Diagnostic Exam and Book 1 Flashcards
How does the federal reserve control the money supply?
a. adjusting the discount rate b. open market operations i.e. buying government securities
Calculate Next year Dividend (D1)
D1 = D0(1+g)
Forecasted Total Return
[(Forecasted stock $ - Current Price) / Current $] + Dividend yield
Expected Return (CAPM)
Rf + Beta (risk premium)
Risk Premium
Market return - risk free rate
If the forecasted return is greater than the expected return then you should _____ the security
buy
If the forecasted return is less than the expected return then you should ______ the security
not buy/sell
What is the double basis rule?
No gain is realized if the donee sells the property for a price between the adjusted basis and the fmv on the date of the gift. Example: Mom gives son property with adjusted basis of $35k and fmv of $30k…the son then sells at $33k…this results in no gain
Are SSI benefits reduced if at FRA and have earned income?
No the benefits aren’t reduced, but a greater portion will likely be taxable
Do CFP’s have to be registered as an investment adviser?
No
Name four organizations that rate the financial strength of life insurance companies
Standard and Poors, Fitch, Moody’s, and AM Best
Under Medicare Part A, do skilled nursing facilities benefits provide any coverage for custodial care?
No
Which of the following types of student financial aid is(are) need-based?
Subsidized Stafford Loan.
Unsubsidized Stafford Loan.
Parent Loan for Undergraduate Students (PLUS) Loan.
Perkins Loan.
Subsidized Stafford Loans and Perkins Loans
How long do patients have in a skill nursing benefit period before they must pay the remaining cost?
100 days
How many days does the skilled nursing facility pay for the entire cost of the patient’s stay?
the skilled nursing facility pays the entire cost of the patient’s stay in a skilled nursing facility for only the first 20 days after certain conditions are met
Kevin wishes to purchase a yacht in 20 years when he retires. If the yacht currently costs $450,000 and inflation is 2% annually, how much should he deposit at the beginning of each year to have enough to purchase the yacht at the end of 20 years? Assume that Kevin will earn an average compounded after-tax annual return of 5% on his investments.
Pay attention it says beginning of year!
Part 1 Part 2
FV = ? FV = $668,676
N = 20 N = 20
PV = $450,000 PV = 0
I = 2% I = 5%
Pmt= 0 PMT = ? = $19,260
Do tax payers get an exemption for giving financial support to a non US citizen?
HELL NO
How much of a rental real estate loss can a tax payer deduct and what are the rules?
$25k but only if they are an active participant and own 10% or more of the property. If MAGI is between $100k and $150k then you can only deduct 50% of the difference between there (MAGI is $120 then can deduct $15k or 50% of $150k - $120k)
What is a 2-6 year graduated vesting schedule?
20% vested after 2 years then 20% each of the following years 3-6 (year 3 = 20% year 4 = 20% etc)
What is the minimum vesting requirement for a defined contribution plan?
3 year cliff or 2-6 year graduated
Constant Growth Dividend Model (Intrinsic Value of Stock)
D1 / r-g
HCE Ratio Test
(NHC Benefit / Total NHC) / (HCE Benefit / Total HCE )
Has to be greater than or equal to 70% to past test
Avergage Benefit Test for HCE
NHC average benefit % / HCE average benefit %
Has to be greater than or equal to 70% to past test
What type of retirement plan is best to use when there are fluctuating cash flows in the business?
Profit sharing plan
Can ESOPs be integrated with SSI?
No
Do pension plans offer flexible funding?
No
Do pension plans limit investment in employer securities?
Yes
Are payments made directly to health care providers considered gifts?
No
Interest free loans under what amount result in no gift consequences?
$100k if the receiver of the loan has investment income less than $1,000
What is a charitable remainder trust?
An irrevocable trust that pays a % of trusts assets each year and allows for the PV to be deducted as a charitable income tax deduction for the current year (i.e. when the trust was established)
During the current year, Mr. Kabel made gifts of the following items to his son:
A bond with an adjusted basis of $12,000 and a fair market value of $40,000.
Stock with an adjusted basis of $22,000 and a fair market value of $33,000.
An auto with an adjusted basis of $12,000 and a fair market value of $14,000.
An interest-free loan of $6,000 for a computer (personal use) on January 1 of the current year; the loan was repaid by the son on December 31 of the current year.
Assume the applicable federal rate was 8% per annum. What is the gross amount of gifts includible on Mr. Kabel’s gift tax return for the current year?
$87k - Gifts loans of $10,000 or less are not subject to gift tax unless the donee uses the proceeds to purchase income-producing property.
Assume you bought 100 shares of XYZ stock for $60 per share with an initial margin of 50% and a 30% maintenance margin. What will be the amount of the margin call if the stock drops to $40 per share?
