CBS Tax Planning & Preparation 2 — Questions and Answers
Question 1: A taxpayer sells a rental property held for 8 years at a $40,000 gain. Which tax rate applies to the long-term capital gain portion?
- Ordinary income rate up to 37%
- 0%, 15%, or 20% depending on taxable income (Correct answer)
- Flat 28% rate
- 10% preferential rate
Correct answer: 0%, 15%, or 20% depending on taxable income
Long-term capital gains on real property are taxed at 0%, 15%, or 20% based on the taxpayer's taxable income bracket.
Question 2: What is the purpose of IRS Form 1040-ES?
- Reporting self-employment income
- Filing estimated quarterly tax payments (Correct answer)
- Claiming itemized deductions
- Reporting foreign income
Correct answer: Filing estimated quarterly tax payments
Form 1040-ES is used to calculate and submit estimated quarterly tax payments for income not subject to withholding.
Question 3: Which of the following retirement contributions reduces a taxpayer's adjusted gross income (AGI) even if they do not itemize?
- Roth IRA contribution
- Traditional IRA contribution (if deductible) (Correct answer)
- 401(k) after-tax contribution
- Non-deductible IRA contribution
Correct answer: Traditional IRA contribution (if deductible)
Deductible Traditional IRA contributions are an above-the-line deduction that reduces AGI regardless of whether the taxpayer itemizes.
Question 4: A married couple filing jointly has $30,000 of net investment income and $180,000 in modified AGI. What surtax may apply?
- No surtax applies below $200,000 MAGI
- 3.8% Net Investment Income Tax on the lesser of NII or MAGI over $250,000 (Correct answer)
- 0.9% Additional Medicare Tax
- 3.8% NII Tax on the full $30,000
Correct answer: 3.8% Net Investment Income Tax on the lesser of NII or MAGI over $250,000
The 3.8% NIIT applies to the lesser of net investment income or the excess of MAGI over $250,000 for MFJ filers.
Question 5: Which tax strategy involves accelerating deductions into the current tax year and deferring income to the next year?
- Tax-loss harvesting
- Income shifting
- Bunching deductions / deferral strategy (Correct answer)
- Step-up in basis planning
Correct answer: Bunching deductions / deferral strategy
Bunching deductions and deferring income reduces current-year taxable income by concentrating deductions now and pushing income forward.
Question 6: What is the 'kiddie tax' and to whom does it apply?
- A tax credit for families with children under 17
- A rule taxing a child's unearned income above a threshold at the parent's marginal rate (Correct answer)
- A deduction for child care expenses
- A penalty for not claiming dependents correctly
Correct answer: A rule taxing a child's unearned income above a threshold at the parent's marginal rate
The kiddie tax taxes unearned income above the annual threshold of children typically under age 19 (or 24 if full-time students) at the parent's tax rate.
Question 7: An employee contributes $3,000 to a Flexible Spending Account (FSA) for medical expenses. Which tax benefit does this provide?
- The $3,000 is deducted at 50% only
- Contributions are excluded from federal income, Social Security, and Medicare taxes (Correct answer)
- The benefit is limited to itemizers only
- FSA funds are taxed when withdrawn for qualified expenses
Correct answer: Contributions are excluded from federal income, Social Security, and Medicare taxes
FSA contributions are made pre-tax, reducing the employee's gross income subject to federal income tax, Social Security, and Medicare taxes.
CBS Tax Planning & Preparation 2
A taxpayer sells a rental property held for 8 years at a $40,000 gain.
Which tax rate applies to the long-term capital gain portion?