22 Individuals: Status, Income & Deductions Practice Questions & Answers

1. 1. A taxpayer's spouse died in March of the tax year. The taxpayer did not remarry before the end of that year and maintained a home for a dependent child. What filing status may the taxpayer use for the year in which the spouse died?

   • A.Head of household
   • B.Qualifying surviving spouse
   • C.Single
   • D.Married filing jointly✓ Answer

   Marital status is normally fixed on the last day of the tax year, but a taxpayer whose spouse dies during the year is treated as married for that entire year and may file a joint return covering the decedent. The qualifying surviving spouse status becomes available only for the two tax years following the year of death.

   Source: IRC §6013(a)(2) — joint return with a deceased spouseReport a problem with this question

2. 2. A married taxpayer paid more than half the cost of keeping up her home, and her dependent son lived with her for more than half the year. She has not filed a joint return. Which additional condition must be met for her to be 'considered unmarried' and file as head of household?

   • A.Her spouse must consent in writing to her use of head of household status
   • B.She must have a court decree of legal separation in force
   • C.Her spouse must not have lived in the home at any time during the last six months of the tax year✓ Answer
   • D.Her spouse must have had no gross income for the year

   A married person is treated as not married for head of household purposes only if the spouse was absent from the household for the entire last six months of the tax year, in addition to furnishing more than half the cost of the home and housing a qualifying child. No consent from the spouse and no court decree is required.

   Source: IRC §7703(b) — married individuals living apart treated as not marriedReport a problem with this question

3. 3. Head of household generally requires that the qualifying person live in the taxpayer's home for more than half the year. Which qualifying person can support head of household status even though that person does not live with the taxpayer?

   • A.A dependent child who lived with the taxpayer for four months
   • B.Any qualifying relative for whom the taxpayer provides more than half the support
   • C.A dependent sibling who lives in her own apartment
   • D.A dependent parent whose main home the taxpayer maintains✓ Answer

   The statute contains a specific exception for a dependent father or mother: the taxpayer qualifies by furnishing more than half the cost of maintaining the parent's principal residence, even a separate household or care facility. Every other qualifying person must actually live in the taxpayer's home for more than half the year.

   Source: IRC §2(b)(1)(B) — head of household, dependent parentReport a problem with this question

4. 4. A married couple files separate returns. One spouse itemizes deductions on Schedule A. What is the effect on the other spouse?

   • A.The other spouse may still claim the full standard deduction
   • B.The other spouse's standard deduction is zero, so that spouse must also itemize✓ Answer
   • C.The other spouse may claim whichever amount produces the lower tax
   • D.The other spouse must claim one half of the standard deduction

   When spouses file separately and one of them itemizes, the standard deduction of the other spouse is reduced to zero by statute, which effectively forces both spouses to itemize. This is one of the classic disadvantages of married filing separately.

   Source: IRC §63(c)(6)(A) — standard deduction denied when spouse itemizesReport a problem with this question

5. 5. Which statement correctly describes the support test that applies to a qualifying child?

   • A.The taxpayer must have provided more than half of the child's total support
   • B.The taxpayer must have provided all of the child's support
   • C.The child must not have provided more than half of his or her own support for the year✓ Answer
   • D.The child must have had no gross income of his or her own

   For a qualifying child the test is stated from the child's side: the child must not furnish more than half of his or her own support. The 'taxpayer provided more than half the support' formulation belongs to the qualifying relative rules, not the qualifying child rules.

   Source: IRC §152(c)(1)(D) — qualifying child support testReport a problem with this question

6. 6. A taxpayer supported an unrelated friend who had very little gross income and was not anyone's qualifying child. Which requirement must be satisfied before the taxpayer may claim the friend as a qualifying relative?

   • A.The friend must have been under age 19 at the end of the year
   • B.The friend must have provided more than half of his own support
   • C.The friend must have lived with the taxpayer for more than half the year
   • D.The friend must have lived in the taxpayer's household as a member of the household for the entire year✓ Answer

   A person who does not fall within one of the listed family relationships can only be a qualifying relative by satisfying the member-of-household test, which requires living in the taxpayer's home for the entire year. Age is irrelevant for a qualifying relative, and the taxpayer, not the dependent, must furnish more than half the support.

