1
An Overview of Federal Taxation
Test Bank
True or False
________ 1. A correlation exists between the amount of Federal tax an individual
pays and the value of benefits an individual receives.
________ 2. The Thirteenth Amendment enacted in 1916 made it clear that Congress
had the right to impose an income tax.
________ 3. The Federal income tax base is called “adjusted gross income.”
________ 4. The gift tax and the estate tax provide a very significant portion of total
Federal revenues.
________ 5. As a source of revenue, the Federal corporate income tax is larger than
the Federal individual income tax.
________ 6. Congress has chosen to exclude many sources of income from taxation
even though it has the authority to tax income from whatever source
derived.
________ 7. A source of income is taxable only when listed as a taxable source of
revenue in the Internal Revenue Code.
________ 8. An expenditure is deductible only when listed as a deduction in the
Internal Revenue Code.
________ 9. If T is in the 35 percent tax rate bracket, then all of T’s income is being
taxed at 35 percent.
________ 10. Knowing his marginal tax rate allows a taxpayer to determine the tax
impact of an additional dollar added to the tax base or an additional
dollar of deduction.
________ 11. A credit is different from a deduction in that the credit reduces the base
amount subject to the tax, whereas a deduction directly reduces the tax
liability itself.
________ 12. The unitary tax is a device that the Federal government has developed to
tax corporations on income that they have earned outside the boundaries
of the United States.
________ 13. Interest income earned on government obligations issued by a state or
local government (e.g., the state of Ohio) is generally subject to Federal
income taxation.
________ 14. Congress enacted wealth transfer taxes primarily to diversify the Federal
government’s sources of income.
________ 15. The estate tax applicable credit amount is $5,120,000 million in 2012.
________ 16. The estate tax applicable credit amount, generally available only to low
income families filing joint income tax returns, reduces the federal
income tax.
________ 17. The gift tax and the estate tax exempt the same amount from taxation in
2012.
________ 18. By making the gift-splitting election, an unmarried donor can in effect
make use of twice the annual exclusion to which she is normally entitled.
________ 19. Unlike the unified transfer tax, the typical state inheritance tax imposes a
tax on the right to receive property at death.
________ 20. Both FICA and FUTA impose a double tax on the employer and the
employee.
________ 21. Self-employed individuals are required to pay self-employment taxes if
self-employment income is $400 or more.
________ 22. FUTA tax revenues are used by the Federal government to augment
unemployment-benefit programs of the various states.
________ 23. An excise tax is imposed on the profits of a business or profession, but
not on an individual’s income.
________ 24. A “tax expenditure” is the amount of tax revenue that Congress budgets
for social programs.
________ 25. A taxpayer is allowed to change the structure of a transaction for the sole
purpose of avoiding taxes, even though the change in structure has no
other economic effect.
Multiple Choice
________ 26. Which of the following characteristics would not be used to describe the
generic nature of a “tax”?
a. Normally, there is a direct relationship between the exaction of
revenue and the benefits received by the taxpayer.
b. A tax is levied on the basis of predetermined criteria.
c. A tax is levied on the basis of recurring periods.
d. A tax may be distinguished from a penalty because it is not
specifically designed to control or stop a particular activity.
e. At least in the United States, taxes are often used to meet certain
social as well as economic goals.
________ 27. Which one of the following statements is not true concerning tax rates?
a. A proportional tax rate is one in which an increasing percentage rate
is applied to increasing increments of the tax base.
b. The marginal tax rate of any rate structure is that percentage at which
the next dollar added to the tax base will be taxed.
c. The average tax rate is the percentage of taxable income paid in tax.
d. The effective tax rate is the percentage of total income paid in tax.
e. An individual cannot pay more in Federal income taxes than he
reports as taxable income unless his marginal tax rate exceeds 100
percent.
________ 28. What type of tax rate do most excise taxes employ?
a. Proportional
b. Progressive
c. Regressive
d. Neutral
e. None of the above
________ 29. T has a tax base of $30,000 and pays a tax of $2,500 on the first $25,000
and $750 on the next $5,000. This is an example of what type of tax
rate?
a. Proportional
b. Progressive
c. Regressive
d. Neutral
e. None of the above
________ 30. T has a tax base of $30,000 and pays a tax of $2,500 on the first $25,000
and $750 on the next $5,000. T has a marginal tax rate of
a. 10 percent
b. 15 percent
c. 20 percent
d. 10.83 percent
e. None of the above
________ 31. T has a tax base of $30,000 and pays a tax of $2,500 on the first $25,000
and $750 on the next $5,000. T has an average tax rate of
a. 10 percent
b. 15 percent
c. 20 percent
d. 10.83 percent
e. None of the above
________ 32. Which one of the following statements is true?
a. Tax credits reduce tax liability at the marginal tax rate.
b. Both tax credits and tax deductions are offsets to taxable income.
c. Dollar for dollar, tax credits are more valuable than tax deductions.
d. The tax impact of an additional dollar of tax base is determined by
multiplying by the average tax rate.
e. “I can’t afford to earn more because it will throw me into a higher tax
bracket and I will keep less than I do now after taxes.”
