Certified Tax Coach (CTC) Exam — Questions and Answers

Question 1: When executing a backdoor Roth IRA conversion, which rule can create unexpected tax if the client holds other pre-tax IRA balances?

Wash sale rule
Step-transaction rule
At-risk rule
Pro-rata rule (Correct answer)

Correct answer: Pro-rata rule

The pro-rata rule treats conversions as coming proportionally from all pre-tax and after-tax IRA balances.

Question 2: Unrecaptured Section 1250 gain from depreciation on real property is taxed at a maximum federal rate of:

20%
15%
25% (Correct answer)
28%

Correct answer: 25%

Gain attributable to prior straight-line depreciation on real property is capped at a 25% rate.

Question 3: What regulatory compliance requirement applies to estate planning?

Regulations are optional for small practices
Compliance is only needed for publicly traded companies
Full compliance with all applicable federal, state, and industry regulations (Correct answer)
Self-regulation is sufficient

Correct answer: Full compliance with all applicable federal, state, and industry regulations

Full regulatory compliance is mandatory regardless of practice size, ensuring market integrity and client protection.

Question 4: An individual transfers an existing life insurance policy to an ILIT and dies 2 years later. What is the estate tax result?

Nothing is included because the trust is irrevocable
The death benefit is included in the gross estate under §2035 (Correct answer)
Only premiums paid after the transfer are included
Only the policy's cash value is included

Correct answer: The death benefit is included in the gross estate under §2035

Transfers of life insurance within 3 years of death pull the proceeds back into the gross estate under §2035.

Question 5: Which retained power causes life insurance proceeds to be included in the insured's estate under §2042?

Being a beneficiary of the policy's issuing insurance company
Being the insured person only
The power to change the policy beneficiary (Correct answer)
Paying premiums through Crummey gifts

Correct answer: The power to change the policy beneficiary

Holding any incident of ownership, such as the right to change beneficiaries, causes estate inclusion under §2042.

Question 6: What is the main advantage of donating appreciated stock held longer than one year directly to a public charity instead of selling it first?

The deduction is limited to the original cost basis
The gain is deferred until the charity sells
The donor deducts fair market value and avoids capital gains tax on the appreciation (Correct answer)
The donor receives a tax credit equal to the gain

Correct answer: The donor deducts fair market value and avoids capital gains tax on the appreciation

Donating long-term appreciated property yields an FMV deduction and the built-in gain is never taxed to the donor.

Question 7: A single filer has $260,000 of MAGI, including $80,000 of net investment income. How much income is subject to the 3.8% Net Investment Income Tax?

$60,000 (Correct answer)
$260,000
$0
$80,000

Correct answer: $60,000

NIIT applies to the lesser of NII ($80,000) or MAGI above the $200,000 single threshold ($60,000).

Question 8: What rule can make a backdoor Roth conversion partially taxable if the client has other pre-tax IRA balances?

The five-year rule
The wash sale rule
The step-transaction doctrine
The pro-rata (aggregation) rule (Correct answer)

Correct answer: The pro-rata (aggregation) rule

All traditional, SEP, and SIMPLE IRA balances are aggregated, so conversions include a proportional share of pre-tax money.

Question 9: A client sells a stock at a loss on December 10 and buys the same stock back on December 28. What is the result?

The loss is permanently lost
The loss is converted to a short-term gain
The loss is fully deductible because the sale happened first
The loss is disallowed under the wash sale rule and added to the new shares' basis (Correct answer)

Correct answer: The loss is disallowed under the wash sale rule and added to the new shares' basis

Buying substantially identical securities within 30 days before or after the sale triggers the wash sale rule, which defers the loss into the new basis.

Question 10: What is the total time allowed under IRC Section 1031 to complete a like-kind exchange by receiving the replacement property?

180 days from the transfer of the relinquished property (Correct answer)
45 days from closing
One year from identification
90 days from the identification period

Correct answer: 180 days from the transfer of the relinquished property

The taxpayer must receive the replacement property by the earlier of 180 calendar days after the transfer of the relinquished property or the due date (including extensions) of the tax return for the year of the exchange.

Question 11: Which action violates confidentiality in tax practice?

Using secure storage
Releasing info to others without consent (Correct answer)
Discussing details with client
Providing info to IRS with consent

Correct answer: Releasing info to others without consent

Confidentiality is a cornerstone of ethical tax practice, requiring professionals to safeguard sensitive client information. Releasing a client's financial or personal details to any third party without their explicit, informed consent or a legal mandate constitutes a direct violation of this ethical duty. Such a breach can lead to severe professional penalties and legal repercussions.

Question 12: Investing capital gains into a Qualified Opportunity Fund and holding the investment for at least 10 years provides what key benefit?

Appreciation on the QOF investment can be excluded via a basis step-up to fair market value (Correct answer)
The deferred gain is permanently forgiven
The investor avoids all state taxes
The investment becomes deductible as ordinary loss

Correct answer: Appreciation on the QOF investment can be excluded via a basis step-up to fair market value

After a 10-year hold, the investor may elect to step up basis to fair market value, excluding post-investment appreciation.

Question 13: What is the best way to handle a client who keeps missing deadlines for documents needed to implement a strategy?

