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QUESTION 1

The core principle of tax planning is to:

A. Defer all income
B. Minimise tax at any cost
C. Avoid all deductions
D. MAXIMISE AFTER-TAX WEALTH — not merely minimise tax

Correct answer: D — MAXIMISE AFTER-TAX WEALTH — not merely minimise tax

Explanation: The objective is MAXIMISING AFTER-TAX WEALTH, not minimising tax. A strategy that saves $10,000 of tax but destroys $50,000 of economic value is a failure. Tax is ONE input into a business or personal decision — never the only one. This is the single most important framing in TCP.

QUESTION 2

The three classic tax planning levers are:

A. TIMING, CHARACTER and ENTITY/JURISDICTION
B. Cash, accrual and hybrid
C. Federal, state and local
D. Income, deductions and credits

Correct answer: A — TIMING, CHARACTER and ENTITY/JURISDICTION

Explanation: TIMING (when income and deductions are recognised); CHARACTER (ordinary vs capital, active vs passive); and ENTITY/JURISDICTION (who is taxed, and where). Nearly every planning technique is an application of one or more of these three.

QUESTION 3

DEFERRING income is generally beneficial because:

A. The TIME VALUE OF MONEY — a dollar of tax paid later is cheaper in present-value terms
B. It reduces AGI
C. Rates always fall
D. It avoids tax permanently

Correct answer: A — The TIME VALUE OF MONEY — a dollar of tax paid later is cheaper in present-value terms

Explanation: Deferral is valuable because of the TIME VALUE OF MONEY. But it is NOT always right: if RATES ARE RISING (by law or because the taxpayer's income is climbing), ACCELERATING income into a low-rate year can beat deferral. Deferral is a default, not a rule.

QUESTION 4

ACCELERATING income into the current year makes sense when:

A. The taxpayer expects to be in a HIGHER bracket next year, or rates are legislated to rise
B. Rates are constant
C. Income is high
D. Deductions are large

Correct answer: A — The taxpayer expects to be in a HIGHER bracket next year, or rates are legislated to rise

Explanation: ACCELERATE income (and DEFER deductions) when you expect to be in a HIGHER bracket later. DEFER income (and ACCELERATE deductions) when you expect a LOWER bracket. The direction depends entirely on the RATE DIFFERENTIAL, weighed against the time value of money.

QUESTION 5

A ROTH conversion is most attractive when the taxpayer:

A. Is over 73
B. Needs cash now
C. Is in a high bracket now
D. Is in a TEMPORARILY LOW bracket, and expects HIGHER rates in retirement

Correct answer: D — Is in a TEMPORARILY LOW bracket, and expects HIGHER rates in retirement

Explanation: A ROTH CONVERSION pays tax NOW at today's rate to secure TAX-FREE growth and withdrawals later. It wins when the CURRENT rate is LOWER than the expected future rate — a gap year, an early retirement before pensions begin, or a year with large offsetting losses.

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QUESTION 6

The ideal year for a large Roth conversion is often:

A. A year with large capital gains
B. A GAP YEAR — retired but before pensions/Social Security begin, when taxable income is temporarily low
C. The year of a bonus
D. A high-income year

Correct answer: B — A GAP YEAR — retired but before pensions/Social Security begin, when taxable income is temporarily low

Explanation: The classic window: RETIRED (wages have stopped) but BEFORE Social Security and required distributions begin. Taxable income is temporarily low, so conversions can be made at low marginal rates — filling up the lower brackets each year rather than converting everything at once.

QUESTION 7

A ROTH IRA has NO required minimum distributions for:

A. Anyone
B. Beneficiaries
C. Anyone over 59.5
D. The ORIGINAL OWNER during their lifetime

Correct answer: D — The ORIGINAL OWNER during their lifetime

Explanation: A ROTH IRA has NO lifetime RMD for the ORIGINAL OWNER — a major planning advantage, allowing the account to compound tax-free indefinitely and pass to heirs. (Traditional IRAs require RMDs from the applicable age; INHERITED accounts have their own distribution rules.)

