your client has an apartment building in Denver and wants to "purchase" a condo in Detroit that he intends to rent out so he fills out Form 8824. Instead of renting out the property in Detroit, he lives in it. What concept is your client attempting to accomplish?

A)Qualifying Transaction
B)Like-Kind Exchange
C)Special Tax Switches
D)Nothing, Form 8824 does not exist.

Question 21

What type of property is not excluded from the definition of like-kind exchanges?

A)Stocks, bonds, and notes.
B)Inventory property used for business.
C)City real estate for a ranch or farm.
D)Foreign real estate.

Question 22

There are several tax consequences of gain or loss on sale of assets; capital assets for businesses are any assets held for long-term investment. What category would not be considered a capital asset?

A)Business Inventories
B)Commodities Derivatives
C)Hedging Transaction Properties
D)None of the above is capital assets.

Question 23

Personal or real property assets used in trade or business that are held for more than one year are what type of asset?

A)Section 1231
B)Section A
C)Section 1231 A
D)Section A 1231

Question 24

Your clients are a young married couple that is not sure how to best file their income taxes. They think they should itemized deductions because they have rental real estate. How should this couple file?

A)Married Filing Separately
B)Head of Household
C)Married Filing Jointly
D)Single

Question 25

Buying shares back after selling them at a loss can negate tax deduction. To maintain the ability to deduct the loss, how long must one wait to repurchase those shares back?

A)26 days
B)31 days
C)46 days
D)91 days

Question 26

What limits a taxpayer's deduction loss to the amount that the taxpayer actually has at risk of loss and affects individuals, estates and trust, partners, shareholders in S corporations, and most C corporations equally?

A)Interplay Risk Computation
B)At-risk Rules
C)Deduction Loss Rules and Regulation
D)Interplay Deductions

Question 27

Your client's husband just died. She has an 8 year old daughter. How long may your client file jointly for federal taxes?

A)One year
B)Two years
C)Indefinitely
D)Once the spouse has passed, the surviving spouse must file single or head of household.

Question 28

What is the difference of an asset that is sold below fair market value referred to as?

A)Wash Sales
B)Bargain Element
C)Depreciation Recapture
D)Personal Property Rules

Question 29

Divorce happens. Often there are children involved needing child support. Often there is property involved that needs "splitting." Sometimes alimony must be paid. Payments as alimony must meet a certain set of rules. What condition is a payment as alimony rule?

A)Payment must be made in cash.
B)Payment must be simultaneous with child support (if applicable).
C)Front loading should not be avoided.
D)Payer and payee must file a joint tax return.

Question 30

What law(s) is based on custom, general principles, and is embodied in case law?

A)Alimony Laws
B)Child Support Laws
C)Common Law
D)Divorce Laws

Question 31

There is a distinction made between gifs that are used by a charity (use related) and gifs that are not used (use unrelated). What situation best describes an use unrelated gift received by a charity?

A)A gifted art piece on display at the local museum.
B)A gifted car that is given to a charity's client.
C)A gifted house that a charity occupies.
D)None of the above.

Question 32

Your client has contributed $45,000 to the Red Cross which exceeds her AGI limit. How many years can she carryover the excess?

A)1 year
B)5 years
C)Until all excess is deducted
D)Cannot carryover excess deductions

Question 33

Your client is making a $5,000 contribution to a local museum. The client realizes that there are tax deductions that can be applied to the current tax year. What would you inform the client of?

A)An appraisal must be done
B)The appraisal fee is not deductible as contributions
C)Both A and B
D)Neither A nor B

Question 34

To what other areas of financial planning does tax planning most closely apply?

A)Education planning
B)Risk management and insurance planning
C)Retirement savings and income planning
D)Estate planning

Question 35

The Revenue Act of 1916 views estates and trusts as what?

A)A way to avoid tax liability
B)A way to transfer wealth between individuals
C)A way to create additional tax liability
D)A way to donate to charitable causes

Question 36

What determines whether an estate or trust's income is taxable to the estate or trust?

A)The amount held by the estate or trust at the end of the taxable year
B)The amount distributed to beneficiaries during the taxable year
C)The distributable net income
D)The distributable gross income

Question 37

Which of the following is true regarding the alternative minimum tax?

A)The alternative minimum tax encourages taxpayers to take advantage of tax relief incentives
B)The alternative minimum tax is an additional tax paid on certain preference items
C)The alternative minimum tax is a parallel tax system that is used to ensure that taxpayers pay less tax, if able
D)The alternative minimum tax is a parallel tax system used to ensure that taxpayers with certain preference items pay a minimum amount of tax

Question 38

What IRS form does an individual taxpayer use to figure any alternative minimum tax?

