TEST BANK FOR Fundamentals of Taxation for Individuals
A Practical Approach, Gregory A. Carnes, Suzanne
Youngberg
Chapter 1-18
Chapter 1 The Professional Practice of Taxation
1) Which of the following is false about tax planning?
A) The appropriate goal for tax planning is to maximize after-tax income.
B) The appropriate goal for tax planning is to minimize a taxpayer's tax liability for the year.
C) Once a taxpayer understands the tax consequences of a particular transaction, they can move on
to the tax planning stage.
D) Tax evasion is not a tax planning strategy.
Answer: B
Explanation: Minimizing a taxpayer's liability is not the appropriate goal for tax planning
because if that were the goal, then the ultimate success would be to reduce a taxpayer's tax liability
to zero–actually an easy goal to meet. If a taxpayer has no income for the year, then there would be
no tax liability, and you will have minimized their taxes. But your client will also be a very poor
and hungry person, so this cannot be the proper goal.
Diff: 1
Learning Objective: LO 1.1
AACSB / AICPA: Knowledge / Accounting Competencies
Bloom's: Knowledge
Section Reference: Sec. 1.1
Time on Task: 5 min
2) Jessica has received several job offers from various accounting firms located in 4 different
states. She has performed an analysis to determine her income, her non-income tax costs (e.g. cost
of living, etc.) and income tax. Jessica is trying to make a decision on which offer to accept, and
she has asked for your advice. Based on the appropriate goal of tax planning, which of the
following states would you advise Jessica to choose?
Gross Wages Non-Income Tax Costs Income Tax
California 120,000 52,000 24,000
New York 100,000 37,000 20,000
Virginia 70,000 10,800 10,500
Texas 50,000 6,000 5,000
A) Texas
B) California
C) Virginia
D) New York
Answer: C
Explanation: The appropriate goal for tax planning is to maximize after-tax income. After-tax
income is net income after reducing revenue for all expenses, including federal income taxes. See
table below for calculation of after-tax income for each state. With that in mind, you should advise
1
,Jessica to choose Virginia because doing so maximizes her after-tax income. The state with the
lowest income tax (i.e., Texas) is not the right answer because minimizing a taxpayer's liability is
not the appropriate goal for tax planning because if that were the goal, then the ultimate success
would be to reduce a taxpayer's tax liability to zero–an easy goal to meet. If a taxpayer has no
income for the year, then there would be no tax liability, and you will have minimized their taxes.
But your client will also be a very poor and hungry person, so this cannot be the proper goal.
Gross Non-Income After-Tax
Wages Tax Costs Income Tax Income
(A) (B) (C) (D) = (A) - (B) - (C)
California 20,000 52,000 24,000 44,000
New York 100,000 37,000 20,000 43,000
Virginia 70,000 10,800 10,500 48,700
Texas 50,000 6,000 5,000 39,000
Diff: 2
Learning Objective: LO 1.1
AACSB / AICPA: Analytic / Accounting Competencies
Bloom's: Application
Section Reference: Sec. 1.1
Time on Task: 8 min
3) Which of the following is not correct regarding tax and non-tax costs?
A) Both tax and non-tax costs must be considered when making financial and investment
decisions.
B) Tax costs include any type of tax paid to a local, state, federal, or foreign government.
C) Non-tax costs are all costs other than tax costs.
D) Effective tax planning requires prioritizing tax costs.
Answer: D
Explanation: Effective tax planning requires consideration of both tax and non-tax costs.
Diff: 1
Learning Objective: LO 1.1
AACSB / AICPA: Knowledge / Accounting Competencies
Bloom's: Knowledge
Section Reference: Sec. 1.1
Time on Task: 5 min
4) Samson's wages are $100,000. He lives in Maryland and his expenses include $25,000 rent,
$12,000 other living expenses, $27,000 income tax, $6,200 payroll tax and $5,500 property tax.
What are Samson's tax costs?
A) $27,000
B) $33,200
C) $61,300
D) $38,700
Answer: D
Explanation: $38,700 = $27,000 + $6,200 + $5,500. Tax costs include any type of tax paid to a
local, state, federal, or foreign government.
