Income Tax Fundamentals 41st Edition Study Companion 100
Original Questions with Worked Answers and Rationales
Practice Questions
1. What distinguishes a deduction from a tax credit?
A. Both always reduce tax dollar for dollar
B. A deduction reduces taxable income; a credit reduces tax
C. A deduction always creates a refund
D. A credit reduces gross receipts only
Correct answer: B. A deduction reduces taxable income; a credit reduces tax
Rationale: Deductions affect the income on which tax is computed. Credits offset
computed tax, subject to their eligibility and refundability rules.
2. Which rate applies to the next dollar of taxable ordinary income?
A. Sales tax rate
B. Payroll withholding percentage necessarily
C. Marginal rate
D. Average rate on all receipts
Correct answer: C. Marginal rate
Rationale: The marginal rate describes the incremental tax effect of additional
income. The average rate reflects tax across a broader income base.
3. What is adjusted gross income generally?
A. Cash receipts minus tax credits
B. Tax liability minus withholding
C. Gross wages minus every personal expense
D. Gross income minus allowable adjustments to income
Correct answer: D. Gross income minus allowable adjustments to income
Rationale: AGI is an intermediate measure in the individual income tax
computation. Itemized or standard deductions are generally considered after AGI.
4. What establishes filing status most directly?
A. Employer preference
B. Marital and household facts under applicable rules
C. The largest possible refund
D. Bank account type
Correct answer: B. Marital and household facts under applicable rules
Rationale: Filing status follows statutory conditions rather than preference alone.
Marital status, dependents, residence, and household support can affect eligibility.
Independent Practice Exam | Page 1
,5. A person is unmarried on December 31 after a final divorce. What status
may be available absent head-of-household eligibility?
A. Qualifying surviving spouse automatically
B. Married filing jointly with the former spouse
C. Single
D. Married filing separately necessarily
Correct answer: C. Single
Rationale: Year-end marital status generally controls. A final divorce ordinarily
prevents joint filing with the former spouse for that tax year.
6. What is required for head-of-household status in addition to qualifying-
person rules?
A. Paying exactly one quarter
B. Having any roommate
C. Paying more than half the cost of keeping up the home
D. Owning rather than renting
Correct answer: C. Paying more than half the cost of keeping up the home
Rationale: Head-of-household eligibility includes household cost and qualifying-
person requirements. Home ownership by itself neither establishes nor prevents
the status.
7. Which statement about a qualifying child is accurate?
A. Relationship, age, residence, support, and joint-return tests matter
B. Any adult friend always qualifies
C. A child must provide over half of personal support
D. Income alone determines qualification
Correct answer: A. Relationship, age, residence, support, and joint-return tests
matter
Rationale: Dependency tests require multiple facts. A qualifying child generally
must not provide more than half of their own support.
8. How does the support test generally differ for a qualifying relative?
A. The taxpayer generally must provide more than half of support
B. Only residence matters
C. The relative must provide most support
D. No income-related test applies
Correct answer: A. The taxpayer generally must provide more than half of support
Rationale: Qualifying-relative rules include a support requirement and other
conditions. They should not be confused with the qualifying-child support test.
Independent Practice Exam | Page 2
, 9. Which receipt is generally included in gross income?
A. A qualifying gift from a parent
B. A loan requiring repayment
C. Return of one's own capital alone
D. Cash wages
Correct answer: D. Cash wages
Rationale: Compensation is generally taxable unless a specific exclusion applies.
Borrowing and capital recovery are not automatically income merely because cash
changes hands.
10. Why is a genuine bank loan usually not income on receipt?
A. There is an obligation to repay
B. All cash receipts are excluded
C. The amount is always small
D. Banks cannot make taxable payments
Correct answer: A. There is an obligation to repay
Rationale: Loan proceeds create a repayment obligation rather than an
unrestricted increase in wealth. Later debt cancellation requires a separate tax
analysis.
11. A parent gives an adult child cash with no services required. What is
generally true for the recipient?
A. It reduces the child's basis in every asset
B. It is always capital gain
C. The gift is excluded from gross income
D. It is wage income automatically
Correct answer: C. The gift is excluded from gross income
Rationale: A genuine gift is generally excluded from the recipient's income. Gift-tax
consequences for the donor are a separate issue.
12. What is generally true of interest from an ordinary savings account?
A. It is always a qualified dividend
B. It is tax-free because already deposited
C. Only withdrawn interest is taxable
D. It is taxable interest
Correct answer: D. It is taxable interest
Rationale: Ordinary bank interest is generally taxable when recognized under the
taxpayer's accounting method. Leaving credited interest in the account does not
necessarily defer it.
