Annual Federal Tax Refresher (AFTR) Comprehension Test — Questions and Answers

Question 1: A self-employed taxpayer earns $50,000 in net profit. What percentage of net self-employment earnings is subject to self-employment tax?

100%
92.35% (Correct answer)
85%
50%

Correct answer: 92.35%

Self-employment tax is calculated on 92.35% of net earnings (net profit × 0.9235) to account for the employer's share of FICA.

Question 2: What is the penalty for failing to take a required minimum distribution from an IRA?

25% of the amount not distributed (Correct answer)
50% of the amount not distributed
A flat $500 penalty
10% of the RMD amount

Correct answer: 25% of the amount not distributed

The SECURE 2.0 Act reduced the RMD failure penalty from 50% to 25% (and further to 10% if corrected within two years).

Question 3: How is the IRS underpayment penalty calculated?

The taxpayer's marginal tax rate applied to the underpaid balance
10% of the total underpaid amount for the year
A flat $500 fee per quarter
The federal short-term interest rate plus 3 percentage points on the underpaid amount (Correct answer)

Correct answer: The federal short-term interest rate plus 3 percentage points on the underpaid amount

The underpayment penalty is computed using the federal short-term interest rate plus 3 percentage points, applied to the underpaid amount for each quarter the payment was late or insufficient.

Question 4: What is the 2024 standard deduction for a single taxpayer under age 65?

$29,200
$14,600 (Correct answer)
$13,850
$12,000

Correct answer: $14,600

The standard deduction for a single filer in 2024 is $14,600, adjusted annually for inflation.

Question 5: A taxpayer's spouse died in 2024. They have a dependent child. What is the most beneficial filing status for tax years 2025 and 2026?

Head of Household
Single
Qualifying Surviving Spouse (Correct answer)
Married Filing Jointly

Correct answer: Qualifying Surviving Spouse

Qualifying Surviving Spouse status allows use of Married Filing Jointly tax rates for two years after the spouse's death when there is a qualifying dependent.

Question 6: Which IRS program provides free tax preparation assistance to low-income and elderly taxpayers?

IRS Free File
Direct File
IRS Taxpayer Advocate Service
VITA (Volunteer Income Tax Assistance) (Correct answer)

Correct answer: VITA (Volunteer Income Tax Assistance)

VITA (Volunteer Income Tax Assistance) offers free tax preparation by IRS-certified volunteers to taxpayers with income below $67,000, people with disabilities, and limited English speakers.

Question 7: Which of the following is an above-the-line deduction (adjustment to income)?

Charitable contributions
Student loan interest (Correct answer)
State income taxes
Mortgage interest

Correct answer: Student loan interest

Student loan interest (up to $2,500) is an above-the-line deduction that reduces AGI regardless of whether the taxpayer itemizes.

Question 8: Which type of income is reported on Schedule E of Form 1040?

Rental income (Correct answer)
Gambling winnings
Alimony received
Self-employment income

Correct answer: Rental income

Schedule E is used to report supplemental income such as rental income, S-corporation income, partnership income, and royalties.

Question 9: A taxpayer receives a state tax refund. Under what condition is the refund taxable?

It is always taxable
If the taxpayer itemized and deducted state taxes in the prior year (Correct answer)
Only if it exceeds $1,000
It is never taxable

Correct answer: If the taxpayer itemized and deducted state taxes in the prior year

A state tax refund is taxable only to the extent the taxpayer received a tax benefit from deducting state taxes in the prior year (the tax benefit rule).

Question 10: Which form reports wages, tips, and other compensation paid by an employer to an employee?

Form 1099-NEC
Form 1098
Form 1099-MISC
Form W-2 (Correct answer)

Correct answer: Form W-2

Form W-2, Wage and Tax Statement, is issued by employers to report employee wages and withheld taxes.

Question 11: A taxpayer may claim 'exempt' from federal income tax withholding on Form W-4 only if which condition is met?

They had zero federal income tax liability last year and expect zero liability this year (Correct answer)
They are claimed as a dependent on another person's return
Their total income is below the standard deduction amount
They are enrolled as a full-time student

Correct answer: They had zero federal income tax liability last year and expect zero liability this year

To claim exempt status on Form W-4, a taxpayer must have had no federal income tax liability in the prior year and must expect to have no liability in the current year.

Question 12: A taxpayer inherits stock worth $50,000 that the deceased purchased for $10,000. What is the heir's tax basis?

$0 (inheritance is tax-free)
$50,000 (stepped-up basis) (Correct answer)
$30,000 (average of cost and FMV)
$10,000 (carryover basis)

Correct answer: $50,000 (stepped-up basis)

Inherited property receives a stepped-up basis equal to the fair market value at the date of death, eliminating built-in gain from the decedent's holding period.