A)Form 1040
B)Form 1040A
C)Form 6251
D)Form 8801

Question 39

In what year was the current alternative minimum tax system created?

A)1950
B)1969
C)1974
D)1978

Question 40

What is the tax base to which you would apply a tax rate when figuring alternative minimum tax?

A)Regular taxable income
B)Alternative minimum taxable income
C)Alternative minimum adjustments
D)Modified accelerated cost recovery system

Question 41

Which of the following is the term used for items that do not reverse over time?

A)Modification
B)Adjustments
C)Preferences
D)Credits

Question 42

Which of the following is NOT an adjustment to adjusted gross income, because it is allowed for alternative minimum tax purposes?

A)Standard deduction
B)Qualified housing interest
C)Personal exemptions
D)State and local taxes

Question 43

Which of the following can be an effective tax planning opportunity for individuals who may be subject to the alternative minimum tax?

A)Always deduct state income tax instead of state sales tax
B)Increase investments in private activity tax-exempt bonds
C)Accelerate income through IRA or pension distributions
D)Pay off all home equity loans

Question 44

In regards to tax planning, what is the financial planner's goal?

A)Maximize the client's tax due
B)Minimize the client's tax due
C)Maximize the client's after-tax wealth
D)Maximize the client's income that can be hidden from the IRS

Question 45

Which of the following is true regarding tax evasion?

A)The U.S. Supreme Court states that taxpayers should arrange transactions to pay the most tax possible
B)Using legal means of reducing the taxpayer's tax liability is considered tax evasion
C)Taxpayers who lie on their tax returns are rarely caught
D)Taxpayers found guilty of tax evasion must pay the tax that would otherwise have been due

Question 46

Which of the following is a non-taxable type of income?

A)Capital gain on the sale of a primary residence
B)Capital gain on stocks
C)Traditional IRA distributions
D)Self-employment income

Question 47

What is a disadvantage to Roth IRAs?

A)The distributions are taxable
B)You cannot deduct current contributions
C)The interest rate is very low
D)The funds can only be distributed to beneficiaries

Question 48

What is the most common method taxpayers use to report income?

A)Cash
B)Accrual
C)Hybrid
D)Accelerated

Question 49

What is the amount of the net investment income tax?

A)2)3%
B)3)8%
C)4)2%
D)5)3%

Question 50

Which type of taxpayer may be affected by passive activity and at-risk rules?

A)Investors in certain partnerships
B)Investors in limited liability companies
C)Business owners who do not participate directly in routine management
D)All of the above

Question 51

What is the purpose of passive activity and at-risk rules?

A)To prevent businesses from incurring losses
B)To prevent taxpayers from investing in high-risk businesses
C)To prevent taxpayers from purposely losing money through a business in order to pay less tax on other income
D)To keep the economy from growing too quickly

Question 52

When were the passive activity and at-risk rules enacted?

A)1950
B)1969
C)1986
D)1996

Question 53

An activity is considered a passive activity if the individual does not do what?

A)Continue investing
B)Materially participate
C)Have other means of income
D)Invest over a certain amount of money

Question 54

Losses from a passive activity can only offset positive income from what type of activity?

A)Passive activity
B)Active activity
C)Portfolio income
D)Any type of activity that was sold or otherwise disposed of

Question 55

What is the limit of loss recognition on at-risk activities?

A)$10,000
B)The taxpayer's adjusted basis in the property
C)The taxpayer's adjusted basis in the property, plus any loans for the activity where the taxpayer is personally liable, minus any previously allowed losses
D)The taxpayer's adjusted basis in the property, plus any non-recourse loans, minus any previously allowed losses

Question 56

Where, on the tax return, can a taxpayer claim a charitable deduction?

A)As a standard deduction
B)As an itemized deduction
C)As a credit
D)As an adjustment to income

Question 57

Rachel learned that her grandmother died and left her an inheritance in 2013. At that time, she decided that she would contribute at least a portion of that inheritance to charity. In 2014, she received the full amount of the inheritance. On December 15, 2015, she made a pledge and wrote a check to the charity. She mailed the check on January 2, 2016, and the charity received the check within a few days. In which year can Rachel deduct the contribution?

A)2013
B)2014
C)2015
D)2016

Question 58

What IRS publication can you use to find a complete list of qualifying charitable organizations?

A)IRS Publication 17
B)IRS Publication 78
C)IRS Publication 942
D)IRS Publication 1040

Question 59

A gift to which of the following is generally deductible?

A)Church
B)Political organization
C)Union
D)Chamber of commerce

Question 60

What is the maximum amount of charitable contributions a taxpayer can claim in any one year?

A)$5,000
B)25% of AGI
C)50% of AGI
D)100% of AGI