CPA Exam — Tax Compliance and Planning (TCP) — All Questions

In 2025, Dana exercises an incentive stock option (ISO) to buy 1,000 shares at the $20 option price when the shares are worth $50 each. She still holds the shares at year-end. How does the exercise affect her 2025 return?

• a.No regular taxable income and no AMT effect until she sells
• b.$30,000 of wage income for both regular tax and AMT
• c.No regular tax income; a $30,000 AMT adjustment✓
• d.$30,000 of capital gain for regular tax, with no AMT effect

Under IRC §421(a), exercising an ISO produces no regular-tax income. IRC §56(b)(3) switches §421 off for AMT, so the $30 × 1,000 = $30,000 spread becomes a positive AMT adjustment in the year of exercise. Wage treatment belongs to a nonstatutory option or a disqualifying disposition. Exercise is not a sale, so no capital gain arises. Saying there is no AMT effect until sale ignores §56(b)(3), which reaches the spread when the shares are held past year-end.

Raj received an ISO in January 2024 with a $10 exercise price. He exercised it in March 2025 when the stock was worth $25, and sold the 1,000 shares in November 2025 for $32 per share. What does he report for 2025?

• a.$22,000 ordinary compensation income and no capital gain
• b.$15,000 ordinary income and $7,000 short-term capital gain✓
• c.$22,000 long-term capital gain and no ordinary income
• d.$15,000 short-term capital gain and $7,000 ordinary income

The sale came less than one year after exercise, so it fails the IRC §422(a)(1) holding periods and is a disqualifying disposition. The spread at exercise, ($25 − $10) × 1,000 = $15,000, is ordinary compensation. Total gain is $22,000, and IRC §422(c)(2) caps the ordinary amount at that gain, so the cap does not bind here. The remaining $7,000 is short-term capital gain because the shares were held under a year. Treating it all as long-term gain assumes a qualifying disposition. Treating it all as compensation ignores basis stepped up to $25. The option that reverses the $15,000 and $7,000 mislabels both pieces.

Mei exercised a nonstatutory stock option (no readily ascertainable value at grant) for 500 shares at $30 when the stock traded at $70, and reported the spread as wages. Eighteen months later she sells the shares for $90 each. What is the result of the sale?

• a.$10,000 long-term capital gain✓
• b.$30,000 long-term capital gain
• c.$20,000 ordinary income and $10,000 capital gain
• d.$10,000 of ordinary compensation income

Treas. Reg. §1.83-7(a) taxes a nonstatutory option without a readily ascertainable fair market value when it is exercised. The $20,000 spread was compensation at that point, so her basis is the $35,000 fair market value, not the $15,000 price she paid. The sale for $45,000 gives $10,000 of gain, long-term because her holding period began at exercise. Using only the $30 price as basis counts the spread twice. Nothing about the later sale makes it compensation. The $20,000 ordinary amount was already reported in the exercise year.

On receiving 2,000 restricted shares worth $5 each (paid nothing; they vest in three years), Lee files a timely §83(b) election. The shares are worth $40 each when they vest. How much ordinary income does Lee report?

• a.Nothing at grant and $80,000 at vesting
• b.$10,000 at grant and $70,000 at vesting
• c.Nothing at grant and $70,000 at vesting
• d.$10,000 at grant and nothing at vesting✓

An election under IRC §83(b), filed within 30 days of the transfer, taxes the property's value at transfer, 2,000 × $5 = $10,000, as compensation at that time. IRC §83(a) then no longer applies when the restrictions lapse. Later appreciation is capital gain when the shares are sold, not income at vesting. Taxing $80,000 at vesting is the no-election result. Adding $70,000 at vesting ignores that the election turns §83(a) off. Taxing nothing at grant and $70,000 at vesting mixes the two treatments.

An employee holds restricted stock units that will be settled in company shares when they vest. At grant he wants to file a §83(b) election to lock in today's low value. What should his adviser tell him?

