(Test Bank) Pearson's Federal Taxation, 2023 Comprehensive

Rupert, 36

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Pearson's Federal Taxation 2023: Individuals, 36e (Rupert) Chapter 1: An Introduction to Taxation LO1: History of Taxation in the United States 1) The federal income tax is the dominant form of taxation by the federal government. Answer: TRUE Explanation: The federal income tax provides more revenues than any other tax. Page Ref.: I:1 -2 Objective: 1 2) The Sixteenth Amendment to the U.S. Constitution permits the passage of a federal income tax law. Answer: TRUE Explanation: The Sixteenth Amendment amended the Constitution to permit the imposition of an income tax. Page Ref.: I:1 -2 Objective: 1 3) When a change in the tax law is deemed necessary by Congress, the entire Internal Revenue Code must be revised. Answer: FALSE Explanation: The federal income tax law is changed on an incremental basis. Page Ref.: I:1 -3 Objective: 1 4) The largest source of federal revenues is the corporate income tax. Answer: FALSE Explanation: The largest source is the individual income tax. Page Ref.: I:1 -3 Objective: 1 5) Until about 100 years ago, attempts to impose a federal income tax were ruled unconstitutional. The amendment to the U.S. Constitution allowing the imposition of a federal income tax is the A) Second Amendment. B) Thirteenth Amendment. C) Sixteenth Amendment. D) Nineteenth Amendment. Answer: C Explanation: The Sixteenth Amendment, ratified in 1913, gave Congress the power to impose a federal income tax. Page Ref.: I:1 -2 Objective: 12 Copyright © 2023 Pearson Education, Inc. 6) The largest source of revenues for the federal government comes from A) individual income taxes. B) corporate income taxes. C) Social Security and Medicare taxes (FICA). D) estate and gift taxes. Answer: A Explanation: The individual income tax has provided the largest source of revenues for many years. Page Ref.: I:1 -3 Objective: 1 LO2: Types of Tax Rate Structures 1) A progressive tax rate structure is one where the rate of tax increases as the tax base increases. Answer: TRUE Explana tion: Under a progressive tax system, the rate increases as the tax base increases. Page Ref.: I:1 -4 Objective: 2 2) The terms "progressive tax" and "flat tax" are synonymous. Answer: FALSE Explanation: A proportional, not progressive, tax and flat t ax are synonymous. Page Ref.: I:1 -4 Objective: 2 3) A proportional tax rate is one where the rate of the tax is the same for all taxpayers, regardless of income levels. Answer: TRUE Explanation: A proportional tax is essentially a flat tax. Page Ref.: I:1 -4 Objective: 2 4) Regressive tax rates decrease as the tax base increases. Answer: TRUE Explanation: Regressive rates increase as the base decreases. Page Ref.: I:1 -5 Objective: 2 5) The marginal tax rate is useful in tax planning because it measures the tax effect of a proposed transaction. Answer: TRUE Explanation: The marginal rate applies to the planned addition to income or reduction to income. Page Ref.: I:1 -5 Objective: 2 3 Copyright © 2023 Pearson Education, Inc. 6) A taxpayer's average tax rate is the tax rat e applied to an incremental amount of taxable income that is added to the tax base. Answer: FALSE Explanation: The marginal tax rate is the tax rate applied to an incremental amount of taxable income. Page Ref.: I:1 -5 Objective: 2 7) If a taxpayer's t otal tax liability is $30,000, taxable income is $100,000, and economic income is $120,000, the average tax rate is 30 percent. Answer: TRUE Explanation: The average rate equals the tax liability divided by the taxable income. Page Ref.: I:1 -5 Objective : 2 8) If a taxpayer's total tax liability is $4,000, taxable income is $20,000, and total economic income is $40,000, then the effective tax rate is 20 percent. Answer: FALSE Explanation: The effective rate would be $4,000/$40,000 = 10 percent. Page R ef.: I:1 -6 Objective: 2 9) Arthur pays tax of $5,000 on taxable income of $50,000 