CFP Tax Planning & Optimization 1 — Questions and Answers
Question 1: What is the primary difference between a tax deduction and a tax credit?
- A deduction reduces taxable income while a credit directly reduces the tax owed (Correct answer)
- A deduction is more valuable than a credit dollar-for-dollar
- A credit reduces taxable income while a deduction reduces tax owed
- Both deductions and credits reduce taxable income equally
Correct answer: A deduction reduces taxable income while a credit directly reduces the tax owed
A tax deduction reduces taxable income (saving taxes at your marginal rate), while a tax credit directly reduces the amount of tax owed dollar-for-dollar.
Question 2: Under the current U.S. tax code, what is the maximum federal long-term capital gains tax rate for high-income taxpayers?
- 15%
- 20%
- 23.8% (Correct answer)
- 37%
Correct answer: 23.8%
High-income taxpayers face a 20% long-term capital gains rate plus the 3.8% Net Investment Income Tax (NIIT), totaling 23.8%.
Question 3: What is 'tax-loss harvesting' in the context of investment planning?
- Selling winning investments to realize gains in low-income years
- Selling investments at a loss to offset capital gains and reduce tax liability (Correct answer)
- Donating appreciated assets to charity to avoid capital gains
- Converting traditional IRA assets to Roth during low-income years
Correct answer: Selling investments at a loss to offset capital gains and reduce tax liability
Tax-loss harvesting involves selling securities at a loss to offset realized capital gains, thereby reducing the investor's current tax liability.
Question 4: What is the annual gift tax exclusion amount per recipient in 2024?
- $15,000
- $16,000
- $17,000
- $18,000 (Correct answer)
Correct answer: $18,000
The annual gift tax exclusion for 2024 is $18,000 per recipient, allowing tax-free gifting to any number of individuals without using the lifetime exemption.
Question 5: Which of the following expenses is generally deductible as a miscellaneous itemized deduction on Schedule A?
- Investment interest expense (Correct answer)
- Non-reimbursed employee business expenses
- Personal casualty losses (non-disaster)
- Political contributions
Correct answer: Investment interest expense
Investment interest expense remains deductible as an itemized deduction on Schedule A, subject to net investment income limitations.
Question 6: What is the 'wash-sale rule' and how does it affect tax-loss harvesting?
- It prohibits selling any investment within 30 days of purchase
- It disallows a tax loss if the same or substantially identical security is repurchased within 30 days before or after the sale (Correct answer)
- It requires investors to wait 60 days before repurchasing sold securities
- It applies only to mutual fund transactions
Correct answer: It disallows a tax loss if the same or substantially identical security is repurchased within 30 days before or after the sale
The wash-sale rule disallows a capital loss deduction when a substantially identical security is purchased within 30 days before or after the loss sale.
CFP Tax Planning & Optimization 1
What is the primary difference between a tax deduction and a tax credit?