Question 1

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 can help reduce current tax liabilities, and putting deductions into the year with the highest marginal tax rate can provide the greatest tax benefit. Both statements are therefore correct rules of thumb to follow when planning for taxes.

Question 2

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

Accepted Answer

Trade or business expenses and rental expenses are classified as above-the-line deductions and not itemized deductions. Property taxes on personal residence and investment interest expense are itemized deductions.

Question 3

The calculation of an individual's income tax includes certain deductions for adjusted gross income. The following are examples of this class of deductions:
I.Trade or business expenses
II.Rental expenses
III.Interest on student loans
IV.Investment interest
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Accepted Answer

Trade or business expenses and rental expenses are deductible if they are incurred in the production of income. Interest on student loans is also deductible up to a certain limit. Investment interest can also be deducted, but it is subject to certain limitations. Therefore, statements I, II, and III are correct, making option B the best choice.

Question 4

Which of the following is an example of tax evasion?

Accepted Answer

Tax evasion refers to intentionally not reporting or under-reporting income or assets to avoid paying taxes. In this case, Bertha not reporting her cash prize on her tax return is an example of tax evasion. The other options do not involve intentionally hiding income or assets to avoid taxes. Option A involves investing in tax-exempt bonds, which is a legitimate tax planning strategy. Option B involves using a tax-advantaged benefit provided by the employer for retirement savings. Option C involves utilizing a lower tax rate on interest income earned by gifting bonds, which is also a legitimate tax planning strategy.

Question 5

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.
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Accepted Answer

All the statements except III are necessary for tax evasion to occur. Avoiding detection by the IRS may not always be a necessary element for tax evasion to take place, therefore statement III is incorrect. The other statements are necessary for the act of tax evasion, including nondisclosure of facts, underpayment of taxes, willfulness on the taxpayer's part, and an affirmative act to intentionally misrepresent taxes.

Question 6

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.
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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 7

Deductions for adjusted gross income 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.Taxpayers deduct the larger of deductions for adjusted gross income or the standard deduction
III.Deductions for adjusted gross income are limited to those incurred in a trade or business, incurred in the earning other forms of income, and certain specifically allowed personal expenses of individuals.
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Accepted Answer

Statement I is correct in that taxpayers have the option to deduct the larger of itemized deductions or the standard deduction. Statement II, however, is incorrect as deductions for adjusted gross income are separate from the standard deduction and taxpayers cannot choose the larger of the two. Statement III is correct in that deductions for adjusted gross income are limited to certain specific expenses related to earning income or conducting business.

Question 8

The income tax formula for individual taxpayers is unique in that deductions are broken into classes.
I.This dichotomy of deductions results in an intermediate income number called adjusted gross income (AGI).
II.One class of deductions is called exclusions from income.
III.One class of deductions is called deductions for adjusted gross income.
IV.Expenses qualifying as deductions for adjusted gross income are not limited by the income of the taxpayer.
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Accepted Answer

Statement I is correct as the income tax formula for individual taxpayers is unique in that deductions are broken into two classes: exclusions from income and deductions for adjusted gross income, resulting in an intermediate income number called AGI. Statement III is correct as one class of deductions is called deductions for adjusted gross income. Statement IV is correct as expenses qualifying as deductions for adjusted gross income are not limited by the income of the taxpayer. Statement II is incorrect as there is no class of deductions called exclusions from income, not deductions for adjusted gross income.

Question 9

Sonya owes a deductible expense that she can pay either (and deduct) this year or next year. She is in the 24% 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 32% marginal tax rate bracket next year, she should pay the expense this year.
III.If Sonya expects to be in the 12% marginal tax rate bracket next year, she should pay the expense this year.
IV.If Sonya expects to be in the 24% marginal tax rate bracket next year, she should pay the expense this year.
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Accepted Answer

If Sonya expects to be in a lower tax bracket next year (12%), she should pay the expense this year to maximize the deduction at the higher rate. If she expects to be in the same bracket (24%), it doesn't matter when she pays it, but paying this year could be beneficial for cash flow or other reasons.

Question 10

Carolyn and Craig are married. They have two children (8 years old and 13 years old) living with them. How many qualifying dependents are claimed on Carolyn and Craig's 2018 tax return for purposes of a tax credit?

Accepted Answer

Carolyn and Craig can claim their two children as qualifying dependents for tax credit purposes. This makes a total of two qualifying dependents.

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 deductions.
​

Accepted Answer

Putting income into the year with the lowest marginal tax rate is a common tax planning strategy to minimize taxes. Deferring deductions is generally not advisable as it may result in higher taxes in the current year.

