NASAA Series 66 — All Questions

A customer's long margin account carries a $30,000 debit balance. Using a 25% maintenance requirement, at what market value does a maintenance call arise?

• a.$40,000✓
• b.$37,500
• c.$30,000
• d.$60,000

A call arises when equity falls to 25% of market value: MV - $30,000 = 0.25 x MV, so MV = $30,000 / 0.75 = $40,000. The $37,500 figure adds 25% of the debit to the debit, $60,000 is the value at which the debit equals 50% of the account, and at $30,000 equity would already be zero.FINRA Rule 4210

A dealer sells a customer a stock from its own inventory at $26.00. The dealer's contemporaneous cost, which is the prevailing market price, was $25.00. What is the markup percentage?

• a.1.0%
• b.3.8%
• c.8.0%
• d.4.0%✓

A markup is measured against the prevailing market price, here the dealer's contemporaneous cost: $1.00 / $25.00 = 4.0%. The 3.8% figure divides by the sale price instead, 1.0% reads the dollar markup as a percentage, and 8.0% doubles it.FINRA Rule 2121 and Supplementary Material .02

A broker-dealer's order router sends marketable orders in a stock to Venue X because it pays the firm a rebate, although Venue Y regularly shows better prices for the same orders. What is the firm's position under FINRA Rule 5310?

• a.It breaches best execution, because the customer's price must come before the rebate✓
• b.It complies if its review of execution quality is performed at least once a year
• c.It complies, because rebates paid by registered exchanges are permitted routing inducements
• d.It complies if it discloses the rebates in its quarterly Rule 606 order-routing report

Rule 5310 requires reasonable diligence to obtain the most favorable price for the customer under prevailing conditions, and payment arrangements cannot override that duty. Disclosing routing payments in a Rule 606 report does not cure poor execution, the source of a rebate does not change the duty, and the required regular and rigorous review of execution quality is quarterly, not annual.FINRA Rule 5310

A retail brokerage routes customers' orders to a market maker that pays the firm for that order flow. Which statement is accurate?

• a.Permitted with disclosure, and the firm must still seek best execution on each order✓
• b.Permitted without customer disclosure if the firm publishes quarterly routing reports
• c.Prohibited for retail orders in listed stocks, so firms may only route to exchanges
• d.Permitted, and best execution is met automatically if the market maker is registered

Payment for order flow is legal, but Rule 607 requires disclosure of the firm's policy at account opening and annually, and the best-execution duty applies regardless of what the firm is paid. It is not prohibited, a registered market maker does not satisfy best execution automatically, and the public Rule 606 report does not replace the customer disclosure.17 CFR 242.607 (Regulation NMS)

A hedge fund trades through several executing brokers but wants one firm to clear and settle those trades, finance its margin and securities lending, and hold its assets. Which firm provides that service?

• a.An introducing broker
• b.A custodian bank
• c.A market maker
• d.A prime broker✓

A prime broker bundles clearing, settlement, financing, securities lending and custody for clients that execute through multiple brokers. An introducing broker takes orders but leaves clearing to another firm, a market maker quotes two-sided prices in specific securities, and a custodian bank safekeeps assets without providing financing or lending.

A customer buys a stock in a regular-way transaction on Wednesday, November 25, 2026, the day before Thanksgiving. When does the trade settle under the T+1 standard?

• a.Friday, November 27, 2026✓
• b.Tuesday, December 1, 2026
• c.Monday, November 30, 2026
• d.Thursday, November 26, 2026

Regular-way settlement is one business day after the trade date, and Thanksgiving is not a business day, so the trade settles Friday. Thursday counts the holiday as a business day, Monday would be the old T+2 result with the holiday skipped, and Tuesday is a T+3 result.17 CFR 240.15c6-1(a)

A portfolio starts at $100,000 and grows to $110,000 by the end of the first quarter. The client then adds $40,000, and the portfolio ends the second quarter at $135,000. What is the time-weighted return for the two quarters?

• a.-1.0%✓
• b.0.0%
• c.-10.0%
• d.-3.6%

Quarter 1 returned +10% ($100,000 to $110,000). Quarter 2 started at $150,000 and ended at $135,000, or -10%. Linking them gives 1.10 x 0.90 - 1 = -1.0%. The 0.0% answer averages the two returns, -3.6% is the dollar gain or loss of -$5,000 divided by the $140,000 invested, and -10% captures only the second quarter.

