CFP Tax Planning Practice Questions
Question 1
A parent has a 529 account with money left after one child finishes college. A younger sibling has qualified higher-education expenses coming due. Which strategy is generally available, assuming the sibling is an eligible family member and plan/state rules are satisfied?
- A. Withdraw the balance to pay the sibling's expenses, which makes the whole amount taxable plus a 10% additional tax because the beneficiary is unchanged.
- B. Treat the unused balance as forfeited to the state unless the account owner cashes out within 60 days.
- C. Change the 529 beneficiary to the younger sibling without triggering federal income tax solely from the eligible beneficiary change.
- D. Roll the whole balance into the original beneficiary's Roth IRA, with no lifetime cap or account-age requirement.
Show answer and explanation
Correct answer: C. Change the 529 beneficiary to the younger sibling without triggering federal income tax solely from the eligible beneficiary change.
Changing a 529 beneficiary to an eligible family member generally is not a federal taxable distribution. Check plan and state rules rather than withdrawing funds unnecessarily.
- A. Fails: a withdrawal for someone other than the beneficiary is nonqualified, and only the earnings, not the whole amount, would be taxed.
- B. Fails: unused 529 money stays with the account owner, who controls it; it is not forfeited to the state.
- C. Correct: an eligible beneficiary change to a family member is generally not a federal taxable event.
- D. Fails: 529-to-Roth rollovers exist but carry a lifetime cap, an account-age requirement and annual limits.
Question 2
For purposes of the 'kiddie tax,' a child's net unearned income above the applicable threshold is generally taxed at:
- A. The child's own marginal tax rate
- B. A flat 10% rate regardless of the parent's income
- C. The parent's marginal tax rate, generally applying to dependent children under age 19 (or under 24 for certain full-time students)
- D. The parent's marginal rate, but only if the child is under age 14
Show answer and explanation
Correct answer: C. The parent's marginal tax rate, generally applying to dependent children under age 19 (or under 24 for certain full-time students)
Under current kiddie tax rules, a child's net unearned income above the statutory threshold is taxed at the parent's marginal rate, not the child's own typically lower rate. The kiddie tax generally applies to dependent children under age 19, or under age 24 for certain full-time students. A temporary rule under the 2017 Tax Cuts and Jobs Act briefly taxed this income at trust/estate rates, but that provision was retroactively repealed by the SECURE Act (2019) — current law uses the parent's marginal rate.
- A. Incorrect: the point of the kiddie tax is to prevent using the child's typically lower marginal rate.
- B. Incorrect: there is no flat 10% kiddie tax rate.
- C. Correct: current law taxes the excess unearned income at the parent's marginal rate, generally for dependents under 19 (or under 24 for certain full-time students). The trust/estate-rate approach was a temporary TCJA rule retroactively repealed by the SECURE Act in 2019.
- D. Incorrect: the age-14 cutoff is outdated; current law extends to older dependents (generally under 19, or under 24 for certain full-time students).
Question 3
A 16-year-old dependent has only unearned income (interest and dividends) this year, above the amount exempt under the kiddie tax rules. How is the excess unearned income generally taxed under current law?
- A. At the child's own marginal tax rate, regardless of amount
- B. The unearned income is simply added to the parents' return and taxed at the parents' marginal rate with no separate child computation required
- C. The entire amount is taxed at the highest trust and estate income tax bracket, with no tax-free tranche
- D. A base amount is tax-free, a next tranche is taxed at the child's rate, and the remainder is taxed at the parents' marginal rate
Show answer and explanation
Correct answer: D. A base amount is tax-free, a next tranche is taxed at the child's rate, and the remainder is taxed at the parents' marginal rate
The kiddie tax (IRC §1(g)) applies to a child's net unearned income above an annually indexed threshold. A first tranche is offset by a standard deduction amount and is tax-free, a second tranche is taxed at the child's own rate, and unearned income above that is taxed at the parents' marginal rate. This reverted to the parents'-rate approach after a temporary 2018-2019 rule that used trust/estate rates was retroactively repealed.
- A. Incorrect - only income within the tax-free and child-rate tranches gets that favorable treatment; the excess uses a different rate.
- B. Incorrect - a separate kiddie tax computation (Form 8615) is generally required, not a simple merge into the parents' return.
- C. Incorrect - describes the temporary 2018 TCJA trust/estate-rate rule, which was retroactively repealed.
- D. Correct - reflects the current multi-tranche kiddie tax structure.
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A taxpayer's spouse died two years ago. The taxpayer has not remarried, maintains a household that is the principal residence of their dependent child, and pays over half the cost of maintaining that household. Which filing status should the taxpayer use to obtain the most favorable rate schedule, assuming all requirements are met?
- A. Head of Household
- B. Married Filing Jointly
- C. Single
- D. Qualifying Surviving Spouse
Show answer and explanation
Correct answer: D. Qualifying Surviving Spouse
Qualifying Surviving Spouse (QSS) status is available for the two tax years following the year of a spouse's death, provided the surviving spouse remains unmarried, maintains a household that is the principal residence of a dependent child, and pays over half the cost of that household. QSS uses the more favorable MFJ rate schedule and standard deduction, which beats Head of Household. Single is wrong because the taxpayer has a qualifying dependent and meets the QSS tests, and MFJ is unavailable because the taxpayer was not married as of year-end.
- A. Head of Household is available but less favorable than Qualifying Surviving Spouse, which uses the more favorable MFJ-equivalent rate schedule for a surviving spouse with a dependent child within the eligible window.
- B. Married Filing Jointly isn't available here — the taxpayer's spouse died in a prior year and they haven't remarried, so MFJ eligibility (available in the year of death) has expired.
- C. Single status is technically available but produces a less favorable rate schedule than Qualifying Surviving Spouse.
- D. Correct. A surviving spouse who hasn't remarried, maintains a home for a dependent child, and pays over half the household costs can use Qualifying Surviving Spouse status (generally for up to two years after the spouse's death), getting MFJ-equivalent rates.