• a.The election is available only if he pays fair market value
• b.No election is possible until shares are actually transferred✓
• c.He must file the election within 30 days of the grant date
• d.The election makes later growth ordinary income

Section 83 applies only to a transfer of property. Treas. Reg. §1.83-3(e) excludes an unfunded, unsecured promise to pay money or property in the future, and that is what an RSU is before settlement. With no transfer yet, there is nothing to elect on, and the shares are taxed when they are delivered. The 30-day deadline applies only when property has actually been transferred. Paying fair value has nothing to do with eligibility. A valid election would convert later appreciation to capital gain, not ordinary income.

Which of the following items is added back as a tax preference in computing an individual's alternative minimum taxable income?

• a.Interest on a general obligation municipal bond
• b.Qualified dividends from a domestic corporation
• c.Acquisition interest on a principal residence mortgage
• d.Interest on a specified private activity bond✓

IRC §57(a)(5) lists interest on specified private activity bonds as an AMT preference. Other tax-exempt municipal interest, such as on general obligation bonds, is not added back. Qualified dividends are already in AMTI and keep their preferential rates under §55(b)(3). Qualified housing interest on acquisition debt stays deductible for AMT under §56(b)(1)(C) and §56(e).

Mara itemizes for 2025 and deducts $9,000 of state income tax, $12,000 of acquisition interest on her principal residence mortgage, and $6,000 of cash gifts to a public charity. How much of these deductions must be added back in computing AMTI?

• a.$0
• b.$15,000
• c.$21,000
• d.$9,000✓

IRC §56(b)(1)(A)(ii) disallows the deduction for state and local taxes in computing AMTI, so the $9,000 is added back. Qualified housing interest stays deductible under §56(b)(1)(C) and §56(e). Charitable contributions are not adjusted. Adding back the charity as well gives $15,000. Adding back the interest gives $21,000. $0 overlooks the tax adjustment.

Olga lends her son $80,000 interest-free to buy a home. The loan has no tax-avoidance purpose, is their only loan, and the son's net investment income for the year is $800. How much interest is imputed to Olga under §7872?

• a.None; his net investment income is $1,000 or less✓
• b.$800, the amount of the son's net investment income
• c.None, because the loan is under $100,000 whatever his income
• d.The full forgone interest at the applicable federal rate

For a gift loan between individuals of $100,000 or less, IRC §7872(d)(1) caps the interest treated as retransferred to the lender at the borrower's net investment income. If that income is $1,000 or less, §7872(d)(1)(E)(ii) treats it as zero. The $800 figure applies the cap but misses the $1,000 floor. Full forgone interest ignores the $100,000 rule. Saying no interest arises for any loan under $100,000 overstates the rule, which is only a cap tied to the borrower's investment income.

Carla, a U.S. citizen, took an assignment in Germany. During a 12-consecutive-month period she was physically present in foreign countries for 340 full days and spent the other days on business in the United States. Which statement is correct?

• a.She can qualify only as a bona fide resident of Germany
• b.She fails for spending over 14 days in the United States
• c.She meets the physical presence test for that 12-month period✓
• d.She fails because she was not abroad for a full calendar year

IRC §911(d)(1)(B) treats a U.S. citizen or resident as a qualified individual if, during any 12 consecutive months, the person is present in a foreign country or countries for at least 330 full days. 340 days meets the test, and the period need not be a calendar year. The calendar-year requirement belongs to the separate bona fide residence test in §911(d)(1)(A), which is an alternative, not a requirement. No 14-day limit on U.S. presence exists; any days beyond the 330 may be spent anywhere.

For 2025, assume that a child's net unearned income is unearned income minus $2,700. Theo, age 12, has $9,000 of interest and dividends and no earned income, and both his parents are living. How much of Theo's income is taxed at his parents' rate?

• a.$6,300✓
• b.$9,000
• c.$7,650
• d.$4,950

Under IRC §1(g), a child under 18 with living parents pays tax at the parents' marginal rate on net unearned income. With the $2,700 amount given, that is $9,000 − $2,700 = $6,300. Taxing all $9,000 ignores the statutory offset. $7,650 subtracts only half of the offset. $4,950 subtracts it one and a half times.