Question 13: The Earned Income Tax Credit (EITC) is best described as:

A deduction only for self-employed individuals
A nonrefundable credit for all wage earners
A refundable credit for low-to-moderate income workers (Correct answer)
A deduction for low-income workers

Correct answer: A refundable credit for low-to-moderate income workers

The EITC is a refundable credit, meaning it can result in a refund even if the taxpayer has no tax liability.

Question 14: A taxpayer with highly uneven income — earning most of it in Q3 — can use which method on Form 2210 to potentially reduce their underpayment penalty?

Regular method
Safe harbor exception method
Short method
Annualized income installment method (Correct answer)

Correct answer: Annualized income installment method

The annualized income installment method computes required estimated payments based on actual income earned in each quarter, rather than equal installments, which can reduce or eliminate penalties for taxpayers with seasonal or irregular income.

Question 15: Form 8867 must be completed by a paid tax preparer who claims which credits for a client?

Education credits only
Child Tax Credit only
All credits on Schedule 3
EITC, CTC, AOTC, and Head of Household (Correct answer)

Correct answer: EITC, CTC, AOTC, and Head of Household

Paid preparers must complete Form 8867 (Due Diligence) when claiming the EITC, Child Tax Credit, American Opportunity Tax Credit, or Head of Household status.

Question 16: A taxpayer sells stock for $10,000 that they purchased for $7,000 two years ago. How is the $3,000 gain classified?

Long-term capital gain (Correct answer)
Ordinary income
Short-term capital gain
Passive income

Correct answer: Long-term capital gain

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 17: What is the backup withholding rate applied to payments when a payee fails to provide a valid taxpayer identification number?

28%
24% (Correct answer)
10%
22%

Correct answer: 24%

The IRS backup withholding rate is 24%, applied to reportable payments such as interest, dividends, and non-employee compensation when a valid TIN has not been provided.

Question 18: Foreign tax credits allow US taxpayers to:

Avoid filing US returns on foreign income
Offset US tax on foreign income with taxes paid to a foreign government (Correct answer)
Exclude all foreign income from US taxes
Deduct foreign living expenses

Correct answer: Offset US tax on foreign income with taxes paid to a foreign government

The foreign tax credit (Form 1116) reduces US income tax by the amount of income tax paid to a foreign government on the same income.

Question 19: A self-employed taxpayer may deduct what portion of their self-employment tax from gross income?

50% (Correct answer)
100%
None
25%

Correct answer: 50%

Self-employed taxpayers can deduct 50% of self-employment tax as an adjustment to income, mimicking the employer's deductible share.

Question 20: Which tax credit directly reduces a taxpayer's tax bill dollar-for-dollar?

Exemptions
Tax credits (Correct answer)
Adjustments to income
Tax deductions

Correct answer: Tax credits

Tax credits reduce the actual tax owed dollar-for-dollar, whereas deductions reduce taxable income and save tax only at the marginal rate.

Question 21: A self-employed taxpayer can deduct 100% of health insurance premiums paid for themselves and their family as:

An adjustment to income on Schedule 1 (Correct answer)
A business expense on Schedule C
An itemized deduction on Schedule A
A miscellaneous itemized deduction

Correct answer: An adjustment to income on Schedule 1

Self-employed individuals deduct health insurance premiums as an above-the-line adjustment to income, reducing AGI.

Question 22: For 2024, the Social Security wage base means that the 6.2% Social Security tax applies only to wages up to what amount?

$168,600 (Correct answer)
$147,000
$176,100
$160,200

Correct answer: $168,600

For 2024, the Social Security wage base is $168,600; earnings above this threshold are exempt from the 6.2% Social Security tax, though the 1.45% Medicare tax has no wage cap.

Question 23: A college student who lives at home and earns $4,000 in wages. Can the parents claim the student as a dependent?

No, the student must file their own return
Yes, if the student is under 24 and a full-time student (Correct answer)
No, because the student earned income
Yes, only if the student earns under $1,000

Correct answer: Yes, if the student is under 24 and a full-time student

A full-time student under age 24 can be claimed as a qualifying child regardless of their income level.

Question 24: What is the annual gift tax exclusion for 2024?

$17,000
$18,000 (Correct answer)
$16,000
$15,000

Correct answer: $18,000

The annual gift tax exclusion for 2024 is $18,000 per recipient, meaning a donor can give up to $18,000 to any number of individuals without gift tax consequences.