A manager's portfolio gains 10% in the first half of the year and loses 10% in the second half. The client made a large deposit just before the loss. How does the client's dollar-weighted return compare with the time-weighted return?

• a.It is not comparable, because a deposit makes the time-weighted return invalid
• b.It is lower, because more dollars were exposed to the second-half loss✓
• c.It is the same, because both measures use the same underlying returns
• d.It is higher, because the deposit lowered the client's average cost

A dollar-weighted return reflects the size and timing of client cash flows, so a deposit made before a loss weighs the loss more heavily and drags the result below the time-weighted figure. The two measures are the same only when no meaningful cash flows occur, an added deposit does not lower the cost of earlier gains, and the time-weighted return remains valid precisely because it removes the effect of cash flows.

A fund returned +20%, -10% and +15% in three consecutive years. What is its approximate annualized (geometric) return?

• a.8.3%
• b.24.2%
• c.15.0%
• d.7.5%✓

The growth factors multiply: 1.20 x 0.90 x 1.15 = 1.242, and the cube root is about 1.075, so the annualized return is about 7.5%. The 8.3% figure is the arithmetic mean, which overstates compound growth, 24.2% is the cumulative three-year return, and 15.0% is the median year.

A fund doubles in value in year 1 (+100%) and then loses half of its value in year 2 (-50%). What is its annualized (geometric) return over the two years?

• a.12.5%
• b.25%
• c.0%✓
• d.50%

The growth factors are 2.00 x 0.50 = 1.00, so the fund ends where it started and the geometric return is 0%. The 25% figure is the arithmetic average of +100% and -50%, 50% is the combined gain-and-loss netted without compounding, and 12.5% halves the arithmetic average.

A fund earns 3.0% in a quarter. If the same quarterly return repeated for four quarters with compounding, what is the annualized return?

• a.9.3%
• b.12.0%
• c.12.6%✓
• d.3.0%

Compounding four quarters gives 1.03^4 - 1 = 12.55%, or about 12.6%. The 12.0% answer multiplies by four without compounding, 9.3% compounds only three quarters, and 3.0% leaves the quarterly figure unannualized.

A taxable portfolio earns a 7% nominal return taxed at 24%, while inflation runs at 2.5%. What is the approximate after-tax real return?

• a.2.8%✓
• b.4.5%
• c.3.4%
• d.5.3%

Tax applies to the nominal return: 7% x (1 - 0.24) = 5.32%, and subtracting inflation of 2.5% leaves about 2.8%. The 3.4% answer taxes the real return instead, 4.5% subtracts inflation but never taxes, and 5.3% taxes but never adjusts for inflation.

A fund described in its prospectus as small-cap value now holds 40% of its assets in large-cap growth stocks. This change is best described as:

• a.Rebalancing, the normal reset of a fund back to its stated target weights
• b.Active share, a measure of how many holdings a fund shares with an index
• c.Tracking error, a statistic showing how closely a fund follows its benchmark index
• d.Style drift, which can change the client's intended allocation and diversification✓

Style drift is a departure from the investment style a fund has declared, which can leave a client with unintended exposure and overlap with other holdings. Tracking error is a statistic and not a description of the change, rebalancing returns weights to a stated target, and active share measures overlap with an index, not a style change.

A portfolio overweights a sector by 5 percentage points versus its benchmark. The sector outperforms, and the manager's stock picks inside the sector match the sector index return. Performance attribution assigns the excess return mainly to:

• a.The selection effect
• b.The allocation effect✓
• c.The market-timing effect
• d.The currency effect

The excess return came from holding more of a sector that did well, which is an allocation (sector weighting) decision. Selection would require stock picks that beat the sector index, market timing refers to changing exposure to the overall market or cash, and no foreign-currency exposure is involved.

A portfolio's year-end values over five years are $120,000, $150,000, $105,000, $130,000 and $160,000. What is the maximum drawdown?

• a.70%
• b.13.3%
• c.12.5%
• d.30%✓

Maximum drawdown is the largest peak-to-trough decline. The peak of $150,000 fell to $105,000, a 30% drop, which is larger than the other declines in the series. The 12.5% answer measures from the first value, 70% is the remaining value as a percentage of the peak, and 13.3% measures the later drop from $150,000 to $130,000.

An investment firm follows the Global Investment Performance Standards (GIPS) in its equity composites but not in its fixed-income composites. May it claim GIPS compliance for the equity composites?