$200
40100= $4,000
.560*100= $3,000 (Initial Margin)
$4k - $3k = $1k (Current Equity)
$4k*.3 = $1,200 (Required Equity)
$1,200 - $1,000 = $200 (cash required)
Randy, age 40 and not a key employee, has employer-provided group term life insurance equal to twice his salary of $75,000. He makes a monthly contribution to pay for the insurance of $5. Randy’s wife Pamela is the sole beneficiary. The employer’s actual cost for Randy’s life insurance protection is $0.25 per month per $1,000 of death benefit, and the uniform premium for group term under the Internal Revenue Code is $0.17 per month per $1,000 of death benefit. What annual amount must Randy report for federal income tax purposes as a result of his group term insurance benefit?
Need to know that group term premiums are tax exempt up to $50k in coverage.
Find excess coverage over $50k = $75k*2 - $50k = $100k
IRC cost per $1k = $.17
Monthly cost = $100k/$1k .17 = $17
Yearly cost = $1712 $204
Taxable amount = IRC Cost - annual employee contribution ($60) = $144
Mark, a financial professional, has been providing financial planning services to Peter for 25 years. Peter is widowed and has an adult son who lives in the same city as Peter. When Mark began his professional relationship with Peter, Peter was 50 years old and mentally sharp. Recently, however, Mark has noticed that Peter sometimes seems confused during their meetings and is unable to remember details about his own financial status. Despite his confusion, Peter has asked Mark to update his estate plan and to make major changes to several key provisions of his will. Which of the following actions is(are) appropriate for Mark in this situation?
- Advise Peter’s son of Peter’s requests concerning his estate plan and ask him to accompany Peter on any future meetings.
- Counsel Peter on the advisability of appointing someone, such as his son or an attorney-in-fact, to assist him in handling his affairs.
- Refer Peter to other professionals, such as medical providers or eldercare specialists, who may be able to help Peter address his diminished capacity.
2 and 3 only
Lance, age 60, has been investing $350 in a tax-deferred fixed annuity at the end of each month for the last 10 years and has been earning a compound return of 6%. If Lance withdraws all of the money from his account today, will he have enough money after paying taxes at 15% to purchase a motor home for $56,000?
A)Yes, because he has $57,358 to purchase the motor home.
B)Yes, because he has $59,200 to purchase the motor home.
C)No, because he has only $55,054 to purchase the motor home.
D)No, because he has only $48,754 to purchase the motor home.
C
John and Patty have newborn twin boys. John, a financial professional, knows the importance of planning ahead and wants to begin saving for their boys’ college education. John and Patty estimate the annual tuition to be about $25,000 (in today’s dollars) per child. Although inflation has averaged 4% overall, the cost of education has been increasing at an average rate of 6% per year. To fund 4 years of college for each boy beginning in 18 years, how much must John and Patty save at the end of each year for the next 18 years? Assume that John and Patty invest in equities and can earn an after-tax annual return of 9%. (Round to the next multiple of $100.)
A)$4,600.
B)$6,700.
C)$13,300.
D)$9,200.
C
Step 1
FV = ? N = 18 PMT = 0 PV = - 50,000 I = 6%
Step 2 (Need to use beginning mode) PMT = $142,717 (PMT From step 1) N = 4 I = (1.09 / 1.06) - 1 FV = 0 PV = ?
Step 3 (switch back to end mode) N = 18 I = 9% PV = 0 FV = PV from step 2 PMT = ?
Robert has a net worth of $200,000 before any of the following transactions:
Paid off credit cards of $10,000 using funds from his savings account.
Transferred $4,000 from his checking account to his IRA.
Purchased $2,000 of furniture on credit.
What is Robert’s net worth after these transactions?
$200k
Which of the following statements regarding Coverdell Education Savings Accounts (ESAs) are CORRECT?:
- Contributions to an ESA are tax deductible.
- Distributions from an ESA are tax free if used for qualified education expenses.
- The ability to make ESA contributions is phased out at higher levels of modified adjusted gross income (MAGI).
- Contributions to an ESA are limited to $2,000 per year per child.
2, 3, and 4
They are NOT tax deductible
Any individual (including the designated beneficiary) can contribute to a Coverdell ESA if the individual's MAGI for the year is less than $110,000. For individuals filing joint returns, that amount is $220,000.
It is important that financial planners used open-ended questions whenever possible. Which of the following questions is(are) open-ended?
- Do you have an IRA?
- What are your financial goals in terms of retirement?
- What are your feelings about investing in the stock market?
