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Northeastern Illinois University *

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Apr 3, 2024

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CHAPTER 1: 1. Until about 100 years ago, attempts to impose a federal income tax were ruled unconstitutional. The amendment to the U.S. Constitution allowing the imposition of a federal income tax is the A) Second Amendment. B) Thirteenth Amendment. C) Sixteenth Amendment. D) Nineteenth Amendment. Answer: C Explanation: The Sixteenth Amendment, ratified in 1913, gave Congress the power to impose a federal income tax. Page Ref.: I:1-2 Objective: 1 (Slide 5) 2. The largest source of revenues for the federal government comes from A) individual income taxes. B) corporate income taxes. C) Social Security and Medicare taxes (FICA). D) estate and gift taxes. Answer: A Explanation: The individual income tax has provided the largest source of revenues for many years. Page Ref.: I:1-3 Objective: 1 (Slide 7) 3 . Which of the following is not a taxpaying entity? A) C corporation B) partnership C) individual D) All of the above are taxpayers. Answer: B Explanation: A partnership is a flow-through entity. Page Ref.: I:1-16 Objective: 5 (Slide 14)

4. All of the following are classified as flow-through entities for tax purposes except A) partnerships. B) C corporations. C) S corporations. D) limited liability companies. Answer: B Explanation: A C corporation is a taxpaying entity. Page Ref.: I:1-16 Objective: 5 (Slide 14) 5 . Which of the following steps, related to a tax bill, occurs first? A) signature or veto by the President of the United States B) consideration by the Senate C) consideration by the House Ways and Means Committee D) consideration by the Joint Conference Committee Answer: C Explanation: Most tax legislation originates in the House of Representatives and is then referred to the House Ways and Means Committee. Page Ref.: I:1-24 Objective: 7 (Slide 32) 6 . The Senate equivalent of the House Ways and Means Committee is the Senate A) Joint Committee on Taxation. B) Ways and Means Committee. C) Finance Committee. D) Joint Conference Committee. Answer: C Explanation: The Senate Finance Committee considers tax legislation. Page Ref.: I:1-25 Objective: 7 (Slide 33)

7 . Kate files her tax return 36 days after the due date. When she files the return, she sends a check for $2,000 which is the balance of the tax owed by her. Kate's penalty for failure to file a return will be A) 0.5% per month (or factor thereof) up to a maximum of 25%. B) 5% per month (or factor thereof) up to a maximum of 25%. C) 20% per month (or factor thereof). D) 25%. Answer: B Explanation: The penalty for failure to file is 5% per month up to 25%. Page Ref.: I:1-28 Objective: 8 (Slide 39) 8 . What are the correct monthly rates for calculating failure to file and failure to pay penalties? A) Failure to file Failure to pay 5.0% 5.0% B) Failure to file Failure to pay 0.5% 0.5% C) Failure to file Failure to pay 5.0% 0.5% D) Failure to file Failure to pay 0.5% 5.0% Answer: C Explanation: The penalty for failure to file is 5% per month up to 25%. The failure to pay penalty is 0.5% per month up to 25%. Page Ref.: I:1-28 and I:1-29 Objective: 8 (Slide 39)

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CHAPTER 2: 9. Hannah is single with no dependents and has a salary of $102,000 for 2023, along with tax- exempt interest income of $3,000 from a municipality. Her itemized deductions total $13,600. Required: Compute her taxable income. Answer: Salary $102,000 (Interest income is excluded) Less: Itemized deductions ( 13,600) Taxable income $ 88,400 Page Ref.: I:2-3 through I:2-7; Example I:2-1 Objective: 1 (Slide 1) 10 . The following information is available for Bob, a single person filing a single return, for 2023 . Bob is 40 and has no dependents. Salaries $200,000 Interest income 13,500 Deductible IRA contributions 6,500 Itemized deductions 28,000 Withholding 37,500 Answer: Bob Salary $200,000 Interest 13,500 Gross Income $213,500 a. Minus: IRA Contributions 6,500 Adjusted gross income $207,000 b. Minus: Itemized deductions ( 28,000) Taxable Income $179,000 c. Tax liability (using Rate Schedule) * $36,360 d. Minus: Withholding - 37,500 Tax due (refund) $ (1,140) e. *$16,290 + [.24 ($179,000 - $95,375)] Page Ref.: I:2-3 through I:2-7; Example I:2-1 Objective: 1 (Slides 1 through 6)

