AFC Tax Planning and Financial Literacy 5

Question 1

Under the American Opportunity Tax Credit (AOTC), what is the maximum credit amount per eligible student per year?

Accepted Answer

$2,500

Answer

The AOTC provides up to $2,500 per eligible student per year for the first four years of post-secondary education.

Question 2

Which of the following best describes 'tax loss harvesting'?

Accepted Answer

Selling losing investments to offset capital gains and reduce tax liability

Answer

Tax loss harvesting involves strategically selling investments at a loss to offset capital gains and up to $3,000 of ordinary income annually.

Question 3

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?

Accepted Answer

Net Investment Income Tax of 3.8%

Answer

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.

Question 4

What is the primary benefit of a Qualified Opportunity Zone (QOZ) investment for tax planning?

Accepted Answer

Deferral and potential reduction of capital gains, with tax-free growth if held 10+ years

Answer

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.

Question 5

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?

Accepted Answer

Nondeductible IRA contribution

Answer

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.

AFC - Accredited Financial Counselor Practice Test

AFC - Accredited Financial Counselor Practice Test

AFC Tax Planning and Financial Literacy 5