• a.Yes, if an independent verifier reviews the equity composites first
• b.No, because compliance applies firm-wide and partial compliance cannot be claimed✓
• c.Yes, if the equity composites are disclosed as the only compliant ones
• d.Yes, if the equity composites include every fee-paying discretionary portfolio

GIPS compliance is firm-wide, so a firm cannot claim compliance for some composites and not others. Disclosure, verification and complete composite construction are all elements of compliance, but none of them substitutes for applying the standards across the firm.GIPS Standards (CFA Institute) 2020

A single filer has 2026 taxable income of $60,000, taxed at 10% up to $12,400, 12% up to $50,400 and 22% above that. What is the filer's approximate effective federal income tax rate?

• a.About 11.6%, taxing everything above $12,400 at the 12% rate
• b.About 14.7%, the plain average of the 10%, 12% and 22% bracket rates
• c.About 13.2%, as $7,912 of total tax is spread over all $60,000 of income✓
• d.22.0%, since the top bracket reached applies to the whole $60,000

Tax is 10% of $12,400 ($1,240) plus 12% of $38,000 ($4,560) plus 22% of $9,600 ($2,112), or $7,912, which is 13.2% of $60,000. The 22% figure is the marginal rate, which applies only to the last $9,600. Averaging the three rates ignores how much income sits in each bracket. Taxing all income above $12,400 at 12% ignores the 22% slice.IRC section 1(j); Rev. Proc. 2025-32

An investor bought mutual fund shares eight months ago. This December the fund pays a long-term capital gain distribution of $600, which the investor reinvests. How is the distribution taxed?

• a.As a short-term capital gain, because the investor held the shares for less than a year
• b.Not until the shares are sold, because the $600 was reinvested rather than taken in cash
• c.As ordinary dividend income, because fund distributions are always taxed at ordinary rates
• d.As a long-term capital gain this year, with the $600 added to the investor's cost basis✓

A capital gain distribution is taxed as long-term gain in the year paid, whatever the shareholder's own holding period, and reinvesting it raises basis by $600 so it is not taxed again at sale. The shareholder's holding period matters only when the shares themselves are sold. Reinvestment does not defer tax. Ordinary-income treatment applies to the fund's interest and non-qualified dividends and to short-term gain distributions, not to long-term gain distributions.IRC section 852(b)(3)

An investor paid $5,000 for 100 fund shares, then over the years reinvested $800 of taxable distributions in additional shares. The investor sells everything for $7,500. What is the taxable gain?

• a.$900, since the $800 reduces the gain a second time
• b.$3,300, since reinvested amounts add to the proceeds
• c.$2,500, since reinvested amounts do not add to basis
• d.$1,700, since the cost basis rises to $5,800✓

Reinvested distributions were taxed when paid, so they are added to basis: $5,000 + $800 = $5,800, and $7,500 - $5,800 = $1,700. Leaving them out of basis ($2,500) would tax the same $800 twice. Subtracting the $800 again ($900) double-counts it in the other direction. Adding it to proceeds ($3,300) misplaces it, since reinvested dollars belong in basis.IRC section 1012

An investor in a taxable account buys a newly issued 10-year zero-coupon corporate bond for $4,000 that will mature at $10,000. Which statement describes the federal tax treatment while the bond is held?

• a.Nothing is taxed unless the bond is sold early, and then only as ordinary income
• b.Nothing is taxed until maturity, when the full $6,000 is reported as a long-term capital gain
• c.Each year's accretion is taxed as a long-term capital gain, with no change to the bond's basis
• d.Part of the discount is taxed as interest each year, and the bond's basis rises by that amount✓

Original issue discount on a taxable bond is accreted and taxed as interest annually, although no cash is received, and each year's accretion increases basis so the investor is not taxed again at maturity. Deferring everything to maturity treats OID as capital gain, which it is not. Taxing only on an early sale ignores the annual accrual rule. Capital gain treatment with no basis change would tax the same amount twice.IRC section 1272

An investor pays $1,050 for a tax-exempt municipal bond with a $1,000 par value and holds it to maturity. What is the tax result of the $50 premium?

• a.The $50 is deducted over the bond's life against interest from other bonds held
• b.A $50 capital loss is recognized when the issuer redeems the bond at par value
• c.The $50 is deducted against ordinary income in the year the bond is purchased
• d.The premium is amortized against basis, with no deduction or loss at maturity✓

On a tax-exempt bond the premium must be amortized, which reduces basis each year but produces no deduction, so basis equals par at maturity and redemption creates no loss. Because the premium is absorbed through basis, no capital loss remains to claim. Deducting it up front or over time is not allowed for tax-exempt interest, since a deduction would shelter taxable income with the cost of earning exempt income.IRC section 171(a)(2) and (b)

A client's regular federal income tax is $40,000 and the tentative minimum tax figured under the AMT rules is $46,000. How much of the client's liability is alternative minimum tax?

