CAT Tax Planning & Preparation 3 — Questions and Answers
Question 1: Which of the following is NOT a requirement to deduct home office expenses under the exclusive-use test?
- The space must be used occasionally for personal activities (Correct answer)
- The space must be used regularly for business
- The space must be the principal place of business or where clients are met
- The space must be used exclusively for trade or business
Correct answer: The space must be used occasionally for personal activities
The exclusive-use rule requires the home office area to be used ONLY for business; any personal use disqualifies the deduction entirely.
Question 2: The Section 179 expense election allows a business to:
- Immediately deduct the full cost of qualifying property in the year placed in service (Correct answer)
- Amortize startup costs over 15 years
- Deduct 50% of an asset's cost in year one
- Accelerate depreciation only for vehicles
Correct answer: Immediately deduct the full cost of qualifying property in the year placed in service
Section 179 allows businesses to expense the full purchase price of qualifying equipment and software in the year it is placed in service, up to the annual limit.
Question 3: A taxpayer who is single with no dependents and takes the standard deduction files using which primary form?
- Form 1040 (Correct answer)
- Form 1040-SR
- Form 1065
- Form 1120
Correct answer: Form 1040
All individual taxpayers file their federal income tax return using Form 1040, regardless of filing complexity or age.
Question 4: The 'kiddie tax' rules apply to a child's unearned income when:
- The child is under age 19 (or under 24 if a full-time student) and unearned income exceeds the threshold (Correct answer)
- The child earns wages from part-time employment
- The child is over age 18 and files independently
- The child's unearned income is below $1,000
Correct answer: The child is under age 19 (or under 24 if a full-time student) and unearned income exceeds the threshold
Under the kiddie tax, a qualifying child's net unearned income above the annual threshold is taxed at the parent's marginal tax rate.
Question 5: Which of the following retirement plan contributions is made with after-tax dollars?
- Roth 401(k) (Correct answer)
- Traditional 401(k)
- Traditional IRA (deductible)
- SEP-IRA
Correct answer: Roth 401(k)
Contributions to a Roth 401(k) are made with after-tax dollars, allowing qualified withdrawals in retirement to be tax-free.
Question 6: A taxpayer sells a capital asset held for 14 months at a gain. This gain is classified as:
- Long-term capital gain (Correct answer)
- Short-term capital gain
- Ordinary income
- Passive income
Correct answer: Long-term capital gain
Assets held for more than 12 months qualify for long-term capital gain treatment, which is taxed at preferential rates (0%, 15%, or 20%).
Question 7: Estimated quarterly tax payments are generally required when a taxpayer expects to owe at least:
- $1,000 in federal tax after withholding and credits (Correct answer)
- $500 in federal tax after withholding and credits
- $2,500 in federal tax after withholding and credits
- $5,000 in federal tax after withholding and credits
Correct answer: $1,000 in federal tax after withholding and credits
Taxpayers must make estimated payments if they expect to owe at least $1,000 in tax after withholding and credits to avoid underpayment penalties.
CAT Tax Planning & Preparation 3
Which of the following is NOT a requirement to deduct home office expenses under the exclusive-use test?