Free Enrolled Agent Part 1 Practice Test: Individuals

Answer: B. Head of household

A parent is the one qualifying person who need not live with the taxpayer: Dana qualifies as head of household if she pays more than half the cost of keeping up the parent's main home (a nursing home counts) and can claim the parent as a dependent. The mother is a qualifying relative because her gross income of $4,100 is under the 2025 limit of $5,200 and Dana provides more than half her support. Single is allowed but gives a smaller standard deduction ($15,750 against $23,625 for 2025) and less favourable rates. Source: IRC 2(b)(1)(B); Pub. 501 (2025), Head of Household, Father or mother; Rev. Proc. 2024-40 sec. 2.24 ($5,200 for 2025). Tax year: 2025 (law as of 31 Dec 2025).

Common mistake: Assuming every head-of-household qualifying person must live in the taxpayer's own home for more than half the year; the parent is the exception.

Answer: C. Qualifying surviving spouse

A surviving spouse may use qualifying surviving spouse status for the two years after the year of death (2024 and 2025 here) if she has not remarried, can claim a son, daughter or stepchild who lived in the home all year, paid more than half the cost of the home and could have filed jointly in the year of death. It carries the joint standard deduction of $31,500 for 2025 and joint rates, so it beats head of household. A joint return was available only for 2023. Source: IRC 2(a); Pub. 501 (2025), Qualifying Surviving Spouse; 2025 Form 1040 instructions, standard deduction (as of 31 Dec 2025). Tax year: 2025 (law as of 31 Dec 2025).

Common mistake: Counting the year of death itself as one of the two qualifying surviving spouse years.

Answer: D. Married filing separately

A married taxpayer is considered unmarried for head of household only if, among other tests, the spouse did not live in the home at any time during the last 6 months of the year. Luis's wife lived there until August 15, so she was in the home during July and August and the test fails. Still married on December 31 and not filing jointly, Luis must file married filing separately. Had she left before July 1, head of household would have been available. Source: IRC 7703(b); Pub. 501 (2025), Considered Unmarried. Tax year: 2025 (law as of 31 Dec 2025).

Common mistake: Treating any separation before year end as enough for head of household; the spouse must be out of the home for the whole last six months.

Answer: B. A nonresident, since he was present fewer than 31 days in 2025

The substantial presence test has two parts: at least 31 days of presence in the current year, and at least 183 weighted days over the three-year period (all current days, one-third of the first prior year, one-sixth of the second prior year). Hugo's weighted total is large, but with only 25 days in 2025 he fails the 31-day requirement, so he is not a resident under this test for 2025. Source: IRC 7701(b)(3)(A); Pub. 519 (2025), Substantial Presence Test (2025). Tax year: 2025 (law as of 31 Dec 2025).

Common mistake: Computing the 183-day total and forgetting the 31-day minimum in the current year.

Answer: A. A nonresident alien who files Form 1040-NR and Form 8843

Days present as an exempt individual do not count toward substantial presence. A student on an F, J, M or Q visa is exempt unless he or she has been exempt as a student for any part of more than 5 calendar years. Wen has been a student in 2022, 2023, 2024 and 2025, four calendar years, so her days do not count and she remains a nonresident. She files Form 1040-NR if she has income to report and attaches Form 8843 to explain the excluded days. Source: IRC 7701(b)(5)(D)-(E); Pub. 519 (2025), Exempt Individual, Students; Form 8843 instructions. Tax year: 2025 (law as of 31 Dec 2025).

Common mistake: Counting a student's days toward the 183-day test during the first five calendar years.

Answer: D. The earned income credit

The earned income credit requires the taxpayer (and spouse, if filing jointly) to have an SSN valid for employment issued by the due date of the return; an ITIN does not qualify. For 2025 the child tax credit also requires the taxpayer (or, on a joint return, one spouse) to have a valid SSN. The credit for other dependents, the foreign tax credit and the dependent care credit can be claimed with an ITIN if the other rules are met. Source: IRC 32(c)(1)(E), 32(m); Pub. 596 (2025), Rule 2; 2025 Form 1040 instructions. Tax year: 2025 (law as of 31 Dec 2025).

Common mistake: Assuming an ITIN holder cannot claim any credit.

Answer: A. As an ordinary dividend, as the holding period was not met

A dividend is qualified only if the stock was held more than 60 days during the 121-day period that begins 60 days before the ex-dividend date. Ray held the stock 19 days, so the dividend is taxed at ordinary rates even if the payer reported it as qualified. It remains a dividend, not a capital gain or return of capital. Source: IRC 1(h)(11)(B)(iii); Pub. 550 (2025), Qualified Dividends, Holding period. Tax year: 2025 (law as of 31 Dec 2025).

