11/05/2024 12:06 PM
Accy 405 – Tax Exam Questions With
Correct Answers
Tax - answer✔Involuntary contribution required by law to finance the function of goverment
4 Characteristics of Tax - answer✔1. Payment required by law
2. Pursuant to legislative power to tax
3. Payment to provide revenue for public/governmental purposes
4. No specific benefits received as a result of payment. Payment is not a fine or a penalty
Adam Smith identifies 4 Basic Requirements for a "Good Tax System"? - answer✔1. Equality
2. Certainty
3. Convenience
4. Economy
Adam Smith identifies Equality as 1 of 4 Basic Requirements for a "Good Tax System". Elaborate? -
answer✔A tax should be based on the taxpayer's ability to pay.
Horizontal Equality - answer✔2 similarly situated taxpayers are taxed the same.
Ex: A & B each earn $15,000 a year and pay $1,500 in tax because they are treated the same. But if A is
married & B is single, we then need vertical equality
Vertical Equality - answer✔Taxpayers with different situations are taxed differently, but fairly in relation
to their ability to pay. Who has the greatest ability to pay tax should pay the greatest portion of tax.
Ex: A & B each earn $15,000 a year. A is married, supports 3 children. B is single. A pays $500, B pays
$1,500
Adam Smith identifies Certainty as 1 of 4 Basic Requirements for a "Good Tax System". Elaborate? -
answer✔Taxpayer should know how much tax to pay, when & how it should be paid.
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11/05/2024 12:06 PM
Adam Smith identifies Convenience as 1 of 4 Basic Requirements for a "Good Tax System". Elaborate? -
answer✔Tax should be levied when it's best convenient for taxpayer to pay, which is when he or she
receives income.
Adam Smith identifies Economy as 1 of 4 Basic Requirements for a "Good Tax System". Elaborate? -
answer✔Tax should have minimum compliance & administrative costs so that the amount that goes to
the US Treasury is as large as possible.
Taxable Income - answer✔Tax base for federal income
Tax = Tax base x Tax rate - answer✔-
Marginal Tax Rate - answer✔Rate of tax to be paid on the next dollar of income
Average Tax Rate - answer✔Total Tax / Taxable Income
Effective Tax Rate - answer✔Total Tax / Economic Income
Economic Income = Taxable Income + Nontaxable Income
Proportional Rate Structure - answer✔Flat tax.
Marginal tax rate & average tax rate are the same for all levels of tax base. As the tax base increase,
total tax paid increases @ a constant rate.
Regressive Rate Structure - answer✔Taxpayers pay a lower rate of tax as income increases. Average tax
rate decreases as tax base increases.
Progressive Rate Structure - answer✔Taxpayers pay a higher rate of tax as income increases. Average
tax increases as the tax base increases.
The US Income Tax is progressive
FICA (theories) - answer✔= Federal Insurance Contribution Act
= Social Security Tax
= Tax levied on wages & salaries earned
Purpose: to provide retirement benefits to all individuals who contributed to the system (medical
insurance, disability & survivor's benefits)
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11/05/2024 12:06 PM
Imposed on employees & self-employed individuals (twice the employee tax)
FICA rates - answer✔1. Old Age, Survivors, Disability Insurance (OASDI): 6.2% on the first $128,400
2. Medical Health Insurance (MHI): 1.45%, not capped
How do FICA rates apply for self-employed individuals? - answer✔- OASDI: 12.4%% on the first $128,400
- MHI: 2.9%, not capped
BUT they are allowed to deduct 1/2 of their tax as a business expense
Sales Tax - answer✔Proportional Rate Structure (Flat Rate)
Excise Taxes - answer✔Imposed on quantity (gallons of gasoline...)
Gift Taxes - answer✔Paid by donor of property - person making the gift. The donee is NOT subject to
either the gift tax or income tax on the gift (FVM)
Internal Revenue Code of 1986 - answer✔Current statutory source of federal income tax law
Deferral - answer✔Item that does not affect the current period's TI but will affect the future period's TIs.
The difference between the financial accounting income & taxable income is what? - answer✔- TI is
based on tax law, which does not base on GAAP. Income tax attempts to collect tax on income in the
period during which the taxpayer has the resources to pay the tax.
- Financial accounting income does not care about resources to pay.
Ex: prepaid rental income may be amortized over the lease period for financial reporting, but must be
reported in full the year it is collected for tax reporting.
Ordinary Income - answer✔Recurring income earned by a taxpayer for a tax year
Tax credit - answer✔Direct reduction in the income tax liability
A & B, whose marginal tax rate is 24%, paid $1000 for child care. What is the difference if the
expenditure is treated as a credit or a prepayment? - answer✔As credit, tax is reduced by full $1000
As prepayment, tax is reduced by $1000*24%