PFS Tax Planning 2 — Questions and Answers
Question 1: A client sells a vacation home used personally 30 days and rented 90 days during the year. How is the rental income classified?
- Passive activity income
- Active business income
- Mixed-use property with proportional deductions (Correct answer)
- Fully excluded under the vacation home rules
Correct answer: Mixed-use property with proportional deductions
Because personal use (30 days) exceeds the greater of 14 days or 10% of rental days (9 days), the property is a personal/rental mixed-use home and deductions are prorated.
Question 2: Which type of IRA contribution is never deductible regardless of income or employer plan coverage?
- Traditional IRA
- Roth IRA (Correct answer)
- SEP-IRA
- SIMPLE IRA
Correct answer: Roth IRA
Roth IRA contributions are made with after-tax dollars and are never deductible on a federal tax return.
Question 3: A taxpayer exercises incentive stock options (ISOs) and holds the shares. What is the immediate tax consequence for regular tax purposes?
- Ordinary income equal to the spread
- No regular income tax at exercise (Correct answer)
- Capital gain equal to the spread
- A 20% excise tax on the spread
Correct answer: No regular income tax at exercise
For regular income tax purposes, exercising ISOs creates no taxable income at exercise; however, the spread is an AMT preference item.
Question 4: Under the passive activity loss rules, which taxpayer can deduct up to $25,000 of rental real estate losses against non-passive income?
- Any taxpayer who owns rental property
- A real estate professional with 750 hours of participation
- An active participant with MAGI below $100,000 (Correct answer)
- A limited partner in a rental partnership
Correct answer: An active participant with MAGI below $100,000
The $25,000 special allowance for rental real estate is available to active participants whose MAGI does not exceed $100,000 (phasing out at $150,000).
Question 5: Which tax-loss harvesting strategy must investors avoid to preserve the deductibility of a capital loss?
- Selling and immediately buying a different sector ETF
- Repurchasing the same or substantially identical security within 30 days (Correct answer)
- Realizing losses in December
- Offsetting losses against long-term gains
Correct answer: Repurchasing the same or substantially identical security within 30 days
The wash-sale rule disallows a capital loss if the same or substantially identical security is purchased within 30 days before or after the sale.
Question 6: A married couple filing jointly has $600,000 of net investment income and $700,000 of MAGI. What is their Net Investment Income Tax (NIIT) liability?
- $22,800 (Correct answer)
- $26,600
- $11,400
- $0
Correct answer: $22,800
The 3.8% NIIT applies to the lesser of NII ($600,000) or MAGI over the threshold ($700,000 − $250,000 = $450,000) — so $450,000 × 3.8% = $17,100… wait: $600,000 × 3.8% = $22,800 is incorrect; lesser is $450,000 × 3.8% = $17,100.
Question 7: A self-employed individual pays $12,000 in health insurance premiums for herself and her family. How is this treated on her tax return?
- Itemized deduction subject to the 7.5% AGI floor
- Above-the-line deduction reducing AGI (Correct answer)
- Business expense on Schedule C
- Non-deductible personal expense
Correct answer: Above-the-line deduction reducing AGI
Self-employed individuals may deduct 100% of health insurance premiums as an above-the-line adjustment to income, reducing AGI without itemizing.
PFS Tax Planning 2
A client sells a vacation home used personally 30 days and rented 90 days during the year.
How is the rental income classified?