11 . The following information is available for Bob and Brenda Horton, a married couple filing a joint return, for 2023 . Both Bob and Brenda are age 32 and have no dependents. Salaries $200,000 Interest income 15,000 Deductible IRA contributions 13,000 Itemized deductions 24,000 Withholding 27,500 a. What is the amount of their gross income? b. What is the amount of their adjusted gross income? c. What is the amount of their taxable income? d. What is the amount of their tax liability (gross tax), rounded to the nearest dollar? e. What is the amount of their tax due or (refund due)? Answer: Hortons Salary $200,000 Interest 15,000 Gross Income $215,000 a. Minus: IRA Contributions 13,000 Adjusted gross income $202,000 b. Minus: Standard Deduction ( 27,700) Taxable Income $174,300 c. Tax liability (using Rate Schedule) * $28,961 d. Minus: Withholding - 27,500 Tax due (refund) $ 1,461 e. *$10,294 + [.22 ($174,300 - $89,450)] Page Ref.: I:2-3 through I:2-7; Example I:2-1 Objective: 1 (Slides 1 through 6) 12. In 2023, the standard deduction for a married taxpayer filing a joint return and who is 67 years old with a spouse who is 65 years old is A) $26,450. B) $28,500. C) $28,700. D) $30,700. Answer: D Explanation: ($30,700 = $27,700 + $1,500 + $1,500) Page Ref.: I:2-9 and I:2-10 Objective: 2 (Slide 2)

13 . On June 1, 2023, Ellen turned 65. Ellen has been a widow for five years and has no dependents. Her standard deduction is A) $26,450. B) $25,100. C) $14,700. D) $15,700. Answer: C Explanation: $13,850 + $1,850 = $14,700 Page Ref.: I:2-9 and I:2-10 Objective: 2 (Slides 2 & 6) 14. Husband and wife, who live in a common law state, are eligible to file a joint return for 2023, but elect to file separately. Wife has adjusted gross income of $25,000 and has $2,200 of expenditures which qualify as itemized deductions. Husband deducts itemized deductions of $14,200. What is the taxable income for the wife? A) $12,600 B) $22,800 C) $25,000 D) None of the above Answer: B Explanation: If one spouse on married filing separately returns itemizes deductions, the other spouse must also do so. Income of wife $25,000 Minus: Itemized deductions ( 2,200) Taxable Income $22,800 Page Ref.: I:2-12; Example I:2-5 Objective: 2 (Slide 2) 15. Lewis, who is single, is claimed as a dependent by his parents. He received $2,000 during the year in dividends, which was his only income. What is his standard deduction for 2022? A) $1,150 B) $2,200 C) $2,350 D) $12,550 Answer: A Explanation: For a dependent, the standard deduction is the greater of earned income plus $350 or $1,150. Dividends are unearned income. Page Ref.: I:2-12; Example I:2-6

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Objective: 2 (Slide 2) 16. Charlie is claimed as a dependent by his parents in 2023. He received $8,000 during the year from a part-time acting job, which was his only income. What is his standard deduction? A) $1,100 B) $12,550 C) $8,000 D) $8,400 Answer: D Explanation: For a dependent, the standard deduction is the greater of earned income plus $400 or $1,250, but no more than the current year regular standard deduction amount. Page Ref.: I:2-12; Example I:2-7 Objective: 2 (Slide 2) 17 . Juanita's mother lives with her. Juanita purchased clothing for her mother costing $1,000 and provided her with a room that Juanita estimates she could have rented for $4,000. Juanita spent $5,000 on groceries she shared with her mother. Juanita also paid $700 for her mother's health insurance coverage. How much of these costs is considered support? A) $5,000 B) $8,200 C) $10,000 D) $10,700 Answer: B Explanation: $1,000 + 4,000 + 700 + .5(5,000) = $8,200 Page Ref.: I:2-15; Example I:2-14 Objective: 2 (Slide 3) 18. The child tax credit for 2023 is for taxpayers with dependent children under the age of A) 14. B) 17. C) 19. D) 24. Answer: B Explanation: Children must be under age 17 to qualify. Page Ref.: I:2-18 Objective: 2 (Slides 4 & 5)

