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

Question 1: An employee is reimbursed $600 under an employer's accountable plan for business travel. How is this treated?

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

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

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

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

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

Correct answer: Form W-2

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

Question 4: 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
Married Filing Jointly
Qualifying Surviving Spouse (Correct answer)
Single

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

Parent's marginal tax rate (Correct answer)
Flat 15% rate
Corporate tax rate
Child's 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 6: Which of the following is an above-the-line deduction (adjustment to income)?

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

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

A simplified single checkbox for standard or non-standard withholding
Dollar amounts entered for additional income, deductions, and credits (Correct answer)
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 8: Which of the following taxes paid is deductible as an itemized deduction?

Estate taxes on inherited property
Real estate property taxes (Correct answer)
Self-employment taxes
Federal income taxes

Correct answer: Real estate property taxes

Real estate property taxes are deductible as part of the SALT deduction (subject to the $10,000 cap) on Schedule A.

Question 9: Form 8867 must be completed by a paid tax preparer who claims which credits for a client?

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

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

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

Correct answer: $2,120

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

Question 11: What is the 2024 maximum contribution to a Health Savings Account (HSA) for self-only coverage?

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

Correct answer: $4,150

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

Question 12: Which test must a qualifying relative pass that a qualifying child does NOT need to pass?

Gross income test (Correct answer)
Age test
Residency test
Relationship 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 13: Contributions to a Roth IRA are made with:

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

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

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

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 15: Passive activity losses can generally be deducted only against:

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

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

January 15
April 15 (Correct answer)
September 15
June 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 17: Which type of income is reported on Schedule E of Form 1040?

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

Correct answer: Rental income

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

Question 18: Which form is used to report interest income of $1,500 from a bank account?

Schedule B (Correct answer)
Schedule E
Schedule D
Form 4952

Correct answer: Schedule B

Schedule B is required when taxable interest or ordinary dividends exceed $1,500, and it reconciles interest and dividend income.

Question 19: Under the like-kind exchange rules (Section 1031), tax deferral is available for the exchange of:

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

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

19
18 (Correct answer)
17
24

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 21: Form 941 is filed by employers to report:

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

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 22: Alimony paid under a divorce agreement finalized in 2019 is treated how for the payer?

Not deductible under the new law
Added to the payer's gross income
Deductible as an adjustment to income (Correct answer)
Deductible only if itemizing

Correct answer: Deductible as an adjustment to income

Alimony under pre-2019 (pre-TCJA) divorce agreements is deductible by the payer and taxable to the recipient under the old rules.

Question 23: A self-employed individual buys a $20,000 vehicle used 60% for business. What is the maximum first-year depreciation deduction using Section 179?

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

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

50%
25% (Correct answer)
15%
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 25: The American Opportunity Tax Credit (AOTC) provides a maximum annual credit of:

$4,000
$2,500 (Correct answer)
$2,000
$1,000

Correct answer: $2,500

The AOTC provides up to $2,500 per eligible student per year for the first four years of higher education.

Question 26: A self-employed taxpayer earns $50,000 in net profit. What percentage of net self-employment earnings is subject to self-employment tax?

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

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

72
75
73 (Correct answer)
70½

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 28: A taxpayer wins $5,000 at a casino. How should this be reported?

Gambling winnings are never taxable
As Other Income on Schedule 1 (Correct answer)
Only if a W-2G was issued
It is tax-free if under $10,000

Correct answer: As Other Income on Schedule 1

All gambling winnings are taxable and must be reported as Other Income on Schedule 1, regardless of whether a Form W-2G was issued.

Question 29: A sole proprietor reports income and expenses on which form?

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

Correct answer: Schedule C

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

Question 30: A self-employed taxpayer may deduct what portion of their self-employment tax from gross income?

None
25%
50% (Correct answer)
100%

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

All W-2 employees regardless of withholding
Taxpayers with gross income exceeding $100,000
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: What is the penalty for failing to file Form 1040 on time (without an extension)?

5% per month on unpaid tax (up to 25%) (Correct answer)
Flat $500 penalty
0.5% per month on unpaid tax
10% of total tax owed

Correct answer: 5% per month on unpaid tax (up to 25%)

The failure-to-file penalty is 5% of unpaid tax per month (up to 25%), significantly larger than the failure-to-pay penalty of 0.5% per month.

Question 33: Which of the following best describes the Preparer Tax Identification Number (PTIN)?

The same as the preparer's Social Security Number
A required identification number for all paid tax return preparers (Correct answer)
Required only for preparers with more than 100 clients
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 34: Quarterly estimated tax payments are due on which dates?

