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Assignment 1 An Overview of the Income Tax System

Assignment 1 An Overview of the Income Tax System. Quiz T F 1. Congress has the power to tax all income from whatever source derived, whether by corporations, individuals, or estates and trusts.

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Assignment 1 An Overview of the Income Tax System

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  1. Assignment 1An Overview of the Income Tax System Quiz T F 1. Congress has the power to tax all income from whatever source derived, whether by corporations, individuals, or estates and trusts. T F 2. Regulations are written by the Internal Revenue Service and serve as the official Treasury interpretation of the Internal Revenue Code. T F 3. The Internal Revenue Service is under the authority of Congress. 4. Which of the following statements concerning a taxpayer who wishes to contest a statutory notice of deficiency assessed against him is correct? (A) He may petition for a jury trial in the U.S. Court of Federal Claims without prepaying the deficiency. (B) He may petition the U.S Tax Court to hear his case without prepaying the deficiency but is not entitled to a jury trial. C) He may petition for a jury trial in the U.S. Tax Court without prepaying the deficiency? (D) He may file a petition to have his case heard before a jury in the U.S. District Court without prepaying the deficiency.

  2. Assignment 1An Overview of the Income Tax System 5. A U.S. Supreme Court interpretation of tax law is the law of the land until which of the following happen (s)? I. Congress enacts a new statue, tantamount to overturning a Court decision. II. The Court overrides its own prior decision. (A) I only (B) II only (C) Both I and II (D) Neither I or II

  3. Assignment 1An Overview of the Income Tax System Quiz Answers: • True • True • False : The Internal Revenue Service is under the authority of the Department of the Treasury and the Secretary of the Treasury. The Secretary of the Treasury is responsible to the President of the United States. Therefore the source of authority for the Internal Revenue Service and the Treasury Department lies in the executive branch. The Internal Revenue Service is not responsible to Congress • B • C Be sure to visit Blackboard at the American College for interactive reviews by following this link:http://blackboard.theamericancollege.edu

  4. Assignment 2An Introduction to Four Basic Income Tax ConceptsDetermination of Income Tax Liability Quiz • Robert and Susan were just divorced. In accordance with the decree, he is paying her $1,000 per month as alimony and $600 per month for support of their twins, aged 5. How much of each monthly payment of $1,600 is allowed as a deduction from Robert’s gross income? (A) $ 0 (B) $600 (C) $1,000 (D) $1,600 T F 2. Taxpayers with adjusted gross income over $50,000 are subject to an overall limitation on their itemized deductions. T F 3. One test that must be met before a taxpayer can claim an individual as a dependent is the relationship test or member-of-the-household test. T F 4. A father can claim a dependency exemption for his 17-year-old married daughter who filed a joint return with her spouse. T F 5. Under the “kidde tax” rules, net unearned income of a child under 18 is taxed at the marginal rate of the child’s parents.

  5. Assignment 2An Introduction to Four Basic Income Tax ConceptsDetermination of Income Tax Liability Quiz Answers: • C • False. For taxpayers, other than married taxpayers filing separately, the threshold amount for the overall limitation on itemized deductions is well over $100,000. This threshold amount is indexed annually for inflation. • True 4. False. A taxpayer may not claim a personal exemption for a child who is married and files a joint return with his or her spouse. 5. False. The kidde tax applies to children under the age of 14 Be sure to visit Blackboard at the American College for interactive reviews by following this link:http://blackboard.theamericancollege.edu

  6. Assignment 3Items of Gross Income Quiz T F 1. Payments of alimony may be made in either property or cash. T F 2. The value of rent-free occupancy of a home by the former spouse and children of the taxpayer is deductible by the taxpayer as alimony and taxable to the former spouse as income. T F 3. Payments to a former spouse are generally treated as child support for tax purposes to the extent the divorce or separation agreement designates them as such. T F 4. The exclusion ratio for an annuity is calculated by dividing the investment in the contract by the expected return under the contract. T F 5. When group term life insurance is provided as part of an employer plan of group insurance, the cost of coverage up to $75,000 is not taxable to an insured employee. T F 6. Special nondiscrimination rules apply to the taxation of group life insurance plans that cover fewer than 10 employees.

