CIM Tax Strategies 5 — Questions and Answers
Question 1: Cash distributions from a master limited partnership (MLP) are typically treated as:
- Qualified dividends
- Mostly return of capital that reduces the unitholder's basis (Correct answer)
- Ordinary income reported on Form 1099-DIV
- Tax-exempt interest
Correct 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.
Question 2: Why are ETFs generally more tax-efficient than comparable mutual funds?
- ETFs cannot hold appreciated securities
- ETFs are exempt from capital gains tax
- ETF dividends are always qualified
- In-kind creation/redemption lets them shed low-basis shares without realizing gains (Correct answer)
Correct 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.
Question 3: To defer a capital gain through a Qualified Opportunity Fund, the gain generally must be invested within:
- 1 year of the sale
- 180 days of the sale (Correct answer)
- 45 days of the sale
- 60 days of the sale
Correct answer: 180 days of the sale
Eligible gains must generally be reinvested in a QOF within 180 days to qualify for deferral.
Question 4: Earnings in a 529 plan withdrawn for qualified higher education expenses are:
- Taxed at capital gains rates
- Free of federal income tax (Correct answer)
- Taxed as ordinary income
- Tax-free only if the beneficiary is under age 24
Correct answer: Free of federal income tax
Qualified 529 withdrawals, including earnings, are excluded from federal income tax.
Question 5: Which account offers a 'triple tax advantage': deductible contributions, tax-free growth, and tax-free qualified withdrawals?
- Coverdell ESA
- Roth IRA
- Traditional 401(k)
- Health Savings Account (HSA) (Correct answer)
Correct answer: Health Savings Account (HSA)
HSAs combine deductible contributions, tax-free growth, and tax-free withdrawals for qualified medical expenses.
Question 6: What key advantage does a donor-advised fund give a client with a high-income year?
- An immediate deduction in the contribution year, with grants to charities made later (Correct answer)
- A tax credit equal to 100% of the contribution
- Full control to take back the assets later
- Avoiding all required minimum distributions
Correct 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.
Question 7: Interest from which type of municipal bond may be a preference item for the alternative minimum tax?
- Private activity bonds (Correct answer)
- General obligation bonds
- Essential-service revenue bonds issued before 1986
- Pre-refunded bonds backed by Treasuries
Correct answer: Private activity bonds
Interest on most private activity bonds is an AMT preference item, though it is exempt from regular tax.
CIM Tax Strategies 5
Cash distributions from a master limited partnership (MLP) are typically treated as: