CTC Tax Planning & Advisory Strategies 3 — Questions and Answers
Question 1: A client receives a large bonus in December. Which income deferral technique, if available, could legally shift that income to the following tax year?
- Electing the installment method under IRC §453
- Requesting that the employer delay the bonus payment to January under a bona fide nonqualified deferred compensation arrangement (Correct answer)
- Contributing the bonus to a Roth IRA before year-end
- Placing the bonus into a joint bank account with a lower-income spouse
Correct answer: Requesting that the employer delay the bonus payment to January under a bona fide nonqualified deferred compensation arrangement
Under a valid nonqualified deferred compensation (NQDC) plan complying with IRC §409A, an employee can elect before the year begins to defer bonus income to a future period.
Question 2: Under IRC §1031, which of the following exchanges does NOT qualify for like-kind exchange tax deferral?
- An office building exchanged for a strip mall
- Farmland exchanged for an apartment complex
- A personal residence exchanged for a rental property of equal value (Correct answer)
- Raw land exchanged for a commercial warehouse
Correct answer: A personal residence exchanged for a rental property of equal value
After the Tax Cuts and Jobs Act (TCJA), §1031 exchanges are limited to real property held for productive use or investment; a personal residence is neither, so it does not qualify.
Question 3: What is the primary advantage of a Grantor Retained Annuity Trust (GRAT) in an estate planning context?
- Assets transferred into a GRAT are immediately removed from the grantor's taxable estate with no gift tax consequences
- If trust assets grow faster than the IRS §7520 hurdle rate, the appreciation passes to beneficiaries gift-tax free (Correct answer)
- The GRAT provides an income tax deduction equal to the present value of the annuity stream
- A GRAT bypasses generation-skipping transfer tax for grandchildren beneficiaries
Correct answer: If trust assets grow faster than the IRS §7520 hurdle rate, the appreciation passes to beneficiaries gift-tax free
A GRAT 'zeroes out' the taxable gift by setting annuity payments so the remainder has minimal gift value; any investment return above the §7520 rate passes to heirs free of transfer tax.
Question 4: A corporation with a fiscal year ending June 30 wants to accelerate deductions into the current fiscal year. Which strategy is MOST appropriate?
- Adopting the cash method of accounting retroactively
- Prepaying expenses that will benefit the next 12-month period under the 12-month rule (Correct answer)
- Electing out of bonus depreciation to spread deductions over time
- Switching to the percentage-of-completion method for long-term contracts
Correct answer: Prepaying expenses that will benefit the next 12-month period under the 12-month rule
Under the 12-month rule, accrual-basis taxpayers may deduct prepaid expenses if the benefit does not extend beyond 12 months from the first benefit date or beyond the end of the following tax year.
Question 5: In advising a high-income client on charitable giving, which vehicle allows the donor to take the charitable deduction in the current year while distributing funds to charities over many future years?
- Charitable lead annuity trust (CLAT)
- Pooled income fund
- Donor-advised fund (DAF) (Correct answer)
- Charitable gift annuity (CGA)
Correct answer: Donor-advised fund (DAF)
A DAF allows an immediate charitable deduction when assets are contributed, while the donor advises on grants to qualified charities over any future time horizon.
Question 6: Which of the following correctly describes the tax treatment of qualified opportunity zone (QOZ) investments under IRC §1400Z-2?
- Capital gains reinvested in a QOZ fund are permanently excluded from income regardless of holding period
- Gain deferred by reinvesting in a QOZ fund is recognized no later than December 31, 2026, and appreciation after 10 years is excluded from tax (Correct answer)
- QOZ investments provide an immediate deduction equal to the amount of capital gain reinvested
- Only gains from real property sales qualify for QOZ deferral treatment
Correct answer: Gain deferred by reinvesting in a QOZ fund is recognized no later than December 31, 2026, and appreciation after 10 years is excluded from tax
QOZ rules defer the original reinvested gain until the earlier of disposition or December 31, 2026, and exclude post-investment appreciation if the investment is held at least 10 years.
Question 7: A client over age 70½ wants to make charitable gifts and minimize taxable income. Which strategy directly reduces adjusted gross income without requiring itemization?
- Cash contribution to a private foundation
- Contribution of appreciated stock to a donor-advised fund
- Qualified charitable distribution (QCD) directly from an IRA to a qualified charity (Correct answer)
- Donor-advised fund contribution followed by a grant recommendation
Correct answer: Qualified charitable distribution (QCD) directly from an IRA to a qualified charity
A QCD from an IRA (up to $105,000 in 2024) counts toward the required minimum distribution but is excluded from gross income, reducing AGI even for non-itemizers.
CTC Tax Planning & Advisory Strategies 3
A client receives a large bonus in December.
Which income deferral technique, if available, could legally shift that income to the following tax year?