Mid-Term Review Questions Flashcards
Marc, a single taxpayer, earns $61,800 in taxable income and $5,180 in interest from an investment in city of Birmingham bonds. Using the U.S. tax rate schedule for 2023, how much federal tax will he owe? (Use tax rate schedule.)
$8,904
$8,904 = $5,147 + 0.22 ($61,800 − $44,725)
If Lindley requests an extension to file her individual tax return in a timely manner, the latest she could pay her tax due without penalty is (assuming the due date does not fall on a weekend or holiday):
April 15th
A taxpayer can avoid a substantial understatement of tax penalty:
if the position has a reasonable basis and is disclosed on the tax return.
Joanna received $60,000 compensation from her employer, the value of her stock in ABC company appreciated by $5,000 during the year (but she did not sell any of the stock), and she received $30,000 of life insurance proceeds from the death of her spouse. What is the amount of Joanna’s gross income from these items?
$60,000
$60,000 compensation is included in gross income, the increase in the value of her stock is not realized income so it is not included in gross income, and the life insurance proceeds are excluded from gross income.
Which of the following types of income are not considered ordinary income?
a) compensation income
b) short-term capital gains
c) qualified dividend income
d) both compensation income and qualified dividend income
e) both short-term capital gains and qualified dividend income
e) Both short-term capital gains and qualified dividend income
Short-term capital gains are capital gains and not ordinary income (short-term gains enter the capital gains netting process). Qualified dividend income is subject to preferential rates and thus is not considered to be ordinary income.
Madison’s gross tax liability is $9,000. Madison had $3,000 of tax credits available, and she had $8,000 of taxes withheld by her employer. What are Madison’s taxes due (or taxes refunded) with her tax return?
$2,000 tax refund
Sheri and Jake Woodhouse have one daughter, Emma, who is 16 years old. They also have taken in Emma’s friend, Harriet, who has lived with them since February of the current year and is also 16 years of age. The Woodhouses have not legally adopted Harriet but Emma often refers to Harriet as her “sister.” The Woodhouses provide all of the support for both girls, and both girls live at the Woodhouse residence. Which of the following statements is true regarding whom Sheri and Jake may claim as dependents for the current year?
They may claim Emma as a dependent qualifying child but may not claim Harriet as a dependent.
Jane is unmarried and has no children, but she provides more than half of her mother’s financial support. Jane’s mother lives in an apartment across town and has a part-time job earning $5,000 a year. Which is the most advantageous filing status available to Jane?
Single
Which of the following series of inequalities is generally most accurate?
a) Gross income ≥ adjusted gross income ≥ taxable income
b) Adjusted gross income ≥ gross income ≥ taxable income
c) Adjusted gross income ≥ taxable income ≥ gross income
d) Gross income ≥ taxable income ≥ adjusted gross income
a) Gross income ≥ adjusted gross income ≥ taxable income
Sadie received $71,200 of compensation from her employer and she received $410 of interest from a corporate bond. What is the amount of Sadie’s gross income from these items?
$71,610
Which of the following statements is true?
a) income character determines the tax year in which the income is taxed
b) income character depends on the taxpayers filing status
c) qualified dividend income is taxed at a lower rate than if the same amount were ordinary income
d) a taxpayer selling a capital asset at a gain recognizes ordinary income
c) qualified dividend income is taxed at a lower rate than if the same amount were ordinary income
Which of the following statements regarding tax credits is true?
a) tax credits reduce taxable income dollar for dollar
b) tax credits provide a greater tax benefit the greater the taxpayers marginal tax rate
c) tax credits reduce taxes due dollar for dollar
d) none of these are true
c) tax credits reduce taxes due dollar for dollar
Jamison’s gross tax liability is $11,500. Jamison had $2,745 of available credits and he had $7,000 of taxes withheld by his employer. What are Jamison’s taxes due (or taxes refunded) with his tax return?
$1,755 taxes due
Catherine de Bourgh has one child, Anne, who is 18 years old at the end of the year. Anne lived at home for seven months during the year before leaving home to attend State University for the remaining five months of the year. During the year, Anne earned $6,000 while working part time. Catherine provided 80 percent of Anne’s support and Anne provided the rest. Which of the following statements regarding whether Anne is Catherine’s qualifying child for the current year is correct?
Anne is a qualifying child of Catherine.
This year Ed celebrated his 25th25th year as an employee of Designer Jeans Company. In recognition of his long and loyal service, the company awarded Ed a gold watch worth $250 and a $2,000 cash bonus. What amount must Ed include in his gross income?
$2,000
Cash bonus payments are includible in gross income but awards of tangible property to employees for length of service or safety achievement are excluded up to $400 of value.
Bernie is a former executive who is retired. This year Bernie received $250,000 in pension payments and $10,000 of Social Security payments. What amount must Bernie include in his gross income?
$258,500
High-income individuals include 85 percent of their Social Security benefits in gross income.
Frank received the following benefits from his employer this year. What amount must Frank include in his gross income?
Benefits Received Amount
Salary $ 54,450
Health insurance 2,900
Group-term life insurance (face $50,000)
$54,450
An employee may exclude from income the cost of medical and dental health insurance premiums and group-term life insurance (face $50,000) premiums an employer pays on the employee’s behalf.
Shaun is a student who has received an academic scholarship to State University. The scholarship paid $14,000 for tuition, $2,500 for fees, and $1,000 for books. In addition, Shaun’s dormitory fees of $8,500 were paid by the university when he agreed to counsel freshman on campus living. What amount must Shaun include in his gross income?
8,500
In January of the current year, Dora made a gift of stock to her granddaughter. At the time of the gift, the stock was worth $15,000. Several months later in the same year after the gift, a $500 dividend was declared on the stock and paid to Dora’s granddaughter. What amount must Dora’s granddaughter include in her gross income for the current year?
The gift of the stock is excluded but the dividend on the shares is taxable. Hence, the answer is $500.
Sabina recently was sickened by eating spoiled peanut butter. She successfully sued the manufacturer for her medical bills ($3,700), her emotional distress ($6,000—she now fears peanut butter), and punitive damages ($44,000). What amount must Sabina include in her gross income?
44,000
Bashira is a cash-basis calendar-year taxpayer. During the last week of December she received a letter containing a $5,000 check for services rendered. Which of the following is a true statement?
Bashira is taxed on the $5,000 of service income in the year she receives the check.
Aroon is a plumber who uses the cash method of accounting. This year Aroon requested that his clients make their checks payable to his son, Feng. This year Feng received checks in the amount of $62,000 for Aroon’s plumbing services. Which of the following is a true statement?
a) Aroon is taxed on $62,000 of plumbing income this year
b) Feng is taxed on $62,000 of plumbing income this year
c) Feng is taxed on $62,000 of income from gifts received this year
d) Aroon may deduct the $62,000 received by Feng
e) none of these are correct
a) Aroon is taxed on $62,000 of plumbing income this year
Wilma has a $25,000 certificate of deposit (CD) at the local bank. The interest on this certificate, $1,000, was credited to her account this year, but she must pay an early withdrawal penalty if she cashes in the CD before next year. Which of the following is a true statement?
Wilma must include the $1,000 of interest in her income this year.
Interest is taxed when credited to the account.
Which of the following describes how the annuity exclusion ratio is calculated for an annuity paid over a fixed period?
a) the expected return is divided by the number of payments
b) the original investment is divided by the prevailing interest rate
c) the original investment is divided by the number of payments
d) the expected return is divided by the prevailing interest rate
e) none of these are correct
c) the original investment is divided by the number of payments