Apr 15, Jul 15, Oct 15, Jan 15
Mar 15, Jun 15, Sep 15, Dec 15
Apr 15, Jun 15, Sep 15, Jan 15 (Correct answer)
Jan 15, Apr 15, Jul 15, Oct 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 35: What is the maximum Child Tax Credit per qualifying child for 2024?

$2,000 (Correct answer)
$3,600
$1,000
$1,500

Correct answer: $2,000

The Child Tax Credit is up to $2,000 per qualifying child under age 17, with a refundable portion of up to $1,700.

Question 36: Form 4868 grants an automatic extension to file Form 1040 for how many months?

4 months
3 months
6 months (Correct answer)
12 months

Correct answer: 6 months

Form 4868 grants an automatic 6-month extension to file (not to pay), extending the filing deadline to October 15.

Question 37: What form does a custodial parent use to release the dependency exemption to the noncustodial parent?

Form 1040-X
Schedule EIC
Form 2441
Form 8332 (Correct answer)

Correct answer: Form 8332

Form 8332, Release/Revocation of Release of Claim to Exemption for Child by Custodial Parent, is used to transfer the dependency claim.

Question 38: What is the annual gift tax exclusion for 2024?

$16,000
$18,000 (Correct answer)
$17,000
$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 39: A taxpayer can avoid the underpayment penalty by paying at least what percentage of the prior year's tax?

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

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

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

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 41: 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 42: A taxpayer receives a state tax refund. Under what condition is the refund taxable?

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

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 43: Which individual is generally NOT required to make quarterly estimated tax payments?

A retiree receiving $25,000 in pension income with no withholding elected
A landlord receiving $40,000 annually in net rental income
A freelance web developer who expects to owe $3,000 in taxes
A W-2 employee whose payroll withholding fully covers their tax liability (Correct answer)

Correct answer: A W-2 employee whose payroll withholding fully covers their tax liability

A W-2 employee whose employer withholds enough to cover their entire tax liability is not required to make estimated payments because the withholding itself satisfies the pay-as-you-go requirement.

Question 44: An employee receives $6,000 in employer-provided educational assistance. How much is excludable from income?

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

Correct answer: $5,250

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

Question 45: The Premium Tax Credit (PTC) is available to taxpayers who purchase insurance through:

Their employer's plan
Medicare or Medicaid
The Health Insurance Marketplace (Exchange) (Correct answer)
Any insurance company

Correct answer: The Health Insurance Marketplace (Exchange)

The Premium Tax Credit is available only for coverage purchased through the ACA Marketplace and is based on household income relative to the federal poverty level.

Question 46: Which filing status has the lowest tax rates in the US tax brackets?

Head of Household
Single
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 47: 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 48: The Alternative Minimum Tax (AMT) was designed to ensure that:

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

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

1 year
3 years (Correct answer)
10 years
2 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 50: 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?

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

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

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

Correct answer: 7.5%

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

Question 52: Which tax credit directly reduces a taxpayer's tax bill dollar-for-dollar?

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

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 53: A self-employed person with no employees wants to open a retirement plan with the highest possible contribution. Which plan is best?

SEP-IRA
SIMPLE IRA
Solo 401(k) (Correct answer)
Traditional IRA

Correct answer: Solo 401(k)

A Solo 401(k) allows contributions both as employee ($23,000 in 2024) and employer (up to 25% of compensation), potentially exceeding SEP-IRA limits.

Question 54: The Lifetime Learning Credit (LLC) provides a maximum annual credit of:

$1,000
$2,000 (Correct answer)
$2,500
$4,000

Correct answer: $2,000

The LLC provides a credit of 20% of up to $10,000 in qualifying education expenses, for a maximum of $2,000 per return.

Question 55: The '110% safe harbor' rule for avoiding underpayment penalties applies when a taxpayer's prior year adjusted gross income exceeded what threshold?

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

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

$14,600 (Correct answer)
$29,200
$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 57: Which of the following expenses is NOT deductible on Schedule C?

Personal vacation expenses (Correct answer)
Business software subscriptions
Business portion of cell phone
Health insurance premiums (if not deducted as adjustment)

Correct answer: Personal vacation expenses

Personal vacation expenses are not deductible business expenses; only the business portion of a trip with both business and personal elements is deductible.

Question 58: Which of the following is considered tax-exempt interest that must still be reported on Form 1040?

US Treasury bond interest
Municipal bond interest (Correct answer)
Corporate bond interest
Savings account interest

Correct answer: Municipal bond interest

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 59: Business meals are generally deductible at what percentage for self-employed taxpayers?

50% (Correct answer)
80%
100%
25%

Correct answer: 50%

Business meals are generally only 50% deductible; the TCJA eliminated the deduction for entertainment expenses entirely.

