Welcome to Part 3 of our CPA TCP (Tax Compliance & Planning) Practice MCQs series. In this section, we bring you questions 101–150, focusing on taxation rules, credits, deductions, compliance, and planning strategies that candidates must master to succeed on the CPA Exam.
Each question comes with a detailed explanation, ensuring not only memorization but also deep conceptual understanding. Whether you’re reviewing for your exam day or reinforcing weak areas, these practice questions will strengthen your preparation.
👉 Don’t forget to check out:
- Part 1 (Q1–50): Tax Basics & Compliance Foundations
- Part 2 (Q51–100): Advanced Deductions, Credits & Filing Scenarios
CPA TCP MCQs Part 3 (Q101–150)
Q101. Which of the following taxpayers must file a tax return, regardless of income?
A. Single under 65 earning $8,000
B. Self-employed earning $350
C. Dependent with $2,000 wages
D. Married filing jointly earning $20,000
Answer: B. Self-employed earning $350
Explanation: Any self-employed person with net earnings of $400 or more must file a tax return, regardless of age or dependency status.
Q102. Which form is used to report capital gains and losses?
A. Form 1040
B. Schedule D
C. Form 8949
D. Schedule C
Answer: B. Schedule D
Explanation: Schedule D is attached to Form 1040 to summarize capital gains/losses. Transactions are first reported on Form 8949, then transferred to Schedule D.
Q103. Which of the following is NOT a deductible medical expense?
A. Prescription drugs
B. Over-the-counter vitamins
C. Doctor’s fees
D. Hospital services
Answer: B. Over-the-counter vitamins
Explanation: Only qualified medical expenses prescribed by a doctor are deductible. OTC vitamins and supplements are not.
Q104. Which of the following tax credits is refundable?
A. Child Tax Credit (nonrefundable portion)
B. Earned Income Tax Credit (EITC)
C. Lifetime Learning Credit
D. Adoption Credit
Answer: B. Earned Income Tax Credit (EITC)
Explanation: EITC is a refundable credit, meaning taxpayers can receive it even if they owe no tax.
Q105. What is the standard deduction for a single filer in 2023?
A. $12,400
B. $12,950
C. $13,850
D. $14,050
Answer: C. $13,850
Explanation: For tax year 2023, the standard deduction for single filers is $13,850.
Q106. Which of the following taxes funds Social Security and Medicare?
A. Federal income tax
B. FICA tax
C. FUTA tax
D. Excise tax
Answer: B. FICA tax
Explanation: FICA tax includes Social Security (6.2%) and Medicare (1.45%) contributions.
Q107. Which form is used by partnerships to file their annual return?
A. Form 1065
B. Form 1120
C. Form 1120-S
D. Form 1041
Answer: A. Form 1065
Explanation: Partnerships use Form 1065 to report income, deductions, and credits. Profits are passed through to partners via Schedule K-1.
Q108. Which of the following is true about an S Corporation?
A. It pays corporate tax at 21%
B. It passes income/losses to shareholders
C. It is taxed the same as a C Corporation
D. It cannot have shareholders
Answer: B. It passes income/losses to shareholders
Explanation: S Corporations avoid double taxation by passing income and losses directly to shareholders.
Q109. Which tax form reports wages, salaries, and tips?
A. 1099-MISC
B. W-2
C. 1099-INT
D. Schedule C
Answer: B. W-2
Explanation: Employers issue Form W-2 to employees to report wages, salaries, and withheld taxes.
Q110. Which of the following is considered unearned income?
A. Salary
B. Business income
C. Interest and dividends
D. Self-employment earnings
Answer: C. Interest and dividends
Explanation: Unearned income includes interest, dividends, and capital gains. Earned income comes from work.
Q111. Which of the following is true about alimony payments under post-2018 divorce agreements?
A. Deductible for payer, taxable for recipient
B. Not deductible for payer, not taxable for recipient
C. Deductible for payer, tax-free for recipient
D. Taxable for both payer and recipient
Answer: B. Not deductible for payer, not taxable for recipient
Explanation: For divorce agreements finalized after Dec 31, 2018, alimony is not deductible by the payer and not taxable to the recipient.