2 and 3
Rob built a house several years ago in New Orleans. The replacement value has increased to $200,000. Rob originally purchased insurance on the house under a homeowners broad form HO-2 policy in the amount of $150,000. The policy contains an 80% coinsurance clause. The roof of the house has been damaged by fire. Since the home was built, the roof had depreciated by 25%. The cost to replace the roof will be $20,000. How much will Rob collect from his policy?
A)$0; Rob did not meet the coinsurance requirement
B)$20,000 less the deductible.
C)$15,000 less the deductible.
D)$18,750 less the deductible.
D
Amount carried / Should have carried
($150k / ($200k*.8) = $150 / $160 = 93.75%
93.75% * $20,000 = $18,750
BCD Corporation is in the process of promoting a new bond issue to a wealthy potential private investor. The bonds will feature a 5.5% coupon, a par value of $1,000, a 30-year maturity, and an A rating. The issue is callable in 10 years for 103% of par value. Assuming the bond will be priced at par, which of the following statements is(are) CORRECT?
- With an A rating, the bond is not considered investment grade.
- The yield to call is 5.73%.
- The call price is $1,030.
2 and 3
Call price = Par Value * 103% = $1,030
Yield to call = FV = $1,030 PV = - $1,000 I/Y = ? * 2 PMT = $55/2 N = 10 *2
Which of the following investment strategies could be considered a protective strategy?
A)Selling a stock short.
B)Selling a call option on a stock you own.
C)Purchasing stock index futures.
D)Buying a put on a stock already owned.
D
Janice, age 50, wants an investment that will offer her the opportunity for long-term growth with moderate risk. She wants a customized portfolio based on an asset-based fee structure. Which of the following would be the best choice for Janice?
A)S&P 500 Index exchange-traded fund.
B)Growth and income mutual fund.
C)Large-cap growth separately managed account.
D)Balanced mutual fund.
C
The best choice for Janice is the large-cap growth separately managed account. This type of investment account offers a customized portfolio approach and an asset-based fee structure for portfolio management services
Which of the following statements regarding bonds is(are) CORRECT?
- Lower coupon bonds are more volatile than higher coupon bonds as interest rates change.
- Bond prices and changes in interest rates have an inverse relationship.
- A direct relationship exists between coupon rates and duration.
1 and 2
The greater a bond’s duration, the ______ the price volatility
greater
The coupon rate and duration of a bond have a ______ relationship
inverse
When bond prices increase, interest rates must be ____
decreasing
Lower coupon bonds are ____ volatile than higher coupon bonds as interest rates change
more
Recently, Vance inherited a large amount of one stock from his late Aunt Carol. Vance's basis in the stock is $500,000. He is concerned that the stock may decline in value in the near future. What is the best investment strategy that he could use to protect the stock from substantial downside risk? A)Stock index futures B)Zero-cost collar C)Purchase a put option D)Write a call option
C
Which of the following statements regarding employee elective deferrals under a Section 401(k) plan is(are) CORRECT?
A)These contributions are not subject to federal income tax or FICA.
B)These contributions are not subject to FICA but are subject to federal income tax.
C)These contributions are subject to FICA but not to federal income tax at the time of contribution to the plan.
D)The actual deferral percentage (ADP) for highly compensated employees in a Section 401(k) plan cannot be more than the ADP of the nonhighly compensated employees multiplied by 1.50.
C
Vicki, age 62, has a net worth of $540,000. Her home has a fair market value of $250,000. She recently had a stroke and is paralyzed. Vicki has 2 children and 6 grandchildren. As her financial planner, which of the following would you recommend?
- Transfer the house to an irrevocable trust in an effort to qualify for Medicaid immediately.
- Transfer both the house and contents to a revocable living trust to avoid probate.
- Give 1 of the adult children a durable power of attorney for health care.
- Gift $14,000 to every child and grandchild each year.
2 and 3
The Severn Partnership has 4 partners. The partners have entered into a binding buy-sell agreement that requires the surviving partners to purchase the partnership interest of the first partner to die. The partners used a cross-purchase agreement, but the agreement remains unfunded. If the partners decide to use life insurance as a funding vehicle, how many policies will be required?
A)4.
B)12.
C)1.
D)16.
B
On January 15, of last year, Tim transferred property to a trust, which he retained the right to revoke. The trust pays Amy 5% of the trust assets valued annually for her life, with the remainder to be paid to a qualified charity. What type of arrangement did Tim create? A)None of these. B)CRAT. C)CRUT. D)CLAT.
A
CRUT are irrevocable not revocable
A client consults a financial professional for help in formulating an estate plan. The client is in poor health and expects to die within the next 3 to 4 years. He has a large estate and would like to begin taking steps to reduce any estate tax that might be due at his death. The client is a widower with 1 adult daughter. The client owns the following property in his name alone:
A life insurance policy insuring his own life, with a death benefit of $5 million
A personal residence with a market value of $6 million
A brokerage fund with a balance of $10 million
Which of the following steps should the client implement first to meet his objectives?