Implement the strategy without the documents
Lower the fee to motivate the client
Stop all communication
Set clear written deadlines, send reminders, and explain the tax cost of delay (Correct answer)

Correct answer: Set clear written deadlines, send reminders, and explain the tax cost of delay

Clear accountability and showing what delay costs in tax dollars keep implementation on track.

Question 14: What is the general due date for Form 706, the federal estate tax return?

9 months after the date of death (Correct answer)
15 months after the date of death
6 months after the date of death
April 15 of the year following death

Correct answer: 9 months after the date of death

Form 706 is due 9 months after death, with an automatic 6-month extension available to file.

Question 15: Why is a health savings account often called 'triple tax-advantaged'?

Contributions are deductible, growth is tax-free, and qualified medical withdrawals are tax-free (Correct answer)
It avoids federal, state, and payroll taxes on all withdrawals
Withdrawals are tax-free for any purpose after age 50
It provides a credit, a deduction, and an exclusion

Correct answer: Contributions are deductible, growth is tax-free, and qualified medical withdrawals are tax-free

HSAs offer deductible (or pre-tax) contributions, tax-free growth, and tax-free distributions for qualified medical expenses.

Question 16: Which source of federal tax authority carries the most weight?

Treasury Regulations
IRS Publications
Revenue Rulings
Internal Revenue Code (Correct answer)

Correct answer: Internal Revenue Code

The Internal Revenue Code is statutory law enacted by Congress and outranks all administrative guidance.

Question 17: What is the maximum federal capital gains rate on long-term gains from the sale of collectibles such as gold coins?

28% (Correct answer)
20%
25%
15%

Correct answer: 28%

Long-term gains on collectibles are taxed at a maximum rate of 28%.

Question 18: What is the annual depreciation period for commercial (nonresidential) real property under MACRS?

39 years (Correct answer)
27.5 years
31.5 years
40 years

Correct answer: 39 years

Nonresidential commercial real property placed in service after May 12, 1993 is depreciated straight-line over 39 years under MACRS.

Question 19: What is a common method for small businesses to reduce taxable income?

Reporting as income
Section 179 deduction (Correct answer)
Capitalizing all expenses
Depreciation over 10 years

Correct answer: Section 179 deduction

The Section 179 deduction allows small businesses to deduct the full purchase price of qualifying equipment and/or software purchased or financed during the tax year, rather than depreciating it over several years. This immediate deduction significantly reduces taxable income in the current year, providing a powerful incentive for businesses to invest in assets and stimulate growth.

Question 20: What is the total window during which a repurchase of substantially identical securities triggers the wash sale rule?

30 days after the sale only
61 days: 30 days before, the sale date, and 30 days after (Correct answer)
30 days before the sale only
90 days after the sale

Correct answer: 61 days: 30 days before, the sale date, and 30 days after

IRC §1091 covers purchases made 30 days before through 30 days after the loss sale, a 61-day window.

Question 21: A C corporation currently pays a flat federal income tax rate of:

28%
35%
21% (Correct answer)
25%

Correct answer: 21%

The Tax Cuts and Jobs Act of 2017 reduced the C corporation flat tax rate to 21%, replacing the previous graduated rate structure.

Question 22: Which federal rule requires paid tax preparers to keep a written information security plan (WISP) to protect client data?

The Sarbanes-Oxley Act Section 404
The FTC Safeguards Rule under the Gramm-Leach-Bliley Act (Correct answer)
IRC §6107 record retention rules
The Taxpayer Bill of Rights

Correct answer: The FTC Safeguards Rule under the Gramm-Leach-Bliley Act

Tax preparers are financial institutions under the GLBA, and the FTC Safeguards Rule requires them to keep a written information security program.

Question 23: A client holds highly appreciated, low-yield stock and wants lifetime income, a charitable deduction, and no immediate capital gains tax on a sale. Which tool fits best?

A charitable remainder trust (Correct answer)
A revocable living trust
A charitable lead trust
A qualified personal residence trust

Correct answer: A charitable remainder trust

A CRT can sell the assets tax-free inside the trust, pay the donor an income stream, and give a partial charitable deduction for the remainder interest.

Question 24: In a Section 1031 exchange, within how many days must replacement property be identified after the relinquished property is transferred?

180 days
90 days
45 days (Correct answer)
30 days

Correct answer: 45 days

Replacement property must be identified within 45 days and acquired within 180 days of the transfer.

Question 25: An investor borrows on margin to buy taxable bonds. How is the deductible investment interest expense limited?

To net investment income, with any excess carried forward (Correct answer)
It is fully deductible against wages
To $10,000 per year
To 50% of AGI

Correct answer: To net investment income, with any excess carried forward

Investment interest expense is deductible only up to net investment income, and disallowed amounts carry forward indefinitely.

Question 26: A decedent's spouse is not a U.S. citizen. Which vehicle allows the estate to claim the marital deduction?

Qualified Personal Residence Trust (QPRT)
Charitable lead annuity trust
Qualified Domestic Trust (QDOT) (Correct answer)
Crummey trust

Correct answer: Qualified Domestic Trust (QDOT)

Property passing to a noncitizen spouse generally qualifies for the marital deduction only through a QDOT.

