CA Tax Planning & Preparation 2 — Questions and Answers
Question 1: A self-employed individual earned $120,000 in net profit. What is the deductible portion of self-employment tax they can claim on their federal return?
- 100% of SE tax paid
- 50% of SE tax paid (Correct answer)
- 25% of SE tax paid
- SE tax is not deductible
Correct answer: 50% of SE tax paid
Self-employed individuals may deduct 50% of self-employment tax as an above-the-line deduction on Form 1040.
Question 2: Which of the following retirement account types allows tax-free qualified withdrawals in retirement?
- Traditional IRA
- SEP-IRA
- Roth IRA (Correct answer)
- SIMPLE IRA
Correct answer: Roth IRA
Roth IRA contributions are made with after-tax dollars, so qualified distributions in retirement are completely tax-free.
Question 3: A taxpayer sells stock held for 14 months at a $10,000 gain. How is this gain classified for federal tax purposes?
- Ordinary income
- Short-term capital gain
- Long-term capital gain (Correct answer)
- Qualified dividend income
Correct answer: Long-term capital gain
Assets held more than 12 months qualify for long-term capital gain treatment with preferential tax rates.
Question 4: Under the passive activity loss rules, which of the following taxpayers may deduct up to $25,000 of rental losses against ordinary income?
- A real estate professional with unlimited participation
- An active participant with MAGI under $100,000 (Correct answer)
- Any taxpayer who owns rental property
- A passive investor with no material participation
Correct answer: An active participant with MAGI under $100,000
The $25,000 rental loss allowance phases out between $100,000–$150,000 MAGI and requires active participation.
Question 5: What is the primary purpose of a Section 1031 like-kind exchange?
- To eliminate capital gains tax permanently
- To defer recognition of capital gain on exchanged business property (Correct answer)
- To convert ordinary income to capital gain
- To accelerate depreciation deductions
Correct answer: To defer recognition of capital gain on exchanged business property
A Section 1031 exchange allows deferral—not elimination—of capital gain when qualifying real property is exchanged for like-kind property.
Question 6: A married couple filing jointly has $500,000 of recognized gain from the sale of their primary residence. How much gain is excluded from income under IRC Section 121?
- $250,000
- $500,000 (Correct answer)
- $0 — primary residences are fully taxable
- $750,000
Correct answer: $500,000
Married couples filing jointly may exclude up to $500,000 of gain on a primary residence sale if ownership and use tests are met.
Question 7: Which form is used to report net operating loss (NOL) carryforwards on an individual tax return?
- Schedule C
- Form 4562
- Form 1045 (Correct answer)
- Schedule A
Correct answer: Form 1045
Form 1045 is used to apply for a quick refund by carrying back an NOL, while the carryforward is tracked and applied on Form 1040.
CA Tax Planning & Preparation 2
A self-employed individual earned $120,000 in net profit.
What is the deductible portion of self-employment tax they can claim on their federal return?