Each of the following children has investment income above the threshold, and each has a living parent. Which child is subject to the kiddie tax?

• a.A 17-year-old who files a joint return with his spouse
• b.A 20-year-old student whose earned income exceeds half his support
• c.A 21-year-old student whose earned income is under half her support✓
• d.A 19-year-old who is not a student and has no earned income

IRC §1(g)(2) reaches a child under 18. It also reaches a child who is 18, or a student under 24, as the §152(c)(3) age test allows, if the child's earned income does not exceed half of their support. A 21-year-old student below that line qualifies. A 19-year-old who is not a student fails the age test. §1(g)(2)(C) excludes any child who files a joint return. A student whose earned income exceeds half of his support fails the support test.

Nora, age 50, takes a $4,000 distribution from her health savings account and uses it for a vacation. Her marginal federal income tax rate is 24%. What is the federal tax cost of the distribution?

• a.$960
• b.$1,360
• c.$1,760✓
• d.$800

A distribution not used for qualified medical expenses is included in gross income under IRC §223(f)(2), costing 24% × $4,000 = $960. IRC §223(f)(4)(A) adds 20% of the includible amount, $800, unless the holder is disabled, has died or is 65 or older. The total is $1,760. $960 and $800 each count only one of the two. $1,360 uses a 10% additional tax, the rate that applied before the law raised it to 20%.

Which of the following individuals is eligible to contribute to a health savings account for the month?

• a.An individual covered by a high-deductible health plan who is enrolled in Medicare Part A
• b.An individual covered only by a high-deductible health plan and not enrolled in Medicare✓
• c.A high-deductible plan enrollee who can be claimed as a dependent on a parent's return
• d.An individual covered by a high-deductible plan and also by a low-deductible employer plan

IRC §223(c)(1) defines an eligible individual as one covered by a high-deductible health plan who has no other health plan that is not a high-deductible plan, apart from permitted coverage. A second, low-deductible plan fails that test. Under §223(b)(7), a person entitled to Medicare benefits has a contribution limit of zero. Under §223(b)(6), no deduction is allowed to someone who may be claimed as another's dependent.

Tomas elects to have $3,000 of salary contributed to a health flexible spending account under his employer's cafeteria plan and spends it all on qualified medical costs. His marginal federal income tax rate is 24%, and his wages are below the Social Security wage base (FICA 7.65%). What are his federal tax savings?

• a.$229.50
• b.$949.50✓
• c.$1,179.00
• d.$720.00

Salary reduction under a §125 cafeteria plan is excluded from income, so federal income tax falls by 24% × $3,000 = $720. IRC §3121(a)(5)(G) also excludes cafeteria plan amounts from FICA wages, saving another 7.65% × $3,000 = $229.50. The total is $949.50. $720.00 and $229.50 each count only one tax. $1,179.00 counts FICA at the combined 15.3% employer-plus-employee rate, but only the employee's 7.65% is his saving.

For 2025, assume a married-filing-jointly standard deduction of $31,500. The Parks pay $12,000 of deductible state and local taxes and $10,000 of mortgage interest, and give $8,000 to charity each year. If they instead give two years' gifts ($16,000) in December 2025, by how much does their 2025 deduction exceed the standard deduction?

• a.$14,500
• b.$0
• c.$8,000
• d.$6,500✓

Giving the usual $8,000, their itemized deductions total $30,000, below the $31,500 standard deduction, so they would take the standard deduction. Bunching both years' gifts raises 2025 itemized deductions to $12,000 + $10,000 + $16,000 = $38,000, which is $6,500 more than the standard deduction (IRC §63(b), (d)). $8,000 is only the extra gift. $14,500 subtracts only $1,500 from the $16,000 of gifts. $0 assumes they still take the standard deduction.

In 2025, Iris, who itemizes and has AGI of $200,000, gives a public charity stock she has held for three years. It cost $5,000 and is worth $20,000. What is the tax result for Iris?

