What is the definition of personal income tax?
A) Tax on company profits
B) Tax on individual earnings
C) Tax on real estate
D) Tax on luxury goods
Answer: B
2. Which of the following is considered taxable income?
A) Lottery winnings
B) Gifts from friends
C) Child support payments
D) Personal loans
Answer: A
3. Which of the following is generally not deductible on a personal income tax return?
A) Mortgage interest
B) Charitable donations
C) Personal living expenses
D) Medical expenses
Answer: C
4. What is the purpose of a tax deduction?
A) To increase taxable income
B) To reduce taxable income
C) To increase tax liability
D) To calculate gross income
Answer: B
5. Which of the following is typically exempt from personal income tax?
A) Interest from a savings account
B) Dividends from stocks
C) Inheritances
D) Wages from employment
Answer: C
6. What is the standard deduction?
A) A flat amount that reduces the amount of income subject to tax
B) A deduction available only for charitable contributions
C) A deduction that varies based on the taxpayer’s income
D) A deduction for business expenses
Answer: A
7. Which of the following is considered “earned income”?
A) Interest on bonds
B) Rental income
C) Wages from a job
D) Capital gains
Answer: C
8. Which of the following can be claimed as a tax credit?
A) Child and dependent care expenses
B) Contributions to a retirement account
C) Mortgage interest payments
D) Charitable donations
Answer: A
9. What is a “tax bracket”?
A) A fixed percentage applied to all income
B) A range of income taxed at a specific rate
C) A method of avoiding taxes
D) A deduction for specific expenses
Answer: B
10. What is the filing status that usually results in the lowest tax rate?
A) Single
B) Married filing jointly
C) Head of household
D) Married filing separately
Answer: B
11. What is the term for income after all deductions have been subtracted?
A) Gross income
B) Taxable income
C) Adjusted gross income
D) Net income
Answer: B
12. Which of the following is an example of a tax credit?
A) Medical expense deduction
B) Mortgage interest deduction
C) Earned Income Tax Credit (EITC)
D) Charitable donation deduction
Answer: C
13. Which of the following is typically not considered taxable income?
A) Salary
B) Unemployment benefits
C) Gifts
D) Dividends
Answer: C
14. What is the purpose of a W-4 form in the United States?
A) To report total income for the year
B) To request a refund from the IRS
C) To inform an employer of tax withholding preferences
D) To claim deductions on a tax return
Answer: C
15. Which of the following could result in a penalty when filing taxes?
A) Filing a tax return late
B) Filing a tax return early
C) Using the standard deduction
D) Donating to charity
Answer: A
16. Which of the following is a progressive tax system?
A) A tax rate that increases as income increases
B) A tax rate that decreases as income increases
C) A flat tax rate for all income levels
D) A tax rate applied only to specific goods
Answer: A
17. What is the alternative minimum tax (AMT)?
A) A tax on all types of income
B) A tax designed to ensure that high-income individuals pay a minimum amount of tax
C) A tax on luxury items
D) A tax that replaces the standard income tax
Answer: B
18. Which of the following can reduce a taxpayer’s liability dollar-for-dollar?
A) A tax deduction
B) A tax credit
C) A tax deferral
D) A tax refund
Answer: B
19. What is the purpose of a 1099 form?
A) To report wages and salaries
B) To report income from self-employment or investments
C) To claim dependents on a tax return
D) To apply for a tax refund
Answer: B
20. What is the difference between a tax deduction and a tax credit?
A) A deduction reduces taxable income, while a credit reduces tax owed
B) A credit reduces taxable income, while a deduction reduces tax owed
C) Both reduce taxable income
D) Both reduce tax owed
Answer: A
21. What is a common consequence of underreporting income on a tax return?
A) No consequences if discovered
B) Penalties and interest on unpaid taxes
C) Receiving a tax refund
D) Reduction in tax liability
Answer: B
22. Which of the following is typically included in “gross income”?
A) Gifts received
B) Life insurance payouts
C) Salary from employment
D) Child support payments
Answer: C
23. Which of the following can be deducted as a business expense for a self-employed individual?
A) Personal living expenses
B) Business-related travel expenses
C) Interest on a personal loan
D) Donations to a political campaign
Answer: B
24. Which of the following is the deadline for filing personal income tax returns in the United States for most taxpayers?
A) January 31st
B) April 15th
C) June 30th
D) December 31st
Answer: B
25. What is the maximum amount a taxpayer can contribute to a traditional IRA and deduct from taxable income (subject to income limits)?
