Exam 1: Federal Income Taxation-An Overview

Jennifer Winfield recently purchased business equipment that qualifies for a new tax incentive. The new incentive allows Winfield to either expense $100,000 of the cost of the equipment or claim a tax credit of 15% of the cost of the equipment. The cost of the equipment is $200,000. If the credit is elected, the first year depreciation will be $34,000. If Winfield chooses to expense $100,000 of the cost, the first year depreciation will be $20,000 on the remaining cost. Winfield's tax rate is either 32% or 37%. Under what conditions should Winfield elect to take the tax credit? Explain and show any calculations to support your answer.

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Question 1

Correct Answer:

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Winfield should elect to take the tax credit option when the tax savings from it are greater than the tax savings under the expense option. Tax credits are direct reductions in the tax liability and the tax savings are not dependent on the taxpayer's marginal tax rate. Deductions reduce taxable income and their value is a function of the taxpayer's marginal tax rate. Therefore, Winfield's decision depends on its marginal tax rate in the current year:
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$\begin{array}{lrr} & \text { Tax Rate } & \text { Tax Rate } \\&37\%&32\%\\\text { Expense Option: }&\$44,400&\$38,400\\\text { Deduction }=\$ 100,000+\$ 20,000=\$ 120,000 & \$ 44,400 & \$ 38,400 \\& & \\\text { Credit Option: } & \$ 30,000 & \$ 30,000 \\\text { Value of tax credit }=\$ 200,000 \times 15 \% & 12,580 & 10,880 \\\text { Value of } \$ 34,000 \text { deduction } & \$ 42,580 & \$ 40,880 \\\end{array}$

The tax credit option provides the largest tax savings when the marginal tax rate is 32%. When the marginal tax rate 37%, the expense option provides a larger tax savings.

Which of Adam Smith's requirements for a good tax system best supports the argument that the federal income tax rate structure should be progressive?

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Question 2

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Joe Bob operates a gas station/grocery store outside the main entrance to a state park. Joe Bob is very independent and dislikes government interference in his business. He pays all his suppliers in cash as they make deliveries. He deposits customer checks to his bank account but retains cash received in the business to pay his expenses. Inventories are material to determining income but he "estimates" his inventory. He keeps a log of daily sales, purchases, and other pay-outs. When preparing his income tax return, his tax preparer carefully compares his gross profit ratio and net profit to sales ratio to other clients operating similar businesses. The accountant then adjusts Joe Bob's income so that the ratios are greater than those reported by comparable businesses. In addition, the tax preparer "adds a guess, usually $20,000 to $50,000, of undisclosed cash sales" that is disclosed on the face of Joe Bob's tax return. Thus, his net profit is increased by the same amount. Joe Bob has never objected to the amount of added income. Has Joe Bob evaded the income tax? Explain.

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Question 3

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No. Evasion results in an underpayment of income tax. It is not clear that an underpayment results because of Tony's misrepresentation of facts.

Match each term with the correct statement below. -A taxpayer is responsible for determining his/her tax liability and timely paying the tax due.

(Multiple Choice)

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Question 4

The income tax formula for individual taxpayers is unique in that deductions are broken into classes. I.This dichotomy of deductions results in an intermediate income number called adjusted gross income (AGI). II.One class of deductions is called exclusions from income. III.One class of deductions is called deductions for adjusted gross income. IV.Expenses qualifying as deductions for adjusted gross income are not limited by the income of the taxpayer.

(Multiple Choice)

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Question 5

Employers are required to pay a Federal Unemployment Tax of 6.2% of the first $10,000 in wages to each employee less a credit of up to 5.4% of state unemployment taxes paid.

(True/False)

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Question 6

If a taxpayer has a choice of receiving income in the current year versus the following year, which of the following tax rates is important in determining the year in which he should include the income?

(Multiple Choice)

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Question 7

Match each term with the correct statement below. -Land and any structures permanently attached to the land.

(Multiple Choice)

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Question 8

According to the IRS definition, which of the following is not a characteristic of a tax?