Question 25: Cancellation of debt income is generally:

Always tax-free
Reported on Schedule D
Taxable as ordinary income unless an exclusion applies (Correct answer)
Taxed as a capital gain

Correct answer: Taxable as ordinary income unless an exclusion applies

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

Question 26: A taxpayer supports their sibling who lives with them and earns $5,000. Which test prevents claiming the sibling as a qualifying relative in 2024?

Gross income test (Correct answer)
Support test
Residency test
Relationship test

Correct answer: Gross income test

For 2024, a qualifying relative's gross income must be less than $5,050; a sibling earning exactly $5,000 may still qualify, but $5,050 or more would fail.

Question 27: Self-employment tax is composed of which two components?

Corporate tax and excise tax
FUTA and SUTA
Social Security tax and Medicare tax (Correct answer)
Federal income tax and state income tax

Correct answer: Social Security tax and Medicare tax

Self-employment tax consists of 12.4% for Social Security and 2.9% for Medicare, totaling 15.3%, covering both the employee and employer shares.

Question 28: Which method allows a self-employed taxpayer to calculate the home office deduction using $5 per square foot?

Simplified method (Correct answer)
Percentage-of-home method
Actual expense method
Straight-line method

Correct answer: Simplified method

The simplified method allows a deduction of $5 per square foot of the home office, up to 300 square feet ($1,500 maximum).

Question 29: A freelancer's Schedule C shows $15,000 net profit. What is their self-employment tax (rounded)?

$2,295
$2,120 (Correct answer)
$3,060
$1,147

Correct answer: $2,120

SE tax = $15,000 × 0.9235 × 0.153 = approximately $2,120.

Question 30: The Additional Medicare Tax of 0.9% applies to wages and self-employment income above what threshold for single filers?

$200,000 (Correct answer)
$125,000
$300,000
$250,000

Correct answer: $200,000

Single filers owe the additional 0.9% Medicare surtax on wages or self-employment income exceeding $200,000; the threshold is $250,000 for married filing jointly.

Question 31: Who is generally required to make quarterly estimated tax payments to the IRS?

Taxpayers with gross income exceeding $100,000
All W-2 employees regardless of withholding
Anyone who filed a federal tax return last year
Individuals who expect to owe at least $1,000 after withholding and credits (Correct answer)

Correct answer: Individuals who expect to owe at least $1,000 after withholding and credits

Individuals who expect to owe at least $1,000 in federal taxes after subtracting withholding and refundable credits must generally make quarterly estimated payments.

Question 32: Passive activity losses can generally be deducted only against:

Wages and salary income
All types of income equally
Passive income from other activities (Correct answer)
Capital gains only

Correct answer: Passive income from other activities

Passive activity losses can only offset passive income; unused passive losses are suspended and carried forward until the activity is disposed of.

Question 33: Which of the following is NOT a requirement for Qualifying Surviving Spouse filing status?

Taxpayer must have earned income (Correct answer)
Taxpayer has a qualifying dependent child
Taxpayer has not remarried
Spouse died in a prior tax year

Correct answer: Taxpayer must have earned income

Qualifying Surviving Spouse does not require the taxpayer to have earned income; it requires an unremarried widow/widower with a dependent child.

Question 34: The IRS statute of limitations to assess additional tax is generally how long from the due date of the return?

3 years (Correct answer)
1 year
2 years
10 years

Correct answer: 3 years

The IRS has 3 years from the later of the return due date or filing date to assess additional taxes, with exceptions for substantial understatements and fraud.

Question 35: Two divorced parents share custody. Who is generally entitled to claim the child as a dependent?

The custodial parent (Correct answer)
The parent who claims Head of Household
Both parents equally
The parent with the higher income

Correct answer: The custodial parent

The custodial parent — the one with whom the child lives the greater number of nights — generally claims the dependency exemption.

Question 36: Which form is used to report the additional 10% early withdrawal penalty on retirement account distributions?

Form 1099-R
Form 8606
Schedule SE
Form 5329 (Correct answer)

Correct answer: Form 5329

Form 5329 is used to calculate and report the 10% additional tax on early distributions from qualified retirement plans.

Question 37: Under the like-kind exchange rules (Section 1031), tax deferral is available for the exchange of:

Personal use property
Foreign currency
Real property held for investment or business use (Correct answer)
Stocks and bonds

Correct answer: Real property held for investment or business use

After the TCJA, Section 1031 like-kind exchanges apply only to real property held for productive use in a trade or business or for investment.

Question 38: What is the 2024 maximum contribution to a Health Savings Account (HSA) for self-only coverage?

$3,850
$7,750
$4,150 (Correct answer)
$3,200

Correct answer: $4,150

For 2024, the HSA contribution limit for self-only HDHP coverage is $4,150.

