Federal Taxation FINAL Exam With Questions
And 100% Correct Answers
Which of the following characteristics would not be used to describe the generic nature of a "tax"?
a. Normally, there is a direct relationship between the exaction of revenue and the benefits received
by the taxpayer.
b. A tax is levied on the basis of predetermined criteria.
c. A tax is levied on the basis of recurring periods.
d. A tax may be distinguished from a penalty because it is not specifically designed to control or stop a
particular activity.
e. At least in the United States, taxes are often used to meet certain social as well as economic goals.
a. There is no direct relationship between the exaction of revenue and any benefit to be received by
the taxpayer.
Which one of the following statements is not true concerning tax rates?
a. A proportional tax rate is one in which an increasing percentage rate is applied to increasing
increments of the tax base.
b. The marginal tax rate of any rate structure is that percentage at which the next dollar added to the
tax base will be taxed.
c. The average tax rate is the percentage of taxable income paid in tax.
d. The effective tax rate is the percentage of total income paid in tax.
e. An individual cannot pay more in Federal income taxes than he reports as taxable income unless his
marginal tax rate exceeds 100 percent.
a. A proportional tax rate is one that remains as a constant percentage regardless of the size of the
tax base. A progressive tax rate structure is one in which an increasing percentage rate is applied to
increasing increments of the tax base.
T has a tax base of $30,000 and pays a tax of $2,500 on the first $25,000 and $750 on the next $5,000
(a fictitious rate schedule). This is an example of what type of tax rate?
a. Proportional
b. Progressive
c. Regressive
d. Neutral
e. None of the above
b. A progressive tax rate structure is one in which an increasing percentage rate is applied to
increasing increments of the tax base. In the problem, a 10% tax rate was applied to the first $25,000,
and a 15% rate to the next $5,000.
T has a tax base of $30,000 and pays a tax of $2,500 on the first $25,000 and $750 on the next $5,000
(a fictitious rate schedule). T has a marginal tax rate of
a. 10 percent.
b. 15 percent.
c. 20 percent.
d. 10.83 percent.
e. None of the above.
b. The marginal tax rate of a tax is that percentage at which the next dollar added to the tax base will
be taxed. In this problem, $750/$5,000 = 15%
T has a tax base of $30,000 and pays a tax of $2,500 on the first $25,000 and $750 on the next $5,000
(a fictitious rate schedule). T has an average tax rate of
a. 10 percent.
b. 15 percent.
c. 20 percent.
,d. 10.83 percent.
e. None of the above.
. d. Average tax rates equal the tax divided by the tax base. Here (2500+750= 3250)/$30,000 =
10.83%.
Which one of the following statements is true?
a. Tax credits reduce tax liability at the marginal tax rate.
b. Both tax credits and tax deductions are offsets to taxable income.
c. Dollar for dollar, tax credits are more valuable than tax deductions.
d. The tax impact of an additional dollar of tax base is determined by multiplying by the average tax
rate.
e. "I can't afford to earn more because it will throw me into a higher tax bracket and I will keep less
than I do now after taxes."
c. A tax credit is a dollar-for-dollar offset against a tax liability. By contrast, a deduction's dollar value
is arrived at by determining the tax on taxable income with and without the deduction, the difference
being its value. Since the tax rate is not 100, the value of a deduction is less than that of a credit.
B, an unmarried taxpayer, knows that her last dollar of income in the current year will be taxed at 10
percent. D, an unmarried taxpayer, knows that his last dollar of current year income will be taxed at
25 percent. Which of the following statements is not true taking into account the above assumptions?
a. D's marginal tax rate is greater than B's.
b. The value of a $2,000 IRA deduction to D will be less than the same amount contributed by B to an
IRA.
c. If both parties suffer a $100,000 business loss that is fully deductible, the impact of the deductible
loss will be greater on D's return than on B's return.
d. B will pay 10 percent of her taxable income to the government.
e. D will not pay 25 percent of his taxable income to the government.
b. The value of a deduction is greater to that person with the higher marginal tax bracket. D's
marginal tax rate is 28% and, accordingly, the value of his IRA deduction will be $840 ($3,000 x 28% =
$840). B's marginal tax rate is 15% and, accordingly, the value of her IRA deduction will be $450
($3,000 x 15% = $450)
Before adjusted gross income can be computed, what following components must be computed?
a. Income
b. Taxable income
c. Gross income
d. a and b
e. a and c
e. See formula in Exhibit 1-3. You need to know Income and Gross Income to get to AGI. Taxable
income comes after AGI.
