Individual taxation — CPA TCP practice questions

A practical strategy to reduce future RMD obligations is to:

1. Convert traditional IRA balances to Roth IRA before age 73
2. Delay all Roth IRA contributions until well after retirement age
3. Convert Roth IRA balances into traditional IRA balances after age 73
4. Take Roth IRA distributions annually starting at age 59½

Answer: A — Convert traditional IRA balances to Roth IRA before age 73

A) Correct — Roth conversions reduce future traditional-IRA RMDs. B) Delaying Roth contributions does not affect RMDs. C) Roth-to-traditional conversion is not permitted. D) Roth IRAs have no lifetime RMD in the first place.

Under SECURE 2.0, the required minimum distribution beginning age is:

1. 73 in 2024, and scheduled to rise to 75 in 2033 for later births
2. 70½ for all IRA and 401(k) account holders regardless of birth date
3. 72 for all IRA holders regardless of the year of their date of birth
4. 65 for taxpayers already fully retired from all wage employment

Answer: A — 73 in 2024, and scheduled to rise to 75 in 2033 for later births

B) 70½ was the pre-SECURE age. A) Correct — 73 today, 75 in 2033. C) 72 was the SECURE Act 1.0 age. D) 65 is not an RMD age.

The IRMAA surcharge on Medicare Part B and D premiums is based on the taxpayer's:

1. Modified AGI from two years prior to the current Medicare premium year
2. Modified AGI from the current tax year in which premiums are due
3. Modified AGI from three years prior to the current Medicare premium year
4. Modified AGI from the year in which the beneficiary enrolls in Medicare

Answer: A — Modified AGI from two years prior to the current Medicare premium year

A) Correct — IRMAA uses MAGI from 2 years back. B) Current-year MAGI is not the base. C) 3 years is not the statutory lookback. D) Enrollment year is not the base.

An individual with a self-directed IRA personally rents out real estate owned by the IRA and collects the rental payments directly into her personal bank account rather than the IRA. Under §4975 prohibited transaction rules, the LIKELY consequence is:

1. No consequence, since self-directed IRAs can hold real estate and the owner can manage it however she prefers
2. The transaction is a prohibited transaction with a disqualified person (herself), and the ENTIRE IRA is disqualified — treated as a full taxable distribution as of the first day of the year the violation occurred
3. Only the specific rental income received personally is taxable, with no effect on the rest of the IRA
4. A 6% excise tax applies only to the improperly received rent, with the IRA otherwise unaffected

Answer: B — The transaction is a prohibited transaction with a disqualified person (herself), and the ENTIRE IRA is disqualified — treated as a full taxable distribution as of the first day of the year the violation occurred

A) Incorrect — while self-directed IRAs CAN hold real estate, the account owner personally benefiting from IRA-owned property (here, diverting rental income to herself) is a classic prohibited transaction with a disqualified person (the owner herself). B) Correct — a prohibited transaction under §4975 with a disqualified person causes the ENTIRE IRA to lose its tax-advantaged status, treated as if the FULL account value were distributed (and taxable) as of the first day of the taxable year in which the prohibited transaction occurred — a severe, all-or-nothing consequence, not a narrow one limited to the specific improper amount. C) Incorrect — this understates the severity; the consequence extends to the ENTIRE IRA balance, not just the diverted rental income. D) Incorrect — the consequence isn't a modest excise tax on the improper amount; it's full disqualification and deemed distribution of the whole account.

A homeowner installs a $40,000 residential solar energy system in 2024. Under the Residential Clean Energy Credit (§25D), her federal tax credit is calculated as:

1. A flat $2,000 regardless of the system's cost
2. 30% of the qualified installation cost ($12,000 in this case), with no overall dollar cap on the credit amount
3. A deduction from taxable income rather than a direct credit against tax liability
4. Limited to $5,000 maximum regardless of the installation's actual cost

Answer: B — 30% of the qualified installation cost ($12,000 in this case), with no overall dollar cap on the credit amount

A) Incorrect — the credit is percentage-based (30%) rather than a flat dollar amount, so it scales with the actual cost of the installation. B) Correct — the Residential Clean Energy Credit provides a 30% credit for qualifying solar, wind, geothermal, and battery storage installations (30% × $40,000 = $12,000 here), with NO overall dollar cap on the credit amount, as extended through 2032 by the Inflation Reduction Act. C) Incorrect — this is a direct dollar-for-dollar CREDIT against tax liability, not merely a deduction that reduces taxable income before computing tax. D) Incorrect — there is no $5,000 cap; the credit is calculated as a percentage of cost with no overall dollar ceiling for qualifying residential clean energy property.

The §469 passive activity loss (PAL) rules generally provide that:

1. Passive losses may only offset the taxpayer's active business income earned
2. Passive losses are fully deductible against portfolio income each year
3. Passive losses can be applied without limit against ordinary wages earned
4. Passive losses are only deductible against passive activity income earned

Answer: D — Passive losses are only deductible against passive activity income earned

D) Correct — passive losses only offset passive income (with narrow exceptions). B) Portfolio income is not passive. C) Ordinary wages cannot absorb passive losses generally. A) Active business income is also not passive.