QUESTION 8

A traditional IRA's tax treatment is:

A. Non-deductible contributions and tax-free withdrawals
B. Tax-free contributions and withdrawals
C. No tax benefit
D. DEDUCTIBLE contributions (subject to limits), tax-DEFERRED growth, and TAXABLE withdrawals

Correct answer: D — DEDUCTIBLE contributions (subject to limits), tax-DEFERRED growth, and TAXABLE withdrawals

Explanation: TRADITIONAL: deduct now, pay tax later. ROTH: no deduction now, tax-free later. The choice turns on whether your rate is HIGHER now or in retirement — with the added consideration that Roth avoids RMDs and passes more efficiently to heirs.

QUESTION 9

A BACKDOOR ROTH involves:

A. A 401(k) loan
B. A rollover from a 529
C. A NON-DEDUCTIBLE traditional IRA contribution, subsequently CONVERTED to a Roth
D. A direct Roth contribution

Correct answer: C — A NON-DEDUCTIBLE traditional IRA contribution, subsequently CONVERTED to a Roth

Explanation: The BACKDOOR ROTH: contribute NON-DEDUCTIBLY to a traditional IRA (there is no income limit on non-deductible contributions), then CONVERT to a Roth. It is used by taxpayers whose income exceeds the direct Roth contribution limit. Beware the PRO-RATA rule if other pre-tax IRA balances exist.

QUESTION 10

The PRO-RATA rule can defeat a backdoor Roth when the taxpayer:

A. Is under 50
B. Holds OTHER PRE-TAX IRA balances — the conversion is then taxed proportionately across ALL IRAs
C. Has no other IRAs
D. Files jointly

Correct answer: B — Holds OTHER PRE-TAX IRA balances — the conversion is then taxed proportionately across ALL IRAs

Explanation: The PRO-RATA (aggregation) rule treats ALL traditional, SEP and SIMPLE IRAs as ONE account. If pre-tax balances exist, the conversion is TAXABLE in proportion to the pre-tax share — destroying the tax-free backdoor. A common fix is rolling the pre-tax IRA into an employer 401(k) first, since 401(k)s are excluded from the calculation.

QUESTION 11

An HSA's TRIPLE tax benefit is:

A. Tax-free growth only
B. PRE-TAX contributions, TAX-FREE growth, and TAX-FREE withdrawals for qualified medical expenses
C. Deduction, deferral, taxable withdrawal
D. Deduction only

Correct answer: B — PRE-TAX contributions, TAX-FREE growth, and TAX-FREE withdrawals for qualified medical expenses

Explanation: The HSA is the ONLY vehicle in the Code with all three. As a planning tool, the sophisticated approach is to CONTRIBUTE MAXIMUM, PAY MEDICAL COSTS OUT OF POCKET, and let the HSA COMPOUND TAX-FREE — reimbursing yourself decades later with no time limit on the reimbursement.

QUESTION 12

After age 65, a NON-MEDICAL HSA withdrawal is:

A. Prohibited
B. Penalty-free and tax-free
C. TAXABLE as ordinary income, but NOT PENALISED — effectively behaving like a traditional IRA
D. Subject to a 20% penalty

Correct answer: C — TAXABLE as ordinary income, but NOT PENALISED — effectively behaving like a traditional IRA

Explanation: Before 65, non-medical withdrawals face income tax PLUS a 20% penalty. After 65, the PENALTY DISAPPEARS and the withdrawal is simply TAXABLE — so an HSA becomes, at worst, a traditional IRA. That downside protection makes maximum funding a low-risk decision.

QUESTION 13

A 529 plan's earnings are:

A. Taxable
B. A credit
C. Deductible federally
D. TAX-FREE when used for QUALIFIED education expenses

Correct answer: D — TAX-FREE when used for QUALIFIED education expenses

Explanation: 529 EARNINGS are TAX-FREE when used for qualified education expenses. Contributions are NOT federally deductible (though many states allow a deduction). Contributions are completed GIFTS eligible for the annual exclusion, with a 5-YEAR FORWARD-AVERAGING election allowing a large front-loaded gift.