A) $1,000
B) $5,500
C) $6,000
D) $10,000
Answer: C (as of 2023)
26. Which of the following types of income is typically taxed at a lower rate?
A) Short-term capital gains
B) Long-term capital gains
C) Ordinary income
D) Dividends from foreign corporations
Answer: B
27. What is a W-2 form used for?
A) To report interest income
B) To report dividend income
C) To report wages earned by an employee
D) To report capital gains
Answer: C
28. Which of the following is a refundable tax credit?
A) Child and dependent care credit
B) Lifetime learning credit
C) American Opportunity Credit
D) Earned Income Tax Credit (EITC)
Answer: D
29. Which of the following is generally not considered a taxable fringe benefit?
A) Employer-provided health insurance
B) Employer-provided vehicle for personal use
C) Employer-paid gym membership
D) Employer-provided meals
Answer: A
30. What is the filing status that provides the least tax benefit?
A) Married filing jointly
B) Head of household
C) Single
D) Married filing separately
Answer: D
31. What is the tax treatment for alimony payments received under post-2018 divorce agreements in the U.S.?
A) Taxable to the recipient
B) Tax-deductible by the payer
C) Non-taxable to the recipient
D) Both A and B
Answer: C
32. Which of the following is an example of a nonrefundable tax credit?
A) Earned Income Tax Credit (EITC)
B) Child Tax Credit
C) Foreign Tax Credit
D) Additional Child Tax Credit
Answer: C
33. What is the primary purpose of Form 1040?
A) To report employment income
B) To report investment income
C) To file an annual federal income tax return
D) To claim a tax refund
Answer: C
34. What is the difference between adjusted gross income (AGI) and modified adjusted gross income (MAGI)?
A) MAGI includes certain income not included in AGI
B) AGI is higher than MAGI
C) MAGI excludes certain deductions
D) They are the same
Answer: A
35. Which of the following is true about the standard deduction?
A) It is available only to taxpayers who itemize deductions
B) It varies depending on filing status
C) It must be repaid if unused
D) It increases taxable income
Answer: B
36. What is the additional standard deduction for taxpayers aged 65 or older?
A) $1,300
B) $1,650
C) $2,000
D) $2,500
Answer: B
37. Which of the following is true regarding the Child Tax Credit in the U.S.?
A) It is only available for children under 13
B) It is nonrefundable
C) It can reduce tax liability to zero
D) It is only available to married couples
Answer: C
38. Which of the following is not typically included in taxable income?
A) Salaries and wages
B) Interest from municipal bonds
C) Dividends from stocks
D) Rental income
Answer: B
39. What is a capital gain?
A) Income earned from renting property
B) Income from the sale of an asset at a higher price than its purchase price
C) Income from dividends
D) Income from wages
Answer: B
40. What is the penalty for early withdrawal from a traditional IRA before age 59½ (without exceptions)?
A) 5% of the amount withdrawn
B) 10% of the amount withdrawn
C) 15% of the amount withdrawn
D) 20% of the amount withdrawn
Answer: B
41. What is “withholding” in the context of personal income tax?
A) Tax on gifts received
B) Tax automatically deducted from paychecks
C) A penalty for underpayment of taxes
D) A credit for overpayment of taxes
Answer: B
42. What is the purpose of the IRS Form 4868?
A) To report dividend income
B) To file for an extension of time to file a tax return
C) To claim a tax refund
D) To request an installment payment plan
Answer: B
43. Which of the following expenses is deductible for self-employed individuals but not for employees?
A) Health insurance premiums
B) Mortgage interest
C) Business travel expenses
D) Charitable contributions
Answer: C
44. What is “tax evasion”?
A) Legally reducing tax liability
B) Illegally avoiding paying taxes
C) Deferring tax payments to a future date
D) Claiming more deductions than allowed
Answer: B
45. What is the purpose of an “itemized deduction”?
A) To claim a higher standard deduction
B) To reduce taxable income by specific expenses
C) To increase taxable income by specific expenses
D) To defer taxes to a later date
Answer: B
46. What is the tax treatment of employer contributions to a 401(k) plan?
A) Taxable when received
B) Tax-free until withdrawn
C) Taxable in the year contributed
D) Not taxable at any time
Answer: B
47. Which of the following describes a “tax-deferred” account?
A) Taxes are paid upfront, and withdrawals are tax-free
B) Contributions are not tax-deductible, but earnings grow tax-free
C) Contributions and earnings are taxed only when withdrawn
D) Contributions are taxed, but withdrawals are tax-free
Answer: C
48. What is a “taxable event”?
A) An occurrence that creates tax liability
B) An occurrence that reduces tax liability
C) An event that allows for tax credits
D) An event that defers taxes to a later date
Answer: A
49. Which of the following best describes a “tax refund”?
A) Money owed to the IRS after filing a return
B) Money returned to a taxpayer due to overpayment of taxes
C) A penalty for underpayment of taxes
D) A deduction for specific expenses
Answer: B
50. What is the purpose of IRS Form 1040-ES?
A) To file an annual tax return
B) To report estimated tax payments
C) To claim tax credits
D) To request a tax refund
Answer: B