Individual Taxation - General

Question 1

What is a “cafeteria plan”

Answer 1

Cafeteria plans are employer-sponsored benefit packages that offer employees a choice between taking cash and receiving qualified benefits. Thus employees may “select their own menu of benefits”

Question 2

If an employee chooses qualified benefits under a cafeteria plan, these benefits are ______ (included/excluded) from the employee’s gross income

Answer 2

Excluded (to the extent allowed by law)

Question 3

If an employee chooses cash benefits under a cafeteria plan, these benefits are ______ (included/excluded) from the employee’s gross income

Answer 3

Included (as compensation)

Question 4

T/F

Under a cafeteria plan, participation is restricted to employees, their spouses, and their minor children

Answer 4

FALSE

Cafeteria plans are restricted to employees only

Question 5

T/F

At least three years of service are required before an employee can participate in a cafeteria plan

Answer 5

FALSE

There is no minimum service requirement that must be met before an employee can participate in a plan

Question 6

T/F

Deferred compensation plans other than 401(k) plans are not included in the definition of a cafeteria plan

Answer 6

TRUE

Question 7

The amount of premium amortization on taxable bonds acquired by the taxpayer after ______ is treated as _________

Answer 7

1987

An offset to the amount of interest income reported on the bond

Question 8

T/F

The method of calculating the annual amortization of a bond is determined by the acquisition date of the bond

Answer 8

FALSE

It is determined by the date the bond was issued

Question 9

If a bond is issued after September 27 ______, the amortization must be calculated under the ______ method

Answer 9

1985

Constant yield to maturity

Question 10

This method computes the amortizable bond premium on the basis of the taxpayer’s yield to maturity, using the taxpayer’s basis for the bond, and compounding at the close of each accrual period

Answer 10

Constant Yield to Maturity

Question 11

If a bond is issued BEFORE September 27 1985, the amortization must be calculated _______

Answer 11

Ratably over the life of the bond

Question 12

T/F

Interest on US Treasury Certificates are subject to tax on an individual’s tax return

Answer 12

TRUE

Question 13

T/F

Interest on both a refund of federal income tax AND state income tax would be subject to tax on an individual’s tax return

Answer 13

TRUE

Note that the refund itself is excluded from gross income, but interest on a refund must be included in gross income

Question 14

T/F

Interest on both federal government obligations AND state government obligations would be subject to tax on an individual’s tax return

Answer 14

FALSE

Interest on federal government obligations would be subject to tax on an individual’s tax return

BUT state government obligations would NOT be subject to tax on an individual’s tax return

Question 15

Interest on an award for personal injuries sustained in an automobile accident is treated as an _______ (inclusion/exclusion) of interest income on the tax return in the year _______ (the accident happened/the interest payment is received)

Answer 15

Inclusion

The year the interest payment is received

Question 16

In the event that an individual receives an interest forfeiture penalty for making a premature withdrawal from a CD, how should this penalty be treated and what taxable year will be affected?

Answer 16

Deducted from Gross Income in arriving at AGI

In the year in which the penalty incurred

Question 17

T/F

All payments received for services must be included in income, even if the services are a condition of receiving a grant or are required of candidates for a degree

Answer 17

TRUE

Question 18

What is alimony recapture?

Answer 18

Alimony recapture may occur if alimony payments sharply decline in the 2nd & 3rd years that payments are made

Question 19

T/F

The recipient of alimony recapture (the individual who originally paid the alimony) is able to exclude alimony recapture from gross income

Answer 19

FALSE

Alimony recapture is included in gross income of the individual receiving the recapture amount (the original payor of alimony)

Question 20

T/F

The payee of alimony (the individual who must return the alimony that they originally received) is allowed a deduction for the alimony recapture

Answer 20

TRUE

Question 21

T/F

For a payment to qualify as deductible alimony by the payor, it must be written in the divorce agreement that the payments must be in cash or a cash equivalent

Answer 21

TRUE

Question 22

T/F

For a payment to qualify as deductible alimony by the payor, it must be written in the divorce agreement that the payments must end at the recipients death