• a.$40,000, the regular tax already computed for the year
• b.$6,000, the excess of tentative minimum tax over regular tax✓
• c.$46,000, the whole tentative minimum tax figure
• d.$86,000, regular tax plus tentative minimum tax

AMT is only the amount by which tentative minimum tax exceeds regular tax, so total liability is $46,000 of which $6,000 is AMT. Calling the whole $46,000 AMT confuses total liability with the add-on. The $40,000 is the regular tax. Adding the two figures ($86,000) pays both taxes in full, which the AMT does not require.IRC section 55(a)

For purposes of the 3.8% net investment income tax, which of the following is NOT included in net investment income?

• a.Qualified dividends paid on domestic common stock held in a taxable account
• b.Net long-term gain from selling publicly traded shares at a profit
• c.Interest paid on a state's tax-exempt general obligation bonds✓
• d.Rent from a residential property the owner does not materially manage

Tax-exempt municipal interest is excluded from net investment income, along with wages, self-employment income and distributions from qualified plans and IRAs. Qualified dividends are included even though they get capital-gain rates. Gains from selling stock are included. Rents from a passive rental are included unless they come from an active trade or business.IRC section 1411(c)

A single retiree who receives Social Security and a modest pension adds $10,000 of municipal bond interest to the portfolio. How does the interest affect taxation of the Social Security benefits?

• a.Exactly 85% of the benefits become taxable at once, since any municipal interest triggers the top tier
• b.Taxation of benefits is unchanged, since tax-exempt interest is left out of the formula entirely
• c.Benefits become less taxable, since municipal interest is subtracted from provisional income
• d.It is tax-exempt itself but counts in provisional income, so a larger share of the benefits may become taxable✓

Provisional income is adjusted gross income plus tax-exempt interest plus half of the benefits, so municipal interest can push income over the $25,000 and $34,000 single-filer thresholds and raise the taxable share of benefits. It is not left out of the formula and it does not reduce provisional income. The taxable portion rises in tiers up to 85%, not automatically to 85%.IRC section 86(b)(2)

In 2026 a single filer has $46,000 of taxable income before counting a $6,000 long-term gain on stock held two years. The 0% rate applies to net capital gain up to taxable income of $49,450 for single filers. How much federal tax is owed on the gain?

• a.$900.00, with the whole $6,000 gain taxed at 15%
• b.$517.50, with 15% applied to the $3,450 in the 0% zone
• c.$382.50, with $3,450 taxed at 0% and $2,550 at 15%✓
• d.$0, since gains on shares held over a year are exempt

Taxable income of $46,000 leaves $3,450 of room below $49,450, so that part of the gain is taxed at 0% and the remaining $2,550 at 15%, which is $382.50. Taxing the whole gain at 15% ignores the 0% zone. A zero result ignores the part of the gain that crosses the threshold. The $517.50 figure applies the 15% rate to the wrong slice.IRC section 1(h); Rev. Proc. 2025-32

A married couple filing jointly receives $30,000 of Social Security benefits and has $30,000 of other adjusted gross income, with no tax-exempt interest. What portion of the benefits is taxable?

• a.$850
• b.$6,000
• c.$6,850✓
• d.$25,500

Provisional income is $30,000 + half of $30,000 = $45,000, which is $1,000 above the $44,000 adjusted base amount for joint filers. Taxable benefits are 85% of that $1,000 ($850) plus the smaller of half the benefits or half the gap between the $44,000 and $32,000 base amounts ($6,000), which is $6,850. $850 omits the first-tier amount. $6,000 omits the second-tier amount. $25,500 is the 85% maximum of all benefits, which the formula caps but does not reach here.IRC section 86(a) and (c)

A domestic C corporation owns 30% of another domestic corporation's stock and receives a $100,000 dividend from it. What is its dividends-received deduction?

• a.$80,000
• b.$50,000
• c.$100,000
• d.$65,000✓

A corporation owning at least 20% (but less than 80%) of the payer deducts 65% of the dividend, here $65,000. The 50% rate applies below 20% ownership. The 80% rate was the pre-2018 deduction for 20%-owned corporations. A 100% deduction needs an affiliated-group relationship of 80% or more.IRC section 243(a) and (c)

Which of the following is NOT an eligible shareholder of an S corporation?

