Free CFP Exam Tax Planning Practice Questions

Employing a child in a family business and paying reasonable compensation for actual work performed (Choice B) is a legitimate income-shifting strategy. The wages are deductible by the business and taxable to the child at the child's lower rate. For sole proprietorships, wages paid to a child under age 18 are also exempt from Social Security and Medicare taxes.
Choice A is incorrect because the assignment of income doctrine prevents a taxpayer from assigning earned income to someone else — income is taxed to the person who earns it.
Choice C is incorrect for the same reason and would create additional gift tax issues. Choice D would result in a grantor trust where income is taxed to the grantor, providing no income-shifting benefit. Legitimate income-shifting strategies must involve actual economic activity and reasonable compensation for services rendered.

Selling ABC stock at a loss and repurchasing the same stock the next day (Choice C) clearly violates the wash sale rule because a substantially identical security was purchased within the 30-day window after the sale. Choice A does not violate the rule because XYZ is a different company and not substantially identical. Choice B is a gray area, but the IRS has generally not treated different index funds tracking different indexes as substantially identical securities. Choice D does not violate the wash sale rule because the repurchase occurs 35 days after the sale, which is outside the 30-day window. The wash sale rule requires the replacement security to be purchased within 30 days before or after the loss sale. When a wash sale occurs, the disallowed loss is added to the basis of the replacement shares.

Stock held longer than 12 months qualifies for long-term capital gains treatment. At the 15% LTCG rate:
$$\$25{,}000 \times 0.15 = \$3{,}750$$

Choice A is incorrect because \$6,000 applies the 24% ordinary income rate, but gains on assets held over 12 months are taxed at preferential LTCG rates.
Choice C is incorrect because \$4,500 uses an 18% rate that does not correspond to any standard LTCG bracket.
Choice B is incorrect because \$5,000 applies a 20% rate, which is the LTCG rate for the highest income bracket, not the 24% ordinary bracket.