QUESTION 14

The 529 five-year election permits a donor to:

A. Change beneficiaries
B. Withdraw early
C. Deduct 5 years of contributions
D. Treat a LUMP-SUM contribution as if made RATABLY over 5 YEARS, using 5 years of annual exclusions at once

Correct answer: D — Treat a LUMP-SUM contribution as if made RATABLY over 5 YEARS, using 5 years of annual exclusions at once

Explanation: The 5-YEAR (superfunding) election lets a donor front-load FIVE YEARS of annual exclusions into a 529 in one go — a powerful estate-planning move, removing a large sum from the estate immediately while it compounds tax-free. Gift splitting doubles it.

QUESTION 15

The KIDDIE TAX applies to a child's:

A. UNEARNED income above a threshold, taxed at the PARENT'S marginal rate
B. Scholarships
C. Wages
D. Earned income

Correct answer: A — UNEARNED income above a threshold, taxed at the PARENT'S marginal rate

Explanation: The KIDDIE TAX taxes a child's UNEARNED income (interest, dividends, capital gains) above a threshold at the PARENT'S marginal rate. It defeats the strategy of shifting investment income to a low-bracket child. Note it does NOT apply to EARNED income — a child's wages are taxed at the child's own rate.

QUESTION 16

Employing your CHILD in your business can be advantageous because:

A. It avoids all tax
B. Wages are tax-free
C. Their WAGES are EARNED income (not subject to the kiddie tax) and are DEDUCTIBLE by the business
D. It avoids payroll tax always

Correct answer: C — Their WAGES are EARNED income (not subject to the kiddie tax) and are DEDUCTIBLE by the business

Explanation: Employing a child SHIFTS income from the parent's high bracket to the child's low one — and because WAGES are EARNED income, the KIDDIE TAX does not apply. The business gets a DEDUCTION. The work must be GENUINE and the pay REASONABLE. (A sole proprietorship employing a child under 18 may also be exempt from FICA.)

QUESTION 17

TAX-LOSS HARVESTING involves:

A. Selling losing positions to REALISE losses that offset gains and up to $3,000 of ordinary income
B. Deferring gains
C. Donating stock
D. Selling winners

Correct answer: A — Selling losing positions to REALISE losses that offset gains and up to $3,000 of ordinary income

Explanation: TAX-LOSS HARVESTING realises losses to offset capital GAINS, plus up to $3,000 of ordinary income annually, with an INDEFINITE carryforward. The WASH SALE rule (no substantially identical purchase within 30 days before or after) is the constraint — but a similar, non-identical fund maintains market exposure.

QUESTION 18

A WASH SALE disallows a loss when substantially identical securities are purchased within:

A. 30 days BEFORE or AFTER the sale (a 61-day window)
B. 30 days AFTER the sale only
C. The same day
D. 60 days after

Correct answer: A — 30 days BEFORE or AFTER the sale (a 61-day window)

Explanation: The window is 61 DAYS: 30 days BEFORE, the day of sale, and 30 days AFTER. The loss is DISALLOWED and ADDED to the replacement shares' basis — deferred, not destroyed. But a purchase in an IRA destroys it PERMANENTLY, because there is no basis to add it to.

QUESTION 19

Repurchasing the identical security in an IRA after a loss sale:

A. Defers the loss
B. Is permitted
C. PERMANENTLY DESTROYS the loss — there is no taxable basis in the IRA to which it can be added
D. Doubles the loss

Correct answer: C — PERMANENTLY DESTROYS the loss — there is no taxable basis in the IRA to which it can be added

Explanation: A wash sale normally DEFERS the loss by adding it to the replacement shares' basis. But shares held in an IRA have no taxable basis — so the disallowed loss simply EVAPORATES. It is the single most damaging wash sale mistake, and it is entirely avoidable.

