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Free Questions › CPA › Tax Compliance and Planning
Free CPA Tax Compliance and Planning Practice Questions & Answers
400 exam-style Tax Compliance and Planning questions. Pick your answer, hit Check answer, and see the worked solution — free to start, no signup.
100% free · No login to startQuestion 91
A taxpayer opening their FIRST Roth at age 58 should note:
Select an option first.
Correct answer: A — The 5-YEAR CLOCK must still run — earnings are not tax-free until age 63, even though they are over 59.5
Explanation: BOTH tests must be met. At 58, opening a first Roth means the 5-YEAR CLOCK runs until 63. Even after turning 59.5, EARNINGS are not qualified until the account has been open 5 years. This argues for opening a Roth EARLY — even with a token amount — simply to START THE CLOCK.
Question 92
Opening a Roth with a small amount purely to START THE CLOCK is:
Select an option first.
Correct answer: D — A GENUINELY VALUABLE move — the 5-year clock starts once, for all Roth IRAs, and cannot be started retroactively
Explanation: The 5-year clock for QUALIFIED distributions starts with the FIRST Roth IRA contribution and applies to ALL Roth IRAs thereafter. Opening one early with even $100 starts the clock permanently. It costs almost nothing and can be worth a great deal later.
Question 93
A taxpayer with both TRADITIONAL and ROTH accounts in retirement should generally withdraw:
Select an option first.
Correct answer: C — STRATEGICALLY — filling the LOW brackets from the traditional account, then topping up TAX-FREE from the Roth
Explanation: The sophisticated drawdown: take enough from the TRADITIONAL account to FILL the low brackets (and stay below IRMAA and Social Security thresholds), then top up any remaining need from the ROTH tax-free. Drawing exclusively from one is almost always suboptimal — the flexibility IS the value of tax diversification.
Question 94
Drawing DOWN a traditional IRA early in retirement (before RMDs) can:
Select an option first.
Correct answer: D — REDUCE later RMDs — smoothing the tax burden and avoiding a bracket spike when RMDs begin
Explanation: Voluntarily drawing down (or CONVERTING) the traditional IRA during low-income early retirement years REDUCES the balance subject to RMDs later. Without this, a large IRA can force enormous RMDs at 73+, spiking the taxpayer into high brackets, IRMAA tiers and the tax torpedo simultaneously.
Question 95
A LARGE traditional IRA at age 73 can create a problem because:
Select an option first.
Correct answer: B — RMDs are MANDATORY and can force the taxpayer into HIGH brackets, IRMAA tiers and the tax torpedo — whether they need the money or not
Explanation: RMDs are MANDATORY. A large traditional IRA forces large taxable distributions regardless of need — spiking the taxpayer into higher brackets, triggering IRMAA surcharges, and increasing the taxable portion of Social Security. Managing the IRA balance DOWN in the years before RMDs begin is a core retirement planning task.
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Question 96
A QCD satisfies the RMD, which means:
Select an option first.
Correct answer: C — The taxpayer meets the RMD requirement WITHOUT the income appearing in AGI at all
Explanation: A QCD SATISFIES the RMD but the amount NEVER ENTERS AGI. That is a double win for a charitably-inclined retiree: the RMD obligation is met, and AGI stays low — protecting against IRMAA, the tax torpedo, and the medical expense floor.
Question 97
A taxpayer who takes an RMD and then donates the cash is WORSE OFF than a QCD because:
Select an option first.
Correct answer: D — The RMD INCREASES AGI (triggering IRMAA and Social Security taxation), and the deduction may be lost entirely to the standard deduction
Explanation: Taking the RMD ADDS to AGI — raising IRMAA, increasing Social Security taxability, and lifting the medical floor. The offsetting charitable DEDUCTION may be worthless if the taxpayer takes the STANDARD deduction. A QCD avoids ALL of this by keeping the income out of AGI in the first place.
Question 98
A CHARITABLE GIFT ANNUITY provides:
Select an option first.
