Basics Beginner: The Basics of Tax Planning

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Choose wisely. There is only one correct answer to each question.

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Review your answers below to learn more.

Which of the following is a good tax-saving strategy?

Selling an asset as quickly as possible for maximum gain

Postponing the payment of operating expenses such as rent, so more deductions can be squeezed into the next tax year

Holding an asset for more than one year before selling it at a gain

Holding an asset for more than one year before selling it at a gain. This results in a lower long-term capital gain rate.

Which of the following statements are true?

A "regular" C corporation is not a tax-paying entity.

A "pass-through" business entity (e.g., a limited liability company) generally pays no tax itself.

A "pass-through " business entity pays tax that is passed through to the business owners.

All the above are true

A "pass-through" business entity (e.g., a limited liability company) generally pays no tax itself. The income passes through to the business owners, who pay tax at their own rate potentially after applying a special deduction first.

Tax considerations will be the paramount factor in any smart business person's or investor's financial decision-making process.

True

False

False. Tax considerations are important, of course, but should not drive the decision-making process.

A _______ is one kind of contribution that can help save you money on your taxes.

Flexible spending account

Tax-free account

Cafeteria plan

Flexible spending account. A flexible spending account is one kind of contribution you can make that can help save you money on your taxes.

How does a contribution to a traditional IRA provide income tax savings?

Within limits, the contribution provides a dollar-for-dollar reduction in the amount of tax you owe.

The contribution provides no tax savings, since IRA funds are taxable when you finally withdraw them.

Within limits, the contribution is deducted from your taxable income.

Within limits, the contribution is deducted from your taxable income. An IRA contribution is an adjustment to income and thereby provides significant tax savings.