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CHAPTER 3—TAXABLE ENTITIES; TAX FORMULA; INTRODUCTION TO PROPERTY TRANSACTIONS TRUE/FALSE 1. A single taxpayer will pay the same amount of tax (or less) as a head of household when their taxable incomes are equal. ANS: F The tax for heads of households at higher income levels is lower (i.e., the tax brackets are larger so a head of household pays 15% on more income). PTS: 1 REF: § 1 and inside front cover of book 2. The income of a child under age 13 is taxed to the parent. ANS: F A child’s income is taxed to the child and not to the parent. A child may be taxed at her or his parent’s rate for a portion of her or his unearned income. PTS: 1 REF: p. 3-3 3. Citizens and residents of the United States generally are taxed on income earned in a foreign country. ANS: T Nonresident aliens are taxed only on their U.S. source income, but citizens and resident aliens are taxed on their worldwide income. PTS: 1 REF: pp. 3-2 and 3-3 4. The sole proprietorship business of an individual taxpayer is treated as a separate entity for tax pur- poses. ANS: F The business earnings are reported on the individual’s tax return along with any other income and de- ductions. The sole proprietorship is treated as a separate entity for accounting purposes, though, and must keep separate records. PTS: 1 REF: pp. 3-5 through 3-10 5. A sole proprietorship’s taxable income is subject to tax using the corporate tax rates. ANS: F The sole proprietorship’s net income is, along with all other income of the individual owner, subject to tax at individual tax rates. PTS: 1 REF: pp. 3-8 and 3-9 6. B and D are beneficiaries of a trust that distributed $6,000 out of earnings to each of them in 20X0. The trust had $11,000 of net income in 20X0. The trust is not required to pay income tax for 20X0. ANS: T
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When a trust distributes its income to the beneficiaries, the distributed income is generally taxed to the beneficiary rather than the trust. PTS: 1 REF: p. 3-8 7. The partnership entity does not pay a Federal income tax on its taxable income. ANS: T The partnership itself is not a taxpaying entity under the Federal income tax system. All of the gains, losses, income, and expenses pass through to the individual partners and are taxable to them. PTS: 1 REF: p. 3-10 and §701 8. A partnership is taxed at the same rates as estates and trusts for Federal income tax purposes. ANS: F The partnership pays no tax and any gains, losses, income, or expenses pass through and are taxed to its partners. A trust or estate pays tax on its undistributed income. PTS: 1 REF: p. 3-10 and § 701 9. An S corporation generally pays no tax on the taxable income it generates. ANS: T The income of an S corporation passes through to its shareholders much like the income of a partner- ship passes through to the individual partners. PTS:
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