Tax Planning & Preparation Flashcards

A self-employed individual earned $120,000 in net profit. What is the deductible portion of self-employment tax they can claim on their federal return?

Answer: 50% of SE tax paid

Self-employed individuals may deduct 50% of self-employment tax as an above-the-line deduction on Form 1040.

Which of the following retirement account types allows tax-free qualified withdrawals in retirement?

Answer: Roth IRA

Roth IRA contributions are made with after-tax dollars, so qualified distributions in retirement are completely tax-free.

A taxpayer sells stock held for 14 months at a $10,000 gain. How is this gain classified for federal tax purposes?

Answer: Long-term capital gain

Assets held more than 12 months qualify for long-term capital gain treatment with preferential tax rates.

Under the passive activity loss rules, which of the following taxpayers may deduct up to $25,000 of rental losses against ordinary income?

Answer: An active participant with MAGI under $100,000

The $25,000 rental loss allowance phases out between $100,000–$150,000 MAGI and requires active participation.

What is the primary purpose of a Section 1031 like-kind exchange?

Answer: To defer recognition of capital gain on exchanged business property

A Section 1031 exchange allows deferral—not elimination—of capital gain when qualifying real property is exchanged for like-kind property.

A married couple filing jointly has $500,000 of recognized gain from the sale of their primary residence. How much gain is excluded from income under IRC Section 121?

Answer: $500,000

Married couples filing jointly may exclude up to $500,000 of gain on a primary residence sale if ownership and use tests are met.

Which form is used to report net operating loss (NOL) carryforwards on an individual tax return?

Answer: Form 1045

Form 1045 is used to apply for a quick refund by carrying back an NOL, while the carryforward is tracked and applied on Form 1040.