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Taxation 1 > Taxation Pre Assessment > Flashcards

Taxation Pre Assessment Flashcards

1
Q

What year was the US income tax on individuals permanently established?

A

1913

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2
Q

What is the second-highest level of legislative authority of tax law in the US?

A

Internal Revenue Code

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3
Q

In which publications does the IRS provide information on the tax consequences of specific transactions encountered in practice?

A

Revenue rulings

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4
Q

What is an example of equity when evaluating a tax system?

A

Each taxpayer pays a different amount based on their income level

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5
Q

What is true horizontal equity?

A

Two taxpayers in similar situations paying the same tax

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6
Q

What is the nature of a progressive tax rate structure?

A

Tax rate increases as income increases

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7
Q

Which tax rate structure is exemplified by the FICA portion of Social Security taxes?

A

Regressive

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8
Q

Which tax is based on the value of an individual’s real estate?

A

Property tax

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9
Q

Which entities are considered flow-through entities in the US tax system?

A

Limited liability partnerships

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10
Q

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?

A

6 years

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11
Q

Which component of a tax practice focuses on minimizing taxes paid and maximizing after-tax flows while accommodating clients’ other desires?

A

Tax planning

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12
Q

Which tax term defines a personal expenditure such as charitable contributions and medical expenses which taxpayers may claim if they keep records?

A

Itemized deductions

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13
Q

What is a realization of income?

A

A form of direct cash flow from underlying assets - ex. payment for stocks sold

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14
Q

Which type of income satisfies all three requirements for the income to be taxable?

A

Renting out a condo

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15
Q

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?

A

taxpayer went on vacation the last two weeks of the year, and does not return and deposit the paycheck until the following January

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16
Q

What is included in gross income?

A

wages, dividends, capital gains, business income, retirement distributions

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17
Q

What is it called when a person attempts to not pay federal income taxes by willfully excluding taxable income?

A

Tax evasion

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18
Q

Which item is excluded from gross income by the Internal Revenue Code

A

gift cards

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19
Q

What must be included in gross income?

A

Receipt of cash dividends

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20
Q

Which two expenses are a tax-free use of a qualified tuition plan (QTP) distribution?

A

Rent and textbooks

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21
Q

What is an example that would result in taxable income?

A

Forgiveness of mortgage debt in a rental property

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22
Q

Which type of gain does a taxpayer have if the taxpayer owns stock that has appreciated in value?

A

An unrealized gain

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23
Q

What is true about realized and recognized gains and losses?

A

Realized losses may be more than recognized losses

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24
Q

What is an example of an ordinary asset?

A

Inventory

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25
Q

What are capital assets?

A

generally illiquid property - land, buildings, and machinery

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26
Q

Which mortgage interest expense is a reduction for adjusted gross income?

A

Rental home

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27
Q

What is deductible as an investment expense?

A

Interest on a loan to purchase land for an investment

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28
Q

What is an example of an item that is deductible as a business expense if a doctor invests personal money in various properties?

A

Property taxes paid on a medical office

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29
Q

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?

A

Repairing a leak in the roof of a building

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30
Q

What is an example of an item that is a deductible business expense?

A

Purchase of a 12 month liability insurance policy

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31
Q

Itemized deductions

A

eligible expenses that taxpayers can claim on federal income tax returns and which decrease their taxable income

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32
Q

Standard deductions

A

a specific dollar amount that reduces the amount of income on which you’re taxed

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33
Q

What is the cost per mile on travel that qualifies as an itemized deductible medical expenditure?

A

$.16 per mile

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34
Q

What is the floor limitation for medical expenses for medical expense deductions?

A

7.5%

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35
Q

What is an example of a tax that qualifies as an itemized deduction?

A

State income tax

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36
Q

Which type of interest qualifies as an itemized deduction?

A

Home mortgage interest

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37
Q

What is an example of a deductible charitable contribution?

A

Contributions equal to 25% of the taxpayers adjusted gross income given to a local church

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38
Q

What is the allowable charitable contribution deduction when an individual donates intangible capital gain property, such as stock to a public charity?