Question 27: If a taxpayer omits more than 25% of the gross income stated on the return, the assessment statute of limitations extends to how many years?

5 years
4 years
Unlimited
6 years (Correct answer)

Correct answer: 6 years

IRC 6501(e) extends the assessment period to 6 years for a substantial omission of gross income over 25%.

Question 28: Under Circular 230 §10.36, who must take reasonable steps to make sure the firm has adequate procedures for Circular 230 compliance?

The IRS Office of Professional Responsibility
Practitioners with principal authority for overseeing the firm's federal tax practice (Correct answer)
Only the firm's outside auditor
Every seasonal employee

Correct answer: Practitioners with principal authority for overseeing the firm's federal tax practice

Section 10.36 puts this responsibility on practitioners with principal authority and responsibility for the firm's tax practice.

Question 29: Which preparer is limited to representing only the clients whose returns they prepared and signed during the period covered?

Attorney
CPA
AFSP Record of Completion holder (Correct answer)
Enrolled agent

Correct answer: AFSP Record of Completion holder

Annual Filing Season Program participants have limited representation rights covering only returns they prepared and signed.

Question 30: A client with highly appreciated stock wants an income stream, a current charitable deduction, and to avoid immediate capital gains on a sale. Which strategy fits best?

Outright gift to a child
Charitable remainder trust (Correct answer)
Grantor retained annuity trust with no charity
Selling and donating the cash proceeds

Correct answer: Charitable remainder trust

A CRT can sell appreciated assets tax-free inside the trust, pay the donor an income stream, and provide a partial deduction.

Question 31: Which study accelerates depreciation by reclassifying building components into 5-, 7-, and 15-year property?

Cost segregation study (Correct answer)
Like-kind exchange
Section 179 recapture
Installment sale

Correct answer: Cost segregation study

A cost segregation study separates shorter-life components so they qualify for faster depreciation and potentially bonus depreciation.

Question 32: What should a professional do when facing a potential conflict of interest?

Disclose and obtain consent (Correct answer)
Proceed without disclosure
Ignore the conflict
Withdraw immediately

Correct answer: Disclose and obtain consent

When a potential conflict of interest arises, a professional has an ethical obligation to fully disclose the nature of the conflict to all affected parties. After providing complete transparency, the professional must obtain informed consent from the client to continue providing services. This process ensures that clients can make well-informed decisions and protects the professional's integrity and objectivity.

Question 33: Under Section 121, married taxpayers filing jointly may exclude up to how much gain on the sale of a principal residence they owned and used for 2 of the last 5 years?

$250,000
$500,000 (Correct answer)
$750,000
$1,000,000

Correct answer: $500,000

The Section 121 exclusion is $250,000 for single filers and $500,000 for qualifying married joint filers.

Question 34: An 88-year-old client holds stock with a very low basis and asks whether to sell it now or keep it. Which tax rule most supports keeping it if the heirs will get it?

Inherited property generally gets a basis step-up to fair market value at death (Correct answer)
Gifted property gets a stepped-up basis
Capital gains are tax-free after age 85
Low-basis stock qualifies for the Section 121 exclusion

Correct answer: Inherited property generally gets a basis step-up to fair market value at death

Under IRC §1014, heirs generally receive a basis equal to fair market value at death, which eliminates the built-in gain.

Question 35: When is a Roth conversion generally most tax-efficient?

Only after age 73
In the client's peak earning year
In a year when the client's taxable income is unusually low (Correct answer)
Immediately before claiming Social Security in a high-income year

Correct answer: In a year when the client's taxable income is unusually low

Converting during low-income years lets the converted amount be taxed at lower marginal rates.

Question 36: A client donates publicly traded stock held for more than one year directly to a public charity. What is the typical tax result?

Deduction at fair market value and no capital gains tax on the appreciation (Correct answer)
Deduction limited to cost basis and gain is taxed
Deduction at fair market value but gain is taxed
No deduction but gain is excluded

Correct answer: Deduction at fair market value and no capital gains tax on the appreciation

Donating long-term appreciated securities yields a fair market value deduction while avoiding capital gains tax.

Question 37: When a rental property is sold for a gain, what tax treatment applies to the portion of gain attributable to depreciation previously deducted on personal property components (Section 1245 property)?

Taxed at unrecaptured Section 1250 rate of 25%
Excluded if held more than one year
Recaptured as ordinary income up to depreciation claimed (Correct answer)
Treated as long-term capital gain

Correct answer: Recaptured as ordinary income up to depreciation claimed

Under IRC Section 1245, gain attributable to depreciation on personal property (5-year, 7-year MACRS assets identified via cost segregation) is fully recaptured as ordinary income up to the amount of depreciation previously deducted.

Question 38: A tax coach discovers that a new client failed to report income on a prior-year return. Under Circular 230 §10.21, what must the coach do?

Report the omission to the IRS within 30 days
Promptly file an amended return on the client's behalf
Withdraw from the engagement immediately
Promptly advise the client of the omission and its consequences (Correct answer)

Correct answer: Promptly advise the client of the omission and its consequences

Section 10.21 requires the practitioner to promptly advise the client of the noncompliance, error, or omission and its consequences.

Question 39: Which retirement account allows for tax-deductible contributions and tax-deferred growth?