Correct answer: D — A PARTIAL deduction AND a lifetime INCOME STREAM, with part of each payment tax-free as a return of principal
Explanation: A CHARITABLE GIFT ANNUITY: the donor transfers assets to a charity in exchange for a LIFETIME INCOME STREAM. They receive a PARTIAL charitable deduction (the excess of the gift over the annuity's value), and part of each payment is a TAX-FREE return of principal. Simpler than a CRT, but with less flexibility.
Question 99
A taxpayer bunching charitable gifts should ideally use:
Select an option first.
Correct answer: A — A DONOR-ADVISED FUND funded with APPRECIATED STOCK — bunching the deduction while giving over time
Explanation: The optimal bunching vehicle: a DAF funded with APPRECIATED LONG-TERM STOCK. You get (1) the FMV deduction, (2) permanent avoidance of the built-in gain, (3) the deduction TIMED into a high-income year, and (4) the freedom to grant to charities over subsequent years. Four benefits, one transaction.
Question 100
A PRIVATE FOUNDATION differs from a DAF in that a foundation:
Select an option first.
Correct answer: D — Offers CONTROL and PERPETUITY — but with LOWER AGI deduction limits, a 5% annual distribution requirement, an excise tax, and public reporting
Explanation: A PRIVATE FOUNDATION gives the family CONTROL and a lasting legacy — but at a cost: LOWER AGI limits (30% cash / 20% property, often at BASIS), a MANDATORY 5% annual distribution, an excise tax on investment income, self-dealing rules, and PUBLIC Form 990-PF filings. A DAF is simpler and more tax-efficient; a foundation buys control.
Question 101
The 'ALTERNATIVE DEPRECIATION SYSTEM' election might be made to:
Select an option first.
Correct answer: C — SLOW depreciation — spreading deductions into future, higher-rate years, or preserving the QBI/UBIA base
Explanation: Electing ADS (or electing OUT of bonus) SLOWS depreciation. Why would you? If rates will RISE, a deduction is worth MORE later. Or to preserve TAXABLE INCOME so a QBI deduction, a credit, or an NOL can be used. Accelerating deductions is not automatically right.
Question 102
The general principle for TIMING deductions is:
Select an option first.
Correct answer: D — Take the deduction in the year it is worth MOST — which depends on the MARGINAL RATE, not the calendar
Explanation: A deduction's VALUE = deduction × MARGINAL RATE. Take it in the year the marginal rate is HIGHEST — weighed against the time value of money. In a year with an NOL, a deduction may be worth ZERO. Blindly accelerating deductions into a low-rate year wastes them.
Question 103
Net SE income is $200,000. SE tax applies to:
Select an option first.
Correct answer: B — $184,700 — 92.35% of net SE income
Explanation: SE tax base = $200,000 × 0.9235 = $184,700. The 7.65% haircut approximates the employer's FICA share an employee would never have been taxed on. One-half of the resulting SE tax is then deductible above the line.
Question 104
An S corporation owner earning $200,000 pays a $80,000 salary. The FICA base is:
Select an option first.
Correct answer: B — $80,000 — only the SALARY bears FICA; the $120,000 distributive share escapes it
Explanation: Only the $80,000 SALARY bears FICA. The $120,000 distributive share escapes SE tax entirely. Versus a sole proprietorship (SE tax on $184,700), the saving on the Medicare portion alone is roughly 2.9% × $104,700 ≈ $3,000, plus any Social Security portion below the wage base.
Question 105
A taxpayer with $50,000 of NII and MAGI of $260,000 (threshold $200,000) owes NIIT of:
Select an option first.
Correct answer: B — $1,900 — 3.8% x the LESSER of NII ($50,000) or the MAGI excess ($60,000)
Explanation: NIIT = 3.8% × LESSER of (a) NII $50,000 or (b) MAGI excess $60,000 = 3.8% × $50,000 = $1,900. Using the $60,000 excess gives $2,280 — the trap. The 'lesser of' test must be computed both ways.
Question 106
Same taxpayer achieves MATERIAL PARTICIPATION in the business generating $40,000 of that NII. NIIT becomes:
Select an option first.
