Financial Planning Flashcards

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

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.

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?

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.

Which placement best follows asset-location principles for a client with both taxable and tax-deferred accounts?

Answer: Taxable bond funds in the tax-deferred account; broad index equity funds in the taxable account

Assets that produce ordinary income, such as taxable bonds, gain the most from tax deferral, while tax-efficient equities fit taxable accounts.

A client who itemizes wants to give $20,000 to a public charity and holds stock bought five years ago for $5,000 that is now worth $20,000. What is the best approach?

Answer: Donate the stock directly, deducting $20,000 and avoiding the $15,000 gain

Donating long-term appreciated stock to a public charity generally lets the donor deduct full fair market value without recognizing the gain.

A client's yearly giving is slightly below the standard deduction. Which strategy can turn those gifts into a tax benefit?

Answer: Bunch several years of gifts into one year through a donor-advised fund

Bunching contributions into one year, often through a DAF, pushes itemized deductions above the standard deduction in that year.

A 20-year-old full-time college student earns large dividend income from a custodial account. What rule may apply?

Answer: The kiddie tax, which can tax unearned income above a threshold at the parents' rate

The kiddie tax applies to children under 19, or full-time students under 24 whose earned income does not cover over half their support.

A client sells a rental property for a large gain and takes payments over 10 years. Which provision lets the client spread the gain recognition?

Answer: The Section 453 installment method

The installment method recognizes gain proportionally as payments are received, though depreciation recapture is taxed in the year of sale.