IRS - Internal Revenue Service Certified Taxation for Individuals Questions and Answers 1 — Questions and Answers
Question 1: A single taxpayer, age 50, has an Adjusted Gross Income (AGI) of $80,000 for the year. They incurred $7,500 in qualified medical expenses. If they choose to itemize their deductions, how much of their medical expenses can they deduct on their Schedule A?
- $2,500
- $7,500
- $1,500 (Correct answer)
- $0
Correct answer: $1,500
A taxpayer can only deduct qualified medical expenses that exceed 7.5% of their Adjusted Gross Income (AGI). In this case, the AGI floor is $80,000 * 7.5% = $6,000. The taxpayer can deduct the amount of expenses that exceeds this floor, which is $7,500 (total expenses) - $6,000 (AGI floor) = $1,500.
Question 2: Which of the following receipts is generally required to be included in a taxpayer's gross income for federal tax purposes?
- A cash inheritance from a deceased parent.
- Child support payments received from a former spouse.
- A $10,000 prize won from a national sweepstakes. (Correct answer)
- Life insurance proceeds received due to the death of the insured.
Correct answer: A $10,000 prize won from a national sweepstakes.
Prizes and awards are generally included in taxable income. Inheritances, child support payments, and life insurance death benefits are specifically excluded from gross income under most circumstances.
Question 3: A freelance consultant expects to owe $4,000 in federal income tax for the year after all withholding and credits are accounted for. To avoid an underpayment penalty, what is the consultant generally required to do?
- File Form 4868 for an automatic extension to pay the full amount with their tax return.
- Nothing, as the amount is below the $5,000 penalty threshold.
- Pay the full amount with their tax return by April 15 of the following year.
- Make estimated tax payments throughout the year. (Correct answer)
Correct answer: Make estimated tax payments throughout the year.
Individuals, including sole proprietors, must generally pay estimated taxes if they expect to owe at least $1,000 in tax for the year. The tax system is 'pay-as-you-go,' and for those without sufficient withholding, estimated tax payments are the required method to pay tax throughout the year on income that is not subject to withholding.
Question 4: How did the Tax Cuts and Jobs Act of 2017 (TCJA) change the federal tax treatment of alimony for divorce or separation agreements executed AFTER December 31, 2018?
- Alimony payments are deductible by the payer and included as taxable income by the recipient.
- The tax treatment is elective and must be specified in the divorce agreement.
- Alimony payments are neither deductible by the payer nor included as taxable income by the recipient. (Correct answer)
- Alimony payments are considered a non-taxable property settlement.
Correct answer: Alimony payments are neither deductible by the payer nor included as taxable income by the recipient.
For divorce or separation agreements executed after December 31, 2018, the TCJA eliminated the deduction for alimony payments for the payer. Consequently, the recipient of the alimony payments no longer includes them in their gross income.
Question 5: A 16-year-old dependent child has $800 of earned income from a part-time job and $3,500 of unearned income from a trust. For the 2025 tax year, what is the primary tax implication for this child's unearned income under the 'Kiddie Tax' rules?
- All $3,500 of unearned income is taxed at the child's lower tax rate.
- The unearned income is tax-free because the child is a minor.
- A portion of the unearned income above a certain threshold will be taxed at the parents' highest marginal tax rate. (Correct answer)
- The earned and unearned income are combined and taxed at the parents' highest marginal tax rate.
Correct answer: A portion of the unearned income above a certain threshold will be taxed at the parents' highest marginal tax rate.
Under the Kiddie Tax rules for 2025, a child's unearned income above a certain threshold ($2,700 for 2025) is taxed at the parents' higher tax rate. The first portion of unearned income is offset by the child's standard deduction, the next portion is taxed at the child's rate, and the excess is taxed at the parents' rate. Therefore, a portion is taxed at the parents' rate.
Question 6: Which of the following statements is true regarding the itemized deduction for state and local taxes (SALT) for the 2025 tax year?
- There is no limit on the amount of state and local taxes that can be deducted.
- The deduction is limited to a total of $40,000 per household ($20,000 if married filing separately). (Correct answer)
- The deduction is only available for state and local property taxes, not income or sales taxes.
- The deduction was permanently eliminated for all taxpayers.
Correct answer: The deduction is limited to a total of $40,000 per household ($20,000 if married filing separately).
For the 2025 tax year, the deduction for state and local taxes, which includes property, income, and/or sales taxes, is capped at $40,000 for most filers, or $20,000 for those who are married filing separately.