A

FMV limited to 30% of AGI

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39
Q

Which item qualifies as a miscellaneous itemized deduction?

A

Gambling expenses

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40
Q

Which tax status provides the largest standard deduction for a divorced single parent with sole custody of a child?

A

Head of household

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41
Q

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?

A

Surviving spouse

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42
Q

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?

A

Head of household

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43
Q

Which tax credit applies to individuals for 2021?

A

Individual recovery credit

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44
Q

Which credit is a refundable tax credit?

A

Earned income credit

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45
Q

Which court cases take precedent over all other court decisions?

A

Supreme Court

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46
Q

Which item is a source of tax law from the judicial branch of government?

A

Court decisions

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47
Q

Which item is a legislative source of tax law?

A

Internal revenue code

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48
Q

What describes the authoritative weight carried by treasury regulations?

A

They have the highest authoritative weight of the administrative sources

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49
Q

Describe the history of taxation in the USA

A
  • 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
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50
Q

Legislative branch

A
  • internal revenue code
  • tax treaties
  • congressional reports
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51
Q

Executive branch

A
  • treasury regulations (final, temp, proposed)
  • revenue rulings
52
Q

Judicial branch

A
  • Supreme Court
  • appellate court
  • tax court
53
Q

Criteria of an equitable tax structure

A

Equity
Certainty
Simplicity
Economy
Convenience

54
Q

Vertical equity

A

People with higher incomes should take on greater taxes

55
Q

Progressive income tax rate

A

Tax rate paid increases as income increases

56
Q

Proportional tax rate

A

Income tax system that levies the same % on everyone regardless of income

57
Q

Regressive income tax

A

Tax structure that takes a larger % from low income groups than high income groups

58
Q

State and local income

A

Taxes withheld from your wages during the year as they appear on your W-2

59
Q

Excise taxes

A

Taxes imposed on the sale of specific “undesired” items or services like tobacco and alcohol

60
Q

Employment FICA

A

Federal insurance contributions act - funds SSN and Medicare programs

61
Q

Franchise taxes

A

Taxes levied on certain businesses for the right to exist as a legal entity and to do business within a specific jurisdiction

62
Q

C Corp

A

Legal structure for a corporation in which the owners are taxed separately from the entity

63
Q

What are two primary sources of tax law in the US?

A

Court decisions
Revenue rulings

64
Q

What is a certainty when evaluating a tax system?

A

Taxes can be estimated if annual income remains the same

65
Q

What increases the tax base of an individual?

A

Interest income

66
Q

Which tax is considered proportional?

A

Excise tax

67
Q

Which tax practice component includes understanding the facts, identifying the issues, locating and analyzing tax authorities, and documenting and communicating the results?

A

Tax research

68
Q

What are exclusions?

A

Items of income that the tax law specially states are not taxable

69
Q

Which payment is included in gross income according to the Internal Revenue code?

A

Cash from the sale of illegal drugs

70
Q

What is an example of an item classified as an itemized deduction?

A

Mortgage interest

71
Q

What is deductible as an investment expense?

A

Interest on a loan to purchase land for an investment

72
Q

Which years are taxpayers eligible for medical expense deductions?

A

Years in which the taxpayer meets the floor limitation

73
Q

Above the line deductions

A

Educator and moving expenses
retirement contributions
health insurance premiums
alimony

74
Q

If tax rates are decreasing, should taxpayers accelerate or decelerate deductions?

A

accelerate

75
Q

True or false: the timing strategy is particularly effective for cash basis taxpayers?

A

True

76
Q

True or false, the conversion strategy capitalize on the fact that tax rates vary across different activities

A

True

77
Q

What is an example of the timing strategy?

A

A cash basis business delaying billing its customers until after year end

78
Q

What is an example of the income shifting strategy?

A

A corporation paying its owner a salary

79
Q

What tax code are we currently in?

A

1986, found in title 26

80
Q

What type of tax system is the US?

A

Progressive

81
Q

Is income tax progressive or regressive?

A

Progressive

82
Q

Is SSN/Medicare progressive or regressive?