QUESTION 20

Donating APPRECIATED long-term stock to charity is superior to selling and donating cash because:

A. The deduction is larger only
B. It is faster
C. It avoids AMT
D. The donor deducts FULL FMV and NEVER recognises the built-in GAIN — a double benefit

Correct answer: D — The donor deducts FULL FMV and NEVER recognises the built-in GAIN — a double benefit

Explanation: Donating APPRECIATED LTCG property to a PUBLIC charity gives a deduction at FULL FMV (30% of AGI limit) AND permanently avoids tax on the built-in gain. Selling first and donating the cash yields the same deduction but a taxable gain. It is the cleanest arbitrage in the individual Code.

QUESTION 21

A DONOR-ADVISED FUND allows a taxpayer to:

A. Avoid all tax
B. Take the DEDUCTION NOW (bunching into a high-income year) while DISTRIBUTING to charities over time
C. Retain control of the assets
D. Deduct twice

Correct answer: B — Take the DEDUCTION NOW (bunching into a high-income year) while DISTRIBUTING to charities over time

Explanation: A DAF separates the TIMING OF THE DEDUCTION from the TIMING OF THE GIVING. Contribute (and deduct) in a HIGH-INCOME year — perhaps BUNCHING several years of giving to clear the standard deduction — then distribute grants to charities over subsequent years. The contribution is IRREVOCABLE.

QUESTION 22

BUNCHING charitable deductions is used to:

A. Defer income
B. Increase AGI
C. Exceed the STANDARD DEDUCTION in alternate years — itemising in one year and taking the standard deduction in the next
D. Avoid the AGI limit

Correct answer: C — Exceed the STANDARD DEDUCTION in alternate years — itemising in one year and taking the standard deduction in the next

Explanation: Post-TCJA, the large standard deduction means many taxpayers get NO benefit from modest annual giving. BUNCHING two or three years of gifts into ONE year (often via a DAF) lifts them over the standard deduction in that year, while they take the standard deduction in the others.

QUESTION 23

A QUALIFIED CHARITABLE DISTRIBUTION (QCD) from an IRA:

A. Is deductible
B. EXCLUDES the distribution from income entirely — better than a deduction, because it reduces AGI
C. Increases AGI
D. Is taxable

Correct answer: B — EXCLUDES the distribution from income entirely — better than a deduction, because it reduces AGI

Explanation: A QCD (available from age 70.5) sends IRA funds DIRECTLY to charity, EXCLUDING the amount from income. This is SUPERIOR to a deduction: it reduces AGI, which gates the medical floor, Medicare IRMAA premiums, and the taxability of Social Security. It also SATISFIES the RMD.

QUESTION 24

A QCD is superior to a deduction because it:

A. Reduces AGI — which drives Medicare premiums, Social Security taxability and other AGI-based thresholds
B. Is larger
C. Is refundable
D. Avoids the AGI ceiling only

Correct answer: A — Reduces AGI — which drives Medicare premiums, Social Security taxability and other AGI-based thresholds

Explanation: An itemised deduction reduces TAXABLE income but NOT AGI. A QCD reduces AGI ITSELF — which cascades: lower Medicare IRMAA premiums, less Social Security included in income, a lower medical expense floor. And it works even for a taxpayer taking the STANDARD deduction.

QUESTION 25

The NET INVESTMENT INCOME TAX is:

A. 0.9%
B. 15%
C. 3.8% on the LESSER of net investment income or MAGI over the threshold
D. 21%

Correct answer: C — 3.8% on the LESSER of net investment income or MAGI over the threshold

Explanation: NIIT = 3.8% × the LESSER of (a) NII or (b) MAGI minus the threshold. NII EXCLUDES wages and ACTIVE business income. Achieving MATERIAL PARTICIPATION therefore removes business income from NII entirely — a genuine planning lever worth 3.8%.

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