Ms. Marple's books and records for 2011 reflect the following information:

Ms. Marple's books and records for 2011 reflect the following information:

Salary earned this year $65,000
Interest on savings account (credited to her account in 2011, withdrawn in 2012) 1,000
Interest on county bonds earned and collected in 2011 2,000

What is the amount Ms. Marple should include in her gross income in 2011?



A) $66,000
B) $67,000
C) $68,000
D) $65,000




Answer: A

Examples of income which are constructively received include all of the following except

Examples of income which are constructively received include all of the following except

A) interest credited to a savings account.
B) a check received after banking hours.
C) a paycheck received from employer, when employer does not have funds in the bank to cover the check.
D) dividends available on December 31; unclaimed dividends will be mailed out.



Answer: C

All of the following statements are true except

All of the following statements are true except

A) Under the cash method, prepaid income such as rent is usually taxed when received rather than when earned.
B) Municipal bond interest is taxable.
C) Alimony received by the taxpayer is taxable.
D) Income earned by selling goods on the Internet is taxable.



Answer: B

Norah, who gives music lessons, is a calendar year taxpayer using the cash basis method of accounting. On October 1 of this year, she received $1,200 for a one-year contract beginning on that date to provide 10 lessons. She gave 6 lessons this year. How much should Norah include in income this year?

Norah, who gives music lessons, is a calendar year taxpayer using the cash basis method of accounting. On October 1 of this year, she received $1,200 for a one-year contract beginning on that date to provide 10 lessons. She gave 6 lessons this year. How much should Norah include in income this year?

A) $0
B) $360
C) $720
D) $1,200



Answer: D

Bill and Hillary, husband and wife, file separate returns. Bill and Hillary live in a community property state that considers separate property income to be community income. Bill's salary is $82,000 and Hillary's salary is $80,000. Hillary receives dividend income of $7,000 from stock inherited from her parents. Bill receives interest income of $5,000 from bonds purchased with his salary after marriage. Bill and Hillary receive $10,000 dividend income from stock they purchased jointly. Bill's income would be

Bill and Hillary, husband and wife, file separate returns. Bill and Hillary live in a community property state that considers separate property income to be community income. Bill's salary is $82,000 and Hillary's salary is $80,000. Hillary receives dividend income of $7,000 from stock inherited from her parents. Bill receives interest income of $5,000 from bonds purchased with his salary after marriage. Bill and Hillary receive $10,000 dividend income from stock they purchased jointly. Bill's income would be

A) $92,000.
B) $93,000.
C) $94,500.
D) $97,000.



Answer: A

Frasier and Marcella, husband and wife, file separate returns. Frasier and Marcella live in a community property state that considers separate property income to be separate. Frasier's salary is $42,000 and Marcella's salary is $46,000. Marcella receives dividend income of $4,000 from stock inherited from her parents. Frasier receives interest income of $1,000 from bonds purchased with his salary after marriage. Frasier and Marcella receive $3,200 dividend income from stock they purchased jointly. Marcella's income would be

Frasier and Marcella, husband and wife, file separate returns. Frasier and Marcella live in a community property state that considers separate property income to be separate. Frasier's salary is $42,000 and Marcella's salary is $46,000. Marcella receives dividend income of $4,000 from stock inherited from her parents. Frasier receives interest income of $1,000 from bonds purchased with his salary after marriage. Frasier and Marcella receive $3,200 dividend income from stock they purchased jointly. Marcella's income would be

A) $50,000.
B) $50,100.
C) $51,100.
D) $51,600.




Answer: B

Which one of the following items is not considered gross income for tax purposes?

Which one of the following items is not considered gross income for tax purposes?

A) gambling winnings
B) illegal income
C) face amount of life insurance received due to the death of the insured
D) cash dividends



Answer: C

Social Security benefits are excluded from taxation for all taxpayers.

Social Security benefits are excluded from taxation for all taxpayers.

Answer: FALSE

Unemployment compensation is exempt from federal income tax.

Unemployment compensation is exempt from federal income tax.

Answer: FALSE

Income from illegal activities is taxable.

Income from illegal activities is taxable.

Answer: TRUE

Mike won $700 in a football pool. This amount is not taxable.

Mike won $700 in a football pool. This amount is not taxable.

Answer: FALSE

Becky wins a car and furniture on a television game show. The fair market value of these items is taxable to Becky.

