Sample Questions and Answers
What is the main advantage of tax-deferred investments, such as 401(k)s?
A) Earnings are tax-free while the investment is growing.
B) Contributions to the investment are tax-deductible.
C) Earnings are taxed at a lower rate than ordinary income.
D) Earnings are not subject to capital gains tax.
Answer: B
Which of the following tax strategies is typically used by investors to reduce their taxable income?
A) Short-term capital gains
B) Tax loss harvesting
C) Paying off credit card debt
D) Investing in non-taxable municipal bonds
Answer: B
When must an individual report a sale of personal property for tax purposes?
A) When the property was sold for a gain
B) Only when the property is sold for more than its original purchase price
C) When the property is sold for a loss
D) All sales of personal property must be reported regardless of gain or loss.
Answer: A
What is the tax rate for long-term capital gains for taxpayers in the highest income tax bracket in 2024?
A) 0%
B) 10%
C) 15%
D) 20%
Answer: D
What is the tax treatment of income from a trust?
A) The trust itself is taxed on all income earned.
B) The income is passed through to the beneficiaries and taxed at their individual tax rates.
C) The income is exempt from tax.
D) The income is taxed at the corporate tax rate.
Answer: B
Which of the following is a characteristic of a tax credit versus a tax deduction?
A) A tax credit reduces taxable income, while a tax deduction reduces the amount of tax owed.
B) A tax credit directly reduces the tax owed, while a tax deduction reduces taxable income.
C) Both tax credits and deductions are available only to individuals with high incomes.
D) A tax credit increases taxable income, while a tax deduction increases the tax owed.
Answer: B
What is the main purpose of tax treaties between countries?
A) To prevent double taxation of the same income
B) To eliminate all taxes on foreign income
C) To impose taxes on international businesses
D) To provide a tax reduction for wealthy citizens
Answer: A
What is the tax treatment for qualified dividends?
A) They are taxed at the same rate as ordinary income
B) They are taxed at the same rate as capital gains
C) They are tax-free
D) They are taxed at a reduced rate
Answer: D
How does the IRS define “self-employment income”?
A) Income earned from a salaried position
B) Income from renting personal property
C) Income from a trade or business carried out by an individual
D) Passive income from investments
Answer: C
Which of the following would be a reason for the IRS to disallow a business deduction?
A) The expense is necessary and ordinary for the business
B) The expense is incurred for personal reasons
C) The expense is paid in cash
D) The expense is related to an employee benefit plan
Answer: B
What is the maximum amount that can be deducted for student loan interest in 2024?
A) $500
B) $1,000
C) $2,500
D) $5,000
Answer: C
Which of the following is true about a tax-free exchange under Section 1031?
A) The property received must be used for personal purposes.
B) The property exchanged must be held for investment or business purposes.
C) Both properties must be located in the same state.
D) The exchange must involve the sale of a capital asset.
Answer: B
Which of the following tax deductions is available for taxpayers who do not itemize?
A) Medical expenses
B) Charitable contributions
C) Standard deduction
D) State income tax
Answer: C
Which of the following is a requirement to qualify for the Child Tax Credit in 2024?
A) The child must be under the age of 18
B) The taxpayer must claim the child as a dependent
C) The child must be a U.S. citizen
D) All of the above
Answer: D
What is the tax rate on a Qualified Small Business Stock (QSBS) held for over five years?
A) 0%
B) 10%
C) 15%
D) 28%
Answer: A
What is the primary purpose of an estate tax return (Form 706)?
A) To determine the taxable value of an estate after a person’s death
B) To file a claim for tax deductions for estate expenses
C) To calculate the inheritance tax for beneficiaries
D) To report income from the estate during its administration
Answer: A
What is the tax implication of a gift made by an individual to a charity?
A) The gift is not deductible if the donor is not itemizing deductions
B) The donor may deduct the gift if they itemize deductions
C) The gift is subject to gift tax
D) The gift is subject to income tax
Answer: B
Which of the following is a characteristic of a tax-exempt organization?
A) The organization must have shareholders.
B) The organization is required to file Form 990.
C) The organization is exempt from state and federal taxes but not local taxes.
D) The organization cannot engage in political activity.
Answer: B
What is the limit on contributions to a Health Savings Account (HSA) for an individual under 55 in 2024?
A) $3,500
B) $6,000
C) $7,000
D) $8,000
Answer: B
What is the purpose of the Alternative Minimum Tax (AMT)?
A) To ensure that high-income individuals pay at least a minimum amount of tax
B) To reduce the tax liability of businesses with significant capital investments
C) To provide tax relief for low-income earners
D) To tax foreign income of U.S. citizens
Answer: A
When is a taxpayer required to file a tax return under the “Self-Employment Tax” rules?
A) Only if they owe more than $1,000 in taxes
B) When their net earnings exceed $400 from self-employment activities
C) When they earn passive income
D) When they receive a notice from the IRS
Answer: B
What is the tax rate for Social Security in 2024?
A) 3.5%
B) 6.2%
C) 7.65%
D) 15.3%
Answer: B
Which of the following is a feature of a SIMPLE IRA plan?
A) Only employers contribute to the plan
B) Employees can choose to make contributions to the plan
C) Only self-employed individuals can contribute
D) It allows for unlimited contribution amounts
Answer: B
How are state income taxes typically treated for federal tax purposes?
A) As an additional tax that reduces taxable income
B) As a tax credit
C) As an itemized deduction if the taxpayer chooses to itemize deductions
D) They are not deductible under any circumstances
Answer: C
Which of the following is true about tax credits versus tax deductions?
