RFC Tax Planning & Optimization 2 — Questions and Answers
Question 1: A client in the 32% marginal tax bracket has $10,000 of short-term capital gains. What is the most tax-efficient way to offset these gains?
- Harvest long-term capital losses from appreciated securities
- Harvest short-term capital losses from depreciated securities (Correct answer)
- Contribute the amount to a traditional IRA
- Convert the gains to a Roth IRA
Correct answer: Harvest short-term capital losses from depreciated securities
Short-term capital losses directly offset short-term capital gains, which are taxed at ordinary income rates, providing the most efficient offset.
Question 2: Which of the following describes the 'wash sale' rule under IRC Section 1091?
- Gains from securities sold within 30 days are taxed as ordinary income
- A loss is disallowed if the same or substantially identical security is repurchased within 30 days before or after the sale (Correct answer)
- Dividends received within 30 days of purchase are treated as return of capital
- Short-term gains become long-term if the holding period spans a year-end
Correct answer: A loss is disallowed if the same or substantially identical security is repurchased within 30 days before or after the sale
The wash sale rule disallows a capital loss deduction when the investor repurchases a substantially identical security within the 61-day window (30 days before or after the sale).
Question 3: A married couple filing jointly earns $600,000 in 2024. Their investment income is $50,000. What additional tax applies to their net investment income?
- 0.9% Additional Medicare Tax
- 3.8% Net Investment Income Tax (NIIT) (Correct answer)
- 20% capital gains surtax
- 2.5% alternative minimum tax add-on
Correct answer: 3.8% Net Investment Income Tax (NIIT)
The 3.8% NIIT applies to net investment income for taxpayers whose MAGI exceeds $250,000 (MFJ), making the entire $50,000 subject to this surtax.
Question 4: Which strategy involves systematically converting traditional IRA funds to a Roth IRA during low-income years to minimize lifetime taxes?
- Backdoor Roth conversion
- Roth IRA ladder strategy
- Bracket-filling Roth conversion (Correct answer)
- Qualified longevity annuity conversion
Correct answer: Bracket-filling Roth conversion
Bracket-filling Roth conversions involve converting just enough traditional IRA funds each year to fill up lower tax brackets, reducing future RMDs and tax-deferred balances.
Question 5: What is the primary tax advantage of holding appreciated securities until death rather than selling them during lifetime?
- The gains are permanently exempt from capital gains tax due to the step-up in basis (Correct answer)
- The estate receives a deduction equal to the unrealized gain
- The heir can defer taxes for another 30 years
- The securities are transferred at original cost basis tax-free
Correct answer: The gains are permanently exempt from capital gains tax due to the step-up in basis
Assets held until death receive a stepped-up basis to fair market value at date of death, eliminating income tax on any unrealized appreciation accumulated during the decedent's lifetime.
Question 6: A client wants to donate $50,000 to charity but minimize taxes. They hold highly appreciated stock with a $5,000 cost basis. What is the optimal strategy?
- Sell the stock and donate the cash proceeds
- Donate the stock directly to the charity
- Contribute the stock to a donor-advised fund and take an immediate deduction (Correct answer)
- Exercise stock options and donate the resulting shares
Correct answer: Contribute the stock to a donor-advised fund and take an immediate deduction
Contributing appreciated stock to a donor-advised fund (DAF) provides an immediate deduction for the full fair market value while avoiding capital gains tax, and the DAF can distribute gifts over time.
Question 7: Under the Tax Cuts and Jobs Act (TCJA), what is the state and local tax (SALT) deduction cap for individuals?
- $5,000 per filer
- $10,000 per household (Correct answer)
- $25,000 for married filing jointly
- Unlimited for property taxes only
Correct answer: $10,000 per household
TCJA capped the combined SALT deduction (income/sales taxes plus property taxes) at $10,000 per household regardless of filing status (except married filing separately, which is $5,000).
RFC Tax Planning & Optimization 2
A client in the 32% marginal tax bracket has $10,000 of short-term capital gains.
What is the most tax-efficient way to offset these gains?