________ 33. B, an unmarried taxpayer, knows that her last dollar of income in the
current year will be taxed at 15 percent. D, an unmarried taxpayer,
knows that his last dollar of current year income will be taxed at 28
percent. Which of the following statements is not true taking into
account the above assumptions?
a. D’s marginal tax rate is greater than B’s.
b. The value of a $3,000 IRA deduction to D will be less than the same
amount contributed by B to an IRA.
c. If both parties suffer a $100,000 business loss that is fully deductible,
the impact of the deductible loss will be greater on D’s return than on
B’s return.
d. B will pay 15 percent of her taxable income to the government.
e. D will not pay 28 percent of his taxable income to the government.
________ 34. Which one of the following tax entities does not pay a Federal income
tax?
a. Trust
b. Partnership
c. Individual
d. Corporation
e. Estate
________ 35. Before adjusted gross income can be computed, what following
components must be computed?
a. Income
b. Taxable income
c. Gross income
d. Both a. and b.
e. Both a. and c.
________ 36. Which one of the following cannot be subtracted from the gross estate to
compute the total taxable transfers?
a. Charitable bequests
b. Taxable gifts made after December 31, 1976
c. Marital deduction
d. Funeral and administrative expenses
e. Both a. and c.
________ 37. Which one of the following statements is not true concerning the estate
tax applicable credit amount?
a. The applicable estate tax credit amount can offset a tax up to
$1,772,800 in 2012.
b. The applicable estate tax credit amount is a lifetime credit.
c. The applicable estate tax credit amount can be used to offset gift
taxes and estate taxes.
d. Use of the applicable estate tax credit amount is mandatory if one
makes a taxable gift.
e. The entire applicable estate tax credit amount can be used in more
than one taxable year to offset additional tax.
________ 38. Which one of the following concerning a decedent’s gross estate is not
true?
a. The gross estate includes the value of all property owned at date of
death, wherever located.
b. Property included in the gross estate generally is valued as of the
date of death.
c. If the decedent’s wife is the beneficiary, proceeds of an insurance
policy on the life of the decedent are excludable from the decedent’s
gross estate.
d. The marital deduction in 2012 is currently set at $5,120,000 million,
allowing for a joint marital deduction of $10,240,000.
e. Any of the unified credit not used by the first spouse to die can be
used by the surviving spouse.
________ 39. The estate tax applicable credit amount effectively shields a maximum of
in 2012 from estate tax
a. $155,800
b. $1,772,800
c. $1,000,000
d. $10,240,000
e. $5,120,000
________ 40. Which one of the following statements is not true concerning the Federal
estate tax?
a. In computing the Federal estate tax liability, all gifts made after
December 31, 1976 are added to the taxable estate.
b. The Federal estate tax is cumulatively computed on taxable gifts
made during a donor’s lifetime and taxable transfers made at the
donor’s death.
c. A decedent is entitled to an unlimited marital deduction for the value
of property passing to a surviving spouse.
d. All gift taxes paid on post-1976 gifts are subtracted from the
tentative tax on total transfers.
e. For most purposes, a decedent’s taxable estate is treated as the
decedent’s last gift.
________ 41. Which one of the following cannot be subtracted from the fair market
value of all gifts made in the current year to compute taxable gifts for the
current year?
a. Applicable gift tax credit amount
b. Marital deduction
c. Annual $13,000 exclusion per donee in 2012
d. Charitable deduction
e. Both b. and d.
________ 42. A husband gives his wife a total of $6 million in gifts for the year ended
2012. The taxable gift resulting from this transfer for the current year are
a. $0
b. $5,987,000
c. $1,000,000
d. $6,000,000
e. None of the above
________ 43. Which one of the following statements is not true concerning lifetime
gifts?
a. A taxpayer may make a $6 million gift to a state university free of
the gift tax.
b. The annual gift exclusion of $13,000 is allowed in 2012 even if the
donor had made gifts in prior years to the same donee.
c. For purposes of computing a Federal gift tax liability, gifts are
valued at the fair market value of the object given at the time of the
gift.
d. The election to split gifts that is available to a married donor requires
only the consent of the spouse owning the property transferred.
e. The marital and charitable deductions for Federal gift tax purposes
are the same as for the Federal estate tax.
________ 44. Which of the following is not true concerning local transfer taxes?
a. A decedent’s child will likely pay less inheritance tax than a
decedent’s nephew on the same size gift.
b. An inheritance tax is imposed on the right to receive property at
death.
c. State estate taxes are often based on the credit allowed under Federal
estate tax laws.
d. Some states will reduce the state estate tax by any inheritance tax
imposed on the heir.
e. The federal credit for state estate and inheritance taxes reduces the
state tax but not the federal tax.
