CTP Tax Preparation & Filing 5 — Questions and Answers
Question 1: A taxpayer has $15,000 of net capital losses in the current year. How much can they deduct against ordinary income, and what happens to the remainder?
- All $15,000 is deductible against ordinary income in the current year
- $3,000 is deductible against ordinary income; $12,000 carries forward indefinitely (Correct answer)
- $3,000 is deductible; the remaining $12,000 is lost permanently
- $15,000 can only offset future capital gains, never ordinary income
Correct answer: $3,000 is deductible against ordinary income; $12,000 carries forward indefinitely
Capital losses can offset capital gains fully, but net capital losses deductible against ordinary income are capped at $3,000 per year; the rest carries forward indefinitely.
Question 2: What is the 'constructive receipt' doctrine and how does it affect cash-basis taxpayers?
- Income is recognized only when cash is physically deposited in a bank account
- Income is taxable when it is made available to the taxpayer without restriction, even if not yet physically received (Correct answer)
- Income from services is taxable only when the service is fully completed
- Cash-basis taxpayers must recognize income only in the year payment is demanded
Correct answer: Income is taxable when it is made available to the taxpayer without restriction, even if not yet physically received
Under constructive receipt, a cash-basis taxpayer must include income when it is credited to their account or made available without restriction, even if not physically received.
Question 3: A taxpayer who is blind AND age 65 or older files as Single. How many additional standard deduction amounts do they receive for 2023?
- None — they only get one additional amount
- One additional amount
- Two additional amounts (Correct answer)
- Three additional amounts
Correct answer: Two additional amounts
For 2023, each condition (age 65+ and blindness) adds a separate additional standard deduction amount, so a single taxpayer who qualifies for both receives two additional amounts.
Question 4: Which IRS notice typically indicates the first formal step in a tax audit by correspondence?
- CP2000 — Underreporter Notice (Correct answer)
- CP503 — Second Balance Due Notice
- Letter 1058 — Final Notice of Intent to Levy
- Notice CP90 — Final Notice
Correct answer: CP2000 — Underreporter Notice
A CP2000 notice is issued when income reported to the IRS by third parties does not match what was reported on the return, initiating a correspondence audit process.
Question 5: A taxpayer pays $12,000 in qualified mortgage interest and $6,000 in state and local taxes. The standard deduction for Single is $13,850. Should they itemize?
- Yes — itemized deductions of $18,000 exceed the standard deduction (Correct answer)
- No — they should always take the standard deduction for simplicity
- Yes — but only if they also have charitable deductions
- No — SALT is capped and reduces their itemized total below the standard deduction
Correct answer: Yes — itemized deductions of $18,000 exceed the standard deduction
Combined itemized deductions of $18,000 ($12,000 mortgage interest + $6,000 SALT, within the $10,000 SALT cap) exceed the $13,850 standard deduction, so itemizing saves more tax.
Question 6: What is the primary purpose of Form 8949?
- To report foreign tax credits
- To report sales and dispositions of capital assets (Correct answer)
- To calculate the net investment income tax
- To report installment sale income
Correct answer: To report sales and dispositions of capital assets
Form 8949 (Sales and Other Dispositions of Capital Assets) is used to report individual capital asset transactions, with totals flowing to Schedule D.
Question 7: Under the Affordable Care Act, what form do taxpayers who purchased insurance through the Marketplace use to reconcile the Premium Tax Credit?
- Form 8962 (Correct answer)
- Form 8965
- Form 1095-A
- Form 8863
Correct answer: Form 8962
Form 8962 (Premium Tax Credit) is used to reconcile the advance payments of the Premium Tax Credit received with the actual credit amount the taxpayer is entitled to based on their income.
CTP Tax Preparation & Filing 5
A taxpayer has $15,000 of net capital losses in the current year.
How much can they deduct against ordinary income, and what happens to the remainder?