Q112. What is the penalty for failure to file a tax return?
A. 0.25% per month of unpaid tax
B. 0.5% per month of unpaid tax
C. 5% per month of unpaid tax (max 25%)
D. Flat $500 penalty
Answer: C. 5% per month of unpaid tax (max 25%)
Explanation: Failure-to-file penalty is 5% per month, capped at 25% of unpaid tax.
Q113. Which of the following is an above-the-line deduction?
A. Mortgage interest
B. Student loan interest
C. State income taxes
D. Charitable contributions
Answer: B. Student loan interest
Explanation: Above-the-line deductions reduce Adjusted Gross Income (AGI). Student loan interest (up to $2,500) is included.
Q114. Which IRS form is used for Individual Income Tax Return?
A. 1065
B. 1040
C. 1120
D. 1099
Answer: B. 1040
Explanation: Form 1040 is the standard Individual Income Tax Return in the U.S.
Q115. Which of the following taxpayers may claim the Child Tax Credit?
A. Parents of children under age 17
B. Parents of children under age 21
C. Parents of any dependent child
D. Guardians of non-relatives
Answer: A. Parents of children under age 17
Explanation: The Child Tax Credit applies to qualifying children under 17 years old at the end of the tax year.
Q116. Which of the following is a refundable tax credit?
A. American Opportunity Tax Credit (AOTC) – partial
B. Child & Dependent Care Credit
C. Lifetime Learning Credit
D. Mortgage Interest Credit
Answer: A. American Opportunity Tax Credit (AOTC) – partial
Explanation: The AOTC is partly refundable (up to 40% of credit).
Q117. Which depreciation method allows the fastest write-off in the early years?
A. Straight-line method
B. Sum-of-years-digits method
C. Declining balance method
D. Units-of-production method
Answer: C. Declining balance method
Explanation: Double-declining balance accelerates depreciation, giving higher deductions in early years.
Q118. A taxpayer sells a personal residence with $350,000 gain. They are single. How much gain is excluded under Section 121?
A. $250,000
B. $350,000
C. $500,000
D. $100,000
Answer: A. $250,000
Explanation: Under IRC Section 121, single filers can exclude up to $250,000 of gain from home sale; married filing jointly can exclude $500,000.
Q119. Which of the following is subject to self-employment tax?
A. Salary from a corporation
B. Partnership distributive share of business income
C. Dividends
D. Interest income
Answer: B. Partnership distributive share of business income
Explanation: Partners are considered self-employed; their distributive business income is subject to self-employment tax.
Q120. Which of the following qualifies as a Section 1231 asset?
A. Inventory
B. Accounts receivable
C. Depreciable business property held >1 year
D. Supplies
Answer: C. Depreciable business property held >1 year
Explanation: Section 1231 assets include depreciable or real business property held >1 year, eligible for favorable capital gains treatment.
Q121. Which form reports cancellation of debt income?
A. W-2
B. 1099-C
C. 1099-MISC
D. 1099-INT
Answer: B. 1099-C
Explanation: Lenders issue Form 1099-C when $600 or more of debt is canceled.
Q122. Which of the following is NOT subject to federal estate tax?
A. Life insurance proceeds paid to a beneficiary
B. Property transferred at death
C. Transfers to a surviving spouse
D. Property held in the decedent’s name
Answer: C. Transfers to a surviving spouse
Explanation: Unlimited marital deduction applies — transfers to surviving spouses are exempt from estate tax.
Q123. A traditional IRA contribution is generally:
A. Not deductible
B. Deductible subject to limits
C. Always deductible regardless of income
D. Deductible only for taxpayers over 59½
Answer: B. Deductible subject to limits
Explanation: Traditional IRA contributions are tax-deductible, but phase out at higher incomes if covered by a retirement plan.
Q124. Which of the following taxpayers may use the cash method of accounting?
A. Large corporations with gross receipts >$25M
B. Small businesses under $25M in gross receipts
C. All corporations
D. Partnerships with corporate partners
Answer: B. Small businesses under $25M in gross receipts
Explanation: The cash method is allowed for businesses with average annual receipts under $25M.
