RFC Tax Planning & Optimization 3 — Questions and Answers
Question 1: A self-employed RFC client earns $200,000 net self-employment income. Which retirement plan allows the largest tax-deductible contribution in 2024?
- SIMPLE IRA
- SEP-IRA
- Solo 401(k)
- Defined benefit pension plan (Correct answer)
Correct answer: Defined benefit pension plan
A defined benefit pension plan can allow contributions far exceeding 401(k) limits because the contribution is actuarially determined based on the desired retirement benefit, potentially reaching $265,000+ annually for older, high-earning self-employed individuals.
Question 2: What is the 'kiddie tax' and to whom does it apply?
- A tax on toys and children's goods imported into the US
- Unearned income of children under age 19 (or 24 if full-time students) taxed at the parent's marginal rate above a threshold (Correct answer)
- A penalty tax on UGMA/UTMA accounts exceeding $2,500
- A withholding tax on wages paid to minors under age 16
Correct answer: Unearned income of children under age 19 (or 24 if full-time students) taxed at the parent's marginal rate above a threshold
The kiddie tax subjects unearned income (dividends, interest, capital gains) above the threshold to the parent's higher marginal rate, preventing income-shifting to children in lower brackets.
Question 3: Which of the following is NOT a strategy to reduce alternative minimum tax (AMT) exposure?
- Avoiding large exercise of incentive stock options in a single year
- Accelerating income into the current year (Correct answer)
- Reducing miscellaneous itemized deductions
- Exercising and immediately selling ISOs in the same calendar year
Correct answer: Accelerating income into the current year
Accelerating income into the current year increases taxable income and thus increases AMT exposure rather than reducing it; the other strategies all reduce AMT preference items or timing.
Question 4: A client has $30,000 in passive activity losses. Under which circumstance can they fully deduct these losses against ordinary income?
- They qualify as a real estate professional with more than 750 hours of real estate activity (Correct answer)
- Their AGI is below $150,000
- They materially participate in the passive activity at least 100 hours
- They convert the passive activity to an active business in the current year
Correct answer: They qualify as a real estate professional with more than 750 hours of real estate activity
Real estate professionals who spend more than 750 hours per year and more than half their working time in real property trades can treat rental losses as non-passive, fully deductible against ordinary income.
Question 5: What tax treatment applies to qualified dividends received by a taxpayer in the 22% ordinary income tax bracket in 2024?
- 22% (same as ordinary income)
- 15% preferential rate (Correct answer)
- 0% because they are below the 25% bracket
- 20% plus 3.8% NIIT
Correct answer: 15% preferential rate
Qualified dividends are taxed at preferential capital gains rates; taxpayers in the 22% or 24% ordinary income brackets pay 15% on qualified dividends.
Question 6: A client receives an inheritance of $500,000 from a non-spouse. What is the federal income tax consequence at the time of receipt?
- The full $500,000 is taxable as ordinary income
- The inheritance is subject to a flat 30% inheritance tax
- No federal income tax is owed on inherited assets at time of receipt (Correct answer)
- Capital gains tax applies on the difference from the decedent's original cost
Correct answer: No federal income tax is owed on inherited assets at time of receipt
Inherited assets are not subject to federal income tax at receipt; the heir receives a stepped-up basis and only pays capital gains tax on appreciation occurring after the inheritance date.
Question 7: Which Section 529 plan feature was expanded by the SECURE 2.0 Act of 2022?
- 529 plans can now be used to pay student loan debt up to $10,000 lifetime per beneficiary
- Unused 529 funds can be rolled over to a Roth IRA subject to certain conditions (Correct answer)
- 529 contributions became federally tax deductible starting in 2024
- 529 plans can now cover K-12 tuition up to $20,000 per year
Correct answer: Unused 529 funds can be rolled over to a Roth IRA subject to certain conditions
SECURE 2.0 allows rollovers of unused 529 funds to a Roth IRA for the beneficiary, subject to a $35,000 lifetime cap and the 529 account being at least 15 years old.
RFC Tax Planning & Optimization 3
A self-employed RFC client earns $200,000 net self-employment income.
Which retirement plan allows the largest tax-deductible contribution in 2024?