Basics Beginner: The Basics of Tax Planning

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The kiddie tax is a term that applies to what type of income?

Unearned income received by people under a certain age

Earned income received by people under a certain age

Any income received by people under a certain age

Unearned income received by people under a certain age. The kiddie tax applies to investment income and other types of unearned income.

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.

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.

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.

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.