Diff: 1
2
,Learning Objective: LO 1.1
AACSB / AICPA: Analytic / Accounting Competencies
Bloom's: Application
Section Reference: Sec. 1.1
Time on Task: 5 min
5) Samson's wages are $100,000. He lives in Maryland and his expenses include $25,000
mortgage interest, $12,000 other living expenses, $27,000 income tax, $6,200 payroll tax and
$5,500 property tax. What is Samson's non-tax costs?
A) $37,000
B) $12,000
C) $61,300
D) $38,700
Answer: A
Explanation: $37,000 = $25,000 + $12,000. Non-tax costs are all costs other than tax costs. Tax
costs include any type of tax paid to a local, state, federal, or foreign government.
Diff: 1
Learning Objective: LO 1.1
AACSB / AICPA: Analytic / Accounting Competencies
Bloom's: Application
Section Reference: Sec. 1.1
Time on Task: 5 min
6) Samson's wages are $100,000. He lives in Maryland and his non-tax costs include $25,000 rent
and $12,000 other living expenses. His tax costs include $27,000 income tax, $6,200 payroll tax
and $5,500 property tax. What is Samson's after-tax income?
A) $73,000
B) $24,300
C) $61,300
D) $29,000
Answer: B
Explanation: $24,300 = $100,000 - $25,000 - $12,000 - $27,000 - $6,200 - $5,500. After-tax
income is net income after reducing revenue for all expenses, including federal income taxes.
Diff: 2
Learning Objective: LO 1.1
AACSB / AICPA: Analytic / Accounting Competencies
Bloom's: Application
Section Reference: Sec. 1.1
Time on Task: 8 min
7) Which of the following statements is false?
A) Individuals file their individual income taxes on Form 1040.
B) Income lines on the Form 1040 are Line 1 - 9
C) Deduction lines on Form 1040 are Line 10, 12 - 13
D) Demographic information is included on the second page of the Form 1040
Answer: D
Explanation: The top half of page 1 of Form 1040 is for demographic information.
Diff: 1
Learning Objective: LO 1.2
3
, AACSB / AICPA: Analytic / Accounting Competencies
Bloom's: Application
Section Reference: Sec. 1.2
Time on Task: 5 min
8) Which of the following can be found on Schedule 1 of the 1040?
A) Student loan interest deduction
B) Self-employment tax
C) Repayment of first-time homebuyer credit
D) Foreign tax credit
Answer: A
Explanation: Schedule 1 is used to report additional income and adjustments to income. Student
loan interest deduction can be found on Schedule 1. Foreign tax credits can be found on Schedule
3. Self-employment tax and repayment of first-time homebuyer credit can be found on Schedule 2.
Diff: 2
Learning Objective: LO 1.2
AACSB / AICPA: Knowledge / Accounting Competencies
Bloom's: Knowledge
Section Reference: Sec. 1.2
Time on Task: 5 min
9) Which of the following can be found on Schedule 2 of the 1040?
A) Student loan interest deduction
B) Taxable refunds or credits
C) Repayment of first-time homebuyer credit
D) Foreign tax credit
Answer: C
Explanation: Schedule 2 is used to report additional taxes. Repayment of first-time homebuyer
credit can be found on Schedule 2. Student loan interest deduction and Taxable refunds or credits
can be found on Schedule 1. Foreign tax credits can be found on Schedule 3.
Diff: 2
Learning Objective: LO 1.2
AACSB / AICPA: Knowledge / Accounting Competencies
Bloom's: Knowledge
Section Reference: Sec. 1.2
Time on Task: 5 min
10) Which of the following can be found on Schedule 3 of the 1040?
A) Student loan interest deduction
B) Self-employment tax
C) Repayment of first-time homebuyer credit
D) Foreign tax credit
Answer: D
Explanation: Schedule 3 is used to report additional payments and credits. Foreign tax credits can
be found on Schedule 3. Student loan interest deduction can be found on Schedule 1.
Self-employment tax and repayment of first-time homebuyer credit can be found on Schedule 2.