A)Transfer ownership of the life insurance policy to his daughter.
B)Transfer his residence to an irrevocable living trust.
C)Add his daughter’s name to the brokerage account as JTWROS.
D)Gift the residence to his daughter.
A
Life insurance of a client is included in their gross estate if client dies and the policy lists he/she as owner.
To avoid this the client would need to transfer ownership of the policy more than 3 year prior to his/her death
3 year rule does not apply to gifts of residence to an irrevocable trust or residence to someone else directly
Megan has a financial planning practice in Atlanta, Georgia. She is meeting with her clients, Mason and Della Sinclair, to present them with a financial plan she has developed for them. Mason and Della had communicated to Megan that one of their goals is to follow their families’ southern tradition and throw their pre-teen daughter, Dixie, a very expensive debutante party in four years. Megan, having grown up in the Midwest, does not understand the purpose of these kinds of celebrations and feels they are a waste of money. What is the best way for Megan to proceed with her clients?
A) Megan should advise the Sinclairs how this goal will impact their overall financial plan.
B) Megan should offer Mason and Della her opinion regarding the extravagance of the debutante party.
C) Because this is not a good use of the Sinclairs’ money, Megan should not include it in their plan as a goal.
D) Megan should offer alternatives that would be less expensive.
A
Edwin, age 83, is a wealthy investor with a net worth of $10 million. He wants to begin gifting his assets to friends and family members, as long as he can do so without incurring any generation-skipping transfer tax (GSTT) or using any of his lifetime GSTT exemption. The people to whom he would like to make gifts include the following:
His ex-wife, Lisa, age 40
His former daughter-in-law, Sheila, age 35, who was married to his son, Doug, until 2 years ago
His granddaughter, Claire, age 22
All of Edwin’s children are still living.
Which of the following recommendations will achieve Edwin’s objectives of avoiding any generation-skipping transfer tax (GSTT) and not using any of his lifetime GSTT exemption?
- Make a cash gift of $100,000 to Lisa
- Make a cash gift of $100,000 to Sheila
- Make a cash gift of $100,000 to Claire
1 and 2
Which of the following are required to register with the SEC as registered investment advisers?
A)Publishers of business and financial publications of general and regular circulation.
B)Lawyers or accountants who provide limited advice regarding securities.
C)Individuals who advise clients on only Treasury bills, Treasury notes, and Treasury bonds.
D)None of these.
D
Which of the following items would NOT be included on a statement of financial position?
- Adjusted tax basis of a real estate investment
- Investment income
- Fair market value of automobiles
- Mortgage payments
1, 2, and 4
Louie, a representative for a large pharmaceutical corporation, would like to purchase a home. Up to this point, he has been renting a condo in fear that he may have to relocate within the next three to five years. However, he would like to own a place of his own. If Louie finds the right home for himself, which mortgage should he choose?
A)30-year fixed FHA
B)5-year adjustable rate mortgage
C)None of these choices are appropriate
D)15-year fixed conventional
B
If expecting to be in home for a short time period then an adjustable rate mortgage (ARM) should be considered
Adjustable rate mortgages usually have __________ interest rates than 30 year conventional mortgages
lower
What is a major downside risk to Adjustable Rate Mortgages?
If interest rates increase, your mortgage payment could also increase
A young, single client approaches a financial planner with $12,000 stating that she would like to develop a financial plan and invest in the stock market. This is her first experience investing and she would like help choosing an appropriate account. What is the financial planner’s most appropriate course of action?
A)Recommend suitable investments
B)Determine whether the client has any consumer debt
C)Open and fund a Roth IRA for the current year
D)Open a brokerage account
B
Ryan and Kim have a 2-year old son, Michael. One of their goals is to begin saving now for Michael’s high school education at River Oaks Academy. After analyzing Ryan and Kim’s financial statements and other relevant information, you conclude that they should save $2,000 at the beginning of the year for the next 12 years. Which of the following education planning vehicles is the most appropriate recommendation for Ryan and Kim?
A)Section 529 plan
B)Coverdell Education Savings Account
C)Series EE savings bonds
D)Lifetime Learning Credit
B
529 Plans and Series EE bonds can’t be used for high school
What is the lifetime learning credit
tax credit that may be used for post secondary education
John, age 55, is unmarried and retired. He has the following liquid assets on deposit at Allworld Bank, an FDIC-insured financial institution:
Account Ownership Balance
Certificate of deposit John $225,000
Savings account Joint with son $70,000
Rollover traditional IRA John $150,000
Checking account John $80,000
What amount is insured by the FDIC?