Taxable brokerage account
Health Savings Account
Traditional IRA (Correct answer)
Roth IRA

Correct answer: Traditional IRA

A Traditional IRA (Individual Retirement Arrangement) allows individuals to make tax-deductible contributions, meaning the amount contributed reduces their current taxable income. The investments within the IRA then grow tax-deferred, with taxes only paid upon withdrawal in retirement. This contrasts with a Roth IRA, where contributions are after-tax but qualified withdrawals are tax-free.

Question 40: Which type of fringe benefit allows a C corporation to deduct 100% of premiums paid for employee health insurance while the benefit is excluded from the employee's gross income?

Disability insurance premiums
Health Reimbursement Arrangement (HRA)
Employer-paid health insurance premiums (Correct answer)
Group-term life insurance above $50,000

Correct answer: Employer-paid health insurance premiums

Employer-paid health insurance premiums are fully deductible by the C corporation and excluded from the employee's gross income under IRC Section 106.

Question 41: What is the IRC §6662 penalty rate for a transaction that lacks economic substance and is not adequately disclosed?

20%
10%
75%
40% (Correct answer)

Correct answer: 40%

Under §6662(i), the economic substance penalty doubles from 20% to 40% when the relevant facts are not adequately disclosed.

Question 42: To contribute to a Health Savings Account, a taxpayer must be covered by which type of health plan?

Any employer-sponsored plan
A flexible spending arrangement
A high-deductible health plan (HDHP) (Correct answer)
Medicare Part A

Correct answer: A high-deductible health plan (HDHP)

HSA eligibility requires HDHP coverage and no disqualifying other coverage such as Medicare.

Question 43: A married couple's taxable income falls entirely within the 0% long-term capital gains bracket. Which strategy is most appropriate?

Tax-gain harvesting to reset basis at no federal tax cost (Correct answer)
Deferring all sales to future years
Converting stocks to bonds
Tax-loss harvesting

Correct answer: Tax-gain harvesting to reset basis at no federal tax cost

Realizing gains in the 0% bracket and repurchasing raises basis tax-free, and the wash sale rule does not apply to gains.

Question 44: The Section 199A qualified business income deduction generally allows eligible owners of pass-through businesses to deduct up to what percentage of QBI?

25%
10%
15%
20% (Correct answer)

Correct answer: 20%

Section 199A provides a deduction of up to 20% of qualified business income, subject to limitations.

Question 45: Under IRC Section 121, what is the maximum gain exclusion on the sale of a primary residence for a married couple filing jointly?

$250,000
$1,000,000
$750,000
$500,000 (Correct answer)

Correct answer: $500,000

IRC Section 121 allows exclusion of up to $500,000 of gain for married couples filing jointly who owned and used the home as their principal residence for at least 2 of the last 5 years.

Question 46: Under Circular 230 §10.22, when relying on information a client provides, a practitioner generally:

Must obtain IRS confirmation of all figures
Must audit every client document
May rely in good faith without verification but must not ignore information that appears incorrect, inconsistent, or incomplete (Correct answer)
May never rely on client information

Correct answer: May rely in good faith without verification but must not ignore information that appears incorrect, inconsistent, or incomplete

Good-faith reliance is permitted, but reasonable inquiries are required when information appears questionable.

Question 47: Which form is generally used to disclose a return position contrary to a Treasury regulation?

Form 8918
Form 8886
Form 8275
Form 8275-R (Correct answer)

Correct answer: Form 8275-R

Form 8275-R is used to disclose positions that are contrary to Treasury regulations, while Form 8275 covers other disclosures.

Question 48: Why is an intentionally defective grantor trust (IDGT) useful in a sale-based estate freeze?

The trust qualifies for the marital deduction
The grantor pays the trust's income tax and the sale is not a taxable event (Correct answer)
Trust assets receive a step-up when the grantor dies
The trust is included in the grantor's estate but excluded for income tax

Correct answer: The grantor pays the trust's income tax and the sale is not a taxable event

Because the grantor and trust are one taxpayer for income tax, sales are ignored and tax payments further reduce the estate.

Question 49: A taxpayer omits gross income exceeding 25% of the gross income reported on the return. What assessment period applies?

3 years
6 years (Correct answer)
4 years
Unlimited

Correct answer: 6 years

A substantial omission of more than 25% of reported gross income extends the assessment period to six years.

Question 50: A client disputes your fee and asks for their records back. Under §10.28, what must you do?

Return only records the client paid for
Send the records to the IRS instead
Return the client records needed for the client's federal tax compliance, even during the dispute (Correct answer)
Hold all records until the fee is paid

Correct answer: Return the client records needed for the client's federal tax compliance, even during the dispute

Client records needed for tax compliance must be returned on request whether or not the fee dispute is settled.

Question 51: Which sanctions may the IRS Office of Professional Responsibility impose under Circular 230 §10.50?

Revocation of a CPA's state license
Imprisonment and criminal fines
Censure, suspension, disbarment, and monetary penalties (Correct answer)
Seizure of the practitioner's business assets

Correct answer: Censure, suspension, disbarment, and monetary penalties

Section 10.50 authorizes censure, suspension, or disbarment from practice before the IRS, as well as monetary penalties.

Question 52: In which situation does the IRS have NO time limit to assess tax?