   Source: IRC §152(d)(2)(H) — member of household relationship testReport a problem with this question

7. 7. An unmarried mother and father both meet all the tests to claim their child as a qualifying child. The child lived with the mother for seven months and with the father for five months. They cannot agree on who claims the child. Under the tie-breaker rules, who is entitled to claim the child?

   • A.The parent who furnished more of the child's support
   • B.The parent with the higher adjusted gross income
   • C.Neither parent, because they failed to agree
   • D.The parent with whom the child lived for the longer period during the year✓ Answer

   When two parents both qualify and cannot agree, the statutory tie-breaker awards the child to the parent with whom the child resided for the longer period during the year. Adjusted gross income is used only as the second-level tie-breaker, when residence time is equal.

   Source: IRC §152(c)(4) — tie-breaker rulesReport a problem with this question

8. 8. A custodial parent signs Form 8332 releasing the claim to her child for the year to the noncustodial parent. Which tax benefit is transferred to the noncustodial parent by that release?

   • A.The earned income credit
   • B.Head of household filing status
   • C.The child and dependent care credit
   • D.The dependency claim and the child tax credit✓ Answer

   The release shifts only the dependency claim and the credits that ride on it, principally the child tax credit and the credit for other dependents. Head of household status, the earned income credit, and the child and dependent care credit are tied to the child's physical residence and always remain with the custodial parent.

   Source: IRC §152(e) — release of claim to a child by the custodial parentReport a problem with this question

9. 9. A plumber remodels a dentist's bathroom, and in exchange the dentist provides dental work of equal value to the plumber. Neither party paid any cash. How is this treated for federal income tax purposes?

   • A.Neither has income because no cash changed hands
   • B.Each must include the fair market value of the services received in gross income✓ Answer
   • C.Only the party who received the more valuable service has income
   • D.The income is deferred until one of them later receives cash

   Gross income means all income from whatever source derived, and property or services received as payment for services are included at their fair market value. Barter exchanges are therefore fully taxable to both parties even though no money changes hands.

   Source: IRC §61(a) and Treas. Reg. §1.61-2(d) — property or services received as compensationReport a problem with this question

10. 10. A full-time degree candidate at an accredited university receives a scholarship that pays her tuition, her required textbooks, and her dormitory room and meal plan. Which part of the scholarship must she include in gross income?

    • A.The portion applied to room and meals✓ Answer
    • B.The portion applied to tuition
    • C.The portion applied to required textbooks
    • D.None of it, because she is a degree candidate

    The scholarship exclusion for a degree candidate reaches only qualified expenses, meaning tuition, fees, books, supplies, and equipment required for courses. Amounts spent on living costs such as room and board are outside the exclusion and are taxable.

    Source: IRC §117 — qualified scholarship exclusionReport a problem with this question

11. 11. Immediately before a credit card company cancelled $15,000 of a taxpayer's debt, the taxpayer's total liabilities exceeded the fair market value of all of his assets by $10,000. He was not in bankruptcy. How much of the cancelled debt must he include in gross income?

    • A.$0
    • B.$5,000✓ Answer
    • C.$15,000
    • D.$10,000

    Cancellation of debt is gross income unless an exclusion applies, and the insolvency exclusion is capped at the amount by which liabilities exceeded the fair market value of assets immediately before the discharge. Here $10,000 of the $15,000 is excluded and the remaining $5,000 is taxable; the excluded amount also requires a reduction of tax attributes.

    Source: IRC §108(a)(1)(B) and §108(a)(3) — insolvency exclusionReport a problem with this question

12. 12. A taxpayer who itemizes deductions had $8,000 of gambling winnings and $10,000 of properly documented gambling losses during the year. How should this be reported?

    • A.Include $8,000 in income and deduct the $10,000 of losses as an adjustment to income
    • B.Report nothing, because the losses exceed the winnings
    • C.Include $8,000 in gross income and deduct $8,000 of losses as an itemized deduction✓ Answer
    • D.Include $8,000 in gross income and deduct $10,000 of losses as an itemized deduction

    Gambling winnings are included in gross income in full and may not be netted against losses on the face of the return. Losses are allowed only as an itemized deduction and only up to the amount of winnings, so the excess loss is simply lost.

