E.40 Tax Reduction/Management Techniques

Question 1

Which of the following tax reduction techniques involves transferring assets to another person or entity?

A. Tax loss harvesting
B. Income deferral
C. Tax-free gifting
D. Tax credit utilization

Answer 1

C. Tax-free gifting

E.40 Tax Reduction/Management Techniques

Question 2

Which of the following is a tax management technique that involves delaying the recognition of income until a later tax year?

A. Tax loss harvesting
B. Income deferral
C. Tax-free gifting
D. Tax credit utilization

Answer 2

B. Income deferral

E.40 Tax Reduction/Management Techniques

Question 3

Sarah is a high-income earner who is approaching retirement age. She wants to reduce her tax liability and save for retirement. Which of the following tax reduction techniques would be most beneficial for her?

A. Roth IRA contributions
B. Traditional IRA contributions
C. Tax-free gifting
D. Charitable donations

Answer 3

B. Traditional IRA contributions

E.40 Tax Reduction/Management Techniques

Question 4

John and Mary are a married couple who own a small business together. Which of the following tax management techniques could they use to reduce their tax liability?

A. Charitable donations
B. Income deferral
C. Tax loss harvesting
D. Capital gain harvesting

Answer 4

B. Income deferral

E.40 Tax Reduction/Management Techniques

Question 5

Which of the following tax reduction techniques involves selling investments that have decreased in value to offset gains from other investments?

A. Tax loss harvesting
B. Income deferral
C. Tax-free gifting
D. Tax credit utilization

Answer 5

A. Tax loss harvesting

E.40 Tax Reduction/Management Techniques

Question 6

Mary inherited a large sum of money from her parents and wants to reduce her taxable income. Which of the following tax reduction techniques would be most beneficial for her?

A. Charitable donations
B. Income deferral
C. Roth IRA contributions
D. Traditional IRA contributions

Answer 6

A. Charitable donations

E.40 Tax Reduction/Management Techniques

Question 7

Which of the following tax management techniques involves selling investments that have increased in value to realize gains?

A. Tax loss harvesting
B. Capital gain harvesting
C. Tax-free gifting
D. Tax credit utilization

Answer 7

B. Capital gain harvesting

E.40 Tax Reduction/Management Techniques

Question 8

Tom is a self-employed consultant who wants to reduce his tax liability. Which of the following tax reduction techniques would be most beneficial for him?

A. Charitable donations
B. Income deferral
C. Roth IRA contributions
D. SEP IRA contributions

Answer 8

D. SEP IRA contributions

E.40 Tax Reduction/Management Techniques

Question 9

Sarah is a small business owner who is planning to retire in five years. She wants to reduce her tax liability and increase her retirement savings. Which of the following tax reduction techniques would be most beneficial for her?

A. Charitable donations
B. Roth IRA contributions
C. Income deferral
D. Capital gain harvesting

Answer 9

C. Income deferral

E.40 Tax Reduction/Management Techniques

Question 10

John is a real estate investor who has incurred losses from rental properties. Which of the following tax management techniques could he use to reduce his tax liability?

A. Passive Activity Loss (PAL)
B. Income deferral
C. Tax-free gifting
D. Charitable donations

Answer 10

A. Passive Activity Loss (PAL)

E.40 Tax Reduction/Management Techniques

Question 11

Mary and Bob are a married couple who have substantial investments in the stock market. They want to reduce their tax liability while continuing to invest. Which of the following tax reduction techniques would be most beneficial for them?

A. Tax loss harvesting
B. Income deferral
C. Roth IRA contributions
D Charitable donations

Answer 11

A. Tax loss harvesting

E.40 Tax Reduction/Management Techniques

Question 12

Tom is a high-income earner who is looking for tax reduction strategies. Which of the following tax reduction techniques would be most beneficial for him?

A. Income deferral
B. Traditional IRA contributions
C. Charitable donations
D Capital gain harvesting

Answer 12

C. Charitable donations

E.40 Tax Reduction/Management Techniques

Question 13

Samantha is a freelancer who wants to reduce her tax liability. Which of the following tax reduction techniques would be most beneficial for her?

A. Income deferral
B. Tax-free gifting
C. Capital gain harvesting
D. SEP IRA contributions

Answer 13

D. SEP IRA contributions

E.40 Tax Reduction/Management Techniques

Question 14

David is a small business owner who wants to reduce his tax liability. Which of the following tax reduction techniques would be most beneficial for him?