Answer 22

TRUE

Question 23

T/F

For a payment to qualify as deductible alimony by the payor, the payments must not be designated as other alimony (for example, child support)

Answer 23

TRUE

Question 24

T/F

Income in Respect of a cash-basis decedent covers income earned and collected after a decedent’s death

Answer 24

FALSE

Question 25

T/F

Income in Respect of a cash-basis decedent receives a stepped-up basis in the decedent’s estate

Answer 25

FALSE

Question 26

T/F

Income in Respect of a cash-basis decedent includes a bonus earned before the taxpayer’s death but not collected until after death

Answer 26

TRUE

Question 27

T/F

Income in Respect of a cash-basis decedent must be included in the decedent’s final income tax return

Answer 27

FALSE

Not included because of the decedent’s method of accounting (cash-basis decedent will not recognize the income until received)

Question 28

Income in Respect of a cash-basis decedent includes a bonus earned before the taxpayer’s death but not collected until after death and will be _______ (included in/excluded from) gross income by the person who receives it

Answer 28

Included in

Question 29

T/F

Income in Respect of a cash-basis decedent includes a bonus earned before the taxpayer’s death but not collected until after death and will be included in gross income by the person who receives it. This income will be treated as ordinary income

Answer 29

FALSE

The income will have the same characteristics to the person who received it as it would have had if the decedent had lived. This means it may be ordinary income or it may be capital income

Question 30

T/F

Proceeds from the state lottery are included in gross income

Answer 30

TRUE

Question 31

T/F

Premiums paid by an employer on group-term life insurance in excess of $50,000 are included in gross income

Answer 31

TRUE

Question 32

These rules require that all costs incurred (both direct and indirect) in manufacturing or constructing real or personal property OR in purchasing or holding property for sale must be capitalized as part of the cost of the property

Answer 32

Uniform Capitalization Rules

Question 33

Uniform capitalization rules do not apply to a small retailer or wholesaler who acquires personal property for resale if the retailer’s/wholesaler’s average annual gross receipts for the three preceding taxable years do not exceed ___

Answer 33

$10M

Question 34

T/F

Research costs are included in inventory under the Uniform Capitalization Rules for goods manufactured by the taxpayer

Answer 34

FALSE

Question 35

T/F

Warehousing costs and/or Off-Site Storage Costs are included in inventory under the Uniform Capitalization Rules for goods manufactured by the taxpayer

Answer 35

TRUE

Question 36

T/F

Quality Control Costs are included in inventory under the Uniform Capitalization Rules for goods manufactured by the taxpayer

Answer 36

TRUE

Question 37

T/F

Taxes excluding income taxes are included in inventory under the Uniform Capitalization Rules for goods manufactured by the taxpayer

Answer 37

TRUE

Question 38

T/F

Marketing Costs are included in inventory under the Uniform Capitalization Rules for goods manufactured by the taxpayer

Answer 38

FALSE

Question 39

What is the specific charge-off method relating to business bad debts?

Answer 39

If you use the specific charge-off method, you can deduct specific business bad debts that become either partly or totally worthless during the tax year. However, with respect to partly worthless bad debts, your deduction is limited to the amount you charged off on your books during the year.

Question 40

What is the reserve method relating to business bad debts?

Answer 40

Accrual of bad-debt expense based on the projected worthlessness of receivables or prior experience with uncollectible receivables. The use of the reserve method by accrual basis taxpayers is permitted only for some small banks and thrift institutions with assets of $500 million or less. Other accrual taxpayers must use the specific charge-off method.

