Tax Planning and Financial Literacy Flashcards
7 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 7 Tax Planning and Financial Literacy flashcards as text
Under the American Opportunity Tax Credit (AOTC), what is the maximum credit amount per eligible student per year?
Answer: $2,500
The AOTC provides up to $2,500 per eligible student per year for the first four years of post-secondary education.
Which of the following best describes 'tax loss harvesting'?
Answer: Selling losing investments to offset capital gains and reduce tax liability
Tax loss harvesting involves strategically selling investments at a loss to offset capital gains and up to $3,000 of ordinary income annually.
A married couple files jointly and has $250,000 in net investment income and $300,000 MAGI. Which additional tax applies to their investment income?
Answer: Net Investment Income Tax of 3.8%
The 3.8% Net Investment Income Tax (NIIT) applies to the lesser of net investment income or MAGI exceeding $250,000 for married filing jointly.
What is the primary benefit of a Qualified Opportunity Zone (QOZ) investment for tax planning?
Answer: Deferral and potential reduction of capital gains, with tax-free growth if held 10+ years
QOZ investments allow capital gains deferral, a step-up in basis after 5-7 years, and complete exclusion of QOZ appreciation if held for at least 10 years.
A client contributes $6,000 to a traditional IRA but their income exceeds the deductibility phase-out range. What is this type of contribution called?
Answer: Nondeductible IRA contribution
When IRA contributions cannot be deducted due to income limits, they are called nondeductible contributions, which still grow tax-deferred and create basis tracked on Form 8606.
Which strategy involves converting a traditional IRA to a Roth IRA to pay taxes now and achieve tax-free growth in retirement?
Answer: Roth conversion
A Roth conversion moves funds from a traditional IRA to a Roth IRA, triggering ordinary income tax now in exchange for tax-free qualified withdrawals later.
What is the 'wash sale' rule and how does it affect tax planning?
Answer: Disallows a loss deduction if substantially identical securities are repurchased within 30 days before or after the sale
The wash sale rule disallows a capital loss if the same or substantially identical security is purchased within 30 days before or after the sale.