Taxation Pre Assessment Flashcards
What year was the US income tax on individuals permanently established?
1913
What is the second-highest level of legislative authority of tax law in the US?
Internal Revenue Code
In which publications does the IRS provide information on the tax consequences of specific transactions encountered in practice?
Revenue rulings
What is an example of equity when evaluating a tax system?
Each taxpayer pays a different amount based on their income level
What is true horizontal equity?
Two taxpayers in similar situations paying the same tax
What is the nature of a progressive tax rate structure?
Tax rate increases as income increases
Which tax rate structure is exemplified by the FICA portion of Social Security taxes?
Regressive
Which tax is based on the value of an individual’s real estate?
Property tax
Which entities are considered flow-through entities in the US tax system?
Limited liability partnerships
A taxpayer fails to report income that exceeds 25% of reported gross income but files the return on time.
How many years after a return was originally due might the statue of limitations expire?
6 years
Which component of a tax practice focuses on minimizing taxes paid and maximizing after-tax flows while accommodating clients’ other desires?
Tax planning
Which tax term defines a personal expenditure such as charitable contributions and medical expenses which taxpayers may claim if they keep records?
Itemized deductions
What is a realization of income?
A form of direct cash flow from underlying assets - ex. payment for stocks sold
Which type of income satisfies all three requirements for the income to be taxable?
Renting out a condo
What is an example of a situation where a taxpayer actually or constructively received income that should be included in gross income for the current year?
taxpayer went on vacation the last two weeks of the year, and does not return and deposit the paycheck until the following January
What is included in gross income?
wages, dividends, capital gains, business income, retirement distributions
What is it called when a person attempts to not pay federal income taxes by willfully excluding taxable income?
Tax evasion
Which item is excluded from gross income by the Internal Revenue Code
gift cards
What must be included in gross income?
Receipt of cash dividends
Which two expenses are a tax-free use of a qualified tuition plan (QTP) distribution?
Rent and textbooks
What is an example that would result in taxable income?
Forgiveness of mortgage debt in a rental property
Which type of gain does a taxpayer have if the taxpayer owns stock that has appreciated in value?
An unrealized gain
What is true about realized and recognized gains and losses?
Realized losses may be more than recognized losses
What is an example of an ordinary asset?
Inventory
What are capital assets?
generally illiquid property - land, buildings, and machinery
Which mortgage interest expense is a reduction for adjusted gross income?
Rental home
What is deductible as an investment expense?
Interest on a loan to purchase land for an investment
What is an example of an item that is deductible as a business expense if a doctor invests personal money in various properties?
Property taxes paid on a medical office
A taxpayer runs an automotive repaid business in a building he owns. The income and expenses are reported on Form 1040, Schedule C. There was no section 179 election made.
Which action represents a deductible business expense for the current tax year, and is therefore not subject to capitalization and depreciation?
Repairing a leak in the roof of a building
What is an example of an item that is a deductible business expense?
Purchase of a 12 month liability insurance policy
Itemized deductions
eligible expenses that taxpayers can claim on federal income tax returns and which decrease their taxable income
Standard deductions
a specific dollar amount that reduces the amount of income on which you’re taxed
What is the cost per mile on travel that qualifies as an itemized deductible medical expenditure?
$.16 per mile
What is the floor limitation for medical expenses for medical expense deductions?
7.5%
What is an example of a tax that qualifies as an itemized deduction?
State income tax
Which type of interest qualifies as an itemized deduction?
Home mortgage interest
What is an example of a deductible charitable contribution?
Contributions equal to 25% of the taxpayers adjusted gross income given to a local church
What is the allowable charitable contribution deduction when an individual donates intangible capital gain property, such as stock to a public charity?
FMV limited to 30% of AGI
Which item qualifies as a miscellaneous itemized deduction?
Gambling expenses
Which tax status provides the largest standard deduction for a divorced single parent with sole custody of a child?
Head of household
A taxpayer is a 60 year old widow who’s widowed mother qualifies as a tax payers dependent. The taxpayer has a taxable income of $60,000.
Which available filing status will provide the lowest tax liability for this tax payer?
Surviving spouse
During the current year, a taxpayer married on January 6, gave birth to a child on April 15, and was divorced on July 3. The taxpayer retain sole custody of the child and has taxable income of $60,000.
Which filing status provides the lowest tax liability for this tax payer?
Head of household
Which tax credit applies to individuals for 2021?
Individual recovery credit
Which credit is a refundable tax credit?
Earned income credit
Which court cases take precedent over all other court decisions?
Supreme Court
Which item is a source of tax law from the judicial branch of government?
Court decisions
Which item is a legislative source of tax law?
Internal revenue code
What describes the authoritative weight carried by treasury regulations?
They have the highest authoritative weight of the administrative sources
Describe the history of taxation in the USA
- Reinstated in 1894
- ruled unconstitutional in 1895 because direct tax is not apportioned to the state populations
- created 16th amendment stating that congress has the power to lay and collect taxes
Legislative branch
- internal revenue code
- tax treaties
- congressional reports
Executive branch
- treasury regulations (final, temp, proposed)
- revenue rulings
Judicial branch
- Supreme Court
- appellate court
- tax court
Criteria of an equitable tax structure
Equity
Certainty
Simplicity
Economy
Convenience
Vertical equity
People with higher incomes should take on greater taxes
Progressive income tax rate
Tax rate paid increases as income increases
Proportional tax rate
Income tax system that levies the same % on everyone regardless of income
Regressive income tax
Tax structure that takes a larger % from low income groups than high income groups
State and local income
Taxes withheld from your wages during the year as they appear on your W-2
Excise taxes
Taxes imposed on the sale of specific “undesired” items or services like tobacco and alcohol
Employment FICA
Federal insurance contributions act - funds SSN and Medicare programs
Franchise taxes
Taxes levied on certain businesses for the right to exist as a legal entity and to do business within a specific jurisdiction
C Corp
Legal structure for a corporation in which the owners are taxed separately from the entity
What are two primary sources of tax law in the US?
