1
Q
What is the key difference between marginal and effective tax rates?
A
Marginal tax rate applies to the last dollar earned; effective tax rate is total tax divided by total income.
2
Q
What is the wash sale rule?
A
A loss is disallowed if a substantially identical security is purchased within 30 days before or after the sale.
3
Q
How are long-term capital gains taxed compared to ordinary income?
A
They are taxed at preferential rates (0%, 15%, or 20%) instead of ordinary income rates.
4
Q
What is the maximum capital loss deduction against ordinary income per year?
A
$3,000, with the remainder carried forward.
5
Q
What is the primary benefit of a Roth IRA?
A
Tax-free qualified distributions in retirement.
6
Q
What is required minimum distribution (RMD)?
A
The minimum amount that must be withdrawn annually from retirement accounts starting at a certain age.
7
Q
At what age do RMDs generally begin under current law?
A
Age 73 (for most current retirees).
8
Q
What is the taxation of Social Security benefits based on?
A
Provisional income (AGI + tax-exempt interest + 50% of Social Security benefits).
9
Q
What percentage of Social Security benefits can be taxable?
A
Up to 85%.
10
Q
What is the step-up in basis rule?
A
Assets inherited receive a basis equal to fair market value at the date of death.
11
Q
What is a key advantage of a revocable living trust?
A
Avoids probate but does not reduce estate taxes.
12
Q
What is the annual gift tax exclusion?
A
The amount an individual can gift per person per year without using lifetime exemption.
13
Q
What is the unlimited marital deduction?
A
Allows unlimited transfers between spouses without gift or estate tax.
14
Q
What is the purpose of life insurance in estate planning?
A
Provide liquidity to pay estate taxes and expenses.
15
Q
What is replacement cost vs. actual cash value in insurance?
A
Replacement cost pays to replace the item; ACV deducts depreciation.
16
Q
What is coinsurance in property insurance?
A
Requires the insured to carry a minimum percentage of coverage or face reduced claim payments.
17
Q
What is the main purpose of disability insurance?
A
To replace income if the insured cannot work due to illness or injury.
18
Q
What is the difference between own-occupation and any-occupation disability definitions?
A
Own-occupation pays if unable to perform current job; any-occupation requires inability to perform any job.
19
Q
What is dollar-cost averaging?
A
Investing a fixed amount regularly regardless of market conditions.
20
Q
What is asset allocation?
A
The process of dividing investments among asset classes to manage risk and return.
21
Q
What is diversification?
A
Spreading investments to reduce risk.
22
Q
What is beta in investing?
A
A measure of a stock’s volatility relative to the market.
23
Q
What is duration in bond investing?
A
A measure of a bond’s sensitivity to interest rate changes.
24
Q
What happens to bond prices when interest rates rise?
A
Bond prices fall.
25
What is the difference between systematic and unsystematic risk?
Systematic risk affects the entire market; unsystematic risk is company-specific.
26
What is a passive activity loss?
A loss from rental or business activities in which the taxpayer does not materially participate.
27
When can passive losses be deducted?
Against passive income or upon disposition of the activity.
28
What is the $25,000 rental real estate exception?
Allows active participants to deduct up to $25,000 of rental losses subject to income phaseouts.
29
What is the kiddie tax?
Taxes a child’s unearned income at the parents’ tax rate above a threshold.
30
What is a like-kind exchange?
A tax-deferred exchange of similar investment or business property.
31
What is boot in a like-kind exchange?
Cash or non-like property received that is taxable.
32
What is self-employment tax?
Social Security and Medicare tax on earned income from self-employment.
33
What is the FICA tax composed of?
Social Security tax and Medicare tax.
34
What is the purpose of a 1035 exchange?
Allows tax-free exchange of life insurance or annuity contracts.
35
What is a MEC (Modified Endowment Contract)?
A life insurance policy that fails the 7-pay test and loses tax advantages on distributions.
36
How are distributions from a MEC taxed?
LIFO basis (earnings first) and may incur penalties.
37
What is the primary benefit of an HSA?
Triple tax advantage: deductible contributions, tax-free growth, tax-free medical withdrawals.
38
What is a flexible spending account (FSA)?
Employer-sponsored account for medical expenses with use-it-or-lose-it rules.
39
What is COBRA?
Allows continuation of employer health coverage after qualifying events at the employee’s expense.
40
What is the primary purpose of an emergency fund?
Provide liquidity for unexpected expenses and reduce reliance on debt.
41
What is a Section 125 cafeteria plan?
An employer-sponsored plan allowing employees to choose between taxable cash and pre-tax benefits
42
How are employee contributions to a Section 125 plan made?
Through salary reduction (pre-tax payroll deductions)
43
Are Section 125 contributions subject to federal income tax?
No
44
Are Section 125 contributions subject to FICA taxes?
