Income Tax

1. Which, if any, of the following taxes are proportional (rather than progressive)?

a.State general sales tax
b.Federal estate tax
c.Federal gift tax
d.Federal corporate income tax
e.All of these choices are correct.

2. Which of the following sources has the highest tax validity?
a.Internal Revenue Code section
b.Regulations
c.Revenue Procedure
d.Revenue Ruling
e.None of these choices are correct.

3. During 2016, Esther had the following transactions:

Salary $70,000
Interest income on Xerox bonds 2,000
Inheritance from uncle 40,000
Contribution to traditional IRA 5,500
Capital losses 2,500

Esther's AGI is:
a.$64,000
b.$67,000
c.$102,000
d.$62,000
e.$104,000

4. Evan and Eileen Carter are husband and wife and file a joint return for 2016. Both are under 65 years of age. They provide more than half of the support of their daughter, Pamela (age 25), who is a full-time medical student. Pamela receives a $5,000 scholarship covering her tuition at college. They furnish all of the support of Belinda (Evan's grandmother), who is age 80 and lives in a nursing home. They also support Peggy (age 66), who is a friend of the family and lives with them. How many dependency exemptions may the Carters claim?
a.Three
b.Four
c.Five
d.Two
e.None of these choices are correct.

5. Kirby is in the 15% tax bracket and had the following capital asset transactions during 2016:

Long-term gain from the sale of a coin collection $11,000
Long-term gain from the sale of a land investment 10,000
Short-term gain from the sale of a stock investment 2,000

Kirby's tax consequences from these gains are as follows:
a.(5% × $10,000) + (15% × $13,000)
b.(15% × $13,000) + (28% × $11,000)
c.(15% × $23,000)
d.(0% × $10,000) + (15% × $13,000)
e.None of these choices are correct.

6. The Green Company, an accrual basis taxpayer, provides business-consulting services. Clients generally pay a retainer at the beginning of a 12-month period. This entitles the client to no more than 40 hours of services. Once the client has received 40 hours of services, Green charges $500 per hour. Green Company allocates the retainer to income based on the number of hours worked on the contract. At the end of the tax year, the company had $50,000 of unearned revenues from these contracts. The company also had $10,000 in unearned rent income received from excess office space leased to other companies. Based on the above, Green must include in gross income for the current year:
a.$10,000
b.$0
c.$50,000
d.$60,000
e.None of these choices are correct.

7. Darryl, a cash basis taxpayer, gave 1,000 shares of Copper Company common stock to his daughter on September 29, 2016. Copper Company is a publicly held company that has declared a $2.00 per share dividend on September 30th every year for the last 20 years. Just as Darryl had expected, Copper Company declared a $2.00 per share dividend on September 30th, payable on October 15th, to stockholders of record as of October 10th. The daughter received the $2,000 dividend on October 18, 2016.
a.Darryl must recognize the $2,000 dividend as his income because he constructively received the dividend.
b.Darryl must recognize $1,500 of the dividend because he owned the stock for three-fourths of the year.
c.Darryl must recognize the income of $2,000 because the purpose of the gift was to avoid taxes.
d.The daughter must recognize the income because she owned the stock when the dividend was declared and she received the $2,000.
e.None of these choices are correct.

8. Under the terms of a divorce agreement, Kim was to pay her husband Tom $7,000 per month in alimony. Kim's payments will be reduced to $3,000 per month when their 9 year-old son becomes 21. The husband has custody of their son. For a twelve-month period, Kim can deduct from gross income (and Tom must include in gross income):
a.$60,000
b.$36,000
c.$0
d.$48,000
e.None of these choices are correct.

9. Albert had a terminal illness which required almost constant nursing care for the remaining two years of his estimated life, according to his doctor. Albert had a life insurance policy with a face amount of $100,000. Albert had paid $25,000 of premiums on the policy. The insurance company has offered to pay him $80,000 to cancel the policy, although its cash surrender value was only $55,000. Albert accepted the $80,000. Albert used $15,000 to pay his medical expenses. Albert made a miraculous recovery and lived another 20 years. As a result of cashing in the policy:
a.Albert must recognize $65,000 ($80,000 - $15,000) of gross income.
b.Albert must recognize $55,000 of gross income, but he has $15,000 of deductible medical expenses.
c.Albert is not required to recognize any gross income because of his terminal illness.
d.Albert must recognize $40,000 ($80,000 - $25,000 - $15,000) of gross income.
e.None of these choices are correct.

10. Tonya is a cash basis taxpayer. In 2016, she paid state income taxes of $8,000. In early 2017, she filed her 2016 state income tax return and received a $900 refund.
a.If Tonya itemized her deductions in 2016 on her Federal income tax return, she must amend her 2016 Federal income tax return and use the standard deduction.
b.If Tonya itemized her deductions in 2016 on her Federal income tax return and her itemized deductions exceeded the standard deduction by at least $900, the refund will not affect her 2017 tax return.
c.If Tonya itemized her deductions in 2016 on her Federal income tax return and her itemized deductions exceeded the standard deduction by more than $900, she must recognize $900 income in 2017 under the tax benefit rule.
d.If Tonya itemized her deductions in 2016 on her Federal income tax return, she should amend her 2016 return and reduce her itemized deductions by $900.
e.None of these choices are correct.

11. Marsha is single, had gross income of $50,000, and incurred the following expenses:

Charitable contribution $2,000
Taxes and interest on home 7,000
Legal fees incurred in a tax dispute 1,000
Medical expenses 3,000
Penalty on early withdrawal of savings 250

Her AGI is:
a.$49,750
b.$39,700
c.$39,750
d.$40,000
e.None of these choices are correct.

12. During 2015, the first year of operations, Silver, Inc., pays salaries of $175,000. At the end of the year, employees have earned salaries of $20,000, which are not paid by Silver until early in 2016. What is the amount of the deduction for salary expense?
a.If Silver uses the cash method, $0 in 2015 and $195,000 in 2016.
b.If Silver uses the accrual method, $175,000 in 2015 and $20,000 in 2016.
c.If Silver uses the accrual method, $195,000 in 2015 and $0 in 2016.
d.If Silver uses the cash method, $175,000 in 2015 and $0 in 2016.
e.None of these choices are correct.