PFS Tax Planning 3

Question 1

What is the primary tax advantage of a 529 college savings plan?

Accepted Answer

Earnings grow tax-free and withdrawals are tax-free for qualified education expenses

Answer

529 plan earnings accumulate tax-deferred and distributions used for qualified education expenses are entirely federal-income-tax-free.

Question 2

A client converts $80,000 from a traditional IRA to a Roth IRA. The client has a basis of $20,000 in all traditional IRAs totaling $200,000. How much of the conversion is taxable?

Accepted Answer

$72,000

Answer

The pro-rata rule applies: basis ratio = $20,000 / $200,000 = 10%, so 10% of $80,000 ($8,000) is non-taxable and $72,000 is taxable.

Question 3

Which business entity structure avoids double taxation while offering limited liability to all owners?

Accepted Answer

S corporation

Answer

An S corporation is a pass-through entity where income is taxed only at the shareholder level, avoiding the double taxation of a C corporation while providing limited liability.

Question 4

Under the kiddie tax rules, a 16-year-old dependent's unearned income above the threshold is taxed at:

Accepted Answer

The parents' marginal rate

Answer

The kiddie tax taxes a qualifying child's net unearned income above the threshold at the parents' marginal federal income tax rate.

Question 5

A taxpayer has $10,000 of short-term capital losses and $6,000 of long-term capital gains. What is the net tax result?

Accepted Answer

$4,000 net short-term loss deductible against ordinary income up to $3,000 per year

Answer

Short-term losses first offset short-term gains, then long-term gains; the remaining $4,000 net capital loss is deductible up to $3,000 against ordinary income per year, with the rest carried forward.

(PFS) Personal Financial Specialist Practice Test

(PFS) Personal Financial Specialist Practice Test

PFS Tax Planning 3