Tax Consulting Income Tax Knowledge 3

Question 1

Which credit is refundable, meaning it can produce a refund larger than taxes paid?

Accepted Answer

Earned Income Tax Credit

Answer

The Earned Income Tax Credit is fully refundable and can generate a refund exceeding tax liability.

Question 2

What is the difference between a tax deduction and a tax credit?

Accepted Answer

A deduction reduces taxable income; a credit reduces tax owed

Answer

A deduction lowers the income subject to tax, while a credit directly reduces the tax liability dollar-for-dollar.

Question 3

Contributions to a traditional 401(k) reduce taxable income because they are made with what kind of dollars?

Accepted Answer

Pre-tax dollars

Answer

Traditional 401(k) contributions are made pre-tax, lowering current taxable income.

Question 4

How long should taxpayers generally keep records supporting an item on a return?

Accepted Answer

At least 3 years

Answer

The IRS generally recommends keeping records for at least three years, matching the standard audit window.

Question 5

Which schedule is used to report itemized deductions on Form 1040?

Accepted Answer

Schedule A

Answer

Schedule A is used to itemize deductions such as mortgage interest, state taxes, and charitable gifts.

Tax Consulting Practice Test