Sample Questions and Answers
Which of the following is NOT considered taxable income for a taxpayer?
A) Wages and salaries
B) Child support payments
C) Interest income
D) Dividends
Answer: B) Child support payments
What is the purpose of Form 1040EZ?
A) To report income and claim deductions
B) To apply for an extension of time to file
C) To report simple tax situations for individuals
D) To report business income and expenses
Answer: C) To report simple tax situations for individuals
Which of the following is considered a tax credit?
A) Standard deduction
B) Earned Income Tax Credit (EITC)
C) Dependent exemption
D) Child tax deduction
Answer: B) Earned Income Tax Credit (EITC)
For the purposes of tax compliance, what is the key difference between a tax deduction and a tax credit?
A) Tax deductions reduce taxable income, while tax credits reduce tax liability directly
B) Tax credits reduce taxable income, while tax deductions reduce tax liability directly
C) Tax deductions apply only to income earned in a foreign country, while tax credits apply to U.S.-earned income
D) There is no difference between the two
Answer: A) Tax deductions reduce taxable income, while tax credits reduce tax liability directly
Which of the following is an example of a tax-deferred retirement account?
A) Roth IRA
B) Traditional IRA
C) 401(k)
D) Both B and C
Answer: D) Both B and C
A taxpayer may claim the Child Tax Credit for a qualifying child who is:
A) Under 18 years of age
B) Under 17 years of age
C) Under 16 years of age
D) Under 21 years of age
Answer: B) Under 17 years of age
What is the maximum tax rate on long-term capital gains for a taxpayer in the 35% ordinary income tax bracket?
A) 0%
B) 15%
C) 20%
D) 25%
Answer: C) 20%
Which of the following is NOT a characteristic of an S corporation?
A) Shareholders must be U.S. citizens or residents
B) It is taxed as a partnership
C) It can have up to 500 shareholders
D) It avoids double taxation
Answer: C) It can have up to 500 shareholders
What is the primary difference between a tax deduction and an exclusion?
A) Deductions reduce taxable income, while exclusions remove certain income from the tax base
B) Exclusions reduce taxable income, while deductions remove certain income from the tax base
C) Deductions only apply to business income, while exclusions only apply to individual income
D) There is no difference between the two
Answer: A) Deductions reduce taxable income, while exclusions remove certain income from the tax base
In tax planning, what does the concept of “tax deferral” mean?
A) Delaying tax payments to a future period without reducing the amount of tax due
B) Paying taxes in installments over a period of time
C) Increasing tax payments to meet future obligations
D) Reducing taxable income through deductions
Answer: A) Delaying tax payments to a future period without reducing the amount of tax due
What is the maximum amount that can be contributed to a traditional IRA in 2024 for an individual under 50 years of age?
A) $6,000
B) $7,000
C) $10,000
D) $12,000
Answer: A) $6,000
A taxpayer who owns rental property must report income and expenses on which form?
A) Schedule C
B) Schedule D
C) Schedule E
D) Schedule F
Answer: C) Schedule E
Which of the following income sources is generally exempt from state income tax?
A) Interest from municipal bonds
B) Dividend income from stock
C) Wages from employment
D) Rental income from property located in the state
Answer: A) Interest from municipal bonds
Which of the following entities is NOT subject to the “self-employment tax”?
A) Sole proprietorships
B) Partnerships
C) S corporations
D) C corporations
Answer: D) C corporations
When should a taxpayer file for an extension of time to file their tax return?
A) Before the original filing deadline
B) After the filing deadline
C) Anytime during the tax year
D) Only if they owe taxes
Answer: A) Before the original filing deadline
Which of the following is the primary purpose of a tax audit?
A) To ensure compliance with tax laws and identify discrepancies
B) To determine if a taxpayer is eligible for additional deductions
C) To review tax-exempt organizations for compliance
D) To assess whether a taxpayer needs to pay estimated taxes
Answer: A) To ensure compliance with tax laws and identify discrepancies
What is the primary advantage of utilizing a tax-deferred annuity?
A) It provides tax-free income
B) The taxpayer pays tax only on the growth of the annuity
C) It allows the taxpayer to deduct contributions
D) It is exempt from state income taxes
Answer: B) The taxpayer pays tax only on the growth of the annuity
A taxpayer who files jointly with a spouse and has one qualifying child may qualify for which of the following?