• a.A $20,000 deduction, with no gain recognized✓
• b.A $5,000 deduction limited to her basis in the stock
• c.A $15,000 deduction for the appreciation only
• d.A $20,000 deduction and a $15,000 recognized capital gain

A gift of long-term capital gain property to a public charity is deducted at fair market value, because the §170(e)(1) reduction does not apply. The deduction is limited to 30% of AGI under §170(b)(1)(C), and $20,000 is well within $60,000. Giving property is not a sale, so the built-in gain is never recognized. The basis limit applies to short-term or ordinary income property, or to gifts to certain private foundations. No rule deducts only the appreciation.

Victor wants to give $18,000 of value to his church this year. He owns stock bought for $30,000 that is now worth $18,000. Which plan minimizes his current-year tax?

• a.Sell the stock, then donate the $18,000 of cash proceeds✓
• b.Donate the stock, deducting $18,000 plus a $12,000 capital loss
• c.Donate the stock now and deduct the loss when the church sells it
• d.Donate the stock and deduct its $30,000 basis

A gift of property is deducted at fair market value, and IRC §170(e) never raises the deduction to basis. A gift is not a sale or exchange, so the $12,000 built-in loss is never recognized if he donates the stock. Selling first creates a $12,000 capital loss under §165 and §1211, and donating the cash then gives an $18,000 deduction. Neither a basis deduction nor a deferred loss after the church sells exists.

Wes, whose AGI is $100,000, gives a public charity long-term capital gain stock worth $40,000 in 2025. He makes no other gifts. How is the gift deducted?

• a.$40,000 in 2025 under the 50% limit for public charities
• b.$30,000 in 2025; $10,000 carried forward five years✓
• c.$20,000 in 2025, with $20,000 carried forward up to five years
• d.$30,000 in 2025, and the $10,000 excess is permanently lost

IRC §170(b)(1)(C)(i) limits gifts of appreciated long-term capital gain property to public charities to 30% of the contribution base, here $30,000. Under §170(b)(1)(C)(ii), the $10,000 excess carries forward to each of the five succeeding years. The 50% limit applies to other gifts to public charities, not to appreciated capital gain property deducted at fair market value. The excess is carried forward, not lost. $20,000 applies a 20% limit, which is the one for private foundations.

In 2025, Felix, who actively participates in his rental real estate, has a $30,000 rental loss and no other passive income. His modified AGI is $130,000. How much of the loss is deductible this year?

• a.$15,000 deductible and $15,000 suspended
• b.$25,000 deductible and $5,000 suspended
• c.$10,000 deductible and $20,000 suspended✓
• d.Nothing deductible and $30,000 suspended

IRC §469(i) allows up to $25,000 of rental real estate losses with active participation. The allowance is reduced by 50% of modified AGI above $100,000: 50% × $30,000 = $15,000. That leaves $10,000 deductible and $20,000 suspended. $25,000 ignores the phase-out. $15,000 is the reduction, not the allowance. Nothing would be allowed only once modified AGI reaches $150,000.

Kim works 80 hours a year in a partnership that produced a $10,000 loss, and has $6,000 of net income from another partnership in which she also works about 80 hours. Neither activity is rental. She also has wages. How much of the loss may she deduct this year?

• a.$0
• b.$10,000
• c.$4,000
• d.$6,000✓

Kim does not meet any material participation test, such as more than 500 hours under Temp. Reg. §1.469-5T(a)(1), in either activity, so both are passive. IRC §469(d)(1) defines the passive activity loss as passive deductions in excess of passive income. The $10,000 loss therefore offsets the $6,000 of passive income, and the other $4,000 is suspended under §469(b). Passive losses cannot offset wages, so $10,000 is too much. $4,000 is the suspended amount, not the deduction. $0 ignores netting within the passive basket.

Owen sells his entire interest in a passive activity to an unrelated buyer in a fully taxable sale, recognizing a $5,000 gain. He has $18,000 of suspended losses from the activity and no other passive activities. What is the net effect on his taxable income?

