AAFM Tax Planning and Compliance

Question 1

Which tax planning strategy involves recognizing capital losses to offset capital gains and reduce taxable income?

Accepted Answer

Tax-loss harvesting

Answer

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?

Accepted Answer

30 days

Answer

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?

Accepted Answer

Roth IRA

Answer

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?

Accepted Answer

Ordinary income

Answer

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?

Accepted Answer

S-corporation

Answer

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.

American Academy of Financial Management (AAFM) Practice Test

American Academy of Financial Management (AAFM) Practice Test

AAFM Tax Planning and Compliance