Q125. Which tax concept prevents double taxation of the same income?
A. Realization principle
B. Claim of right doctrine
C. Tax credit mechanism
D. Substance over form
Answer: C. Tax credit mechanism
Explanation: Foreign tax credits and other credits prevent double taxation of the same income.
Q126. Which of the following is considered passive income?
A. Salary
B. Rental income
C. Self-employment income
D. Interest income
Answer: B. Rental income
Explanation: Rental real estate is generally treated as passive income, unless taxpayer is a real estate professional.
Q127. Which entity type allows owners to avoid both double taxation and self-employment tax?
A. Sole proprietorship
B. Partnership
C. S Corporation
D. C Corporation
Answer: C. S Corporation
Explanation: S Corporation shareholders avoid double taxation, and their distributions (not wages) are exempt from self-employment tax.
Q128. What is the maximum contribution limit for a Roth IRA in 2023 for under age 50?
A. $5,500
B. $6,000
C. $6,500
D. $7,500
Answer: C. $6,500
Explanation: For 2023, Roth IRA contribution limit = $6,500; those 50+ get an additional $1,000 catch-up.
Q129. Which of the following is subject to Alternative Minimum Tax (AMT)?
A. Standard deduction
B. Private activity bond interest
C. Regular tax credits
D. Earned Income Credit
Answer: B. Private activity bond interest
Explanation: Certain tax-exempt interest (private activity bonds) is an AMT preference item.
Q130. Which form reports distributions from pensions, annuities, and retirement plans?
A. 1099-R
B. 1099-DIV
C. 1099-INT
D. W-2G
Answer: A. 1099-R
Explanation: Form 1099-R is issued for pension, annuity, and retirement account distributions.
Q131. Which of the following is considered a capital asset?
A. Inventory
B. Accounts receivable
C. Personal-use property like a car
D. Business machinery
Answer: C. Personal-use property like a car
Explanation: Capital assets generally include personal or investment property, not business inventory or receivables.
Q132. Which of the following is true about Qualified Dividends?
A. Taxed as ordinary income
B. Taxed at preferential long-term capital gains rates
C. Always tax-free
D. Subject to self-employment tax
Answer: B. Taxed at preferential long-term capital gains rates
Explanation: Qualified dividends are taxed at 0%, 15%, or 20%, similar to long-term capital gains.
Q133. The Kiddie Tax applies to which of the following?
A. Earned income of children under 18
B. Unearned income of children under 19 (or 24 if a full-time student)
C. Salary of children working in family business
D. Any dependent’s income
Answer: B. Unearned income of children under 19 (or 24 if full-time student)
Explanation: The Kiddie Tax applies to unearned income (like dividends) of children, taxed at parents’ rate.
Q134. Which of the following is deductible as a business expense?
A. Political contributions
B. Lobbying expenses
C. Fines and penalties
D. Ordinary and necessary expenses
Answer: D. Ordinary and necessary expenses
Explanation: Business deductions are limited to ordinary and necessary costs of carrying on trade or business.
Q135. Which depreciation system is most commonly used for tax purposes in the U.S.?
A. MACRS
B. Straight-line
C. ACRS
D. Units-of-production
Answer: A. MACRS
Explanation: The Modified Accelerated Cost Recovery System (MACRS) is the standard depreciation method for U.S. tax purposes.
Q136. Which of the following is an example of a tax credit rather than a deduction?
A. Mortgage interest
B. Child Tax Credit
C. State income taxes
D. Business expenses
Answer: B. Child Tax Credit
Explanation: Tax credits reduce tax liability directly, while deductions reduce taxable income.
Q137. Which of the following is subject to capital gains treatment?
A. Sale of inventory
B. Sale of stock
C. Sale of accounts receivable
D. Sale of services
Answer: B. Sale of stock
Explanation: Gains from stock sales are capital gains, while inventory and receivables are ordinary income.
Q138. Which form reports partnership income to partners?
