Chapter 3 - Customer Accounts and Tax Issues

Question 1

Earned or ordinary income

Answer 1

Compensation received for providing goods or services.

Question 2

Passive income

Answer 2

Investor doesn’t have an active role. Passive losses may only offset other passive income or gains.

Question 3

Dividend income

Answer 3

Cash dividends taxes payable in year of receipt. Stock dividend taxes by adjusting tax basis of their stock.

Question 4

Interest income on bonds

Answer 4

Corporations - federal and state/local taxation
US Government - federal taxation
Municipalities - state/local dependent on issuer and customer specifics

Question 5

Deferred income

Answer 5

For retirement or annuity accounts (withdrawals taxed at ordinary income).

Question 6

Progressive taxes

Answer 6

Graduated

Question 7

Regressive taxes

Answer 7

Flat

Question 8

Dividend tax

Answer 8

Max of 20%

Question 9

REIT dividends tax

Answer 9

As ordinary income

Question 10

Alternative Minimum Tax

Answer 10

First calculate taxes using the standard method, and then use the AMT method then pay the greater of the two.

Question 11

Gift taxes

Answer 11

$14k per year to any number of persons. Married couples may combine their gifts to $28k per year. Amounts above are subject to a gift tax payable by the giver.

Question 12

Marital deduction

Answer 12

Couple may give unlimited gifts to each other and first to die can leave an unlimited amount to the survivor.

Question 13

Estate tax exemption

Answer 13

$5mm subject to inflation. Maximum tax rate is 40%.

Question 14

Net investment income tax

Answer 14

3.8% on net investment income (capital gains and dividends if adjusted gross income exceeds $200k for singles or $250k for those filing jointly.

Question 15

Gift to 529 plan

Answer 15

May lump 5 years together up to the gift limit (so $70k for single, $140k for married).

Question 16

Short term capital gains

Answer 16

Held less than one year; taxed at ordinary income.

Question 17

Long term capital gains

Answer 17

Held more than one year; taxed at max of 20%.

Question 18

Netting of capital gains/losses

Answer 18

Can offset with no dollar limitation. Can offset taxes on ordinary income up to $3k and can be carried forward.

Question 19

Single/married tax status

Answer 19

Determined by status on 12/31 of that year.

Question 20

Reasonable-basis obligation

Answer 20

Reasonable basis that a recommendation is suitable for at least some investors.

Question 21

Customer-specific obligation

Answer 21

Reasonable basis that a recommendation is suitable to a particular customer based on their investment profile.

Question 22

Quantitative obligation

Answer 22

Reasonable basis to believe that a series of recommended transactions, even if they are suitable for a customer, are not excessive when considering the customer’s investment profile.

Question 23

Send updated information

Answer 23

Within 30 days of change notification to both previous address and new address.