AAFM Tax Planning and Compliance 1 — Questions and Answers
Question 1: Which tax planning strategy involves recognizing capital losses to offset capital gains and reduce taxable income?
- Tax deferral
- Tax-loss harvesting (Correct answer)
- Income shifting
- Asset location
Correct answer: Tax-loss harvesting
Tax-loss harvesting sells securities at a loss to offset realized capital gains, reducing current-year tax liability while maintaining similar market exposure.
Question 2: The wash-sale rule disallows a capital loss deduction if substantially identical securities are repurchased within how many days before or after the sale?
- 15 days
- 30 days (Correct answer)
- 60 days
- 90 days
Correct answer: 30 days
IRS wash-sale rules prohibit claiming a capital loss if the same or substantially identical security is bought within 30 days before or after the loss sale.
Question 3: Which retirement account type allows after-tax contributions but provides tax-free qualified withdrawals?
- Traditional IRA
- SEP-IRA
- Roth IRA (Correct answer)
- SIMPLE IRA
Correct answer: Roth IRA
A Roth IRA is funded with after-tax dollars, and qualified distributions—including all investment growth—are completely tax-free in retirement.
Question 4: Long-term capital gains on assets held more than one year are taxed at preferential rates compared to which other income type?
- Qualified dividends
- Ordinary income (Correct answer)
- Municipal bond interest
- Social Security benefits
Correct answer: Ordinary income
Long-term capital gains are taxed at 0%, 15%, or 20% depending on income level, which is typically lower than the ordinary income tax rates applied to wages and interest.
Question 5: Which tax structure allows business income to pass through to owners' personal returns, avoiding entity-level corporate tax?
- C-corporation
- S-corporation (Correct answer)
- Real estate investment trust
- Regulated investment company
Correct answer: S-corporation
An S-corporation is a pass-through entity where income, losses, and credits flow directly to shareholders' personal tax returns, avoiding the double taxation inherent in C-corporations.
Question 6: Qualified Opportunity Zone investments can defer and potentially reduce capital gains taxes by investing in which types of areas?
- High-income urban centers
- Federally designated economically distressed communities (Correct answer)
- Foreign free-trade zones
- Enterprise zones in wealthy suburbs
Correct answer: Federally designated economically distressed communities
Qualified Opportunity Zones are economically distressed US communities designated by the Treasury where investments can defer, reduce, and potentially eliminate capital gains taxes.
AAFM Tax Planning and Compliance 1
Which tax planning strategy involves recognizing capital losses to offset capital gains and reduce taxable income?