A) Tax credits reduce taxable income, while tax deductions reduce the amount of tax owed.
B) Both tax credits and deductions directly reduce the amount of tax owed.
C) Tax credits reduce the amount of tax owed, while tax deductions reduce taxable income.
D) Tax deductions and credits are not available to taxpayers who make more than $200,000 annually.
Answer: C
When does an individual need to file a tax return under the IRS “filing requirement”?
A) If the individual earns over $10,000 in wages
B) If the individual has tax liabilities exceeding $1,000
C) If the individual is self-employed and earns over $400
D) All of the above
Answer: D
What is the maximum amount of child and dependent care expenses that can be used for the Child and Dependent Care Credit in 2024?
A) $3,000
B) $5,000
C) $6,000
D) $8,000
Answer: C
What is the tax treatment for alimony payments under the 2024 tax law?
A) Alimony payments are deductible by the payer and taxable to the recipient
B) Alimony payments are not deductible by the payer and not taxable to the recipient
C) Alimony payments are deductible by the payer and not taxable to the recipient
D) Alimony payments are neither deductible by the payer nor taxable to the recipient
Answer: B
What is the main advantage of using a Roth IRA for retirement savings?
A) Contributions are tax-deductible
B) Earnings grow tax-deferred and withdrawals are tax-free in retirement
C) Contributions are tax-free
D) It has no contribution limits
Answer: B
Which of the following tax benefits is available for education expenses under Section 529 plans?
A) Contributions to the plan are tax-deductible
B) Earnings grow tax-free and withdrawals for qualified expenses are tax-free
C) Withdrawals for any purpose are tax-free
D) Contributions are subject to a $10,000 annual limit
Answer: B
What is the maximum tax rate for long-term capital gains in 2024?
A) 15%
B) 20%
C) 25%
D) 28%
Answer: B
When can a taxpayer elect to treat a vehicle as a business expense for tax purposes?
A) If the vehicle is used for personal commuting
B) If the vehicle is used more than 50% for business purposes
C) If the vehicle is leased
D) If the vehicle is registered under the taxpayer’s name
Answer: B
What is the primary purpose of Form 8862?
A) To apply for an extension of time to file
B) To claim the Child Tax Credit
C) To claim the Earned Income Tax Credit (EITC) after it has been denied
D) To report foreign bank accounts
Answer: C
What is the tax treatment of gains from the sale of a primary residence in 2024?
A) Gains are always taxable
B) Gains up to $250,000 ($500,000 for married couples) may be excluded if certain requirements are met
C) Gains are taxable only if the property was inherited
D) Gains from the sale of a primary residence are excluded from tax only if the property was owned for more than 10 years
Answer: B
How is income from rental properties generally taxed?
A) As ordinary income
B) As capital gains
C) As dividend income
D) It is not taxable
Answer: A
What is the maximum contribution limit for an Individual Retirement Account (IRA) in 2024 for individuals under the age of 50?
A) $3,000
B) $5,000
C) $6,000
D) $7,000
Answer: C
Which of the following is true about the taxability of life insurance death benefits?
A) They are always subject to income tax
B) They are tax-free to the beneficiary if the death benefits do not exceed $1,000,000
C) They are tax-free to the beneficiary if paid as a lump sum
D) They are taxable to the beneficiary if the policyholder paid premiums with after-tax dollars
Answer: C
How does the IRS define “earned income” for the purposes of calculating the Earned Income Tax Credit (EITC)?
A) Only wages from an employer
B) Wages, salaries, and self-employment income
C) Wages, interest, and dividend income
D) Wages, salaries, and rental income
Answer: B
What is the maximum amount of credit that can be claimed for child and dependent care expenses under the Child and Dependent Care Credit in 2024?
A) $1,000
B) $2,000
C) $3,000
D) $5,000
Answer: C
Which of the following income sources is subject to the Net Investment Income Tax (NIIT)?
A) Wages
B) Social Security benefits
C) Interest and dividends
D) Rental income from real estate used for personal purposes
Answer: C
What is the limit on the amount of gifts that can be made tax-free under the annual gift exclusion for 2024?
A) $10,000
B) $15,000
C) $20,000
D) $30,000
Answer: B
What type of income is subject to self-employment tax?
A) Income from investments
B) Passive income from rental property
C) Net earnings from a trade or business
D) Wages from an employer
Answer: C
When is an employer required to issue Form W-2 to an employee?
A) By January 31 of the year following the tax year
B) By April 15 of the year following the tax year
C) By December 31 of the tax year
D) By March 15 of the year following the tax year
Answer: A
Which of the following is true about the tax treatment of an individual’s home office deduction?
A) It is only available to self-employed individuals
B) It can only be claimed by homeowners
C) It can be claimed for any office in the home, regardless of business use
D) The home office must be used exclusively and regularly for business purposes
Answer: D
What is the IRS tax treatment for a foreign tax credit?
A) It allows taxpayers to exclude foreign income from their taxable income
B) It allows taxpayers to receive a direct refund of foreign taxes paid
C) It allows taxpayers to claim a credit against U.S. tax liability for foreign taxes paid
D) It allows taxpayers to deduct foreign taxes paid from their gross income
Answer: C
What is the maximum tax credit available for the American Opportunity Tax Credit (AOTC) in 2024?
A) $500
B) $1,000
C) $2,500
D) $5,000
Answer: C
Under the Affordable Care Act, how is the Premium Tax Credit determined?
A) Based on the taxpayer’s filing status
B) Based on the taxpayer’s income and household size
C) Based on the type of health insurance purchased
D) Based on the number of dependents
Answer: B
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