A. Roth IRA contributions
B. Income deferral
C. Charitable donations
D. Capital gain harvesting

Answer 14

B. Income deferral

E.40 Tax Reduction/Management Techniques

Question 15

C. Income deferral

A. Tax loss harvesting
B. Tax credit utilization
C. Income deferral
D. Traditional IRA contributions

Answer 15

C. Income deferral

E.40 Tax Reduction/Management Techniques

Question 16

Mike is a high-income earner who regularly donates to causes he cares about. He is looking for a way to reduce his tax liability while supporting these organizations. Which of the following tax reduction techniques would be most beneficial for him?

A. Tax loss harvesting
B. Charitable donations
C. Capital gain harvesting
D. Income deferral

Answer 16

B. Charitable donations

E.40 Tax Reduction/Management Techniques

Question 17

Amy is a freelancer who expects her income to remain steady over the next few years. She wants to reduce her tax liability for the current year and save for retirement. Which of the following tax reduction techniques would be most beneficial for her?

A. Tax-free gifting
B. Capital gain harvesting
C. Traditional IRA contributions
D. Income deferral

Answer 17

C. Traditional IRA contributions

E.40 Tax Reduction/Management Techniques

Question 18

Which of the following is a tax credit for individuals with low to moderate income?

A. Child and Dependent Care Credit
B. Lifetime Learning Credit
C. Earned Income Tax Credit
D. American Opportunity Tax Credit

Answer 18

C. Earned Income Tax Credit

E.40 Tax Reduction/Management Techniques

Question 19

Which of the following is an example of tax planning?

A. Maximizing deductions
B. Delaying income
C. Splitting income
D. All of the above

Answer 19

D. All of the above

E.40 Tax Reduction/Management Techniques

Question 20

Which of the following is not a tax-advantaged retirement account?

A. 401(k)
B. Traditional IRA
C. Roth IRA
D. Brokerage Account

Answer 20

D. Brokerage Account

E.40 Tax Reduction/Management Techniques

Question 21

Which of the following is an example of tax-loss harvesting?

A. Selling a stock for a profit
B. Holding a stock for the long term
C. Selling a stock at a loss to offset gains
D. None of the above

Answer 21

C. Selling a stock at a loss to offset gains

E.40 Tax Reduction/Management Techniques

Question 22

Which of the following is a tax-deferred investment account for education expenses?

A. 529 Plan
B. Coverdell Education Savings Account
C. Traditional IRA
D. Roth IRA

Answer 22

B. Coverdell Education Savings Account

E.40 Tax Reduction/Management Techniques

Question 23

Which of the following accounts offers tax-deductible contributions, tax-free growth, and allows you to keep and invest unused funds for future medical expenses, even after changing jobs or retiring?

A. Health Savings Account (HSA)
B. Flexible Spending Account (FSA)
C. Traditional IRA
D. Roth IRA

Answer 23

A. Health Savings Account (HSA)

E.40 Tax Reduction/Management Techniques

Question 24

Which of the following is an example of tax-efficient investing?

A. Investing in mutual funds
B. Investing in individual stocks
C. Investing in tax-free municipal bonds
D. All of the above

Answer 24

C. Investing in tax-free municipal bonds

E.40 Tax Reduction/Management Techniques

Question 25

Which of the following is an example of tax deferral?

A. Investing in a traditional IRA
B. Investing in a Roth IRA
C. Investing in a brokerage account
D. None of the above

Answer 25

A. Investing in a traditional IRA

E.40 Tax Reduction/Management Techniques

Question 26

Which of the following is not a tax deduction for small business owners?

A. Home office deduction
B. Health insurance deduction
C. Charitable contributions
D. Travel expenses

Answer 26

C. Charitable contributions

E.40 Tax Reduction/Management Techniques

Question 27

Tom is a high-income earner who wants to reduce his tax liability. Which of the following tax planning strategies could he use?

A. Maximize deductions
B. Delay income
C. Split income
D. All of the above

Answer 27

D. All of the above

E.40 Tax Reduction/Management Techniques

Question 28

Sarah is a self-employed individual looking for a tax-advantaged account that allows her to make tax-deductible contributions, grow her savings tax-free, and use the funds for qualified medical expenses at any time. Which of the following accounts best meets her needs?

