Taxation I (C237)

Correct answer D. The rate of tax increases as the tax base increases.

Explanation:

A progressive tax system is designed to impose a higher tax rate on individuals with higher incomes, ensuring that those who earn more contribute a greater percentage of their earnings. This system is based on the ability-to-pay principle, which promotes economic fairness by reducing the tax burden on lower-income individuals and redistributing wealth more equitably. Many modern tax systems, including the U.S. federal income tax, follow a progressive structure to ensure a balanced and fair approach to taxation.

Why other options are wrong:

A. Taxpayers devote a greater percentage of income to pay the tax relative to higher-income individuals.

This describes a regressive tax system, not a progressive one. In a regressive tax system, lower-income individuals pay a higher proportion of their income in taxes compared to higher-income individuals. Examples of regressive taxes include sales taxes and excise taxes, where the tax burden falls more heavily on those with lower incomes.

B. Each taxpayer devotes the same percentage of income to pay the tax.

This describes a proportional or flat tax system, not a progressive one. In a proportional tax system, all individuals pay the same percentage of their income in taxes, regardless of income level. While this system may seem fair on the surface, it does not account for the differing abilities of taxpayers to contribute.

C. The rate of tax decreases as the tax base increases.

This statement describes a regressive tax system, where higher earners pay a lower percentage of their income in taxes than lower earners. This is the opposite of a progressive tax system, which aims to increase tax rates as income rises to ensure a more equitable distribution of the tax burden.

Correct answer A. 15th day of the 4th month following the end of the tax year.

Explanation:

For individuals, the U.S. federal income tax return is due on April 15, which is the 15th day of the 4th month following the end of the tax year (December 31). If April 15 falls on a weekend or holiday, the due date is moved to the next business day.

Why other options are wrong:

B. 15th day of the 3rd month following the end of the tax year.

This is incorrect because it applies to corporate tax returns for C corporations (March 15), not individual tax returns.

C. Last day of the tax year.

This is incorrect because the tax year typically ends on December 31, but returns are not due until April 15 of the following year.

D. April 1st of the following year.

This is incorrect because the tax return is not due on April 1st but rather on April 15 unless extended.

Correct answer B. Only government agencies performing governmental functions are exempt from taxation.

Explanation:

Government agencies that perform essential governmental functions, such as law enforcement, public education, and infrastructure development, are generally exempt from taxation. This exemption is based on the principle that the government should not tax itself. However, if a government agency engages in proprietary (commercial or for-profit) activities, it may be subject to taxation like a private business. The exemption applies only when the agency serves a public function.

Why other options are wrong:

A. Government agencies engaged in proprietary functions are always exempt from taxation.

This is incorrect because government agencies that engage in proprietary activities, such as operating a state-owned business, are often subject to tax. For example, if a government agency runs a commercial enterprise, like a public transportation service that competes with private companies, it may be required to pay taxes on its profits.

C. All government agencies are exempt from taxation regardless of their functions.

This is incorrect because not all government agencies qualify for tax exemptions. While agencies performing governmental functions are generally exempt, those involved in proprietary activities may be taxed. The blanket exemption does not apply to all government entities.

D. Government agencies performing governmental functions are subject to tax unless expressly exempted.

This is incorrect because government agencies performing essential governmental functions are inherently tax-exempt. They do not need explicit exemptions unless there are specific legal provisions requiring taxation. The general rule is that taxation applies only to government entities involved in commercial or non-governmental activities.

Correct answer D. The total depends on the specific amounts of each expense.

Explanation:

Itemized deductions are calculated based on specific expenses incurred by the taxpayer. Deductible expenses typically include charitable donations, state and local taxes paid (subject to a cap), and medical expenses exceeding a certain threshold of adjusted gross income (AGI). Since each taxpayer’s total itemized deductions depend on their actual expenses and applicable limits, the total cannot be fixed but varies based on individual circumstances.

Why other options are wrong:

A. The total is only the sum of medical expenses.

This is incorrect because itemized deductions include multiple categories beyond medical expenses. While medical expenses are deductible above a certain threshold (7.5% of AGI), other qualifying expenses, such as state taxes and charitable donations, also contribute to the total.

B. The total is the sum of donations and tax payments only.

Itemized deductions include additional allowable expenses beyond just donations and state tax payments. Medical expenses above the AGI threshold are also deductible, meaning the total is not limited to just donations and taxes.

C. The total is fixed at $10,000 regardless of expenses.

While the deduction for state and local taxes (SALT) is capped at $10,000, the total itemized deductions are not fixed at this amount. The total depends on additional deductible expenses, such as charitable donations and medical expenses, which do not have the same cap.

Correct answer B. Contributions equal to a percentage of adjusted gross income given to a local church

Explanation:

Donations to qualified charitable organizations, including churches, are deductible as itemized deductions, subject to certain limitations. The IRS allows deductions for cash contributions up to 60% of a taxpayer's adjusted gross income (AGI) when given to qualifying charities such as religious organizations, educational institutions, and public charities.

