US Federal Income Tax

Correct answer: B. The loss is disallowed for 2025 because the repurchase falls within the 30-day window before or after the sale, but the disallowed loss is added to the basis of the newly acquired shares

IRC Section 1091 disallows a loss on the sale of stock or securities if the taxpayer acquires substantially identical stock or securities within the 61-day window beginning 30 days before and ending 30 days after the sale; buying the same stock back on December 1, 2025, sixteen days after a November 15, 2025 sale, falls inside that window, so the loss is disallowed, but it is not lost forever — it is added to the basis of the repurchased shares, deferring the benefit until those shares are later sold. The first option is wrong because 30 days, not 15, is the relevant threshold, and 16 days is still within the disallowance window. The third option is wrong because the wash sale rule defers the loss through a basis adjustment rather than eliminating it permanently. The fourth option is wrong because the timing of the disallowance depends on the 30-day acquisition window around the sale date, not on which tax year the return is filed.

Source: Internal Revenue Code Section 1091; IRS Instructions for Schedule D (Form 1040) (2025), 'Wash Sales'

Correct answer: B. Total gross income minus above-the-line adjustments to income reported on Schedule 1, calculated before the standard deduction or itemized deductions are applied

The IRS defines AGI as total gross income minus certain adjustments to income, often called 'above-the-line' deductions because they are subtracted on Schedule 1 before the standard or itemized deduction is ever applied; Form 1040 adds total income on line 9, subtracts Schedule 1 adjustments on line 10, and reports AGI on line 11, all before the deduction is taken on a later line. The first and third options are wrong because the standard or itemized deduction is subtracted from AGI to reach taxable income, a step that happens after AGI is already calculated, not as part of calculating it. The third option is doubly wrong because itemized deductions are an alternative to the standard deduction, not something applied automatically before AGI. The fourth option is wrong because personal exemptions were suspended for tax years 2018 through 2025 and, in any case, exemptions would apply to taxable income, not to computing AGI itself.

Source: IRS 'Adjusted gross income' (irs.gov/filing/adjusted-gross-income); 2025 Form 1040 and Schedule 1 instructions

Correct answer: B. Short-term capital gain, because the holding period must exceed one year — not merely equal one year — to qualify as long-term

The IRS holding period rule counts from the day after acquisition through and including the day of disposition, and a gain is long-term only if the asset was held for more than one year; holding from March 10, 2024, through March 10, 2025, is exactly one year, so the sale one day too early to exceed the one-year mark produces a short-term gain, taxed at ordinary income rates rather than preferential long-term rates. The first option is wrong because reaching exactly one year is not the same as exceeding it — the IRS's own example shows that selling on the one-year anniversary date, rather than the day after, still yields a short-term result. The third option is wrong because there is no capital gains exemption tied to holding an asset for a calendar year. The fourth option is wrong because the more-than-one-year threshold applies to taxable brokerage holdings generally and is not altered by account type in this context.

Source: IRS Topic no. 409, Capital gains and losses (2025)

Correct answer: A. SE tax is imposed at a combined 15.3% rate (12.4% Social Security plus 2.9% Medicare), and the taxpayer may deduct one-half of the SE tax when computing AGI

The IRS sets the self-employment tax rate at a combined 15.3%, made up of 12.4% for Social Security and 2.9% for Medicare, and allows the self-employed taxpayer to deduct the employer-equivalent half of that tax as an adjustment to income when figuring AGI, mirroring the fact that an employer would otherwise pay half of an employee's FICA tax. The second option is wrong because 7.65% is only the employee-side FICA rate; self-employed individuals owe both the employee and employer shares, totaling 15.3%. The third option is wrong because the SE tax deduction is an above-the-line adjustment to income on Schedule 1, not an itemized deduction on Schedule A, so it is available even to taxpayers who take the standard deduction. The fourth option is wrong because SE tax funds Social Security and Medicare separately from, and in addition to, federal income tax owed on the same self-employment earnings.

Source: IRS 'Self-employment tax (Social Security and Medicare taxes)'; 2025 Instructions for Schedule SE (Form 1040)

Correct answer: A. The taxpayer is unmarried (or considered unmarried) at year-end, paid more than half the cost of keeping up a home for the year, and a qualifying person lived with the taxpayer for more than half the year

The IRS requires three things for Head of Household status: the taxpayer must be unmarried or considered unmarried at the end of the year, must have paid more than half the cost of keeping up a home for the year, and must have a qualifying person who lived in that home for more than half the year (an exception exists only for a dependent parent, who need not live with the taxpayer). The second option is wrong because filing a separate return while still married generally results in Married Filing Separately status, not Head of Household, unless the specific 'considered unmarried' exception applies. The third option is wrong because Head of Household requires a qualifying person in the home; living alone with no dependents does not meet that requirement regardless of preference for a lower rate. The fourth option is wrong because the qualifying person must be a dependent (or otherwise meet the specific relationship tests), and an unrelated friend who is not a dependent does not satisfy that requirement.

Source: IRS Publication 501 (2025), 'Head of Household'

Correct answer: A. On the lesser of net investment income ($30,000) or the amount by which MAGI exceeds the $200,000 single-filer threshold ($20,000), so the 3.8% tax applies to $20,000

Under IRC Section 1411, the 3.8% NIIT applies to the lesser of an individual's net investment income or the excess of MAGI over the statutory threshold for their filing status; for a single filer the threshold is $200,000, so with MAGI of $220,000 the excess is $20,000, which is less than the $30,000 of net investment income, making $20,000 the taxable base. The second option is wrong because the tax is capped at the MAGI-excess amount when that figure is smaller than net investment income, not applied to the full investment income figure regardless of MAGI. The third option is wrong because NIIT is never assessed on total MAGI; it is assessed only on the lesser-of amount described above. The fourth option is wrong because $250,000 is the threshold for married filing jointly and qualifying surviving spouse, not for single filers, whose threshold is $200,000 and is not indexed for inflation.

