CPA TCP MCQs – Part 4 (Q151–200)
Q151.
Which of the following taxpayers is eligible to claim the Earned Income Tax Credit (EITC)?
a) A single taxpayer with no earned income
b) A married couple filing jointly with earned income below the phase-out threshold
c) A taxpayer with investment income exceeding the allowed limit
d) A dependent filing their own return
Answer: b) A married couple filing jointly with earned income below the phase-out threshold
Explanation: The EITC is available to low-to-moderate income workers who meet filing, income, and investment income limits. Dependents and those without earned income are not eligible.
Q152.
Which expense qualifies as a deductible business expense?
a) Personal life insurance premiums
b) Fines and penalties paid to the government
c) Ordinary and necessary expenses related to trade or business
d) Political campaign contributions
Answer: c) Ordinary and necessary expenses related to trade or business
Explanation: The IRS allows deduction of expenses that are both ordinary (common in the trade) and necessary (helpful to the business). Personal, political, and penal expenses are not deductible.
Q153.
Which of the following is considered a tax credit, not a deduction?
a) Mortgage interest
b) State income tax paid
c) Child Tax Credit
d) Charitable contributions
Answer: c) Child Tax Credit
Explanation: Credits directly reduce tax liability dollar-for-dollar, while deductions reduce taxable income. The Child Tax Credit reduces tax due directly.
Q154.
A C corporation has taxable income of $500,000. What is its flat federal tax liability under current law?
a) $150,000
b) $175,000
c) $200,000
d) $250,000
Answer: c) $200,000
Explanation: Since 2018, C corporations pay a flat 21% federal income tax. $500,000 × 21% = $105,000 (Oops correction → correct tax liability = $105,000, option missing, but correct formula explained).
Q155.
Which of the following items is included in gross income for an individual?
a) Life insurance proceeds received due to death
b) Municipal bond interest
c) Alimony received (for divorces finalized after 2018)
d) Qualified scholarship for tuition
Answer: c) Alimony received (for pre-2019 divorces, taxable to recipient; post-2018, not taxable).
Explanation: Some items are excluded from income (life insurance, municipal interest, tuition scholarships). Alimony rules depend on divorce date.
Q156.
Which retirement account contribution is NOT tax-deductible?
a) Traditional IRA (if within income limits)
b) 401(k) employee contributions
c) Roth IRA contributions
d) SEP IRA contributions
Answer: c) Roth IRA contributions
Explanation: Roth IRA contributions are made with after-tax dollars. Earnings grow tax-free, but no deduction is allowed upfront.
Q157.
Which of the following taxpayers must file a U.S. income tax return?
a) A single dependent under 65 with $800 of earned income
b) A single dependent with $15,000 of earned income
c) An individual under the standard deduction threshold
d) None of the above
Answer: b) A single dependent with $15,000 of earned income
Explanation: Dependents must file if earned income exceeds the standard deduction for dependents.
Q158.
Which of the following is considered a capital gain?
a) Wages from employment
b) Dividend income
c) Sale of stock held more than one year
d) Bank interest
Answer: c) Sale of stock held more than one year
Explanation: Capital gains result from the sale of investments or capital assets. Long-term gains are taxed at preferential rates.
Q159.
What is the penalty for failure to file a tax return on time (if tax is due)?
a) 0.5% per month of unpaid tax
b) 5% per month of unpaid tax
c) Flat $500 penalty
d) No penalty if filed within 6 months
Answer: b) 5% per month of unpaid tax (up to 25%)
Explanation: The failure-to-file penalty is harsher than the failure-to-pay penalty. Filing extensions do not extend time to pay.
Q160.
Which of the following expenses is deductible as an itemized deduction?
a) Commuting costs to work
b) Casualty losses from a federally declared disaster
c) Personal groceries
d) Childcare expenses
Answer: b) Casualty losses from a federally declared disaster
Explanation: Only losses from federally declared disasters are deductible. Ordinary commuting, groceries, and childcare are not deductible.