Court decisions
Revenue rulings
What is a certainty when evaluating a tax system?
Taxes can be estimated if annual income remains the same
What increases the tax base of an individual?
Interest income
Which tax is considered proportional?
Excise tax
Which tax practice component includes understanding the facts, identifying the issues, locating and analyzing tax authorities, and documenting and communicating the results?
Tax research
What are exclusions?
Items of income that the tax law specially states are not taxable
Which payment is included in gross income according to the Internal Revenue code?
Cash from the sale of illegal drugs
What is an example of an item classified as an itemized deduction?
Mortgage interest
What is deductible as an investment expense?
Interest on a loan to purchase land for an investment
Which years are taxpayers eligible for medical expense deductions?
Years in which the taxpayer meets the floor limitation
Above the line deductions
Educator and moving expenses
retirement contributions
health insurance premiums
alimony
If tax rates are decreasing, should taxpayers accelerate or decelerate deductions?
accelerate
True or false: the timing strategy is particularly effective for cash basis taxpayers?
True
True or false, the conversion strategy capitalize on the fact that tax rates vary across different activities
True
What is an example of the timing strategy?
A cash basis business delaying billing its customers until after year end
What is an example of the income shifting strategy?
A corporation paying its owner a salary
What tax code are we currently in?
1986, found in title 26
What type of tax system is the US?
Progressive
Is income tax progressive or regressive?
Progressive
Is SSN/Medicare progressive or regressive?
Regressive
Proportional tax AKA flat tax
Taxed at a constant rate
Sufficiency
Assessing the amount of the tax revenues - Must tax enough $ to pay for the government
Equity
How the tax burden should be distributed
Certainty
Should be able to determine when, where, and how to determine taxable amounts
Convenience
System should be designed to collect tax revenue without undue hardship (collecting sales tax when purchasing items)
Economy
Compliance costs should be reasonable
What is the Medicare tax rate for self employed vs. employed?
Self employed: 2.9%
Employee: 1.45%
When must taxpayers file by?
April 15th unless an extension is filed (does not apply to owed amounts)
Fraudulent return statue of limitation
Indefinite
Primary source of administrative tax law
Treasury regulations
Example of a non-flow entity type
C corp
Flow through entities
Passes any income straight to owners, shareholders, and investors
Private letter ruling
Requested by taxpayer
Technical advice memorandum
Requested by agent during audit
Revenue rulings
Explains how the IRS stands on tax issues
Circular 230
Regulations issued by IRS governing tax practice
Cash method
Declare only when cash is in hand
Accrual method
Declared all at once, not necessarily when the cash is in hand
Basis
What did you spend to purchase?
NOT what it sold for
Capital assets
Property not including business inventory/property
What is the depreciation schedule for vehicles?
5 years
Does land depreciate?
No
What does not qualify for itemized deductions?
Over the counter prescriptions
Which expense is a reduction for AGI?
rental property expenses
What are the only misc deductions?
Gambling and moving expenses if active military pursuant to orders
What is the American Opportunity credit max deduction?
$2500 per qualifying dependent
Who qualifies for the earned income credit?
- Taxpayers who have at least 1 qualifying dependent of 19 years old or greater
- can’t have passive income of greater than $10K
- have a job
Child tax credit
$3K under 18
$3,600 under 6
What is the name of the special tax credit for 2021 only?
Individual recovery credit
What is the OASDI (SSN) tax rate to an employee vs. self employed?
Employee: 6.2%
Self employed: 12.4%
What is the general statue of limitations?
3 years
What is the statue of limitations for omitting items of gross income that exceed 25%?
6 years
What comes first in the tax research process?
Facts
What are the steps in the tax research process?
Facts
Issues
Locate relevant authorities
Analyze tax authorities
Document and communicate results
Which is more advantageous? Open or closed facts?
Open - because you can change the choice based on what you were consulted
Open vs. closed facts
Open: consulting tax professional before making a choice
Closed: consulting tax professional after making a choice
Flow through vs. non flow through entities
Flow through: entity itself doesn’t pay the taxes - it passes the taxes through to the owners
Non-flow through: entity pays taxes on the money it makes
What does gross income NOT include?
- Interest from municipal bonds
- Gifts
- Inheritances
When does a taxpayer recognize income?
- When they receive an economic benefit
- When they realize the income
- No tax provision allows exclusion
Realized vs. unrealized vs. recognized
Realized: complete transaction/ money in hand
Unrealized: incomplete transaction / no money in hand
Recognized: does it get declared or is it a loss?
All events test
Accrual method
- all events have occurred that determine the right to receive income
- amount can be determined with relative accuracy
What is the depreciation schedule for furniture?
7 years
What can be itemized?
- property tax on personal residence
- mortgage interest on personal residence
- state income tax
- charity donations
- medical expenses above floor limitation
What is the charitable contribution limit?
30%
