IRS Deductions and Credits 3 — Questions and Answers
Question 1: Which of the following is a refundable tax credit?
- Child and Dependent Care Credit
- Earned Income Tax Credit (Correct answer)
- Lifetime Learning Credit
- Saver's Credit
Correct answer: Earned Income Tax Credit
The Earned Income Tax Credit is fully refundable, meaning it can reduce tax liability below zero and result in a refund.
Question 2: What is the maximum amount of student loan interest a taxpayer may deduct per year?
- $1,000
- $2,500 (Correct answer)
- $4,000
- $5,000
Correct answer: $2,500
Taxpayers may deduct up to $2,500 in student loan interest paid during the year, subject to income phase-outs.
Question 3: The American Opportunity Tax Credit provides up to how much per eligible student per year?
- $1,000
- $2,000
- $2,500 (Correct answer)
- $4,000
Correct answer: $2,500
The AOTC provides up to $2,500 per student for qualified education expenses in the first four years of higher education.
Question 4: For the home office deduction simplified method, what is the deduction per square foot?
- $3
- $5 (Correct answer)
- $8
- $10
Correct answer: $5
The simplified method allows a $5 per square foot deduction for up to 300 square feet of home office space.
Question 5: Which of the following expenses qualifies as a miscellaneous itemized deduction under current law?
- Unreimbursed employee expenses
- Investment advisory fees
- Tax preparation fees
- Gambling losses to the extent of gambling winnings (Correct answer)
Correct answer: Gambling losses to the extent of gambling winnings
The TCJA suspended most miscellaneous itemized deductions; gambling losses offset against winnings remain deductible.
Question 6: A self-employed taxpayer pays $6,000 in health insurance premiums. Where is this deduction claimed?
- Schedule A as an itemized deduction
- Schedule C as a business expense
- Form 1040 as an above-the-line deduction (Correct answer)
- It is not deductible
Correct answer: Form 1040 as an above-the-line deduction
Self-employed health insurance premiums are an above-the-line deduction on Form 1040, reducing AGI.
Question 7: The Lifetime Learning Credit is worth what percentage of qualified education expenses?
- 10%
- 20% (Correct answer)
- 25%
- 100%
Correct answer: 20%
The Lifetime Learning Credit equals 20% of up to $10,000 in qualified education expenses, for a maximum of $2,000.
IRS Deductions and Credits 3
Which of the following is a refundable tax credit?