CTC Tax Planning & Advisory Strategies 2 — Questions and Answers
Question 1: A married couple filing jointly has $400,000 in ordinary income. Which strategy would MOST directly reduce their exposure to the 3.8% Net Investment Income Tax (NIIT)?
- Convert traditional IRA to Roth IRA to eliminate future RMDs
- Shift passive investment income into an active trade or business in which they materially participate (Correct answer)
- Increase contributions to a Health Savings Account
- Elect installment sale treatment on a capital gain transaction
Correct answer: Shift passive investment income into an active trade or business in which they materially participate
Income from a trade or business in which the taxpayer materially participates is excluded from NIIT, so converting passive income to active business income reduces the NIIT base.
Question 2: Under the 'bunching' strategy for itemized deductions, what is the primary tax benefit achieved?
- Permanently eliminates the standard deduction limitation
- Concentrating deductions into alternating years to exceed the standard deduction threshold in those years (Correct answer)
- Deferring all deductible expenses to a future tax year with higher rates
- Converting above-the-line deductions into itemized deductions
Correct answer: Concentrating deductions into alternating years to exceed the standard deduction threshold in those years
Bunching concentrates deductible expenses (like charitable contributions) into one year so they exceed the standard deduction, then claiming the standard deduction in the off-year.
Question 3: A self-employed consultant earns $300,000 net profit. Which retirement plan allows the HIGHEST total annual contribution for 2024?
- SIMPLE IRA
- SEP-IRA
- Solo 401(k) with employee and employer contributions (Correct answer)
- Defined contribution profit-sharing plan only
Correct answer: Solo 401(k) with employee and employer contributions
A Solo 401(k) allows both employee deferrals (up to $23,000 in 2024 plus catch-up) and employer profit-sharing contributions (up to 25% of compensation), potentially totaling more than a SEP-IRA alone.
Question 4: Which tax planning technique involves gifting appreciated stock to a donor-advised fund to receive an immediate charitable deduction while retaining advisory control over grant distributions?
- Charitable remainder unitrust (CRUT)
- Private foundation strategy
- Donor-advised fund (DAF) contribution (Correct answer)
- Qualified charitable distribution (QCD)
Correct answer: Donor-advised fund (DAF) contribution
A DAF allows the donor to claim an immediate deduction for the full fair market value of contributed appreciated property while recommending grants to charities over time.
Question 5: For a business owner considering entity conversion from a C corporation to an S corporation, what is the MOST significant built-in gains tax concern?
- S corporations cannot deduct state income taxes paid
- Appreciated assets held at the time of conversion are subject to corporate-level tax if sold within the recognition period (generally 5 years) (Correct answer)
- S corporation shareholders cannot receive tax-free fringe benefits
- The conversion triggers immediate recognition of all accumulated earnings and profits
Correct answer: Appreciated assets held at the time of conversion are subject to corporate-level tax if sold within the recognition period (generally 5 years)
The built-in gains (BIG) tax imposes a corporate-level tax on gains accrued before S election if those assets are sold within the 5-year recognition period.
Question 6: A taxpayer in the 37% bracket wants to shift income to their child in the 12% bracket. Under the Kiddie Tax rules, what income of the child is taxed at the parent's marginal rate?
- All earned income of the child regardless of amount
- Net unearned income above the threshold (approximately $2,500 in 2024) for children under age 19 or full-time students under 24 (Correct answer)
- Only investment income from assets the child directly inherited
- Total income of the child if it exceeds $10,000
Correct answer: Net unearned income above the threshold (approximately $2,500 in 2024) for children under age 19 or full-time students under 24
The Kiddie Tax taxes a child's net unearned income above the annual threshold at the parent's top marginal rate, limiting income-shifting strategies.
Question 7: Which of the following is the BEST description of a tax-loss harvesting strategy?
- Selling loss positions to realize capital losses that offset capital gains, then repurchasing similar (but not substantially identical) securities after 31 days (Correct answer)
- Deferring loss recognition by holding depreciated securities indefinitely to avoid wash-sale rules
- Converting short-term capital losses to long-term losses by holding securities for more than one year before selling
- Using passive activity losses to offset active business income in the same tax year
Correct answer: Selling loss positions to realize capital losses that offset capital gains, then repurchasing similar (but not substantially identical) securities after 31 days
Tax-loss harvesting sells depreciated securities to realize losses that offset gains, then waits 31 days to repurchase similar holdings without triggering the wash-sale disallowance rule.
CTC Tax Planning & Advisory Strategies 2
A married couple filing jointly has $400,000 in ordinary income.
Which strategy would MOST directly reduce their exposure to the 3.8% Net Investment Income Tax (NIIT)?