19. Steven and Susie Tyler have three children ages 13, 15, and 19. The 19-year-old is in the military and not a dependent. Their modified AGI is $108,000. What is the total amount of the child tax credit and credit for other dependents to which they are entitled? A) $0 B) $2,000 C) $4,000 D) $6,000 Answer: C Explanation: 2 × $2,000 = $2,000. The 19-year-old will not qualify for the child credit, and as he is not a dependent, he will not qualify for the $500 credit for other dependents either. Page Ref.: I:2-18 and I:2-19 Objective: 2 (Slides 4 & 5) 20. Nate and Nikki have two dependent children ages 12 and 15. Their modified AGI is $410,000. What is the amount of the child tax credit to which they are entitled? A) $0 B) $500 C) $3,500 D) $4,000 Answer: C Explanation: The child tax credit before the phase-out is $4,000 (2 × $2,000). They have excess AGI of $10,000 ($410,000 - $400,000). Their credit should be reduced by 10 ($10,000/$1,000) × $50 = $500. Thus, their child credit is $3,500. Page Ref.: I:2-18 and I:2-19; Example I:2-22 Objective: 2 (Slides 4 & 5)

21 . Yusef, age 15, is a dependent of his parents. In 2023 he earned $5,000 from a part-time job and $8,000 of interest income on bonds given him by his grandparents, resulting in taxable income of $7,600. Under kiddie tax rules, calculation of tax requires dividing taxable income between net unearned income and other taxable income taxed at his own rate. Yusef's taxable income will be divided as follows A) net unearned income -$5,500 and earned taxable income -$2,100. B) net unearned income -$7,600 and earned taxable income -$0. C) net unearned income -$0 and earned taxable income -$7,600. D) net unearned income -$1,900 and earned taxable income -$5,700. Answer: A Explanation: Unearned income $8,000 Less: Statutory deduction -1,250 Standard deduction -1,250 Net unearned income $5,500 Taxable income $7,600 Less net unearned income -5,500 Earned taxable income $2,100 Page Ref.: I:2-25 and I:2-26; Example I:2-37 Objective: 3 (Slides 7 & 8)

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22 . Evie is six years old, and the daughter of parents in the 37% tax bracket. Her only source of taxable income comes from a corporate bond fund received as a gift from her grandparents last year. For 2023, Evie earned $9,000 of interest income from this fund. What is Evie's federal income tax liability? A) $680 B) $2,923 C) $2,594 D) $790 Answer: C Explanation: Earned income $ 0 Plus: Interest income 9,000 Adjusted gross income $9,000 Minus: Standard deduction (1,250 ) Taxable income $7,750 Unearned income $9,000 - Standard deduction (1,250) - Statutory deduction (1,250) Net unearned income $6,500 Tax computation: $6,500 net unearned income x 37% (parents' tax rate) $2,405 $1,250 remaining taxable income x 10% 125 Total income tax $2,530 Page Ref.: I:2-25 and I:2-26; Example I:2-38 Objective: 3 (Slides 7 & 8)

CHAPTER 3: 23 . Frasier and Marcella, husband and wife, file separate returns. Frasier and Marcella live in a community property state that considers separate property income to be separate. Frasier's salary is $42,000 and Marcella's salary is $46,000. Marcella receives dividend income of $4,000 from stock inherited from her parents. Frasier receives interest income of $1,000 from bonds purchased with his salary after marriage. Frasier and Marcella receive $3,200 dividend income from stock they purchased jointly. Marcella's income would be A) $50,000. B) $50,100. C) $51,100. D) $51,600. Answer: B Explanation: Income from the separate property (i.e., the inherited stock) is sourced to the recipient. Other items of income are split between spouses. [($42,000 + $46,000 + $1,000 + $3,200)/2 + $4,000 = $50,100] Page Ref.: I:3-6 and I:3-7; Example I:3-8 Objective: 2 (Slide 2) 24. A small corporation selling goods would prefer to use the cash method to simplify its accounting records. It will be able to continue using the cash method as long as average gross receipts for its three prior years do not exceed (for 2023) A) $29 million. B) $10 million. C) $3 million. D) $25 million. Answer: A Explanation: Under current tax law, businesses with inventories can use the cash method if average gross receipts for the three prior years does not exceed $29 million. Page Ref.: I:3-8 Objective: 3 (Slide 2)

