tax ch 1-3

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105 terms · mc

a

A tax rate that increases as the tax base increases is an example of what kind of tax rate structure?
A. Progressive.
B. Proportional.
C. Regressive.
D. Recessive

b

A tax rate that remains the same as the tax base increases is an example of what kind of tax rate structure?
A. Progressive.
B. Proportional.
C. Regressive.
D. Recessive

c

A tax rate that increases as the tax base decreases is an example of what kind of tax rate structure?
A. Progressive.
B. Proportional.
C. Regressive.
D. Recessive.

b

A tax rate structure where the tax rate remains at the same rate regardless of the tax base is:
A. A progressive rate structure.
B. A proportional rate structure.
C. A regressive rate structure.
D. None of the above

d

Which of the following is an example of a regressive tax?
A. Federal income tax.
B. State and local taxes levied on property.
C. Sales tax.
D. Social security tax

a

The federal income tax is an example of a:
A. Progressive rate structure.
B. Proportional rate structure.
C. Regressive rate structure.
D. Flat tax structure

c

Jake earned $15,000 and paid $1,500 of income tax, while Jill earned $40,000 and paid $3,000 of income tax. The structure of the tax their income is subject to is:
A. Progressive.
B. Proportional.
C. Regressive.
D. Flat.

d

Jordan and Paul, a married couple, have taxable income of $48,025 which is taxed as follows:
$16,700 X 10%= 1,670.00
(48,025 - 16,700) X 15%= 4,698.75
Total tax liability $6,368.75
Their marginal tax rate is:
A. 0%.
B. 10%.
C. 13.3%.
D. 15%.

c

Jordan and Paul, a married couple, have taxable income of $48,025 which is taxed as follows:
16,700 X 10% = 1,670.00
(48,025-16,700) X 15% = 4,698.75
Total tax liability = $6,368.75
Their average tax rate is:
A. 0%.
B. 10%.
C. 13.3%.
D. 15%.

b

Which statement is correct with respect to marginal and average tax rates under a progressive tax structure?
A. At very high levels of taxable income, a taxpayer's marginal and average tax rates will be the same.
B. At very low levels of taxable income, a taxpayer's marginal and average tax rates will be the same.
C. For most taxpayers, the average tax rate is larger than the marginal tax rate.
D.Generalizations cannot be made. The question can only be answered with reference to the tax situation of
a specific taxpayer.

c

With respect to the income tax formula, which of the following statements is correct?
A. The simplified income tax formula is only applicable to taxpayers with taxable income less than $100,000.
B. Tax liability is determined by applying an appropriate tax rate to total income.
C. Certain deductions from income are permitted before calculating tax liability.
D. Tax payments are ignored when calculating the tax refund or tax due with the return.

d

Which of the following statements is true with respect to marginal and average tax rates under a progressive tax structure?
A. Marginal rates are always larger than average rates.
B. Marginal rates are always smaller than average rates.
C. Average rates can only be calculated for taxpayers with income over $100,000.
D. Average rates are never more than marginal rates

c

Which of the following would disqualify a taxpayer from filing a Form 1040EZ?
A. The taxpayer is married.
B. The taxpayer has interest income of $1,400.
C. The taxpayer is age 66.
D. The taxpayer received unemployment compensation income of $1,700

d

Which of the following would disqualify a taxpayer from filing a Form 1040EZ?
A. The taxpayer has total income of $74,000.
B. The taxpayer has interest income of $500.
C. The taxpayer is age 63.
D. The taxpayer has one dependent

b

Which of the following would disqualify a taxpayer from filing a Form 1040EZ?
A. Has total taxable income under $100,000.
B. Be age 68 and not blind.
C. Has no dependents.
D. Has interest income less than $1,500.

