WMS Tax Planning & Strategies 2

Question 1

A Roth IRA conversion is generally most advantageous when which of the following conditions exists?

Accepted Answer

The client expects to be in a higher tax bracket in retirement than they are currently

Answer

Converting to a Roth IRA is most beneficial when the client expects higher future tax rates, since paying tax at today's lower rate is preferable to paying more tax on larger distributions later.

Question 2

What is the Net Investment Income Tax (NIIT) and who is subject to it?

Accepted Answer

A 3.8% surtax on net investment income for taxpayers whose modified AGI exceeds certain thresholds

Answer

The NIIT is a 3.8% surtax on the lesser of net investment income or the excess of modified AGI above $200,000 (single) or $250,000 (married filing jointly).

Question 3

Which strategy allows a high-income client who exceeds the Roth IRA income limits to still fund a Roth IRA?

Accepted Answer

Backdoor Roth IRA: make a non-deductible Traditional IRA contribution and convert it to Roth

Answer

The backdoor Roth IRA is a two-step strategy where a high-income taxpayer makes a non-deductible Traditional IRA contribution and then converts it to a Roth IRA, bypassing the income limits on direct Roth contributions.

Question 4

Under IRC Section 1031, which type of exchange allows a real estate investor to defer capital gains taxes?

Accepted Answer

A like-kind exchange of real property held for investment or business use for other qualifying real property

Answer

A Section 1031 like-kind exchange allows investors to defer capital gains taxes by reinvesting proceeds from the sale of investment real property into another qualifying real property of equal or greater value.

Question 5

What is 'asset location' as a wealth management tax-planning strategy?

Accepted Answer

Strategically placing different asset classes in the most tax-efficient account type (taxable, tax-deferred, or tax-exempt)

Answer

Asset location involves placing assets in account types where their tax characteristics are most advantageous, such as holding tax-inefficient bonds in tax-deferred accounts and tax-efficient equities in taxable accounts.

(WMS) Wealth Management Specialist Certification Practice Test

(WMS) Wealth Management Specialist Certification Practice Test

WMS Tax Planning & Strategies 2