  7. Assignment 3Items of Gross Income Quiz Answers: • False. Alimony payments must be made in cash. • False. Although a divorce decree sometimes allows the custodial spouse and children rent-free occupancy of the family home, the value of a similar rental is not treated as alimony. • True • True • False. An insured employee may exclude the value of premiums representing the first $50,000 of coverage if certain nondiscrimination rules are met. • True Be sure to visit Blackboard at the American College for interactive reviews by following this link:http://blackboard.theamericancollege.edu

  8. Assignment 4Exclusions from Gross Income Quiz T F 1. A bequest of a specific sum paid in three or fewer installments is generally not taxable as income. T F 2. Accrued interest from certain U.S. savings bonds that are redeemed in order to pay for qualified higher education expenses of the taxpayer may be excludible from gross income. T F 3. The first-tier base amount for a married couple filing a joint return is $25,000 for purposes of determining the taxability of their Social Security benefits. T F 4. Social Security benefits are excludible in full from gross income unless the recipient’s adjusted gross income exceeds $100,000. T F 5. The amounts received under workers’ compensation acts are excludible from gross income. T F 6. If an employer pays the premiums for health care coverage for an employee, the premiums paid by the employer are includible in the gross income of the employee.

  9. Assignment 4Exclusions from Gross Income Quiz Answers: • True • True • False. This base amount is $32,000. • False. Social Security benefits are partially taxable if the taxpayer’s “provisional income” (modified adjusted gross income plus one-half of Social Security retirement benefits) exceeds certain threshold amounts determined by filing status. These threshold amounts are significantly less than $100,000. • True • False. These premiums are generally excludible from the gross income of the employee. Be sure to visit Blackboard at the American College for interactive reviews by following this link:http://blackboard.theamericancollege.edu 0000

  10. Assignment 5Business Expenses and Expenses for the Production of Income Quiz T F 1. All business expenditures, including fines and penalties, are deductible. T F 2. In determining reasonableness of compensation, the employee’s total compensation including commissions, bonuses, and retirement plan contributions is considered. T F 3. The standard mileage allowance for business use of a car is deemed to include depreciation. T F 4. Meals furnished to employees on business premises are deductible without regard to the 50 percent limitation. T F 5. Home-office deductions may have the effect of creating a net loss from business activities. T F 6. The 2 percent floor for itemized deductions applies to the deduction for annuity payments ceasing before the taxpayer’s recovery of his investment.

  11. Assignment 5Business Expenses and Expenses for the Production of Income Quiz (continued) T F 7. A taxpayer who owns stock that has declined in value may take a deduction for that loss. T F 8. No deduction is allowed for a loss of expected income unrealized due to a shift in employment opportunities. T F 9. A taxpayer may take a loss deduction for the value of a rare coin that he or she has mislaid. T F 10. A casualty loss that is not reimbursed will be deductible to the extent that it exceeds $100 on a single taxpayer’s return or $200 for taxpayers filing. T F 11. A non-business bad debt is treated as a short-term capital loss. T F 12. If a deduction for a bad debt resulted in a tax benefit to a taxpayer, the future unexpected repayment of the debt will be treated as income.

