WGU C237 Taxation I Comprehensive Actual Exam Questions With Detailed Correct Answers.

Describe the history of taxation in the US - correct answer 1861 - to finance civil war 1894 - Income tax reinstated but ruled unconstitutional 1895 1913 - 16th amendment 1940 - WWII mass tax 1943 - pay as you go withholding 1986 - Internal Revenue Code Identify the sources of tax law - correct answer Legislative Branch - Internal Revenue Code (Top) - Congressional Committee Reports Executive - Income Tax Regulations - Revenue Rulings - Revenue Procedures - Letter Rulings Judicial - Court Decisions Describe the criteria of an equitable tax structure - correct answer Equity - equality Certainty - Stability and certainty of amount of taxes Convenience - no burden of records and compliance Economy- minimal compliance and administrative costs Simplicity - understandability Describe the structure of individual income tax rates - correct answer Progressive - tax increases as tax base increases Proportional - flat tax Regressive - decreases as tax base increases Calculate an individuals federal income tax from his or her taxable income - correct answer Total Income - Exclusions = Gross income - Deductions - Exemptions = Taxable income X tax rate = Income tax before credits - Tax Credits = Total tax liabilty - Prepayments =Bal due or refund Distinguish between various types of taxes - correct answer State Tax Local Income Franchise Tax Wealth transfer tax Gift tax Federal Estate tax Property tax Federal excise tax - customs Sales Tax Identify different types of entities that are subject to taxation in the US - correct answer -Tax paying entities Individuals C Corps -Flow through Entities sole proprietorship Partnerships S Corps LLC LL Partnerships Trusts Describe the administrative procedures of the IRS - correct answer Enforcement procedures - verify accuracy and audit Statute of limitations - 3 years; up to 6 years if off by 25%; no limit for civil fraud Describe various components of a tax practice - correct answer Tax Compliance and Procedure Tax Research Tax Planning and Consulting Financial planning Define each component of the individual income tax formula - correct answer Income Exclusion - any nontaxable income Deductions - for AGI - expenses connected with business; from AGI - personal expenses Adjusted Gross Income Itemized Deductions and Standard Deductions Personal exemption Taxable Income Tax Rates and Gross Tax Credit and prepayments - some credits are refundable Identify three conditions that must be met for income to be taxable - correct answer Economic benefit Realization of Income Recognition of Income Identify the primary accounting methods for individual tax purposes - correct answer cash receipts and disbursements method accrual method hybrid method Define gross income in accordance with IRC Sec 61a - correct answer all income from whatever source derived, including (but not limited to) the listed items of income. or income reduced by exclusions Explain tax planning strategies individuals can use to minimize their tax liabilities - correct answer Shifting Income Maximizing Itemized Deductions MFJ vs MJS Splitting Income Identify terms that the IRS does not define as income - correct answer Unrealized Income Self-Help Income Rented value use of personal property Gross sale price of property Identify various types of major statutory exclusions from gross income - correct answer Gifts and Inheritance Life Insurance Welfare Certain scholarships qualified adoption expenses person injury payments discharge from indebtedness 5 Identify the difference between a realized gain and a recognized gain - correct answer Realized G/L - Amount Realized - Adjusted Basis Recognized gain = amount actually reported on tax = Realized gain Cost basis - correct answer Cash + FMV + Shipping, installation, insurance in transit Gift Gain/Loss - correct answer Basis = the donor's A/B Gifts-generally carry donors basis Bequeth = on date of death Gift Tax added to Donor's A/B - correct answer = Gift tax paid x (FMV at time of give - Donor's A/B)/ (Gift - Annual Exclusion) Basiss for business purposes - correct answer = lower of FMV on conversion or Owner's A/B Calculate property basis - correct answer Initial Basis + Capital additions - Capital recoveries = Adjusted basis All property is a capital asset except - correct answer Inventory; Accts rcvable; supplies, letters; copyrights;1231 assets calculate the tax treatment of capital gains and losses - correct answer 3000 max moss per year; excess carried forward