CFP Tax Planning Practice Questions

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.

• AA. Fails: a withdrawal that is not used for the named beneficiary's expenses is nonqualified, but only the earnings portion is subject to income tax and the 10% additional tax. Contributions come back tax-free, so the whole amount is not taxed. Changing the beneficiary first avoids this result.
• BB. Fails: federal law sets no deadline requiring a 529 account to be distributed after the beneficiary finishes college. The owner can keep the account open, change the beneficiary, or use it for later qualified expenses.
• CC. Correct: an eligible beneficiary change to a qualifying family member is generally not a federal taxable event, so the balance can pay the younger sibling's qualified expenses without tax on the change.
• DD. Fails: 529-to-Roth rollovers exist but are limited by a lifetime cap, an account-age requirement and annual Roth contribution limits, so the whole balance cannot be moved without limits. Check current rules for exact figures.

• Source: IRC section 529 (qualified tuition programs), accessed October 2026

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the 2017 Tax Cuts and Jobs Act briefly taxed this income at trust/estate rates, but that provision was retroactively repealed by the SECURE Act (2019).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.

• AA. Incorrect: the point of the kiddie tax is to prevent using the child's typically lower marginal rate.
• BB. Incorrect: there is no flat 10% kiddie tax rate.
• CC. 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 The trust/estate-rate approach was a temporary TCJA rule retroactively repealed by the SECURE Act in 2019.
• DD. Incorrect: the age-14 cutoff is outdated; current law extends to older dependents (generally under 19, or under 24 for certain full-time students).

• Source: 26 U.S.C. § 1, accessed October 2026

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.

• AA. Incorrect - this stops after the tax-free base and the child-rate tranche. Net unearned income above the child-rate tranche is taxed at the parents' marginal rate, not the child's rate.
• BB. Incorrect - this reverses the structure. The tax-free base comes first, then a tranche at the child's rate, and only the excess is taxed at the parents' rate.
• CC. Incorrect - this describes the 2018-2019 TCJA rule, which taxed a child's net unearned income at trust and estate rates. The SECURE Act replaced it with the parents'-rate approach starting in 2020, and it allowed an election to apply that approach to 2018-2019.
• DD. Correct - net unearned income is taxed in tiers. A base amount is tax-free, the next tranche is taxed at the child's rate, and the remainder is taxed at the parents' marginal rate. Only the part of the income that actually reaches the top tier is taxed at the parents' rate.

• Source: 26 U.S.C. § 1, accessed October 2026

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.

• AA. 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.
• BB. 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.
• CC. Single status is technically available but produces a less favorable rate schedule than Qualifying Surviving Spouse.
• DD. 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.

• Source: 26 U.S.C. § 2, accessed October 2026
• Source: 26 U.S.C. § 1, accessed October 2026

Correct answer: A. Avoid using the same expenses to justify both tax-free 529 treatment and an education credit

The same qualified expenses cannot be used both to support a tax-free 529 distribution and to claim an education credit. Allocate expenses between the two benefits, for example by paying part of the tuition out of pocket for the credit.

• AA. Correct: double counting the same expenses is not allowed, so expenses must be allocated between the 529 and the credit.
• BB. After-tax funding of the 529 does not permit the same expenses to also support a credit.
• CC. Distributing the balance in a later year does not fix the overlap; the rule concerns the same expenses in the same year.
• DD. Eligibility is set by tax law, not by the invoice or the plan administrator; ineligible costs make earnings taxable.

• Source: IRC section 529 (qualified tuition programs), accessed October 2026

Correct answer: A. Claim the standard deduction, since it exceeds their itemized total

Taxpayers should claim whichever is larger. The standard deduction or total itemized deductions. Because most itemized deductions cannot be carried forward if unused. Since itemized deductions here are less than the standard deduction, taking the standard deduction minimizes taxable income. Filing separately generally produces a worse combined result for a married couple, and a taxpayer must choose one method: the standard deduction and itemized deductions cannot be stacked on the same return.

• AA. Correct. Since itemized deductions are less than the standard deduction, claiming the larger standard deduction minimizes taxable income and is the most tax-efficient choice.
• BB. Wrong. Itemizing when the total is below the standard deduction raises taxable income and tax this year. Mortgage interest, capped state and local taxes, and charitable gifts of this type do not carry forward when they go unused, so nothing is preserved.
• CC. Filing separately generally forfeits the ability to file jointly and can disqualify or limit various deductions and credits; it isn't a mechanism to combine or optimize itemized deductions here and typically produces a worse outcome for married couples.
• DD. Wrong. Taxpayers must choose either the standard deduction or itemized deductions on a given return. The two cannot be stacked, even for joint filers, so combining them is not allowed.

• Source: 26 U.S.C. § 63, accessed October 2026

Correct answer: D. Short-term capital gain, because the holding period must exceed one year (more than one year and one day)

To achieve long-term treatment, an asset must be held for more than one year. The holding period must extend at least one day past the one-year anniversary of purchase. Selling on the exact one-year anniversary date results in a holding period of exactly one year, which is short-term; the sale would need to occur on or after March 16 of Year 2. Tax bracket does not affect the character of the gain, only the rate applied once character is determined.

• AA. A full calendar year elapsing is not the legal test; the tax code requires the holding period to exceed one year, so a year passing alone does not establish long-term treatment.
• BB. Selling exactly one year later does not satisfy the 'more than one year' requirement, so this is short-term, not long-term, capital gain.
• CC. The holding-period rule for long-term vs. short-term characterization is fixed by statute and does not vary with the investor's tax bracket or income.
• DD. Correct. To qualify for long-term capital gains treatment, the holding period must be more than one year (i.e., one year and one day); a sale on the exact one-year anniversary is treated as short-term.

• Source: IRS Topic no. 409, Capital gains and losses, accessed October 2026