• a.A grantor trust whose deemed owner is a U.S. resident individual
• b.The estate of a deceased shareholder, during administration
• c.A general partnership formed by two of the current shareholders✓
• d.A U.S. resident alien individual who holds shares directly

An S corporation may be owned only by individuals, estates, certain trusts and certain exempt organizations, so a partnership, like any corporation, is ineligible. An estate is expressly allowed. A U.S. resident alien individual is allowed, since only nonresident aliens are barred. A grantor trust owned by an eligible individual is allowed.IRC section 1361(b)(1)

A partner's Schedule K-1 shows a $50,000 share of partnership income, but the partnership distributed only $10,000 in cash to that partner during the year. How much income does the partner report?

• a.$40,000, since only the income the partnership retained is taxed
• b.$0, since income is taxed only on a sale or liquidation of the interest
• c.$10,000, since only cash actually received during the year is taxed
• d.$50,000, since partnership income flows through to the partner✓

A partnership pays no income tax; each partner reports a distributive share of its income as it is earned, and the share increases the partner's basis while distributions reduce it. Taxing only the cash received, only the retained portion, or nothing until liquidation ignores flow-through taxation.IRC sections 701 and 702

A complex trust keeps $20,000 of taxable income undistributed in 2026. Which statement compares its tax treatment with an individual's?

• a.The trust pays a flat 21% rate, the same as a C corporation
• b.The trust uses the single-filer brackets, so 37% starts above $640,600
• c.Retained income is taxed to the beneficiaries even though nothing was paid out
• d.The trust reaches the 37% bracket at just $16,000 of taxable income✓

Trust and estate brackets are compressed: for 2026 the 37% rate starts above $16,000, versus $640,600 for a single individual. Trusts are not taxed at the 21% corporate rate. Trusts do not use the individual schedule. Income retained by a complex trust is taxed to the trust; beneficiaries are taxed on amounts distributed or required to be distributed.IRC section 1(e); Rev. Proc. 2025-32

A client creates a revocable living trust and keeps the right to revoke it. The trust earns $12,000 of interest this year. Who reports the income?

• a.The trust, at compressed trust rates, since it is a separate legal entity
• b.The beneficiaries, at their own rates, even if nothing is distributed
• c.No one this year, since income is deferred until the trust ends
• d.The client, on a personal return, since the trust is a grantor trust✓

A trust the grantor can revoke is a grantor trust, so its income is taxed to the grantor as if the trust did not exist. Separate trust-rate taxation applies to non-grantor trusts that retain income. Beneficiaries are taxed only on distributions, and not at all from a trust whose terms let the grantor take everything back. Interest is taxable when earned, not deferred.IRC sections 671 and 676

In 2026 an unmarried donor gives a friend $25,000 in cash and also pays the friend's $30,000 tuition directly to the university. Assuming no other gifts to the friend, what is the amount of taxable gifts for the year?

• a.$36,000, since both gifts together exceed the annual exclusion by that amount
• b.$25,000, since the exclusion applies only to gifts of property
• c.$11,000, since only the tuition payment exceeds the annual exclusion
• d.$6,000, the cash gift less the $19,000 annual exclusion✓

Tuition paid directly to the school is not a gift at all, so only the $25,000 cash gift counts, and $25,000 - $19,000 = $6,000 is a taxable gift that is reported on Form 709 and absorbed by the lifetime exemption. Adding the tuition ($36,000) ignores the direct-payment exclusion. Netting the exclusion against the tuition ($11,000) applies it to a payment that was never a gift. Denying the exclusion on cash gifts ($25,000) misstates the rule.IRC sections 2503(b) and 2503(e)

A married couple wants to treat a $30,000 cash gift from one spouse to their daughter as made half by each spouse. What must they do to split the gift?

• a.Nothing, because spouses can split a gift of any size automatically without filing
• b.They must hold the funds as community property, since splitting is limited to those states
• c.The giving spouse files Form 709 alone, with no consent needed from the other spouse
• d.Both spouses consent and report it on Form 709, even though no gift tax is due✓

Gift splitting lets spouses use two annual exclusions ($38,000 for 2026), but only if both spouses consent, and the consent is shown on a timely gift tax return, so Form 709 is filed even if nothing is owed. It is not automatic. The donor spouse cannot apply the other spouse's exclusion without that spouse's consent. Splitting is available to married couples in every state, not just community-property states.IRC section 2513

A husband dies in 2026 leaving everything to his wife. His estate is well under the filing threshold, but the wife wants to preserve his unused exclusion for her own estate. What is required?