Question 39: Medical expenses are deductible as an itemized deduction to the extent they exceed what percentage of AGI?

10%
12%
5%
7.5% (Correct answer)

Correct answer: 7.5%

Medical expenses exceeding 7.5% of adjusted gross income (AGI) are deductible as an itemized deduction on Schedule A.

Question 40: A taxpayer receives a CP2000 notice from the IRS. What does this indicate?

The taxpayer owes a large balance due
There is a discrepancy between reported income and third-party information (Correct answer)
The return is being audited
The return was accepted with no changes

Correct answer: There is a discrepancy between reported income and third-party information

A CP2000 is an IRS automated underreporter notice proposing changes when income or deductions on the return don't match third-party documents.

Question 41: A taxpayer's divorce was finalized on December 31. What is their filing status for that tax year?

Married Filing Jointly
Head of Household
Married Filing Separately
Single (Correct answer)

Correct answer: Single

Filing status is determined by marital status on the last day of the tax year; a divorce finalized on December 31 means the taxpayer files as Single.

Question 42: Which schedule reports capital gains and losses from the sale of investments?

Schedule B
Schedule A
Schedule D (Correct answer)
Schedule E

Correct answer: Schedule D

Schedule D is used to report capital gains and losses from the sale or exchange of capital assets such as stocks and real estate.

Question 43: The Qualified Business Income (QBI) deduction under Section 199A allows eligible self-employed taxpayers to deduct up to what percentage of QBI?

25%
30%
20% (Correct answer)
15%

Correct answer: 20%

Section 199A allows a deduction of up to 20% of qualified business income from pass-through entities and sole proprietorships.

Question 44: By what deadline must employers furnish Form W-2 to their employees?

February 28
January 31 (Correct answer)
January 15
February 15

Correct answer: January 31

Employers are required to provide employees with Form W-2 by January 31 of the year following the tax year, giving employees sufficient time to prepare and file their tax returns.

Question 45: Quarterly estimated tax payments are due on which dates?

Jan 15, Apr 15, Jul 15, Oct 15
Apr 15, Jul 15, Oct 15, Jan 15
Apr 15, Jun 15, Sep 15, Jan 15 (Correct answer)
Mar 15, Jun 15, Sep 15, Dec 15

Correct answer: Apr 15, Jun 15, Sep 15, Jan 15

Estimated tax due dates are April 15, June 15, September 15, and January 15 of the following year.

Question 46: Schedule C net profit of $40,000 is subject to self-employment tax on what amount?

$37,000
$36,940 (Correct answer)
$38,000
$40,000

Correct answer: $36,940

Self-employment tax is calculated on 92.35% of net earnings: $40,000 × 0.9235 = $36,940.

Question 47: A taxpayer contributes $3,000 to a traditional IRA. They are covered by a workplace retirement plan and have an AGI that exceeds the phase-out range. What is the IRA deduction?

$1,500
$3,000
$0 (Correct answer)
$6,000

Correct answer: $0

If a taxpayer is covered by a workplace plan and their AGI exceeds the phase-out range, no deduction is allowed for traditional IRA contributions.

Question 48: Section 179 expensing allows a business to:

Immediately deduct the full cost of qualifying property in the year of purchase (Correct answer)
Deduct personal expenses as business costs
Avoid self-employment tax on profits
Defer income to future years

Correct answer: Immediately deduct the full cost of qualifying property in the year of purchase

Section 179 allows immediate expensing of qualifying business property rather than depreciating it over its useful life.

Question 49: Starting in 2020, the redesigned Form W-4 eliminated withholding allowances and replaced them with what?

Dollar amounts entered for additional income, deductions, and credits (Correct answer)
A simplified single checkbox for standard or non-standard withholding
A flat withholding rate tied to the employee's tax bracket
A percentage-based withholding election chosen by the employee

Correct answer: Dollar amounts entered for additional income, deductions, and credits

The 2020 Form W-4 redesign replaced the old allowance system with entries for dollar amounts representing additional income, itemized deductions, and tax credits to improve withholding accuracy.

Question 50: Social Security benefits become partially taxable when the taxpayer's combined income exceeds which threshold for single filers?

$15,000
$50,000
$25,000 (Correct answer)
$32,000

Correct answer: $25,000

Up to 50% of Social Security benefits may be taxable when combined income (AGI + nontaxable interest + half of SS benefits) exceeds $25,000 for single filers.

Question 51: What is the standard due date for individual tax returns (Form 1040) for calendar-year taxpayers?

April 15 (Correct answer)
April 1
May 1
March 15

Correct answer: April 15

Form 1040 is due on April 15 for calendar-year individual taxpayers; if April 15 falls on a weekend or holiday, it shifts to the next business day.