a

Employers report wage income to employees on a:
A. Form W-2.
B. Form W-3.
C. Form 1099-E.
D. Form 1099-G

b

Interest payers (banks, savings and loans, insurance companies, etc.) report interest earnings to taxpayers on a:
A. Form W-2-INT.
B. Form 1099-INT.
C. Form 1099-INC.
D. Form 4070

a

On Form 1040EZ, the permitted deduction from income for a single taxpayer is:
A. $5,800.
B. $9,350.
C. $10,000.
D. $18,700

b

In terms of dollars, wage earning taxpayers will normally pay the majority of their tax liability:
A. When they file their tax return.
B. Through withholding from their wages.
C. In the following tax year.
D. In advance in January

a

Victoria determined her tax liability was $6,145. Her employer withheld $6,451 from her paychecks during the year. Victoria's tax return would show:
A. A refund of $306.
B. A refund of $6,451.
C. Tax due of $306.
D. Tax due of $6,145

_

The tax liability for a single individual with taxable income of $67,493 is:
A. $13,061.
B. $13,056.
C. $11,721.
D. $9,286.

_

The tax liability for a married couple with taxable income of $92,409 is:
A. $20,011.
B. $19,599.
C. $17,957.
D. $15,481

b

For equivalent amounts of taxable income, the total tax liability of a single individual:
A. Will be less than married filing jointly.
B. Will be more than married filing jointly.
C. Will be more than married filing separately.
D. Cannot be determined with the information provided

d

Hamad is an employee of Mountain Company. He properly completed his Form 1040EZ tax return and was required to pay the IRS $1,244 at the time of filing. He had income tax withholding during the year of $4,782. Hamad's tax liability for the year was:
A. $1,244.
B. $3,538.
C. $4,782.
D. $6,026.

b

Alice is an employee of Valley Company. She properly completed her Form 1040EZ tax return and received a refund from the IRS of $1,244. Alice had income tax withholding during the year of $4,782. Her tax liability for the year was:
A. $1,244.
B. $3,538.
C. $4,782.
D. $6,026

_

Peter and Penelope are married and have combined W-2 income of $57,421. They paid an additional $127 when they filed their taxes. How much income tax did their employers withhold during the year?
A. $4,847.
B. $5,101.
C. $7,652.
D. $7,906.

d

Which of the following trial courts hear tax cases?
A. U.S. Tax Court.
B. U.S. District Court.
C. U.S. Court of Federal Claims.
D. All of the above

a

Which court hears most of the litigated tax disputes between the IRS and taxpayers?
A. U.S. Tax Court.
B. U.S. District Court.
C. U.S. Court of Federal Claims.
D. None of the above.

d

Which of the following are primary sources of tax authority?
A. Statutory sources.
B. Administrative sources.
C. Judicial sources.
D. All of the above

a

Which of the following is a statutory source of tax authority?
A. Internal Revenue Code.
B. IRS Regulation.
C. Revenue Ruling.
D. Tax Court decision

d

Which of the following is an administrative source of tax law?
A. Revenue Ruling.
B. IRS Regulation.
C. Private Letter Ruling.
D. All of the above

b

Which of the following types of Regulations is the strongest tax authority?
A. Final.
B. Legislative.
C. Temporary.
D. Proposed

a

Which of the following refers to an income tax regulation?
A. Reg. §1.162-5.
B. Reg. §20.2032-1.
C. Reg. §25.2503-4.
D. Reg. §31.3301-1

d

Which of the following is correct with respect to Private Letter Rulings?
A. Issued when a taxpayer wants to know the tax treatment of a specific tax situation.
B. Can be relied upon by all taxpayers in a similar tax situation.
C. Provides tax authority only to the taxpayer to whom it is issued.
D. Both a and c

a

Which of the following courts has the highest tax validity?
A. Court of Appeals for the Fifth Circuit.
B. U.S. Court of Federal Claims.
C. U.S. District Court.
D. U.S. Tax Court.

