Tax Preparation Income Types and Reporting 3

Question 1

Which of the following income items is NOT subject to Social Security and Medicare taxes (FICA)?

Accepted Answer

Dividend income

Answer

Dividend income is investment income and is not subject to FICA taxes; only earned income from employment is subject to FICA.

Question 2

A taxpayer sells stock for $10,000 that they purchased for $7,000 two years ago. How is the $3,000 gain classified?

Accepted Answer

Long-term capital gain

Answer

Assets held for more than one year qualify for long-term capital gain treatment, which is taxed at preferential rates (0%, 15%, or 20%).

Question 3

Which of the following is considered tax-exempt interest that must still be reported on Form 1040?

Accepted Answer

Municipal bond interest

Answer

Municipal bond interest is exempt from federal income tax but must still be reported on Form 1040 because it affects other calculations like Social Security taxability.

Question 4

Cancellation of debt income is generally:

Accepted Answer

Taxable as ordinary income unless an exclusion applies

Answer

Forgiven debt is generally taxable as ordinary income, but exclusions apply for insolvency, bankruptcy, and certain mortgage debt forgiveness.

Question 5

Which form reports dividend income paid to a shareholder?

Accepted Answer

Form 1099-DIV

Answer

Form 1099-DIV is issued by corporations and mutual funds to report dividends and capital gain distributions paid to investors.

Tax Preparation Practice Test

Tax Preparation Practice Test

Tax Preparation Income Types and Reporting 3