Chapter 1

Question 1

What is the goal of tax planning?

Answer 1

maximize after-tax income

Question 2

What is after-tax income?

Answer 2

net income after reducing revenue for all expenses, including federal income taxes

Question 3

What is considered a tax cost?

Answer 3

any tax paid to a local, state, federal, or foreign government

Question 4

What is the form used to complete and file an individual tax return?

Answer 4

form 1040

Question 5

What is tax compliance?

Answer 5

determining tax effects for transactions that have already occurred, including preparing tax returns

Question 6

what is tax planning?

Answer 6

process of estimating an individual’s tax liability for multiple scenarios and or multiple years and considering was to maximize after tax income.

Question 7

Are open or closed transactions preferred in tax planning?

Answer 7

open, you can consider tax options before it is final

Question 8

When evaluating tax planning alternatives which rate should be used?

Answer 8

marginal tax rate

Question 9

What is the marginal tax rate?

Answer 9

the tax rate applied to the next additional $ of income earned

Question 10

What is the calculation for average tax rate?

Answer 10

total income tax / taxable income

Question 11

What is the calculation for effective tax rate?

Answer 11

total income tax / total income

Question 12

What is the highest percent of income tax used in Alabama?

Answer 12

5%

Question 13

If tax rates are increasing in the future ____________ income and __________ deductions of the current year.

Answer 13

increase, decrease

Question 14

If tax rates are decreasing in the future ______ income and _______ deductions in the current year.

Answer 14

decrease, increase

Question 15

Pass through entities are:

Answer 15

entities that pass income through their owners who report income on their tax return
(LLCS, Partnerships, S Corps)

Question 16

What is static forecasting?

Answer 16

tax collected will always increase as a rate increases

Question 17

What is dynamic forecasting?

Answer 17

assumes a relationship between base, rate, and tax

Question 18

What are the two behavioral responses to tax policies?

Answer 18

income effect, substitution effect

Question 19

What is the income effect?

Answer 19

prediction that tax payers will work more to increase income with tax rates increase

Question 20

What is the substitution effect?

Answer 20

increased tax rates make workers decrease their hours in order to have more time for activities

Question 21

What is the standard of CPA ethics?

Answer 21

the Code of Professional Conduct by the AICPA

Question 22

Are tax rules and GAAP the same?

Answer 22

no

Question 23

matching principle

Answer 23

requires a business to record expenses incurred during the same period it recognizes revenue

Question 24

conservatism principle

Answer 24

requires businesses to recognize expenses and liabilities as quick as possible. liabilities are recorded even with uncertainty, revenues and assets recorded when assured.

Question 25

What is the goal of GAAP and financial accounting?

Answer 25

protect public trust

Question 26

What is the goal of tax rules?

Answer 26

generate revenue to fund the federal government

Question 27

Does tax law allow expenses to be estimated?

Answer 27

no

Question 28

What are goals of policymakers in reference to the income tax system?

Answer 28

• raise revenue (war efforts)
• social objectives (incentivize charitable contributions)
• economic objectives (impacts on economy)
• equity objectives (make tax burdens equal)
• political objectives

Question 29

What is horizontal equity?

Answer 29

taxpayers in similar states pay similar amounts

Question 30

What is vertical equity?

Answer 30

those with a greater ability to bear tax burden pay more

Question 31

What is a proportional tax structure?

Answer 31

a flat tax rate for all

Question 32

What is a progressive tax structure?

Answer 32

marginal tax rates that increase as income (tax base) increases

Question 33

What is a regressive tax structure?

Answer 33

marginal tax rates that decrease as income (tax base) increases

Question 34

what is an excise tax?

Answer 34

sales tax based on quantity purchased rather than price

Question 35

What are the three local/state taxes?

Answer 35

sales, income, property

Question 36

Real property tax is on:

Answer 36

land and buildings

Question 37

personal property tax is on:

Answer 37

cars, boats, certain other business owned assets

Question 38

Implicit taxes are:

Answer 38

costs imposed on an individual due to a tax advantage that the government has given a particular transaction (not an actual tax)