  12. Assignment 5Business Expenses and Expenses for the Production of Income Quiz Answers: • False. There are certain expenditures that are not deductible because to allow them would be against public policy. Included in this category are fines or similar penalties paid to a government for a violation of a law as well as illegal bribes and kickbacks. • True • True • True • False. Home-office deductions are not permitted to the extent they create or increase a net loss from business activities. Disallowed deductions may be carried over and deducted in succeeding years subject to the same limitations. • False. The deduction for un-recovered basis in an annuity is a miscellaneous itemized deduction that is not subject to the 2 percent floor. • False. A mere decline in value, without a realizable event, does not give rise to a deductible loss. • True • False. Deductible casualty losses do not include the ordinary situation in which a taxpayer simply loses or mislays property. • False. Non-reimbursed casualty losses are deductible to the extent a) each loss exceeds $100 and (b )total losses are greater than 10 percent of the taxpayer’s adjusted gross income. Both of these limitations must be applied. • True • True Be sure to visit Blackboard at the American College for interactive reviews by following this link:http://blackboard.theamericancollege.edu

  13. Assignment 6Losses and Bad DebtsItemized Deductions for Individuals Quiz T F 1. Medical Expense deductions cannot exceed 50% of the taxpayer’s medical care expenses for the year. T F 2. Long-term care insurance premiums are deductible in full as medical expenses regardless of their amounts. T F 3. Any joint owner of property who actually pays a deductible tax on the property may take a deduction for the payment. T F 4. Individual taxpayers may not deduct interest on credit card charges for the purchase of personal items.

  14. Assignment 6Losses and Bad DebtsItemized Deductions for Individuals Quiz Answers: • False. A medical expense deduction is allowed for the entire portion of deductible medical expenses (including medical expense insurance that exceeds 7.5% of the taxpayer’s adjusted gross income. • False. Qualified long-term care insurance premiums are eligible for treatment as medical expenses. However, deductibility of these premiums is subject to annual dollar amount limitations based on the covered individual’s age. • True • True Be sure to visit Blackboard at the American College for interactive reviews by following this link:http://blackboard.theamericancollege.edu

  15. Assignment 7Itemized Deductions for IndividualsIndividual Income Tax Credits Quiz T F 1. Charitable contributions are allowed for gifts of property but not for gifts of services to the charity. T F 2. A qualifying child for purposes of the tax credit for children is one who is under the age of 19 at the end of the tax year. T F 3. The adoption credit must be claimed for the tax year following the year in which the expenses are paid, unless the adoption becomes final during or before the year the expenses are paid. T F 4. Both the Hope and Lifetime education credits are subject to phaseout rules for taxpayers with modified adjusted gross income in excess of certain levels.

  16. Assignment 7Itemized Deductions for IndividualsIndividual Income Tax Credits Quiz Answers: • True • False. The child must be under age 17, not 19 • True • True Be sure to visit Blackboard at the American College for interactive reviews by following this link:http://blackboard.theamericancollege.edu

  17. Assignment 8Cost Recovery DeductionsLimitations on “Passive Activity” Losses and Credits Quiz T F 1. A depreciation deduction for property placed in service before January 1981 may be claimed under one of several acceptable depreciation methods. T F 2. Under the double-declining-balance method of depreciation, the annual amount of depreciation for an asset with a life of 5 years would be 40% of an asset’s un-recovered cost. T F 3. The expensing election is available for property held for investment. T F 4. The dollar limits applicable to luxury automobiles prevent them from ever being fully depreciated for tax purposes. T F 5. Certain intangible assets acquired after August 10, 1993, are eligible for amortization over a fixed period.

  18. Assignment 8Cost Recovery DeductionsLimitations on “Passive Activity” Losses and Credits Quiz Answers: • True • True • False. The expensing election is only available for tangible personal property used in a trade or business. • False. The dollar limits apply annually to cost recovery deductions. If these limits do not allow the full depreciation percentage to be taken, the recovery period is extended to allow cost recovery later. • True Be sure to visit Blackboard at the American College for interactive reviews by following this link:http://blackboard.theamericancollege.edu

  19. Assignment 9Sales and Exchanges of Property Quiz T F1. The “amount realized” on a sale of property is the same as the gain realized. T F 2. Losses on the sale of property are generally not deductible unless the transaction was in connection with a trade or business or an activity entered into for profit. T F 3. An exchange of General Motors stock valued at $15,000 for a General Motors auto valued at $15,000 is treated as a like-kind exchange that will allow taxation of gain to be postponed. T F 4. Nontaxable exchanges occur when property is exchanged solely for other property of like kind. T F 5. For purposes of the exclusion of gain from the sale of a personal residence, married taxpayers filing jointly may exclude up to $500,000 where both spouses meet the use requirement and one spouse meets the ownership requirement.