Question 52: A self-employed person's net loss from Schedule C may:

Be deducted only against passive income
Reduce other income on the tax return (subject to at-risk rules) (Correct answer)
Not be deducted against wages
Only be carried forward to future years

Correct answer: Reduce other income on the tax return (subject to at-risk rules)

Schedule C losses from an active trade or business can offset other income on Form 1040 subject to at-risk and basis limitations.

Question 53: When is the fourth (final) quarterly estimated tax payment due for calendar year taxpayers?

December 31
November 15
October 15
January 15 (Correct answer)

Correct answer: January 15

The fourth quarterly estimated tax payment is due January 15 of the following year, unless the taxpayer files their complete return and pays all tax owed by February 1.

Question 54: A freelancer receives $700 from a single client. Is the client required to issue a 1099-NEC?

Yes, any amount requires a 1099
Yes, amounts over $500 require a 1099
No, only amounts over $1,000 require reporting
No, the threshold is $600 (Correct answer)

Correct answer: No, the threshold is $600

Form 1099-NEC is required when payments to an independent contractor reach $600 or more during the tax year.

Question 55: The Child and Dependent Care Credit is calculated as a percentage of which amount?

Total childcare costs paid
The dependent's income
The lesser of actual expenses or $3,000 ($6,000 for 2+) (Correct answer)
The taxpayer's earned income

Correct answer: The lesser of actual expenses or $3,000 ($6,000 for 2+)

The credit is based on qualifying expenses up to $3,000 for one dependent or $6,000 for two or more, multiplied by a credit percentage.

Question 56: Which IRS form reports distributions from a traditional IRA or 401(k)?

Form 1099-DIV
Form 5498
Form 1099-R (Correct answer)
Form W-2

Correct answer: Form 1099-R

Form 1099-R reports distributions from pensions, annuities, retirement plans, and IRAs.

Question 57: Which IRS form do employees complete to instruct their employer on how much federal income tax to withhold from each paycheck?

Form W-2
Form W-4 (Correct answer)
Form 941
Form 1040-ES

Correct answer: Form W-4

Form W-4, the Employee's Withholding Certificate, tells employers how much federal income tax to withhold based on the employee's filing status and any adjustments.

Question 58: A tax preparer who prepares more than 11 returns in a year is required to do what?

Apply for an EFIN
File all returns electronically (e-file mandate) (Correct answer)
Register with the state tax board
Become a CPA

Correct answer: File all returns electronically (e-file mandate)

Paid tax preparers who prepare more than 10 individual returns per year are subject to the IRS e-file mandate and must file returns electronically.

Question 59: A home office deduction for self-employed individuals requires the office space to be used:

Occasionally for business
Exclusively and regularly for business (Correct answer)
For any work-related activity
Primarily for business

Correct answer: Exclusively and regularly for business

The home office deduction requires exclusive and regular use as the principal place of business, not merely primary or occasional use.

Question 60: Which test must a qualifying relative pass that a qualifying child does NOT need to pass?

Relationship test
Gross income test (Correct answer)
Residency test
Age test

Correct answer: Gross income test

A qualifying relative must have gross income below the exemption threshold, a rule that does not apply to qualifying children.

Question 61: Form 941 is filed by employers to report:

Quarterly payroll taxes including income tax withheld and FICA (Correct answer)
Annual wages and tips
Self-employment income
Annual FUTA taxes

Correct answer: Quarterly payroll taxes including income tax withheld and FICA

Form 941, Employer's Quarterly Federal Tax Return, reports wages paid, federal income tax withheld, and employer/employee FICA taxes each quarter.

Question 62: Which of the following is NOT deductible as a mortgage interest deduction?

Interest on a home equity loan used for home improvement
Points paid to obtain a mortgage on a primary home
Interest on a first mortgage of $700,000
Interest on a mortgage for a vacation home above the $750,000 limit (Correct answer)

Correct answer: Interest on a mortgage for a vacation home above the $750,000 limit

Under the TCJA, mortgage interest is deductible on acquisition debt up to $750,000 combined for primary and secondary homes; amounts over this limit are not deductible.

Question 63: The Alternative Minimum Tax (AMT) was designed to ensure that:

Low-income taxpayers pay more tax
Retirement income is taxed at a flat rate
High-income taxpayers pay a minimum level of tax regardless of deductions (Correct answer)
All businesses pay corporate tax

Correct answer: High-income taxpayers pay a minimum level of tax regardless of deductions

The AMT is a parallel tax calculation that adds back certain preference items and deductions to ensure high-income taxpayers pay at least a minimum tax.

Question 64: For calendar year taxpayers, when is the first quarterly estimated tax payment due?

