CBS Tax Planning & Preparation 3 — Questions and Answers
Question 1: Which filing status generally results in the lowest federal income tax liability for an eligible taxpayer?
- Single
- Married Filing Separately
- Head of Household
- Married Filing Jointly (Correct answer)
Correct answer: Married Filing Jointly
Married Filing Jointly typically provides the widest tax brackets and largest standard deduction, resulting in the lowest tax for most couples.
Question 2: What is tax-loss harvesting?
- Delaying recognition of capital gains until retirement
- Selling investments at a loss to offset capital gains and reduce taxable income (Correct answer)
- Converting traditional IRA assets to Roth at a loss
- Harvesting depreciation recapture on business assets
Correct answer: Selling investments at a loss to offset capital gains and reduce taxable income
Tax-loss harvesting sells depreciated securities to realize capital losses that offset gains and up to $3,000 of ordinary income annually.
Question 3: For 2024, what is the standard mileage rate for business driving that a self-employed taxpayer may deduct?
- 58.5 cents per mile
- 65.5 cents per mile
- 67 cents per mile (Correct answer)
- 72 cents per mile
Correct answer: 67 cents per mile
The IRS set the standard business mileage rate at 67 cents per mile for 2024.
Question 4: A taxpayer who cannot file by April 15 files Form 4868. What does this extension grant?
- An extension of time to pay any taxes owed without penalty
- A 6-month extension to file the return, but taxes are still due April 15 (Correct answer)
- An automatic 3-month extension with no additional forms required
- An extension only for self-employed taxpayers
Correct answer: A 6-month extension to file the return, but taxes are still due April 15
Form 4868 grants a 6-month filing extension to October 15 but does not extend the deadline to pay taxes owed, which remain due April 15.
Question 5: Which provision allows a self-employed individual to deduct 100% of health insurance premiums paid for themselves and their family?
- Schedule A medical expense deduction
- Self-Employed Health Insurance Deduction (above-the-line) (Correct answer)
- HSA contribution deduction
- Business expense on Schedule C only
Correct answer: Self-Employed Health Insurance Deduction (above-the-line)
Self-employed individuals may deduct 100% of health insurance premiums as an above-the-line deduction on Form 1040, reducing AGI.
Question 6: What is the 'wash-sale rule' and how does it affect tax-loss harvesting?
- It requires capital losses to be spread over 3 years
- It disallows a loss deduction if a substantially identical security is purchased within 30 days before or after the sale (Correct answer)
- It limits capital loss deductions to $1,500 for single filers
- It prevents loss deductions on assets held less than one year
Correct answer: It disallows a loss deduction if a substantially identical security is purchased within 30 days before or after the sale
The wash-sale rule disallows the capital loss if the taxpayer buys the same or substantially identical security within 30 days before or after selling at a loss.
Question 7: Which of the following is an example of 'income shifting' for tax planning purposes?
- Converting a traditional IRA to a Roth IRA
- Gifting income-producing assets to a lower-bracket family member (Correct answer)
- Deferring salary into a 401(k)
- Accelerating depreciation on business equipment
Correct answer: Gifting income-producing assets to a lower-bracket family member
Income shifting transfers income-producing assets or income to family members in lower tax brackets to reduce the overall family tax burden.
CBS Tax Planning & Preparation 3
Which filing status generally results in the lowest federal income tax liability for an eligible taxpayer?