CFP Tax Planning & Optimization 2 — Questions and Answers
Question 1: What is the alternative minimum tax (AMT) designed to prevent?
- High-income taxpayers from using legitimate deductions to reduce their tax to zero or near zero (Correct answer)
- Middle-income taxpayers from over-contributing to retirement accounts
- Small businesses from taking excessive depreciation deductions
- Taxpayers from claiming more than three dependents
Correct answer: High-income taxpayers from using legitimate deductions to reduce their tax to zero or near zero
The AMT ensures that high-income taxpayers pay a minimum level of tax by disallowing certain deductions and applying a separate tax calculation.
Question 2: Which estate planning strategy allows a client to remove appreciating assets from their taxable estate while retaining an income stream for a period of years?
- Charitable Remainder Trust (CRT)
- Grantor Retained Annuity Trust (GRAT) (Correct answer)
- Irrevocable Life Insurance Trust (ILIT)
- Qualified Personal Residence Trust (QPRT)
Correct answer: Grantor Retained Annuity Trust (GRAT)
A GRAT allows the grantor to transfer appreciating assets out of their estate while retaining annuity payments for a set term, with only the appreciation above the IRS hurdle rate passing gift-tax-free.
Question 3: What is a Qualified Opportunity Zone (QOZ) investment and what is the primary tax benefit?
- An investment in government bonds that provides tax-free interest income
- An investment in designated low-income areas that provides deferral and possible exclusion of capital gains (Correct answer)
- A retirement account for small business owners in rural zones
- A municipal bond fund that generates AMT-exempt income
Correct answer: An investment in designated low-income areas that provides deferral and possible exclusion of capital gains
Investing capital gains into a Qualified Opportunity Fund allows deferral of the original gains and potential exclusion of gains from the QOZ investment held for at least 10 years.
Question 4: For a married couple filing jointly in 2024, at what income level does the Net Investment Income Tax (NIIT) of 3.8% begin to apply?
- $125,000
- $200,000
- $250,000 (Correct answer)
- $500,000
Correct answer: $250,000
The 3.8% NIIT applies to net investment income when a married couple's modified adjusted gross income exceeds $250,000.
Question 5: What is 'bunching' as a tax planning strategy for charitable deductions?
- Donating to multiple charities simultaneously to meet minimum thresholds
- Concentrating two or more years of charitable contributions into a single tax year to exceed the standard deduction (Correct answer)
- Establishing a donor-advised fund to hold all charitable contributions
- Donating appreciated stock instead of cash to avoid capital gains
Correct answer: Concentrating two or more years of charitable contributions into a single tax year to exceed the standard deduction
Bunching involves concentrating multiple years of charitable gifts into one year to exceed the standard deduction threshold, enabling itemizing in that year for greater total tax savings.
Question 6: Which of the following is NOT a tax-advantaged education savings vehicle?
- 529 Plan
- Coverdell Education Savings Account (ESA)
- UGMA/UTMA Custodial Account (Correct answer)
- Series EE Savings Bonds (used for education)
Correct answer: UGMA/UTMA Custodial Account
UGMA/UTMA accounts are custodial accounts that offer no specific tax advantages for education expenses, unlike 529 plans, Coverdell ESAs, and qualifying savings bonds.
CFP Tax Planning & Optimization 2
What is the alternative minimum tax (AMT) designed to prevent?