Correct answer: B — $380 — only $10,000 of NII remains; 3.8% x the LESSER of $10,000 or $60,000
Explanation: Material participation removes the $40,000 of business income from NII, leaving $10,000. NIIT = 3.8% × $10,000 = $380 — a $1,520 saving. Documenting the hours to achieve material participation is worth real money, and this is the arithmetic that proves it.
Question 107
A Roth conversion of $80,000 in a year with a $60,000 NOL produces taxable income of:
Select an option first.
Correct answer: A — $20,000 — the NOL absorbs $60,000 of the conversion
Explanation: The NOL ABSORBS $60,000 of the conversion income, leaving only $20,000 taxable. Converting into an NOL year is exceptionally efficient — a deferred-tax asset (the traditional IRA) is converted into a PERMANENTLY tax-free one (the Roth) at little or no cost.
Question 108
A taxpayer in the 0% LTCG bracket realises a $30,000 long-term gain. The tax is:
Select an option first.
Correct answer: D — $0 — and they may repurchase immediately, RESETTING basis $30,000 higher for free
Explanation: In the 0% LTCG bracket the gain is TAX-FREE, and there is NO WASH SALE rule for GAINS — so the taxpayer repurchases immediately, resetting basis $30,000 higher at ZERO cost. That is $30,000 of future gain permanently eliminated.
Question 109
A taxpayer donates stock (basis $20,000; FMV $100,000) held 3 years to a public charity. AGI is $250,000. The deduction is:
Select an option first.
Correct answer: C — $75,000 — FMV of $100,000 limited to 30% of AGI
Explanation: Appreciated LTCG property to a PUBLIC charity: deduct at FULL FMV ($100,000), capped at 30% of AGI = $75,000. The excess $25,000 carries FORWARD 5 years. The $80,000 built-in gain is NEVER taxed — that is the second, hidden benefit.
Question 110
Same stock, but held only 8 MONTHS. The deduction is:
Select an option first.
Correct answer: B — $20,000 — SHORT-TERM property is ORDINARY INCOME property, deductible at the LESSER of basis or FMV
Explanation: Held under a year, the stock is SHORT-TERM capital gain property — treated as ORDINARY INCOME property, deductible only at the LESSER OF BASIS OR FMV = $20,000. Waiting four more months would unlock a $75,000 deduction. Four months is worth $55,000 of deduction.
Question 111
A taxpayer with AGI of $200,000 donates $150,000 CASH to a public charity. The current deduction is:
Select an option first.
Correct answer: B — $120,000 — 60% of AGI, with $30,000 carried forward 5 years
Explanation: CASH to a PUBLIC charity: 60% of AGI = 60% × $200,000 = $120,000. The excess $30,000 carries FORWARD 5 years. (Appreciated PROPERTY would face the lower 30% ceiling.)
Question 112
An ISO: 5,000 shares, strike $8, FMV at exercise $60. The AMT ADJUSTMENT is:
Select an option first.
Correct answer: B — $260,000 — 5,000 x ($60 - $8)
Explanation: AMT adjustment = 5,000 × ($60 − $8) = 5,000 × $52 = $260,000. There is NO regular taxable income at exercise — but this $260,000 AMT adjustment can produce a substantial tax bill on stock the employee has not sold and may not be able to sell.
Question 113
The same grant as an NQSO produces ORDINARY income at exercise of:
Select an option first.
Correct answer: C — $260,000 — subject to withholding, with a matching EMPLOYER deduction
Explanation: An NQSO exercise creates $260,000 of ORDINARY compensation income, subject to payroll withholding, and the EMPLOYER gets a corresponding DEDUCTION. Compare the ISO: no regular income, an AMT adjustment, and NO employer deduction on a qualifying disposition.
Question 114
A cash balance plan permits a 58-year-old owner a contribution of (illustratively) $250,000. At a 37% marginal rate, the tax saving is:
Select an option first.