Becky wins a car and furniture on a television game show. The fair market value of these items is taxable to Becky.

Answer: TRUE

With some exceptions, amounts withdrawn from a pension plan prior to the normal starting date are subject to a ten percent nondeductible penalty.

With some exceptions, amounts withdrawn from a pension plan prior to the normal starting date are subject to a ten percent nondeductible penalty.

Answer: TRUE

Payments from an annuity are not taxable until the taxpayer has recovered the purchase price of the annuity.

Payments from an annuity are not taxable until the taxpayer has recovered the purchase price of the annuity.

Answer: FALSE

Property settlements made incident to a divorce have no immediate tax consequences; that is, the transfer from one spouse to another is not taxable.

Property settlements made incident to a divorce have no immediate tax consequences; that is, the transfer from one spouse to another is not taxable.

Answer: TRUE

In order to be treated as alimony for tax purposes, payments must be made in cash.

In order to be treated as alimony for tax purposes, payments must be made in cash.

Answer: TRUE

Alimony received is taxable to the recipient while child support payments are not.

Alimony received is taxable to the recipient while child support payments are not.

Answer: TRUE

The recipient of a taxable stock dividend includes the value of the stock received in gross income and that amount becomes the basis for the stock received.

The recipient of a taxable stock dividend includes the value of the stock received in gross income and that amount becomes the basis for the stock received.

Answer: TRUE

Distributions in excess of a corporation's current and accumulated earnings and profits are treated as a nontaxable recovery of capital unless they exceed the basis of the stock.

Distributions in excess of a corporation's current and accumulated earnings and profits are treated as a nontaxable recovery of capital unless they exceed the basis of the stock.

Answer: TRUE

In 2011 and 2012, qualified dividends received by individuals are taxed at the same rate as ordinary income.

In 2011 and 2012, qualified dividends received by individuals are taxed at the same rate as ordinary income.

Answer: FALSE

Improvements to leased property made by a lessee are includable in the lessor's gross income only if made in lieu of rent or if rent is reduced because of the improvements.

Improvements to leased property made by a lessee are includable in the lessor's gross income only if made in lieu of rent or if rent is reduced because of the improvements.

Answer: TRUE

For a cash basis taxpayer, security deposits received on rental property are taxable to the landlord upon receipt.

For a cash basis taxpayer, security deposits received on rental property are taxable to the landlord upon receipt.

Answer: FALSE

Interest on the obligations of the U.S. government, states, territories, and U.S. possessions and their political subdivisions are tax-exempt.

Interest on the obligations of the U.S. government, states, territories, and U.S. possessions and their political subdivisions are tax-exempt.

Answer: FALSE

Gains realized from property transactions are included in gross income unless a nonrecognition rule applies.

Gains realized from property transactions are included in gross income unless a nonrecognition rule applies.

Answer: TRUE

An accrual basis taxpayer may defer advance payments for services if the payments are for services to be performed before the end of the tax year following the year of receipt.

An accrual basis taxpayer may defer advance payments for services if the payments are for services to be performed before the end of the tax year following the year of receipt.

Answer: TRUE

Under the accrual method of accounting, income is considered earned when all the events have occurred which fix the right to receive the income and when the amount of income can be determined with reasonable accuracy.

Under the accrual method of accounting, income is considered earned when all the events have occurred which fix the right to receive the income and when the amount of income can be determined with reasonable accuracy.

Answer: TRUE

Interest on Series E and Series EE U.S. savings bonds need not be reported until the bonds mature.

Interest on Series E and Series EE U.S. savings bonds need not be reported until the bonds mature.

Answer: True

Interest credited to a bank savings account is taxed regardless of whether or not it is withdrawn.

Interest credited to a bank savings account is taxed regardless of whether or not it is withdrawn.

Answer: TRUE

A check received after banking hours is considered constructively received by the payee even though the check can not be converted to cash.

A check received after banking hours is considered constructively received by the payee even though the check can not be converted to cash.

Answer: TRUE

A cash-basis taxpayer can defer income recognition by refusing to accept payment.

A cash-basis taxpayer can defer income recognition by refusing to accept payment.

Answer: FALSE

Under the cash method of accounting, income is reported in the year the taxpayer actually or constructively receives the income.

Under the cash method of accounting, income is reported in the year the taxpayer actually or constructively receives the income.