To qualify for net unrealized appreciation treatment on employer stock held in a 401(k), which of the following is a required element of the distribution?

1. The distribution must occur over at least 5 years to spread the tax burden
2. The employee must still be actively employed at the time of distribution
3. It must be a 'lump-sum distribution' of the participant's ENTIRE plan balance within a single tax year, triggered by a qualifying event
4. The stock must have been held in the plan for at least 10 years

Answer: C — It must be a 'lump-sum distribution' of the participant's ENTIRE plan balance within a single tax year, triggered by a qualifying event

A) Incorrect — a multi-year spread-out distribution would not qualify as the required lump-sum distribution. C) Correct — NUA requires a lump-sum distribution of the ENTIRE balance of the plan within one tax year, triggered by a qualifying event such as separation from service, reaching 59½, death, or disability. B) Incorrect — the qualifying triggering events (separation from service, disability, death, 59½) generally presuppose the employee is NOT actively employed in most cases (or has reached the applicable age), not still actively working under the original employment relationship in a way that would preclude a triggering event. D) Incorrect — there's no minimum holding period requirement for the stock itself within the plan.

The 529 'superfunding' 5-year election allows a donor to contribute up to:

1. $90,000 per beneficiary in one year (5 × $18,000) without gift tax
2. $45,000 per beneficiary in one year (5 × $9,000) without gift tax
3. $180,000 per beneficiary in one year (10 × $18,000) without gift tax
4. $540,000 per beneficiary in one year (5 × $108,000) without gift tax

Answer: A — $90,000 per beneficiary in one year (5 × $18,000) without gift tax

A) Correct — $90,000 single-donor superfund (2024 exclusion × 5). B) $45,000 uses the wrong multiplier. C) The multiplier is 5 years, not 10. D) $108,000 is not the annual exclusion.

A taxpayer maintains a permanent place of abode in New York and spends 190 days in New York during the year, despite having established domicile in Florida. Under New York's statutory residency test, the taxpayer is:

1. Not a New York resident, because Florida domicile controls exclusively
2. Exempt from the test because Florida has no state income tax
3. A New York statutory resident, because the permanent-abode-plus-183-day test is satisfied independent of domicile
4. Only taxed on New York-source income regardless of days present

Answer: C — A New York statutory resident, because the permanent-abode-plus-183-day test is satisfied independent of domicile

A) Incorrect — domicile in another state does NOT override the statutory residency test; a taxpayer can be a nonresident-by-domicile but still a statutory resident. C) Correct — many states, including New York, deem a taxpayer a resident for tax purposes if they maintain a permanent place of abode in the state AND are present more than 183 days, regardless of domicile intent elsewhere — a frequent trap for people who think establishing Florida domicile alone is sufficient. B) Incorrect — Florida having no income tax doesn't create an exemption from New York's own residency test. D) Incorrect — statutory residents are generally taxed on worldwide income by the state, similar to domiciliaries.

A self-employed consultant with $200,000 of net self-employment income wants to maximize retirement plan contributions using a SEP-IRA. Her maximum 2024 SEP contribution is limited to:

1. The lesser of 25% of compensation (as adjusted for self-employment) or the annual dollar limit ($69,000 for 2024)
2. A flat $23,000 regardless of income level
3. 100% of her net self-employment income with no cap
4. $7,000, the traditional IRA contribution limit

Answer: A — The lesser of 25% of compensation (as adjusted for self-employment) or the annual dollar limit ($69,000 for 2024)

A) Correct — SEP-IRA contributions for a self-employed individual are limited to the lesser of a percentage of compensation (effectively around 20% of net self-employment income after the self-employment tax deduction and contribution adjustments, often described as 25% of the adjusted compensation base) or the annual dollar limit ($69,000 for 2024). B) Incorrect — $23,000 is the 2024 elective deferral limit for 401(k)-type plans, not the SEP contribution limit, which is employer-only and percentage-based. C) Incorrect — SEP contributions are capped by both a percentage limit and a dollar limit, not unlimited relative to net self-employment income. D) Incorrect — $7,000 is the 2024 traditional/Roth IRA contribution limit, an entirely different (and much smaller) type of account from a SEP-IRA.

Digital nomad / remote work tax issues?

US citizens working abroad remain subject to US tax on worldwide income; may qualify for FEIE/FTC, but must track days for the physical presence test (330 days abroad in 12-month period) and state domicile ties.

HSA contribution eligibility?

Requires enrollment in a qualifying High Deductible Health Plan (HDHP) and no other disqualifying coverage (e.g., general-purpose FSA, Medicare); 2024 limits $4,150 self-only/$8,300 family, plus $1,000 catch-up if 55+.

Foreign earned income exclusion (§911)?

Up to $126,500 (2024) of foreign earned income excluded if bona fide resident or physical presence test (330 days in 12 months).

Above-the-line deductions?

Reduce AGI. Examples: HSA contributions, half of SE tax, SE health insurance, traditional IRA, student loan interest, educator expenses.