ChFC Income Tax Planning Practice Questions

Correct answer: C. $0 — the special $25,000 active-participation allowance is fully phased out at this income level, so the loss is suspended and carried forward

The $25,000 special allowance for active participation in rental real estate phases out $1 for every $2 of modified AGI between $100,000 and $150,000, and is completely eliminated at $150,000 of MAGI. At exactly $150,000, none of the $25,000 allowance survives, so the $20,000 passive loss cannot be deducted currently against nonpassive income; it is suspended and carried forward to offset future passive income or gain on disposition.

• A. Incorrect — active participation only unlocks a limited $25,000 special allowance that phases out between $100,000 and $150,000 of MAGI; deductibility is not unlimited and there is no $200,000 threshold.
• B. Incorrect; the allowance is reduced by $1 for every $2 of MAGI above $100,000, so at $150,000 it is fully eliminated rather than cut in half.
• C. Correct — at $150,000 MAGI, the phaseout is complete, leaving $0 of currently deductible allowance and a suspended carryforward loss.
• D. Incorrect; the $25,000 maximum applies only at or below $100,000 of MAGI, and it is fully phased out by $150,000.

Correct answer: C. No gain or loss is recognized, because the sale price falls between the loss basis (gift-date FMV) and the gain basis (donor's carryover basis)

When FMV at the time of a gift is less than the donor's basis, a dual basis applies: the donor's basis is used to determine gain, and the gift-date FMV is used to determine loss. Since the $25,000 sale price falls between the $22,000 loss basis and the $30,000 gain basis, no gain or loss is recognized.

• A. A $5,000 loss using the donor's $30,000 basis for both gain and loss is wrong because the lower gift-date FMV of $22,000 is the loss basis, and a $25,000 sale falls between the two bases, so no loss is recognized.
• B. Using the $22,000 gift-date FMV for both gain and loss is wrong; FMV serves only as the loss basis, and the donor's higher basis governs gains, so the $25,000 sale produces no gain.
• C. Under the dual-basis rule for gifted property that has declined in value, a sale price between the loss basis (gift-date FMV, $22,000) and the gain basis (donor's basis, $30,000) — like $25,000 — results in no recognized gain or loss.
• D. Gifted property does not take a zero basis to the recipient; it generally carries over the donor's basis, subject to the dual-basis rule when FMV is lower at the time of the gift.

• Source: IRC section 1015 (basis of property acquired by gift)

Correct answer: A. The loss is disallowed because the repurchase occurred within 30 days of the sale, inside the 61-day wash sale window

The wash sale rule disallows a loss deduction if a taxpayer sells a security at a loss and buys the same or a substantially identical security within a 61-day window spanning 30 days before the sale, the day of sale, and 30 days after the sale. Crossing a calendar year-end does not restart or reset this window — the disallowance applies regardless of which tax year the repurchase falls in. The rule applies to stocks, mutual funds, and other securities alike, not just individual stocks.

• A. Correct. The wash sale rule covers a 61-day window (30 days before the sale through 30 days after); repurchasing a substantially identical fund on January 5, only 21 days after a December 15 sale, falls squarely inside it and disallows the loss.
• B. The wash sale window runs 30 days before and after the sale regardless of the calendar or tax year — crossing from December into January doesn't exempt the repurchase.
• C. There's no minimum pre-sale holding period that exempts a loss from the wash sale rule — the rule turns on the timing of the repurchase, not how long the original shares were held.
• D. The wash sale rule applies to substantially identical securities generally, including mutual funds and ETFs tracking the same index, not just individual stocks.

• Source: IRC section 1091 (wash sales)

Correct answer: C. Qualifying Surviving Spouse

A surviving spouse with a dependent child who has not remarried may use Qualifying Surviving Spouse status (using MFJ tax rates) for the two years following the year of death, provided she maintains a household for the child. In the year of death itself, MFJ is typically used; afterward, QSS status is available for the following two years.

• A. Single filing status doesn't reflect the more favorable rates available to a surviving parent maintaining a household for a dependent child in the two years after a spouse's death.
• B. Head of Household is a different, less favorable status than what's available here; the special status providing MFJ-equivalent tax rates for the two years following the year of death is Qualifying Surviving Spouse, not simply HoH.
• C. Correct. For the two tax years following the year of a spouse's death, a taxpayer who remains unmarried and maintains a household for a dependent child may file as Qualifying Surviving Spouse, using rates equivalent to Married Filing Jointly.
• D. Married Filing Jointly is only available for the year of death itself (if not remarried); it isn't available indefinitely in later years — the applicable status thereafter is Qualifying Surviving Spouse for two years, then Head of Household or Single.