CAT Tax Planning & Preparation 2 — Questions and Answers
Question 1: A self-employed taxpayer earns $80,000 in net self-employment income. What is the deductible portion of self-employment tax on the federal return?
- 50% of SE tax paid (Correct answer)
- 100% of SE tax paid
- 25% of SE tax paid
- SE tax is not deductible
Correct answer: 50% of SE tax paid
Self-employed individuals may deduct 50% of their self-employment tax as an above-the-line deduction on Form 1040.
Question 2: Which filing status generally results in the lowest tax liability for an unmarried taxpayer supporting a dependent child?
- Head of Household (Correct answer)
- Single
- Married Filing Jointly
- Qualifying Surviving Spouse
Correct answer: Head of Household
Head of Household status provides wider tax brackets and a higher standard deduction than Single status for qualifying taxpayers.
Question 3: The American Opportunity Tax Credit (AOTC) covers which years of post-secondary education?
- First four years only (Correct answer)
- Any year of higher education
- Graduate school only
- First two years only
Correct answer: First four years only
The AOTC is available only for the first four years of post-secondary education and cannot be claimed beyond that period.
Question 4: What is the maximum deduction a taxpayer can take for cash charitable contributions to a public charity under normal rules (as a % of AGI)?
- 60% (Correct answer)
- 30%
- 50%
- 100%
Correct answer: 60%
Cash contributions to public charities are deductible up to 60% of the taxpayer's adjusted gross income, with excess carried forward five years.
Question 5: A taxpayer converts a traditional IRA to a Roth IRA. What is the tax consequence in the year of conversion?
- The converted amount is included in gross income (Correct answer)
- No tax is owed if the funds are reinvested within 60 days
- Only 50% of the converted amount is taxable
- The conversion is always tax-free
Correct answer: The converted amount is included in gross income
The pre-tax amount converted from a traditional IRA to a Roth IRA is fully included in the taxpayer's gross income in the year of conversion.
Question 6: Under the passive activity loss rules, rental real estate losses are generally:
- Deductible only against passive income (Correct answer)
- Fully deductible against any income
- Never deductible
- Deductible only against active income
Correct answer: Deductible only against passive income
Passive activity losses, including most rental losses, can only offset passive activity income unless a special allowance or real estate professional exception applies.
Question 7: What form does an employer use to report wages paid and taxes withheld for each employee annually?
- W-2 (Correct answer)
- W-4
- 1099-NEC
- 941
Correct answer: W-2
Form W-2, Wage and Tax Statement, is issued by employers to employees and the IRS to report annual wages and withheld taxes.
CAT Tax Planning & Preparation 2
A self-employed taxpayer earns $80,000 in net self-employment income.
What is the deductible portion of self-employment tax on the federal return?