b

A single taxpayer is 45 years old and has wages of only $15,000. Which is the simplest form this person can file?
A. 1040A.
B. 1040EZ.
C. 1040.
D. 1040ES

a

A 35 - year - old taxpayer with a dependent child and claiming head of household status has received $24,000 in alimony payments and earned wages of $45,000. Which is the simplest form this person can file?
A. 1040.
B. 1040A.
C. 1040ES.
D. 1040EZ

d

A taxpayer is married with a qualifying child (dependent), but she has been living separate from her spouse for the last five months of the year. However, she paid for more than half of the cost of keeping up the household. Her spouse does not want to file jointly. What filing status must she use when filing her tax return? She wants to obtain the maximum legal benefit.
A. Single.
B. Head of Household.
C. Qualifying Widow(er).
D. Married Filing Separately

c

The taxpayer's spouse died at the beginning of 2008. He has no qualifying child. Which status should the taxpayer select when filing his tax return for 2009?
A. Married Filing Jointly.
B. Married Filing Separately.
C. Single.
D. Qualifying Widow(er).

a

A legally divorced taxpayer maintains a household for himself and maintains a separate household that is the principal place of abode of his dependent widowed mother. What filing status should he use when filing his tax return?
A. Head of Household.
B. Single.
C. Qualifying widow(er).
D. Married Filing Separately

b

For tax purposes, marital status is determined as of the __________ day of the year.
A. first
B. last
C. third
D. None of the above

d

What was the amount of the personal exemption for 2009?
A. $3,100.
B. $3,400.
C. $3,750.
D. $3,650

b

Tina is 21 years of age and a full-time student living with her parents. She had wages of $550 ($60 of income tax withholding) for 2009. Can Tina claim her exemption on her return even though her parents will claim her as a dependent on their tax return?
A. Tina and her parents can both claim the exemption.
B. No, Tina cannot claim the exemption.
C. No one can claim the exemption for Tina.
D. Yes, Tina can claim the exemption

a

A taxpayer can deduct a(an) __________ amount from AGI for each dependent.
A. exemption
B. deduction
C. itemized
D. adjustment

c

Maria is 21 years of age and a full-time student living by herself. She had wages of $19,000 for 2009. Can Maria claim the exemption for herself on her tax return?
A. Maria's parents can claim the exemption.
B. Both, Maria and her parents can claim the exemption.
C. Yes, Maria can claim the exemption.
D. No one can claim the exemption for Maria

b

To be a qualifying child, the taxpayer must meet three general tests and five specific tests. Which one is not part of the five specific tests?
A. Relationship test.
B. Gross income test.
C. Residency test.
D. Special test for qualifying child of more than one taxpayer

b

To be a qualifying child, the taxpayer must meet three general tests and five specific tests. What are the three general tests?
A. Relationship test, residency test and gross income test.
B. Dependent taxpayer test, joint return test and citizen or resident test.
C. Dependent taxpayer test, relationship test and citizen or resident test.
D. Support test, age test and relationship test.

a

To be a qualifying relative, the taxpayer must meet three general tests and four specific tests. Which one is not part of the four specific tests?
A. Age test.
B. Gross income test.
C. Support test.
D. Relationship test or member of household test

c

For a qualifying relative to be claimed as a dependent, this person must either be related to the taxpayer, or be a member of the taxpayer's household for the entire year. Select the relative who must be part of the taxpayer's household for the entire year.
A. Father.
B. Sister.
C. Cousin.
D. Son-in-law

b

The taxpayer must provide over ________ of the qualifying relative's support to be able to claim a dependency xemption.
A. 49%
B. 50%
C. 51%
D. 75%

c

Which of the following items would not be considered as support for a dependency exemption?
A. Medical insurance premiums.
B. Food.
C. Life insurance premiums.
D. Clothing

a

Carl, James and Thomas are supporting their mother who lives in a separate apartment. Their contributions towards her support are 10%, 40% and 50%, respectively. In a multiple support agreement, who would be entitled to claim the mother as a dependent?
A. James or Thomas.
B. Carl.
C. Carl, James or Thomas.
D. None of the above