Common mistake: Relying on the Form 1099-DIV box without checking the shareholder's holding period.

Answer: C. $5,000

For 2025, gambling losses are an itemized deduction on Schedule A, limited to gambling winnings reported as income: $5,000. The rest is lost; non-itemizers deduct none. The One Big Beautiful Bill Act's 90% limit starts in 2026. Why not the others: $7,000 is what you get if you deducted all losses. $3,000 is what you get if you applied the $3,000 capital loss limit. $0 is what you get if you treated gambling losses as never deductible. Source: IRC 165(d); 2025 Schedule A instructions, line 16; Pub. 525 (2025). Tax year: 2025 (law as of 31 Dec 2025).

Common mistake: Allowing losses above winnings or netting them without itemizing.

Answer: A. Deductible by Al and taxable to Bea

Alimony paid under a divorce or separation instrument executed before 2019 remains deductible by the payer (adjustment to income) and taxable to the recipient, unless a later modification expressly adopts the new rules. For instruments executed after 2018, alimony is neither deductible nor taxable. The rule depends on the instrument's date, not the year of payment. Source: IRC 71 and 215 (pre-2019 instruments); TCJA sec. 11051; Pub. 504 (2025). Tax year: 2025 (law as of 31 Dec 2025).

Common mistake: Applying the post-2018 rule to every alimony payment made today.

Answer: D. It is excluded from income, and no rental expenses are deductible

If a dwelling unit used as a residence is rented for fewer than 15 days during the year, the rental income is not included in gross income and no rental expenses are deducted (mortgage interest and taxes remain deductible as itemized deductions in the usual way). Cole rented for 12 days, so the $9,000 is tax-free. Source: IRC 280A(g); Pub. 527 (2025), Used as a home but rented less than 15 days. Tax year: 2025 (law as of 31 Dec 2025).

Common mistake: Reporting short-term rental income that the 14-day rule excludes.

Answer: D. No, as he pays fair rent for his main home

Use by a family member is personal use unless the property is rented at a fair rental price to someone who uses it as his or her main home. Fair-rent use as a main home by the son is not personal use by Bea, so the rental is not limited as a vacation home. Below-market rent to a relative would count as personal use. Source: IRC 280A(d)(2)-(3); Pub. 527 (2025), Personal Use of Dwelling Unit. Tax year: 2025 (law as of 31 Dec 2025).

Common mistake: Treating every rental to a relative as personal use.

Answer: B. They are deductible in full in 2025

When a taxpayer disposes of her entire interest in a passive activity in a fully taxable transaction with an unrelated party, suspended losses from that activity are released and treated as nonpassive. Joan deducts the $14,000 in 2025. The $3,000 limit applies to net capital losses, not passive losses. Source: IRC 469(g)(1)(A); Pub. 925 (2025), Dispositions. Tax year: 2025 (law as of 31 Dec 2025).

Common mistake: Leaving suspended losses suspended after a complete taxable disposition.

Answer: C. Taxable as income, but not subject to the 10% additional tax

A Roth distribution is qualified only if it is made after the 5-year period beginning January 1 of the first year a Roth contribution was made (here, not until 2027) and after age 59½, death, disability or a first home purchase. Nell's withdrawal is nonqualified: her $18,000 of contributions come out first tax-free, and the $5,000 of earnings are taxable. She is over 59½, so the 10% additional tax does not apply. Source: IRC 408A(d)(2), 72(t)(2)(A)(i); Pub. 590-B (2025), Distributions from Roth IRAs. Tax year: 2025 (law as of 31 Dec 2025).

Common mistake: Treating age 59½ alone as enough for a qualified Roth distribution.

Answer: C. No, because he separated from service in or after the year he turned 55

Distributions from a qualified employer plan to an employee who separates from service in or after the year he reaches age 55 are excepted from the 10% additional tax. The exception does not apply to IRAs, so rolling the money into an IRA and then withdrawing it before 59½ would make the 10% tax apply. The $40,000 is still taxable income. Source: IRC 72(t)(2)(A)(v); Pub. 575 (2025), Separation from service. Tax year: 2025 (law as of 31 Dec 2025).

Common mistake: Applying the age-55 separation exception to IRA distributions.

Answer: A. By December 31, 2034

A designated beneficiary who is not an eligible designated beneficiary (spouse, minor child, disabled or chronically ill person, or one not more than 10 years younger) must empty the account by the end of the 10th year after the year of death: December 31, 2034. Because the father died after his required beginning date, Theo must also take annual distributions in years 1 to 9. The 5-year rule applies to non-designated beneficiaries such as estates when the owner died before the required beginning date. Source: IRC 401(a)(9)(H); Treas. Reg. 1.401(a)(9)-5(d); Pub. 590-B (2025), 10-year rule. Tax year: 2025 (law as of 31 Dec 2025).

