CIMA Tax Law & Regulations 3 — Questions and Answers
Question 1: Which IRC section governs the rules for deducting investment interest expense, and what is the general limitation?
- IRC 163(d); limited to net investment income (Correct answer)
- IRC 212; limited to 2% of AGI
- IRC 163(j); limited to 30% of adjusted taxable income
- IRC 469; limited to passive income
Correct answer: IRC 163(d); limited to net investment income
IRC Section 163(d) limits the deduction for investment interest expense to the taxpayer's net investment income for the year; excess is carried forward.
Question 2: A non-qualified stock option (NQSO) is exercised when the stock's FMV is $50 and the exercise price is $20. The employee recognizes:
- $20 ordinary income at exercise
- $30 ordinary income at exercise (Correct answer)
- $50 capital gain at exercise
- $30 capital gain deferred until sale
Correct answer: $30 ordinary income at exercise
The $30 spread (FMV minus exercise price) at exercise is ordinary income subject to payroll and income taxes for the employee when an NQSO is exercised.
Question 3: The unified credit against estate and gift tax was set at an exemption equivalent of approximately $13.61 million per person in 2024. This amount is scheduled to:
- Increase permanently each year with inflation
- Sunset to roughly $7 million (inflation-adjusted) after 2025 (Correct answer)
- Remain fixed at $13.61 million permanently
- Be eliminated entirely after 2025
Correct answer: Sunset to roughly $7 million (inflation-adjusted) after 2025
The Tax Cuts and Jobs Act (TCJA) doubled the exemption, but absent new legislation the exemption sunsets after 2025, reverting to the pre-TCJA level adjusted for inflation.
Question 4: Under IRC Section 72(t), early withdrawals from IRAs before age 59½ are subject to a penalty of:
- 5%
- 10% (Correct answer)
- 15%
- 20%
Correct answer: 10%
A 10% early withdrawal penalty applies under IRC Section 72(t) in addition to ordinary income taxes, unless a specific exception applies.
Question 5: Which of the following correctly describes the tax treatment of a Roth IRA conversion?
- The converted amount is tax-free if held for 5 years
- The converted amount is included in gross income in the year of conversion (Correct answer)
- Only the earnings portion of the traditional IRA is taxable at conversion
- The conversion is not a taxable event
Correct answer: The converted amount is included in gross income in the year of conversion
A Roth conversion is a taxable event; the pre-tax amount converted from a traditional IRA (or pre-tax contributions plus earnings) is included in gross income in the conversion year.
Question 6: For high-income taxpayers, the Section 199A qualified business income (QBI) deduction for a specified service trade or business (SSTB) is:
- Always 20% of QBI regardless of income
- Phased out between the income threshold and $100,000 above it (MFJ) (Correct answer)
- Limited to 50% of W-2 wages
- Completely disallowed at any income level
Correct answer: Phased out between the income threshold and $100,000 above it (MFJ)
For SSTBs, the QBI deduction phases out between the taxable income threshold ($383,900 MFJ in 2024) and the threshold plus $100,000, after which no deduction is allowed.
Question 7: A charitable remainder unitrust (CRUT) pays the income beneficiary what each year?
- A fixed dollar amount determined at inception
- A fixed percentage of the trust's assets revalued annually (Correct answer)
- The greater of trust income or a fixed percentage
- Net investment income of the trust
Correct answer: A fixed percentage of the trust's assets revalued annually
A CRUT pays a fixed percentage (at least 5%) of the trust's FMV as revalued each year, so the payout fluctuates with asset values.
CIMA Tax Law & Regulations 3
Which IRC section governs the rules for deducting investment interest expense, and what is the general limitation?