Try 10 focused CFP® questions on Tax Planning, with answers and explanations, then continue with Securities Prep.
| Field | Detail |
|---|---|
| Exam route | CFP® |
| Issuer | CFP Board |
| Topic area | Tax Planning |
| Blueprint weight | 14% |
| Page purpose | Focused sample questions before returning to mixed practice |
Use this page to isolate Tax Planning for CFP®. Work through the 10 questions first, then review the explanations and return to mixed practice in Securities Prep.
| Pass | What to do | What to record |
|---|---|---|
| First attempt | Answer without checking the explanation first. | The fact, rule, calculation, or judgment point that controlled your answer. |
| Review | Read the explanation even when you were correct. | Why the best answer is stronger than the closest distractor. |
| Repair | Repeat only missed or uncertain items after a short break. | The pattern behind misses, not the answer letter. |
| Transfer | Return to mixed practice once the topic feels stable. | Whether the same skill holds up when the topic is no longer obvious. |
Blueprint context: 14% of the practice outline. A focused topic score can overstate readiness if you recognize the pattern too quickly, so use it as repair work before timed mixed sets.
These questions are original Securities Prep practice items aligned to this topic area. They are designed for self-assessment and are not official exam questions.
Topic: Tax Planning
Maria, age 79, asks her CFP professional whether to give her lake cabin to her daughter now or keep it until death.
Exhibit: Estate note
Which planning action is most strongly supported by these facts?
Best answer: C
What this tests: Tax Planning
Explanation: The exhibit points to basis management as the key issue: the cabin has substantial built-in gain, Maria does not need sale proceeds, and estate-tax reduction is not the priority. In that setting, holding the property for transfer at death is the most supported strategy because a lifetime gift would carry over the low basis.
When a client owns highly appreciated property with a low basis, basis management often becomes the main tax issue. Here, the cabin’s built-in gain is about $780,000, and the exhibit says Maria does not need to sell it and is not facing transfer-tax pressure. That means there is little reason to give away a low-basis asset during life, because a lifetime gift generally passes the donor’s carryover basis to the recipient.
If Maria instead keeps the cabin until death, the property will generally receive a basis adjustment to fair market value at death, which can sharply reduce or eliminate capital gain for her daughter on a later sale. The closest distractor focuses on estate reduction, but the exhibit expressly says transfer-tax exposure is not the driver here.
Because the cabin has a very low basis and no estate-tax or liquidity problem is shown, preserving a potential basis step-up is the strongest tax-driven strategy.
Topic: Tax Planning
Elena and Marcus are starting a graphic design firm and want to own it 50/50 for voting control, but Marcus will contribute $400,000 of startup capital while Elena will manage the business full time. Marcus wants larger cash distributions until most of his capital is recovered, and Elena wants early business losses and future income to pass through to their personal returns because her spouse has high W-2 income and the couple faces near-term college costs for two children. They also want limited liability because the firm will sign a long office lease and hire employees. Which entity structure is the single best recommendation?
Best answer: B
What this tests: Tax Planning
Explanation: An LLC taxed as a partnership best matches the clients’ combined tax and liability goals. It allows pass-through treatment and flexible economic arrangements, such as preferred distributions to the capital-contributing owner, while still giving both owners liability protection.
The deciding issue is that Elena and Marcus want unequal economics with equal control. An LLC taxed as a partnership is a pass-through entity, so income and losses generally flow to the owners rather than being taxed first at the business level. It also allows flexible allocation and distribution provisions, such as giving Marcus preferred cash distributions because he contributed more capital, as long as the arrangement has real economic effect.
That flexibility matters because they want 50/50 control but do not want profits and cash flow handled strictly in proportion to ownership. A general partnership can provide pass-through taxation and flexible allocations, but it does not solve the liability concern. An S corporation gives pass-through taxation, but its one-class-of-stock rules generally require economic rights to track ownership. The key takeaway is that partnership taxation combined with LLC liability protection best fits these facts.
This structure provides pass-through taxation, flexible economic allocations and distributions, and liability protection for both owners.
Topic: Tax Planning
Maya and Luis, who file jointly, have MAGI of $130,000. Their daughter is a first-year undergraduate student enrolled at least half-time, with $10,000 of tuition and required fees and $8,000 of qualified room and board. They have enough cash and 529 plan funds to cover everything. Assume they qualify for the full American Opportunity Tax Credit of up to $2,500 if at least $4,000 of tuition and required fees is paid without using that same expense to support a tax-free 529 distribution. Which recommendation best matches these facts?
Best answer: C
What this tests: Tax Planning
Explanation: Education tax benefits must be coordinated so the same expense is not used twice. Here, reserving $4,000 of tuition for the American Opportunity Tax Credit while using the 529 plan for the remaining tuition and qualified room and board captures both benefits and materially improves the outcome.
The key concept is coordination of education tax benefits. The same tuition expense cannot be used both to support a tax-free 529 distribution and to claim the American Opportunity Tax Credit. Because Maya and Luis can receive up to $2,500 of credit by keeping $4,000 of tuition outside the 529 calculation, the efficient strategy is to pay that $4,000 from cash and use the 529 for the remaining tuition and qualified room and board.
