CTA Tax Planning and Strategy 1 — Questions and Answers
Question 1: Which tax planning strategy involves shifting income to a family member in a lower tax bracket?
- Income acceleration
- Income splitting (Correct answer)
- Tax deferral
- Loss harvesting
Correct answer: Income splitting
Income splitting involves transferring income-producing assets or business income to family members in lower tax brackets to reduce the overall family tax burden.
Question 2: What is the primary benefit of tax deferral strategies?
- Eliminating tax permanently
- Moving taxable income to a later period, allowing current funds to grow (Correct answer)
- Reducing the applicable tax rate immediately
- Avoiding state income taxes
Correct answer: Moving taxable income to a later period, allowing current funds to grow
Tax deferral moves income recognition to a future period, allowing those funds to grow on a pre-tax basis in the interim.
Question 3: Tax-loss harvesting is a strategy that involves:
- Selling appreciated assets to pay off debt
- Selling securities at a loss to offset capital gains (Correct answer)
- Converting traditional IRA to Roth IRA
- Accelerating deductions into the current year
Correct answer: Selling securities at a loss to offset capital gains
Tax-loss harvesting involves deliberately selling investments at a loss to offset realized capital gains and reduce taxable income.
Question 4: Which strategy is used to convert a traditional IRA to a Roth IRA, paying taxes now to receive tax-free distributions later?
- Roth conversion (Correct answer)
- Rollover
- Direct transfer
- Stretch IRA
Correct answer: Roth conversion
A Roth conversion involves transferring funds from a traditional IRA to a Roth IRA and including the converted amount in current taxable income.
Question 5: The 'bunching' strategy for charitable contributions involves:
- Donating to multiple charities simultaneously
- Concentrating multiple years' donations into one year to exceed the standard deduction (Correct answer)
- Making charitable contributions through a business entity
- Donating appreciated property instead of cash
Correct answer: Concentrating multiple years' donations into one year to exceed the standard deduction
Bunching accelerates charitable contributions into a single year so total itemized deductions exceed the standard deduction, then taking the standard deduction in other years.
Question 6: Which type of trust is used to reduce estate taxes by making an irrevocable gift of appreciating assets while retaining an income stream?
- Revocable living trust
- Charitable remainder trust
- Grantor retained annuity trust (GRAT) (Correct answer)
- Special needs trust
Correct answer: Grantor retained annuity trust (GRAT)
A GRAT allows a grantor to transfer appreciating assets to heirs estate-tax-free if the assets outperform the IRS Section 7520 rate.
CTA Tax Planning and Strategy 1
Which tax planning strategy involves shifting income to a family member in a lower tax bracket?