• a.The wife must claim the unused amount on her own income tax return for the year her husband died
• b.The executor must file a timely Form 706 and elect portability of the deceased spouse's unused exclusion✓
• c.The estate must fund a credit shelter trust with the unused amount, since portability is unavailable otherwise
• d.Nothing, since the unused exclusion passes automatically to the surviving spouse

Portability is elective: the executor must file an estate tax return (Form 706) on time, even if no tax is due, to transfer the deceased spousal unused exclusion amount. It is not automatic. It is claimed on the estate tax return, not on a 1040. A credit shelter trust is an alternative planning method, not a requirement for portability.IRC section 2010(c)(5)(A)

A donor gave stock to a niece when the donor's basis was $50,000 and the fair market value was $40,000. The niece later sells the stock for $45,000. What is the result for the niece?

• a.A $10,000 loss, mixing the $40,000 and $50,000 figures
• b.Neither a gain nor a loss is recognized on the sale of the shares✓
• c.A $5,000 loss, measured against the $50,000 donor basis
• d.A $5,000 gain, using the $40,000 value at the time of the gift

When basis at the time of the gift exceeds fair market value, the donee uses the donor's basis ($50,000) to figure a gain and the lower fair market value ($40,000) to figure a loss. A $45,000 sale falls between the two, so there is no gain or loss. A $5,000 gain uses the value as a gain basis, and a $5,000 loss uses the donor basis as a loss basis; each applies the wrong number to the wrong direction. A $10,000 loss combines the two measures incorrectly.IRC section 1015(a)

A grandparent contributes $95,000 to a 529 plan for one grandchild in 2026 and elects five-year averaging on Form 709. There are no other gifts to the grandchild. What is the amount of taxable gifts?

• a.$57,000, the amount over a married couple's combined exclusion
• b.$76,000, the amount over a single year's annual exclusion
• c.$0, since the gift is spread over five annual exclusions✓
• d.$95,000, since 529 contributions never qualify for the exclusion

A five-year election treats the contribution as five equal gifts of $19,000, which equals $95,000 and uses an exclusion each year, so nothing is taxable. The $76,000 figure ignores the election. The $57,000 figure applies gift splitting, which needs a spouse who is not a party to this gift. Contributions to a 529 plan are completed gifts that do qualify for the annual exclusion.IRC section 529(c)(2)(B)

An insured transfers an existing $500,000 life insurance policy to an irrevocable life insurance trust and dies two years later. How are the proceeds treated for federal estate tax?

• a.Excluded, because the trust beneficiaries pay the premiums after the transfer
• b.Excluded, because the trust was irrevocable and the insured held no ownership rights at death
• c.Included only to the extent of the policy's cash value on the date of transfer
• d.Included in the gross estate at full value, because the transfer was within three years of death✓

Under the three-year rule, life insurance transferred within three years of death is pulled back into the gross estate at its full death benefit. Irrevocability alone does not avoid this rule, which is why an ILIT usually buys a new policy instead. The cash value measures a gift, not the estate inclusion. Who pays premiums afterward does not change inclusion.IRC section 2035(a)

A client with stock worth $800,000 and a basis of $100,000 transfers it to a charitable remainder trust that then sells it. Which statement is correct?

• a.The trust sells tax-free; the client gets income plus a partial deduction✓
• b.The client receives a charitable deduction for the full $800,000 market value
• c.The client gets no deduction at all, since the right to income is retained
• d.The client is taxed on the $700,000 gain when the stock is transferred

A CRT is tax-exempt, so it can sell appreciated stock without paying tax at the sale, and the client keeps an income stream with a deduction equal to the present value of the charity's remainder. The transfer is not a taxable sale. A full deduction is impossible because the client keeps an income interest. Retaining income does not eliminate the deduction for the remainder.IRC sections 664 and 170(f)(2)

A U.S. citizen dies with a $5 million estate and leaves all of it outright to a spouse who is not a U.S. citizen. What is needed for the estate to claim the unlimited marital deduction?