A credit usually provides stronger dollar-for-dollar tax value than simply using the same $4,000 for a tax-free 529 distribution. The closest alternative is paying all tuition from cash, but that goes further than necessary and leaves available 529 tax-free funding unused in the current year.
This preserves $4,000 of tuition for the AOTC while still allowing tax-free 529 distributions for the other qualified expenses.
Topic: Tax Planning
Jordan, 58, left his employer in June and Mia, 56, still works as a teacher. They are helping pay their daughter’s college costs, want to preserve cash until Jordan fully retires at 60, and expect to use the standard deduction again this year. Jordan also wants to avoid selling his concentrated employer stock until after retirement. During a final review of their tax organizer, the CFP professional learns of several items that may not be reflected on the draft return. Which item is most likely to change the couple’s Form 1040 materially if it was omitted?
Best answer: B
What this tests: Tax Planning
Explanation: The largest likely omission is the $86,000 cash distribution from a traditional IRA. Because it is generally taxable as ordinary income absent after-tax basis, it would increase adjusted gross income and taxable income enough to change the Form 1040 materially.
When deciding which missing item is most likely to change a Form 1040 materially, first ask whether it directly changes adjusted gross income by a large amount. A cash distribution from a traditional IRA usually appears as ordinary income unless the client has after-tax basis, and the stem gives no indication of basis. Omitting an $86,000 distribution would therefore substantially increase AGI and likely total tax, which makes it the highest-priority item to verify.
The key takeaway is to prioritize large taxable items over smaller or tax-free items when reviewing a draft return.
A large cash distribution from a traditional IRA is generally ordinary income and would materially increase AGI and tax liability.
Topic: Tax Planning
Alicia expects a large bonus this year and is committed to giving $30,000 to a qualified public charity. She owns mutual fund shares worth $30,000 with an $8,000 basis and has held them for several years. She will itemize deductions this year regardless of how she funds the gift. Which recommendation is best characterized as a tax-saving strategy rather than primarily a cash-flow-timing strategy?
Best answer: D
What this tests: Tax Planning
Explanation: The tax-saving recommendation is the direct transfer of appreciated shares. Because Alicia already plans to make the gift and will itemize, gifting the low-basis shares can satisfy her charitable goal while avoiding capital gains tax that would arise on a sale.
The key distinction is whether the recommendation changes Alicia’s taxable income or merely changes when money moves. A direct gift of long-term appreciated securities to a qualified public charity is a true tax-saving strategy because Alicia can generally claim a charitable deduction if she itemizes and she avoids realizing the built-in capital gain on the shares. That reduces tax in a way that monthly funding patterns or tax-payment adjustments do not. By contrast, changing installment timing affects liquidity, and increasing withholding affects when the IRS receives money, but neither changes the underlying amount of tax owed. The closest distractor is selling the shares first; once Alicia sells, the capital gain is recognized, so the embedded-gain tax benefit disappears.
A direct gift of long-term appreciated shares can avoid capital gains recognition while still supporting the charitable deduction Alicia already intends to claim.
Topic: Tax Planning
At an initial planning meeting, Dana says she personally owns a warehouse that she leases to her S corporation. She is considering keeping the warehouse in her own name, contributing it to the corporation, or transferring it to an irrevocable trust for her children. She wants lower taxes now but may sell the warehouse within five years. The CFP professional has not yet reviewed adjusted basis, depreciation history, projected rental income, or whether the trust would be grantor or non-grantor. What is the most appropriate next step?
Best answer: D
What this tests: Tax Planning
Explanation: Before recommending any transfer, the CFP professional should analyze the projected tax consequences of personal, business, and trust ownership. The missing facts in the stem directly affect annual income taxation, gain recognition, and depreciation recapture if the warehouse is later sold.
This is an analysis step, not an implementation step. Dana is comparing three ownership structures, so the CFP professional should first evaluate how each one would affect ongoing rental income taxation and a possible future sale. Key facts include adjusted basis, depreciation history, projected income, and whether the trust would be taxed as a grantor or non-grantor trust. Those details can materially change annual tax treatment and the tax cost of selling or transferring the property.
Only after that comparison should the planner coordinate with the client’s CPA and attorney on any titling recommendation. Moving the asset first, or picking a structure for convenience or estate reasons alone, skips the required tax analysis and can create avoidable consequences.
The planner should first compare the current and future tax consequences of each ownership structure because basis, depreciation, and trust tax status could materially change the outcome.
Topic: Tax Planning
Jordan and Mia, both age 49, expect 2025 MAGI of $145,000 and file jointly. Their son is starting his first year of college, will attend full-time, live on campus, and has no scholarships. The year-one bill is $18,000 of tuition and required fees plus $12,000 of room and board, and their 529 plan has enough assets to cover all of it. They want to minimize current-year taxes, avoid retirement-account withdrawals because they are behind on savings, and keep their emergency reserve intact, so they can spare only about $4,000 from cash flow. If they pay at least $4,000 of tuition and fees without using those same expenses for a 529 tax-free distribution, they will qualify for the full $2,500 American Opportunity Tax Credit. What is the single best recommendation?