(Multiple Choice)

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Question 9

Heidi and Anastasia are residents of the mythical country of Wetland. Heidi pays $1,500 income tax on taxable income of $6,000. Anastasia pays income tax of $21,000 on taxable income of $72,000. The income tax structure is I.Progressive. II.Proportional. III.Regressive. IV.Value-added. V.Marginal.

(Multiple Choice)

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Question 10

Match each term with the correct statement below. -The period of time during which a taxpayer and/or the IRS can correct a taxpayer's taxable income.

(Multiple Choice)

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Question 11

Taxpayer A pays tax of $3,300 on taxable income of $10,000 while taxpayer B pays tax of $6,600 on $20,000. The tax is a

(Multiple Choice)

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Question 12

Joy receives a used car worth $13,000 from her uncle as a graduation present. As a result of the gift I.Joy will have $13,000 of taxable income. II.Joy's uncle's gift will subject him to the gift tax.

(Multiple Choice)

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Question 13

Match each term with the correct statement below. -Tax planning using legal methods to minimize the tax liability.

(Multiple Choice)

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Question 14

Maria is single and has a 2018 taxable income of $199,800. She also received $15,000 of tax-exempt income. Maria's effective tax rate is:

(Multiple Choice)

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Question 15

Match each term with the correct statement below. -Direct reduction in the income tax liability often created by Congress to further a public purpose.

(Multiple Choice)

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Question 16

When planning for an investment that will extend over several years, the ability to predict how the results of the investment will be taxed is important. This statement is an example of

(Multiple Choice)

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Question 17

Katie pays $10,000 in tax-deductible property taxes. Katie's marginal tax rate is 32%, average tax rate is 28%, and effective tax rate is 25%. Katie's tax savings from paying the property tax is:

(Multiple Choice)

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Question 18

Which of the following payments is a tax? I.Artis paid the IRS a penalty of $475 (above his $11,184 income tax balance due) because he had significantly underpaid his estimated income tax. II.Lindsey paid $135 to the State of Indiana to renew her CPA license. III.Carrie paid a $3.50 toll to cross the Mississippi River. IV.Darnell paid $950 to the County Treasurer's Office for an assessment on his business equipment.

(Multiple Choice)

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Question 19

Katarina, a single taxpayer, has total income from all sources of $100,000 for 2018. Her taxable income after taking into consideration $25,000 in deductions and $10,000 in exclusions is $65,000. Katarina's tax liability is $10,240. What are Katarina's marginal, average, and effective tax rates?

(Multiple Choice)

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Question 20

Showing 1 - 20 of 150

Which of Adam Smith's requirements for a good tax system best supports the argument that the federal income tax rate structure should be progressive?

Match each term with the correct statement below. -A taxpayer is responsible for determining his/her tax liability and timely paying the tax due.

Employers are required to pay a Federal Unemployment Tax of 6.2% of the first $10,000 in wages to each employee less a credit of up to 5.4% of state unemployment taxes paid.

If a taxpayer has a choice of receiving income in the current year versus the following year, which of the following tax rates is important in determining the year in which he should include the income?

Match each term with the correct statement below. -Land and any structures permanently attached to the land.

According to the IRS definition, which of the following is not a characteristic of a tax?

Heidi and Anastasia are residents of the mythical country of Wetland. Heidi pays $1,500 income tax on taxable income of $6,000. Anastasia pays income tax of $21,000 on taxable income of $72,000. The income tax structure is I.Progressive. II.Proportional. III.Regressive. IV.Value-added. V.Marginal.

Match each term with the correct statement below. -The period of time during which a taxpayer and/or the IRS can correct a taxpayer's taxable income.

Taxpayer A pays tax of $3,300 on taxable income of $10,000 while taxpayer B pays tax of $6,600 on $20,000. The tax is a

Joy receives a used car worth $13,000 from her uncle as a graduation present. As a result of the gift I.Joy will have $13,000 of taxable income. II.Joy's uncle's gift will subject him to the gift tax.

Match each term with the correct statement below. -Tax planning using legal methods to minimize the tax liability.

