Exam #1 (CH. 1-6) Flashcards
(126 cards)
1
Q
A person may assign the gross income that they earned to any other person for tax purposes.
A
False
2
Q
In 2025, a qualifying citizen or resident of the US may exclude up to $130,000 of foreign earned income from their US gross income.
A
True
3
Q
Fringe benefits are valuable to employees because they are always nontaxable.
A
False
4
Q
Some fringe benefits have nondiscrimination requirements, while others do not.
A
True
5
Q
An HSA must be established by an employer.
A
False
6
Q
Any group life insurance benefit in excess of $50,000 is taxable to the employer.
A
False
7
Q
Disability insurance premiums paid by the employer are deductible by the employer and are excluded from the employee’s gross income.
A
True
8
Q
A cafeteria plan is most appropriate when all of the employees need the same benefits.
A
False
9
Q
Any funds remaining in an FSA are rolled over for use in future years.
A
False
10
Q
FSAs must meet nondiscrimination requirements.
A
True
11
Q
When long-term care premiums are paid by the employer, benefits received by the employee (up to the greater of $420/day for 2025 or the actual cost of the care) are excluded from gross income.
A
True
12
Q
An employee can exclude the value of meals provided in kind from gross income, even if the meals are not furnished on the employer’s business premises.
A
False
13
Q
Free guaranteed seats for airline employees are a no-additional-costs service.
A
False
14
Q
Qualified employee discounts on services may not exceed 20%.
A
True
15
Q
Personal use of a company car is a working condition fringe benefit.
A
False
16
Q
There is no limit on qualified transportation fringe benefits.
A
False
17
Q
The qualifying retirement planning services exclusion does not apply to the value of tax preparation services.
A
True
18
Q
The athletic facilities fringe benefit can discriminate without jeopardizing the exclusion.
A
True
19
Q
Combat zone pay received by military personnel is included in gross income.
A
False
20
Q
Employer, contributions to employer, sponsored retirement plans are generally excluded from the employees gross income. TRUE
A
True
21
Q
No gross income for regular tax is recognized by the employee on the date an ISO is granted, nor on the date an ISO is exercised.
A
True
22
Q
Up to 85% of Social Security benefits may be taxable. TRUE
MAGI includes municipal bond interest.
A
True
23
Q
Above-the-line deductions are also known as adjustments to income.
A
True
24
Q
Whenever expenses are associated with the business activity, they are below-the-line deductions.
A
False
25
Taxpayers must deduct the lesser of their itemized deductions or the standard deduction.
False
26
Above-the-line deductions are usually considered to be more favorable than below-the-line deductions on a dollar-for-dollar basis.
True
27
Individuals who are enrolled in Medicare qualify to establish an HSA.
False
28
The maximum allowable contribution to an HSA is reduced by any contributions made to an MSA.
True
29
Self-employed individuals may deduct 100% of health insurance premiums paid on behalf of themselves and their dependents.
True
30
The long-term care contract must be a qualified contract in order to receive an income tax deduction.
True
31
An unmarried taxpayer can make a contribution to an IRA, even if they do not have an earned income.
False
32
Active participation in a retirement plan does not affect the deductibility of a traditional IRA.
False
33
The deductibility threshold for a traditional IRA is increased for a non-active participant spouse.
True
34
Contributions to traditional and Roth IRA that are in excess of the allowable amount or subject to a 4% penalty.
False
35
The deductibility threshold for a traditional IRA is increased for a non-active participant spouse.
True
36
Temporary living expenses may be deducted by an employee as moving expenses.
False
37
Educator expenses in excess of $300 or not deductible below the line for tax years 2018-2025.
True
38
Alimony paid is always deductible by the payor.
False
39
An S corporation cannot deduct medical insurance cost for greater-than-2% owners of the corporation.
True
40
An ordinary expense is one that is typically incurred in the normal conduct of businesses in the same line of operations.
True
41
The cost of investigating the purchase of a new business line or deductible, regardless of whether the new line of business is actually acquired.
False
42
Business owners should classify as many of their expenses as they can as business expenses.
True
43
Investor expenses, such as investment advisory and custodial fees and tax or miscellaneous itemized deductions subject to the 2% floor, and have been suspended for tax years 2018-2025 by TCJA 2017.