    Source: IRC §165(d) — wagering losses allowed only to the extent of wagering gainsReport a problem with this question

13. 13. Whether any part of a taxpayer's Social Security benefits is taxable depends on comparing a measure of income to a base amount. What is that measure of income?

    • A.Adjusted gross income plus tax-exempt interest plus one half of the benefits✓ Answer
    • B.Only wages and self-employment income
    • C.Taxable income after subtracting the standard deduction
    • D.Adjusted gross income plus the full amount of the benefits

    The statute measures 'combined' or provisional income as modified adjusted gross income, plus otherwise tax-exempt interest, plus one half of the Social Security benefits received. Including tax-exempt interest in this test is why municipal bond interest can make benefits taxable even though the interest itself is not taxed.

    Source: IRC §86 — taxation of Social Security benefitsReport a problem with this question

14. 14. A cash-basis taxpayer's client mailed a check that arrived at the taxpayer's office on the last business day of the year. The taxpayer left it in a drawer and deposited it in January. In which year is the payment income?

    • A.In the year he actually deposited the check
    • B.He may choose either year
    • C.In the year the check was made available to him, because it was subject to his unrestricted control✓ Answer
    • D.In the year the payer's bank honored the check

    Under the constructive receipt doctrine, income is taxed when it is credited to the taxpayer's account, set apart, or otherwise made available so that he could draw on it without substantial limitation. A taxpayer cannot defer income simply by declining to cash or deposit a check already in hand.

    Source: Treas. Reg. §1.451-2 — constructive receipt of incomeReport a problem with this question

15. 15. Why does the placement of a deduction as an adjustment to income ('above the line') rather than as an itemized deduction matter to a taxpayer?

    • A.Because adjustments reduce adjusted gross income and may be claimed whether or not the taxpayer itemizes✓ Answer
    • B.Because adjustments are available only to taxpayers who itemize
    • C.Because adjustments are subtracted after the standard deduction is applied
    • D.Because adjustments reduce tax dollar for dollar in the same way a credit does

    Adjustments are subtracted from gross income to arrive at adjusted gross income and are available to every taxpayer, including one who claims the standard deduction. Because AGI is the gatekeeper for many floors, ceilings, and phase-outs, lowering AGI can also increase other deductions and credits, which an itemized deduction cannot do.

    Source: IRC §62 — adjusted gross income definedReport a problem with this question

16. 16. A severe windstorm that was not the subject of any federal disaster declaration destroyed a taxpayer's personal garage. The loss was not covered by insurance. How is the loss treated on the taxpayer's individual return?

    • A.It is deductible only to the extent of the taxpayer's capital gains
    • B.It is fully deductible as an itemized deduction
    • C.It is deductible as an adjustment to income
    • D.It is not deductible, because a personal casualty loss is allowed only if attributable to a federally declared disaster✓ Answer

    A personal casualty or theft loss is deductible only if it is attributable to a federally declared disaster, apart from the narrow rule allowing personal casualty losses to offset personal casualty gains. Even a qualifying disaster loss is then reduced by a per-event floor and an AGI-based floor before anything is deductible.

    Source: IRC §165(h)(5) — personal casualty losses limited to federally declared disastersReport a problem with this question

17. 17. A taxpayer's tax before credits is $400. He qualifies for a nonrefundable credit of $1,000 and has no other credits and no withholding. What is the result?

    • A.He receives a refund of $600
    • B.The credit reduces his tax to zero and the remaining $600 produces no refund✓ Answer
    • C.The unused $600 must be carried back to the prior year
    • D.The credit is limited to $400 and he may deduct the remaining $600

    A nonrefundable credit can only reduce a tax liability down to zero; any excess is simply not paid out, and unless a specific carryforward rule exists for that credit, it is lost. A refundable credit, by contrast, is treated as a payment and can generate a refund larger than the tax owed, which is why the classification is so heavily tested.

    Source: IRC §26(a) — limitation based on tax liability for nonrefundable personal creditsReport a problem with this question

18. 18. A married couple filing jointly paid a licensed daycare center to care for their four-year-old child so that one spouse could work. Which circumstance would prevent them from claiming the child and dependent care credit?