Maria is single and has a 2018 taxable income of $199,800. She also received $15,000 of tax-exempt income. Maria's effective tax rate is:

Match each term with the correct statement below. -Direct reduction in the income tax liability often created by Congress to further a public purpose.

When planning for an investment that will extend over several years, the ability to predict how the results of the investment will be taxed is important. This statement is an example of

Katie pays $10,000 in tax-deductible property taxes. Katie's marginal tax rate is 32%, average tax rate is 28%, and effective tax rate is 25%. Katie's tax savings from paying the property tax is:

Katarina, a single taxpayer, has total income from all sources of $100,000 for 2018. Her taxable income after taking into consideration $25,000 in deductions and $10,000 in exclusions is $65,000. Katarina's tax liability is $10,240. What are Katarina's marginal, average, and effective tax rates?

Income Tax Concepts

Income Sources

Income Exclusions

Introduction to Business Expenses

Business Expenses

Losses-Deductions and Limitations

Taxation of Individuals

Acquisitions of Property

Cost Recovery on Property: Depreciation, Depletion, and Amortization

Property Dispositions

Non-Recognition Transactions

Choice of Business Entity-General Tax and Nontax Factorsformation

Choice of Business Entity-Operations and Distributions

Choice of Business Entity-Other Considerations

Tax Research

Filters

Exam 1: Federal Income Taxation-An Overview

Which of Adam Smith's requirements for a good tax system best supports the argument that the federal income tax rate structure should be progressive?

Match each term with the correct statement below. -A taxpayer is responsible for determining his/her tax liability and timely paying the tax due.

Employers are required to pay a Federal Unemployment Tax of 6.2% of the first $10,000 in wages to each employee less a credit of up to 5.4% of state unemployment taxes paid.

If a taxpayer has a choice of receiving income in the current year versus the following year, which of the following tax rates is important in determining the year in which he should include the income?

Match each term with the correct statement below. -Land and any structures permanently attached to the land.

According to the IRS definition, which of the following is not a characteristic of a tax?

Match each term with the correct statement below. -The period of time during which a taxpayer and/or the IRS can correct a taxpayer's taxable income.

Taxpayer A pays tax of $3,300 on taxable income of $10,000 while taxpayer B pays tax of $6,600 on $20,000. The tax is a

Joy receives a used car worth $13,000 from her uncle as a graduation present. As a result of the gift I.Joy will have $13,000 of taxable income. II.Joy's uncle's gift will subject him to the gift tax. ​

Match each term with the correct statement below. -Tax planning using legal methods to minimize the tax liability.

Maria is single and has a 2018 taxable income of $199,800. She also received $15,000 of tax-exempt income. Maria's effective tax rate is:

Match each term with the correct statement below. -Direct reduction in the income tax liability often created by Congress to further a public purpose.

When planning for an investment that will extend over several years, the ability to predict how the results of the investment will be taxed is important. This statement is an example of

Katie pays $10,000 in tax-deductible property taxes. Katie's marginal tax rate is 32%, average tax rate is 28%, and effective tax rate is 25%. Katie's tax savings from paying the property tax is:

Katarina, a single taxpayer, has total income from all sources of $100,000 for 2018. Her taxable income after taking into consideration $25,000 in deductions and $10,000 in exclusions is $65,000. Katarina's tax liability is $10,240. What are Katarina's marginal, average, and effective tax rates?

Income Tax Concepts

Income Sources

Income Exclusions

Introduction to Business Expenses

Business Expenses

Losses-Deductions and Limitations

Taxation of Individuals

Acquisitions of Property

Cost Recovery on Property: Depreciation, Depletion, and Amortization

Property Dispositions

Non-Recognition Transactions

Choice of Business Entity-General Tax and Nontax Factorsformation

Choice of Business Entity-Operations and Distributions

Choice of Business Entity-Other Considerations

Tax Research

Filters

Joy receives a used car worth $13,000 from her uncle as a graduation present. As a result of the gift I.Joy will have $13,000 of taxable income. II.Joy's uncle's gift will subject him to the gift tax.