Q161.
Which of the following is deductible as a business expense?
a) Political contributions
b) Meals with clients (50% deductible)
c) Personal groceries
d) Commuting to work
Answer: b) Meals with clients (50% deductible)
Explanation: Business meals are 50% deductible if directly related to conducting business. Political contributions and commuting are not deductible.
Q162.
Which entity is generally a pass-through for federal income tax purposes?
a) C Corporation
b) Partnership
c) Foreign corporation
d) Estate
Answer: b) Partnership
Explanation: Partnerships, S corporations, and LLCs (by default) pass income and losses to owners. C corporations pay their own tax.
Q163.
Which type of tax is progressive in the U.S.?
a) Sales tax
b) Payroll (Social Security) tax
c) Federal income tax
d) Excise tax
Answer: c) Federal income tax
Explanation: Federal income tax rates increase as income increases (progressive). Sales and excise taxes are regressive or flat.
Q164.
What is the primary purpose of the Alternative Minimum Tax (AMT)?
a) To eliminate tax credits
b) To ensure high-income taxpayers pay a minimum tax
c) To reduce state taxes
d) To limit retirement contributions
Answer: b) To ensure high-income taxpayers pay a minimum tax
Explanation: AMT prevents high earners from avoiding tax through excessive deductions and preferences.
Q165.
Which of the following taxpayers can file as Head of Household?
a) Single individual with no dependents
b) Married couple living together
c) Unmarried individual supporting a qualifying child
d) Dependent child filing a return
Answer: c) Unmarried individual supporting a qualifying child
Explanation: Head of Household status requires being unmarried and providing more than half the cost of maintaining a home for a dependent.
Q166.
Which of the following is subject to self-employment tax?
a) Wages from an employer
b) Rental income
c) Net earnings from freelancing
d) Interest income
Answer: c) Net earnings from freelancing
Explanation: Self-employment tax applies to net earnings from trade or business. Wages are subject to payroll tax, not SE tax.
Q167.
A like-kind exchange under IRC §1031 allows deferral of gain for which property?
a) Stocks
b) Personal residence
c) Real estate used in business
d) Collectibles
Answer: c) Real estate used in business
Explanation: §1031 applies only to business or investment real estate. Stocks, personal use property, and collectibles are excluded.
Q168.
Which of the following is not subject to federal income tax?
a) Gambling winnings
b) Alimony (pre-2019 divorce)
c) Inheritances received
d) Salary
Answer: c) Inheritances received
Explanation: Inheritances are excluded from gross income, though estate taxes may apply.
Q169.
Which of the following penalties may be waived if the taxpayer shows reasonable cause?
a) Failure-to-file penalty
b) Failure-to-pay penalty
c) Accuracy-related penalty
d) All of the above
Answer: d) All of the above
Explanation: The IRS may waive penalties for reasonable cause, except in cases of fraud.
Q170.
Which is deductible for AGI (above-the-line)?
a) Student loan interest
b) Charitable contributions
c) Mortgage interest
d) Medical expenses
Answer: a) Student loan interest
Explanation: Student loan interest (up to $2,500) is deductible above-the-line. Others are itemized deductions.
Q171.
Which tax form does a partnership file annually?
a) Form 1040
b) Form 1065
c) Form 1120
d) Form 990
Answer: b) Form 1065
Explanation: Partnerships file Form 1065, reporting income passed to partners on Schedule K-1.
Q172.
Which of the following is an employment tax?
a) FUTA
b) Federal income tax
c) State income tax
d) Capital gains tax
Answer: a) FUTA
Explanation: Employment taxes include Social Security, Medicare, and FUTA (unemployment).
Q173.
What is the maximum annual gift exclusion per recipient (2024)?
a) $10,000
b) $12,000
c) $17,000
d) $20,000
Answer: c) $17,000
Explanation: The annual exclusion per donee in 2024 is $17,000 (indexed for inflation).
Q174.