The taxpayer was audited in a prior year
The return was filed more than 60 days late
The taxpayer filed a false or fraudulent return with intent to evade tax (Correct answer)
The return claimed a large refund

Correct answer: The taxpayer filed a false or fraudulent return with intent to evade tax

Under IRC 6501(c), tax may be assessed at any time when a fraudulent return is filed or no return is filed.

Question 53: What primary tax benefit do Qualified Opportunity Zone (QOZ) fund investments offer to taxpayers who invest capital gains?

Temporary deferral of gain, potential step-up in basis, and exclusion of appreciation after 10 years (Correct answer)
Immediate exclusion of all capital gains
Conversion of capital gains to ordinary loss deductions
Permanent exclusion of gain up to $1 million

Correct answer: Temporary deferral of gain, potential step-up in basis, and exclusion of appreciation after 10 years

QOZ investments allow deferral of recognized gain until 2026 (or earlier sale), a 10% step-up if held 5 years, 15% if held 7 years, and complete exclusion of post-investment appreciation if held at least 10 years.

Question 54: A donor gifts stock with a $50,000 basis and $30,000 FMV; the donee later sells it for $40,000. What is the donee's gain or loss?

$10,000 gain
No gain or loss (Correct answer)
$20,000 loss
$10,000 loss

Correct answer: No gain or loss

Under the dual-basis rule of §1015, a sale between the donor's basis and the FMV at gift produces no gain or loss.

Question 55: How should financial planning performance be reported to clients?

Provide accurate, complete, and timely performance reporting with appropriate benchmarks (Correct answer)
Reporting is only required annually
Let clients check their own accounts
Only report positive results

Correct answer: Provide accurate, complete, and timely performance reporting with appropriate benchmarks

Accurate, complete, and timely reporting with appropriate benchmarks enables informed decision-making by clients.

Question 56: Which vehicle lets a donor take an immediate charitable deduction while recommending grants to charities over future years?

Private operating foundation
Grantor retained annuity trust
Charitable lead trust
Donor-advised fund (Correct answer)

Correct answer: Donor-advised fund

Contributions to a donor-advised fund are deductible when made, while grants can be recommended later.

Question 57: Why is empathy important in advisory relationships?

Shortens meetings
Builds client trust (Correct answer)
Avoids tough questions
Increases pricing

Correct answer: Builds client trust

Empathy in advisory relationships is crucial because it allows the advisor to understand and share the client's feelings, fostering a deeper connection. This creates a sense of being heard and understood, which is fundamental for building strong client trust and rapport. When clients feel genuinely understood, they are more likely to be open, receptive to advice, and confident in their advisor.

Question 58: What fiduciary duty applies to financial planning?

Maximize the advisor's commission
Follow the firm's sales targets above all
Recommend the most expensive products
Act in the client's best interest with loyalty, care, and full disclosure (Correct answer)

Correct answer: Act in the client's best interest with loyalty, care, and full disclosure

Fiduciary duty requires acting in the client's best interest with loyalty, care, and full disclosure of all material facts.

Question 59: What does a tiered service model (e.g., basic, advanced, premium planning) mainly do for client relations?

Removes the need for engagement letters
Avoids Circular 230 requirements
Guarantees higher refunds
Lets clients pick a level of service that matches their needs and budget (Correct answer)

Correct answer: Lets clients pick a level of service that matches their needs and budget

Tiered packages make the value clear and let clients choose an appropriate level of service.

Question 60: A tax coach wants to show a prospect the value of a proposed planning engagement. Which framing is most persuasive?

The coach's hourly billing rate
Projected tax savings compared with the planning fee (return on investment) (Correct answer)
A list of every IRC section the coach has studied
The number of hours the plan will take to prepare

Correct answer: Projected tax savings compared with the planning fee (return on investment)

Showing savings as a multiple of the fee makes the value concrete and supports value-based pricing.

Question 61: What continuing education requirement supports estate planning competence?

Initial licensure is sufficient
Education is only needed when seeking promotion
Read financial news occasionally
Ongoing education in regulatory changes, market developments, and best practices (Correct answer)

Correct answer: Ongoing education in regulatory changes, market developments, and best practices

Financial markets, regulations, and best practices evolve constantly, requiring ongoing education for competent practice.

Question 62: Under SECURE 2.0, at what age must a client born in 1955 begin required minimum distributions from a traditional IRA?

73 (Correct answer)
70½
75
72

Correct answer: 73

SECURE 2.0 set the RMD age at 73 for those born 1951 through 1959, rising to 75 for those born in 1960 or later.

Question 63: What is tax-loss harvesting?

Selling at a profit
Offsetting gains with losses (Correct answer)
Reinvesting dividends
Deferring capital gains

Correct answer: Offsetting gains with losses

Tax-loss harvesting is a strategy where investors sell investments at a loss to offset capital gains and potentially a limited amount of ordinary income. By realizing losses, investors can reduce their overall taxable income, thereby lowering their tax bill. This strategy is particularly useful for managing capital gains taxes and can be applied annually.

Question 64: To receive qualified dividend rates on common stock, how long must the shares be held?