True
44
Which amendment to the Constitution made a Federal Income Tax constitutional?
A. 16th
B. 14th
C. 10th
D. 12th
A. 16th
45
What business taxes will this course cover?
A. The course does not cover corporate taxation, as such, but it will cover some aspects of the taxation of pass-through entities. Examples would be partnerships and LLCs.
B. The course material does not apply to corporate, partnership, or LLC taxes in any way, but it will cover payroll taxes to some extent.
C. The course covers individual and corporate income taxes on the federal level.
D. The course ignores business taxes.
A. The course does not cover corporate taxation, as such, but it will cover some aspects of the taxation of pass-through entities. Examples would be partnerships and LLCs.
46
What does this course cover?
A. All other answers are true
B. Business taxation for pass-through entities
C. Income tax
A. All other answers are true
47
The IRS collects over three billion dollars each year. What is the greatest source of collections?
A. Personal income tax
B. Business income tax
C. Estate and gift tax
D. Employment tax
A. Personal income tax
48
Which of the following imposed the first constitutional federal income tax?
A. The Revenue Act of 1913
B. The Revenue Act of 1861
C. The Revenue Act of 1894
D. 16th Amendment
A. The Revenue Act of 1913
49
Which statement is true regarding tax rates?
A. The highest tax rate in 2025 is 37%, which is low historically.
B. The highest tax rate in 2025 is 37%, which is high historically.
C. The highest tax bracket in 2025 is 39.6%, which is high historically.
D. The highest tax bracket in 2025 is 39.6%, which is low historically.
A. The highest tax rate in 2025 is 37%, which is low historically.
50
Which of the following is one of the basic rules of income taxation?
A. Everything that increases wealth counts as income
B. Two things are certain, death and taxes
C. Income is not taxed until it is realized
D. Congress holds the power to create, edit, or remove taxes
A. Everything that increases wealth counts as income
51
Elliot filed his income tax return for 2024 on July 1, 2025. He was not able to pay the tax due until Aug 2, 2025. In May 2026, he discovered that he had not taken all deductions and he could get a refund if he filed an amended return. Per the statute of limitations, how long does Elliot have to file an amended return?
A. July 1, 2028
B. August 2, 2027
C. August 2, 2028
D. April 15, 2026
A. July 1, 2028
He has three years from the date of filing (July 1, 2028) or 2 years from the date of payment (August 2, 2027), whichever is later, to file an amended return.
52
Who pays FICA taxes?
A. All other answers are correct
B. Self-employed persons
C. Employers
D. Employees
A. All other answers are correct
53
Josh's wife became ill and died last year, and as a result their tax situation has been neglected. The tax return is 8 months overdue. It is estimated that he will owe $6,000, but the number cannot be nailed down for another couple of months because Josh does not have all tax info needed to complete and file the return. What would be good advice for Josh?
A. Pay the estimated amount now, if possible, to stop or reduce the failure to pay penalty.
B. File a return and amend it later in order to stop the failure to file penalty.
C. None of the other answers are good advice.
D. Wait two months to file and pay.
A. Pay the estimated amount now, if possible, to stop or reduce the failure to pay penalty.
54
Which of the following statements is true of the Department of the Treasury?
A. The Department of the Treasury is directly under the President who selects the Secretary of the Treasury.
B. The Department of the Treasury maintains a supply of gold to back the United States Dollar which is part of why the Dollar is the gold standard for currency around the globe.
C. The Department of the Treasury is part of the Congressional Branch and is responsible for enacting tax law as written by Congress, but can also create tax law through Treasury Regulations.
D. The Department of the Treasury is overseen by the Internal Revenue Service and is responsible for the collection of income tax.
A. The Department of the Treasury is directly under the President who selects the Secretary of the Treasury.
55
Does Congress have the authority to tax frequent flyer miles, which are a form of income?
A. Yes. Congress has broad authority to tax income from whatever source derived.
B. No. They are not award in the form of money.
C. No. Congress does not have that authority because it is not in the tax code.
D. Yes. The Supreme Court decided to tax frequent flyer miles.
A. Yes. Congress has broad authority to tax income from whatever source derived.
56
Which of the following statements is true regarding tax bills?
