CTP Tax Preparation & Filing 4 — Questions and Answers
Question 1: A taxpayer converts a traditional IRA to a Roth IRA. What is the tax consequence in the year of conversion?
- No immediate tax; taxes are deferred until Roth distributions begin
- The converted amount is included in gross income as ordinary income (Correct answer)
- The converted amount is taxed at the capital gains rate
- A 10% early withdrawal penalty always applies regardless of age
Correct answer: The converted amount is included in gross income as ordinary income
When converting a traditional IRA to a Roth IRA, the pre-tax amount converted is included in gross income as ordinary income in the year of conversion.
Question 2: What is the statute of limitations for the IRS to assess additional tax on a standard federal income tax return?
- 1 year from the filing date
- 2 years from the payment date
- 3 years from the later of the filing date or due date (Correct answer)
- 6 years from the filing date
Correct answer: 3 years from the later of the filing date or due date
The standard statute of limitations is 3 years from the later of the date the return was filed or the original due date of the return.
Question 3: A taxpayer receives a 1099-C for $8,000 of cancelled credit card debt. Under what circumstance might this amount NOT be taxable?
- If the debt was cancelled by a non-profit organization
- If the taxpayer was insolvent immediately before the cancellation (Correct answer)
- If the taxpayer has been a customer of the creditor for more than 5 years
- If the cancelled amount is under $10,000
Correct answer: If the taxpayer was insolvent immediately before the cancellation
Cancelled debt is excludable from income to the extent the taxpayer was insolvent (liabilities exceeded assets) immediately before the cancellation under IRC §108.
Question 4: Which form do employers use to reconcile annual W-2 filings with the Social Security Administration?
- Form 940
- Form 941
- Form W-3 (Correct answer)
- Form 1096
Correct answer: Form W-3
Form W-3 (Transmittal of Wage and Tax Statements) is submitted to the SSA along with Copy A of all W-2 forms to reconcile totals.
Question 5: A taxpayer sells their primary residence for a $300,000 gain after living there 3 of the last 5 years. How much gain is taxable if they file as Single?
- $300,000 — the full gain is taxable
- $50,000 — only gains above $250,000 are taxable (Correct answer)
- $0 — the entire gain is excluded
- $150,000 — half the gain is excluded
Correct answer: $50,000 — only gains above $250,000 are taxable
Single filers can exclude up to $250,000 of gain on a primary residence sale under IRC §121, so $300,000 - $250,000 = $50,000 is taxable.
Question 6: Which of the following is an 'above-the-line' deduction that reduces AGI regardless of whether the taxpayer itemizes?
- Mortgage interest
- State and local income taxes
- Contributions to a Health Savings Account (HSA) (Correct answer)
- Charitable contributions to qualified organizations
Correct answer: Contributions to a Health Savings Account (HSA)
HSA contributions made by the taxpayer (not through employer payroll) are an above-the-line deduction reducing AGI, available even to non-itemizers.
Question 7: What does the term 'basis' mean in the context of tax preparation?
- The fair market value of an asset at the time of sale
- The taxpayer's cost or investment in an asset used to calculate gain or loss (Correct answer)
- The minimum value of an asset for depreciation purposes
- The adjusted value of an asset after applying inflation factors
Correct answer: The taxpayer's cost or investment in an asset used to calculate gain or loss
Basis generally represents the taxpayer's investment in an asset (usually cost), which is subtracted from the sale price to determine the taxable gain or deductible loss.
CTP Tax Preparation & Filing 4
A taxpayer converts a traditional IRA to a Roth IRA.
What is the tax consequence in the year of conversion?