CTP Tax Preparation & Filing 3

Question 1

A married couple files jointly with $180,000 AGI. Which deduction phase-out is most likely to affect them?

Accepted Answer

Student loan interest deduction

Answer

The student loan interest deduction phases out for married filing jointly taxpayers with MAGI above $145,000 (2023), making it unavailable at $180,000 AGI.

Question 2

What is the 'kiddie tax' and who does it primarily affect?

Accepted Answer

A tax that applies children's unearned income above a threshold to the parent's tax rate

Answer

The kiddie tax taxes a child's net unearned income above the threshold (e.g., $2,500 in 2023) at the parent's marginal tax rate to prevent income-shifting strategies.

Question 3

A taxpayer received $5,000 from a lawsuit settlement for personal physical injury. How is this treated for tax purposes?

Accepted Answer

Excluded from gross income entirely

Answer

Compensatory damages received for personal physical injuries or physical sickness are excluded from gross income under IRC Section 104.

Question 4

When must a taxpayer include a Schedule B with their Form 1040?

Accepted Answer

When taxable interest or ordinary dividends exceed $1,500

Answer

Schedule B is required when the taxpayer has more than $1,500 in taxable interest income or ordinary dividends, or has certain foreign accounts or trusts.

Question 5

What is the difference between a tax credit and a tax deduction?

Accepted Answer

A deduction reduces taxable income; a credit reduces tax owed dollar-for-dollar

Answer

A deduction lowers taxable income (saving taxes at the marginal rate), while a tax credit directly reduces the tax owed dollar-for-dollar, making credits generally more valuable.

(CTP) Certified Tax Professional Practice Test

(CTP) Certified Tax Professional Practice Test

CTP Tax Preparation & Filing 3