  20. Assignment 9Sales and Exchanges of Property Quiz Answers: • False. The amount realized is the value of all cash or property received for the asset transferred. Realized gain is calculated by subtracting the transferred asset’s basis from the amount realized. • True • False. An exchange of stock for an auto of equal value is not a qualifying transaction under the like-kind exchange provisions. Therefore the gain on such an exchange is recognized to the extent of the gain realized. • True • True Be sure to visit Blackboard at the American College for interactive reviews by following this link:http://blackboard.theamericancollege.edu

  21. Assignment 10The Taxation of Capital Gains and LossesThe Alternative Minimum Tax Quiz T F 1. The 15 percent maximum capital gains rate is reduced to 5% for individual taxpayers in the 10 percent marginal income tax rate bracket. T F 2. On the sale of depreciable real property held for more than one year and used in the taxpayer’s trade or business, all gains and losses are treated as capital gains and losses T F 3. Sec. 1231 property used in a trade or in business receives very preferential tax treatment; that is, gains from the sale of such property are capital gains while losses are fully deductible against ordinary income. T F 4. The AMT rate for individual taxpayers is 20 percent. T F 5. A “small” corporation that is exempt from the AMT will later lose its exemption if its 3-year average gross receipts exceed $5 million. T F 6. The ACE preference may subject corporations to the AMT on items that are not included in gross income for purposes of regular income tax.

  22. Assignment 10The Taxation of Capital Gains and LossesThe Alternative Minimum Tax Quiz Answers: • True • False. On the one hand, if depreciable real property used in a trade or business (Sec. 1231 property) is sold and the gains exceed the losses, the resulting net gain is treated as a long-term capital gain. On the other hand, if the losses exceed the gains, the resulting net loss is treated as an ordinary loss, deductible in full from the taxpayer’s ordinary income. However, net Sec. 1231 losses are subject to a special recapture provision. • True • False. The AMT rates for individual taxpayers are 26 and 28 percent. • False. A corporation will lose its existing AMT exemption if its 3-year average gross receipts exceed $7.5 million. • True Be sure to visit Blackboard at the American College for interactive reviews by following this link: http://blackboard.theamericancollege.edu

  23. Assignment 11 Income Taxation of Life InsuranceTax Treatment of Modified Endowment Contracts Quiz T F 1. Life insurance death benefits are excluded from gross income of an individual beneficiary but are taxable income to a trust. T F 2. Accelerated death benefits paid under a life insurance contract to a terminally ill insured are generally excludible from gross income as amounts paid by reason of death. T F 3. An employer who pays the premiums on an individual policy owned by an employee and insuring the employee’s life may deduct these payments as additional compensation to the employee. T F 4. A corporation may take a deduction for premium payments made for insurance on the life of an officer of the corporation if the beneficiary is the corporation. T F 5. Interest on a life insurance policy loan of $50,000 may be deductible if the insured is a “key person” with respect to the taxpayer. T F 6. Allowable interest deductions for loans from business-owned policies are now subject to limitations based upon the “Moody’s” rate.