    • A.They paid the provider by check rather than in cash
    • B.The care was provided outside the taxpayers' home
    • C.The other spouse had no earned income and was neither a full-time student nor disabled during the year✓ Answer
    • D.The child was four years old at the end of the year

    The credit is designed to relieve work-related care costs, so on a joint return both spouses must have earned income, subject only to the deemed-earnings rule for a spouse who is a full-time student or incapable of self-care. Care outside the home is allowed, the child is under the age limit, and paying by check is fine as long as the provider's taxpayer identification number is reported.

    Source: IRC §21 — child and dependent care credit, earned income requirementReport a problem with this question

19. 19. A parent paid qualified tuition for one child attending college. Which statement correctly describes the coordination between the American opportunity credit and the lifetime learning credit?

    • A.Both credits may be claimed for the same student if different expenses are used for each
    • B.Either credit may be claimed for expenses that were paid with a tax-free scholarship
    • C.Only one of the two credits may be claimed for the same student in the same year✓ Answer
    • D.Both credits may be claimed if the student attends two different institutions

    The education credits are coordinated so that no more than one of them may be claimed with respect to the same student for the same tax year, although a taxpayer with several students may claim a different credit for each. Expenses paid with tax-free scholarship funds are not qualified expenses for either credit, because that would allow a double benefit.

    Source: IRC §25A — American opportunity and lifetime learning credits, coordination rulesReport a problem with this question

20. 20. Which statement is true of the earned income credit?

    • A.It is refundable and requires earned income and valid Social Security numbers for the taxpayer and each qualifying child✓ Answer
    • B.It is unavailable to any taxpayer who has a qualifying child
    • C.It may be claimed by a taxpayer whose only income is interest and dividends
    • D.It is a nonrefundable credit that can only offset income tax

    The earned income credit is refundable, so it can produce a refund exceeding the tax owed, but it is conditioned on having earned income from work and on valid Social Security numbers for the taxpayer, any spouse, and each qualifying child. A taxpayer with only investment income has no earned income and is also subject to a separate disqualifying investment income limit.

    Source: IRC §32 — earned income creditReport a problem with this question

21. 21. A taxpayer received a distribution from her traditional IRA and wants to avoid tax on it by rolling it over to another traditional IRA. What is the deadline for completing the rollover?

    • A.Within 30 days after receiving the distribution
    • B.Within 90 days after receiving the distribution
    • C.By the due date of her return for that year
    • D.Within 60 days after receiving the distribution✓ Answer

    An amount distributed to the participant is excluded from income only if it is contributed to an eligible retirement plan no later than the 60th day after it is received, a period fixed by statute rather than adjusted annually. A direct trustee-to-trustee transfer avoids the deadline and the once-per-12-months limit on IRA-to-IRA rollovers entirely.

    Source: IRC §408(d)(3) — 60-day rollover requirementReport a problem with this question

22. 22. A 35-year-old taxpayer took a distribution from his employer's qualified 401(k) plan and used all of it toward the purchase of his first home. Does the first-time homebuyer exception spare him the 10 percent additional tax on early distributions?

    • A.No; the first-time homebuyer exception applies only to distributions from an IRA, not from a qualified employer plan✓ Answer
    • B.No; there is no first-time homebuyer exception in the tax law at all
    • C.Yes, but only if the plan is a designated Roth account
    • D.Yes; the exception applies to a distribution from any retirement plan

    The exceptions to the additional tax on early distributions are not uniform across plan types: the first-time homebuyer exception and the higher education exception are written for IRAs only. Employer plan distributions have their own exceptions, such as separation from service after reaching the statutory age and payments under a qualified domestic relations order.

    Source: IRC §72(t)(2)(F) — first-time homebuyer exception limited to IRAsReport a problem with this question

Practice questions based on the Internal Revenue Code, Treasury Department Circular No. 230, and the IRS Special Enrollment Examination content outline. Enrolled Agent and the SEE are administered by the IRS; this site is not affiliated with or endorsed by the IRS or Treasury. Questions deliberately avoid inflation-adjusted figures — rates, brackets, standard deductions, contribution and phase-out limits, mileage rates and penalty amounts change every year, so look those up for the tax year you are tested on. This is study material, not tax advice. About the Enrolled Agent exam →