Tax Strategies Flashcards

Cash distributions from a master limited partnership (MLP) are typically treated as:

Answer: Mostly return of capital that reduces the unitholder's basis

MLP distributions are mostly return of capital, which defers tax by lowering basis until the units are sold.

Why are ETFs generally more tax-efficient than comparable mutual funds?

Answer: In-kind creation/redemption lets them shed low-basis shares without realizing gains

In-kind redemptions let ETFs remove low-basis lots without taxable sales, which reduces capital gain distributions.

To defer a capital gain through a Qualified Opportunity Fund, the gain generally must be invested within:

Answer: 180 days of the sale

Eligible gains must generally be reinvested in a QOF within 180 days to qualify for deferral.

Earnings in a 529 plan withdrawn for qualified higher education expenses are:

Answer: Free of federal income tax

Qualified 529 withdrawals, including earnings, are excluded from federal income tax.

Which account offers a 'triple tax advantage': deductible contributions, tax-free growth, and tax-free qualified withdrawals?

Answer: Health Savings Account (HSA)

HSAs combine deductible contributions, tax-free growth, and tax-free withdrawals for qualified medical expenses.

What key advantage does a donor-advised fund give a client with a high-income year?

Answer: An immediate deduction in the contribution year, with grants to charities made later

DAF contributions are deductible when made, while the donor can recommend grants over later years.

Interest from which type of municipal bond may be a preference item for the alternative minimum tax?

Answer: Private activity bonds

Interest on most private activity bonds is an AMT preference item, though it is exempt from regular tax.