More than 90 days during the 181-day period around the ex-dividend date
More than 60 days during the 121-day period beginning 60 days before the ex-dividend date (Correct answer)
More than one year
At least 30 days at any time during the year

Correct answer: More than 60 days during the 121-day period beginning 60 days before the ex-dividend date

Common stock must be held more than 60 days within the 121-day window beginning 60 days before the ex-dividend date.

Question 65: A client discloses that a prior-year return omitted significant income. Under Circular 230 §10.21, what must the practitioner do?

Promptly advise the client of the noncompliance and its consequences (Correct answer)
Ignore it because it relates to a prior year
Report the client to the IRS
Immediately file an amended return without asking the client

Correct answer: Promptly advise the client of the noncompliance and its consequences

Section 10.21 requires advising the client of the error or omission and its consequences, not filing or reporting on the client's behalf.

Question 66: Under the simplified home office method, what is the maximum annual deduction?

$1,500 (Correct answer)
$3,000
$2,500
$1,000

Correct answer: $1,500

The simplified method allows $5 per square foot up to 300 square feet, for a maximum of $1,500.

Question 67: What is the primary tax disadvantage for a taxpayer classified as a 'dealer in real estate' rather than an 'investor'?

Gains are taxed as ordinary income and subject to self-employment tax rather than at capital gains rates (Correct answer)
Passive activity loss rules apply more strictly to dealers
Installment sale reporting is prohibited for dealers
Depreciation deductions are not allowed on dealer property

Correct answer: Gains are taxed as ordinary income and subject to self-employment tax rather than at capital gains rates

Real estate dealers hold property primarily for sale to customers in the ordinary course of business, so gains are ordinary income subject to self-employment taxes, rather than the preferential long-term capital gains rates available to investors.

Question 68: What is the main purpose of a professional code of ethics?

To guide ethical behavior (Correct answer)
To replace legal regulations
To promote competition
To outline billing practices

Correct answer: To guide ethical behavior

A professional code of ethics serves as a foundational guide for the conduct of professionals within a specific field. Its primary purpose is to establish clear principles and rules that ensure practitioners act with integrity, honesty, and in the best interest of their clients and the public. This framework helps maintain trust, uphold professional standards, and ensure responsible practice.

Question 69: Which individual income tax understatement is 'substantial' for the §6662 accuracy-related penalty?

One exceeding the greater of 5% of the correct tax or $10,000
One exceeding the greater of 10% of the correct tax or $5,000 (Correct answer)
Any understatement over $1,000
One exceeding 25% of the correct tax

Correct answer: One exceeding the greater of 10% of the correct tax or $5,000

For individuals, an understatement is substantial if it exceeds the greater of 10% of the tax required to be shown or $5,000.

Question 70: Under a properly structured accountable plan, how are employee business expense reimbursements treated?

Deductible by the employee as a miscellaneous itemized deduction
Subject to FICA but not income tax
Included in the employee's W-2 wages
Excluded from the employee's income and deductible by the employer (Correct answer)

Correct answer: Excluded from the employee's income and deductible by the employer

Accountable plan reimbursements are not taxable to the employee and are deductible business expenses for the employer.

Question 71: What regulatory compliance requirement applies to tax strategies?

Compliance is only needed for publicly traded companies
Full compliance with all applicable federal, state, and industry regulations (Correct answer)
Self-regulation is sufficient
Regulations are optional for small practices

Correct answer: Full compliance with all applicable federal, state, and industry regulations

Full regulatory compliance is mandatory regardless of practice size, ensuring market integrity and client protection.

Question 72: A 'backdoor Roth IRA' strategy is used by high-income earners to circumvent Roth IRA income limits by:

Contributing to a Roth 401(k) and then transferring to a Roth IRA
Rolling over a 401(k) plan to a Roth IRA without tax
Making a non-deductible Traditional IRA contribution then converting it to Roth (Correct answer)
Converting a SEP-IRA directly to a Roth IRA

Correct answer: Making a non-deductible Traditional IRA contribution then converting it to Roth

The backdoor Roth involves making a non-deductible contribution to a Traditional IRA (no income limit) and then converting the account to a Roth IRA, paying tax only on any pre-tax funds mixed in (pro-rata rule).

Question 73: What is the civil penalty rate for civil fraud under IRC §6663?

100% of the underpayment
20% of the underpayment
75% of the underpayment due to fraud (Correct answer)
40% of the underpayment

Correct answer: 75% of the underpayment due to fraud

Section 6663 imposes a penalty equal to 75% of the portion of the underpayment attributable to fraud.

Question 74: Under IRC §6713, what is the civil penalty for each unauthorized disclosure or use of taxpayer information by a preparer?

$1,000 per disclosure with no cap
$50 per disclosure, up to $25,000 a year
$250 per disclosure, up to $10,000 a calendar year (Correct answer)
$500 per disclosure, up to $50,000 a year

Correct answer: $250 per disclosure, up to $10,000 a calendar year

Section 6713 imposes $250 per unauthorized disclosure or use, capped at $10,000 per calendar year (higher for identity-theft cases).

Question 75: What role does body language play in client meetings?