Common mistake: Allowing a life-expectancy stretch to an adult child.

Answer: C. No gain or loss

When the fair market value of gifted property is less than the donor's basis at the gift, the donee uses the donor's basis ($10,000) to figure gain and the fair market value ($7,000) to figure loss. A sale for $8,000 shows no gain using $10,000 and no loss using $7,000, so there is neither gain nor loss. Source: IRC 1015(a); Treas. Reg. 1.1015-1(a)(2); Pub. 551 (2025), Property Received as a Gift. Tax year: 2025 (law as of 31 Dec 2025).

Common mistake: Using the donor's basis for both gain and loss.

Answer: C. As a short-term capital gain

A gain is long-term only if the asset was held more than one year. The holding period begins the day after acquisition and includes the day of sale, so shares bought on March 3, 2024 must be sold on or after March 4, 2025 for long-term treatment. Cleo held them exactly one year, so the gain is short-term. Source: IRC 1222(3); Pub. 550 (2025), Holding Period. Tax year: 2025 (law as of 31 Dec 2025).

Common mistake: Treating exactly one year as long-term.

Answer: B. Yes, but gain allocated to the rental years is not excludable

Gina owned the home and used it as her main home for at least 2 of the 5 years ending on the sale date, so she qualifies for the exclusion. But under section 121(b)(5), gain allocated to periods of nonqualified use after 2008 (here the 2 rental years before she moved in, out of nearly 5 years of ownership) cannot be excluded; depreciation claimed after May 6, 1997 is also taxable. Rental use after the last period of residence would not count as nonqualified use. Source: IRC 121(a), 121(b)(5), 121(d)(6); Pub. 523 (2025), Nonqualified use. Tax year: 2025 (law as of 31 Dec 2025).

Common mistake: Excluding all of the gain when the home was a rental before it became the main home.

Answer: A. No; a mandatory charge is not determined by the customer

Qualified tips must be paid voluntarily, not subject to negotiation and determined by the customer. Service charges and automatic gratuities added to the bill are not qualified tips unless the customer is expressly allowed to remove or change them. The amount is still wages; it just cannot be deducted on Schedule 1-A. Wait staff is a listed tipped occupation. Source: IRC 224(d); 2025 Form 1040 instructions, Instructions for Schedule 1-A, Qualified Tips, Example 1. Tax year: 2025 (law as of 31 Dec 2025).

Common mistake: Treating every gratuity a server receives as a qualified tip.

Answer: B. An employee with self-only HDHP coverage and no other health plan

An eligible individual is covered under a high-deductible health plan, has no other disqualifying health coverage (a general-purpose health FSA disqualifies), is not enrolled in Medicare and cannot be claimed as someone else's dependent. Limited-purpose FSAs (dental and vision) are allowed. Source: IRC 223(c)(1), 223(b)(6)-(7); Pub. 969 (2025), Qualifying for an HSA. Tax year: 2025 (law as of 31 Dec 2025).

Common mistake: Overlooking a spouse's or one's own general-purpose FSA as disqualifying coverage.

Answer: C. $2,000 is income plus a 20% additional tax

HSA distributions not used for qualified medical expenses are included in income and, unless the account holder is 65, disabled or has died, are subject to a 20% additional tax (not the 10% that applies to retirement plans). Pia owes tax on $2,000 plus $400. A distribution made by mistake can be returned, but a vacation is not a mistake. Source: IRC 223(f)(2), 223(f)(4); Pub. 969 (2025), Distributions From an HSA. Tax year: 2025 (law as of 31 Dec 2025).

Common mistake: Applying the 10% retirement-plan rate to HSA distributions.

Answer: A. No, as the proceeds were not used on the home

Interest on a home equity loan is deductible only if the proceeds are used to buy, build or substantially improve the home securing the loan. Using the money to pay personal debts makes it personal interest, which is not deductible, regardless of total debt. Home equity loans used for improvements can be acquisition debt. Source: IRC 163(h)(3)(B), 163(h)(3)(F)(i)(I); Pub. 936 (2025), Home equity loan interest. Tax year: 2025 (law as of 31 Dec 2025).

Common mistake: Allowing home equity interest because the debt is under the $750,000 limit.

