Free PFS Practice Questions

Question 1

Elena sells her entire position in a publicly traded stock at a loss in her taxable account. Fourteen days later, she buys the same number of identical shares in her own Roth IRA at another brokerage firm. Her Form 1099-B does not identify a wash sale. What is the consequence for the loss on her federal income tax return?

Accepted Answer

The loss is disallowed, with no corresponding increase in her Roth IRA basis.

Answer

The loss is deductible because the replacement account is tax-exempt.

Answer

The disallowed loss increases the Roth IRA basis available to offset future distributions.

Answer

The loss is deductible up to the annual capital-loss limit; the remainder carries forward.

Question 2

During an estate-planning meeting, a remarried client gives two instructions: "My spouse must receive income for life, but cannot redirect the remaining assets away from my children from my first marriage. This bequest must also qualify for the federal estate-tax marital deduction." Both spouses are U.S. citizens. Assuming proper drafting and any required election, which arrangement satisfies both instructions?

Accepted Answer

A QTIP trust providing lifetime income to the spouse and the remainder to the children.

Answer

A credit-shelter trust using the client's estate-tax exclusion, with lifetime income to the spouse and remainder to the children.

Answer

A marital trust giving the spouse unrestricted power to appoint the remainder beneficiaries.

Answer

An outright bequest coupled with the spouse's revocable will naming the children.

Question 3

A woman with severe cognitive impairment bathes, dresses, eats, toilets, transfers, and maintains continence independently. Her physician recently certified that she needs substantial supervision because she wanders from home and cannot recognize hazards. Her tax-qualified long-term-care policy uses the federal chronic-illness criteria; the elimination period is satisfied and services follow her prescribed care plan. Her family believes benefits require losing two physical abilities. Which interpretation is correct?

Accepted Answer

Her certified need for supervision meets the separate cognitive-impairment trigger, despite her physical independence.

Answer

Shopping and medication management can substitute for two of the six qualifying activities of daily living.

Answer

A nursing-facility admission is required before cognitive impairment qualifies a physically independent person for benefits.

Answer

Eligibility must wait until two activities of daily living require substantial assistance for at least 90 days.

Question 4

How much of Nina's 2026 Roth conversion is taxable?

Amount converted from a traditional IRA: $30,000.
Previously reported nondeductible IRA basis: $12,000.
December 31 traditional IRA balance after conversion: $18,000.
December 31 traditional SEP IRA balance: $72,000.

These are her only non-Roth IRAs. There are no other distributions, contributions, or outstanding rollovers for the year.

Accepted Answer

$27,000; allocate basis across all IRAs and the conversion.

Answer

$18,000; recover all nondeductible contributions first.

Answer

$22,500; exclude the employer-funded SEP IRA.

Answer

$26,000; divide the basis by the year-end IRA balances without adding the conversion.

Question 5

A business owner has received the retirement recommendations promised under a recommendations-only engagement. She now emails the CPA/PFS: "Please arrange the account transfers and keep the plan on track each year." The CPA is competent and appropriately registered to provide those services, but the existing agreement assigns implementation and monitoring to the client. Before accepting the additional work, the CPA should:

Accepted Answer

Agree on and document the expanded services, responsibilities, compensation, and monitoring arrangements.

Answer

Begin the transfers under the existing agreement and document monitoring responsibilities at the first annual review.

Answer

Treat the email as authorization for both discretionary investment management and continuing annual updates.

Answer

Decline all implementation assistance because providing recommendations prevents the CPA from carrying them out.

Question 6

An executive exercises vested incentive stock options at a substantial discount to fair market value and holds the unrestricted shares through year-end. A tax memorandum states: "No shares were sold, so no tax analysis is needed." Which exposure does that conclusion overlook?

Accepted Answer

An alternative minimum tax adjustment for the exercise-date spread, despite no regular income inclusion at exercise.

Answer

Ordinary wage income on the exercise-date spread, as with a nonqualified stock option.

Answer

Long-term capital gain at exercise, once the option has been outstanding for two years.

Answer

Payroll tax on the exercise-date spread, even though regular federal income tax is deferred until sale.

Question 7

Forty minutes before a home closing, a client receives an email in the existing title-company conversation directing her down payment to a different account. The message contains the correct purchase price and property address. A caller using the title officer's displayed phone number then confirms the change. The wire has not been released. Which verification should occur before the client sends the funds?

Accepted Answer

Call the title officer at the number independently established earlier and verify the recipient and account details.

Answer

Call the number supplied in the new email and ask the officer to repeat information from the purchase contract.

Answer

Ask the caller to send revised instructions on title-company letterhead before authorizing the wire.

Answer

Send a small test transfer and release the balance once the email sender confirms that it arrived.

Question 8

Two managers report annualized results for the same period, net of all fees and using the same risk-free rate and market benchmark:

Manager North: Sharpe ratio 0.64; Treynor ratio 8.2%.
Manager South: Sharpe ratio 0.86; Treynor ratio 7.1%.

The client is comparing compensation for total portfolio volatility, not just exposure to market movements. Which conclusion do these results support?

Accepted Answer

South earned more excess return per unit of total volatility; North ranked higher per unit of market risk.

Answer

North had stronger performance for this comparison because its higher Treynor ratio incorporates company-specific risk.

Answer

South had the higher absolute return and the lower standard deviation because its Sharpe ratio was higher.

Answer

North generated the larger benchmark-relative alpha, as indicated by its higher Treynor ratio.

Question 9

The records for a gift of stock show a donor's adjusted basis of $120,000 and a gift-date fair market value of $90,000. The recipient later sells all the shares for $105,000. No gift tax was paid, and there were no transaction costs or intervening basis adjustments. The recipient's reportable federal gain or loss is:

Accepted Answer

Neither gain nor loss, because the sale price falls between the two applicable basis amounts.

Answer

A $15,000 capital gain, using the stock's fair market value when received as the tax basis.

Answer

A $15,000 capital loss, carrying the donor's entire adjusted basis into the recipient's sale.

Answer

A $30,000 capital loss, preserving the decline from the donor's basis to the value at the gift.

Question 10

Ruth, age 76, took her entire annual required minimum distribution from an entirely pretax traditional IRA in February. In November she wants the IRA custodian to make an additional qualified charitable distribution directly to an eligible public charity. The proposed transfer is below the annual limit, and she has made no deductible IRA contributions after age 70 1/2. How should the adviser explain the effect on this year's income?

Accepted Answer

The later transfer can be excluded from income, but the February withdrawal remains taxable.

Answer

The later charitable transfer can be applied retroactively to exclude an equal amount of the February withdrawal.

Answer

Report the new transfer as taxable income and claim an itemized charitable deduction.

Answer

The later transfer is excluded from income and creates a credit against the amount that must be distributed next year.

Free PFS Practice Questions

Domain 1: Personal financial planning process (7-11%)

Question 1

Domain 3: Foundational financial planning concepts (7-11%)

Question 2

Domain 4: Estate planning (11-14%)

Question 3

Question 4

Domain 5: Charitable planning (4-6%)

Question 5

Domain 6: Risk management planning (11-14%)

Question 6

Domain 7: Employee and business owner planning (4-6%)

Question 7

Domain 8: Investment planning (11-14%)

Question 8

Question 9

Domain 9: Retirement and Financial Independence Planning (11-14%)

Question 10

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