CA Tax Planning & Preparation 3 — Questions and Answers
Question 1: A C corporation has taxable income of $500,000. What flat federal corporate income tax rate applies under current law (post-TCJA)?
- 28%
- 35%
- 21% (Correct answer)
- 25%
Correct answer: 21%
The Tax Cuts and Jobs Act of 2017 established a flat 21% federal corporate income tax rate for C corporations.
Question 2: Which of the following is NOT a qualifying reason to avoid the 10% early withdrawal penalty from a traditional IRA?
- First-time home purchase up to $10,000
- Substantially equal periodic payments (SEPP)
- Purchase of a vacation home (Correct answer)
- Total and permanent disability
Correct answer: Purchase of a vacation home
Purchase of a vacation home is not a listed exception to the 10% early distribution penalty under IRC Section 72(t).
Question 3: A taxpayer contributes $6,000 to a Health Savings Account (HSA). What is the primary federal tax advantage of an HSA?
- Contributions are taxable but withdrawals are tax-free
- Contributions are deductible, grow tax-free, and qualified withdrawals are tax-free (Correct answer)
- Only employer contributions are tax-free
- HSAs provide a tax credit, not a deduction
Correct answer: Contributions are deductible, grow tax-free, and qualified withdrawals are tax-free
HSAs offer a triple tax advantage: deductible contributions, tax-free growth, and tax-free qualified medical expense withdrawals.
Question 4: What is the 'kiddie tax' and who does it apply to?
- A surtax on gifts to minors
- A rule taxing a child's unearned income at the parent's marginal rate (Correct answer)
- An additional tax on child tax credit claims
- A penalty for underclaiming dependent exemptions
Correct answer: A rule taxing a child's unearned income at the parent's marginal rate
The kiddie tax taxes a child's net unearned income exceeding a threshold at the parent's marginal tax rate to prevent income-shifting strategies.
Question 5: Under the alternative minimum tax (AMT) system, which of the following is an AMT preference item that may trigger AMT liability?
- Charitable cash contributions
- Accelerated depreciation on personal property (Correct answer)
- Mortgage interest on a primary residence
- Standard deduction
Correct answer: Accelerated depreciation on personal property
Accelerated MACRS depreciation in excess of straight-line depreciation is a preference item added back for AMT calculation purposes.
Question 6: A taxpayer uses the home office deduction. Which method allows a simplified calculation of $5 per square foot up to 300 square feet?
- Actual expense method
- Simplified method (Correct answer)
- Proportional allocation method
- Safe harbor method
Correct answer: Simplified method
The IRS simplified method allows $5 per square foot (max 300 sq ft = $1,500) without tracking actual home expenses.
Question 7: What is the 'wash sale' rule, and what does it disallow?
- Deducting losses on securities sold and repurchased within 30 days before or after the sale (Correct answer)
- Claiming gains on securities held less than 30 days
- Deducting more than $3,000 of capital losses annually
- Offsetting capital gains with passive activity losses
Correct answer: Deducting losses on securities sold and repurchased within 30 days before or after the sale
The wash sale rule disallows a loss deduction when substantially identical securities are purchased within 30 days before or after the sale.
CA Tax Planning & Preparation 3
A C corporation has taxable income of $500,000.
What flat federal corporate income tax rate applies under current law (post-TCJA)?