MULTIPLE CHOICE QUESTIONS



Chapter 12

MULTIPLE CHOICE QUESTIONS

Question 1. If an investor chose to implement a tax strategy, which would allow him or her to completely avoid taxation, he or she would be a proponent of which strategy?

A. Deferral

B. Deflection

C. Diversion

D. A and C

E. None of the above. No tax strategy can be used to completely avoid taxation.

Question 2. What are the five Ds of tax planning?

A. Deductibles, deflection, deferral, diminution, diversion

B. Depreciation, deduction, diminution, diversification, deferral

C. Deflection, diversification, deductibles, diminution, diversion

D. Deflection, distribution, diversification, deferral, diversion

E. Diversion, deflection, diminution, deduction, deferral

Question 3. Which of the following are not true with respect to flexible spending accounts?

A. Contributions are made with after-tax dollars

B. Contributions are made with before-tax dollars

C. Contributions may be made by the employee

D. Contributions may be made by the employer

E. Contributions may be made by both the employee and the employer

Question 4. For 2012, investment interest deduction is limited to:

A. the interest taken out for investment purposes only

B. the taxpayer’s earned income

C. the taxpayer’s passive income

D. the amount of tax payment for the year

E. the gain only on the investment that was made with the fund borrowed specifically for that investment

Question 5. Which of the following couples would benefit the most by postponing marriage until the following year?

A. Couples who have similar amounts of income

B. Couples where one spouse earns substantially more than the other

C. Couples where one spouse earns substantially less than the other

D. B and C

E. A and C

Question 6. Which of the following expenses are not fully deductible?

A. Property taxes

B. Miscellaneous business expenses

C. Home mortgage interest (with certain statutory limits)

D. Charitable contributions (with certain statutory limits)

E. State and local taxes

Question 7. Which of the following expense deductions are limited by law?

A. Moving expenses

B. Casualty losses

C. Mortgage interest

D. Investment management fees

E. All of the above are limited by law

Question 8. Which of the following are requirements an individual must meet in order to deduct the expenses associated with a secondary residence?

A. Rental income must not be received

B. It is used for personal use the greater of 14 days personally per year or 10 percent of the number of days it is rented out

C. Rental income must be received

D. A and B

E. B and C

Question 9. An investor who is contemplating the purchase of tax-free municipal bonds should consider:

A. the impact on taxable Social Security income

B. the Alternative Minimum Tax

C. the impact on pension income

D. A and B

E. All of the above

Question 10. A master limited partnership differs from a limited partnership in that the master limited partnership:

A. trades directly (through units) on major exchanges or on over-the-counter, whereas a limited partnership does not

B. allows an investor to buy it with a minimum investment, whereas a limited partnership does not

C. is typically more profitable

D. A and B

E. B and C

Question 11. Which of the following is not true with respect to a charitable remainder trust?

A. It permits the donor to receive tax benefits

B. It permits the donor to receive income benefits

C. It is revocable

D. It pays the donor income for a certain period or for life and ultimately passes the principal to the charity

E. All of the above are true

Question 12. A viable tax planning strategy for individuals with taxable Social Security is to:

A. reject Social Security income altogether

B. reduce modified income to $32,000 for married couples

C. report only $32,000 as income regardless of the actual amount of income earned

D. separate Social Security income from Medicare income

Question 13. Under the current law (2012), there is “kiddie tax” for children. Which of the following statements is(are) true with respect to this controversial tax?

A. It only applies to children under the age of 15

B. It only applies to children who have net investment income greater than $1,900

C. It is only levied on a child’s earned income

D. It could subject the child to pay taxes at the parent’s highest marginal tax rate

E. B and D

Question 14. When “income timing” is used as a tax strategy:

A. one would want to channel income into a lower tax year

B. it is especially beneficial for the self employed since it can be easily adopted by them

C. it is accomplished by prepaying or postponing the payment of certain bills

D. it may be more difficult for the employed taxpayer

E. all of the above are true

Question 15. What are two important income tax-saving strategies?

A. Buying option and internal revenue bonds

B. Income deferral and income acceleration

C. Investing in treasury notes and treasury bonds

D. Buying homes and taxable investments

E. All of the above

Question 16. Debt incurred to acquire, construct, or substantially improve a principal or secondary residence, to the extent that such indebtedness does not exceed $1 million is called a(n):

A. outstanding indebtedness

B. acquisition indebtedness

C. construction loan

D. municipal bond

E. construction indebtedness

Question 17. When one has accumulated shares of a stock or a mutual fund over time at different prices, for minimizing taxes, which of the following shares should be sold?

A. Those that cost the most

B. Those that cost the least to provide a larger capital gain

C. It doesn’t matter since the company will automatically compute a weighted average of your various purchase prices

D. It doesn’t matter since the company will automatically sell the shares which cost the least

E. None of the above

Question 18. Which is the simplest form of business ownership?

A. Sole proprietorship

B. S corporation

C. C corporation

D. Limited partnership

E. Master limited partnership

Question 19. A Limited Liability Company

I. has limited access to the privileges enjoyed by a partnership

II. is a form of unincorporated business organization

III. can be formed under IRC 1040 and only with the prior approval of the IRS

IV. is a partnership surrounded by a limited liability shield

V. combines the benefits of taxation of a corporation with the limited liability of a partnership

A. All are correct answers

B. None are true answers

C. Only II and IV are correct

D. Only II, III and IV are correct

E. Only IV is correct

Question 20. Which of the following areas are not closely scrutinized by the IRS with respect to audits?

A. Interest expenses

B. Mortgage payments

C. Alternative minimum tax

D. Self-employment income

E. All of the above are scrutinized

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