FFC Tax Planning and Strategies Flashcards

Which tax credit directly reduces a taxpayer's federal income tax liability dollar-for-dollar (rather than reducing taxable income)?

Answer: Child Tax Credit

The Child Tax Credit reduces federal income tax owed dollar-for-dollar, making it more valuable than a deduction of the same amount, which only reduces taxable income.

A client uses their home exclusively and regularly as their principal place of business. Which tax benefit may they qualify for?

Answer: Home office deduction

The home office deduction allows self-employed individuals to deduct expenses related to the portion of their home used exclusively and regularly for business.

What is 'income shifting' as a tax planning strategy?

Answer: Transferring income or assets to family members in lower tax brackets

Income shifting involves transferring income-producing assets or income to family members in lower marginal tax brackets to reduce the family's overall tax burden.

What is the maximum annual gift tax exclusion per recipient a U.S. taxpayer may give in 2024 without filing a gift tax return?

Answer: $18,000

In 2024, the annual gift tax exclusion is $18,000 per recipient, meaning a donor can give up to this amount to any number of individuals without filing Form 709.

A coach's client is in the 22% marginal tax bracket and donates appreciated stock held over one year to a qualified charity. What is the primary tax benefit?

Answer: Deduction equal to the stock's fair market value and avoidance of capital gains tax on appreciation

Donating appreciated stock allows the donor to deduct the full fair market value and avoid recognizing capital gains on the built-up appreciation, maximizing the tax benefit.

Which retirement account type requires no tax deduction at contribution but allows completely tax-free qualified withdrawals in retirement?

Answer: Roth IRA

Roth IRA contributions are made with after-tax dollars, but qualified distributions—including all earnings—are entirely tax-free in retirement.