Source: Internal Revenue Code Section 1411; IRS Topic no. 559, Net investment income tax; 2025 Instructions for Form 8960

Correct answer: A. The taxpayer must have been entitled to file a joint return for the year the spouse died, must not have remarried, must have a dependent child (or stepchild/adopted child) living in the home more than half the year, and must have paid more than half the cost of keeping up the home — available for the two tax years following the year of death

The IRS allows Qualifying Surviving Spouse status for the two tax years following the year a spouse died, provided the taxpayer was entitled to file jointly in the year of death, has not remarried before the end of the current tax year, has a child, stepchild, or adopted child who qualifies (or would qualify but for a specific exception) as a dependent, that child lives in the home for more than half the year, and the taxpayer pays more than half the cost of keeping up that home; here the spouse died in 2024 and the facts satisfy all of these for the 2025 return, so the status applies. The second option is wrong because the availability window is limited to the two years following the year of death, not five years, and a dependent child is required. The third option is wrong because remarrying before the end of the year disqualifies the taxpayer entirely rather than being a requirement. The fourth option is wrong because, unlike Head of Household, Qualifying Surviving Spouse status requires a dependent child specifically; a dependent parent does not satisfy it.

Source: IRS Publication 501 (2025), 'Qualifying Surviving Spouse'

Correct answer: A. Paying, through withholding and timely estimated payments, at least the lesser of 90% of the 2025 tax or 110% of the 2024 tax, because the taxpayer's 2024 AGI exceeded the $150,000 threshold that raises the prior-year percentage from 100% to 110%

IRC Section 6654's safe harbors avoid the underpayment penalty if the taxpayer pays the smaller of 90% of the current year's tax or a percentage of the prior year's tax; that percentage is 100% for taxpayers whose prior-year AGI was $150,000 or less, but rises to 110% once prior-year AGI exceeds $150,000, so a taxpayer with $180,000 of 2024 AGI must use 110% of the 2024 tax (or 90% of the 2025 tax, if lower) rather than 100%. The second option is wrong because the 100% figure only applies below the $150,000 AGI threshold; above it, the higher 110% figure replaces it. The third option describes only the current-year-based prong of the test and ignores that meeting either prong is sufficient, but on its own understates what the prior-year-based prong requires at this income level. The fourth option is wrong because a safe harbor remains available above $150,000 of AGI; the threshold changes the applicable percentage rather than eliminating the safe harbor.

Source: Internal Revenue Code Section 6654; IRS 2025 Instructions for Form 2210; 'Underpayment of estimated tax by individuals penalty'

Correct answer: A. Up to $1,700 per qualifying child of the unused Child Tax Credit may be refundable through the Additional Child Tax Credit

The Child Tax Credit is only partially refundable: when it exceeds the tax owed, the taxpayer may claim the Additional Child Tax Credit for the unused amount, capped for 2025 at $1,700 per qualifying child, computed on Schedule 8812. The second option is wrong because the credit is not fully nonrefundable — the ACTC exists specifically to refund a capped portion of the amount that could not be used against tax liability. The third option is wrong because the refundable amount is limited to $1,700 per qualifying child in 2025, not the full unused credit with no ceiling. The fourth option is wrong because the ACTC is a refund paid to the taxpayer in the current year, computed via Schedule 8812, rather than a carryforward applied to a future year's return.

Source: IRS Instructions for Schedule 8812 (Form 1040) (2025); IRS 'Child Tax Credit'

Correct answer: A. Six years from the date the return was filed, rather than the general three-year period, because the omission exceeds the 25% threshold

IRC Section 6501 generally gives the IRS three years from the filing date to assess additional tax, but extends that period to six years when a taxpayer omits from gross income an amount properly includible that exceeds 25% of the gross income stated on the return, which is exactly the fact pattern described. The second option states the general rule but ignores the statutory exception that applies once the 25% omission threshold is met, which is the specific rule this scenario is testing. The third option is wrong because Section 6501 does not eliminate the limitations period entirely for large omissions — it extends the period to a defined six years rather than making assessment open-ended, and an unlimited period applies only in narrower situations such as a false or fraudulent return, not merely a large omission. The fourth option is wrong because the six-year period runs from the filing date of the return, not from whenever the IRS happens to discover the omission.

Source: Internal Revenue Code Section 6501; IRS 'Statutes of limitations for assessing, collecting and refunding tax'

Correct answer: A. The stock must be held for at least 61 days during the 121-day period that begins 60 days before the ex-dividend date

To be taxed as a qualified dividend under IRC Section 1(h)(11), common stock generally must be held for more than 60 days during the 121-day period that begins 60 days before the ex-dividend date, which the IRS phrases as holding the stock for at least 61 days of that 121-day window; preferred stock dividends attributable to periods over 366 days instead require at least 91 days within a 180-day window. The second option is wrong because the required holding period runs around the ex-dividend date over a 121-day window, not as a flat 30-day pre-declaration requirement with nothing required afterward. The third option is wrong because ordinary dividends only become qualified dividends if both the payer and holding-period conditions are met; qualification is not automatic. The fourth option is wrong because it confuses the qualified-dividend holding period with the unrelated more-than-one-year threshold that separates long-term from short-term capital gains.

Source: Internal Revenue Code Section 1(h)(11); IRS Topic no. 404, Dividends and other corporate distributions (2025)