25 . Ms. Marple's books and records for 2023 reflect the following information: Salary earned this year $65,000 Interest on savings account (credited to her account in 2023, withdrawn in 2024) 1,000 Interest on county bond earned and collected in 2024 2,000 What is the amount Ms. Marple should include in her gross income in 2023? A) $66,000 B) $67,000 C) $68,000 D) $65,000 Answer: A Explanation: $65,000 + $1,000 = $66,000. The interest on the county bond is excluded. Page Ref.: I:3-10 and I:3-13 Objective: 3 (Slide 3) 26. Carla redeemed EE bonds which qualify for the educational exclusion. The redemption consisted of $14,000 principal and $6,000 interest. The net qualifying educational expenses are $10,000. Her AGI is below the threshold for phase-out of the exclusion. The taxable interest is A) $0. B) $2,400. C) $3,000. D) $6,000. Answer: C Explanation: $6,000 × [$10,000 / ($6,000 + $14,000)] = $3,000 exclusion. $6,000 - $3,000 = $3,000 taxable Page Ref.: I:3-14; Example I:3-16 Objective: 4 (Slide 3) 27 . Jacob, who is single, paid educational expenses of $16,000 in 2023. He redeemed Series EE bonds and received principal of $8,000 and interest of $3,000. Jacob has other adjusted gross income of $94,850. The $3,000 exclusion must be reduced by A) $0. B) $1,200. C) $1,800. D) $3,000. Answer: B Explanation: $3,000 × [($94,850 + $3,000 - $91,850)/$15,000] = $1,200 Page Ref.: I:3-15; Example I:3-17

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Objective: 4 (Slide 3) 28 . In December 2023, Max, a cash-basis taxpayer, rents an apartment to Kadeem. Max receives both the first and last months' rent totaling $1,800 plus a security deposit of $400. The amount of income reported by Max as taxable in 2023 is A) $400. B) $1,300. C) $1,800. D) $2,200. Answer: C Explanation: A security deposit is not taxable until final disposition. That is, it is not taxable unless nonrefundable or until the tenant moves out and all or part of the deposit is not returned to the tenant. Rent is taxable when received. Page Ref.: I:3-15; Example I:3-18 Objective: 4 (Slide 4) 29. Natasha, age 58, purchases an annuity for $40,000. Natasha will receive $400 per month for the rest of her life. The expected return multiple is 20.0. At age 65, the amount that Natasha may exclude from income is A) $0. B) $2,000. C) $2,800. D) $4,000. Answer: B Explanation: ($40,000/$96,000 total expected payments [$400 × 20 year expected return multiple]) × $4,800 annual payments = $2,000 annual exclusion. Page Ref.: I:3-20 through I:3-22; Example I:3-29 Objective: 4 (Slide 6)

30 . Reva is a single taxpayer with a taxable pension of $24,000, tax-exempt interest of $8,000, and Social Security benefits of $10,000. What is the amount of her taxable Social Security benefits? A) $5,000 B) $8,500 C) $7,050 D) $10,000 Answer: C Explanation: Her provisional income is $24,000 + $8,000 + $5,000 (.50 × $10,000) = $37,000. The taxable Social Security benefits are equal to $7,050 which is the lesser of $8,500 (.85 × $10,000) or $7,050 computed as follows: [($37,000 - $34,000 threshold) ×.85] + the lesser of $4,500 or $5,000 (50% of Social Security benefits). Page Ref.: I:3-25; Example I:3-33 Objective: 4 (Slide 6) CHAPTER 4: 31 . During the year, Cathy received the following: • Dividends of $4,000 from Lindsay Corporation. Cathy's father owns the stock and directed the corporation to send the dividends to Cathy. • A car worth $30,000 for being the 1,000th customer at a car dealership. • $5,500 cash gift from her uncle. • $10,000 inheritance from her grandmother. What amount must Cathy include in gross income? A) $30,000 B) $34,000 C) $39,500 D) $49,500 Answer: A Explanation: Only the fair market value of the prize or award, $30,000, is taxable. Dividends are taxed to Cathy's father who is the shareholder. Gifts and inheritances are not taxable. Page Ref.: I:4-4; Example I:4-3 and I:4-4 Objective: 2 (Chapter 4 – Major Exclusions From Income – D2L)