April 15 (Correct answer)
January 15
June 15
September 15

Correct answer: April 15

The first quarterly estimated tax payment for the calendar year is due April 15, coinciding with the regular individual income tax filing deadline.

Question 65: Which of the following individuals qualifies as a dependent under the qualifying child rules?

A 23-year-old child who is a full-time student (Correct answer)
A 20-year-old sibling who works full-time
A 19-year-old cousin who lives with the taxpayer
A 17-year-old niece who does not live with the taxpayer

Correct answer: A 23-year-old child who is a full-time student

A full-time student under age 24 who is the taxpayer's child qualifies as a qualifying child regardless of income.

Question 66: The Net Investment Income Tax (NIIT) of 3.8% applies to which taxpayers?

All taxpayers with investment income
Self-employed individuals with rental income
Only corporate taxpayers
Taxpayers with MAGI over $200,000 (single) or $250,000 (MFJ) (Correct answer)

Correct answer: Taxpayers with MAGI over $200,000 (single) or $250,000 (MFJ)

The 3.8% NIIT applies to the lesser of net investment income or the amount by which MAGI exceeds $200,000 for singles ($250,000 for MFJ).

Question 67: A taxpayer can avoid the underpayment penalty by paying at least what percentage of the prior year's tax?

100% of prior year tax (or 110% if income over $150,000) (Correct answer)
95% of current year tax
85% of estimated current year tax
90% of current year tax

Correct answer: 100% of prior year tax (or 110% if income over $150,000)

The safe harbor rule allows avoiding the underpayment penalty by paying 100% of the prior year's tax (or 110% if prior year AGI exceeded $150,000).

Question 68: A taxpayer is claimed as a dependent by their parents. Can they still file their own tax return?

Yes, and they can also claim the standard deduction for dependents (Correct answer)
No, dependents cannot file returns
Yes, but they cannot claim a personal exemption
No, their income is reported on the parent's return

Correct answer: Yes, and they can also claim the standard deduction for dependents

Dependents can file their own return but must use the dependent standard deduction rules (the greater of earned income + $400 or $1,300 for 2024).

Question 69: Which filing status has the lowest tax rates in the US tax brackets?

Single
Head of Household
Married Filing Jointly (Correct answer)
Married Filing Separately

Correct answer: Married Filing Jointly

Married Filing Jointly (and Qualifying Surviving Spouse) has the widest tax brackets, resulting in the lowest tax rates at most income levels.

Question 70: The $25,000 rental activity loss allowance for active participants phases out for AGI between:

$100,000 and $150,000 (Correct answer)
$150,000 and $200,000
$200,000 and $250,000
$50,000 and $100,000

Correct answer: $100,000 and $150,000

The $25,000 special allowance for rental real estate losses for active participants phases out for AGI between $100,000 and $150,000.

Question 71: A sole proprietor can deduct contributions to a SEP-IRA up to what percentage of net self-employment earnings?

15%
25% (Correct answer)
50%
10%

Correct answer: 25%

SEP-IRA contributions are limited to 25% of net self-employment compensation (after SE tax deduction), up to an annual dollar cap.

Question 72: An employee receives $6,000 in employer-provided educational assistance. How much is excludable from income?

$2,500
$6,000
$0 — all is taxable
$5,250 (Correct answer)

Correct answer: $5,250

Up to $5,250 of employer-provided educational assistance can be excluded from income under IRC Section 127.

Question 73: The kiddie tax rules tax a child's unearned income above a threshold at the:

Flat 15% rate
Child's tax rate
Parent's marginal tax rate (Correct answer)
Corporate tax rate

Correct answer: Parent's marginal tax rate

The kiddie tax applies to unearned income of children under 19 (or under 24 if full-time students) above the annual threshold, taxed at the parent's rate.

Question 74: A married couple can file as Married Filing Separately to reduce their total tax liability in which common scenario?

One spouse has large medical expenses (Correct answer)
They have no dependents
Both spouses have equal income
They want to maximize the standard deduction

Correct answer: One spouse has large medical expenses

Filing separately can benefit a couple when one spouse has significant itemizable expenses like medical costs that must exceed a percentage of AGI.

Question 75: An Individual Taxpayer Identification Number (ITIN) is issued to:

Nonresident and resident aliens who are not eligible for an SSN (Correct answer)
Tax professionals for preparer registration
Businesses operating in the US
US citizens without a Social Security Number

Correct answer: Nonresident and resident aliens who are not eligible for an SSN

ITINs are issued by the IRS to foreign nationals and others who need a taxpayer ID for US tax purposes but are not eligible for a Social Security Number.