  24. Assignment 11 Income Taxation of Life Insurance Taxation of Modified Endowment Contracts Quiz Answers: • False. Lump-sum proceeds payable by reason of the insured’s death are generally excluded from the gross income of individuals, trusts, and estates. • True • True • False. IRC Sec. 264 prohibits a deduction by any taxpayer for premiums paid on life insurance contracts if the taxpayer is directly or indirectly a beneficiary. • True • True Be sure to visit Blackboard at the American College for interactive reviews by following this link:http://blackboard.theamericancollege.edu

  25. Assignment 12Taxation of Corporations and Shareholders Quiz T F 1. Limited liability means that it is only the officers of a corporation who are liable for the debts of the corporation T F 2. A corporation is not legally dissolved on the death, disability, incapacity, or withdrawal of any of its owners. T F 3. One tax advantage of corporate status is the tax treatment of dividends paid to individual shareholders. T F 4. The tax advantages of corporate status include the ability to deduct the cost of certain nontaxable fringe benefits for employees. T F 5. A corporation that elects to be taxed as an S corporation will have all income and losses passed through to its shareholders in a way similar to the partnership form of business. T F 6. An S corporation election is a means f allowing start-up losses of a company to be deducted on the individual returns of its shareholders. T F 7. A distribution by a corporation can sometimes be taxable as a dividend even if the corporation has no current or accumulated earnings and profits. T F 8. A corporation’s redemption of its own stock will be treated as a capital transaction if the distribution is not essentially equivalent to a dividend.

  26. Assignment 12Taxation of Corporations and Shareholders Quiz Answers • False. Limited liability means that a creditor of a corporation cannot proceed against the individual shareholders personally to satisfy a corporate debt. • True. • False. A tax disadvantage of a business corporation is the potential of double taxation of earnings. Since the corporation is a separate tax entity, earnings will be taxed to the corporation as earned and then again to the shareholders if a distribution to them is classified as a corporate dividend. • True. • True. • True. • False. A distribution by a corporation that has no current or accumulated earnings and profits cannot be taxable as a dividend. • True Be sure to visit Blackboard at the American College for interactive reviews by following this link: http://blackboard.theamericancollege.edu

  27. Assignment 13Taxation of Distributions to a Corporation’s Shareholders Quiz T F 1. A distribution by a corporation can sometimes be taxable as a dividend even if the corporation has no current or accumulated earnings and profits. T F 2. A corporation’s redemption of its own stock will be treated as a capital transaction if the distribution is not essentially equivalent to a dividend.

  28. Assignment 13Taxation of Distributions to a Corporation’s Shareholders Quiz Answers: • False. A distribution by a corporation that has no current or accumulated earnings and profits cannot be taxable as a dividend. • True Be sure to visit Blackboard at the American College for interactive reviews by following this link:http://blackboard.theamericancollege.edu

  29. Assignment 14Taxation of Partners and Partners and Partnerships Quiz T F 1. Profits earned by a partnership are taxed twice – to the partnership itself and also to the owners. T F 2. Partners in a partnership may deduct their shares of the partnership’s net loss on their individual tax returns. T F 3. When a partner contributes appreciated assets to a partnership, he or she recognizes gain on the transfer. T F 4. Upon the liquidation of an interest in a service partnership, payments for goodwill are treated as capital gain regardless of whether they are mentioned as such in the partnership agreement. T F 5. A manufacturing partnership can deduct payments for unrealized receivables when liquidating a retiring partner’s interest.

  30. Assignment 14Taxation of Partners and Partnerships Quiz Answers: • False. The partnership itself is not a taxpayer. Therefore, profits are taxed only once to each partner. • True • False. No gain is recognized on the transfer of appreciated assets to a partnership. The contributor-partner will generally take as his or her original basis for his or her partnership interest the basis he or she had in the property contributed at the time of contribution. • False. If the partnership agreement specifies that payments will be made for goodwill, the partners receiving liquidating distributions will report payments for goodwill as capital gain, but the payments are not deductible by the partnership. If the agreement is silent as to goodwill, the payments are taxable to the partners as ordinary income and are deductible by the partnership. • False. Payments to a retiring partner that are attributable to unrealized receivables are not deductible by a manufacturing partnership. Although the retiring partner will treat such amounts as ordinary income, the partnership treats such amounts as made-for-partnership property. No deduction is allowed. Be sure to visit Blackboard at the American College for interactive reviews by following this link:http://blackboard.theamericancollege.edu

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