Question 1

Bob Blumingdale has a dependent son, age 18, who is a computer whiz. He is earning over $25,000 a year writing software programs for Hewlett Packard, even though he is a freshman in college. Bob has just learned about kiddie tax and wants to engage you for tax planning. How do you advise him?

Accepted Answer

The answer of Bob Blumingdale has a dependent son, age...

Question 2

What are the five Ds of tax planning?

Accepted Answer

The five Ds of tax planning are Diversion, Deflection, Diminution, Deduction, and Deferral. These strategies are used to minimize tax liability and optimize financial planning by appropriately managing income, expenses, and investments.

Question 3

If an investor chose to implement a tax strategy which would allow him or her to completely avoid taxation, he or she would be a proponent of which strategy?

Accepted Answer

No tax strategy can completely avoid taxation. While some strategies may offer deferral or diversion options, ultimately taxes will need to be paid at some point. Any strategy claiming to completely avoid taxation is likely illegal or not sustainable in the long-term.

Question 4

Which of the following are not true with respect to flexible spending accounts?

Accepted Answer

Contributions to flexible spending accounts (FSAs) are made with before-tax dollars, not after-tax dollars. This means that the money contributed to an FSA is deducted from the employee's income before taxes are applied, reducing the amount of income tax the employee owes.

Question 5

Ron Horworth, age 53, has found an excellent buyer for his home. By selling this home he will realize a capital gain of $150,000. However, if he waits until he is 55, he believes that $125,000 of this gain will be tax free. He doesn't want to lose this opportunity for selling his home now and hence seeks your assistance.

Accepted Answer

The answer of Ron Horworth, age 53, has found an...

Question 6

A viable tax planning strategy for individuals with taxable Social Security is to:

Accepted Answer

By reducing modified income to $32,000 for married couples, the taxpayer can avoid higher taxation on their Social Security benefits. Modified income is calculated by taking half of Social Security benefits, adding other taxable income, and any tax-exempt interest earned. By reducing other taxable income (such as through retirement account contributions or deductions), the taxpayer can stay below the threshold for higher Social Security taxation. Rejecting Social Security income altogether (A) is not a viable option for individuals who have contributed to the system and need the income in retirement. Reporting only $32,000 as income regardless of actual income earned (C) would be fraudulent and illegal. Separating Social Security income from Medicare income (D) is not a tax planning strategy relevant to Social Security taxation.

Question 7

A master limited partnership differs from a limited partnership in that the master limited partnership:

Accepted Answer

A master limited partnership (MLP) is publicly traded on major exchanges or over-the-counter, unlike a traditional limited partnership which is not publicly traded.

Question 8

Myron Stanner has learned from a tax seminar that tax planning is beyond the comprehension of the average person. He is asking for your opinion.

Accepted Answer

The answer of Myron Stanner has learned from a tax...

Question 9

What are two important income tax-saving strategies?

Accepted Answer

Income deferral involves delaying the receipt of income until the following tax year, which can lower your current year's taxable income and potentially reduce your tax rate. Income acceleration involves taking additional income in the current year, which can help avoid potential tax rate increases in the following year. Both strategies can help reduce your overall tax burden. The other options listed do not necessarily provide effective tax-saving strategies.

Question 10

Jay Smith, a retired engineer, is a risk-averse person. He was quite satisfied with his portfolio which consisted mostly of tax-free municipal bonds. However, his financial planner told him that, although tax-free, municipal bond interest is taken into account in calculating social security taxes. Jay believes that his financial planner is trying to sell him something and is seeking a clarification from you.

Accepted Answer

The answer of Jay Smith, a retired engineer, is a...

Question 11

Under the current law 2015, there is "kiddie tax" for children. Which of the following statements isare true with respect to this controversial tax?

Accepted Answer

Choice B is correct because the kiddie tax only applies to children who have net investment income greater than $2,100. 
Choice D is also correct because under the kiddie tax, a child's unearned income (such as investment income) may be taxed at the parent's highest marginal tax rate if that rate is higher than the child's own tax rate. Therefore, the correct answer is E.

Choices A and C are incorrect because the kiddie tax applies to children under the age of 18 (or under the age of 24 if the child is a full-time student) and it only applies to a child's unearned income, not earned income.

Question 12

Which of the following requirements an individual must meet in order to deduct the expenses associated with a secondary residence?

Accepted Answer

To deduct expenses associated with a secondary residence, the individual must use the property for personal use for the greater of 14 days or 10% of the number of days it is rented out, and rental income must be received. This allows for the deduction of expenses like mortgage interest and real estate taxes under certain conditions.

Question 13

Mary Shultz has discovered an error in her previous year's tax return. Revising her tax return would result in a hefty refund of $8,000, but Mary is afraid that such an action on her part would trigger a tax audit which might be disastrous. What is your advice?

Accepted Answer

The answer of Mary Shultz has discovered an error in...

Question 14

When "income timing" is used as a tax strategy:

Accepted Answer

Income timing as a tax strategy involves managing when income is recognized to take advantage of lower tax rates in certain years, which can be particularly useful for self-employed individuals who have more control over their income streams. It can involve strategies such as prepaying expenses or deferring income, and while it can be more challenging for employed taxpayers who have less control over their income, it remains a viable strategy for many.

Question 15

Which of the following couples would benefit the most by postponing marriage until the following year?

Accepted Answer

The answer of Which of the following couples would benefit...

Question 16

For 2016, investment interest deduction is limited to:

Accepted Answer

The investment interest deduction is limited to the interest paid on loans or other debt that is used to purchase or carry investment property. The deduction is limited to the amount of investment income received during the year, meaning that investment interest cannot be used to create a net loss on a tax return. Earned income, passive income, and tax payments are not factors in determining the limitation on investment interest deduction. The gain on investment made with borrowed funds also does not affect the limit on investment interest deduction.

Question 17

Which of the following expenses are not fully deductible?

Accepted Answer

Miscellaneous business expenses are subject to limitations and are not fully deductible. The other expenses listed are fully deductible, although some may have certain statutory limits.

Question 18

Which of the following expense deductions are limited by law?

Accepted Answer

All of the choices listed, A) Moving expenses, B) Casualty losses, C) Mortgage interest, and D) Investment management fees, are subject to various limitations under tax law. These limitations can include thresholds that must be met before deductions can be taken, caps on the amount that can be deducted, and specific qualifying criteria that must be met.

Question 19

Which of the following is not true with respect to a charitable remainder trust?

Accepted Answer

A charitable remainder trust is irrevocable once it is established. This means that the donor cannot change the terms or cancel the trust once it has been set up.

Question 20

An investor who is contemplating the purchase of tax-free municipal bonds should consider:

Accepted Answer

When considering the purchase of tax-free municipal bonds, an investor should consider both the impact on taxable Social Security income as well as the possibility of triggering the alternative minimum tax (AMT). If an investor earns too much tax-exempt income or has too many tax deductions, it could raise their AMT liability. However, pension income is typically not impacted by tax-free municipal bonds. Therefore, choices A and B are important factors to consider, while choice C is not as relevant.

Quiz 12: Tax Planning: Concepts and Strategies