• a.A prenuptial agreement waiving the spouse's rights to the property
• b.The property must pass into a qualified domestic trust (QDOT)✓
• c.Nothing more, since the marital deduction is unlimited for any spouse
• d.The estate must elect portability on a timely Form 706

The marital deduction is denied for property passing outright to a surviving spouse who is not a U.S. citizen unless the property passes to a QDOT, which defers estate tax until principal is distributed or the spouse dies. The deduction is not unlimited for every spouse. A waiver would not satisfy the statute. Portability is a separate election concerning the unused exclusion, not a way to claim the deduction.IRC section 2056(d)

A 40-year-old single client has 2026 modified AGI of $160,500. Assume the Roth IRA contribution limit is $7,500 and the phase-out range for single filers is $153,000 to $168,000. What is the maximum Roth IRA contribution?

• a.$5,625
• b.$3,750✓
• c.$7,500
• d.$1,875

The $160,500 income is halfway through the $15,000 range ($7,500 / $15,000 = 50%), so the limit is cut by half, from $7,500 to $3,750. The full $7,500 applies only below $153,000. The $5,625 figure assumes a 25% reduction. Zero applies only at or above $168,000.IRC section 408A(c)(3)

A single client covered by a workplace retirement plan has 2026 modified AGI of $95,000, above the $91,000 top of the deduction phase-out. The client contributes to a traditional IRA. What is the result?

• a.The contribution is an excess contribution, because income exceeds the limit for IRAs
• b.The contribution is partly deductible, because income is within the phase-out range
• c.The contribution is permitted but nondeductible, and the basis is tracked on Form 8606✓
• d.The contribution is fully deductible, because income limits apply only to Roth IRAs

Income limits affect only whether a traditional IRA contribution is deductible when the owner is covered by a plan; anyone with earned income may contribute. Above $91,000 for a covered single filer the deduction is gone, and the after-tax basis is tracked on Form 8606. The excess-contribution answer applies Roth rules to a traditional IRA. The deduction is not partial because the income is beyond the range. It is not fully deductible, because covered taxpayers face a phase-out.IRC section 219(g)

A married couple filing jointly, both age 40, has $90,000 of compensation, all earned by one spouse. Ignoring income limits for Roth contributions, what is the most they can put into IRAs for 2026 if the individual limit is $7,500?

• a.$8,600, which includes a catch-up contribution amount
• b.$7,500, since only the earning spouse may contribute
• c.$90,000, limited only by their combined compensation
• d.$15,000, as long as joint compensation covers both✓

A spousal IRA lets a nonworking spouse contribute based on the working spouse's compensation, so the couple can contribute up to $7,500 each, or $15,000, provided joint compensation covers it. Restricting contributions to the earner ignores the spousal rule. The catch-up of $1,100 applies only at age 50 or older. Compensation is a ceiling, not the limit.IRC section 219(c)

A client holds a $93,000 pre-tax traditional IRA. This year the client makes a $7,000 nondeductible contribution to another traditional IRA and converts that $7,000 to a Roth IRA. All balances are as of year-end. How much of the conversion is taxable?

• a.$0
• b.$6,510✓
• c.$7,000
• d.$6,473

The pro-rata rule treats all traditional IRAs as one: after-tax basis is $7,000 of a $100,000 total (the $93,000 left plus the $7,000 converted), so 7% of the conversion is tax-free and 93% x $7,000 = $6,510 is taxable. Zero assumes the converted dollars can be selected as the after-tax ones. $6,473 comes from leaving the converted $7,000 out of the denominator. $7,000 ignores the basis altogether.IRC section 408(d)(2)

A 45-year-old converted $20,000 from a traditional IRA to a Roth IRA two years ago. The Roth IRA has never held regular contributions or other conversions, and the client now withdraws the $20,000. What is the tax result?

• a.Income tax on $20,000 with no additional tax, since conversions are available any time
• b.No income tax and no additional tax, because Roth contributions come out first
• c.Income tax on $20,000 plus a $2,000 additional tax, since the full amount is taxable
• d.No income tax, but the 10% additional tax of $2,000 applies within five years✓

The converted amount was taxed at conversion, so it is not taxed again, but a distribution within five years of conversion before age 59½ draws the 10% additional tax on the part that was taxable at conversion ($2,000). Taxing the $20,000 again would tax it twice. Because the account holds nothing but the conversion, the withdrawal comes from it; if regular contributions were also in the account, the ordering rules would take those out first, tax-free and penalty-free, and conversions carry their own five-year clocks.IRC section 408A(d)(3)(F)

A 76-year-old client was required to take a $20,000 RMD for the year but took nothing, and then takes the full amount and files the correction within the correction window. What is the excise tax?