A. All of the other statements are true.
B. The Senate Finance Committee is the Senate committee that deals with tax law.
C. All tax bills must originate in the House.
AD The House Ways and Means Committee is the House committee that deals with tax law.
A. All of the other statements are true.
57
If there is a conflict between administrative and judicial law, which has authority?
A. Judicial
B. Administrative
C. The Treasury Department will decide D. The House Ways and Means Committee will decide
A. Judicial
58
Which statement is true about taxation and the Judicial System?
A. There are courts devoted only to tax issues.
B. The Supreme Court does not hear tax issues because tax issues are not relevant to the Constitution. The Supreme Court does not hear tax issues because tax issues are not relevant to the Constitution.
C. Tax matters do not go to courts. The IRS handles all taxpayer issues.
D. Tax cases cannot be appealed
A. There are courts devoted only to tax issues.
59
Which will decrease taxes more: a tax credit of $500 or a tax deduction of $500?
A. A tax deduction because it decreases tax dollar for dollar
B. A tax credit because it decreases tax dollar for dollar
C. A tax deduction because it decreases tax by $500 times the tax bracket
D. A tax credit because it decreases tax by $500 times the tax bracket
B. A tax credit because it decreases tax dollar for dollar
60
Sebastian is a middle school teacher with gross income in of $40,000 in 2025. Based only on the following, what is Sebastian’s adjusted gross income?
He has $500 qualified student loan interest expense, $2,500 alimony paid from a 2015 divorce, $3,000 mortgage interest, and $2,000 deductible contribution to a traditional IRA. His standard deduction for 2024 is $15,000. Look on the 2024 Form 1040 Schedule 1 in Chapter 3 of the textbook at the deductions shown there for AGI.
A. $25,000
B. $20,000
C. $20,400
D. $35,000
D. $35,000
Sebastian’s adjusted gross income is his total gross income of $40,000 - $500 in qualified student loan interest expense - $2,000 contribution to a traditional IRA - $2,500 alimony paid = $35,000. The standard deduction or itemized deductions are below-the-line deductions.
61
Sal is claimed as a dependent by his parents. In 2025, he earned $500 from a part-time job and $2,500 in interest from a savings account. Sal’s taxable income for 2025 is:
A. $0
B. $2,500
C. $500
D. $1,650
D. $1,650
$2,500 (interest) + $500 (wages) = $3,000 (gross income) - $1,350 (greater of standard deduction of $1,350 or $450 plus earned income) = $1,650 of taxable income.
62
Chris is filing as head of household. Her taxable income is $120,000. What is her tax liability for 2025?
A. $20,149
B. $18,626
C. $20,594
D. $19,908
D. $19,908
Taxable Income from:
$103,351 to $197,300
24%
Bracket
$15,912.00
$120,000.00
(103,350.00)
x.24
$16,650.00
3,996.00
$19,908.00
63
Olivia and Lillian each supply 45% of their mother's support. Their mother supplies the other 10%, which is $3,000 in dollar terms. The mother does not live with her daughters. She lives in a very small apartment. Can either of them claim their mother as a dependent?
A. No, because the mother doesn't satisfy the abode test
B. Yes, the mother meets the requirements for a qualifying relative under the multiple support rules, so one daughter each year can claim her
C. Yes, the mother meets the requirements for a qualifying child, so both daughters can claim her as a dependent
D. No because neither daughter supplies more than 50% of their mother's support
B. Yes, the mother meets the requirements for a qualifying relative under the multiple support rules, so one daughter each year can claim her
64
Goldie (age 60) and Kurt (age 62) are married to each other and file a joint return. Their itemized deductions total $25,000. What are their total below-the-line deductions for 2025?
A. $30,000
B. $55,000
C. $25,000
D. $29,200
A. $30,000
Their Standard Deduction is $30,000, so the taxpayers would not itemize because itemized deductions are smaller.
65
Which of the following is not excluded from gross income?
A. Gifts
B. Interest income on municipal bonds
C. Scholarships
D. Dividend income
D. Dividend income
66
What is the 'NUI?'
Net Unearned Income. It is the amount of income of a dependent that is subject to taxation at the parent's highest marginal tax rate.
67
Per the textbook and lecture, in which situations, might it be beneficial for a married person to file separately instead of together? Check all that apply.