$470,000
All categories of accounts can be insured up to $250k
But similar accounts are aggregated together (checking, savings, CDs, etc.
Joint accounts are separately insured for $250k
Ed is employed by ABC Trucking, where he is covered by a health insurance plan, a contributory long-term disability insurance plan, and a pension plan. Ed pays $40 per quarter and ABC pays $60 per quarter for a monthly disability benefit of $1,000 following a 60-day elimination (waiting) period. During the current year, Ed was disabled for 5 months. How much, if any, of the disability insurance benefits are taxable to Ed in the current year?
A)$0.
B)$3,000.
C)$1,200.
D)$1,800.
D
60 day elimination period means he only got benefits for 3 months
$1,000*3 = $3k
$3k * % of employer paid premium
$3k * 60% = $1,800
Sally purchased a single premium deferred annuity in 1980 at a cost of $42,000. Her lifetime annuity distributions of $833.33 per month will begin on September 1st of the current year, at which time her life expectancy will be 21 years. How much must Sally include in her gross income from this SPDA in the current year? (Round to the nearest dollar.)
A)$2,000.
B)$667.
C)$8,000.
D)$2,667.
D
$833.33 * 12 * 21 = $210,000
$42k / $210k = 20%
That makes 80% taxable
80% * $833.33 * 4 = $2,667
Which of the following statements regarding the death benefit of a universal life (UL) insurance policy is(are) CORRECT?
- UL policies generally give the policyowner an option to adjust the death benefit.
- Option A is known as the level death benefit option.
- Most UL policies allow the policyowner to change insureds as needs change.
- Option B is known as the increasing death benefit option.
1, 2, and 4
UL Option A provides for a ____ Death Benefit
Level
UL Option B provides for a _____ Death Benefit
Increasing
Can you change insureds on UL policies?
no
Do UL policies allow the policy owner the option to adjust the DB?
yes
Lisa is 40 years old, but her youthful looks allow her to pass for 35. She just applied for a $20,000 life insurance policy and stated on her application that she was 35 years old. The premium for a 35 year old is $15 per $1,000, which resulted in an annual premium of $300. Had she not misrepresented her age, the premium would have been $25 per $1,000 resulting in an annual premium of $500 for the same policy. Lisa dies unexpectedly just 1 year later at age 41. Assuming the insurance company discovers that she misstated her age on the application, what amount will be paid to Lisa’s beneficiary/beneficiaries?
A)$10,000.
B)$19,800.
C)$12,000.
D)$0.
C
Real coverage = fake premium / real premium * fake benefit
$300 / $500 * $20,000
Until yesterday, Fred was employed by Avias Company. The company has a group health insurance plan that covers 24 employees. Fred’s health coverage included his spouse and 2 dependent children, ages 5 and 7. Which of the following events would qualify Fred, his spouse, or his dependents for COBRA coverage and for how long?
- Fred’s death (36 months).
- Termination of employment as a result of dismissal due to downsizing (36 months).
- Divorce (29 months).
- Legal separation (36 months).
1 and 4
Qualifying events include death of the covered employee, termination of employment, including retiring, voluntary resignation, being laid off, and being fired for anything except gross misconduct, a change in status (e.g., full time to part time), divorce or legal separation causing the spouse and/or dependent children to lose coverage, child reaching an age where the child is no longer eligible to be covered, employee reaching Medicare age, and spouse and/or dependent child losing coverage as a result. Voluntary or involuntary termination qualifies the individual for 18 months of COBRA coverage. Divorce, legal separation or termination of employment due to death qualifies the individual for 36 months of COBRA coverage.
Jack, age 36, is a self-made millionaire and enjoys taking financial risks. He would like to retire by age 60. He has amassed a sizable portfolio, but he is concerned the allocation is not maximizing growth. He is willing to take risks to achieve higher long-term returns. Which of the following portfolios would be most suitable for Jack to meet his retirement goal?
A)Portfolio 1 - 20% S&P 500 Index Fund, 50% Small-Cap Growth Fund, 25% International Stock Fund.
B)Portfolio 2 - 50% Russell 2000 Index Fund, 20% Corporate Bond Fund, 20% Biotechnology Fund, 10% Energy Sector Fund.
C)Portfolio 4 - 60% S&P 500 Index Fund, 10% Small-Cap Growth Fund, 10% Foreign Stock Fund, 10% Pacific Rim Growth Fund, 10% Corporate Bond Fund.
D)Portfolio 3 - 40% Small-Cap Growth Fund, 20% Corporate Bond Fund, 15% Utilities Stock Fund, 15% Foreign Stock Fund, 10% Municipal Bond Fund.