Independent Practice Exam | Page 3
Original Questions with Worked Answers and Rationales
Practice Questions
1. What distinguishes a deduction from a tax credit?
A. Both always reduce tax dollar for dollar
B. A deduction reduces taxable income; a credit reduces tax
C. A deduction always creates a refund
D. A credit reduces gross receipts only
Correct answer: B. A deduction reduces taxable income; a credit reduces tax
Rationale: Deductions affect the income on which tax is computed. Credits offset
computed tax, subject to their eligibility and refundability rules.
2. Which rate applies to the next dollar of taxable ordinary income?
A. Sales tax rate
B. Payroll withholding percentage necessarily
C. Marginal rate
D. Average rate on all receipts
Correct answer: C. Marginal rate
Rationale: The marginal rate describes the incremental tax effect of additional
income. The average rate reflects tax across a broader income base.
3. What is adjusted gross income generally?
A. Cash receipts minus tax credits
B. Tax liability minus withholding
C. Gross wages minus every personal expense
D. Gross income minus allowable adjustments to income
Correct answer: D. Gross income minus allowable adjustments to income
Rationale: AGI is an intermediate measure in the individual income tax
computation. Itemized or standard deductions are generally considered after AGI.
4. What establishes filing status most directly?
A. Employer preference
B. Marital and household facts under applicable rules
C. The largest possible refund
D. Bank account type
Correct answer: B. Marital and household facts under applicable rules
Rationale: Filing status follows statutory conditions rather than preference alone.
Marital status, dependents, residence, and household support can affect eligibility.
Independent Practice Exam | Page 1
,5. A person is unmarried on December 31 after a final divorce. What status
may be available absent head-of-household eligibility?
A. Qualifying surviving spouse automatically
B. Married filing jointly with the former spouse
C. Single
D. Married filing separately necessarily
Correct answer: C. Single
Rationale: Year-end marital status generally controls. A final divorce ordinarily
prevents joint filing with the former spouse for that tax year.
6. What is required for head-of-household status in addition to qualifying-
person rules?
A. Paying exactly one quarter
B. Having any roommate
C. Paying more than half the cost of keeping up the home
D. Owning rather than renting
Correct answer: C. Paying more than half the cost of keeping up the home
Rationale: Head-of-household eligibility includes household cost and qualifying-
person requirements. Home ownership by itself neither establishes nor prevents
the status.
7. Which statement about a qualifying child is accurate?
A. Relationship, age, residence, support, and joint-return tests matter
B. Any adult friend always qualifies
C. A child must provide over half of personal support
D. Income alone determines qualification
Correct answer: A. Relationship, age, residence, support, and joint-return tests
matter
Rationale: Dependency tests require multiple facts. A qualifying child generally
must not provide more than half of their own support.
8. How does the support test generally differ for a qualifying relative?
A. The taxpayer generally must provide more than half of support
B. Only residence matters
C. The relative must provide most support
D. No income-related test applies
Correct answer: A. The taxpayer generally must provide more than half of support
Rationale: Qualifying-relative rules include a support requirement and other
conditions. They should not be confused with the qualifying-child support test.
Independent Practice Exam | Page 2
, 9. Which receipt is generally included in gross income?
A. A qualifying gift from a parent
B. A loan requiring repayment
C. Return of one's own capital alone
D. Cash wages
Correct answer: D. Cash wages
Rationale: Compensation is generally taxable unless a specific exclusion applies.
Borrowing and capital recovery are not automatically income merely because cash
changes hands.
10. Why is a genuine bank loan usually not income on receipt?
A. There is an obligation to repay
B. All cash receipts are excluded
C. The amount is always small
D. Banks cannot make taxable payments
Correct answer: A. There is an obligation to repay
Rationale: Loan proceeds create a repayment obligation rather than an
unrestricted increase in wealth. Later debt cancellation requires a separate tax
analysis.
11. A parent gives an adult child cash with no services required. What is
generally true for the recipient?
A. It reduces the child's basis in every asset
B. It is always capital gain
C. The gift is excluded from gross income
D. It is wage income automatically
Correct answer: C. The gift is excluded from gross income
Rationale: A genuine gift is generally excluded from the recipient's income. Gift-tax
consequences for the donor are a separate issue.
12. What is generally true of interest from an ordinary savings account?
A. It is always a qualified dividend
B. It is tax-free because already deposited
C. Only withdrawn interest is taxable
D. It is taxable interest
Correct answer: D. It is taxable interest
Rationale: Ordinary bank interest is generally taxable when recognized under the
taxpayer's accounting method. Leaving credited interest in the account does not
necessarily defer it.
Independent Practice Exam | Page 3