What tax policy goal(s) best explain(s) the progressive rate structure?
a. Tax revenue enhancement
b. Horizontal equity
c. Vertical equity
d. Both b and c
c. Vertical equity implies that taxpayers who are not in the same situation will be treated differently. A
progressive rate structure taxes those taxpayers with higher income at a higher rate than lower
income taxpayers.
True or False: If T is in the 35% tax rate bracket, then all of T's income is being taxed at 35%
, F. The 35% rate is T's marginal rate. The marginal rate is that percentage at which the next dollar
added to the tax base will be taxed.
Which of the following is not normally a tax-paying entity under the Federal income tax?
a. The regular corporation
b. The estate of a deceased individual
c. The partnership entity
d. A trust for the benefit of a minor child
1. c.
Partnerships is not subject to tax. Instead, their income or losses flow through to the partners who
include the income in their own taxable income
Sandy and Dave formed a law partnership, agreeing to split the income 50:50. The partnership had
net income of $100,000. Dave withdrew $55,000 throughout the year, and Sandy withdrew $50,000.
Dave and Sandy had no other income. Because of the partnership activities, Dave's A.G.I. increased by
a. $100,000.
b. $55,000.
c. $50,000.
d. $35,000.
2. c.
A partner pays taxes on his or her share (50% in this case)of the partnership income ($100,000).
Therefore, Sandy and Dave each have gross income of $50,000.
An S-corporation's tax treatment is most similar to the
a. sole proprietorship.
b. partnership.
c. individual.
d. corporation.
3. b.
If a corporation elects S-corporation status, it is taxed in virtually the same fashion as a partnership.
G is an eleven-year-old heiress whose share of income from various sources is as follows for the
current year:
G's Share of
Entity's G's Share of
Source Net Income Distributions
LM Trust $45,000 $30,000
ABC Partnership 80,000 22,000
XYZ Corporation, a C corporation 480,000 76,000
Interest from bank savings account 50,000
G's A.G.I. (ignoring the deduction for one-half of any self-employment tax, if any) is how much?
a. $178,000
b. $605,000
c. $251,000
d. $236,000
4. d.
And 100% Correct Answers
Which of the following characteristics would not be used to describe the generic nature of a "tax"?
a. Normally, there is a direct relationship between the exaction of revenue and the benefits received
by the taxpayer.
b. A tax is levied on the basis of predetermined criteria.
c. A tax is levied on the basis of recurring periods.
d. A tax may be distinguished from a penalty because it is not specifically designed to control or stop a
particular activity.
e. At least in the United States, taxes are often used to meet certain social as well as economic goals.
a. There is no direct relationship between the exaction of revenue and any benefit to be received by
the taxpayer.
Which one of the following statements is not true concerning tax rates?
a. A proportional tax rate is one in which an increasing percentage rate is applied to increasing
increments of the tax base.
b. The marginal tax rate of any rate structure is that percentage at which the next dollar added to the
tax base will be taxed.
c. The average tax rate is the percentage of taxable income paid in tax.
d. The effective tax rate is the percentage of total income paid in tax.
e. An individual cannot pay more in Federal income taxes than he reports as taxable income unless his
marginal tax rate exceeds 100 percent.
a. A proportional tax rate is one that remains as a constant percentage regardless of the size of the
tax base. A progressive tax rate structure is one in which an increasing percentage rate is applied to
increasing increments of the tax base.
T has a tax base of $30,000 and pays a tax of $2,500 on the first $25,000 and $750 on the next $5,000
(a fictitious rate schedule). This is an example of what type of tax rate?
a. Proportional
b. Progressive
c. Regressive
d. Neutral
e. None of the above
b. A progressive tax rate structure is one in which an increasing percentage rate is applied to
increasing increments of the tax base. In the problem, a 10% tax rate was applied to the first $25,000,
and a 15% rate to the next $5,000.
T has a tax base of $30,000 and pays a tax of $2,500 on the first $25,000 and $750 on the next $5,000
(a fictitious rate schedule). T has a marginal tax rate of
a. 10 percent.
b. 15 percent.
c. 20 percent.
d. 10.83 percent.
e. None of the above.
b. The marginal tax rate of a tax is that percentage at which the next dollar added to the tax base will
be taxed. In this problem, $750/$5,000 = 15%
T has a tax base of $30,000 and pays a tax of $2,500 on the first $25,000 and $750 on the next $5,000
(a fictitious rate schedule). T has an average tax rate of
a. 10 percent.
b. 15 percent.
c. 20 percent.