d

For head of household status, personal and dependency exemptions are reduced when AGI exceeds:
A. $331,000.
B. $166,800.
C. $125,100.
D. $208,500

b

The basic standard deduction in 2009 for a single taxpayer, under 65 and not blind, is:
A. $5,450.
B. $5,700.
C. $7,100.
D. $8,350

c

The basic standard deduction in 2009 for a taxpayer, under 65 and not blind, filing married filing jointly is:
A. $12,500.
B. $10,900.
C. $11,400.
D. $8,350

d

The basic standard deduction in 2009 for a taxpayer, 67 and not blind, filing head of household is:
A. $8,350.
B. $9,450.
C. $7,100.
D. $9,750

a

When a taxpayer can be claimed as a dependent on the tax return of another individual, the basic standard deduction for the taxpayer is limited to the greater of (a)_______, or (b) the taxpayer's earned income plus $300, but not more than the amount of the basic standard deduction.
A. $950.
B. $900.
C. $1,000.
D. $300.

c

Luisa's parents can claim her as a dependent on their tax return. In 2009, her only source of income was a part-time job as a medical clerk where she earned $2,100 during the year. What is Luisa's standard deduction?
A. $2,100.
B. $2,300.
C. $2,400.
D. $5,150

b

Tom's parents can claim him as a dependent on their tax return. In 2009, his only source of income was $1,000 of interest income received from Global Bank. What is Tom's standard deduction?
A. $5,700.
B. $950.
C. $1,000.
D. $300.

d

What is the amount of the social security wage limitation for 2009?
A. $97,500.
B. $102,000.
C. $95,700.
D. $106,800

b

What is the amount of the tax liability for a married couple having taxable income of $143,500? All answers should be rounded to the nearest dollar.
A. $28,250.
B. $28,444.
C. $26,638.
D. $21,525

a

What is the amount of the tax liability for a single person having taxable income of $62,300? All answers should be rounded to the nearest dollar.
A. $11,769.
B. $11,763.
C. $15,575.
D. $15,581

c

What is the amount of the tax liability for a head of household person having taxable income of $86,483? All answers should be rounded to the nearest dollar.
A. $12,375.
B. $16,473.
C. $16,471.
D. $21,621.

d

What is the amount of the tax liability for a qualifying widow(er) with a dependent child and having taxable income of $17,854? All answers should be rounded to the nearest dollar.
A. $1,785.
B. $1,843.
C. $1,788.
D. $1,846

b

Failure to make required estimated payments will subject the taxpayer to a potential underpayment penalty plus interest. However, if the difference between the tax shown on the return and the amount of tax withheld for wages is less than _______, the taxpayer will not be assessed a penalty.
A. $1,250
B. $1,000
C. $850
D. $500

d

The interest charged by IRS for the first three months of 2009 was:
A. 7%.
B. 6%.
C. 4%.
D. 5%.

d

John forgot to file his tax return by April 15. He did not file an extension. John finally filed his tax return on July 1 and had a remaining tax liability of $1,500. What is John's failure to file penalty? Assume he made all his payments on time.
A. $375.
B. $300.
C. $233.
D. $225

b

The failure to pay penalty is ________ of the tax shown on the return for each month (or fraction of a month) the tax is unpaid, up to a maximum of 25%.
A. 0.25%
B. 0.5%
C. 5.0%
D. 5.5%

a

The IRS can impose a _______ penalty on any portion of understatement of tax that is attributable to fraud.
A. 75%
B. 50%
C. 25%
D. 5%

d

Criminal penalties only apply to:
A. Tax evasion.
B. Willful failure to file a return.
C. Careless disregard for tax authority.
D. a and b.