C
Portfolio 4 is the best choice for Jack based on his age and risk tolerance. A mix of 90% stocks and 10% bonds is appropriate for an investor who is willing to take risks to achieve higher long-term returns.
Which of the following types of orders might an investor use to purchase stock on an exchange?
- Stop order.
- Good-til-cancelled (GTC) order.
- Stop-limit order.
All of these
MB Mutual Fund had an alpha of 3% and a beta of 1.5 over the past year. If the risk-free rate has been 5% and the actual return for MB Mutual Fund has been 17%, what has been the market risk premium over this same period according to Jensen’s alpha?
6%
Non-U.S. Government zero-coupon bonds may be subject to which of the following types of risk?
- Default risk.
- Reinvestment rate risk.
- Purchasing power risk.
- Interest rate risk.
1, 3 , and 4
Reinvestment rate risk is the risk that interim cash flows cannot be reinvested at a rate of return equal to the yield expected of the underlying investment. This risk does not apply to zero-coupon bonds because cash flows are received only at sale or maturity. Non-U.S. government zero-coupon bonds are subject to default risk, purchasing power risk, and interest rate risk.
The risk that interim cash flows cannot be reinvested at a rate of return equal to the yield expected of the underlying investment
Reinvestment Rate Risk
Darby is single and has 2 dependents. Financial records show the following were received by Darby in the current year:
Gift from a friend $12,000
Cash dividends received from domestic common stock $1,200
Prize won in state lottery $1,000
Salary from employer $35,000
Child support received from ex-spouse $6,000
Alimony receieved from ex-spouse $12,000
Long term capital loss $5,000
What is Darby’s adjusted gross income (AGI) for the current year?
$46,200
You can only deduct $3k of the LTC loss
Which of the following is included in AMTI for calculating the alternative minimum tax for an individual taxpayer?
- Excess accelerated depreciation over straight line on equipment.
- Excess of depletion deduction over the adjusted basis.
- Excess of fair market value above the exercise price if exercised for freely transferable ISOs.
- Net appreciation on long-term capital gain property donated to a public charity.
1 , 2, and 3
In the current year, Garrett invested $100,000 for a 20% partnership interest in an activity in which he is a material participant. The partnership reported a loss of $400,000 in the current year and $200,000 in the next year. Garrett’s share of the partnership’s loss was $80,000 in the current year and $40,000 in the next year. How much of the loss from the partnership can Garrett deduct?
A)$80,000 in the current year, $20,000 in the next year.
B)$50,000 in the current year, $50,000 in the next year.
C)$80,000 in the current year, $40,000 in the next year.
D)$0 in the current year, $0 in the next year.
A
At Risk Rule
can’t deduct losses greater than the capital you put in
Which of the following statements regarding the income tax treatment of involuntary conversion of real property is(are) CORRECT?
- Gain may be deferred if the taxpayer reinvests the amount realized from the converted property in another property.
- The period for reinvestment is 2 years from the end of the year in which the realization took place for conversion events caused by nature (e.g., fire, earthquake).
- The reinvestment period for conversion acts caused by government (eminent domain) is 3 years from the end of the year in which realization of the conversion took place.
- If the conversion was into cash, the nonrecognition treatment is mandatory, not elective.
1, 2, and 3
Gain may be deferred if the taxpayer reinvests the amount realized from the converted property in another property. The period for reinvestment is 2 years from the end of the year in which the realization took place for conversion events caused by nature. The reinvestment period for conversion acts caused by government/eminent domain is 3 years from the end of the year in which realization of the conversion took place. If the conversion is into cash, nonrecognition is elective.
A calendar-year taxpayer made the following charitable contributions in the current year:
Basis Fair Market Value
Cash to church $5,000 $5,000
Unimproved land to the city of Kenner, Louisiana
$40,000 $70,000
The land had been held as an investment and was acquired 5 years ago. Shortly after receipt, the city of Kenner sold the land for $90,000. If the taxpayer’s AGI is $120,000, the maximum allowable charitable contribution deduction in the current year is:
A)$75,000 if the reduced deduction election is made.
B)$25,000 if the reduced deduction election is not made.
C)$36,000 if the reduced deduction election is not made.
D)$45,000 if the reduced deduction election is made.
D
The maximum allowable charitable deduction for the current year is $45,000 if the reduced deduction election is made. The taxpayer has 2 options with respect to the contribution deduction. First, she can deduct the FMV of the land limited to 30% of her AGI. In this case, the total deduction would be $41,000 [$5,000 cash + $36,000($70,000 FMV limited to 30% of $120,000)]. The carryover for the next 5 years is $34,000 ($70,000 FMV − $36,000 current year deduction).