Answer: B. Deducted over the 30-year life of the loan

Points paid to buy or build a main home can usually be deducted in full in the year paid. Points paid to refinance are generally deducted ratably over the life of the loan ($200 a year here), unless part of the new loan is used to improve the home. Any undeducted balance is deducted when the loan ends, for example on another refinancing with a different lender. Source: IRC 461(g)(2); Pub. 936 (2025), Points. Tax year: 2025 (law as of 31 Dec 2025).

Common mistake: Deducting refinance points in full like purchase points.

Answer: A. $2,600, the gross proceeds shown on Form 1098-C

When a donated vehicle worth more than $500 is sold by the charity without significant intervening use or material improvement, the deduction is limited to the gross proceeds from the sale, reported to the donor on Form 1098-C, which must be attached. Fair market value applies only in exceptions such as significant charitable use. Source: IRC 170(f)(12); Pub. 4303; Pub. 526 (2025), Cars, Boats, and Airplanes. Tax year: 2025 (law as of 31 Dec 2025).

Common mistake: Deducting book value when the charity sold the car.

Answer: A. Yes; on a joint return only one spouse needs a valid SSN

Beginning in 2025, the taxpayer must have a valid SSN to claim the child tax credit, but on a joint return only one spouse needs one; the other must have an SSN or ITIN issued by the due date. The child must also have a valid SSN. Raúl's wife has an SSN and the daughter has one, so they qualify. Source: IRC 24(h)(7) as amended by P.L. 119-21; 2025 Schedule 8812 instructions; 2025 Form 1040 instructions, What's New. Tax year: 2025 (law as of 31 Dec 2025).

Common mistake: Requiring both spouses to have SSNs.

Answer: C. Yes, because the daughter is 19 and not Tina's dependent

Payments to a relative can qualify unless the provider is the taxpayer's dependent, the taxpayer's spouse, the parent of the qualifying child, or the taxpayer's own child under age 19 at year end. Tina's daughter is 19 and not a dependent, so the payments qualify if the other tests are met, and Tina reports her SSN on Form 2441. Source: IRC 21(e)(6); Pub. 503 (2025), Payments to Relatives or Dependents. Tax year: 2025 (law as of 31 Dec 2025).

Common mistake: Assuming payments to family members never qualify.

Answer: B. The lifetime learning credit

The American opportunity credit can be claimed for a student for no more than four tax years and only for the first four years of postsecondary education. After four years of claims, the lifetime learning credit (20% of up to $10,000 of expenses per return) remains available with no limit on the number of years. Both credits cannot be claimed for the same student in the same year. Source: IRC 25A(b)(2), 25A(c)(2)(A); Pub. 970 (2025). Tax year: 2025 (law as of 31 Dec 2025).

Common mistake: Allowing a fifth year of the American opportunity credit.

Answer: C. Her employer withholds 0.9% on her wages over $200,000, but they owe none

An employer must withhold Additional Medicare Tax on wages paid to an employee over $200,000 in a year, regardless of filing status. The tax itself applies to combined wages over $250,000 for joint filers. Kim and her husband have $240,000, so they owe none, and the $270 withheld is credited on Form 8959. Source: IRC 3101(b)(2), 3102(f); Form 8959 instructions (2025). Tax year: 2025 (law as of 31 Dec 2025).

Common mistake: Assuming withholding follows the joint $250,000 threshold.

Answer: C. $69,688

The 2025 single exemption of $88,100 is reduced by 25% of AMTI over $626,350: 25% x $73,650 = $18,413. The exemption is $69,688. Why not the others: $88,100 is what you get if you ignored the phase-out. $51,275 is what you get if you phased out at 50 cents per dollar. $18,413 is what you get if you used the 25% reduction itself as the exemption. Source: IRC 55(d)(1)-(3); Rev. Proc. 2024-40 sec. 2.11. Tax year: 2025 (law as of 31 Dec 2025).

Common mistake: Using a 50% phase-out rate (the rate before TCJA was 25% too).

Answer: D. $88,100

Rev. Proc. 2024-40 sets the 2025 AMT exemption at $88,100 for unmarried individuals, $137,000 for joint returns and surviving spouses and $68,500 for married filing separately. It phases out at 25 cents per dollar of AMTI over $626,350 (single). $85,700 was the 2024 single figure. Source: IRC 55(d); Rev. Proc. 2024-40 sec. 2.11. Tax year: 2025 (law as of 31 Dec 2025).

Common mistake: Using the 2024 figure or the married-filing-separately amount.