• a.$10,000
• b.$5,000
• c.$20,000
• d.$2,000✓

The excise tax on a missed RMD is 25% of the shortfall, reduced to 10% if the account owner takes the missed amount and files a return within the correction window. Ten percent of $20,000 is $2,000. $5,000 is the uncorrected 25% rate. $10,000 reflects the pre-2023 50% rate. $20,000 is the full shortfall and not the tax.IRC section 4974(a) and (e)

An adult child of the owner, who is not disabled or chronically ill, inherits a Roth IRA from a parent who died in 2025 after the account had been open more than five years. Which statement describes the child's distribution requirements?

• a.Annual withdrawals over the beneficiary's life expectancy must begin the year after death
• b.Empty the account by the end of year ten after death, with no required annual withdrawals✓
• c.Empty it within five years, because the owner died after the required beginning date
• d.The beneficiary may roll the account into their own Roth IRA to delay withdrawals

An adult child who is not an eligible designated beneficiary falls under the ten-year rule, and a Roth IRA owner is treated as having died before the required beginning date, so no annual distributions are required within the ten years; qualified withdrawals are also tax-free. Life-expectancy payments are for eligible designated beneficiaries such as a surviving spouse, a minor child, or a disabled or chronically ill person. The five-year rule applies only when there is no designated beneficiary, and a Roth owner is never treated as having died after the required beginning date. Only a surviving spouse may treat the IRA as their own.IRC section 401(a)(9)(B)(ii) and (H)

A 52-year-old widow inherits her late husband's traditional IRA and plans to take distributions for living expenses. Which choice avoids the 10% additional tax on those withdrawals?

• a.Either choice, because a surviving spouse is exempt from the additional tax in both
• b.Retitle the account to her children, since the exception passes to them as owners
• c.Roll it into her own IRA, since a spousal rollover waives the additional tax for withdrawals
• d.Keep the account as an inherited IRA, since distributions made because of the owner's death are exempt✓

Distributions from an inherited IRA are exempt from the 10% additional tax on early distributions whatever the beneficiary's age, so the widow can withdraw freely (subject to income tax). Treating the account as her own makes withdrawals before 59½ subject to the additional tax. Surviving-spouse status alone does not exempt distributions. Retitling to children is not a method of accessing her own needs.IRC section 72(t)(2)(A)(ii)

A 71-year-old client who is not yet required to take RMDs wants to send $5,000 directly from a traditional IRA to a public charity. Which statement is accurate?

• a.It qualifies, because QCD eligibility begins at age 70½, regardless of the RMD age✓
• b.It qualifies only if the payment is directed to the client's own donor-advised fund
• c.It does not qualify until the client reaches the age at which RMDs must begin
• d.It qualifies, but the $5,000 is taxable income offset only by an itemized deduction

A QCD is available from age 70½ regardless of the RMD age, and a direct transfer to a public charity is excluded from gross income. It does not wait for RMDs to begin. The exclusion means the amount is not income at all, so no deduction is needed. Gifts to donor-advised funds do not qualify as QCDs.IRC section 408(d)(8)

A 56-year-old client leaves a job and holds the former employer's 401(k) and an old rollover IRA. Which source can fund withdrawals before age 59½ without the 10% additional tax?

• a.Neither account, because the exception does not begin until the client turns 59½
• b.The old IRA, since the age 55 exception applies to every retirement account
• c.The former employer's 401(k), since separation after age 55 qualifies✓
• d.Either account, because both qualify once the client has passed the age of 55

The exception applies to distributions from an employer plan after separation from service in or after the year the employee turns 55, and it does not extend to IRAs, so rolling the money into an IRA first would lose it. It does not apply to every account, nor does it cover both sources. The exception begins at 55, not 59½.IRC section 72(t)(2)(A)(v)

Which of the following is NOT subject to the limit of one rollover per 12-month period?

• a.A 60-day rollover distribution from one traditional IRA to another
• b.A 60-day rollover distribution from a SEP-IRA to a traditional IRA
• c.A 60-day rollover distribution from a Roth IRA to another Roth IRA
• d.A trustee-to-trustee transfer between two traditional IRAs✓

The one-per-year limit applies to 60-day rollovers made by the owner from any IRA, aggregated across all the owner's IRAs, including SEP, SIMPLE and Roth IRAs. A direct transfer between trustees is not a rollover distribution and can be repeated as often as needed. The three rollover choices all count toward the limit.IRC section 408(d)(3)(B); IRS Announcement 2014-32