• a.A net decrease of $18,000
• b.A net increase of $5,000
• c.A net decrease of $13,000✓
• d.No effect until he acquires another passive activity

On a fully taxable disposition of an entire interest to an unrelated party, IRC §469(g)(1)(A) frees the suspended losses. The $18,000 of losses, less the $5,000 gain, is treated as not from a passive activity and can offset other income, a net decrease of $13,000. A decrease of $18,000 leaves out the gain, which is still reported. An increase of $5,000 ignores the freed losses. The release does not wait for another passive activity.

Sam invests $20,000 of cash in an equipment-leasing activity, which he does not manage. He is personally liable on $30,000 of the activity's debt, and the activity also has $50,000 of nonrecourse debt secured by the equipment. His share of the loss is $65,000. How much of the loss clears the at-risk limit?

• a.$65,000
• b.$50,000✓
• c.$100,000
• d.$20,000

Under IRC §465(b), a taxpayer is at risk for cash contributed and for borrowed amounts he is personally liable to repay, here $20,000 + $30,000 = $50,000. Nonrecourse debt adds to the amount at risk only if it is qualified nonrecourse financing for holding real property under §465(b)(6), and equipment debt is not. The other $15,000 is suspended under §465. Counting only the cash gives $20,000. Counting all debt gives $100,000. $65,000 is the loss before any limit.

Lena's share of an S corporation's ordinary loss is $40,000. Her stock basis is $30,000, her amount at risk is $25,000, and she does not materially participate. She has no passive income. How does her loss sort out?

• a.$40,000 passive-suspended, with basis and at-risk limits not reached
• b.$10,000 basis-limited, $5,000 at-risk-limited, $25,000 passive-suspended✓
• c.$15,000 at-risk-limited and $25,000 passive-suspended
• d.$10,000 basis-limited and $30,000 passive-suspended

The limits apply in order. First, IRC §1366(d)(1) limits the loss to stock basis, $30,000, suspending $10,000. Second, §465 limits the remaining $30,000 to the $25,000 at risk, suspending $5,000. Last, the $25,000 left is a passive loss under §469, and with no passive income it is fully suspended (Temp. Reg. §1.469-2T(d)(6)). The other splits skip one limit or apply them out of order.

For 2025, assume an annual gift tax exclusion of $19,000. Ruth, who is unmarried, gives her son $50,000 cash, gives her niece $10,000, and pays a university $30,000 directly for her grandson's tuition. What are her 2025 taxable gifts?

• a.$42,000
• b.$50,000
• c.$71,000
• d.$31,000✓

Only the gift to her son exceeds the annual exclusion: $50,000 − $19,000 = $31,000. The $10,000 to her niece is fully excluded under IRC §2503(b). Tuition paid directly to an educational organization is not a gift at all under §2503(e) and uses none of the exclusion. $42,000 treats the tuition as a gift reduced by an exclusion. $71,000 applies no exclusions except the one to the son. $50,000 is only the son's gift before the exclusion.

For 2025, assume an annual exclusion of $19,000. Aaron gives his daughter $60,000, and he and his wife, both U.S. citizens, elect to split gifts. What are their combined taxable gifts?

• a.$0
• b.$11,000
• c.$41,000
• d.$22,000✓

Under IRC §2513, a split gift is treated as made one-half by each spouse. Each is treated as giving $30,000 and uses a $19,000 exclusion, leaving $11,000 of taxable gifts each, $22,000 combined. $41,000 is the result without splitting. $11,000 is only one spouse's share. $0 would require the exclusion to cover $30,000 for each spouse.

Beth transfers $200,000 to an irrevocable trust that must accumulate all income for 15 years and then distribute everything to her 30-year-old nephew. What is the amount of her taxable gift?

• a.$100,000, half of the value transferred
• b.$181,000, after one annual exclusion
• c.$0, because the property is in trust
• d.$200,000✓

The nephew cannot use or enjoy the property until a future date, so the gift is of a future interest. IRC §2503(b) allows the annual exclusion only for gifts of present interests. The minor's-trust exception in §2503(c) does not help because the nephew is well over 21. The whole $200,000 is a taxable gift. Putting property in an irrevocable trust completes the gift, and no rule halves it.

