E.36 Fundamental and current tax law

Question 1

Which of the following is a characteristic of a tax credit?

A. It reduces taxable income
B. It reduces the amount of tax owed
C. It increases the amount of tax owed
D. It is a deduction from gross income

Answer 1

B. It reduces the amount of tax owed

E.36 Fundamental and current tax law

Question 2

Which of the following is a current highest federal tax rate for long-term capital gains for most taxpayers?

A. 10%
B. 15%
C. 20%
D. 25%

Answer 2

C. 20%

E.36 Fundamental and current tax law

Question 3

Which of the following is an example of a tax-exempt organization?

A. Non-profit hospital
B. Private foundation
C. For-profit corporation
D. LLC

Answer 3

A. Non-profit hospital

E.36 Fundamental and current tax law

Question 4

Julia recently had several financial transactions and interactions. Which of the following transactions involving Julia would be considered a taxable event for her?

A. Selling her primary residence at a loss of $5,000.
B. Receiving a gift of $12,000 from her uncle.
C. Donating her old coats to a local charity.
D. Withdrawing funds from her Roth IRA at age 57.

Answer 4

D. Withdrawing funds from her Roth IRA at age 57.

E.36 Fundamental and current tax law

Question 5

A taxpayer is considering converting their traditional IRA to a Roth IRA. Which of the following is a potential advantage of a Roth IRA for those who expect to be in a higher tax bracket?

A. Tax-deductible contributions
B. Tax-free withdrawals in retirement
C. No required minimum distributions (RMDs)
D. Lower income tax rates in retirement

Answer 5

B. Tax-free withdrawals in retirement

E.36 Fundamental and current tax law

Question 6

Which of the following taxes is a flat tax?

A. Federal income tax
B. State income tax
C. Sales tax
D. Excise tax

Answer 6

C. Sales Tax

E.36 Fundamental and current tax law

Question 7

What is the purpose of a tax credit?

A. To reduce taxable income
B. To increase taxable income
C. To reduce tax liability
D. To increase tax liability

Answer 7

C. To reduce tax liability

E.36 Fundamental and current tax law

Question 8

Which of the following tax forms is used to report self-employment income?

A. Form W-2
B. Form 1099
C. Form 1040
D. Form 8829

Answer 8

C. Form 1040

E.36 Fundamental and current tax law

Question 9

Which of the following is not considered a tax deduction?

A. Home mortgage interest
B. Charitable donations
C. Medical expenses
D. Rental income

Answer 9

D. Rental income

E.36 Fundamental and current tax law

Question 10

Which of the following is not a capital asset?

A. Stocks
B. Real estate
C. Collectibles
D. Inventory held for sale to customers

Answer 10

D. Inventory held for sale to customers

E.36 Fundamental and current tax law

Question 11

Which of the following is NOT a requirement for claiming the Earned Income Tax Credit (EITC)?

A. The taxpayer must have earned income.
B. The taxpayer must have a qualifying child or be between the ages of 25 and 65.
C. The taxpayer’s adjusted gross income must be below a certain threshold.
D. The taxpayer must have a valid Social Security number.

Answer 11

B. The taxpayer must have a qualifying child or be between the ages of 25 and 65.

E.36 Fundamental and current tax law

Question 12

Which of the following tax credits is specifically aimed at covering the first four years of post-secondary education and can be partially refundable?

A. Child Tax Credit
B. American Opportunity Tax Credit
C. Lifetime Learning Credit
D. Earned Income Tax Credit

Answer 12

B. American Opportunity Tax Credit

The AOTC credit is specifically designed for taxpayers who incur qualifying expenses for the first four years of post-secondary education. It can cover expenses such as tuition, certain fees, and course materials needed for enrollment or attendance. Importantly, the AOTC is partially refundable; if the credit reduces the tax owed to zero, 40% of the remaining amount of the credit (up to $1,000) can be refunded to the taxpayer. This specific focus on the first four years of college and its partial refundability distinguish it from other educational tax credits.

E.36 Fundamental and current tax law

Question 13

Which of the following is true about the standard deduction?

A. It is only available to taxpayers who do not itemize their deductions.
B. It is a fixed amount that reduces taxable income.
C. It is the same for all taxpayers regardless of filing status.
D. All of the above.

Answer 13

A. It is only available to taxpayers who do not itemize their deductions.

The standard deduction is an alternative to itemizing deductions. Taxpayers must choose between taking the standard deduction or itemizing their deductions (such as mortgage interest, state and local taxes, charitable contributions, etc.). They cannot do both.

E.36 Fundamental and current tax law

Question 14

Sarah owns a rental property that she rents out for $1,500 per month. She incurs $1,000 in expenses related to the property each month. How much rental income does she need to report on her tax return?

A. $0
B. $500
C. $1,000
D. $1,500

Answer 14

D. $1,500

E.36 Fundamental and current tax law

Question 15

Mark sold a stock that he owned for less than a year and realized a $3,000 capital loss. How much of this loss can he use to offset other income?

A. $0
B. $1,500
C. $2,000
D. $3,000

Answer 15

D. $3,000

E.36 Fundamental and current tax law

Question 16

Sarah and David are married and file jointly, with a combined income of $500,000. They sold their primary residence this year and made a profit of $600,000. How much of the capital gain is subject to federal income tax?

A. $100,000
B. $250,000
C. $350,000
D. $600,000

Answer 16

A. $100,000.

For married couples filing jointly, up to $500,000 of capital gains on the sale of a primary residence is excluded from income if they meet the ownership and use tests. Since Sarah and David made a profit of $600,000, they can exclude $500,000, leaving $100,000 subject to tax.
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E.36 Fundamental and current tax law*

Question 17

Tom, who is 70 years old, is planning to withdraw $50,000 from his traditional IRA. What is the potential tax implication of this withdrawal?

A. The withdrawal is tax-free.
B. The withdrawal will be taxed as capital gain.
C. The withdrawal will be taxed as ordinary income.
D. There is no tax implication as Tom is above 59½ years old.

Answer 17

C. The withdrawal will be taxed as ordinary income.

Withdrawals from traditional IRAs are taxed as ordinary income regardless of the age of the taxpayer at the time of the withdrawal. Since Tom is withdrawing from a traditional IRA, it will be added to his taxable income for the year.
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E.36 Fundamental and current tax law*

Question 18

Chloe, a freelance graphic designer, has opted to use the cash method of accounting for her business. In December 2023, she invoiced a client $5,000, which was paid in January 2024. When should Chloe recognize this income?

A. In December 2023
B. In January 2024
C. In the tax year she invoices
D. In the tax year she receives payment

Answer 18

D. In the tax year she receives payment.

Under the cash method of accounting, income is recognized when received. Therefore, even though Chloe invoiced in December 2023, she should recognize the income in January 2024, which is when she actually received the payment.

E.36 Fundamental and current tax law