WMS Tax Planning & Strategies 1 — Questions and Answers
Question 1: What is the maximum federal long-term capital gains tax rate for high-income taxpayers under current U.S. tax law?
- 10%
- 15%
- 20% (Correct answer)
- 25%
Correct answer: 20%
The maximum federal long-term capital gains tax rate is 20% for taxpayers in the highest income bracket, separate from the additional 3.8% NIIT surtax that may also apply.
Question 2: A client exercises incentive stock options (ISOs) and holds the shares without selling them. Which tax planning consideration is most critical?
- The spread is subject to ordinary income tax immediately upon exercise
- The spread may trigger the Alternative Minimum Tax (AMT) in the year of exercise (Correct answer)
- ISOs are always entirely tax-free upon exercise regardless of circumstances
- The gain is always treated as a short-term capital gain upon exercise
Correct answer: The spread may trigger the Alternative Minimum Tax (AMT) in the year of exercise
The bargain element (spread) on ISO exercise is an AMT preference item and can trigger AMT liability even though no regular income tax is owed at the time of exercise.
Question 3: Which strategy involves selling securities at a loss to offset capital gains while reinvesting in similar securities to maintain market exposure?
- Tax deferral
- Tax-loss harvesting (Correct answer)
- Asset location
- Income shifting
Correct answer: Tax-loss harvesting
Tax-loss harvesting involves selling securities at a loss to offset capital gains and reinvesting in similar (but not substantially identical) securities to maintain portfolio exposure while capturing the tax benefit.
Question 4: What is the annual gift tax exclusion amount per recipient for 2025?
- $15,000
- $16,000
- $17,000
- $19,000 (Correct answer)
Correct answer: $19,000
The annual gift tax exclusion for 2025 is $19,000 per recipient, allowing donors to give this amount to any number of individuals without reducing their lifetime exemption.
Question 5: A client holds highly appreciated securities with a very low cost basis. Which strategy allows them to benefit a charity while avoiding capital gains tax?
- Sell the securities first, then donate the cash proceeds to charity
- Donate the appreciated securities directly to a qualified charity (Correct answer)
- Transfer the securities to a taxable account before donating
- Convert the securities to bonds before making the charitable gift
Correct answer: Donate the appreciated securities directly to a qualified charity
Donating appreciated securities directly to a qualified charity allows the donor to deduct the fair market value while avoiding capital gains tax on the built-in gain entirely.
Question 6: What is the 'step-up in basis' rule and how does it benefit heirs who inherit assets?
- Heirs inherit assets at a higher purchase price administratively set by the estate
- Inherited assets receive a new cost basis equal to the fair market value at the decedent's date of death (Correct answer)
- Heirs must pay capital gains tax on all appreciation before inheriting the assets
- The original cost basis from when the decedent purchased the asset is carried over to heirs unchanged
Correct answer: Inherited assets receive a new cost basis equal to the fair market value at the decedent's date of death
The step-up in basis resets the cost basis of inherited assets to their fair market value on the decedent's date of death, eliminating income tax on all pre-death appreciation.
Question 7: Which type of income from municipal bonds is generally exempt from federal income tax?
- Capital gains from selling municipal bonds at a profit
- Revenue bonds only, not general obligation bonds
- Private activity bonds only, regardless of the investor's AMT status
- Interest income from most municipal bonds issued by state and local governments (Correct answer)
Correct answer: Interest income from most municipal bonds issued by state and local governments
Interest income from municipal bonds issued by state and local governments is generally exempt from federal income tax, making them particularly valuable to high-income investors in high tax brackets.
WMS Tax Planning & Strategies 1
What is the maximum federal long-term capital gains tax rate for high-income taxpayers under current U.S. tax law?