c

For tax purposes, one of the requirements to recognize income is:
A. The income can be tax- exempt.
B. The transaction must occur but it's not necessary to complete it.
C. There must be an economic benefit.
D. All of the above

a

If an attorney performs some estate tax work for a client and the client agrees to pay $1,000 to him and $2,000 to a local financial institution for a debt the attorney owes, the attorney has income of:
A. $3,000.
B. $2,000.
C. $1,000.
D. None of the above

c

Pedro agreed to repair a house for a client and started to work on December 30, 2007. On January 2, 2009, he completed the job and received payment from the client. Pedro must record the income in:
A. 2007.
B. 2008.
C. 2009.
D. Both 2008 and 2009.

d

If Tom, an accountant, agrees to provide accounting services to Carl, a friend, in exchange for Carl fixing Tom's office floor, then:
A. Tom must report income on his tax return.
B. Carl must report income on his tax return.
C. Neither Tom nor Carl must report income on their tax returns.
D. Both of them must report income on their tax returns

d

Income may be realized in the form of:
A. Property.
B. Cash.
C. Services.
D. All of the above

a

When filing their tax returns, almost all individuals use:
A. The cash receipts and disbursements method.
B. The accrual method.
C. The recognition method.
D. The accounting method

b

Under the cash receipts and disbursements method, the taxpayer reports income in the year:
A. Income is negotiated.
B. Income is received.
C. Income is earned.
D. Income is accrued

c

Constructive receipt means the taxpayer has:
A. Earned the income.
B. Accrued the income.
C. Control of the income for his or her use.
D. a and b

b

A taxpayer can exclude from income interest received from:
A. A savings account established at a local bank.
B. Municipal bonds issued by the state.
C. A seller-financed mortgage transaction.
D. A credit union

d

When an individual's marginal ordinary income tax rate is 25% or more, the tax rate on qualified dividends is:
A. 0%.
B. 5%.
C. 10%.
D. 15%.

a

What is the tax liability for a single individual who has taxable income of $115,500, that includes a taxable qualified dividend of $2,000? All answers should be rounded to the nearest dollar.
A. $25,800.
B. $26,060.
C. $25,500.
D. $24,562

d

An individual must complete Schedule B (Forms 1040A or 1040) if the following situation occurs:
A. Received interest income of $1,500.
B. Received dividend income of $1,000.
C. Received interest income of $100.
D. Received tax- exempt interest of $700

a

Tom and Betsy, who are married filing jointly, reported a standard deduction of $10,900 on their 2008 tax return. They paid $500 to the state for income taxes in 2008. In 2009, they received a $125 refund of state taxes paid in 2008. What is the amount that Tom and Betsy need to report on their 2009 tax return?
A. $0.
B. $125.
C. $375.
D. $500

c

Rose, who files as head of household, reported itemized deductions of $8,050 on her 2008 tax return. Her itemized deductions included $300 of state taxes paid. In 2009, she received a $175 refund of state taxes paid in 2008. What is the amount that Rose needs to report on her 2009 tax return?
A. $300.
B. $175.
C. $50.
D. $0.

b

Provisional income is calculated by starting with Adjusted Gross Income (AGI) before social security benefits and adding back specific items. One of these items is:
A. Qualified dividends.
B. Deducted interest on educational loans.
C. Capital gains.
D. Wages

d

Caroline, who files as head of household, received $9,000 of social security benefits. Her AGI before the social security benefits was $27,000. She also received $200 of tax- exempt interest. What is the amount of taxable social security benefits?
A. $9,000.
B. $7,650.
C. $4,500.
D. $3,350

d

What item should not be included in income?
A. Sick pay.
B. Jury duty pay.
C. Prizes and awards.
D. Worker's compensation payments

b

The following fringe benefit provided by the employer is not taxable to the employee:
A. Vacation pay.
B. Employer-paid premiums on group-term life insurance with a coverage of $40,000 per person.
C. Educational assistance for up to $10,000 per person.
D. Sick pay

c

Employer-paid premiums on life insurance are not taxable to the employees, unless the coverage is in excess of _________________.
A. $5,000
B. $5,250
C. $50,000
D. $51,000