Question 12

Based on the following information, what is the 2018 taxable income for a married couple with two children?
?
$$\begin{array} { l r } 
\text { Total income } & \$ 120,000 \
\text { Excludable income } & 2,000 \
\text { Deductions for AGI } & 5,000 \
\text { Allowable itemized deductions } & 8,000
\end{array}$$

Accepted Answer

Taxable income = Total income - Excludable income - Deductions for AGI - Allowable itemized deductions= $120,000 - $2,000 - $5,000 - $8,000= $89,000

Question 13

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

1. Statement I is correct because AGI is indeed used to limit certain deductions. For example, some deductions are only allowed if they exceed a certain percentage of AGI.2. Statement II is correct because AGI is a term specific to the individual income tax formula in the United States, distinguishing it from other measures of income.3. Statement III is correct because AGI is calculated by making certain adjustments to gross income, such as subtracting specific allowable deductions, before personal exemptions and itemized or standard deductions are applied.

Question 14

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

Alice is not reporting the stamps received as income, which is a violation of tax laws and considered tax evasion. If detected by the IRS, she would be subject to payment of tax, interest, and penalty on the unreported income. Therefore, both statements I and II are correct.

Question 15

Betty hires Sam, a C.P.A., to prepare her current federal income tax return for the first time. In preparing the return, Sam determines an error in last year's return. Sam should:
I.Do nothing and see if the IRS catches the error.
II.Inform Betty and recommend corrective measures.
III.Immediately contact the IRS
IV.Immediately call Betty and tell her he can not complete this year's return
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Accepted Answer

Sam should inform Betty and recommend corrective measures because it is his professional responsibility to ensure the accuracy of both the current and prior year's tax returns. Simply waiting for the IRS to catch the error could lead to penalties and interest for Betty. Contacting the IRS immediately without informing Betty and recommending corrective measures could also cause confusion and unnecessary stress. Calling Betty and informing her that he cannot complete this year's return is not necessary in this situation.

Question 16

For 2018, Nigel and Lola, married taxpayers without children, calculated their total allowable itemized deductions to be $28,100. Accordingly, Nigel and Lola file jointly and should deduct from adjusted gross income
I.the standard deduction amount of $24,000
II.total itemized deductions equal to $28,100.
III.tax credits totaling $4,000 for two qualifying individuals
IV.the standard deduction of $24,000 plus the itemized deductions of $28,100
​

Accepted Answer

Since the total allowable itemized deductions are greater than the standard deduction amount, the taxpayer should deduct the total itemized deductions of $28,100 from their adjusted gross income. Tax credits for qualifying individuals are a separate calculation, and adding the standard deduction to the itemized deductions would result in double counting. Therefore, only statement II is correct.

Question 17

Trang is in the 12% 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 22% 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 12% marginal tax...

Question 18

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. By putting income into the year with the lowest marginal tax rate and deferring recognition of income, taxpayers can potentially minimize their tax liability. Timing income and deductions can help individuals take advantage of changes in tax laws and regulations, as well as fluctuations in their own income and expenses. However, it's important to note that tax planning should not be the only factor considered in financial decision-making, and seeking the guidance of a professional tax advisor is recommended.

Question 19

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 20

Sarah owes a deductible expense that she can either pay (and deduct) this year or next year. She is in the 22% 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 32% marginal tax rate bracket next year, she should pay the expense next year.
​

Accepted Answer

If Sarah expects to be in a higher tax bracket next year, she should delay the deduction and pay the expense in that year. This will result in a larger tax savings as the higher tax rate will apply to the deduction. Therefore, statement II is correct. However, statement I is incorrect as deductions do not always have to be taken in the current year. It depends on the individual's tax situation and future expectations.

Quiz 1: Federal Income Taxation-An Overview

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.

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

The calculation of an individual's income tax includes certain deductions for adjusted gross income. The following are examples of this class of deductions: I.Trade or business expenses II.Rental expenses III.Interest on student loans IV.Investment interest

Which of the following is an example of tax evasion?

Carolyn and Craig are married. They have two children (8 years old and 13 years old) living with them. How many qualifying dependents are claimed on Carolyn and Craig's 2018 tax return for purposes of a tax credit?

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.

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.

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.

Quiz 1: Federal Income Taxation-An Overview

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. ​

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

The calculation of an individual's income tax includes certain deductions for adjusted gross income. The following are examples of this class of deductions: I.Trade or business expenses II.Rental expenses III.Interest on student loans IV.Investment interest ​

Which of the following is an example of tax evasion?

Carolyn and Craig are married. They have two children (8 years old and 13 years old) living with them. How many qualifying dependents are claimed on Carolyn and Craig's 2018 tax return for purposes of a tax credit?

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. ​

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. ​

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. ​

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.

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

The calculation of an individual's income tax includes certain deductions for adjusted gross income. The following are examples of this class of deductions: I.Trade or business expenses II.Rental expenses III.Interest on student loans IV.Investment interest

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.

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.

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.