Diff: 2
Learning Objective: LO 1.2
4
A Practical Approach, Gregory A. Carnes, Suzanne
Youngberg
Chapter 1-18
Chapter 1 The Professional Practice of Taxation
1) Which of the following is false about tax planning?
A) The appropriate goal for tax planning is to maximize after-tax income.
B) The appropriate goal for tax planning is to minimize a taxpayer's tax liability for the year.
C) Once a taxpayer understands the tax consequences of a particular transaction, they can move on
to the tax planning stage.
D) Tax evasion is not a tax planning strategy.
Answer: B
Explanation: Minimizing a taxpayer's liability is not the appropriate goal for tax planning
because if that were the goal, then the ultimate success would be to reduce a taxpayer's tax liability
to zero–actually an easy goal to meet. If a taxpayer has no income for the year, then there would be
no tax liability, and you will have minimized their taxes. But your client will also be a very poor
and hungry person, so this cannot be the proper goal.
Diff: 1
Learning Objective: LO 1.1
AACSB / AICPA: Knowledge / Accounting Competencies
Bloom's: Knowledge
Section Reference: Sec. 1.1
Time on Task: 5 min
2) Jessica has received several job offers from various accounting firms located in 4 different
states. She has performed an analysis to determine her income, her non-income tax costs (e.g. cost
of living, etc.) and income tax. Jessica is trying to make a decision on which offer to accept, and
she has asked for your advice. Based on the appropriate goal of tax planning, which of the
following states would you advise Jessica to choose?
Gross Wages Non-Income Tax Costs Income Tax
California 120,000 52,000 24,000
New York 100,000 37,000 20,000
Virginia 70,000 10,800 10,500
Texas 50,000 6,000 5,000
A) Texas
B) California
C) Virginia
D) New York
Answer: C
Explanation: The appropriate goal for tax planning is to maximize after-tax income. After-tax
income is net income after reducing revenue for all expenses, including federal income taxes. See
table below for calculation of after-tax income for each state. With that in mind, you should advise
1
,Jessica to choose Virginia because doing so maximizes her after-tax income. The state with the
lowest income tax (i.e., Texas) is not the right answer because minimizing a taxpayer's liability is
not the appropriate goal for tax planning because if that were the goal, then the ultimate success
would be to reduce a taxpayer's tax liability to zero–an easy goal to meet. If a taxpayer has no
income for the year, then there would be no tax liability, and you will have minimized their taxes.
But your client will also be a very poor and hungry person, so this cannot be the proper goal.
Gross Non-Income After-Tax
Wages Tax Costs Income Tax Income
(A) (B) (C) (D) = (A) - (B) - (C)
California 20,000 52,000 24,000 44,000
New York 100,000 37,000 20,000 43,000
Virginia 70,000 10,800 10,500 48,700
Texas 50,000 6,000 5,000 39,000
Diff: 2
Learning Objective: LO 1.1
AACSB / AICPA: Analytic / Accounting Competencies
Bloom's: Application
Section Reference: Sec. 1.1
Time on Task: 8 min
3) Which of the following is not correct regarding tax and non-tax costs?
A) Both tax and non-tax costs must be considered when making financial and investment
decisions.
B) Tax costs include any type of tax paid to a local, state, federal, or foreign government.
C) Non-tax costs are all costs other than tax costs.
D) Effective tax planning requires prioritizing tax costs.
Answer: D
Explanation: Effective tax planning requires consideration of both tax and non-tax costs.
Diff: 1
Learning Objective: LO 1.1
AACSB / AICPA: Knowledge / Accounting Competencies
Bloom's: Knowledge
Section Reference: Sec. 1.1
Time on Task: 5 min
4) Samson's wages are $100,000. He lives in Maryland and his expenses include $25,000 rent,
$12,000 other living expenses, $27,000 income tax, $6,200 payroll tax and $5,500 property tax.
What are Samson's tax costs?
A) $27,000
B) $33,200
C) $61,300
D) $38,700
Answer: D
Explanation: $38,700 = $27,000 + $6,200 + $5,500. Tax costs include any type of tax paid to a
local, state, federal, or foreign government.