No
45
Are Section 125 contributions subject to FUTA taxes?
No
46
What is the main tax advantage of a Section 125 plan?
Reduces taxable income for income tax, FICA, and FUTA
47
What types of benefits can be included in a Section 125 plan?
Health insurance, FSAs, dependent care assistance, and sometimes HSAs
48
What is a key rule about Section 125 elections?
They must be made before the plan year begins
49
Can Section 125 elections be changed during the year?
Only with a qualifying life event
50
What is a qualifying life event for Section 125 changes?
Marriage, divorce, birth, death, or change in employment
51
What happens to unused funds in a health FSA?
Generally forfeited under the use-it-or-lose-it rule
52
Do Section 125 plans benefit employers?
Yes, they reduce employer payroll tax liability
53
Why are Section 125 plans called cafeteria plans?
Employees can choose from a menu of benefit options
54
Are employer contributions to Section 125 plans taxable to employees?
Generally no if used for qualified benefits
55
What is the impact of Section 125 contributions on take-home pay?
Reduces taxes, increasing net take-home pay
56
What is the passive activity loss rule?
Passive losses can only offset passive income unless an exception applies
57
What is the $25,000 rental real estate exception?
Allows active participants to deduct up to $25,000 of rental losses, phased out above $100K AGI
58
At what AGI does the $25,000 rental loss exception fully phase out?
150000
59
What is material participation?
Regular, continuous, and substantial involvement in an activity
60
What happens to suspended passive losses?
They are carried forward or released upon sale of the activity
61
How are capital gains and losses netted?
Net short-term against short-term and long-term against long-term, then net the results
62
What type of capital gains are taxed at ordinary income rates?
Short-term capital gains
63
What is the maximum capital loss deduction per year?
$3,000 against ordinary income
64
What is the wash sale rule timeframe?
30 days before or after the sale
65
What happens to disallowed wash sale losses?
They are added to the basis of the new security
66
What is investment interest expense limited to?
Net investment income
67
What is NOT included in net investment income?
Qualified dividends and long-term capital gains (unless elected)
68
What is the kiddie tax threshold concept?
Unearned income above a threshold is taxed at parents' rate
69
What is self-employment tax rate?
15.3% (12.4% Social Security + 2.9% Medicare)
70
What portion of self-employment tax is deductible?
50% as an above-the-line deduction
71
What is the difference between a tax credit and deduction?
Credit reduces tax dollar-for-dollar; deduction reduces taxable income
72
What is a refundable tax credit?
Can reduce tax liability below zero and result in a refund
73
What is the step-up in basis at death?
Basis is adjusted to fair market value at date of death
74
What is probate?
Court process of distributing a deceased person’s estate
75
What assets avoid probate?
Joint accounts, TOD/POD accounts, life insurance, retirement accounts
76
What is the unlimited marital deduction?
Unlimited tax-free transfers between spouses
77
What is a revocable trust?
Can be changed and avoids probate but does not reduce estate taxes
78
What is coinsurance formula in property insurance?
(Insurance carried / Insurance required) × Loss
79
What happens if coinsurance requirement is NOT met?
Claim payment is reduced proportionally
80
What is replacement cost coverage?
Pays cost to replace property without depreciation
81
What is actual cash value (ACV)?
Replacement cost minus depreciation
82
What is own-occupation disability insurance?
Pays if unable to perform current job
83
What is any-occupation disability insurance?
Pays only if unable to perform any job
84
What is the inverse relationship in bonds?
When interest rates rise, bond prices fall
85
What is duration?
Measure of a bond’s sensitivity to interest rate changes
86
What is diversification?
Reducing risk by spreading investments
87
What is systematic risk?
Market risk that cannot be diversified away
88
What is unsystematic risk?
Company-specific risk that can be diversified away
89
What is a like-kind exchange?
Tax-deferred exchange of similar investment property
90
What is boot in a 1031 exchange?
Cash or non-like property received and taxed
91
What is a 1035 exchange?
Tax-free exchange of life insurance or annuity contracts
92
What is a MEC?
Life insurance policy that loses tax advantages due to overfunding
93
How are MEC distributions taxed?
LIFO (earnings first) and possible penalty
94
What is COBRA?
Continuation of employer health coverage after qualifying event
95
What is an HSA triple tax advantage?
Tax-deductible contributions, tax-free growth, tax-free withdrawals
96
What is the FSA use-it-or-lose-it rule?
Unused funds are forfeited (with limited exceptions)
97
What is fiduciary duty?
Acting in the best interest of the client
98
When should a CFP professional terminate a client relationship?
When the client is engaging in illegal or unethical behavior
99
What is the key rule for passive activity losses?
They can only offset passive income unless an exception applies
100
What is the rental real estate loss exception?
Up to $25,000 deductible if actively participating, phased out $100K–$150K AGI
101
What is the maximum capital loss deduction per year?
