IRS Taxation for Individuals 2 — Questions and Answers
Question 1: A single taxpayer has $80,000 in wages and $5,000 in qualified dividends. How are the qualified dividends taxed for a taxpayer in the 22% ordinary income bracket?
- At 22% ordinary income rate
- At 15% preferential rate (Correct answer)
- At 0% because they are exempt
- At 20% because income exceeds $80,000
Correct answer: At 15% preferential rate
Qualified dividends for taxpayers in the 22% bracket are taxed at the 15% preferential capital gains rate.
Question 2: Which of the following expenses is deductible as a medical expense on Schedule A?
- Gym membership for general fitness
- Cosmetic surgery to improve appearance
- Prescription eyeglasses and contact lenses (Correct answer)
- Teeth whitening procedure
Correct answer: Prescription eyeglasses and contact lenses
Prescription eyeglasses and contact lenses qualify as deductible medical expenses because they correct a medical condition.
Question 3: A taxpayer sells their primary residence after living there for 18 months. What is the maximum capital gains exclusion available?
- $0 — no exclusion applies
- $125,000 — prorated for time lived there (Correct answer)
- $250,000 — prorated for partial ownership
- $500,000 — full exclusion applies
Correct answer: $125,000 — prorated for time lived there
The $250,000 exclusion ($500,000 MFJ) is prorated when the taxpayer fails to meet the full 2-year requirement due to a qualifying unforeseen circumstance.
Question 4: What is the 'kiddie tax' and when does it apply?
- A tax on children who earn wages under age 14
- A tax that applies a parent's rate to a child's unearned income above a threshold (Correct answer)
- A penalty for claiming a child as a dependent incorrectly
- A flat 10% tax on any income earned by a dependent under 19
Correct answer: A tax that applies a parent's rate to a child's unearned income above a threshold
The kiddie tax taxes a child's net unearned income above the threshold at the parent's marginal rate to prevent income shifting.
Question 5: A married couple filing jointly has $300,000 in net investment income and $250,000 in modified AGI. What additional tax may apply?
- 0.9% Additional Medicare Tax on wages
- 3.8% Net Investment Income Tax on the lesser of NII or MAGI over threshold (Correct answer)
- 3.8% Net Investment Income Tax on all investment income
- No additional tax applies below $400,000 MAGI
Correct answer: 3.8% Net Investment Income Tax on the lesser of NII or MAGI over threshold
The 3.8% NIIT applies to the lesser of net investment income or the amount by which MAGI exceeds $250,000 for MFJ filers.
Question 6: Which of the following is NOT a qualifying relative for dependency purposes?
- A cousin who lives with the taxpayer all year and earns $3,000
- A parent who does not live with the taxpayer but receives more than half their support
- A sibling who is age 25, not a student, and earns $8,000 (Correct answer)
- A nephew who lives with the taxpayer all year and earns $2,000
Correct answer: A sibling who is age 25, not a student, and earns $8,000
A sibling who earns $8,000 fails the gross income test ($4,700 limit for 2023) required for qualifying relative status.
Question 7: A taxpayer contributes $6,500 to a traditional IRA but is covered by a workplace retirement plan and has AGI of $85,000 (single). What portion is deductible?
- Full $6,500 is deductible
- Partially deductible — phaseout applies
- Not deductible — income exceeds phaseout range (Correct answer)
- $3,250 — always 50% deductible
Correct answer: Not deductible — income exceeds phaseout range
For 2023, the traditional IRA deduction phases out for single filers covered by a workplace plan between $73,000 and $83,000 AGI, so $85,000 exceeds the range and no deduction is allowed.
IRS Taxation for Individuals 2
A single taxpayer has $80,000 in wages and $5,000 in qualified dividends.
How are the qualified dividends taxed for a taxpayer in the 22% ordinary income bracket?