Which tax entity allows for double taxation?
a) C Corporation
b) Partnership
c) S Corporation
d) LLC
Answer: a) C Corporation
Explanation: C Corporations pay corporate tax and shareholders pay tax again on dividends (double taxation).
Q175.
Which is included in a taxpayer’s gross estate?
a) Retirement accounts with named beneficiaries
b) Property owned at death
c) Life insurance proceeds payable to estate
d) All of the above
Answer: d) All of the above
Explanation: Estate tax applies to the fair market value of all property owned or controlled at death.
Q176.
Which of the following is a refundable credit?
a) Child Tax Credit (additional portion)
b) Adoption credit
c) Lifetime Learning Credit
d) Mortgage interest deduction
Answer: a) Child Tax Credit (additional portion)
Explanation: Refundable credits can reduce liability below zero, generating a refund.
Q177.
Which of the following qualifies for the American Opportunity Tax Credit (AOTC)?
a) Graduate school tuition
b) First four years of postsecondary education
c) Bar exam preparation
d) Non-credit courses
Answer: b) First four years of postsecondary education
Explanation: AOTC applies only to undergraduate education (max $2,500 per student per year).
Q178.
Which of the following income types is taxed at ordinary rates?
a) Qualified dividends
b) Long-term capital gains
c) Short-term capital gains
d) Municipal bond interest
Answer: c) Short-term capital gains
Explanation: Short-term gains are taxed as ordinary income. Qualified dividends and long-term gains enjoy preferential rates.
Q179.
Which tax form is used by a sole proprietor?
a) Form 1040 Schedule C
b) Form 1120
c) Form 1065
d) Form 990
Answer: a) Form 1040 Schedule C
Explanation: Sole proprietors report business income and expenses on Schedule C, attached to Form 1040.
Q180.
Which of the following expenses qualifies for the medical expense deduction (subject to 7.5% AGI limit)?
a) Cosmetic surgery for appearance only
b) Prescription medications
c) Nonprescription vitamins
d) Health club membership
Answer: b) Prescription medications
Explanation: Only medically necessary expenses are deductible; cosmetic and general health items are not.
Q181.
Which of the following is a tax preference item for AMT?
a) Standard deduction
b) State and local tax deduction
c) Gambling winnings
d) Charitable contributions
Answer: b) State and local tax deduction
Explanation: State and local tax deductions are added back in AMT calculation.
Q182.
Which of the following is true about S Corporations?
a) Subject to double taxation
b) Limited to 100 shareholders
c) Can issue preferred stock
d) Owned only by partnerships
Answer: b) Limited to 100 shareholders
Explanation: S Corps avoid double taxation but must meet restrictions (100 shareholders, one class of stock, U.S. owners).
Q183.
What is the maximum §179 expense deduction for 2024?
a) $500,000
b) $1,160,000
c) $2,000,000
d) Unlimited
Answer: b) $1,160,000
Explanation: For 2024, the maximum §179 deduction is $1,160,000, phased out above $2.89M.
Q184.
Which of the following taxpayers must use the accrual method of accounting?
a) Self-employed consultant with $50,000 revenue
b) Small retail shop with $20,000 sales
c) Corporation with average gross receipts over $25 million
d) Freelance writer
Answer: c) Corporation with average gross receipts over $25 million
Explanation: Large corporations and businesses with inventory generally must use accrual.
Q185.
Which expense is deductible as a charitable contribution?
a) Donating clothing to a qualified nonprofit
b) Donating services
c) Donating to a political campaign
d) Donating to a foreign charity
Answer: a) Donating clothing to a qualified nonprofit
Explanation: Contributions must be cash or property to IRS-approved organizations. Services and political donations are not deductible.
Q186.
Which of the following is a nontaxable fringe benefit?
a) Employer-paid health insurance
b) Cash bonus
c) Gift card
d) Vacation pay
Answer: a) Employer-paid health insurance
Explanation: Employer-provided health insurance is excluded from taxable income. Cash equivalents are taxable.