________ 45. The FICA Tax rate is best considered:
a. Proportional
b. Progressive
c. Regressive
d. Neutral
e. None of the above
________ 46. Which one of the following statements does not apply to the Federal
Insurance Contribution Act (FICA)?
a. The proceeds raised from the FICA tax are used to finance old-age,
survivors, and disability insurance payments (Social Security
benefits).
b. Amounts withheld from an individual’s paycheck for social security
are not subject to income tax.
c. An employer is required to withhold both Federal income taxes and
FICA taxes from each employee’s wages paid during the year.
d. FICA taxes are imposed on each dollar of an employee’s wages up to
a fixed amount per year.
e. The employer is required to pay over to the Federal government both
the employee’s portion of FICA tax and his own portion of the FICA
tax.
________ 47. Which of the following is not a true statement?
a. The current FUTA tax rate is 6.2 percent of the first $7,000 of wages
paid during the year to each covered employee.
b. Most states also impose an unemployment tax on employers.
c. A credit is allowed against an employer’s FUTA tax liability: a
maximum of 5.4 percent of the first $7,000 of wages paid during the
year to each covered employee.
d. For an employee paid more than $7,000 during the year, FUTA tax
paid by the employer is normally $434.
e. All of the above are true.
________ 48. Which one of the following is not a type of excise tax?
a. A tax on retail sales of products and commodities
b. A tax on facilities and services
c. A tax on income from professional services of physicians, dentists,
lawyers, and accountants
d. Occupational taxes
e. Manufacturers’ taxes
________ 49. Which of the following is not an excise tax?
a. Use tax
b. Occupational tax
c. Retail sales or products and commodities taxes
d. Manufacturers’ taxes
e. Windfall profit tax
________ 50. Which one of the following miscellaneous types of taxes is not matched
with the property or activity that is being taxed?
a. Tangible personal property tax covers land, buildings, and
residences.
b. Intangible personal property tax covers stocks, bonds, and accounts
and notes receivable.
c. Franchise tax covers the right to operate a business in the state of
New York.
d. Sales tax covers gross receipts from the retail sale of clothing,
automobiles, and equipment.
e. Use tax covers the possession and enjoyment of clothing,
automobiles, and equipment.
________ 51. Which of the following is not a social objective of the tax laws?
a. Fight unemployment problems of certain disadvantaged groups of
citizens through the targeted jobs credit.
b. Place more after-tax income into the hands of taxpayers for their
disposal.
c. Relieve the tax burdens of taxpayers who are 65 or over or are blind.
d. Subsidize the cost of a home, and thus encourage home ownership.
e. Encourage individuals to provide for their future needs by
contributing to their retirement savings accounts.
________ 52. What principle is not a characteristic of a “good” tax?
a. The tax is certain and not arbitrary.
b. The tax is “hidden” (i.e., its burden on the public is not apparent).
c. The tax is convenient.
d. The tax is equitable.
e. The tax is economically efficient (i.e., advances an appropriate goal).
________ 53. The equity principle does not help explain which one of the following?
a. Deduction of interest on a home
b. The progressive tax structure
c. Deduction of medical expenses
d. The timing of a tax
e. Deduction of casualty losses
________ 54. What tax policy goal(s) best explain(s) the progressive rate structure?
a. Tax revenue enhancement
b. Horizontal equity
c. Vertical equity
d. Both b. and c.
________ 55. Which one of the following qualities of a “good tax” is not
administrative in nature?
a. Certainty
b. Economical operation
c. Simplicity
d. Efficiency
e. All are administrative in nature.
________ 56. Which of the following transactions is not matched with a tax planning
technique that will have the effect of minimizing or deferring taxes?
a. Parents transfer property to a trust. Income from property deposited
in trust for their children who are at least 19 years of age is taxed at
the children’s rate, rather than at the parents’ higher tax rate.
b. Corporation X pays no dividends this year. Income is deferred to the
stockholders, since they do not pay tax until they receive the
dividends.
c. J is in the 28 percent marginal tax bracket in 2012 and the 15 percent
marginal tax bracket in 2013. J chooses to pay income tax on his
Series EE Federal bonds annually rather than realizing all the interest
income when the bonds mature in 2012.
d. J is in the 28 percent marginal tax bracket in 2012 and the 15 percent
marginal tax bracket in 2013. J chooses to deduct certain
discretionary expenses in 2012 rather than in 2013.
e. S, a heart surgeon, hires his two sons, ages 16 and 18, to clean his
office four times a week. The two sons are legitimate employees and
do the work they were hired to do.
________ 57. A tax planner (for individual income taxation) does not need to
understand which one of the following tax factors?
a. Amount of income, deduction, and credit
b. Character of income, deduction, and credit
c. Source of income, deduction, and credit
d. Timing of income, deduction, and credit
e. Recognition of income, deduction, and credit
1
An Overview of Federal Taxation
Solutions to Test Bank
True or False
1
An Overview of Federal Taxation
Comprehensive Problems
Solutions to Comprehensive Problems
