IRS Taxation for Individuals 3

Question 1

A taxpayer receives a $2,000 state income tax refund. Under what condition must this refund be included in gross income?

Accepted Answer

Only if the taxpayer itemized and deducted state taxes in the prior year and received a tax benefit

Answer

The tax benefit rule requires inclusion of a state tax refund only to the extent the prior-year deduction provided a federal tax benefit.

Question 2

What is the standard mileage rate used for and how is it applied?

Accepted Answer

For business, medical, moving, and charitable driving as an alternative to actual expenses

Answer

The IRS standard mileage rate can be used for business, medical/moving, and charitable driving as an alternative to tracking actual vehicle expenses.

Question 3

A taxpayer wins $10,000 at a casino. They also have $7,000 in documented gambling losses. How is this reported?

Accepted Answer

$10,000 is included in income; losses of $7,000 deducted on Schedule A if itemizing

Answer

Gambling winnings are fully included in gross income, and gambling losses are deductible only as an itemized deduction up to the amount of winnings.

Question 4

Which credit directly reduces the tax owed dollar-for-dollar, rather than reducing taxable income?

Accepted Answer

Child and Dependent Care Credit

Answer

Tax credits like the Child and Dependent Care Credit reduce tax liability dollar-for-dollar, unlike deductions which reduce taxable income.

Question 5

A self-employed taxpayer has net self-employment income of $100,000. What deduction can they take for self-employment tax?

Accepted Answer

Half of SE tax paid — approximately 7.65% of net earnings

Answer

Self-employed individuals can deduct one-half of self-employment tax paid as an adjustment to income on Schedule 1.

(IRS) Internal Revenue Service Certified Practice Test