AFC Tax Planning and Financial Literacy 2 — Questions and Answers
Question 1: Which retirement account allows contributions to be made with after-tax dollars, growing tax-free?
- Traditional IRA
- SEP IRA
- Roth IRA (Correct answer)
- SIMPLE IRA
Correct answer: Roth IRA
Roth IRA contributions are made with after-tax dollars, and qualified withdrawals in retirement are completely tax-free.
Question 2: The Alternative Minimum Tax (AMT) was originally designed to ensure that:
- Low-income earners pay some tax
- High-income earners pay at least a minimum level of tax (Correct answer)
- All capital gains are taxed equally
- Self-employed individuals pay payroll taxes
Correct answer: High-income earners pay at least a minimum level of tax
The AMT was created to prevent high-income taxpayers from using excessive deductions and credits to eliminate their tax liability.
Question 3: A client contributes $3,000 to a traditional IRA and is in the 22% tax bracket. What is the maximum immediate tax savings from this deductible contribution?
- $330
- $660 (Correct answer)
- $660
- $660
Correct answer: $660
The tax savings equals the contribution multiplied by the marginal tax rate: $3,000 × 22% = $660.
Question 4: Which of the following describes the 'above-the-line' deductions on a federal tax return?
- Deductions taken only when itemizing
- Deductions subtracted from gross income to arrive at AGI (Correct answer)
- Deductions available only to businesses
- Deductions that phase out at higher income levels
Correct answer: Deductions subtracted from gross income to arrive at AGI
Above-the-line deductions reduce gross income to calculate Adjusted Gross Income (AGI) and are available regardless of whether you itemize.
Question 5: A self-employed financial counselor must pay self-employment tax at approximately what rate on net self-employment income?
- 7.65%
- 12.4%
- 15.3% (Correct answer)
- 21.0%
Correct answer: 15.3%
Self-employment tax is 15.3% (12.4% Social Security + 2.9% Medicare) on net self-employment earnings, covering both the employee and employer shares.
Question 6: Which tax-advantaged account can be used to pay for qualified medical expenses with pre-tax dollars and is only available to those enrolled in a high-deductible health plan?
- Flexible Spending Account (FSA)
- Health Savings Account (HSA) (Correct answer)
- Health Reimbursement Arrangement (HRA)
- Medical Savings Account (MSA)
Correct answer: Health Savings Account (HSA)
An HSA requires enrollment in a qualifying high-deductible health plan and offers a triple tax advantage: pre-tax contributions, tax-free growth, and tax-free withdrawals for medical expenses.
AFC Tax Planning and Financial Literacy 2
Which retirement account allows contributions to be made with after-tax dollars, growing tax-free?