Helps convey trust and clarity (Correct answer)
No role
Only used in presentations
Can contradict your message

Correct answer: Helps convey trust and clarity

Body language, encompassing eye contact, posture, and gestures, significantly impacts how a message is perceived during client meetings. Positive body language conveys attentiveness, confidence, and trustworthiness, reinforcing verbal communication and building rapport. Conversely, negative body language can undermine a professional's message and create distrust, regardless of the words spoken.

Question 76: Under Circular 230 §10.34, a practitioner may not willfully, recklessly, or through gross incompetence sign a return taking a position that:

Has substantial authority
Is more likely than not to be sustained
Lacks a reasonable basis (Correct answer)
Is disclosed on Form 8275

Correct answer: Lacks a reasonable basis

Section 10.34(a) bars signing a return that takes a position without a reasonable basis or an unreasonable position under §6694.

Question 77: A client asks how long they should keep supporting records for a deduction. A generally accurate answer is:

Records never need to be kept
Six months
Exactly one year
At least three years from filing, longer in some cases, such as six years for substantial underreporting or for as long as the records affect basis (Correct answer)

Correct answer: At least three years from filing, longer in some cases, such as six years for substantial underreporting or for as long as the records affect basis

The general assessment period is three years, extended in certain cases, and basis records must be kept as long as they are relevant.

Question 78: A client with highly appreciated, low-yield assets wants an income stream, a partial current charitable deduction, and to avoid immediate capital gains on sale. Which strategy fits best?

Charitable remainder trust (Correct answer)
Outright gift to a private foundation
Intentionally defective grantor trust
Qualified charitable distribution

Correct answer: Charitable remainder trust

A CRT can sell contributed assets without immediate tax, pays the donor an income stream, and provides a deduction for the remainder interest.

Question 79: A client moves an existing life insurance policy into an irrevocable life insurance trust (ILIT) and dies two years later. What happens?

The proceeds are excluded because the ILIT owns the policy
Only the cash value is included
The proceeds are included in the estate under the three-year rule of §2035 (Correct answer)
The proceeds are taxed as income to beneficiaries

Correct answer: The proceeds are included in the estate under the three-year rule of §2035

Under §2035, policies transferred within three years of death are pulled back into the gross estate, so ILITs often buy new policies instead.

Question 80: Which of these is prohibited for a tax return preparer under IRC §6695(f) and §10.31?

Explaining refund timing to a client
Endorsing or negotiating a client's federal refund check (Correct answer)
Using IRS e-file
Direct-depositing a refund into the client's own account

Correct answer: Endorsing or negotiating a client's federal refund check

Preparers may not endorse or otherwise negotiate a taxpayer's refund check.

Question 81: Under Section 1244, what is the maximum annual ordinary loss a married couple filing jointly may claim on qualifying small business stock?

$3,000
$250,000
$100,000 (Correct answer)
$50,000

Correct answer: $100,000

Section 1244 allows up to $100,000 ($50,000 for other filers) of loss on qualifying stock to be treated as ordinary rather than capital.

Question 82: What communication method is most appropriate for delivering confidential financial advice?

Group webinars
Phone voicemail
Public social media
Encrypted email or secure meetings (Correct answer)

Correct answer: Encrypted email or secure meetings

For delivering confidential financial advice, communication methods must prioritize security to protect sensitive client data from unauthorized access. Encrypted email ensures messages are scrambled and only readable by the intended recipient, while secure in-person or virtual meetings minimize eavesdropping risks. Public platforms or insecure methods are inappropriate for such sensitive information.

Question 83: The kiddie tax generally applies to unearned income of a full-time student who is under what age?

24 (Correct answer)
18
21
26

Correct answer: 24

The kiddie tax applies to children under 19 and full-time students under 24 whose earned income doesn't exceed half their support.

Question 84: Under §10.22, a practitioner may rely on another person's work product if they:

Have a signed indemnity from that person
Get the client's verbal approval
Charge a reduced fee
Used reasonable care in engaging, supervising, training, and evaluating that person (Correct answer)

Correct answer: Used reasonable care in engaging, supervising, training, and evaluating that person

Section 10.22(b) presumes due diligence when the practitioner used reasonable care in engaging, supervising, training, and evaluating the person.

Question 85: Which practice best documents the advice given during a client meeting?

Relying on memory
Recording the call without the client's consent
A brief text message saying "great meeting"
A written meeting summary sent to the client listing decisions, recommendations, and next steps (Correct answer)

Correct answer: A written meeting summary sent to the client listing decisions, recommendations, and next steps

A written recap creates a record, confirms understanding, and reduces disputes.

Question 86: Which condition must be met to elect alternate valuation under §2032?

The surviving spouse must consent in writing
It must decrease both the gross estate value and the estate tax liability (Correct answer)
The estate must include a closely held business
It must increase the heirs' income tax basis

Correct answer: It must decrease both the gross estate value and the estate tax liability

The election is only available when it reduces both the gross estate and the combined estate and GST tax.

Question 87: For at least how long should employers keep employment tax records?

7 years
2 years
3 years
4 years (Correct answer)

Correct answer: 4 years

The IRS requires employers to keep employment tax records for at least four years after the tax is due or paid, whichever is later.

Question 88: A client age 62 wants tax-free and penalty-free Roth IRA earnings. Besides being over 59½, what else must be true for the distribution to be qualified?