,d. 10.83 percent.
e. None of the above.
. d. Average tax rates equal the tax divided by the tax base. Here (2500+750= 3250)/$30,000 =
10.83%.
Which one of the following statements is true?
a. Tax credits reduce tax liability at the marginal tax rate.
b. Both tax credits and tax deductions are offsets to taxable income.
c. Dollar for dollar, tax credits are more valuable than tax deductions.
d. The tax impact of an additional dollar of tax base is determined by multiplying by the average tax
rate.
e. "I can't afford to earn more because it will throw me into a higher tax bracket and I will keep less
than I do now after taxes."
c. A tax credit is a dollar-for-dollar offset against a tax liability. By contrast, a deduction's dollar value
is arrived at by determining the tax on taxable income with and without the deduction, the difference
being its value. Since the tax rate is not 100, the value of a deduction is less than that of a credit.
B, an unmarried taxpayer, knows that her last dollar of income in the current year will be taxed at 10
percent. D, an unmarried taxpayer, knows that his last dollar of current year income will be taxed at
25 percent. Which of the following statements is not true taking into account the above assumptions?
a. D's marginal tax rate is greater than B's.
b. The value of a $2,000 IRA deduction to D will be less than the same amount contributed by B to an
IRA.
c. If both parties suffer a $100,000 business loss that is fully deductible, the impact of the deductible
loss will be greater on D's return than on B's return.
d. B will pay 10 percent of her taxable income to the government.
e. D will not pay 25 percent of his taxable income to the government.
b. The value of a deduction is greater to that person with the higher marginal tax bracket. D's
marginal tax rate is 28% and, accordingly, the value of his IRA deduction will be $840 ($3,000 x 28% =
$840). B's marginal tax rate is 15% and, accordingly, the value of her IRA deduction will be $450
($3,000 x 15% = $450)
Before adjusted gross income can be computed, what following components must be computed?
a. Income
b. Taxable income
c. Gross income
d. a and b
e. a and c
e. See formula in Exhibit 1-3. You need to know Income and Gross Income to get to AGI. Taxable
income comes after AGI.
What tax policy goal(s) best explain(s) the progressive rate structure?
a. Tax revenue enhancement
b. Horizontal equity
c. Vertical equity
d. Both b and c
c. Vertical equity implies that taxpayers who are not in the same situation will be treated differently. A
progressive rate structure taxes those taxpayers with higher income at a higher rate than lower
income taxpayers.
True or False: If T is in the 35% tax rate bracket, then all of T's income is being taxed at 35%
, F. The 35% rate is T's marginal rate. The marginal rate is that percentage at which the next dollar
added to the tax base will be taxed.
Which of the following is not normally a tax-paying entity under the Federal income tax?
a. The regular corporation
b. The estate of a deceased individual
c. The partnership entity
d. A trust for the benefit of a minor child
1. c.
Partnerships is not subject to tax. Instead, their income or losses flow through to the partners who
include the income in their own taxable income
Sandy and Dave formed a law partnership, agreeing to split the income 50:50. The partnership had
net income of $100,000. Dave withdrew $55,000 throughout the year, and Sandy withdrew $50,000.
Dave and Sandy had no other income. Because of the partnership activities, Dave's A.G.I. increased by
a. $100,000.
b. $55,000.
c. $50,000.
d. $35,000.
2. c.
A partner pays taxes on his or her share (50% in this case)of the partnership income ($100,000).
Therefore, Sandy and Dave each have gross income of $50,000.
An S-corporation's tax treatment is most similar to the
a. sole proprietorship.
b. partnership.
c. individual.
d. corporation.
3. b.
If a corporation elects S-corporation status, it is taxed in virtually the same fashion as a partnership.
G is an eleven-year-old heiress whose share of income from various sources is as follows for the
current year:
G's Share of
Entity's G's Share of
Source Net Income Distributions
LM Trust $45,000 $30,000
ABC Partnership 80,000 22,000
XYZ Corporation, a C corporation 480,000 76,000
Interest from bank savings account 50,000
G's A.G.I. (ignoring the deduction for one-half of any self-employment tax, if any) is how much?
a. $178,000
b. $605,000
c. $251,000
d. $236,000
4. d.