Question 76: A self-employed consultant uses the actual expense method for vehicle deductions. Which record is most important to maintain?

Total miles driven
A mileage log showing business and personal miles (Correct answer)
Vehicle purchase price
Fuel receipts only

Correct answer: A mileage log showing business and personal miles

The IRS requires contemporaneous mileage records showing business and personal miles to substantiate the business-use percentage for vehicle deductions.

Question 77: A sole proprietor reports income and expenses on which form?

Schedule C (Correct answer)
Form 1120-S
Form 1065
Schedule E

Correct answer: Schedule C

Sole proprietors report business income and deductible expenses on Schedule C (Profit or Loss from Business) of Form 1040.

Question 78: Electronic filing (e-file) requires returns to be accepted or rejected within how many days by the IRS?

10 business days
5 business days
1 day
24–48 hours (Correct answer)

Correct answer: 24–48 hours

The IRS generally accepts or rejects electronically filed returns within 24–48 hours of submission.

Question 79: The exclusion of gain from the sale of a primary residence applies to gains up to:

$500,000 (single) / $1,000,000 (MFJ)
$100,000 (single) / $200,000 (MFJ)
There is no limit — all gain is excluded
$250,000 (single) / $500,000 (MFJ) (Correct answer)

Correct answer: $250,000 (single) / $500,000 (MFJ)

Under Section 121, taxpayers may exclude up to $250,000 ($500,000 for MFJ) of gain from the sale of a primary residence if ownership and use tests are met.

Question 80: A taxpayer provides more than half the support for their elderly parent who lives in a different home. Which test may they satisfy to claim the parent?

Qualifying child test
Head of Household test
Earned income test
Qualifying relative test (Correct answer)

Correct answer: Qualifying relative test

An elderly parent who does not live with the taxpayer can be claimed as a qualifying relative if support and income tests are met.

Question 81: What is the 2024 contribution limit for a traditional or Roth IRA (under age 50)?

$5,500
$6,000
$7,000 (Correct answer)
$8,000

Correct answer: $7,000

The 2024 IRA contribution limit is $7,000 for individuals under age 50, with an additional $1,000 catch-up contribution allowed for those 50 and older.

Question 82: Under the IRS safe harbor rule, a taxpayer can avoid an underpayment penalty by paying at least what percentage of the current year's tax liability?

90% (Correct answer)
75%
80%
95%

Correct answer: 90%

Taxpayers can avoid the underpayment penalty by paying at least 90% of the current year's tax liability, or 100% of the prior year's tax, whichever is smaller.

Question 83: A 52-year-old withdraws $15,000 from a traditional IRA. The early withdrawal penalty does NOT apply because:

No exception exists and the penalty applies (Correct answer)
The distribution is under $20,000
They are over 50 years old
They are over age 59½, so no penalty applies — wait, they are 52, so the penalty does apply

Correct answer: No exception exists and the penalty applies

The 10% early withdrawal penalty applies to individuals under age 59½ unless a specific exception (disability, first-home purchase, SEPP, etc.) applies.

Question 84: Required Minimum Distributions (RMDs) from traditional IRAs must generally begin at age:

75
72
70½
73 (Correct answer)

Correct answer: 73

The SECURE 2.0 Act raised the RMD starting age to 73 for individuals who turn 72 after December 31, 2022.

Question 85: Which form allows retirees and pension recipients to elect federal income tax withholding from their retirement distributions?

Form 1040-ES
Form W-9
Form W-4P (Correct answer)
Form W-4

Correct answer: Form W-4P

Form W-4P, Withholding Certificate for Pension or Annuity Payments, allows retirees to request federal income tax withholding from pension, annuity, or IRA distributions.

Question 86: What is the maximum age for a qualifying child dependent who is not a full-time student?

18 (Correct answer)
19
24
17

Correct answer: 18

A qualifying child must be under age 19 at the end of the tax year unless they are a full-time student.

Question 87: How many months must a taxpayer have paid more than half the household costs to qualify for Head of Household?

3 months
More than 6 months (Correct answer)
6 months
All 12 months

Correct answer: More than 6 months

To file as Head of Household, the taxpayer must have paid more than half the cost of keeping up a home for more than half the year.

Question 88: Which IRS form is used to calculate and submit quarterly estimated tax payments?

Form 2210
Form 1040-ES (Correct answer)
Form W-4
Form 1099-ES

Correct answer: Form 1040-ES

Form 1040-ES, Estimated Tax for Individuals, is the form used to calculate the estimated tax owed and to submit quarterly payments to the IRS.