Assume a basic exclusion amount of $15,000,000 for 2026. Irene has never made a taxable gift. In 2026 she makes taxable gifts of $2,000,000, after exclusions. What is the result?

• a.No gift tax is due; her estate's remaining exclusion falls by $2,000,000✓
• b.Gift tax is due on the amount by which the gifts exceed the annual exclusion
• c.No gift tax is due, and the exclusion available to her estate is unchanged
• d.Gift tax is due at 40% on the full $2,000,000 of taxable gifts made

The unified credit under IRC §2505 offsets gift tax on cumulative taxable gifts up to the basic exclusion amount, so no tax is paid. Lifetime taxable gifts are added back as adjusted taxable gifts in computing estate tax (§2001(b)), which reduces the exclusion left at death. Tax at 40% would apply only above the exclusion. The system is unified, so the estate exclusion does fall. Annual exclusions were already subtracted in arriving at taxable gifts.

Dev receives stock as a gift. The donor's basis was $10,000, and the stock was worth $7,000 on the date of the gift. No gift tax was paid. Dev later sells it for $8,000. What does Dev recognize?

• a.No gain or loss✓
• b.A $1,000 capital loss
• c.A $2,000 capital loss
• d.A $1,000 capital gain

Under IRC §1015(a), when a donor's basis exceeds value at the gift date, the donee uses the donor's $10,000 basis for gain and the $7,000 value for loss. Measured against $10,000, the $8,000 sale is not a gain. Measured against $7,000, it is not a loss. So no gain or loss is recognized. A $2,000 loss uses the gain basis for a loss. A $1,000 gain uses the loss basis for a gain. No basis produces a $1,000 loss.

Walter, 91 and in poor health, owns stock with a basis of $40,000 that is now worth $900,000. He plans to leave it to his daughter. What is the best income tax advice for his daughter's sake?

• a.Keep it, so her basis steps up to value at his death✓
• b.Give the stock to her now, which avoids tax on its appreciation
• c.Give her the stock now so she takes his $40,000 basis
• d.Sell the stock now and give her the cash proceeds

Property acquired from a decedent takes a basis equal to its fair market value at the date of death under IRC §1014(a). That step-up permanently eliminates income tax on the $860,000 of appreciation. A lifetime gift carries over the donor's basis under §1015. Selling now triggers the tax. A gift does not avoid tax on the appreciation; it passes the built-in gain to the donee.

Jordan, age 45, has made $30,000 of regular contributions to a Roth IRA he opened in 2018, and the account has $12,000 of earnings. He withdraws $25,000 for a non-qualifying purpose. How is the withdrawal taxed?

• a.All $25,000 is taxable and subject to the 10% additional tax
• b.A pro-rata share of about $7,143 is taxable and subject to 10%
• c.None of it is taxable or subject to the 10% additional tax✓
• d.All $25,000 is taxable but exempt from the 10% additional tax

Under IRC §408A(d)(4)(B), distributions from a Roth IRA come first from regular contributions. The $25,000 does not exceed his $30,000 of contributions, so it is a tax-free return of basis. Because nothing is includible in income, the §72(t) 10% additional tax has nothing to apply to. The pro-rata option applies traditional IRA rules. Treating all $25,000 as taxable, with or without the 10% additional tax, taxes contributions as if they were earnings.

Helen, age 62, made her first Roth IRA contribution in 2023. In 2025 she withdraws the whole account, including earnings. How are the earnings treated?

• a.Tax-free, because she is over age 59½
• b.Tax-free, as Roth IRA earnings are not taxed
• c.Taxable and subject to the 10% additional tax
• d.Taxable, but not subject to the 10% additional tax✓

A qualified distribution requires both a triggering event, such as reaching age 59½, and the five-taxable-year period under IRC §408A(d)(2)(B). Her period began in 2023 and does not end until after 2027, so the distribution is not qualified and the earnings are includible. Because she is over 59½, the §72(t)(2)(A)(i) exception removes the 10% additional tax. Being over 59½ alone is not enough for tax-free treatment.