Answer: C. Leave it to him at death rather than give it now

Property received by gift keeps the donor's basis ($20,000), so the son would have about $180,000 of gain on a sale. Property received from a decedent takes a basis equal to fair market value at death, eliminating the built-in gain. Selling it herself triggers the gain for Ruth. Gift tax paid adds only the part attributable to appreciation and cannot raise basis to full value. Source: IRC 1014(a), 1015(a), 1015(d); Pub. 551 (2025). Tax year: 2025 (law as of 31 Dec 2025).

Common mistake: Assuming a gift gives the donee a fair-market-value basis.

Answer: C. It is not deductible

A car used only for personal purposes is a capital asset, but a loss on the sale of personal-use property is not deductible. A gain on such a sale would be taxable capital gain. Only losses on investment or business property, or casualty losses in disaster areas, are deductible. Source: IRC 165(c); Pub. 544 (2025), Personal-use property. Tax year: 2025 (law as of 31 Dec 2025).

Common mistake: Deducting a loss on personal-use property as a capital loss.

Answer: D. Paying two years of gifts in one year and itemizing only that year

Bunching deductible payments such as charitable gifts (for example through a donor-advised fund) into one year can push itemized deductions well above the $31,500 joint standard deduction for 2025 that year, while taking the standard deduction the next. Filing separately does not help, because if one spouse itemizes the other must too. Source: IRC 63(b)-(c), 170; Pub. 526 (2025); 2025 Form 1040 instructions. Tax year: 2025 (law as of 31 Dec 2025).

Common mistake: Assuming deductions are worth the same whenever they are paid.

Answer: C. File Form 709, but she owes no gift tax

A gift of a present interest over the $19,000 annual exclusion to one donee requires a Form 709. The $6,000 excess is a taxable gift that uses part of Joan's $13,990,000 basic exclusion through the unified credit, so no tax is paid. Gifts are never income to the recipient. Source: IRC 6019, 2503(b), 2505; Form 709 instructions (2025), Who Must File. Tax year: 2025 (law as of 31 Dec 2025).

Common mistake: Skipping Form 709 because no tax is owed.

Answer: B. Each spouse has a $19,000 gift, and Form 709 is required

Spouses who consent to split gifts are treated as each making half of every gift either makes to third parties during the year. Each is treated as giving $19,000, within each one's annual exclusion, so no taxable gift results. But gift splitting must be elected on Form 709 with the other spouse's consent, so a return is required. Source: IRC 2513; Form 709 instructions (2025), Gift Splitting. Tax year: 2025 (law as of 31 Dec 2025).

Common mistake: Assuming split gifts need no return.

Answer: C. File Form 706 to elect portability, within 5 years of death

The deceased spousal unused exclusion (DSUE) amount passes to the surviving spouse only if the executor elects portability on a complete and properly prepared Form 706. For estates not otherwise required to file, Rev. Proc. 2022-32 allows the election up to the fifth anniversary of death. It is not automatic. Source: IRC 2010(c)(5)(A); Rev. Proc. 2022-32; Form 706 instructions, Extension to elect portability. Tax year: 2025 (law as of 31 Dec 2025).

Common mistake: Assuming portability applies without a Form 706.

Answer: B. Yes, signature authority is enough

A U.S. person with a financial interest in or signature or other authority over foreign financial accounts exceeding $10,000 in aggregate must file an FBAR. Signature authority alone is enough, subject to specific exceptions (for example certain officers of publicly traded or regulated U.S. entities). Leo reports the account but not its income, which belongs to the employer. Source: 31 CFR 1010.350(f); Pub. 54 (12-2025), FinCEN Form 114; FBAR instructions. Tax year: 2025 (law as of 31 Dec 2025).

Common mistake: Thinking only account owners report foreign accounts.

Answer: A. Report the gift on Form 3520; no income tax is due on it

A U.S. person who receives gifts from a nonresident alien individual or foreign estate totaling more than $100,000 in a year must report them on Form 3520, due with the income tax return. The gift itself is not taxable income, and the donor (not the recipient) would be responsible for any U.S. gift tax. Penalties for not filing can be 5% of the gift per month, up to 25%. Source: IRC 6039F, 102; Form 3520 instructions (2025). Tax year: 2025 (law as of 31 Dec 2025).

Common mistake: Treating the gift as income, or ignoring the reporting requirement.

Answer: C. The physical presence test

The physical presence test is met by being physically present in a foreign country or countries for at least 330 full days during any 12 consecutive months, along with a foreign tax home. The bona fide residence test requires residence for an uninterrupted full tax year. Substantial presence and closer connection are residency tests for aliens. Source: IRC 911(d)(1); Pub. 54 (12-2025), Physical Presence Test. Tax year: 2025 (law as of 31 Dec 2025).

Common mistake: Confusing the foreign earned income exclusion tests with alien residency tests.