A. 529 Plan
B. Coverdell Education Savings Account
C. Health Savings Account (HSA)
D. Flexible Spending Account (FSA)

Answer 28

C. Health Savings Account (HSA)

E.40 Tax Reduction/Management Techniques

Question 29

Mark is an individual who wants to offset his gains with his losses. Which of the following tax-loss harvesting strategies could he use?

A. Selling a stock for a profit
B. Holding a stock for the long term
C. Selling a stock at a loss to offset gains
D. None of the above

Answer 29

C. Selling a stock at a loss to offset gains

E.40 Tax Reduction/Management Techniques

Question 30

Jane is a small business owner who wants to reduce her taxes in retirement by contributing to an account that allows her savings to grow tax-free, with tax-free withdrawals in retirement. Which of the following retirement accounts best suits her needs?

A. 401(k)
B. Traditional IRA
C. Roth IRA
D. All of the above

Answer 30

C. Roth IRA

E.40 Tax Reduction/Management Techniques

Question 31

Mike is an individual who wants to reduce his taxes on his rental income. Which of the following tax reduction strategies could he use?

A. Maximize deductions
B. Delay income
C. Split income
D. All of the above

Answer 31

A. Maximize deductions

E.40 Tax Reduction/Management Techniques

Question 32

Kelly is a high-income earner who wants to reduce her taxes on her investment income. Which of the following tax-efficient investing strategies could she use?

A. Investing in mutual funds
B. Investing in individual stocks
C. Investing in tax-free municipal bonds
D. All of the above

Answer 32

C. Investing in tax-free municipal bonds

E.40 Tax Reduction/Management Techniques

Question 33

David is an individual who wants to reduce his taxes on his education expenses. Which of the following tax-deferred investment accounts could he use?

A. 529 Plan
B. Coverdell Education Savings Account
C. Health Savings Account (HSA)
D. Flexible Spending Account (FSA)

Answer 33

A. 529 Plan

E.40 Tax Reduction/Management Techniques

Question 34

Anna is a small business owner who wants to reduce the taxes on her business income. Which of the following tax reduction strategies could she use?

A. Maximize deductions
B. Delay income
C. Split income
D. All of the above

Answer 34

D. All of the above

E.40 Tax Reduction/Management Techniques

Question 35

You are advising a retired couple who recently had a certificate of deposit (CD) mature. They are primarily interested in maximizing current income from the proceeds of this CD. Additionally, they are not concerned about leaving these funds to their heirs, as they believe their heirs are already well-provided for. Which of the following investment choices would most likely offer the highest after-tax income while also being efficient for estate tax purposes?

A. A single premium deferred annuity (SPDA)
B. A laddered portfolio of municipal bonds
C. An equity income mutual fund
D. A joint and survivor immediate annuity

Answer 35

B. A laddered portfolio of municipal bonds

Municipal bonds generally offer tax-free interest income, which can be beneficial for clients seeking after-tax income. A laddered approach to municipal bonds provides the added advantage of diversifying interest rate risk by having bonds maturing at different times. Although the other options can provide income, they might not have the same level of tax efficiency or may have other implications for the client’s estate. For instance, immediate annuities can offer guaranteed income but may not have the same estate tax advantages as the interest from municipal bonds.

E.40 Tax Reduction/Management Techniques

Question 36

Samuel acquired 400 shares of XYZ Corporation on December 5th of the prior year at $30 each. He then bought an additional 400 shares 6 months later at $35 each. Currently, the shares are valued at $33. Samuel is considering selling 150 shares. To minimize his tax liability, which action should he take?

A. Use the IRS’s default method to decide which shares to sell.
B. Sell the shares acquired 6 months ago.
C. Sell the shares acquired the previous year.
D. Use an average cost basis of $32.50 for tax purposes of the sale.

Answer 36

C. Sell the shares acquired the previous year.

If Samuel sells the shares he bought the previous year, he’d be selling them at a loss since he bought them for $30 and they are currently valued at $33. This loss can help in offsetting other capital gains and reduce the overall tax liability. If he chooses the IRS default method or the average cost basis, the cost basis might be higher, resulting in a smaller capital loss or even a capital gain. Selling the shares acquired 6 months ago will result in a capital loss too, but it would be considered a short-term loss which is generally less advantageous than a long-term capital loss from a tax perspective.

E.40 Tax Reduction/Management Techniques