Question 89: Contributions to a Roth IRA are made with:

After-tax dollars and qualified withdrawals are tax-free (Correct answer)
After-tax dollars and distributions are taxed
Pre-tax dollars and grow tax-free
Pre-tax dollars and distributions are taxed

Correct answer: After-tax dollars and qualified withdrawals are tax-free

Roth IRA contributions are nondeductible (made with after-tax money), but qualified distributions, including earnings, are completely tax-free.

Question 90: Which of the following best describes the Preparer Tax Identification Number (PTIN)?

The same as the preparer's Social Security Number
Required only for preparers with more than 100 clients
A required identification number for all paid tax return preparers (Correct answer)
An optional number for CPAs only

Correct answer: A required identification number for all paid tax return preparers

All paid tax return preparers must obtain and renew a PTIN annually; using an expired or invalid PTIN can result in penalties.

Question 91: An employee is reimbursed $600 under an employer's accountable plan for business travel. How is this treated?

Excluded from taxable income (Correct answer)
Deducted as a miscellaneous itemized deduction
Included in W-2 wages
Reported on Schedule C

Correct answer: Excluded from taxable income

Reimbursements under an accountable plan are excluded from the employee's taxable income because the employee substantiated the business expense.

Question 92: Which IRS notice is sent when a taxpayer has an unpaid balance and the IRS intends to levy?

CP14
CP2000
CP11
CP504 (Correct answer)

Correct answer: CP504

CP504 is a final notice before levy, warning the taxpayer that the IRS may seize assets (including state tax refunds) if the balance is not paid.

Question 93: What is the maximum Saver's Credit percentage for a single taxpayer with the lowest AGI?

100%
20%
50% (Correct answer)
10%

Correct answer: 50%

The Retirement Savings Contributions Credit (Saver's Credit) is up to 50% of contributions for the lowest income tier, based on AGI.

Question 94: A self-employed individual buys a $20,000 vehicle used 60% for business. What is the maximum first-year depreciation deduction using Section 179?

$20,000
$12,000 (Correct answer)
$10,000
$6,000

Correct answer: $12,000

Section 179 deduction is limited to the business-use percentage: $20,000 × 60% = $12,000 (subject to annual limitations and luxury auto caps).

Question 95: A taxpayer owes $3,000 in taxes but cannot pay. What is the best first step?

File the return on time and pay what they can, then request a payment plan (Correct answer)
File a bankruptcy petition
File for an extension to delay payment
Ignore the bill until the IRS contacts them

Correct answer: File the return on time and pay what they can, then request a payment plan

Filing on time avoids the larger failure-to-file penalty; paying what is possible and setting up an installment agreement minimizes penalties and interest.

Question 96: The '110% safe harbor' rule for avoiding underpayment penalties applies when a taxpayer's prior year adjusted gross income exceeded what threshold?

$150,000 (Correct answer)
$75,000
$100,000
$200,000

Correct answer: $150,000

Taxpayers with prior year AGI over $150,000 ($75,000 if married filing separately) must pay 110% of the prior year's tax liability to meet the safe harbor and avoid underpayment penalties.

Question 97: A taxpayer pays $8,000 in state and local taxes. Under the TCJA, how much can they deduct on Schedule A?

$0
$5,000 (Correct answer)
$8,000
$10,000

Correct answer: $5,000

The TCJA capped the state and local tax (SALT) deduction at $10,000 ($5,000 for MFS), so only $5,000 is deductible if filing Married Filing Separately.

Question 98: An Offer in Compromise (OIC) allows a taxpayer to:

Convert their tax debt to a loan
Settle their tax debt for less than the full amount owed (Correct answer)
Delay filing their return for up to two years
Avoid all penalties permanently

Correct answer: Settle their tax debt for less than the full amount owed

An OIC is an IRS program that allows qualifying taxpayers to settle their tax debt for less than the total amount owed based on their ability to pay.

Question 99: Charitable cash contributions to qualified organizations are generally limited to what percentage of AGI?

60% (Correct answer)
30%
50%
100%

Correct answer: 60%

Cash contributions to public charities are generally limited to 60% of AGI; any excess can be carried forward for five years.

Question 100: Which form is used by nonresident aliens to file a US income tax return?

Form 1040-NR (Correct answer)
Form 1040-SR
Form W-7
Form 1040

Correct answer: Form 1040-NR

Form 1040-NR is the US Nonresident Alien Income Tax Return for foreign nationals with US-source income.

Annual Federal Tax Refresher (AFTR) Comprehension Test

The Annual Federal Tax Refresher (AFTR) exam is required for non-credentialed tax preparers to participate in the IRS Annual Filing Season Program (AFSP), testing knowledge of tax law updates, individual tax preparation, and IRS practices and procedures.

100

Questions

180 min

Time Limit

70%

To Pass

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