AAFM Tax Planning and Compliance 2 — Questions and Answers
Question 1: The alternative minimum tax (AMT) is designed to ensure that high-income individuals pay at least a minimum amount of tax by disallowing certain what?
- Standard deductions
- Preferential deductions and credits (Correct answer)
- Foreign tax credits
- Retirement contributions
Correct answer: Preferential deductions and credits
The AMT recalculates tax liability by adding back certain preferential deductions and exemptions, ensuring wealthy taxpayers cannot reduce their effective tax rate below the AMT floor.
Question 2: Which estate planning technique transfers future asset appreciation out of an estate by selling assets to a grantor trust in exchange for an installment note?
- GRAT
- IDGT installment sale (Correct answer)
- QPRT
- CLAT
Correct answer: IDGT installment sale
An intentionally defective grantor trust (IDGT) installment sale removes future appreciation from the estate by exchanging assets for a promissory note at the applicable federal rate, with income tax paid by the grantor.
Question 3: Qualified dividends are taxed at long-term capital gain rates if the underlying stock is held for more than how many days?
- 30 days
- 60 days
- 61 days (Correct answer)
- 90 days
Correct answer: 61 days
To receive qualified dividend treatment, investors must hold the stock for more than 60 days in the 121-day period surrounding the ex-dividend date, which means at least 61 days.
Question 4: Which IRS provision allows self-employed individuals to deduct health insurance premiums paid for themselves and their families?
- Section 125 cafeteria plan
- Section 162 trade or business deduction
- Self-employed health insurance deduction (Correct answer)
- Section 199A deduction
Correct answer: Self-employed health insurance deduction
Self-employed individuals can deduct 100% of health insurance premiums for themselves, spouses, and dependents as an above-the-line deduction on their personal tax return.
Question 5: The Section 199A qualified business income deduction allows eligible pass-through business owners to deduct up to what percentage of qualified business income?
- 10%
- 15%
- 20% (Correct answer)
- 25%
Correct answer: 20%
Section 199A allows owners of S-corporations, partnerships, and sole proprietorships to deduct up to 20% of qualified business income, subject to income thresholds and limitations.
Question 6: Which tax planning strategy places income-producing assets in lower-bracket family members' names to reduce the overall family tax burden?
- Tax-loss harvesting
- Income shifting (Correct answer)
- Asset location
- Tax deferral
Correct answer: Income shifting
Income shifting moves investment income or business income to family members in lower tax brackets through gifts, family partnerships, or employment of family members.
AAFM Tax Planning and Compliance 2
The alternative minimum tax (AMT) is designed to ensure that high-income individuals pay at least a minimum amount of tax by disallowing certain what?