Alternatively, she can deduct the adjusted basis, limited to 50% of AGI. The total deduction would be $40,000 for the land and $5,000 for the cash, for a total of $45,000. There would be no carryover with this option but the deduction for the current year would me maximized.
Reduced Deduction Election
allows you to deduct the basis of an asset being gifted to charity up to 50% of your agi
Does the Reduced Deduction Election allow for carry over?
No
What is the maximum deduction allowed for land if the Reduced Deduction Election is not selected?
30% of a taxpayer’s agi
William is a 17-year-old high school student who has $3,200 of investment income from mutual funds and $5,000 of earnings from a part-time job. His parents claim him as a dependent. How much of William’s income is taxed at his parents’ highest marginal income tax rate?
A)$2,850.
B)$0.
C)$1,100.
D)$2,000.
C
Non earned income - kiddie tax allowable amount
$3,200 - $2,100 = $1,100
Kidde Tax
a threshold set that requires a dependent child’s passive income over a specified amount to be taxed at his/her parent’s marginal rate.
2017 amount = $2,100
Duane, a financial planner, is meeting with Lisa, who wants information regarding how several investment sales she has completed this year will impact her income tax return. Lisa has sold the following properties:
Section 1202 stock, which Lisa purchased December 12, 2014, for $50,000 and sold December 15, 2017, for its FMV of $65,000.
A vacation home Lisa inherited from her uncle, who died in 2015 and who had a basis of $95,000 in the home. The home had a FMV of $135,000 in his gross estate. Lisa sold it for $160,000 July 1, 2017. Lisa has used the vacation home only 4 weeks since she inherited it; otherwise it was vacant.
Stock Lisa inherited from another uncle, who also died in 2015. His basis in the stock was $20,000 and the FMV in his gross estate was $15,000. Lisa sold it November 1, 2017, for $17,000.
What should Duane tell Lisa?
- 100% of the gain on the sale of the Section 1202 stock is excluded from Lisa’s income for both regular income tax and AMT purposes.
- Lisa must recognize a $2,000 gain on the sale of the stock she inherited from her uncle.
- Lisa’s gain on the vacation home is all capital gain.
- Lisa must recognize a total gain of $27,000 on the sale of her investments.
2 and 3
Statement 1 is incorrect. Section 1202 stock must be held for 5 years in order for Lisa to exclude the gain from her taxable income. Statement 4 is incorrect. The total gain Lisa must recognize is $42,000 ($15,000 on the Section 1202 stock + $25,000 on the vacation home sale + $2,000 from the stock sale). Note that the vacation home does NOT qualify for the Section 121 gain exclusion, which applies to the sale of a personal residence only.
How long must section 1202 stock be held in order for an individual to exclude the gain from their taxable income?
5 years
What is section 121 gain exclusion rule?
allows a taxpayer to exclude up to $250,000 ($500,000 for certain taxpayers who file a joint return) of the gain from the sale (or exchange) of property owned and used as a principal residence for at least two of the five years before the sale.
In the current year, Pamela, who is single, had the following capital gains and losses:
Short-term capital gains $40,000 Short-term capital losses $32,000 Long-term capital gains $15,000 Long-term capital losses $27,000 What is Pamela's net capital gain or loss for the current year, and how is it treated on her current year's tax return?
A) She has a net capital loss of $4,000, fully deductible in the current year.
B) She has a short-term capital gain of $8,000 and a $12,000 long-term capital loss.
C) She has a short-term capital gain of $8,000 and a $3,000 long-term capital loss with a $9,000 carryover.
D) She has a $3,000 deductible long-term capital loss with a $1,000 long-term capital loss carryover.
D
Net the long term capital gain consequences
- $27k loss + $15k gain = - $12k loss
Net the short term capital gain consequences
$40k gain - $32k loss = $8k gain
Net the total gain consequences
- $12k loss + $8k gain = -$4k loss
max loss per year = - $3k
meaning there is $1k in loss carry forward
Bill and Curt have entered into an exchange of property. Bill gives Curt a fishing boat that has an FMV of $15,000. In exchange, Curt forgives a $20,000 debt that Bill owes him. Bill acquired the boat in an estate auction for a bargain price of $6,000. What is Bill’s realized gain in this transaction?
A)$14,000
B)$6,000
C)$15,000
D)$9,000
A
FMV of Boat - Basis of Boat = $9k gain
Debt forgiven - FMV Boat = $5k gain
Total = $14k
On January 10 of the current year, Mark sold stock with an adjusted tax basis of $6,000 to his son Les for $4,000 (fair market value). On July 31 of the next year, Les sold the same stock for $5,000 in a bona fide arms-length transaction to Sara, who is unrelated to Les or Mark. What is the proper tax treatment for these transactions?