Why other options are wrong:

A. Cash given to neighbors who lost their home in a flood.

While helping a neighbor is a kind gesture, donations to individuals are not tax-deductible. Only contributions to qualified 501(c)(3) nonprofit organizations can be deducted. If the money were given to a recognized disaster relief charity, it would be deductible.

C. The cash equivalent of time given serving in a local homeless shelter.

The IRS does not allow deductions for the value of a person’s time or services, even if they are volunteers for a qualified organization. However, expenses directly related to volunteer work, such as mileage or supplies purchased for the organization, may be deductible.

D. Donations to a movie theater for renovations.

Donations to for-profit businesses, including privately owned movie theaters, are not tax-deductible. Only contributions to qualified nonprofit organizations, such as historical preservation charities, would potentially qualify if the movie theater were operated by a nonprofit entity.

Correct answer D. $0

Explanation:

The student loan interest deduction is subject to income limitations. For married couples filing jointly in 2023, the deduction begins to phase out at $145,000 and is completely eliminated at $175,000 of modified adjusted gross income (MAGI). Since the given scenario states that the taxpayer's AGI exceeds $140,000, they may be in the phase-out range, but if their AGI is above the threshold, they cannot claim any deduction—hence, the correct answer is $0.

Why other options are wrong:

A. $1,000

The deduction is either up to $2,500 or completely phased out based on income; there is no $1,000 limit.

B. $5,000

The maximum allowable deduction is $2,500, not $5,000.

C. $2,500

While $2,500 is the maximum deduction for eligible taxpayers, this amount is phased out for those with AGI exceeding $140,000 (filing jointly).

Correct answer D. A gift from a relative

Explanation:

Under the Internal Revenue Code, gifts are generally excluded from gross income for the recipient. This means that if a person receives a monetary or non-monetary gift from a relative, they are not required to report it as taxable income. However, in certain cases, the donor may be subject to the federal gift tax if the gift exceeds the annual exclusion limit set by the IRS.

Why other options are wrong:

A. A cash dividend

Cash dividends paid to shareholders are considered taxable income and must be reported on a tax return. Dividends represent a distribution of corporate earnings, and the IRS requires individuals to pay taxes on them in the year they are received.

B. A radio prize won at a church bingo game

Prizes and winnings from contests, games, and lotteries are taxable under the IRS rules. Even if the winnings come from a church bingo game, they must be reported as taxable income unless an exemption applies. The IRS treats all forms of gambling and prize winnings as taxable income.

C. Earned income from painting a fence

Any earned income, whether from employment or independent work, is subject to taxation and must be reported. Compensation for services, including informal jobs such as painting a fence, is taxable under the U.S. tax code, regardless of how it is paid (cash, check, or barter).

Correct answer A. Jason reports income in year 1.

Explanation:

Under the accrual basis of accounting, income is recognized when it is earned, regardless of when payment is received. If Jason completed the work in year 1, he must report the income for that year, even if he does not receive payment until year 2. This method ensures that financial statements accurately reflect economic activity rather than cash flow.

Why other options are wrong:

B. Jason reports income in year 2.

This would be correct under the cash basis of accounting, where income is reported only when received. However, under the accrual method, Jason must report the income in the year he earns it, not when he receives the payment.

C. Jason reports half the income in year 1 and half in year 2.

Income recognition under the accrual method does not allow splitting income across multiple years unless the work is performed over multiple years. If Jason completed the job in year 1, all of the income must be reported in that year.

D. Jason reports income only when the invoice is paid.

This is incorrect because recognizing income when payment is received follows the cash basis of accounting, not the accrual basis. The accrual method requires reporting income when it is earned, regardless of payment timing.

Correct answer A. An order to review a case from a lower court

Explanation:

A Writ of Certiorari is a legal order issued by a higher court, typically the Supreme Court, directing a lower court to send records of a case for review. It is used when a party seeks to appeal a lower court’s decision, and the higher court agrees to hear the case. The Supreme Court grants certiorari at its discretion, usually in cases involving significant legal principles or conflicts among lower courts.

Why other options are wrong:

B. A formal complaint filed against the IRS

A Writ of Certiorari is unrelated to IRS complaints. Tax disputes with the IRS are handled through administrative appeals or litigation in tax courts, not through a writ from the Supreme Court.

C. A request for a new trial in a lower court

A request for a new trial in a lower court is usually called a "motion for a new trial" or an "appeal for retrial," not a Writ of Certiorari. The writ is specifically for a higher court to review a lower court’s decision, not to restart proceedings.

D. Denial to hear a case by the Supreme Court

If the Supreme Court denies a Writ of Certiorari, it means the lower court's ruling stands. However, the writ itself is a request for review, not a denial.