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ChFC Income Tax Planning Practice Questions

Official outline
The American College ChFC designation (courses)
Questions on this page
7
Updated
Nov 3, 2026

  1. Question 1, hard

    A taxpayer with $150,000 of modified AGI actively participates (but is not a real estate professional) in a rental real estate activity that generates a $20,000 tax loss for the year. Under the passive activity loss rules, how much of this loss may generally be deducted against the taxpayer's other, nonpassive income this year?

    • A.The full $20,000, because active participation in a rental activity permits an unlimited current deduction against nonpassive income when modified AGI is below $200,000
    • B.$12,500, because the special $25,000 allowance is cut in half at this income level and is applied against the rental loss
    • 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
    • D.$25,000, the maximum active-participation allowance, which applies at this income level because MAGI does not exceed $150,000
    Show answer and explanationHide answer

    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.

  2. Question 2, hard

    A mother gifts stock to her son with an adjusted basis of $30,000, when the fair market value at the time of the gift is $22,000. The son later sells the stock for $25,000. What is the son's recognized gain or loss?

    • A.A $5,000 loss, using the donor's basis of $30,000 as the basis for determining both gains and losses on the later sale, ignoring the lower value at the date of the gift
    • B.A $3,000 gain, using the fair market value at the time of the gift as the basis for determining both gain and loss on the later sale
    • 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)
    • D.A $25,000 gain, because gifted property has a zero basis to the recipient until the donor's holding period has been satisfied
    Show answer and explanationHide answer

    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.

  3. Question 3, medium

    A client sells a mutual fund at a loss on December 15 to harvest the loss for tax purposes, then repurchases a substantially identical fund on January 5 of the following year. Under the wash sale rule, what is the effect on the deductibility of the loss?

    • A.The loss is disallowed because the repurchase occurred within 30 days of the sale, inside the 61-day wash sale window
    • B.The loss is fully deductible because the repurchase occurred in a different tax year
    • C.The loss is fully deductible as long as the fund was held for at least one day before the sale
    • D.The wash sale rule only applies to individual stocks, not mutual funds
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    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.

  4. Question 4, easy

    A taxpayer's spouse died earlier this year. The taxpayer has a dependent child and has not remarried. Assuming she maintains a household for the child, for the two tax years following the year of death she may generally file as:

    • A.Single
    • B.Head of Household only
    • C.Qualifying Surviving Spouse
    • D.Married Filing Jointly indefinitely
    Show answer and explanationHide answer

    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.

  5. Question 5, medium

    Which of the following is a common adjustment item added back to regular taxable income when computing Alternative Minimum Taxable Income (AMTI)?

    • A.Qualified acquisition-debt mortgage interest on a primary residence claimed on Schedule A
    • B.State and local income and property taxes deducted for regular tax purposes
    • C.Cash charitable contributions to a public charity
    • D.Contributions to a traditional IRA
    Show answer and explanationHide answer

    Correct answer: B. State and local income and property taxes deducted for regular tax purposes

    The deduction for state and local taxes (SALT) is not allowed for AMT purposes and must be added back to regular taxable income when computing AMTI. Qualified home mortgage interest and charitable contributions generally remain deductible for AMT purposes, and the IRA deduction isn't an AMT preference item.

    • A. Qualified acquisition-debt mortgage interest claimed on Schedule A generally remains deductible for AMT purposes and is not an addback item.
    • B. State and local income and property taxes are deductible for regular tax purposes but must be added back when computing AMTI, since AMT doesn't allow the SALT deduction.
    • C. Cash charitable contributions to a public charity remain deductible for AMT purposes and aren't added back.
    • D. Traditional IRA contributions are a regular-tax adjustment to income, not an AMT preference or addback item.

  6. Question 6, easy

    A taxpayer should itemize deductions on Schedule A instead of claiming the standard deduction when:

    • A.The taxpayer's total eligible itemized deductions exceed the standard deduction amount for their filing status
    • B.The taxpayer has paid mortgage interest on a primary residence during the year, since that deduction makes itemizing more beneficial than the standard deduction
    • C.The taxpayer's adjusted gross income exceeds $100,000, since higher-income filers phase out of the standard deduction
    • D.The taxpayer is self-employed, since business expenses must be deducted on Schedule A rather than Schedule C
    Show answer and explanationHide answer

    Correct answer: A. The taxpayer's total eligible itemized deductions exceed the standard deduction amount for their filing status

    The decision to itemize is purely a mathematical comparison: if the sum of allowable itemized deductions (mortgage interest, state and local taxes up to the SALT cap, charitable contributions, certain medical expenses above the AGI floor, etc.) exceeds the standard deduction available for the taxpayer's filing status, itemizing produces a lower taxable income and should be elected. Having some mortgage interest, a particular income level, or self-employment status do not, by themselves, determine whether itemizing is beneficial.

    • A. Correct. A taxpayer should itemize only when total eligible itemized deductions (mortgage interest, SALT up to the cap, charitable gifts, etc.) exceed the standard deduction for their filing status, since either the greater of the two reduces taxable income.
    • B. Having mortgage interest doesn't automatically make itemizing beneficial; if total itemized deductions still fall short of the standard deduction, the standard deduction remains the better choice.
    • C. The decision to itemize turns on total itemized deductions relative to the standard deduction, not on an income level like $100,000; the standard deduction is not phased out at that threshold.
    • D. Self-employment status doesn't drive the itemize-vs-standard decision; self-employment expenses are generally deducted on Schedule C, separate from itemized deductions on Schedule A.

  7. Question 7, medium

    An investor purchased stock on March 15 of last year and sold it on March 16 of this year for a gain. How will the gain be taxed?

    • A.Short-term, at ordinary income rates, because the holding period is exactly one year
    • B.It is not taxable, because the shares were held over a full calendar year
    • C.Short-term capital gains rates, because the sale occurred in a different tax year than the purchase
    • D.Long-term capital gains rates, because the holding period exceeds one year
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    Correct answer: D. Long-term capital gains rates, because the holding period exceeds one year

    To qualify for long-term capital gains treatment, an asset must be held for more than one year. That is, at least one year and one day. Holding from March 15 to March 16 of the following year satisfies this 'more than one year' requirement, so the gain is taxed at long-term rates.

    • A. Incorrect. The holding period is one year plus one day, more than exactly one year.
    • B. Incorrect. The gain is fully taxable; only its character (long-term vs. short-term) is affected by holding period.
    • C. Incorrect. Crossing a calendar or tax year boundary has no bearing on holding-period classification.
    • D. Correct. Held more than one year (one year, one day), qualifying for long-term treatment.

Sources

Federal regulations

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