while taxpayer Barbara pays tax of $12,000 on $120,000. The tax is a A) progressive tax. B) proportional tax. C) regressive tax. D) None of the above. Answer: B Explanation: The tax rate is proportional because the 10% tax rate applies to both taxpayers regardless of their income level. Page Ref.: I:1 -4; Example I:1 -3 Objective: 2 10) Which of the following taxes is progressive? A) sales tax B) excise tax C) p roperty tax D) federal income tax Answer: D Explanation: Federal income tax rates increase as a taxpayer's taxable income rises. Page Ref.: I:1 -4; Topic Review I:1 -1 Objective: 2 4 Copyright © 2023 Pearson Education, Inc. 11) Which of the following taxes is proportional? A) gift tax B) income tax C) sales tax D) Federal Insurance Contributions Act (FICA) Answer: C Explanation: A sales tax is assessed at a fixed rate of the purchase amount, based on state and local law. Page Ref.: I:1 -4; Topic Review I:1 -1 Objective: 2 12) Which of the following taxes is regressive? A) Federal Insurance Contributions Act (FICA) B) excise tax C) property tax D) gift tax Answer: A Explanation: For upper income wage earners, the Social Security tax ceases at a maximum wage base. For 2022, wages over $ 147,000 are not subject to the Social Security tax. Page Ref.: I:1 -5; Topic Review I:1 -1 Objective: 2 13) The corporate tax rate is A) progressive. B) regressive. C) proportional. D) none of the above. Answer: C Explanation: The corporate tax rate is a flat 21 percent. Page Ref.: I:1 -5 Objective: 2 14) Sarah contributes $25,000 to a church. Sarah's marginal tax rate is 35% while her average tax rate is 25%. After considering her tax savings, Sarah's contribution costs A) $6,250. B) $8,750. C) $16,2 50. D) $18,750. Answer: C Explanation: [$25,000 × (100% - 35%)] = $16,250 Page Ref.: I:1 -5; Example I:1 -4 Objective: 2 5 Copyright © 2023 Pearson Education, Inc. 15) Helen, who is single, is considering purchasing a residence that will provide an $18,000 tax deduction for property taxes and mortgage interest. If her marginal tax rate is 24% and her effective tax rate is 20%, what is the amount of Helen's tax savings from purchasing the residence? A) $3,600 B) $4,320 C) $3,200 D) $18,000 Answer: B Explanation: $18,000 × .24 marginal rate = $4,320 tax savings. Page Ref.: I:1 -5; Example I:1 -4 Objective: 2 16) Charlotte pays $8,000 in tax deductible property taxes. Charlotte's marginal tax rate is 24%, effective tax rate is 20% and average rate is 22%. Charlotte's tax savings from paying the property tax is A) $1,600. B) $1,760. C) $1,920. D) $8,000. Answer: C Explanation: $8,000 × 0.24 = $1,920 Page Ref.: I:1 -5; Example I:1 -4 Objective: 2 17) Briana, who is single, has taxable income for 2022 of $90,000, resulting in a t otal tax of $15,436. Her total economic income is $100,000. Briana's average tax rate and effective tax rate are, respectively, A) 17.15% and 15.44%. B) 17.15% and 24%. C) 15.44% and 24%. D) 15.44% and 17.15%. Answer: A Explanation: Average tax rate: $15,436 ÷ $90,000 = 17.15% Effective tax rate: $15,436 ÷ $100,000 = 15.44% Page Ref.: I:1 -5 and I:1 -6; Example I:1 -5 Objective: 2 18) Larry and Ally are married and file a joint return. They are considering purchasing a personal residence that wil l generate two deductions: $10,000 in home mortgage interest and $8,000 in real estate taxes. Their marginal tax rate is 24%. What is the total tax savings if Larry and Ally purchase the residence? Answer: ($10,000 + $8,000) × .24 = $4,320 Page Ref.: I:1 -5; Example I:1 -4 Objective: 2 6 Copyright © 2023 Pearson Education, Inc. 19) Larry and Ally are married and file a joint return. They are considering purchasing a personal residence that will generate two deductions: $10,000 in home mortgage interest and $8,000 in real estate taxes. Their marg inal tax rate is 24%. If Larry and Ally purchase the residence, what will be the after -tax cost of this additional $18,000 in expenditures? Answer: Tax savings of expenditures: ($10,000 + $8,000) × .24 = $4,320 After -tax cost:: $18,000 - $4,320 = $13,680 . Page Ref.: I:1 -5; Example I:1 -4 Objective: 2 LO3: Other Types of Taxes 1) All states impose a state income tax which is generally based on an individual's federal adjusted gross income (AGI) with minor adjustments. Answer: FALSE Explanation: While many states impose a state income tax, not all states do. In those states that do impose tax, the taxes vary greatly in both form and rates. Page Ref.: I:1 -7 Objective: 3 2) The unified transfer tax system, comprised of the gift and estate taxes, is based upon the total property transfers an individual makes during lifetime and at death. Answer: TRUE Explanation: Gift and estate taxes, which comprise a unified transfer tax system, are based on cumulative transfers. Page Ref.: I:1-7 Objective: 3 3) Gifts between spouses are generally exempt from transfer taxes. Answer: TRUE Explanation: The tax law allows for unlimited transfers between spouses. Page Ref.: I:1 -8 Objective: 3 4) The primary liability for payment of the gif t tax is imposed upon the donee. Answer: FALSE Explanation: The gift tax is imposed on the donor. Page Ref.: I:1 -8 Objective: 3 5) For gift tax purposes, a $16,000 annual exclusion per donee is permitted. Answer: TRUE Explanation: Donors are allowed to exclude $16,000 per donee per year for gift tax purposes. Page Ref.: I:1 -8 Objective: 3 7 Copyright © 2023 Pearson Education, Inc. 6) An individual will be subject to gift tax on gifts made to a charity greater than $16,000. Answer: FALSE Explanation: Contributions to charity are not li mited by the $16,000 gift tax exclusion. Page Ref.: I:1 -8 Objective: 3 7) Property is generally included on an estate tax return at its historical cost basis. Answer: FALSE Explanation: Property is generally valued at fair market value at date of death or the alternate valuation date. Page Ref.: I:1 -10 Objective: 3 8) Property transferred to the decedent's spouse is exempt from the estate tax because of the estate tax marital deduction provision. Answer: TRUE Explanation: The estate and gift t ax law allows tax exempt transfers to spouses. Page Ref.: I:1 -10 Objective: 3 9) Gifts made during a taxpayer's lifetime may affect the amount of estate tax paid by the taxpayer's estate. Answer: TRUE Explanation: Gift and estate taxes are applied to cumulative transfers under the uniform tax system. Page Ref.: I:1 -10 Objective: 3 10) While federal and state income taxes, as well as the federal gift and estate taxes, are generally progressive in nature, property taxes are proportional. Answer: TRUE Explanation: Property taxes are assessed on the value of property. Page Ref.: I:1 -11 Objective: 3 11) The unified transfer tax system A) imposes a single tax upon transfers of property during an individual's lifetime only. B) imposes a sing le tax upon transfers of property during an individual's life and at death. C) imposes a single tax upon transfers of property only at an individual's death. D) none of above. Answer: B Explanation: The gift (transfers during life) tax and estate (transfers after death) tax systems are unified. Page Ref.: I:1 -7 Objective: 3 8 Copyright © 2023 Pearson Education, Inc. 12) When property is transferred, the gift tax is based on A) replacement cost of the transferred property. B) fair market value on the date of transfer. C) the transferor' s original cost of the transferred property. D) the transferor's depreciated cost of the transferred property. Answer: B Explanation: The gift tax is based on the property's fair market value on the date of transfer. Page Ref.: I:1 -8 Objective: 3 13) Paul makes the following property transfers in the current year: • $22,000 cash to his wife • $34,000 cash to a qualified charity • $220,000 house to his son • $3,000 computer to an unrelated friend The total of Paul's taxable gifts, assuming he does not elect gift splitting with his spouse, subject to the unified transfer tax is A) $204,000. B) $210,000. C) $245,000. D) $279,000. Answer: A Explanation: $220,000 - $16,000 = $204,000. The gift to the unrelated friend is below the $16,000 annual gift tax exclusion. The gifts to his wife and to the charity are not subject to gift tax. Page Ref.: I:1 -8; Example I:1 -6 Objective: 3 14) Charlie makes the following gifts in the current year: $40,000 to his spouse, $30,000 to his church, $18,000 to his nephew, and $25,000 to a friend. Assuming Charlie does not elect gift splitting with his wife, his taxable gifts in the current year will be A) $27,000. B) $11,000. C) $25,000. D) $43,000. Answer : B Explanation: ($18,000 - $16,000) + (25,000 - $16,000) = $11,000. The gift to his spouse and the charitable gift are not subject to gift taxes. Page Ref.: I:1 -8; Example I:1 -6 Objective: 3 9 Copyright © 2023 Pearson Education, Inc. 15) Shaquille buys new cars for five of his friends. Each car cost $70,000. What is the amount of Shaquille's taxable gifts? A) $0 B) $270,000 C) $334,000 D) $350,000 Answer: B Explanation: 5 × ($70,000 - $16,000) = $270,000 Page Ref.: I:1 -8; Example I:1 -6 Objective: 3 16) In 2022, an estate is not taxable unless the sum of the taxable estate and taxable gifts made after 1976 exceeds A) $4,769,800. B) $10,000,000. C) $5,000,000. D) $12,060,000. Answer: D Explanation: The unified credit equivalent for estate and gift taxes is $12,060,000 for 2022. This exclusion amount equates to a unified credit of $4,769,800. Page Ref.: I:1 -9; Example I:1 -7 Objective: 3 17) Eric dies in 2022 and has a gross estate val ued at $16,500,000. The estate incurs funeral and administrative expenses of $100,000 and also pays off Eric's debts which amount to $250,000. Eric bequeaths $600,000 to his wife. Eric made no taxable transfers during his life. Eric's taxable estate will b e A) $10,780,200. B) $15,550,000. C) $3,490,000. D) $16,500,000. Answer: B Explanation: ($16,500,000 - $100,000 - $250,000 - $600,000) = $15,550,000 Page Ref.: I:1 -10; Example I:1 -8 Objective: 3 18) Jose dies in 2022 and has a gross estate valued at $ 13,000,000. Over the past ten years, Jose had made taxable gifts of $400,000. The estate incurs funeral and administrative expenses of $100,000 and also pays off Jose's debts which amount to $300,000. Jose bequeaths $500,000 to his wife. What is the amount of Jose's tax base, the amount on which the estate tax is computed? A) $12,100,000 B) $12,500,000 C) $440,000 D) $840,000 Answer: B Explanation: $13,000,000 - $100,000 funeral/administrative expense - $300,000 liabilities - $500,000 marital transfers = $12,100,000 taxable estate + $400,000 gifts = $12,500,000 tax base Page Ref.: I:1 -10; Example I:1 -8 Objective: 3 10 Copyright © 2023 Pearson Education, Inc. 19) Which of the following statements is incorrect ? A) Property taxes are levied on real estate. B) Excise taxes are assessed on items such as gasoline and telephone use. C) Gift taxes are generally imposed on the recipient of a gift. D) The estate tax is based on the fair market value of property at death or the alternate valuation date. Answer: C Explanation: Gift taxes are imposed on the donor of a gift, not the recipient. Page Ref.: I:1 -8 through I:1 -11 Objective: 3 20) Kole earns $150,000 in 2022 in his job as a sales manager. What is his FICA tax? A) $11,289 B) $11,246 C) $11,475 D) $12,379 Answer: A Explanation: (147,000 × .0 62) + (150,000 × .0145) = $11,289 Page Ref.: I:1 -11 Objective: 3 21) Jillian, a single individual, earns $230,000 in 2022 through her job as an accounting manager. What is her FICA tax? A) $12,719 B) $12,449 C) $17,595 D) $17,865 Answer: A Explanation: (147,000 × .062) + (230,000 × .0145) + ((230,000 - 200,000) × .009) = $12,719 Page Ref.: I:1 -11 Objective: 3 22) Martha is self -employed in 2022. Her self employment income is $150,000. What is her self - employment tax? A) $22,950 B) $22,578 C) $22,491 D) None of the above Answer: B Explanation: (147,000 × .124) + (150,000 × .029) = $22,578 Page Ref.: I:1 -11 Objective: 3 11 