Best answer: C
What this tests: Tax Planning
Explanation: The American Opportunity Tax Credit materially changes the funding choice because leaving $4,000 of tuition and fees outside the 529 distribution produces a full $2,500 credit. Using exactly the cash they can spare captures that credit while the 529 covers the remaining eligible costs.
The core concept is coordinating education tax benefits so the same qualified expense is not used twice. In this case, the couple can spare only $4,000 from cash, but that amount is enough to unlock the full $2,500 American Opportunity Tax Credit when applied to tuition and required fees. Their 529 can then pay the rest of the tuition and fees plus on-campus room and board, which are qualified 529 expenses for a student attending at least half-time.
Paying all tuition from cash would also preserve the credit, but it ignores their stated cash-flow limit.
This captures the full AOTC while letting the 529 cover remaining eligible costs without straining cash reserves or retirement assets.
Topic: Tax Planning
Elaine, age 79, is widowed and has ample liquid assets for retirement. Her lake house is worth $1.2 million and has a $220,000 tax basis. Elaine wants the property to go to her son, who expects to sell it shortly after receiving it. Elaine’s estate is not expected to owe estate tax, and her main goal is to maximize her son’s after-tax proceeds. Which action best aligns with that goal?
Best answer: D
What this tests: Tax Planning
Explanation: When a client holds a highly appreciated asset, does not need to sell it, and is not facing estate tax pressure, basis management often drives the strategy. Because the son expects to sell soon, keeping the property until death generally preserves a basis adjustment and can minimize capital gain on that later sale.
The key planning judgment is whether transfer-tax concerns or income-tax basis concerns matter more. Here, estate tax is not expected, Elaine has enough liquid assets for retirement, and her son is likely to sell soon after receiving the property. That makes basis management the dominant issue.
A lifetime gift usually gives the recipient Elaine’s carryover basis, so the built-in gain follows the property. If the lake house remains included in Elaine’s estate until death, it generally receives a basis adjustment to fair market value at that time. If the son sells soon afterward, his taxable gain may be far smaller. Using a will or revocable trust can preserve control while still keeping the property in the estate.
The tempting alternative is gifting now to remove future appreciation from the estate, but the facts show estate reduction is not the primary problem.
Because basis management is the main issue here, retaining a highly appreciated asset until death can preserve a basis adjustment for the son’s later sale.
Topic: Tax Planning
Elena is the sole shareholder of an S corporation consulting firm. The business expects $260,000 of net income before her pay this year, and Elena performs nearly all client work and management. To free up cash for a home purchase, she wants to cut her $110,000 salary to $20,000 and take the rest as shareholder distributions. Which tax constraint is most decisive in recommending against this change?
Best answer: A
What this tests: Tax Planning
Explanation: In an S corporation, income generally passes through for income-tax purposes whether cash is distributed or not. The decisive issue here is payroll tax: Elena cannot replace reasonable compensation with very low wages and large distributions simply to avoid FICA and Medicare taxes.
The key comparison is that S corporation wages are subject to income tax and payroll tax, while shareholder distributions generally are not subject to payroll tax. But that payroll-tax advantage applies only after an owner who provides substantial services has been paid reasonable compensation.
Here, Elena performs nearly all of the revenue-producing and management work, so cutting salary from $110,000 to $20,000 creates the central problem: the IRS could treat part of the distributions as reclassified wages subject to payroll taxes and possible penalties. Her business income would still generally pass through to her for income-tax purposes, whether distributed or not.
Retirement plan limits and future Social Security benefits may matter, but they are secondary to the reasonable-compensation rule.
Because Elena performs substantial services, she must receive reasonable compensation as W-2 wages before excess cash is taken as S corporation distributions.
Topic: Tax Planning
Raj and Elena, both W-2 employees, expect unusually high income this year from a one-time bonus. After discovery and a tax projection, their CFP professional confirms they can still increase their pre-tax 401(k) salary deferrals for the remaining pay periods, and there is no projected underpayment penalty issue. Elena suggests reducing payroll withholding instead so they “pay less tax now.” What is the most appropriate next step?
Best answer: D
What this tests: Tax Planning
Explanation: The CFP professional has already completed the analysis, so the next step is to recommend the strategy that actually reduces current taxable income. Increasing pre-tax 401(k) deferrals can lower this year’s tax liability, while lowering withholding, absent penalty concerns, only changes when cash leaves the household.
This item turns on distinguishing tax liability from tax payment timing. Once the CFP professional has gathered the facts and completed the projection, the appropriate process step is to recommend and document the option that reduces taxable income. In this scenario, increasing traditional 401(k) salary deferrals for the remaining pay periods can reduce current-year taxable wages. By contrast, changing payroll withholding does not change how much income is taxed; it only changes how quickly the tax is prepaid, assuming there is no underpayment penalty issue. In a CFP workflow, that distinction should be made explicit before implementation so the clients understand which recommendation saves tax and which one only changes short-term cash flow. The closest distractors either implement first or delay an already-supported recommendation.
Increasing pre-tax 401(k) deferrals can reduce current taxable income, while lowering withholding only changes when tax is remitted.
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