Financial Advisor Tax Planning Strategies for Financial Advisors 1 — Questions and Answers
Question 1: Which of the following investment strategies reduces current taxable income by harvesting losses to offset capital gains?
- Momentum investing
- Tax-loss harvesting (Correct answer)
- Tax-gain harvesting
- Dividend reinvestment
Correct answer: Tax-loss harvesting
Tax-loss harvesting involves selling investments at a loss to offset realized capital gains, reducing current tax liability.
Question 2: Long-term capital gains on securities held more than one year are taxed at preferential rates of 0%, 15%, or 20% based on:
- The type of security sold
- The investor's taxable income level (Correct answer)
- How long the security was held beyond one year
- Whether the gain was realized or unrealized
Correct answer: The investor's taxable income level
The 0%, 15%, or 20% long-term capital gains tax rates are determined by the taxpayer's taxable income relative to established IRS thresholds.
Question 3: The Net Investment Income Tax (NIIT) of 3.8% applies to individuals with net investment income whose modified adjusted gross income (MAGI) exceeds:
- $100,000 single / $150,000 married filing jointly
- $125,000 single / $250,000 married filing jointly
- $200,000 single / $250,000 married filing jointly (Correct answer)
- $250,000 single / $500,000 married filing jointly
Correct answer: $200,000 single / $250,000 married filing jointly
The 3.8% NIIT under IRC Section 1411 applies to the lesser of net investment income or MAGI above $200,000 (single) or $250,000 (married filing jointly).
Question 4: Which type of municipal bond interest is generally exempt from federal income tax?
- Revenue bonds only
- General obligation bonds only
- Both general obligation and revenue bonds (Correct answer)
- Municipal bonds issued in the taxpayer's home state only
Correct answer: Both general obligation and revenue bonds
Interest from both general obligation and revenue municipal bonds is generally exempt from federal income tax, though some private activity bonds may be subject to the AMT.
Question 5: An investor sells highly appreciated stock to a charity rather than donating cash. The primary tax advantage is:
- They receive a deduction equal to the original cost basis
- They avoid capital gains tax and can deduct the full fair market value (Correct answer)
- They can deduct twice the stock's market value
- They eliminate the need to report the transaction to the IRS
Correct answer: They avoid capital gains tax and can deduct the full fair market value
Donating appreciated securities directly to a charity avoids capital gains tax on the appreciation and allows a deduction for the full fair market value (subject to AGI limitations).
Question 6: What is the primary tax advantage of funding a Health Savings Account (HSA)?
- Contributions are not subject to FICA taxes and grow tax-free for qualified medical expenses (Correct answer)
- Contributions are only tax-deductible at the state level
- Withdrawals are tax-free for any purpose after age 65
- There are no contribution limits
Correct answer: Contributions are not subject to FICA taxes and grow tax-free for qualified medical expenses
HSA contributions are triple tax-advantaged: deductible (or pre-tax through payroll), grow tax-deferred, and are withdrawn tax-free for qualified medical expenses.
Financial Advisor Tax Planning Strategies for Financial Advisors 1
Which of the following investment strategies reduces current taxable income by harvesting losses to offset capital gains?