TAX PREPARATION TEST QUESTIONS WITH
CORRECT ANSWERS 2026
Dependent - CORRECT ANSWER -An individual who may be claimed on another person's income
tax return. To be claimed as a dependent, a person must meet the qualifying child or qualifying
relative test.
Active Participant - CORRECT ANSWER -A taxpayer who is covered by a qualified employer-
maintained retirement plan, or a qualified self-employed retirement plan, if even for only one
day during the year.
Additional Child Tax Credit (ACTC) - CORRECT ANSWER -A refundable credit available to certain
taxpayers who get less than the full amount of the Child Tax Credit. The credit is available to
taxpayers with earned income exceeding $2,500 or those with three or more qualifying children
and whose regular Child Tax Credit exceeds tax liabilities minus other refundable credits. The
Additional Child Tax Credit is computed on Form 8812. See also: Child Tax Credit.
Adjusted Gross Income (AGI) - CORRECT ANSWER -Adjusted gross income equals gross income
less reductions that are allowable, regardless of whether personal deductions are itemized.
Adoption Credit - CORRECT ANSWER -A nonrefundable credit for qualified adoption expenses
incurred for each eligible child. For 2020, the credit cannot exceed $14,300 per child. The limit is
a per-child limit, not an annual limit, and can be carried forward for up to five years or until
used.
American Opportunity Tax Credit (AOTC) - CORRECT ANSWER -A credit for qualifying education
expenses paid for an eligible student to an eligible educational institution. One restriction is that
the expenses must be for the first four years of higher education. The AOTC may be partially
refundable.
,Audit - CORRECT ANSWER -An IRS examination and verification of a taxpayer's return or other
transactions with tax consequences. A correspondence audit is a tax audit the IRS performs by
mail. An office audit is an audit by the IRS conducted in the agent's office. A field audit is
conducted by the IRS on the business premises of the taxpayer or in the office of the tax
practitioner representing the taxpayer.
403(b) Plan - CORRECT ANSWER -A deferred compensation plan available to employees of many
public educational institutions and tax-exempt organizations. Also known as a tax-sheltered
annuity (TSA) plan.
Bronze/Silver/Gold/Platinum Plans - CORRECT ANSWER -The four levels of qualified health plans
offered by health insurance marketplaces, based on the value of the coverage provided.
Cafeteria Plan - CORRECT ANSWER -A plan wherein an employer offers a choice of nontaxable,
fringe benefits from which participating employees may select. The plan may be funded with
employer contributions, employee contributions (usually through salary reduction agreements),
or a combination of both. It is also often called a §125 plan or a flexible spending account (FSA).
Calendar Year - CORRECT ANSWER -An accounting period that extends from January 1 to
December 31.
Capital Gains Distribution - CORRECT ANSWER -Amounts paid by mutual funds, regulated
investment companies, and real estate investment trusts. These amounts represent the
shareholder's portion of gain from the sale of capital assets owned by these investment
companies. Capital gain distributions are taxed in the year constructively received and are
always considered to be held long-term.
Capital Gain - CORRECT ANSWER -The gains from the sales or exchanges of capital assets.
Capital Loss - CORRECT ANSWER -The loss from the sale or exchange of a capital asset. If capital
losses exceed capital gains, the excess can be deducted on a taxpayer's return and used to
, reduce other income up to a limit. Up to $3,000 ($1,500 if MFS) of net capital loss is deductible
annually with the excess carried forward to future years. Losses on personal-use assets are not
deductible.
Charitable Contributions - CORRECT ANSWER -Money or property donated to a qualified
charitable organization. Beginning for tax year 2020, cash-only contributions up to $300 ($150
MFS) are deductible on form 1040. Cash contributions greater than $300 ($150 MFS), and all
other types of contributions, are only deductible on Schedule A as an itemized deduction. A
taxpayer can either take the above-the-line deduction or itemize deductions, not both.
Child and Dependent Care Tax Credit - CORRECT ANSWER -A nonrefundable tax credit of 20-35%
of employment-related child and dependent care expenses for amounts of up to $6,000,
available to individuals who are employed and have a qualifying child or disabled spouse or
dependent.
Child Tax Credit (CTC) - CORRECT ANSWER -A nonrefundable credit of up to $2,000 per
dependent child under age 17 at the end of the tax year with an SSN.
Combat Pay - CORRECT ANSWER -Pay received by a servicemember assigned to a combat zone
and exempted from taxable income.
Common Law Marriage - CORRECT ANSWER -A marriage established in a state that legally
recognizes non-ceremonial marriages. The parties must have the legal capacity and the intent to
marry, and they must live together and present themselves publicly as married. See also:
Husband and Wife.
Community Property - CORRECT ANSWER -Property considered to belong in equal shares to a
husband and wife. This concept of ownership for property acquired after marriage is followed in
Arizona, California, Idaho, Louisiana, New Mexico, Nevada, TEXAS, Washington, and Wisconsin.