Correct answer: B — $92,500 — $250,000 x 37%
Explanation: Tax saving = $250,000 × 37% = $92,500. A DEFINED BENEFIT / CASH BALANCE plan permits actuarially-determined contributions far exceeding a 401(k) — particularly for an OLDER, HIGH-INCOME owner with few employees. It is the largest deduction available to a successful professional practice.
Question 115
A taxpayer converts $100,000 to a Roth in the 24% bracket. The tax cost is:
Select an option first.
Correct answer: D — $24,000 — paid NOW, in exchange for TAX-FREE growth and withdrawals thereafter
Explanation: Conversion tax = $100,000 × 24% = $24,000, ideally paid from OUTSIDE funds (paying it from the IRA itself shrinks the converted amount and may trigger a penalty). The conversion wins if the future rate exceeds 24% — and it also eliminates future RMDs on that balance.
Question 116
A retiree has $60,000 of Social Security and $40,000 of IRA withdrawals. Taking an extra $10,000 from the IRA also makes $8,500 more Social Security taxable. Their effective marginal rate in the 12% bracket is:
Select an option first.
Correct answer: C — About 22.2% — 12% x ($10,000 + $8,500) / $10,000
Explanation: THE TAX TORPEDO. The extra $10,000 adds $10,000 of IRA income AND $8,500 of newly-taxable Social Security = $18,500 of additional taxable income. Tax = 12% × $18,500 = $2,220 on $10,000 of actual income = an EFFECTIVE 22.2% rate. The nominal bracket is a lie.
Question 117
The tax torpedo argues for Roth conversions BEFORE claiming Social Security because:
Select an option first.
Correct answer: D — Conversions completed BEFORE Social Security begins avoid the torpedo entirely — and they REDUCE future RMDs that would otherwise drive provisional income
Explanation: BEFORE Social Security begins, there is no Social Security to be dragged into tax — so conversions face only the NOMINAL rate. And converting REDUCES the future traditional IRA balance, shrinking the RMDs that would later drive provisional income and trigger the torpedo. It attacks the problem twice.
Question 118
A taxpayer $500 below an IRMAA threshold realises an extra $1,000 of income, triggering a $2,000 annual surcharge (both spouses). The effective marginal rate on that $1,000 is:
Select an option first.
Correct answer: B — OVER 200% — the $1,000 of income triggers a $2,000 surcharge PLUS income tax
Explanation: IRMAA is a CLIFF. The $1,000 of income costs: income tax (say $240) PLUS the FULL $2,000 surcharge = $2,240 on $1,000 of income — an effective rate of 224%. Managing income to stay just BELOW an IRMAA threshold can be worth thousands, and it is why precise year-end income control matters for retirees.
Question 119
A taxpayer in a gap year has $30,000 of taxable income, a $50,000 traditional IRA, and $40,000 of unrealised LTCG. The 0% LTCG bracket and the 12% bracket both have room. They must choose between:
Select an option first.
Correct answer: D — GAIN HARVESTING (0% tax) and a ROTH CONVERSION (12% tax) — they COMPETE for the same bracket space, so the taxpayer must model which is worth more
Explanation: Both strategies CONSUME the same low-bracket room. Gain harvesting is FREE (0%) but only resets basis. A Roth conversion costs 12% but converts a deferred-tax asset into a PERMANENTLY tax-free one. Which wins depends on the expected future rate and the horizon — but WASTING the gap year entirely is the real error.
Question 120
A retiree with a $2m traditional IRA at 73 faces RMDs of roughly $75,000. Combined with Social Security, this pushes them into a high bracket. The move they SHOULD have made was:
Select an option first.
Correct answer: B — ROTH CONVERSIONS during the low-income gap years between retirement and RMDs — shrinking the IRA before RMDs began
Explanation: The GAP YEARS (retired, but before Social Security and RMDs) are the ONE window to convert at low rates. Failing to use them means a large IRA forces large mandatory distributions at 73+, spiking the taxpayer into high brackets, IRMAA tiers and the tax torpedo simultaneously — for the rest of their life.
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