$3,000 against ordinary income
102
What is the wash sale rule?
Loss disallowed if repurchase within 30 days before or after sale
103
What is investment interest expense limited to?
Net investment income
104
How is unearned income taxed under kiddie tax rules?
At the parents’ marginal tax rate above the threshold
105
What is the coinsurance formula?
(Insurance carried ÷ Insurance required) × Loss
106
What happens if coinsurance requirement is not met?
The claim payout is reduced proportionally
107
What is the formula for actual cash value (ACV)?
Replacement cost minus depreciation
108
What is replacement cost coverage?
Pays full cost to replace property without depreciation
109
What is own-occupation disability insurance?
Pays if unable to perform current occupation
110
What is any-occupation disability insurance?
Pays only if unable to perform any job
111
What happens to bond prices when interest rates rise?
Bond prices fall
112
What does duration measure?
Sensitivity of a bond’s price to interest rate changes
113
What risk cannot be diversified away?
Systematic (market) risk
114
What does diversification reduce?
Unsystematic (company-specific) risk
115
What is a like-kind exchange?
Tax-deferred exchange of similar investment property
116
What is boot in a like-kind exchange?
Cash or non-like property received that is taxable
117
What is a 1035 exchange?
Tax-free exchange of life insurance or annuity contracts
118
What is a MEC?
A life insurance policy that loses tax advantages due to overfunding
119
How are MEC distributions taxed?
LIFO (earnings first) and possible penalty
120
What is COBRA?
Continuation of employer health coverage after qualifying event
121
What is the triple tax advantage of an HSA?
Deductible contributions, tax-free growth, tax-free withdrawals
122
What is the FSA rule for unused funds?
Use-it-or-lose-it (with limited exceptions)
123
What is fiduciary duty?
Acting in the best interest of the client
124
What should a CFP professional do if a client is acting illegally?
Terminate the relationship
125
What is the difference between a tax credit and deduction?
Credit reduces tax dollar-for-dollar; deduction reduces taxable income
126
What is the step-up in basis rule?
Assets receive FMV basis at date of death
127
What is probate?
Court process of distributing estate assets
128
What assets typically avoid probate?
Joint accounts, TOD/POD accounts, life insurance, retirement accounts
129
What is the main difference between Traditional and Roth accounts?
Traditional = tax later; Roth = tax now, tax-free withdrawals
130
What is an RMD?
Required minimum distribution from retirement accounts
131
Do passive losses offset active or portfolio income?
No, only passive income (unless an exception applies)
132
Can rental real estate losses always be deducted?
No, only up to $25,000 and subject to AGI phaseout
133
Are qualified dividends included in net investment income for investment interest deduction?
No (unless taxpayer elects to include them)
134
Are long-term capital gains taxed at ordinary income rates?
No, they receive preferential tax rates
135
Is a tax deduction more valuable than a tax credit?
No, a credit is more valuable (dollar-for-dollar reduction)
136
Do all assets receive a step-up in basis at death?
No, only assets included in the taxable estate
137
Do retirement accounts get a step-up in basis?
No, they are income in respect of a decedent (IRD)
138
Does Medicare cover long-term nursing home care?
No, only limited short-term care
139
Does Medicaid require low income to qualify?
Yes
140
Is replacement cost the same as market value?
No, it is the cost to rebuild/replace
141
If coinsurance requirement is not met, is the full loss covered?
No, payout is reduced
142
Does disability insurance always cover inability to perform current job?
No, only own-occupation policies do
143
Are employer retirement plan contributions subject to FICA?
No
144
Are 401(k) employee contributions subject to FICA?
Yes
145
Does diversification eliminate all investment risk?
No, only unsystematic risk
146
Do bond prices rise when interest rates rise?
No, they fall
147
Can a wash sale loss be permanently deducted?
No, it is deferred by adjusting basis
148
Is boot in a like-kind exchange tax-free?
No, it is taxable
149
Are all life insurance distributions tax-free?
No, MECs are taxed LIFO and may have penalties
150
Can a CFP continue working with a client engaging in illegal activity?
No, must terminate relationship
151
Is COBRA coverage free?
No, employee pays up to 102% of cost
152
Can FSA funds be carried over indefinitely?
No, use-it-or-lose-it rule applies
153
Are HSA withdrawals always tax-free?
No, only if used for qualified medical expenses
154
Is a revocable trust effective for reducing estate taxes?
No, it only avoids probate
155
Are joint accounts subject to probate?
No, they pass by survivorship
156
Is FUTA paid by employees?
No, employers only
157
Are all Social Security benefits tax-free?
No, up to 85% may be taxable
158
Can investment interest expense offset all types of income?
No, only investment income
159
Is a short-term capital gain taxed at preferential rates?
No, it is taxed as ordinary income
160
Do you pay FICA taxes on IRA distributions?
No
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