Tax Planning & Preparation Flashcards

A taxpayer in the 22% marginal bracket donates appreciated stock held over one year to a qualified charity. What is the primary tax advantage?

Answer: Deduction equals fair market value and no capital gains tax is owed on the appreciation

Donating long-term appreciated stock lets the taxpayer deduct the full fair market value while avoiding capital gains tax on the built-in appreciation.

What is a Qualified Opportunity Zone (QOZ) investment and its primary tax benefit?

Answer: An investment that defers and potentially reduces capital gains taxes by reinvesting gains into designated distressed areas

QOZ investments allow taxpayers to defer capital gains by reinvesting into designated zones, with potential step-up in basis and exclusion of new gains after a 10-year hold.

Which depreciation method allows a business to immediately expense up to the annual limit on qualifying assets in the year of purchase?

Answer: Section 179 expensing election

Section 179 allows businesses to immediately deduct the full cost of qualifying property in the year placed in service, up to the annual dollar limit.

Under the passive activity loss (PAL) rules, when can a real estate professional fully deduct rental losses against ordinary income?

Answer: When they materially participate and spend more than 750 hours in real estate trades or businesses

A taxpayer qualifying as a real estate professional (750+ hours and more than half of working time in real property activities) can deduct rental losses against ordinary income.

What is the primary tax advantage of a Health Savings Account (HSA) compared to a Flexible Spending Account (FSA)?

Answer: HSA funds roll over indefinitely and can be invested, offering a triple tax advantage

HSAs offer a triple tax advantage: contributions are pre-tax, growth is tax-free, and qualified withdrawals are tax-free, with no use-it-or-lose-it rule.

A taxpayer owes the IRS $50,000 but cannot pay. Which IRS resolution option allows the taxpayer to pay a reduced amount to settle the entire debt?

Answer: Offer in Compromise (OIC)

An Offer in Compromise allows eligible taxpayers to settle their tax debt for less than the full amount owed if they meet IRS qualification criteria.

Which of the following education-related tax benefits has an income phase-out and reduces the tax owed dollar-for-dollar?

Answer: American Opportunity Tax Credit (AOTC)

The AOTC is a credit of up to $2,500 per eligible student that directly reduces tax owed and is subject to MAGI phase-outs.