Question 41

T/F

Business bad debts may be deducted under either the specific charge-off method or the reserve method

Answer 41

FALSE

The specific charge-off method must used

Question 42

A NOL generally represents a ______

Answer 42

Business Loss

Question 43

T/F

Since a NOL generally represents a Business Loss, nonbusiness income and nonbusiness deductions/losses are not included in the computation for a NOL

Answer 43

TRUE

Question 44

A NOL can generally be carried back ___ and forward ____

Answer 44

2 years

20 years

Question 45

T/F

A net capital loss is among the acceptable deductions for a NOL

Answer 45

FALSE

No deduction is allowed for a net capital loss

Question 46

T/F

Rental activity can be either a passive or a non-passive activity based on the owner’s participation in the operation of the rental property

Answer 46

FALSE

Rental activity is defined as a passive activity regardless of the owner’s participation in the operation of the rental income

Question 47

Passive losses relating to rental real estate activities that cannot be used in the current year may be carried ______

Answer 47

Forward indefinitely or until the property is disposed of in a taxable transaction

Question 48

T/F

The maximum annual contribution to a Roth IRA is subject to reduction if the taxpayer’s adjusted gross income exceeds certain thresholds

Answer 48

TRUE

Question 49

T/F

Like a traditional IRA, contributions to a Roth IRA are not deductible

Answer 49

FALSE

Contributions to a Roth IRA are not deductible but this is UNLIKE a traditional IRA

Question 50

T/F

Like a traditional IRA, contributions to a Roth IRA can be made even after the taxpayer reaches 70 1/2

Answer 50

FALSE

Contributions to a Roth IRA can be made even after the taxpayer reaches 70 1/2, but this is UNLIKE a traditional IRA

Question 51

T/F

Contributions to an education IRA are not deductible

Answer 51

TRUE

Question 52

T/F

A taxpayer may contribute up to $2000 to an education IRA to pay the costs of the designated beneficiary’s higher education

Answer 52

TRUE

However, the annual contribution is phased out by AGI in excess of certain thresholds

Question 53

T/F

Eligibility for an education IRA is phased out if adjusted gross income exceeds certain threshold levels

Answer 53

TRUE

Question 54

T/F

Contributions can be made to an education IRA on behalf of a beneficiary until the beneficiary reaches age 21

Answer 54

FALSE

The maximum age is 17. Contributions cannot be made to an education IRA on behalf of a beneficiary if the beneficiary is 18 or older.

Question 55

T/F

Withdrawals of earnings in an education IRA will be tax-free if used to pay the qualified higher education expenses of the designated beneficiary

Answer 55

TRUE

Question 56

Where are lottery winnings reported?

Answer 56

As Other Income on pg. 1 of Form 1040

Question 57

T/F

Guaranteed payment from services rendered to a partnership are subject to self-employment tax

Answer 57

TRUE

Question 58

T/F

Ordinary income from an S corporation is subject to self-employment tax

Answer 58

FALSE

Question 59

Estimated income taxes on self-employment income are ______ (included/excluded) from the computation of net self-employment income

Answer 59

Excluded

Question 60

Charitable Contributions are ______ (included/excluded) from the computation of net self-employment income

Answer 60

Excluded

Question 61

Investment Income is ______ (included/excluded) from the computation of net self-employment income

Answer 61

Excluded

Question 62

Gains/Losses on the disposition of property used in a trade or business are ______ (included/excluded) from the computation of net self-employment income

Answer 62

Excluded

Question 63

Advertising costs are ______ (included/excluded) from the computation of net self-employment income

Answer 63

Included

Question 64

Business telephone calls are ______ (included/excluded) from the computation of net self-employment income

Answer 64

Included

Question 65

Self-Employment tax is _____ (fully deductible/partially deductible) from Gross Income in arriving at AGI

Answer 65

Partially Deductible

Question 66

T/F

If Social Security Tax (FICA) is withheld in an amount greater than the maximum for a particular year, this excess can be used as in itemized deduction

Answer 66

FALSE

Question 67

T/F

If Social Security Tax (FICA) is withheld in an amount greater than the maximum for a particular year, this excess can be reimbursed by the employers if it resulted from correct withholding by 2 or more employers

Answer 67

FALSE

If 2 or more employers withheld correctly, no reimbursement from them can be obtained

Question 68

If Social Security Tax (FICA) is withheld in an amount greater than the maximum for a particular year, this excess can be a credit against income tax if that excess resulted from correct withholding by 2 or more employers

Answer 68

TRUE

Question 69

If Social Security Tax (FICA) is withheld in an amount greater than the maximum for a particular year, this excess can be a credit against income tax if that excess resulted from correct withholding by 1 employer

Answer 69

FALSE

If only 1 employer withheld correctly then the amount should be reimbursed, not used as a tax credit

Question 70

How are foreign income taxes paid by a corporation treated?