A) Child Tax Credit
B) Earned Income Tax Credit
C) Both A and B
D) Neither A nor B
Answer: C) Both A and B
What is the tax rate on ordinary income for a single filer in the 2024 tax year with a taxable income of $70,000?
A) 12%
B) 22%
C) 24%
D) 32%
Answer: B) 22%
Which form is used by a taxpayer to report the sale of securities or other capital assets?
A) Schedule A
B) Schedule C
C) Schedule D
D) Form 1040
Answer: C) Schedule D
What type of income is subject to the Net Investment Income Tax (NIIT)?
A) Salaries and wages
B) Interest, dividends, and capital gains
C) Social Security benefits
D) Military pension
Answer: B) Interest, dividends, and capital gains
Which of the following is true regarding tax treatment of dividends paid to shareholders of C corporations?
A) Dividends are fully deductible by the corporation
B) Dividends are taxed at the corporate tax rate
C) Dividends are taxed to the individual shareholders as income
D) Dividends are tax-exempt for individual shareholders
Answer: C) Dividends are taxed to the individual shareholders as income
What is the primary purpose of tax-loss harvesting?
A) To increase taxable income by offsetting gains
B) To defer tax payments
C) To reduce taxable income by offsetting capital gains with losses
D) To claim more deductions for medical expenses
Answer: C) To reduce taxable income by offsetting capital gains with losses
What is the tax consequence of withdrawing funds from a Roth IRA before age 59½?
A) No tax, provided the funds are withdrawn for medical expenses
B) Early withdrawal penalties may apply to both principal and earnings
C) Early withdrawal penalties apply only to the earnings
D) The entire withdrawal is taxed as ordinary income
Answer: C) Early withdrawal penalties apply only to the earnings
Which of the following is an example of “income shifting” in tax planning?
A) Increasing business deductions
B) Moving taxable income to a lower tax bracket family member
C) Deferring income to the next tax year
D) Maximizing contributions to retirement accounts
Answer: B) Moving taxable income to a lower tax bracket family member
Which tax document is typically used by a self-employed individual to report income and expenses?
A) Form 1040
B) Form 1065
C) Schedule C
D) Schedule E
Answer: C) Schedule C
Which of the following types of income is subject to both federal and state income tax?
A) Social Security benefits
B) Interest from U.S. Treasury bonds
C) Wages from employment
D) Disability benefits
Answer: C) Wages from employment
What type of tax planning strategy involves making gifts to family members to shift income to lower tax brackets?
A) Estate tax planning
B) Charitable giving planning
C) Income splitting
D) Deferred tax planning
Answer: C) Income splitting
What is the IRS form used to request a ruling on the tax consequences of a proposed transaction?
A) Form 1120
B) Form 3115
C) Form 8889
D) Form 7004
Answer: B) Form 3115
What is the tax treatment for income from the sale of a primary residence?
A) Fully taxable
B) Excluded up to $250,000 ($500,000 for married taxpayers)
C) Excluded if the home was owned for at least 5 years
D) Taxed at the long-term capital gains rate regardless of ownership period
Answer: B) Excluded up to $250,000 ($500,000 for married taxpayers)
Which of the following is generally NOT considered a tax-exempt benefit?
A) Health insurance premiums paid by an employer
B) Employer contributions to a 401(k) plan
C) Tuition reimbursement from an employer
D) Cash bonuses from an employer
Answer: D) Cash bonuses from an employer
Which of the following is true about a “Qualified Plan”?
A) It allows employees to contribute pre-tax income to retirement
B) It must be established by a corporation or partnership
C) It cannot provide benefits for more than 25 employees
D) Contributions to qualified plans are always subject to FICA taxes
Answer: A) It allows employees to contribute pre-tax income to retirement
What is the “Kiddie Tax”?
A) A tax that applies to income earned by minors
B) A tax credit for children under 17
C) A tax on gifts given to minors
D) A tax on children who inherit property
Answer: A) A tax that applies to income earned by minors
Which of the following is NOT a typical tax planning strategy for businesses?
A) Depreciation of assets
B) Income shifting
C) Accelerating deductions into the current year
D) Deferring income recognition until the next year
Answer: B) Income shifting
Which of the following types of income is considered “passive income” under IRS rules?
A) Wages earned from a job
B) Income from rental properties
C) Income from a limited partnership investment
D) Both B and C
Answer: D) Both B and C
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