C237 Taxation I Updated Actual Questions And Correct Answers

C237 TAXATION I UPDATED ACTUAL QUESTIONS AND
CORRECT ANSWERS

Question:
1. Define each component of the individual income tax
formula

Answer:
income from whatever source derived
exclusions=any item of income that the tax laws says is not taxable
gross income=all income received in cash, property, and services from whatever
source derived and from which the taxpayer derives a direct economic benefit
deductions for AGI=expense one would see on an income statement (wages,
repairs, depreciation) and some nonbusiness deductions (alimony, moving
expenses, IRA contributions)
AGI=measure of taxable income that falls between gross
income and taxable income
deductions from AGI=itemized deductions, standard deductions,
personal/dependent exemptions
taxable income=for individuals, taxable income is adjusted gross income reduced
by deductions from adjusted gross income
tax rate (from table)=rate applied to taxable income to determine gross tax
gross tax=tax due before tax credits or prepayments
tax credits=amounts that can be deducted from the gross tax to arrive at net tax
due or refund due
prepayments
net tax payable or refund due

Question:
2. Calculate an individual's income tax when provided with
monetary amounts for each component of the tax
formula

Answer:
income from whatever source derived
- exclusions
= gross income
- deductions for AGI
= AGI
- deductions from AGI (exemptions & deductions)
= taxable income
x tax rate (from table)
= gross tax
- credits
- prepayments
= net tax payable or refund due

,Question:
3. Identify three conditions that must be met for income to
be taxable

Answer:
there must be economic benefit
income must be realized (when earning process is complete)
income must be recognized (special tax provisions allow for exclusion of some
income items)

Question:
4. Identify the primary accounting methods for individual
tax purposes

Answer:
cash method (income is reported in the year the taxpayer actually receives the
cash not the year it was earned)
accrual method (report income in the year it was earned)

Question:
5. Define gross income in accordance with IRC Section 61(a)

Answer:
General Definition.-Except as otherwise provided in this subtitle, gross income
means all income from whatever source derived, including (but not limited to) the
following items: Compensation for services, including fees, commissions, fringe
benefits, and similar items Gross income derived from business Gains derived
from dealings in property Interest Rents Royalties Dividends Alimony and
separate maintenance payments Annuities Income from life insurance and
endowment contracts Pensions Income from discharge of indebtedness
Distributive share of partnership gross income Income in respect of a decedent
Income from an interest in an estate or trust

Question:
6. Explain tax planning strategies individuals can use to
minimize their tax liability

Answer:
shifting income (from one family member in a higher tax bracket to one in a lower
tax bracket)
splitting income
maximizing itemized deductions
filing joint or separate returns

, Question:
7. Identify items that the IRS does not define as income.

Answer:
unrealized income
self-help income
rental value of personal-use property
gross selling price of property

Question:
8. Identify various types of major statutory exclusions from
gross income.

Answer:
Gifts and inheritances (Sec. 102) Life insurance proceeds (Sec. 101) Public
assistance payments Qualified adoption expenses (Sec. 137) Payments for
personal physical sickness and injury (Sec. 104) Discharge of indebtedness during
bankruptcy or insolvency (Sec. 108) Gain on sale of personal residence (Sec. 121)
Partial exclusions for Social Security benefits (Sec. 86)

Question:
9. Identify the difference between a realized gain (or loss)
and a recognized gain (or loss)

Answer:
realized gain (loss)=the amount realized from the sale of property is compared
with the adjusted basis of that property; amount realized is the sum of FMV plus
any debt received by the buyer
recognized gain (loss)=amount of gain or loss reported on tax return (may not be
recognized due to special tax provisions)

Question:
10. Calculate property basis.

Answer:
initial basis plus capital additions minus capital recoveries=adjusted basis
Cost is the amount paid in cash or FMV of property received in exchange
if gift - basis is usually the same as the donor's basis (gift tax paid by donor may
increase basis)
if inheritance - FMV on date of death or AVD (6 months after death)