Question 60: Which IRS form reports distributions from a traditional IRA or 401(k)?

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

Correct answer: Form 1099-R

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

Question 61: When is the fourth (final) quarterly estimated tax payment due for calendar year taxpayers?

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

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

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

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 63: 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
They are enrolled as a full-time student
Their total income is below the standard deduction amount

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

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

Correct answer: Form 5329

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

Question 65: What is the residency test requirement for a qualifying child?

Must live with the taxpayer for more than half the year (Correct answer)
Must have the same permanent address as the taxpayer
Must live with the taxpayer for at least 3 months
Must live with the taxpayer all year

Correct answer: Must live with the taxpayer for more than half the year

A qualifying child must have lived with the taxpayer for more than half of the tax year to pass the residency test.

Question 66: An Individual Taxpayer Identification Number (ITIN) is issued to:

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

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 67: What is the purpose of IRS Form 2210?

To report additional self-employment tax owed at year-end
To calculate an underpayment penalty or show that an exception or waiver applies (Correct answer)
To request an extension of time to pay taxes owed
To claim a refund of estimated tax payments already made

Correct answer: To calculate an underpayment penalty or show that an exception or waiver applies

Form 2210, Underpayment of Estimated Tax by Individuals, is used to determine whether an underpayment penalty applies and to calculate its amount, or to document that a waiver or exception eliminates the penalty.

Question 68: Which form is used by nonresident aliens to file a US income tax return?

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

Correct answer: Form 1040-NR

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

Question 69: A taxpayer inherits stock worth $50,000 that the deceased purchased for $10,000. What is the heir's tax basis?

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

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 70: An employer must deposit federal payroll taxes by what general deadline for monthly depositors?

The last day of the following month
The 7th of the following month
The 15th of the following month (Correct answer)
The 10th of the following month

Correct answer: The 15th of the following month

Monthly depositors must deposit payroll taxes by the 15th day of the month following the payroll month.

Question 71: 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
Defer income to future years
Avoid self-employment tax on profits

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

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

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

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

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

A 17-year-old niece who does not live with the taxpayer
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

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 75: Which form reports dividend income paid to a shareholder?

Schedule K-1
Form W-2
Form 1099-DIV (Correct answer)
Form 1099-INT

Correct answer: Form 1099-DIV

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

Question 76: Which form allows retirees and pension recipients to elect federal income tax withholding from their retirement distributions?

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

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

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

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 78: Foreign tax credits allow US taxpayers to:

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

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

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

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

CP14
CP504 (Correct answer)
CP11
CP2000

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 81: Which of the following is generally excluded from gross income under the IRC?

Gifts received (Correct answer)
Wages from a second job
Gambling winnings
Interest on a personal savings account

Correct answer: Gifts received

Gifts received are generally excluded from the recipient's gross income under IRC Section 102, though the donor may owe gift tax.

Question 82: A self-employed consultant uses the actual expense method for vehicle deductions. Which record is most important to maintain?

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

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 83: How is the IRS underpayment penalty calculated?

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

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

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

Correct answer: $36,940

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

Question 85: Form W-4 is completed by an employee to:

Report tips to the employer
Report wages to the IRS
Claim withholding allowances and instruct the employer on withholding (Correct answer)
Apply for an ITIN

Correct answer: Claim withholding allowances and instruct the employer on withholding

Form W-4, Employee's Withholding Certificate, tells the employer how much federal income tax to withhold from the employee's paycheck.

Question 86: A home office deduction for self-employed individuals requires the office space to be used:

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

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

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

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 88: 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)
Passive income
Short-term capital gain
Ordinary 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 89: A married couple can file as Married Filing Separately to reduce their total tax liability in which common scenario?

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

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

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

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

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

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 92: 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)
Residency test
Support 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 93: Which filing status gives the highest standard deduction for a single parent with a qualifying child?

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

Correct answer: Head of Household

Head of Household status provides a larger standard deduction than Single and requires a qualifying dependent.

Question 94: A tax preparer who prepares more than 11 returns in a year is required to do what?

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

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

Form W-4
Form 1040-ES (Correct answer)
Form 2210
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 96: A taxpayer needs to correct an error on a previously filed Form 1040. Which form do they use?

Form 1040-X (Correct answer)
Form 1040-EZ
Form 1040-ES
Form 1040-SR

Correct answer: Form 1040-X

Form 1040-X, Amended U.S. Individual Income Tax Return, is used to correct errors or make changes to a previously filed return.

Question 97: The $25,000 rental activity loss allowance for active participants phases out for AGI between:

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

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

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

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

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

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

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

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.

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%

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