Copyright © 2023 Pearson Education, Inc. 23) Vincent makes the following gifts during 2022: $15,000 cash gift to wife Gift of automobile valued at $35,000 to his adult son Gift of golf clubs valued at $5,000 to a friend $10,000 contribution to church Although he is married, none of the gifts are considered joint gifts with his wife. What are the total taxable gifts subject to the unified transfer tax? Answer: Gift Value Adjustment Taxable Gift Cash to wife $15,000 spousal gifts excluded $ 0 Auto to son 35,000 less $16,000 exclusion 19,000 Clubs to friend 5,000 less $16,000 exclusion 0 Church donation 10,000 charity gifts excluded 0 Taxable gifts $19,000 Page Ref.: I:1 -8; Example I:1 -6 Objective: 3 12 Copyright © 2023 Pearson Education, Inc. 24) Jeffery died in 2022 leaving a $16,000,000 gross estate. Six months after his death, the gross assets are valued at $16,100,000. In years prior to 2022 (but after 1976), Jeffery had made taxable gifts of $300,000. Of the $16,000,000 gross estate, estate assets valued at $3 million were transferred to his wife and $100,000 was used to pay administrative and funeral expenses. Jeffery had debts of $200,000 which were p aid by the estate, and the remainder of the estate was transferred to his children. a.What is the amount of Jeffery's taxable estate? b.What is the tax base for computing Jeffery's estate? c.What is the amount of estate tax owed if the unified credit is $4,625,800? d.Alternatively, if six months after his death, the gross assets in Jeffery's estate declined in value to $15,000,000, can the administrator of Jeffery's estate elect the alternate valuation date? Answer: Gross Estate $16,000,000 Minus: Funeral and administrative expenses ( 100,000) Minus: Debts ( 200,000) Minus: Marital deduction (3,000,000 ) Taxable estate (a) $12,700,000 Plus: Taxable gifts made after 1976 300,000 Tax base (b) $13,000,000 Tentative tax on estate tax base $345,800 + [.4 × (13,000,000 - $1,000,000)] $ 5,145,800 Minus: Tax credits (unified tax credit) 4,769,800 Unified transfer tax due (c) $ 376,000 d. The alternate valuation date (six months after the date of death) may be elected only if the aggregate value of the gross estate decreases during the six -month period following the date of death and the election results in a lower estate tax liability. In this case, the alternate valuation date can be elected. Page Ref.: I:1 -10; Example I:1 -8 Objective: 3 25) Mia is self -employed as a consultant. During 2022, Mia earned $180,000 in self -employment income. What is Mia's self -employment tax? Answer: .124 × $147,000 = $18,228 .029 × $180,000 = 5,220 Self-employment tax $23,448 Page Ref.: I:1 -11 Objective: 4 13 Copyright © 2023 Pearson Education, Inc. LO4: Criteria for a Tax Structure 1) Adam Smith's canons of taxation are equity, certainty, convenience, and economy. Answer: TRUE Explanation: Adam Smith's canons of taxation include equity, certainty, convenience and economy. Page Ref.: I:1 -12 Objective: 4 2) The primary objective of the federal income tax law is to achieve various economic and social policy objectives. Answer: FALSE Explanation: The primary objective of the federal income tax law is to raise revenues for government operations. Page Ref.: I:1 -14 Objective: 4 3) Which of the following is not one of Adam Smith's canons of taxation? A) equity B)convenience C) certainty D) economic stimulation Answer: D Explanation: Smith's canons of taxation are equity, certainty, convenience and economy (in terms of administration of the tax system). Page Ref.: I:1 -12 Objective: 4 4) Horizontal equity means that A) taxpayers with the same amount of income should pay the same amount of tax. B) taxpayers with larger amounts of income should pay more tax than taxpayers with lower amounts of income. C) all taxpayers should pay the same tax. D) None of the above. Answer: A Explanation: Horizontal equity means that taxpayers with the same amount of income should pay the same amount of tax. Page Ref.: I:1 -13 Objective: 414 Copyright © 2023 Pearson Education, Inc. 5) Vertical equity means that A) taxpayers with the same amount of income should pay the same amount of tax. B) taxpayers with larger amounts of income should pay more tax than taxpayers with lower amounts of income. C) all taxpayers should pay the same tax. D) None of the above. Answer: B Explanation: Vertical equity means that taxpayers with larger amounts of income should pay more tax than taxpayer's with lower amounts of income. Page Ref.: I:1 -13 Objective: 4 6) Which of the following is not an objective of the federal income tax law? A) Stimulate private investment. B) Redistribution of wealth. C) Encourage research and development activities. D) Prevent taxpayers from paying a higher percentage of their income in personal income taxes due t o inflation. Answer: B Explanation: Redistribution of wealth is not an objective of the federal income tax law. Page Ref.: I:1 -14 and I:1 -15 Objective: 4 7) Which of the following is not a social objective of the tax law? A) prohibition of a deduction for illegal bribes, fines and penalties B) a deduction for charitable contributions C) an exclusion for interest earned by large businesses D) creation of tax -favored pension plans Answer: C Explanation: There is no exclusion for interest income earned by large businesses. Page Ref.: I:1 -15 Objective: 4 8) A presidential candidate proposes replacing the income tax with a national sales tax. The sales tax would have a flat rate. Describe the impact of this change in terms of tax structure and equity. Answer: The change would replace a progressive tax with a proportional tax. The national sales tax decreases vertical equity since taxpayers with higher income would not necessarily pay more in taxes. The sales tax would be based on consumption, not incom e. The impact of the sales tax is regressive since taxpayers with lower levels of income would pay a greater percentage of their income. Page Ref.: I:1 -3, I:1 -4 and I:1 -14; Topic Review I:1 -1 Objective: 415 Copyright © 2023 Pearson Education, Inc. LO5: Entities in the Federal Income Tax Syste m 1) Individuals are the principal taxpaying entities in the federal income tax system. Answer: TRUE Explanation: Revenues from income taxation of individuals far exceed those of other taxpayers. Page Ref.: I:1 -17 Objective: 5 2) The various entities in the federal income tax system may be classified into two general categories, taxpaying entities (such as individuals and C [regular] corporations) and flow-through entities such as sole proprietorships, partnerships, S corporatio ns, and limited liability companies. Answer: TRUE Explanation: Certain business entities do not pay tax; the income is passed through to the business owners. The business owners pay the tax on the taxable income earned by the entity as part of their tax liability. Page Ref.: I:1 -17 Objective: 5 3) Dividends paid from most U.S. corporations are taxed at the same rate as the recipients' salaries and wages. Answer: FALSE Explanation: Qualifying dividends are taxed at a preferential rate. Page Ref.: I:1-20 Objective: 5 4) Flow -through entities do not have to file tax returns since they are not taxable entities. Answer: FALSE Explanation: S Corporations, partnerships and limited liability companies have to file an informational tax return each yea r. Page Ref.: I:1 -20 Objective: 5 5) Organizing a corporation as an S Corporation results in a single level of taxation. Answer: TRUE Explanation: S Corporations do not pay tax. Owners of the corporation pay tax on their share of the corporation's tax able income, but do not pay tax on the distributions received. Page Ref.: I:1 -22 Objective: 5 6) In a limited liability partnership, a partner is not liable for his partner's acts of negligence or misconduct. Answer: TRUE Explanation: A partner in an LLP is liable for his own acts of negligence or misconduct, but not those of his partners. Page Ref.: I:1 -23 Objective: 5