Question

Answer TRUE OR FALSE. CHAPTER 1

1. Two notable trends in tax revenue sources is that social security taxes have decreased gradually while corporate income taxes have increased gradually over the last fifty years. 2. If a progressive tax rate system is used, as a taxpayer's taxable income decreases, a progressively higher rate of tax is applied. 3. The marginal tax rate measures the tax rate applicable to the next dollar of income or deduction for a taxpayer. 4. All states impose a state income tax. 5. Using retroactive dates for changes in the tax law violates the objective of certainty as identified in Adam Smith's "canons of taxation." 6. The only objective of the federal income tax law is to raise revenue. 7. Partnerships, S corporations and trusts are all taxpaying entities. 8. Knowledge of tax law sources could be considered the most important topic in the textbook. 9. The statute of limitations remains open indefinitely if a fraudulent return is filed or if no return is filed. 10. If offered a $400 credit or a $1,000 deduction, a taxpayer with a 30% marginal tax rate should take the deduction. CHAPTER2 11. Deductions for AGI include deductions attributable to rents and royalties and contributions to retirement plans. 12. All taxpayers are allowed the full standard deduction ($12,200 for single taxpayers, for example) when filing a tax return. 13. In order to qualify as a dependent a qualifying relative's gross income must be less than $5,000. 14. A married individual can never claim head-of-household filing status. 15. A child of the taxpayer must be a dependent to be subject to the kiddie tax. 16. The kiddie tax does not apply to a child under 18 until his or her unearned income exceeds $2,200. 17. In general, taxpayers must file a return if their gross income is at least the sum of the total basic standard deduction and the additional standard deduction for age and blindness. 18. The information reporting system makes it more difficult for taxpayers to avoid IRS detection if they omit income from their returns. 1 19. The due date for Form 1040 is generally the 15th day of the 3rd month after the end of their tax year. 20. In general, spouses who file separate returns for a given year may elect to change to a joint return by filing an amended joint return but taxpayers may not change from a joint return to separate returns after the due date for the return. CHAPTER 14 21. The present AMT system operates as a separate tax system, parallel to the regular income tax system. 22. A taxpayer taking the standard deduction will have no adjustments when calculating the AMT. 23. Most taxpayers will not have AMT tax preference items. 24. All regular tax itemized deductions are allowed for AMT purposes. 25. There is a wage cap on the HI portion but not on the OASDI portion of the self-employment tax. 26. The Additional Medicare Tax applies to both net earnings from self-employment and salary. 27. One-half of the Additional Medicare Tax is deductible for AGI. 28. There is no penalty for underpayment of estimated tax as long as the required annual payment is made by January 15 of the year following the end of the taxpayer's tax year. CHAPTER3 29. Gross income is not limited to amounts received in the form of cash but the important question is whether the taxpayer receives an economic benefit. 30. Income from separate property is always considered to be separate income. 31. A cash basis taxpayer will include compensation in income in the year actually or constructively received. 32. Although the interest from municipal bonds is not taxable any gain on the sale of such bonds is taxable. 33. To qualify for the Series EE bond exclusion the bonds can be a gift from grandparents. 34. In general, security deposits are not included in income when received. 35. Cash dividends as well as stock dividends are taxable. 36. A property settlement is a division of property pursuant to divorce and is taxable to the recipient. 37. The simplified method is used only for annuity distributions from qualified retirement plans. 38. Total gambling winnings must be included in gross income and gambling losses (up to the amount of current year's winnings) are allowable as an itemized deduction. 39. Unemployment compensation is taxable. 40. Income from illegal activities is not taxable.

Answer 1

1. False. The social security tax rate has been increase gradually over the last years while corporate income taxes has come down.

2. False. With progressive tax rate, as income rises, the income is taxed at higher rate.

3. True. The marginal tax rate measures the impact of additional dollar of income on overall tax.

4. False. Not all states impose a state income tax. There are some exceptions to the same.