Answer 70

They may be claimed either as a deduction or as a credit at the option of the corporation

Question 71

T/F

A lifetime learning credit can result in a refund even if the individual had no income tax liability

Answer 71

FALSE

Question 72

T/F

A credit for the elderly or the disabled can result in a refund even if the individual had no income tax liability

Answer 72

FALSE

Question 73

T/F

An earned income credit can result in a refund even if the individual had no income tax liability

Answer 73

TRUE

Question 74

T/F

A Child and dependent care credit can result in a refund even if the individual had no income tax liability

Answer 74

FALSE

Question 75

T/F

The American Opportunity Credit is available for the first four years of postsecondary education program

Answer 75

TRUE

Question 76

T/F

The American Opportunity Credit is available on a per student basis

Answer 76

TRUE

Question 77

T/F

The American Opportunity Credit requires that eligible students must be enrolled full-time for at least one academic period during the year

Answer 77

FALSE

The American Opportunity Credit requires that eligible students must be enrolled HALF-time for at least one academic period during the year

Question 78

T/F

Under the American Opportunity Credit, if a parent claims a child as a dependent, any qualified expenses paid by the child are deemed to be paid by the parent

Answer 78

TRUE

This means the parent can claim the credit rather than the child

Question 79

T/F

The Lifetime Learning Credit is available on a per student basis

Answer 79

FALSE

It is available on a per-taxpayer basis

Question 80

An individual may avoid the penalty of underpayment of estimated tax if the timely estimated tax payments equal the required annual amount of ____ of the tax on the return for the current period, paid in ____ equal installments

Answer 80

90%

4

Question 81

An individual may avoid the penalty of underpayment of estimated tax if the timely estimated tax payments equal the required annual amount of ____ of the prior year’s tax liability, paid in ____ equal installments assuming the person was in a low-income tax bracket in the prior year (less than _____ gross income)

Answer 81

100%

4

$150,000

Question 82

An individual may avoid the penalty of underpayment of estimated tax if the timely estimated tax payments equal the required annual amount of ____ of the prior year’s tax liability, paid in ____ equal installments assuming the person was in a high-income tax bracket in the prior year (greater than _____ gross income)

Answer 82

110%

4

$150,000

Question 83

A claim for refund of erroneously paid income taxes filed by an individual before the statute of limitations expires must be submitted on ______

Answer 83

Form 1040X

Question 84

The amount on which the penalties for late filing and late payment will be computed is _____

Answer 84

Based on the amount of net tax due

For example, if $50,000 was due and $45,000 was paid, the penalty is based off of the $5,000 net tax due

Question 85

How is Alimony Recapture Calculated?

Answer 85

Recapture for the 2nd year occurs to the extent that the alimony paid in the second year exceeds the alimony paid in the third year by more than $15,000.

Recapture for the 1st year occurs to the extent that the alimony paid in the first year exceeds the average alimony paid in the second and third years by more than $15,000.

Question 86

T/F

The uniform capitalization method must be used by manufacturers of tangible personal property

Answer 86

TRUE

Question 87

T/F

The uniform capitalization method must be used by retailers of personal property with $2M dollars in average annual gross receipts for the three preceding years

Answer 87

FALSE

These rules do not apply to a small retailer or wholesaler who acquires personal property for resale if the retailer’s or wholesaler’s average annual gross receipts for the three preceding taxable years do not exceed $10M

Question 88

Passive losses relating to rental real estate activities are carried ____

Answer 88

Forward indefinitely or until the property is disposed of in a taxable transaction