b

Payments under written dependent care assistance plans are tax- free, except that the exclusion for a single person cannot exceed his or her earned income and cannot exceed _________________.
A. $2,500
B. $5,000
C. $5,150
D. $5,250

c

Monique is a graduate student at a state university. In 2009, she received a scholarship of $8,000 ($6,000 for tuition and fees and $2,000 for campus housing) and a graduate assistantship that pays $4,000. What is the amount that she must report on her tax return?
A. $2,000.
B. $4,000.
C. $6,000.
D. $12,000

c

If a student must perform certain services for the educational institution (e.g., graduate assistantships), the amount paid for services is considered:
A. A scholarship.
B. A fellowship.
C. Wages.
D. All of the above

c

Employers can reimburse employees for up to _________________ per year of educational assistance,
whether or not job-related.
A. $5,000
B. $5,150
C. $5,250
D. $5,520

d

The Qualified Tuition Program (QTP) is a state program to help taxpayers pay for education expenses. Name the IRS section that created this type of program.
A. IRC §162.
B. IRC §101.
C. IRC §71.
D. IRC §529

b

Which one of the following items is not exempt under the umbrella of compensation for injuries or sickness?
A. Payments received for damages as a result of personal physical injuries.
B. Employer-provided adoption assistance.
C. Payments received under workers' compensation acts.
D. Disability income received from a terrorist attack in a foreign country while employed by the U.S. government

a

Life insurance proceeds because of the death of the insured are fully excludable from the gross income of the recipient if the payment is made:
A. As a lump sum.
B. Over time.
C. It does not matter how these payments are made.
D. a and b

b

Taxable income includes:
A. Child support payments.
B. Sick pay.
C. Welfare payments.
D. Workers' compensation payments

d

Taxable income does not include:
A. Alimony payments.
B. Qualified dividend payments.
C. Interest payments.
D. Child support payments

c

Jose redeemed $3,000 (principal of $2,000 and interest of $1,000) of Series I Savings Bonds to pay qualified higher education expenses. His qualified expenses for the year totaled $2,500 and AGI consists of wages of $20,000. What is the amount of interest that Jose must include in income?
A. $0.
B. $833.
C. $167.
D. $1,000

a

Imputed interest rules do not apply to the following:
A. Sale of property for $3,000 or less.
B. Sale of a personal residence.
C. Sale of a farm for $1 million or less.
D. Both a and b.

a

Imputed interest rules apply to term loans or demand loans in which the interest rate is less than the Applicable Federal Rate (AFR). Which of the following transactions does not fall under these rules? Assume in all situations that interest is below the AFR.
A. Gift loans of $10,000 in which interest foregone is in the form of a gift.
B. Loans in which a principal purpose is to avoid tax.
C.Loans in which the below-market or interest- free loan would have a significant effect on the tax liability
of the borrower or lender.
D. Both a and b

d

Lloyd purchased $125,000 of A and D Corporation's newly issued bonds for $114,500. The bonds carry an interest rate of 8% and mature in 5 years. What is the initial OID on these bonds?
A. $2,000.
B. $2,100.
C. $5,250.
D. $10,500

d

The original issue discount (OID) rules apply to all debt instruments with OID, except:
A. Non-business loans of $10,000 or less between natural persons.
B. Tax- exempt debt.
C. U.S. Savings Bonds.
D. All of the above

d

An individual with an original issue discount (OID) instrument must report annually a portion of the OID as:
A. Qualified dividend income.
B. Capital gains.
C. Miscellaneous income.
D. Interest income

d

Morris redeemed $6,000 (principal of $4,500 and interest of $1,500) of Series I Savings Bonds to pay qualified higher education expenses. His qualified expenses for the year totaled $6,500 and AGI consists of wages of $32,000. What is the amount of interest that Morris can exclude from income?
A. $0.
B. $500.
C. $1,000.
D. $1,500

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