CTP Tax Planning & Strategy 2 — Questions and Answers
Question 1: A taxpayer with $200,000 in net investment income and $250,000 in modified AGI (filing single) will owe the Net Investment Income Tax on how much income?
- $50,000 (Correct answer)
- $200,000
- $150,000
- $250,000
Correct answer: $50,000
The 3.8% NIIT applies to the lesser of net investment income ($200,000) or the excess of MAGI over the $200,000 threshold ($50,000) — so only $50,000 is subject to the tax.
Question 2: Which retirement account allows after-tax contributions with tax-free qualified withdrawals, making it ideal for a taxpayer who expects to be in a higher bracket in retirement?
- Traditional IRA
- SEP-IRA
- Roth IRA (Correct answer)
- SIMPLE IRA
Correct answer: Roth IRA
Roth IRA contributions are made with after-tax dollars, and qualified distributions are entirely tax-free, benefiting taxpayers who anticipate higher future rates.
Question 3: A self-employed taxpayer pays $8,000 in self-employment tax. How much of that is deductible on Form 1040 as an adjustment to income?
- $8,000
- $4,000 (Correct answer)
- $6,120
- $2,000
Correct answer: $4,000
The deductible portion of self-employment tax is 50% of the total SE tax paid, so $8,000 × 50% = $4,000.
Question 4: For tax planning purposes, which strategy is most effective for a cash-basis taxpayer who wants to reduce current-year taxable income?
- Accelerate income into the current year
- Defer deductions to next year
- Accelerate deductions into the current year (Correct answer)
- Convert ordinary income to capital gains next year
Correct answer: Accelerate deductions into the current year
A cash-basis taxpayer can reduce current-year income by accelerating deductible expenses (e.g., prepaying business expenses or making charitable contributions) before year-end.
Question 5: Which of the following is a tax-advantaged account that can be used for qualified medical expenses and whose unused balance rolls over indefinitely without penalty?
- Flexible Spending Account (FSA)
- Health Reimbursement Arrangement (HRA)
- Health Savings Account (HSA) (Correct answer)
- Dependent Care FSA
Correct answer: Health Savings Account (HSA)
HSAs have a triple tax advantage—contributions are deductible, growth is tax-free, and qualified withdrawals are tax-free—and balances roll over with no expiration.
Question 6: A taxpayer sells stock with a $20,000 gain after holding it for 13 months. Assuming a 22% ordinary rate and 15% preferential rate, how are the gains taxed?
- At 22% ordinary income rate
- At 15% long-term capital gains rate (Correct answer)
- At 0% since it qualifies for exclusion
- At a blended 18.5% rate
Correct answer: At 15% long-term capital gains rate
Stock held more than 12 months qualifies as long-term capital gain, taxed at preferential rates (0%, 15%, or 20%) rather than ordinary income rates.
Question 7: Which business entity structure provides pass-through taxation while also offering limited liability to all owners without the ownership restrictions of an S corporation?
- C corporation
- S corporation
- General partnership
- Multi-member LLC taxed as a partnership (Correct answer)
Correct answer: Multi-member LLC taxed as a partnership
A multi-member LLC taxed as a partnership provides pass-through taxation and limited liability for all members, with no restrictions on number or type of owners that S corporations impose.
CTP Tax Planning & Strategy 2
A taxpayer with $200,000 in net investment income and $250,000 in modified AGI (filing single) will owe the Net Investment Income Tax on how much income?