Tax Planning and Financial Literacy Flashcards
6 cards from real AFC practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 6 Tax Planning and Financial Literacy flashcards as text
Financial literacy is best defined as:
Answer: The knowledge and skills to make informed and effective financial decisions
Financial literacy encompasses the knowledge, skills, and confidence needed to manage money effectively and make sound financial decisions.
According to the IRS, the penalty for early withdrawal from a traditional IRA before age 59½ is:
Answer: 10%
Early withdrawals from a traditional IRA before age 59½ are subject to a 10% early withdrawal penalty in addition to ordinary income taxes.
Which of the following best describes tax-loss harvesting?
Answer: Selling investments at a loss to offset capital gains
Tax-loss harvesting involves selling securities at a loss to offset capital gains and up to $3,000 of ordinary income per year.
The Earned Income Tax Credit (EITC) is primarily targeted at:
Answer: Low- to moderate-income working individuals and families
The EITC is a refundable tax credit specifically designed to benefit low- to moderate-income workers, with the credit amount based on income and number of children.
Which concept describes the reduction in a deduction or credit as a taxpayer's income rises above a certain threshold?
Answer: Phase-out
Phase-outs gradually reduce or eliminate tax benefits such as deductions, credits, and exemptions as income exceeds specified thresholds.
A client asks about the 'Rule of 72.' This rule estimates:
Answer: The number of years to double an investment at a given rate of return
The Rule of 72 states that dividing 72 by the annual rate of return gives an approximate number of years required to double an investment.