1. When separated couples aren't willing to cooperate on filing their taxes jointly
2. When one spouse is very low earning and the other is very high earning and they live in a community property state
3. When each of the married couple earns about the same income
4. When one spouse has high medical bills
1 and 4
68
It has been a tragic year for Alicia.
Alicia’s divorce from her husband Peter became final on December 30 of 2025. They had only lived together for the first 4 months of 2025. Thereafter, Peter moved out and the children lived with him. Alicia was declared legally blind in May of 2025. Alicia did not contribute anything to the cost of maintaining the household when the children were living with her husband. Alicia is 40 years old.
You are doing some tax projections for her. What filing status can Alicia use for 2025 and what is her standard deduction?
1. Single; $15,000
2. Married Filing Jointly; $31,600
3. Single; $17,000
4. Head of Household; $22,500
5. Married Filing Jointly; $15,000
6. Head of Household; $11,250
7. Married Filing Separately; $15,000
8. Head of Household (abandoned spouse); $24,500
3. Single; $17,000
69
Holland and Zach are divorced. They have 1 child, Hayden, age 2. Zach's income is high enough that he cannot take the child tax credit. Holland's income is low enough that she can use the child tax credit. Which statement below is true?
A. If Holland is the custodial parent, she should consider filing Form 8332 to allow Zach to use the child tax credit.
B. The parent with the lower income is always the parent that tax law allows to take the child tax credit.
C. If Zach is the custodial parent, he should consider filing Form 8332 to allow Holland to use the child tax credit.
D. If Zach is the custodial parent, the child tax credit cannot be used by either parent.
C. If Zach is the custodial parent, he should consider filing Form 8332 to allow Holland to use the child tax credit.
70
Jessica's 1st husband, Emory, died several years ago. Emory had a child, Jordan, by a previous relationship, who lived with them. When Emory died, Jordan had no other relatives to raise him, so he remained with Jessica, who raised him. Jessica later remarried. When Jordan was 16, he got a job and earned $5,000 during the year. Can Jessica and her new husband claim Jordan as a dependent?
NOTE: Step relationships are not dissolved by death or divorce, so Jordan is still considered Jessica's step-son for tax purposes.
A. No, he does not meet the age test
B. Yes, as a qualifying relative
C. Yes, as a qualifying child
D. No, because he earned too much money for a step-son to be considered a dependent
C. Yes, as a qualifying child
71
Azel is 72 years old, single, and blind. What is her standard deduction for 2025?
A. $17,000
B. $19,000
C. $18,500
D. $30,000
B. $19,000
72
Elena's parents come in for tax planning. In 2024 Elena's grandparents gifted Elena some securities which will generate some unearned income for her in 2025. Elena's parents are concerned about the tax implications.
Elena will be 18 years old at the end of 2025. She will earn $3,000 during 2025 working at an ice cream store. She will also receive $4,000 in interest income during 2025. Elena is claimed as a dependent by her parents. How much of Elena’s income will be taxed at her parent's marginal tax rate for 2025?
A. $1,300
B. $4,000
C. $3,550
D. None, she is too old for Kiddie Tax
A. $1,300
Her taxable income is $7,000 - $3,450 standard deduction = $3,550. Her NUI is $4,000 - $2,700 = $1,300. For 2025, Elena’s net unearned income of $1,300 will be taxed at her parent's marginal tax rate. The remaining portion of her taxable income will be taxed at Elena’s rate, so $3,550 - $1,300 = $2,250 will be taxed at Elena's rate.
73
Kari is 14 and a dependent. She has interest income of $8,000 and wage income of $4,000. How much is her NUI for 2025?
A. $1,350
B. $6,650
C. $5,300
D. $8,000
C. $5,300
In this case the NUI is unearned income minus 2 x basic standard deduction of a dependent $8,000 - (2 x 1,350) = $5,300.
74
Which of the following are valid (long-term) capital gains rates? Check all that apply.
1. 37%
2. 15%
3. 32%
4. 20%
5. 10%
6. 0%
2, 4, and 6
75
Which type of account below could you use if you are saving to pay for high school tuition in 2025?
