FFC FFC Tax Planning and Strategies 2 — Questions and Answers
Question 1: Which type of account allows a self-employed individual to contribute the highest dollar amount for retirement on a tax-deferred basis?
- SEP-IRA (Correct answer)
- SIMPLE IRA
- Traditional IRA
- Health Savings Account (HSA)
Correct answer: SEP-IRA
A SEP-IRA allows self-employed individuals to contribute up to 25% of net self-employment income, up to the annual IRS limit, far exceeding traditional IRA limits.
Question 2: What does the Alternative Minimum Tax (AMT) primarily target?
- Low-income taxpayers who claim too many credits
- High-income taxpayers who use deductions and preferences to reduce regular tax (Correct answer)
- Capital gains on real estate sales
- Self-employed individuals with variable income
Correct answer: High-income taxpayers who use deductions and preferences to reduce regular tax
The AMT ensures that high-income taxpayers who benefit heavily from deductions and tax preferences pay a minimum level of federal income tax.
Question 3: A financial fitness coach is advising a client who received an inheritance. Which statement about inherited assets and taxes is most accurate?
- The heir pays income tax on the full value of the inheritance
- Inherited assets typically receive a stepped-up cost basis to fair market value at date of death (Correct answer)
- All inherited assets are subject to the federal estate tax
- Capital gains taxes are due immediately upon inheritance
Correct answer: Inherited assets typically receive a stepped-up cost basis to fair market value at date of death
Inherited assets generally receive a stepped-up basis equal to their fair market value on the decedent's date of death, potentially eliminating capital gains on prior appreciation.
Question 4: Which of the following is a qualified education expense that may be paid from a 529 plan without triggering taxes or penalties?
- Transportation to and from campus
- Tuition, fees, and required books (Correct answer)
- Student loan interest payments
- Health insurance premiums
Correct answer: Tuition, fees, and required books
Qualified 529 distributions include tuition, mandatory fees, and required books and supplies; non-qualified expenses trigger income tax and a 10% penalty on earnings.
Question 5: What is the purpose of a Qualified Opportunity Zone (QOZ) investment from a tax perspective?
- To eliminate all federal taxes on investment income permanently
- To defer and potentially reduce capital gains taxes by reinvesting in designated economically distressed areas (Correct answer)
- To provide a charitable deduction equal to the investment amount
- To avoid state income taxes on earned income
Correct answer: To defer and potentially reduce capital gains taxes by reinvesting in designated economically distressed areas
QOZ investments allow taxpayers to defer existing capital gains and, if held long enough, exclude gains on the QOZ investment itself, incentivizing development in low-income communities.
Question 6: Under the 'wash-sale rule,' how long must an investor wait before repurchasing the same or substantially identical security after selling at a loss to claim the tax deduction?
- 15 days before or after the sale
- 30 days before or after the sale (Correct answer)
- 60 days before or after the sale
- 90 days after the sale only
Correct answer: 30 days before or after the sale
The wash-sale rule disallows the loss deduction if the same or substantially identical security is purchased within 30 days before or after the sale at a loss.
FFC FFC Tax Planning and Strategies 2
Which type of account allows a self-employed individual to contribute the highest dollar amount for retirement on a tax-deferred basis?