The client's MAGI is below the Roth contribution limit
The client has stopped earning wages
At least 5 tax years have passed since the first contribution to any Roth IRA (Correct answer)
The Roth IRA has been open at least 10 years

Correct answer: At least 5 tax years have passed since the first contribution to any Roth IRA

A qualified Roth distribution requires age 59½ (or death/disability/first home) plus satisfying the 5-year holding period that starts with the first Roth contribution.

Question 89: A net operating loss (NOL) generated after December 31, 2017 can generally be carried:

Forward indefinitely but limited to 80% of taxable income (Correct answer)
Back 5 years with no carryforward limit
Back 2 years and forward 20 years
Forward 20 years with no income limitation

Correct answer: Forward indefinitely but limited to 80% of taxable income

Under the TCJA, NOLs arising after 2017 may only be carried forward (no carryback for most taxpayers) and are limited to 80% of taxable income in the year of use.

Question 90: How should risk be assessed in financial planning?

Risk assessment is only needed for retirees
Ignore risk for aggressive growth
Use a one-size-fits-all risk profile
Evaluate risk tolerance, capacity, time horizon, and investment objectives systematically (Correct answer)

Correct answer: Evaluate risk tolerance, capacity, time horizon, and investment objectives systematically

Comprehensive risk assessment considers tolerance, capacity, time horizon, and objectives to create appropriate strategies.

Question 91: Under IRC Section 6694, what standard must an undisclosed return position generally meet to avoid a preparer penalty?

Not frivolous
Realistic possibility
Reasonable basis
Substantial authority (Correct answer)

Correct answer: Substantial authority

Undisclosed positions generally need substantial authority, while disclosed positions need only a reasonable basis.

Question 92: What is the consequence of willfully failing to file a tax return?

No consequence
A small penalty only
Extension granted automatically
Possible criminal charges (Correct answer)

Correct answer: Possible criminal charges

Willfully failing to file a tax return is a serious offense with consequences far beyond just monetary penalties. The IRS and Department of Justice can pursue criminal charges against individuals who intentionally avoid their filing obligations. This can result in substantial fines, imprisonment, or both, highlighting the legal imperative for all eligible individuals to file their tax returns.

Question 93: How should estate planning performance be reported to clients?

Provide accurate, complete, and timely performance reporting with appropriate benchmarks (Correct answer)
Let clients check their own accounts
Reporting is only required annually
Only report positive results

Correct answer: Provide accurate, complete, and timely performance reporting with appropriate benchmarks

Accurate, complete, and timely reporting with appropriate benchmarks enables informed decision-making by clients.

Question 94: How long must a practitioner keep written conflict-of-interest consents under §10.29?

Until the client dies
7 years
36 months from the end of the representation (Correct answer)
12 months

Correct answer: 36 months from the end of the representation

Consents must be kept for at least 36 months after the representation ends and be available to the IRS on request.

Question 95: Under SECURE 2.0, unused 529 plan funds may be rolled into the beneficiary's Roth IRA up to what lifetime maximum?

$100,000
$35,000 (Correct answer)
$50,000
$10,000

Correct answer: $35,000

SECURE 2.0 allows up to $35,000 lifetime in 529-to-Roth rollovers, subject to annual limits and a 15-year account rule.

Question 96: Which inherited asset does NOT receive a step-up in basis because it is income in respect of a decedent?

Publicly traded stock
A traditional IRA (Correct answer)
A personal residence
Undeveloped land

Correct answer: A traditional IRA

IRD items such as traditional IRAs and deferred compensation are excluded from the step-up under §1014(c).

Question 97: Which statement in client marketing materials would most likely violate Circular 230 §10.30?

Contact us for a free consultation
Our team includes enrolled agents and CPAs
Our firm is an IRS-endorsed tax planning provider (Correct answer)
We specialize in proactive tax planning for small businesses

Correct answer: Our firm is an IRS-endorsed tax planning provider

Section 10.30 bars false or misleading statements, including claims of IRS endorsement.

Question 98: What is a common way to avoid the 3-year rule when funding an ILIT with life insurance?

Transfer the policy to the spouse instead
Have the trustee buy a new policy with cash gifted to the trust (Correct answer)
Have the insured remain policy owner but name the trust as beneficiary
Borrow against the policy before transfer

Correct answer: Have the trustee buy a new policy with cash gifted to the trust

If the trust applies for and owns the policy from inception, the insured never held incidents of ownership to transfer.

Question 99: A married couple filing jointly sells their main home after owning and living in it for 3 of the last 5 years. What is the maximum gain they can exclude under §121?

$500,000 (Correct answer)
Unlimited
$750,000
$250,000

Correct answer: $500,000

Joint filers meeting the ownership and use tests may exclude up to $500,000 of gain.

Question 100: The Required Minimum Distribution (RMD) starting age for individuals who turn 73 in 2023 or later is:

72
70½
73 (Correct answer)
75

Correct answer: 73

SECURE 2.0 Act increased the RMD starting age to 73 for individuals who turn 73 in 2023 or later, with a further increase to 75 scheduled for those born in 1960 or later.

Certified Tax Coach (CTC) Exam

The CTC certification designates tax professionals who specialize in proactive tax planning strategies to help clients save money on taxes.

100

Questions

180 min

Time Limit

75%

To Pass

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