CORRECT ANSWERS 2026
Dependent - CORRECT ANSWER -An individual who may be claimed on another person's income
tax return. To be claimed as a dependent, a person must meet the qualifying child or qualifying
relative test.
Active Participant - CORRECT ANSWER -A taxpayer who is covered by a qualified employer-
maintained retirement plan, or a qualified self-employed retirement plan, if even for only one
day during the year.
Additional Child Tax Credit (ACTC) - CORRECT ANSWER -A refundable credit available to certain
taxpayers who get less than the full amount of the Child Tax Credit. The credit is available to
taxpayers with earned income exceeding $2,500 or those with three or more qualifying children
and whose regular Child Tax Credit exceeds tax liabilities minus other refundable credits. The
Additional Child Tax Credit is computed on Form 8812. See also: Child Tax Credit.
Adjusted Gross Income (AGI) - CORRECT ANSWER -Adjusted gross income equals gross income
less reductions that are allowable, regardless of whether personal deductions are itemized.
Adoption Credit - CORRECT ANSWER -A nonrefundable credit for qualified adoption expenses
incurred for each eligible child. For 2020, the credit cannot exceed $14,300 per child. The limit is
a per-child limit, not an annual limit, and can be carried forward for up to five years or until
used.
American Opportunity Tax Credit (AOTC) - CORRECT ANSWER -A credit for qualifying education
expenses paid for an eligible student to an eligible educational institution. One restriction is that
the expenses must be for the first four years of higher education. The AOTC may be partially
refundable.
,Audit - CORRECT ANSWER -An IRS examination and verification of a taxpayer's return or other
transactions with tax consequences. A correspondence audit is a tax audit the IRS performs by
mail. An office audit is an audit by the IRS conducted in the agent's office. A field audit is
conducted by the IRS on the business premises of the taxpayer or in the office of the tax
practitioner representing the taxpayer.
403(b) Plan - CORRECT ANSWER -A deferred compensation plan available to employees of many
public educational institutions and tax-exempt organizations. Also known as a tax-sheltered
annuity (TSA) plan.
Bronze/Silver/Gold/Platinum Plans - CORRECT ANSWER -The four levels of qualified health plans
offered by health insurance marketplaces, based on the value of the coverage provided.
Cafeteria Plan - CORRECT ANSWER -A plan wherein an employer offers a choice of nontaxable,
fringe benefits from which participating employees may select. The plan may be funded with
employer contributions, employee contributions (usually through salary reduction agreements),
or a combination of both. It is also often called a §125 plan or a flexible spending account (FSA).
Calendar Year - CORRECT ANSWER -An accounting period that extends from January 1 to
December 31.
Capital Gains Distribution - CORRECT ANSWER -Amounts paid by mutual funds, regulated
investment companies, and real estate investment trusts. These amounts represent the
shareholder's portion of gain from the sale of capital assets owned by these investment
companies. Capital gain distributions are taxed in the year constructively received and are
always considered to be held long-term.
Capital Gain - CORRECT ANSWER -The gains from the sales or exchanges of capital assets.
Capital Loss - CORRECT ANSWER -The loss from the sale or exchange of a capital asset. If capital
losses exceed capital gains, the excess can be deducted on a taxpayer's return and used to
, reduce other income up to a limit. Up to $3,000 ($1,500 if MFS) of net capital loss is deductible
annually with the excess carried forward to future years. Losses on personal-use assets are not
deductible.
Charitable Contributions - CORRECT ANSWER -Money or property donated to a qualified
charitable organization. Beginning for tax year 2020, cash-only contributions up to $300 ($150
MFS) are deductible on form 1040. Cash contributions greater than $300 ($150 MFS), and all
other types of contributions, are only deductible on Schedule A as an itemized deduction. A
taxpayer can either take the above-the-line deduction or itemize deductions, not both.
Child and Dependent Care Tax Credit - CORRECT ANSWER -A nonrefundable tax credit of 20-35%
of employment-related child and dependent care expenses for amounts of up to $6,000,
available to individuals who are employed and have a qualifying child or disabled spouse or
dependent.
Child Tax Credit (CTC) - CORRECT ANSWER -A nonrefundable credit of up to $2,000 per
dependent child under age 17 at the end of the tax year with an SSN.
Combat Pay - CORRECT ANSWER -Pay received by a servicemember assigned to a combat zone
and exempted from taxable income.
Common Law Marriage - CORRECT ANSWER -A marriage established in a state that legally
recognizes non-ceremonial marriages. The parties must have the legal capacity and the intent to
marry, and they must live together and present themselves publicly as married. See also:
Husband and Wife.
Community Property - CORRECT ANSWER -Property considered to belong in equal shares to a
husband and wife. This concept of ownership for property acquired after marriage is followed in
Arizona, California, Idaho, Louisiana, New Mexico, Nevada, TEXAS, Washington, and Wisconsin.