A

Regressive

83
Q

Proportional tax AKA flat tax

A

Taxed at a constant rate

84
Q

Sufficiency

A

Assessing the amount of the tax revenues - Must tax enough $ to pay for the government

85
Q

Equity

A

How the tax burden should be distributed

86
Q

Certainty

A

Should be able to determine when, where, and how to determine taxable amounts

87
Q

Convenience

A

System should be designed to collect tax revenue without undue hardship (collecting sales tax when purchasing items)

88
Q

Economy

A

Compliance costs should be reasonable

89
Q

What is the Medicare tax rate for self employed vs. employed?

A

Self employed: 2.9%
Employee: 1.45%

90
Q

When must taxpayers file by?

A

April 15th unless an extension is filed (does not apply to owed amounts)

91
Q

Fraudulent return statue of limitation

A

Indefinite

92
Q

Primary source of administrative tax law

A

Treasury regulations

93
Q

Example of a non-flow entity type

A

C corp

94
Q

Flow through entities

A

Passes any income straight to owners, shareholders, and investors

95
Q

Private letter ruling

A

Requested by taxpayer

96
Q

Technical advice memorandum

A

Requested by agent during audit

97
Q

Revenue rulings

A

Explains how the IRS stands on tax issues

98
Q

Circular 230

A

Regulations issued by IRS governing tax practice

99
Q

Cash method

A

Declare only when cash is in hand

100
Q

Accrual method

A

Declared all at once, not necessarily when the cash is in hand

101
Q

Basis

A

What did you spend to purchase?

NOT what it sold for

102
Q

Capital assets

A

Property not including business inventory/property

103
Q

What is the depreciation schedule for vehicles?

A

5 years

104
Q

Does land depreciate?

A

No

105
Q

What does not qualify for itemized deductions?

A

Over the counter prescriptions

106
Q

Which expense is a reduction for AGI?

A

rental property expenses

107
Q

What are the only misc deductions?

A

Gambling and moving expenses if active military pursuant to orders

108
Q

What is the American Opportunity credit max deduction?

A

$2500 per qualifying dependent

109
Q

Who qualifies for the earned income credit?

A
  • 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
110
Q

Child tax credit

A

$3K under 18
$3,600 under 6

111
Q

What is the name of the special tax credit for 2021 only?

A

Individual recovery credit

112
Q

What is the OASDI (SSN) tax rate to an employee vs. self employed?

A

Employee: 6.2%
Self employed: 12.4%

113
Q

What is the general statue of limitations?

A

3 years

114
Q

What is the statue of limitations for omitting items of gross income that exceed 25%?

A

6 years

115
Q

What comes first in the tax research process?

A

Facts

116
Q

What are the steps in the tax research process?

A

Facts
Issues
Locate relevant authorities
Analyze tax authorities
Document and communicate results

117
Q

Which is more advantageous? Open or closed facts?

A

Open - because you can change the choice based on what you were consulted

118
Q

Open vs. closed facts

A

Open: consulting tax professional before making a choice
Closed: consulting tax professional after making a choice

119
Q

Flow through vs. non flow through entities

A

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

120
Q

What does gross income NOT include?

A
  • Interest from municipal bonds
  • Gifts
  • Inheritances
121
Q

When does a taxpayer recognize income?

A
  • When they receive an economic benefit
  • When they realize the income
  • No tax provision allows exclusion
122
Q

Realized vs. unrealized vs. recognized

A

Realized: complete transaction/ money in hand
Unrealized: incomplete transaction / no money in hand
Recognized: does it get declared or is it a loss?

123
Q

All events test

A

Accrual method
- all events have occurred that determine the right to receive income
- amount can be determined with relative accuracy

124
Q

What is the depreciation schedule for furniture?

A

7 years

125
Q

What can be itemized?

A
  • property tax on personal residence
  • mortgage interest on personal residence
  • state income tax
  • charity donations
  • medical expenses above floor limitation
126
Q

What is the charitable contribution limit?

A

30%

Taxation 1 (2 decks)

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