Answer: TRUE

The cash receipts and disbursements method of accounting is used by most individual taxpayers and most noncorporate businesses that do not have inventories.

The cash receipts and disbursements method of accounting is used by most individual taxpayers and most noncorporate businesses that do not have inventories.

Answer: TRUE

If a taxpayer's method of accounting does not clearly reflect income, the IRS may specify a different accounting method which must be used by the taxpayer.

If a taxpayer's method of accounting does not clearly reflect income, the IRS may specify a different accounting method which must be used by the taxpayer.

Answer: TRUE

Earnings of a minor child are taxed to the child regardless of the state's property law system.

Earnings of a minor child are taxed to the child regardless of the state's property law system.

Answer: TRUE

In community property states, income from separate property owned before marriage is always considered separate income after marriage.

In community property states, income from separate property owned before marriage is always considered separate income after marriage.

Answer: FALSE

For federal income tax purposes, income is allocated between a husband and wife depending on the state of residence.

For federal income tax purposes, income is allocated between a husband and wife depending on the state of residence.

Answer: TRUE

A taxpayer may not avoid responsibility for payment of income taxes by assigning the income to a third party.

A taxpayer may not avoid responsibility for payment of income taxes by assigning the income to a third party.

Answer: TRUE

The portion of a taxpayer's wages that are garnished by court order and forwarded to pay a delinquent bank loan are not taxable income to the taxpayer.

The portion of a taxpayer's wages that are garnished by court order and forwarded to pay a delinquent bank loan are not taxable income to the taxpayer.

Answer: FALSE

AAA Corporation distributes an automobile to Alexandria, a shareholder, in lieu of a cash dividend. Alexandria must report the value of the automobile as dividend income.

AAA Corporation distributes an automobile to Alexandria, a shareholder, in lieu of a cash dividend. Alexandria must report the value of the automobile as dividend income.

Answer: TRUE

Ellen, a CPA, prepares a tax return for Frank, a farmer, in exchange for twenty bushels of rice. Since no cash changed hands, neither taxpayer reports income.

Ellen, a CPA, prepares a tax return for Frank, a farmer, in exchange for twenty bushels of rice. Since no cash changed hands, neither taxpayer reports income.

Answer: FALSE

Gregory receives 100 shares of stock from his employer as a year-end bonus. The fair market value of the stock is included in Gregory's income for the year.

Gregory receives 100 shares of stock from his employer as a year-end bonus. The fair market value of the stock is included in Gregory's income for the year.

Answer: TRUE

Gross income may be realized when a taxpayer receives economic benefit even if no cash is received.

Gross income may be realized when a taxpayer receives economic benefit even if no cash is received.

Answer: TRUE

Gross income is limited to amounts received in the form of cash.

Gross income is limited to amounts received in the form of cash.

Answer: FALSE

Internal Revenue Code Section 61 provides an inclusive list of all possible items taxed under the Code.

Internal Revenue Code Section 61 provides an inclusive list of all possible items taxed under the Code.

Answer: FALSE

The wherewithal-to-pay concept provides that a tax should be collected when the taxpayer is most easily able to pay the tax.

The wherewithal-to-pay concept provides that a tax should be collected when the taxpayer is most easily able to pay the tax.

Answer: TRUE

Under the economist's definition, unrealized gains, as well as gifts and inheritances, are income.

Under the economist's definition, unrealized gains, as well as gifts and inheritances, are income.

Answer: TRUE

Except as otherwise provided, gross income means all income from whatever source derived.

Except as otherwise provided, gross income means all income from whatever source derived.

Answer: TRUE

Lester, a widower qualifying as a surviving spouse, has $209,000 of salary, five personal and dependency exemptions and itemizes deductions. Lester must use which form to report his taxable income?

Lester, a widower qualifying as a surviving spouse, has $209,000 of salary, five personal and dependency exemptions and itemizes deductions. Lester must use which form to report his taxable income?

A) Form 1040ES
B) Form 1040EZ
C) Form 1040A
D) Form 1040




Answer: D

Form 4868, a six-month extension of time to file, allows a taxpayer to

Form 4868, a six-month extension of time to file, allows a taxpayer to

A) avoid interest on underpayment of taxes due.
B) extend the filing date of the return as well as payment of the tax due.
C) extend the filing date of the return but the estimated amount of tax due must still be paid by the original due date of the return.
D) extend the filing date only at the discretion of the IRS.




Answer: C

A taxpayer can receive innocent spouse relief if

A taxpayer can receive innocent spouse relief if

A) the understated tax is attributable to erroneous items of the other spouse.
B) the innocent spouse did not know and had no reason to know that there was an understatement of tax.
C) under the circumstances, it would be inequitable to hold the innocent spouse liable for the understated tax.
D) All of the above.




Answer: D

In the following situations, a married couple may prefer to file separately rather than jointly:

In the following situations, a married couple may prefer to file separately rather than jointly:

A) The 7.5% floor for deducting medical expenses will be lower.
B) A couple is separated and contemplating divorce.
C) One spouse can be held responsible for the entire tax liability.
D) All of the above




Answer: D

In order to shift the taxation of dividend income from a parent to a child,

In order to shift the taxation of dividend income from a parent to a child,

A) the parent must direct the corporation to pay the dividend to the child.
B) the parent must transfer ownership of the stock to the child.
C) the parent can deposit the dividend in the child's bank account.
D) all of the above will result in shifting the taxation to the child.




Answer: B

In 2011, if an individual with a marginal tax rate of 15% has a long-term capital gain, it is taxed at

In 2011, if an individual with a marginal tax rate of 15% has a long-term capital gain, it is taxed at

A) 0%.
B) 5%.
C) 10%.
D) 15%.





Answer: A

Ray is starting a new business and trying to decide between a corporation, S corporation and partnership. Which of the following statements regarding his decision is correct?

Ray is starting a new business and trying to decide between a corporation, S corporation and partnership. Which of the following statements regarding his decision is correct?

A) An S corporation owner must pay income taxes only on the salary received.
B) A partner in a partnership is taxed on his or her share of partnership income.
C) A shareholder in a C corporation is taxed on his or her share of corporate income.
D) S corporations pay taxes on their current year income.




Answer: B

A corporation has revenue of $350,000 and deductible business expenses of $240,000. What is the federal income tax, before credits?

A corporation has revenue of $350,000 and deductible business expenses of $240,000. What is the federal income tax, before credits?

A) $16,500
B) $22,500
C) $26,150
D) $42,900




Answer: C

Vincent, age 12, is a dependent of his parents. During 2011, Vincent's earned income from wages is $2,600 and Vincent received $3,000 of interest income. The parent's marginal rate is 28% and Vincent's marginal rate is 10%. Vincent's tax is

Vincent, age 12, is a dependent of his parents. During 2011, Vincent's earned income from wages is $2,600 and Vincent received $3,000 of interest income. The parent's marginal rate is 28% and Vincent's marginal rate is 10%. Vincent's tax is

A) $-0-.
B) $270.
C) $308.
D) $468.




Answer: D

Frank, age 17, received $4,000 of dividends and $1,500 from a part-time job. Frank is a dependent of his parents who are in the 28% percent bracket. Frank's taxable income is

Frank, age 17, received $4,000 of dividends and $1,500 from a part-time job. Frank is a dependent of his parents who are in the 28% percent bracket. Frank's taxable income is

A) $0
B) $350.
C) $400.
D) $3,700.




Answer: D

Michelle, age 20, is a full-time college student with earned income from wages of $5,200 and interest income of $700. Michelle's parents provide more than half of Michelle's support. Michelle's taxable income is

Michelle, age 20, is a full-time college student with earned income from wages of $5,200 and interest income of $700. Michelle's parents provide more than half of Michelle's support. Michelle's taxable income is

A) $0.
B) $100.
C) $400.
D) $5,700.




Answer: C

Elise, age 20, is a full-time college student with earned income from wages of $4,400 and interest income of $500. Elise's parents provide more than half of her support. Elise's taxable income is

Elise, age 20, is a full-time college student with earned income from wages of $4,400 and interest income of $500. Elise's parents provide more than half of her support. Elise's taxable income is

A) $0.
B) $200.
C) $500.
D) $3,950.




Answer: B

Keith, age 17, is a dependent of his parents. During 2011, he received $3,000 of dividend income. The parent's marginal rate is 28% and Keith's rate is 10%. Keith's tax is

Keith, age 17, is a dependent of his parents. During 2011, he received $3,000 of dividend income. The parent's marginal rate is 28% and Keith's rate is 10%. Keith's tax is

A) $-0-.
B) $165.
C) $205.
D) $300.




Answer: B