A. Neither
B. Either one
C. Section 529 Plan
D. Coverdell Education Savings Account
B. Either one
76
Jennie is looking at a municipal bond that pays 4%. She is in the 32% tax bracket. There is no state income tax. The NIIT does apply.
What is her tax equivalent yield?
A. 8%
B. 5.2%
C. 2.1%
D. 6.2%
D. 6.2%
77
Which of the following must be included in Pete’s income and taxed at ordinary rates?
(1) Short-term capital gains of $10,000 from the sale of stock
(2) Long-term capital gains of $80,000 from the sale of stock
(3) Interest income from Pete’s savings account
(4) A gift from Pete’s brother of $15,000
A. 1 and 2
B. 1 and 3
C. 1, 2, 3, and 4
D. 3 and 4
B. 1 and 3
78
Mrs. and Mr. Smith want to help out their grandchild, but they don't wish to give a lot. They decide to make a below-market loan of $150,000 to help the grandchild purchase a home. Are there any tax issues here?
A. There will be imputed interest income to the grandparents and a tax deduction for the grandchild, above and beyond the interest paid
B. There will be interest income to the grandparents and a tax deduction for the grandchild, equal to the interest paid
C. The entire loan will be subject to estate tax
D. There are no tax implications here because it is a personal loan
A. There will be imputed interest income to the grandparents and a tax deduction for the grandchild, above and beyond the interest paid
79
The net investment income tax is imposed on which of the following income items for taxpayers subject to the tax?
Check all that apply.
1. Dividend Income
2. Interest Income
3. Capital Gains
4. Wages
1, 2, and 3
80
Ellie annuitized her annuity contract in 2025 which has a basis in the account. How will her distributions be taxed?
A. Part of the distributions will be taxable and part will be a return of basis
B. All of it will be taxed
C. The entire distributions will be taxed
D. Nothing will be taxed until the basis has been recovered
A. Part of the distributions will be taxable and part will be
81
Cally is currently single and in college, but next year, she will graduate and probably get a rather high-paying job. This year she is in the 10% bracket. She has stock with a basis of $1,000 that is now worth $10,000.
What might be good tax planning advice for her?
A. Sell the stock and get a tax-free gain, BUT you can not ever repurchase that stock in your portfolio, even if it would be a good pick for you
B. You don't give her any advice
C. Hold onto that stock until you are in a high tax bracket and then sell
D. Sell the stock to get the gains tax-free. If it is desirable to have the stock in your portfolio, you can repurchase the stock and have a higher basis
D. Sell the stock to get the gains tax-free. If it is desirable to have the stock in your portfolio, you can repurchase the stock and have a higher basis
82
Al purchased stock on Jan 3, 2024 for $60,000, and then sold it on Jan 3, 2025 for $80,000. He is single with taxable income of $400,000. At what rate will the $20,000 gain be taxed in 2025?
A. 0%
B. 35%
C. 20%
D. 15%
B. 35%
Al made a huge mistake. He held the stock for a year, NOT more than a year, so the gain will be taxed at ordinary rates: 35%. If he had waited one more day, the capital gains rates would have applied and the gain would only have been taxed at 15%.
83
Hannah is single with MAGI of $300,000. Her investment income is $50,000. What is the amount of the net investment income tax she must pay?
A. $3,800
B. $0
C. $34,600
D. $1,900
D. $1,900
84
Mr. and Mrs. X's divorce was finalized in Dec 2017. Per the decree, monthly alimony payments are to be made from Mr. X to Mrs. X starting in Jan 2018. They ask you for advice re the alimony for 2018 tax planning purposes. Which of the following is true?
A. Per TCJA 2017, Mr. X can deduct the alimony payments from gross income in 2018, but not thereafter, and Mrs. X will need to include the alimony payments in income for 2018, but not thereafter.
B. Per TCJA 2017, Mr. X cannot deduct the alimony payments from gross income in 2018 and beyond, and Mrs. X will not need to include the alimony payments in income.
C. Mr. X can deduct the alimony payments from gross income in 2018 and beyond, and Mrs. X will need to include the alimony payments in income.
D. Per TCJA 2017, Mr. X can deduct the alimony payments from gross income in 2018, but not between 2018 and 2025, and Mrs. X will need to include the alimony payments in income for 2018, but not between 2018 and 2025.