Marco retired from his employer in the year he turned 56. Which of the following distributions avoids the 10% additional tax on early distributions?

• a.A distribution from his traditional IRA at age 57 to buy a car
• b.A 401(k) distribution after he left the employer✓
• c.A distribution from an IRA after he rolls his 401(k) balance into it
• d.A hardship distribution from the 401(k) at age 50 while employed

IRC §72(t)(2)(A)(v) exempts distributions to an employee after separation from service after reaching age 55. Under §72(t)(3)(A), that exception does not apply to IRAs, so rolling the balance into an IRA first gives it up. Buying a car is not an excepted purpose. A hardship distribution at 50 has no age-55 separation.

Nadia, age 45, withdraws $12,000 from her traditional IRA, all deductible contributions and earnings, to pay her daughter's qualified college tuition. How is the withdrawal treated?

• a.Only $10,000 of it is exempt from the 10% additional tax
• b.Tax-free and exempt from the 10% additional tax
• c.Taxable, but exempt from the 10% additional tax✓
• d.Taxable and subject to the 10% additional tax

A traditional IRA distribution of deductible contributions and earnings is included in gross income under IRC §408(d)(1) and §72. IRC §72(t)(2)(E) waives the 10% additional tax for IRA distributions up to qualified higher education expenses, so the full $12,000 is excepted. It is still income. The $10,000 cap belongs to the separate first-time homebuyer exception.

Ian paid $60,000 for an annuity that will pay him $500 a month for life. His expected return is $100,000. He receives $6,000 this year. How much is taxable?

• a.$6,000
• b.$2,400✓
• c.$3,600
• d.$0

Under IRC §72(b), the exclusion ratio is investment in the contract divided by expected return: $60,000 ÷ $100,000 = 60%. That excludes $3,600 of the $6,000, leaving $2,400 taxable. $6,000 ignores his investment. $3,600 is the excluded portion. $0 treats every payment as a return of capital.

Owen invests $50,000 in stock, receives $1,000 of qualified dividends, and sells the stock one year and a day later for $56,000. Assume a 15% rate on both the dividends and the gain. What is his after-tax return on investment?

• a.10.2%
• b.14.0%
• c.12.2%
• d.11.9%✓

Pretax income is the $6,000 gain plus $1,000 of dividends, or $7,000. Both are taxed at 15% (IRC §1(h)(1), (h)(11)), so after-tax income is $7,000 × 0.85 = $5,950, and $5,950 ÷ $50,000 = 11.9%. 14.0% is the pretax return. 10.2% leaves out the dividends. 12.2% taxes the gain but not the dividends.

For 2025, assume an annual gift exclusion of $19,000. Grandma Ruiz contributes $95,000 to a §529 plan for her grandson and wants to avoid using any of her lifetime exclusion. What should she do?

• a.Deduct the $95,000 on her income tax return
• b.Exclude it as tuition paid directly to a school
• c.Elect five-year ratable treatment, $19,000 a year✓
• d.Report a $76,000 taxable gift for 2025

IRC §529(c)(2)(B) lets a donor elect to take a §529 contribution above the annual exclusion into account ratably over five years, $19,000 a year, so no taxable gift results if she makes no other gifts to him. Without the election, $76,000 would be a taxable gift. The §2503(e) tuition exclusion requires payment directly to the educational institution, not to a §529 plan. §529 contributions are not deductible for federal income tax.

A married couple bought land for $200,000, holding it as joint tenants with right of survivorship. The husband dies when the land is worth $600,000. What is the widow's basis in the land?

• a.$200,000
• b.$600,000
• c.$300,000
• d.$400,000✓

For a spousal qualified joint interest, IRC §2040(b) includes one-half of the value, $300,000, in the decedent's estate. That half takes a stepped-up basis under §1014(a) and (b)(9). The widow's own half keeps its $100,000 cost basis, for a total of $400,000. $200,000 ignores the step-up. $600,000 steps up the whole property. $300,000 counts only the inherited half.