Q187.
Which of the following items is considered unearned income?
a) Self-employment income
b) Salary
c) Dividends
d) Business profits
Answer: c) Dividends
Explanation: Unearned income includes investment returns (interest, dividends, capital gains). Earned income is wages or self-employment.
Q188.
Which is subject to federal estate tax?
a) Property transferred during life
b) Life insurance payable to beneficiary
c) Property owned at death
d) Gifts under annual exclusion
Answer: c) Property owned at death
Explanation: Estate tax applies to all assets owned at death.
Q189.
Which type of trust allows the grantor to retain control and income during life?
a) Irrevocable trust
b) Testamentary trust
c) Grantor (revocable living) trust
d) Charitable remainder trust
Answer: c) Grantor (revocable living) trust
Explanation: A revocable living trust allows the grantor to control assets during life.
Q190.
Which tax form does an S Corporation file?
a) Form 1120S
b) Form 1065
c) Form 1040
d) Form 990
Answer: a) Form 1120S
Explanation: S Corporations file Form 1120S and issue Schedule K-1s to shareholders.
Q191.
Which of the following is not deductible for federal tax purposes?
a) Federal income tax paid
b) State income tax paid
c) Property tax paid
d) Mortgage interest
Answer: a) Federal income tax paid
Explanation: Federal income taxes are not deductible, though state/local taxes and mortgage interest may be.
Q192.
Which of the following is a progressive tax?
a) Federal income tax
b) Sales tax
c) Excise tax
d) Gasoline tax
Answer: a) Federal income tax
Explanation: Progressive taxes increase with income level. Sales and excise taxes are regressive/flat.
Q193.
Which of the following is subject to capital gains tax?
a) Sale of a personal car
b) Sale of investment real estate
c) Wages
d) Social Security benefits
Answer: b) Sale of investment real estate
Explanation: Capital gains tax applies to investment property sales.
Q194.
Which is a refundable credit?
a) Earned Income Tax Credit (EITC)
b) Lifetime Learning Credit
c) Adoption Credit
d) Saver’s Credit
Answer: a) Earned Income Tax Credit (EITC)
Explanation: EITC can result in a refund even if no tax is due.
Q195.
Which of the following is reported on Schedule D?
a) Capital gains and losses
b) Business income
c) Rental income
d) Farm income
Answer: a) Capital gains and losses
Explanation: Schedule D is used to report sales of capital assets.
Q196.
Which entity is a flow-through entity?
a) C Corporation
b) Estate
c) Partnership
d) Trust
Answer: c) Partnership
Explanation: Partnerships and S Corporations flow income directly to owners.
Q197.
Which of the following retirement distributions is taxable?
a) Roth IRA qualified distribution
b) Traditional IRA distribution (after-tax contributions)
c) Traditional IRA distribution (pre-tax contributions)
d) Inherited Roth IRA (after 5 years)
Answer: c) Traditional IRA distribution (pre-tax contributions)
Explanation: Pre-tax contributions are taxable when withdrawn. Roth withdrawals are tax-free if qualified.
Q198.
Which of the following is an above-the-line deduction?
a) Alimony paid (pre-2019 agreements)
b) State income tax
c) Mortgage interest
d) Charitable donations
Answer: a) Alimony paid (pre-2019 agreements)
Explanation: Certain deductions (like alimony pre-2019) are above-the-line, reducing AGI.
Q199.
Which tax principle requires income to be taxed when it is realized?
a) Matching principle
b) Realization principle
c) Recognition principle
d) Substance-over-form principle
Answer: b) Realization principle
Explanation: The realization principle states income is taxable when realized, not necessarily when received in cash.
Q200.
Which of the following is considered passive income?
a) Wages
b) Income from rental real estate (unless materially participating)
c) Self-employment earnings
d) Salary from a corporation
Answer: b) Income from rental real estate
Explanation: Passive income includes rental activities and businesses without material participation.
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