Case Studies & Practical Application Flashcards

Robert and Susan are married filing jointly with combined income of $320,000. Their financial planner recommends tax-loss harvesting. They realize $15,000 in losses and $8,000 in short-term gains. What is the net tax outcome?

Answer: $7,000 net loss, with $3,000 deducted against ordinary income and $4,000 carried forward

Net capital losses offset capital gains first; remaining losses up to $3,000 reduce ordinary income annually, with excess carried forward indefinitely.

A client age 52 wants to access $50,000 from her 401(k) to fund a business venture. She separated from service this year. Which option avoids the 10% early withdrawal penalty?

Answer: Rule of 55 separation-from-service exception

The Rule of 55 allows penalty-free distributions from a current employer's 401(k) when an employee separates from service in or after the year they turn 55.

A high-net-worth client holds $3M in appreciated stock with a $200,000 basis. She wants to diversify without triggering capital gains. Which advanced strategy is most appropriate?

Answer: Establish a Charitable Remainder Trust (CRT) funded with the stock

A CRT allows the client to contribute appreciated stock, avoid immediate capital gains tax, receive an income stream, and claim a partial charitable deduction.

John, age 62, is considering claiming Social Security. His FRA benefit is $2,400/month. His wife (age 60) has no work history. What is the primary financial planning consideration for the claiming decision?

Answer: Delay to 70 to increase his benefit by 32% and maximize the survivor benefit for his wife

Delaying to 70 earns 8%/year delayed credits and maximizes the survivor benefit, which is critical since his wife has no independent Social Security earnings record.

A client has a $500,000 whole life policy with $180,000 cash value and a $120,000 cost basis. She wants to surrender it and purchase a diversified investment portfolio. What is the tax consequence?

Answer: $60,000 ordinary income on the gain inside the policy

Surrendering a life insurance policy triggers ordinary income tax on the gain (cash value minus cost basis), which is $180,000 − $120,000 = $60,000.

A client's estate is worth $15M. She wants to transfer her closely held business (valued at $4M) to her children while minimizing estate and gift taxes. Which strategy is most applicable?

Answer: Grantor Retained Annuity Trust (GRAT) funded with business interests

A GRAT allows appreciation above the IRS hurdle rate (Section 7520 rate) to pass to beneficiaries gift-tax-free, ideal for high-growth assets like a closely held business.

A 40-year-old client earns $95,000 and contributes 6% to his 401(k) to get the full employer match of 3%. His advisor recommends increasing his savings rate. What should be evaluated FIRST before recommending a higher contribution?

Answer: His emergency fund adequacy and high-interest debt obligations

CFP financial planning hierarchy requires securing an adequate emergency fund and eliminating high-cost debt before increasing retirement contributions beyond the employer match.