C. Mr. X can deduct the alimony payments from gross income in 2018 and beyond, and Mrs. X will need to include the alimony payments in income.
85
Joe purchased stock on Jan 3, 2024 for $60,000, and the sold it on Jan 4, 2024 for $80,000. He is MFJ in the 32% tax bracket. At what rate will the $20,000 gain be taxed in 2025?
A. 15%
B. 0%
C. 20%
D. 28%
A. 15%
86
All of the following statements concerning community property are correct, EXCEPT?
A. If a couple files as MFJ, the community property rules will not make a difference on their tax return
B. In community property states, half of the income earned (wages, salaries, etc. ) by a spouse is deemed to be earned by each spouse
C. Texas is a community property state
D. Community property rules apply to couples who are divorced
D. Community property rules apply to couples who are divorced
87
What does tax-deferred mean?
A. It will never be taxed
B. It won't be taxed until later
C. It is taxed now
D. It means the same as 'tax-free'
B. It won't be taxed until later
88
Sean receives about $50,000 in qualified dividend income each year. Which statement below is true?
A. Qualified dividends are not taxable
B. Qualified dividends received from are taxed as ordinary income
C. Qualified dividends are taxed at long-term capital gains rate
D. All dividends are taxed at long-term capital gains rates
C. Qualified dividends are taxed at long-term capital gains rate
89
Gains on property are normally taxed upon sale or exchange.
True
90
Barter transactions are not reportable for income tax purposes.
True
91
In community property states, half of the income earned from community property is deemed to be the income of each spouse.
True
92
The only relief available under section 66 is innocent spouse relief.
False
93
Interest income of less than $10 per year does not have to be included in gross income.
False
94
Dividend income is reported to a taxpayer on Form 1099-DIV.
True
95
All dividends paid by US corporations or qualified dividends are subject to favorable tax treatment.
False
96
Non-qualified annuity payments include both a non-taxable return of invested money and gross income.
True
97
Surrendering an annuity may result in gross income.
True
98
Distributions from traditional IRAs are generally taxable as ordinary gross income.
True
99
An LLC is normally taxed as a partnership.
True
100
Municipal bonds are generally more appropriate for taxpayers with low marginal tax rates.
False
101
Life insurance proceeds are normally excludable from the gross income of the beneficiary.
True
102
Distributions from Roth IRA are normally included in gross income.
False
103
For the purpose of redeeming a Series EE savings bond, qualified educational expenses do not include expenses for room and board.
True
104
529 plans may be either prepaid tuition programs or college savings plans.
True
105
Up to $19,000 per year may be contributed to a Coverdell education savings account.
False
106
For divorce agreements entered into before 2019, alimony is deductible for AGI by the payor, but must be included in the gross income of the payee.
True
107
No interest is generally imputed on below-market-rate loans of $10,000.
True
108
Income generated on inherited property is excluded from the gross income of the recipient.
False
109
Punitive damages must be included in the gross income of the party that receives the damages.
True
110
Child support payments are included in the gross income of the payee.
False
111
Income includes a return of invested capital.
False
112
Property obtained by inheritance is not included in the gross income.
True
113
A nonresident alien taxpayer is allowed to use the standard deduction.
False
114
For tax years 2018-2025, personal dependency exemptions are deducted from AGI.
False
115
Tax credits increase the amount that the taxpayer owes.
False
116
Tax credits are available for child dependent care expenses.
True
117
Only businesses may choose a tax year other than the calendar year.
False
118
Two commonly used tax accounting methods are the cash method and the accrual method.
True
119
The determination of whether a taxpayer is married is made as of the beginning of the year.
False
120
A surviving spouse must not have remarried to use the surviving spouse filing status.
True
121
A taxpayer is entitled to claim as a dependent anyone who lives in the taxpayer’s home.
False
122
A qualifying child must live with the taxpayer for more than half of the year.
True
123
A qualifying relative, unlike a qualifying child, is subject to a gross income test.
True
124
For the purposes of calculating NUI, unearned income does not include the wages received by the child as a result of their personal efforts.
True
125
The kiddie tax only affects children with unearned income greater than $2700 (2025).
True
126
An automatic one-year extension to file a return may be obtained by an individual taxpayer.
False