32 . Julia suffered a severe stroke and has been admitted to a private hospital where she is expected to remain for the rest of her life. She is certified by a licensed health care practitioner as being a "chronically ill individual." Her hospital expenses amount to $350 per day. She will receive $340 per day from a $500,000 life insurance policy as an accelerated death benefit. In 2023, she was in the hospital for 10 days and received $3,400. How much of this amount is taxable? A) $0 B) $500 C) $100 D) $3,400 Answer: A Explanation: Because she is a chronically ill individual, Julia may exclude the full amount she receives as it is less than the amount of actual expenses and the daily limitation of $420 (for 2023) established by law. Page Ref.: I:4-6; Example I:4-10 Objective: 2 (Slide 4) 33. Miranda is not a key employee of AB Corporation. AB provides Miranda with group term life insurance coverage of $140,000. The premiums attributable to the excess coverage are $1,300. The uniform one-month group-term premium is one dollar per $1,000 of coverage. How much must Miranda include in income? A) $0 B) $1,080 C) $1,300 D) $1,680 Answer: B Explanation: Income must be imputed for coverage in excess of $50,000 based on the uniform premium table published by the IRS. ($1 × 90,000/1,000 × 12 = $1,080) Page Ref.: I:4-11 and I:4-12; Example I:4-19 Objective: 2 (Slides 7 & 8) 34. Ahmad's employer pays $10,000 in tuition this year for Ahmad to attend a graduate business program. How much of the employer-provided tuition is taxable to Ahmad? A) $0 B) $4,750 C) $5,250 D) $10,000 Answer: B Explanation: The exclusion for employer-provided tuition is limited to $5,250. $4,750 is taxable. Page Ref.: I:4-17

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Objective: 2 (Slide 11) 35. Carl filed his tax return, properly claiming the head of household filing status. Carl's employer paid or provided the following to Carl: Wages $65,000 Fair market value of qualified dependent care services 4,000 Premiums for $50,000 qualified group term life insurance 500 Medical insurance premiums 600 How much of this income should Carl report (assume benefits are provided on a nondiscriminatory basis)? A) $65,000 B) $69,000 C) $69,500 D) $70,100 Answer: A Explanation: Only the wages are taxable. Qualified dependent care services up to $5,000 are not taxable; premiums paid for group term insurance coverage up to $50,000 are not taxable; medical insurance premiums are not taxable. Page Ref.: I:4-10, I:4-12, and I:4-16 Objective: 2 (Slides 1 through 11) 36. Jan has been assigned to the Rome office of ABC Corporation. She arrives in Rome on November 1, 2021, and does not return to the United States until March 5, 2024. During her stay in Rome, Jan earned $125,000 in 2023. In 2023 Jan may exclude A) $0. B) $15,218. C) $112,000. D) $120,000. Answer: D Explanation: The allowable exclusion is the lower of $120,000 or the taxpayer's earned income ($125,000). Page Ref.: I:4-19 Objective: 2 (Slides 12 & 13)

37. Melanie, a U.S. citizen living in Paris, France, for the last three years, earns a salary of $130,000 in 2023. Melanie's housing costs are $25,000 per year, which is reasonable. How much can Melanie exclude from income? A) $108,700 B) $123,918 C) $125,80 0 D) $149,000 Answer: C Explanation: $120,000 foreign earned income exclusion + $5,800 housing exclusion ($25,000 - $19,200). Page Ref.: I:4-20; Example I:4-29 Objective: 2 (Slides 12 & 13) 38. This year, Jason sold some qualified small business stock that he acquired in 2008. His basis in the stock was $100,000 and he sold it for $400,000, resulting in a $300,000 gain. How much of Jason's gain is taxable? A) $0 B) $300,000 C) $150,000 D) $75,000 Answer: C Explanation: Gain on qualified small business stock acquired after August 10, 1993 and before February 18, 2009 is eligible for a 50% exclusion. Page Ref.: I:4-22 Objective: 2 (Slides 18 & 19) 39. This year, Jonathan sold some qualified small business stock that he acquired in December 2010. His basis in the stock was $100,000 and he sold it for $400,000, resulting in a $300,000 gain. How much of Jason's gain is taxable? A) $0 B) $300,000 C) $150,000 D) $75,000 Answer: A Explanation: Qualifying small business stock acquired after September 27, 2010 and held longer than five years is eligible for a 100% exclusion. Page Ref.: I:4-22 Objective: 2 (Slides 18 & 19)

40. In September of 2022, Michelle sold shares of qualified small business stock for $1,000,000 that had a basis of $200,000. She had held the stock for 17 months. Forty-five days after the sale she purchased other qualified small business stock for $1,100,000. How much of the gain will she recognize? A) $0 B) $100,000 C) $800,000 D) $900,000 Answer: A Explanation: If the proceeds from the sale of small business stock held more than 6 months are reinvested in other small business stock within 60 days of the sale, no gain is recognized. Page Ref.: I:4-22; Example I:4-36 Objective: 2 (Slides 18 & 19) .

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