Chapter 15: Taxes Flashcards
Which of the following are qualified retirement plans under IRS rules?
I. ESOPs
II. 401k
III. Traditional IRA
IV. SEP IRA
A. II only
B. II and IV
C. I and III
D. I, II, III, and IV
D. I, II, III, and IV
ESOP: employee stock ownership plan
All of the following are TRUE about SIMPLE IRAs and SEP IRAs EXCEPT
A. they both allow pretax contributions from the employee and employer
B. they both require immediate vesting on all contributions
C. SEP IRAs allow higher annual contributions than SIMPLE IRAs
D. only businesses with 100 employees or fewer are eligible for SIMPLE IRAs
A. they both allow pretax contributions from the employee and employer
SEP IRAs allow contributions from employer only, SIMPLE IRAs allow from both. Both allow pretax contributions. SIMPLE IRAs are allowed only for businesses with 100 employees or fewer who earn at least $5,000 in salary. SEP IRAs do not require a minimum of employees
A self employed carpenter has earned $200,000 this year. How much tax deductible income may he deposit into a Keogh plan this year?
A. $25,000
B. $30,000
C. $40,000
D. $52,000
C. $40,000
The maximum amount of self employed income that can be contributed into a Keogh plan each year is 100% of self employed income or $52,000, which ever is less. The investor may write off 20% (25% net) of his gross income, which is $40,000 (20% of $200,000)
In a particular year, a client realizes $30,000 in long term capital gains and $50,000 in long term capital losses. How much of the capital losses would be carried forward to the following year?
A. $3,000
B. $17,000
C. $20,000
D. $30,000
B. $17,000
The client has a net capital loss of $20,000 ($50,000 loss - $30,000 gain). The client writes off $3,000 of that capital loss against her earned income and carries the additional loss of $17,000 forward to write off against any capital gains he may have in the following year. In the event the client doesn’t have any capital gains the following year, she can still write off $3,000 of the $17,000 against any earned income and carry the remaining $14,000 forward, which can be used to offset any capital gains the following year.
If a client sells ABC common stock at a loss on June 2 for 30 days he can’t buy
I. ABC common stock
II. ABC warrants
III. ABC call options
IV. ABC preferred stock
A. I only
B. I and IV
C. I, II, and III only
D. I, II, III, and IV
C. I, II, and III only
The client needs to avoid the wash sale rule, therefore she can’t buy back the same security (common stock) or anything convertible into the same security (warrants and call options) within 30 days.
The client wouldn’t be able to buy ABC common stock, ABC convertible preferred stock, ABC convertible bonds, ABC call options, ABC warrants, or ABC rights for 30 days. He can buy ABC preferred stock, ABC bonds, or ABC put options.
A client purchases a 5% corporate bond with 10 years to maturity at 80. What would the client’s annual reported income on this bond be?
A. $20
B. $30
C. $50
D. $70
D. $70
The client purchased the bond at 80 ($800) and you can assume that it matures at $1,000 (par) in 10 years. You need to take the $200 difference and divided it by 10 to get $20 accretion. The interest would be $1,000 * 5% for 10 years for a total of $50. The total income would be $70 ($20 + $50).
A client purchased a 7% ABC corporate bond at 80 with 10 years to maturity. Six years later, the client sold the bond at 85. What is the gain or loss?
A. $50 gain
B. $70 loss
C. $150 loss
D. none of the above
B. $70 loss
First, adjust the cost basis of the bond in the time the bond matures. The bond was purchased at $800 and matures at $1,000 in ten years.
Next, take the $200 difference and divide it by the 10 years to maturity:
Annual accretion = $200 / !0 years = $20
Then take the $20 per year accretion and multiply it by the number of years that the investor held the bond:
$20 per year * 6 years = $120 total accretion
Next, add the total accretion to the purchase price of the bond to determine the investor’s adjusted cost basis:
$800 original cost + $120 total accretion = $920 (adjusted cost basis)
After that, compare the adjusted cost basis to the selling price to determine the gain or loss:
$920 adjusted cost basis - $850 selling price = $70 capital loss
A client purchases a 7% corporate bond with 20 years to maturity at 110. If the client decides to amortize the bond, what is the annual reported income?
A. $5
B. $65
C. $70
D. $75
B. $65
Because the client purchased the bond at 110 ($1,100) and you can assume that it matures at $1,000 in 20 years, you need to take the $100 difference and divide it by 20 to get $5. The client’s reported income would be $65 ($70 interest minus $5 amortization).
Corporate bondholders can elect to amortize their premium bonds or not. However, all municipal bond holders must amortize their premium bonds, whether they were purchased as a new issue or in the secondary market (used).
The maximum employer contribution to each employee’s SEP-IRA is ____ % of the employee’s compensation or ______, whichever is less.
25%
53,000
______ = market price - par value / years till maturity
Amortization of a bond
