FFC Tax Planning and Strategies Flashcards

Which type of account allows a self-employed individual to contribute the highest dollar amount for retirement on a tax-deferred basis?

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.

What does the Alternative Minimum Tax (AMT) primarily target?

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.

A financial fitness coach is advising a client who received an inheritance. Which statement about inherited assets and taxes is most accurate?

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.

Which of the following is a qualified education expense that may be paid from a 529 plan without triggering taxes or penalties?

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.

What is the purpose of a Qualified Opportunity Zone (QOZ) investment from a tax perspective?

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.

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?

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.