Tax Planning and Compliance Flashcards

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

Answer: Tax-loss harvesting

Tax-loss harvesting sells securities at a loss to offset realized capital gains, reducing current-year tax liability while maintaining similar market exposure.

The wash-sale rule disallows a capital loss deduction if substantially identical securities are repurchased within how many days before or after the sale?

Answer: 30 days

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.

Which retirement account type allows after-tax contributions but provides tax-free qualified withdrawals?

Answer: Roth IRA

A Roth IRA is funded with after-tax dollars, and qualified distributions—including all investment growth—are completely tax-free in retirement.

Long-term capital gains on assets held more than one year are taxed at preferential rates compared to which other income type?

Answer: Ordinary income

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.

Which tax structure allows business income to pass through to owners' personal returns, avoiding entity-level corporate tax?

Answer: S-corporation

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.

Qualified Opportunity Zone investments can defer and potentially reduce capital gains taxes by investing in which types of areas?

Answer: Federally designated economically distressed communities

Qualified Opportunity Zones are economically distressed US communities designated by the Treasury where investments can defer, reduce, and potentially eliminate capital gains taxes.