Diff: 1
2
,Learning Objective: LO 1.1
AACSB / AICPA: Analytic / Accounting Competencies
Bloom's: Application
Section Reference: Sec. 1.1
Time on Task: 5 min
5) Samson's wages are $100,000. He lives in Maryland and his expenses include $25,000
mortgage interest, $12,000 other living expenses, $27,000 income tax, $6,200 payroll tax and
$5,500 property tax. What is Samson's non-tax costs?
A) $37,000
B) $12,000
C) $61,300
D) $38,700
Answer: A
Explanation: $37,000 = $25,000 + $12,000. Non-tax costs are all costs other than tax costs. Tax
costs include any type of tax paid to a local, state, federal, or foreign government.
Diff: 1
Learning Objective: LO 1.1
AACSB / AICPA: Analytic / Accounting Competencies
Bloom's: Application
Section Reference: Sec. 1.1
Time on Task: 5 min
6) Samson's wages are $100,000. He lives in Maryland and his non-tax costs include $25,000 rent
and $12,000 other living expenses. His tax costs include $27,000 income tax, $6,200 payroll tax
and $5,500 property tax. What is Samson's after-tax income?
A) $73,000
B) $24,300
C) $61,300
D) $29,000
Answer: B
Explanation: $24,300 = $100,000 - $25,000 - $12,000 - $27,000 - $6,200 - $5,500. After-tax
income is net income after reducing revenue for all expenses, including federal income taxes.
Diff: 2
Learning Objective: LO 1.1
AACSB / AICPA: Analytic / Accounting Competencies
Bloom's: Application
Section Reference: Sec. 1.1
Time on Task: 8 min
7) Which of the following statements is false?
A) Individuals file their individual income taxes on Form 1040.
B) Income lines on the Form 1040 are Line 1 - 9
C) Deduction lines on Form 1040 are Line 10, 12 - 13
D) Demographic information is included on the second page of the Form 1040
Answer: D
Explanation: The top half of page 1 of Form 1040 is for demographic information.
Diff: 1
Learning Objective: LO 1.2
3
, AACSB / AICPA: Analytic / Accounting Competencies
Bloom's: Application
Section Reference: Sec. 1.2
Time on Task: 5 min
8) Which of the following can be found on Schedule 1 of the 1040?
A) Student loan interest deduction
B) Self-employment tax
C) Repayment of first-time homebuyer credit
D) Foreign tax credit
Answer: A
Explanation: Schedule 1 is used to report additional income and adjustments to income. Student
loan interest deduction can be found on Schedule 1. Foreign tax credits can be found on Schedule
3. Self-employment tax and repayment of first-time homebuyer credit can be found on Schedule 2.
Diff: 2
Learning Objective: LO 1.2
AACSB / AICPA: Knowledge / Accounting Competencies
Bloom's: Knowledge
Section Reference: Sec. 1.2
Time on Task: 5 min
9) Which of the following can be found on Schedule 2 of the 1040?
A) Student loan interest deduction
B) Taxable refunds or credits
C) Repayment of first-time homebuyer credit
D) Foreign tax credit
Answer: C
Explanation: Schedule 2 is used to report additional taxes. Repayment of first-time homebuyer
credit can be found on Schedule 2. Student loan interest deduction and Taxable refunds or credits
can be found on Schedule 1. Foreign tax credits can be found on Schedule 3.
Diff: 2
Learning Objective: LO 1.2
AACSB / AICPA: Knowledge / Accounting Competencies
Bloom's: Knowledge
Section Reference: Sec. 1.2
Time on Task: 5 min
10) Which of the following can be found on Schedule 3 of the 1040?
A) Student loan interest deduction
B) Self-employment tax
C) Repayment of first-time homebuyer credit
D) Foreign tax credit
Answer: D
Explanation: Schedule 3 is used to report additional payments and credits. Foreign tax credits can
be found on Schedule 3. Student loan interest deduction can be found on Schedule 1.
Self-employment tax and repayment of first-time homebuyer credit can be found on Schedule 2.
Diff: 2
Learning Objective: LO 1.2
4