A. W-2
B. 1120
C. 1065 Schedule K-1
D. 1099-MISC
Answer: C. 1065 Schedule K-1
Explanation: Partnerships file Form 1065 and issue Schedule K-1 to report each partner’s distributive share.
Q139. Which entity type generally pays federal income tax at the entity level?
A. Partnership
B. S Corporation
C. C Corporation
D. Sole Proprietorship
Answer: C. C Corporation
Explanation: C Corporations face double taxation: tax at corporate level and tax on dividends to shareholders.
Q140. Which of the following is considered a preferential tax item under AMT?
A. Salary
B. State and local tax deduction
C. Alimony
D. IRA contributions
Answer: B. State and local tax deduction
Explanation: State and local tax (SALT) deductions are not allowed for Alternative Minimum Tax (AMT).
Q141. Which of the following is deductible as medical expenses (subject to 7.5% AGI)?
A. Cosmetic surgery for personal reasons
B. Health insurance premiums
C. Over-the-counter vitamins
D. Gym membership fees
Answer: B. Health insurance premiums
Explanation: Qualified medical expenses include premiums, hospital bills, and prescription drugs, subject to 7.5% of AGI.
Q142. Which of the following taxpayers may use Head of Household filing status?
A. Single with no dependents
B. Married filing jointly
C. Unmarried with dependent child
D. Qualifying widow(er)
Answer: C. Unmarried with dependent child
Explanation: Head of Household status applies to unmarried taxpayers supporting a qualifying child or dependent.
Q143. What is the maximum annual gift exclusion per recipient in 2023?
A. $10,000
B. $15,000
C. $17,000
D. $20,000
Answer: C. $17,000
Explanation: For 2023, the annual gift exclusion is $17,000 per donee.
Q144. Which of the following is subject to Social Security tax?
A. Dividend income
B. Interest income
C. Wages up to annual limit
D. Rental income
Answer: C. Wages up to annual limit
Explanation: Social Security tax applies only to earned income (wages), subject to annual wage cap.
Q145. Which of the following expenses may qualify for the American Opportunity Credit?
A. Room and board
B. Tuition and required course materials
C. Transportation costs
D. Application fees
Answer: B. Tuition and required course materials
Explanation: The AOTC covers tuition, fees, and required materials, but not living expenses.
Q146. Which of the following is true about the Earned Income Tax Credit (EITC)?
A. Available only to married couples
B. Refundable credit for low-to-moderate income taxpayers
C. Non-refundable credit for education expenses
D. Only available to self-employed individuals
Answer: B. Refundable credit for low-to-moderate income taxpayers
Explanation: The EITC is a refundable credit designed to help low-income working families.
Q147. Which IRS form reports interest income?
A. 1099-DIV
B. 1099-R
C. 1099-INT
D. 1065
Answer: C. 1099-INT
Explanation: Form 1099-INT reports interest income from banks, bonds, and other investments.
Q148. Which of the following is deductible as an itemized deduction?
A. Commuting expenses
B. Mortgage interest on qualified residence
C. Personal fines
D. Political donations
Answer: B. Mortgage interest on qualified residence
Explanation: Mortgage interest on up to $750,000 (post-2017 loans) is deductible as an itemized deduction.
Q149. Which is true about Roth IRA withdrawals?
A. Contributions are taxable upon withdrawal
B. Qualified withdrawals are tax-free
C. Withdrawals are always subject to penalty
D. All distributions are taxable as income
Answer: B. Qualified withdrawals are tax-free
Explanation: Roth IRA qualified withdrawals (after 59½ and 5-year rule) are tax-free.
Q150. Which of the following is subject to Net Investment Income Tax (NIIT)?
A. Salary
B. Rental income
C. IRA withdrawals
D. Alimony
Answer: B. Rental income
Explanation: The 3.8% NIIT applies to passive income like rentals, dividends, and capital gains above thresholds.
You’ve now completed CPA TCP MCQs Part 3 (Q101–150). With these practice questions, you’re one step closer to mastering Tax Compliance & Planning for the CPA Exam.
🚀 Next, continue with Part 4 (Q151–200), the final set of TCP MCQs, to complete your preparation.