A)Les has a recognized gain of $2,000 in the current year.
B)Les has a recognized gain of $1,000 in the next year.
C)Mark has a recognized loss of $2,000 in the current year.
D)Neither Mark nor Les has a recognized gain or loss in either year.
D
This is an application of the related party rules. Neither Mark nor Les has a recognized gain or loss in either year. Mark has a $2,000 realized loss in the first year, but cannot recognize it because of the related party rule. Mark forever loses the ability to take a deduction for the loss because it is the result of a related party transaction. Les has a realized gain of $1,000 in the second year. He can reduce his gain by Mark’s loss (up to the amount of gain). Les has no gain or loss in the second year. The remaining $1,000 loss is no longer available to either of them.
What is the related party rule?
If you sold an asset to a related party (spouse, child, etc.) at a loss, you will never be able to deduct the loss on your tax return
Can the receiver of a related party transaction realize a loss if the asset is sold to an unrelated party in the future? If so, how much loss can be realized?
Yes they can realize a loss, but only up to an amount equal to the gain they received when selling the asset.
Example: Mark sells stock to his son with basis of $6k and FMV of $4k. Son then sells stock to an unrelated party for $5k. Son has $1k in gain, but can use the loss that Mark never got to realize to offset this gain, but only up to $1k. So the Son would never realize any gain on his tax return nor would he realize a loss due to the offsetting
Richard, who is single, has a traditional IRA that contains a portfolio of mutual funds with a current value of $107,000. He is expected to incur approximately $9,600 in medical bills in the next couple of months. Assuming he qualifies to maintain and fund a HSA and he has not made any contributions to the HSA in the current year, could Richard simply transfer the $9,600 from his IRA into an HSA and pay his medical bills with qualified tax free distributions from his HSA?
A)Richard could make a one-time trustee-to-trustee transfer of the maximum amount of $15,000 from his traditional IRA to his HSA.
B)No, this type of transfer is not allowed by the Tax Code.
C)No. Richard could make a one-time, trustee-to-trustee transfer from his traditional IRA to his HSA, but the estimated medical expenses of $9,600 exceeds the maximum allowable contribution for the current year to a HSA for an insured with single coverage, therefore, Richard’s transfer is limited to the maximum contribution allowable.
D)Yes, Richard could make a one-time trustee-to-trustee transfer of $9,600 from his traditional IRA to his HSA.
C
Which of the following employee(s) is(are) highly compensated for qualified plan nondiscrimination testing purposes in the current year?
- Stephen, a 6% owner of an incorporated law firm.
- Franklin, who earned $135,000 last year and he was the top-paid employee.
- Jerome, whose salary was the 10th highest of 50 employees and who earned $75,000 last year.
- Margo, a corporate vice president of marketing and 1% owner of the company, whose salary last year was $68,000.
1 and 2
Who is considered a highly compensated employee for 2017 purposes?
5% or more owner or salary over $120k
Which of the following statements regarding nonqualified stock options (NQSOs) and incentive stock options (ISOs) is(are) CORRECT?
- NQSOs will not create an AMT adjustment upon exercise, but ISOs will.
- Gain may be included in W-2 wages upon exercise for NQSOs but not ISOs.
- Once vested, both NQSOs and ISOs can be exercised and the stock can be sold immediately.
- Typically, on the date of the option grant, W-2 compensation income, which is a type of ordinary income, is created for an NQSO but not for an ISO.
1, 2, and 3
Which of the following pension plans must be covered by Pension Benefit Guarantee Corporation (PBGC) insurance?
- Cash balance pension plan.
- Money purchase pension plan.
- Target benefit pension plan.
- Traditional defined benefit pension plan.
1 and 4
Only ___ benefit pension plans and ___ ____ pension plans are covered by PBGC
Defined, cash balance
Bob had a cumulative IRA account balance of $450,000 as of December 31 of last year, turned age 70 on April 1 of this year, received a distribution of $15,000 from his IRA on December 31 of this year, and had a life expectancy of 23.5 years as of the same date. Which of the following statements regarding Bob’s required minimum distributions is CORRECT?
A)Bob will incur a penalty because he failed to take the required minimum distribution by December 31 of the current year.
B)Bob’s distribution of $15,000 is sufficient to meet his required minimum distribution requirement.
C)Bob is not subject to the required minimum distribution rules.
D)Bob will not have a penalty for the current year, but he will need to withdraw the balance of his required minimum distribution for the current year by April 1 of next year.
D
If a taxpayer has is covered by an employer sponsored plan, but doesn’t participate in the plan, how much of their IRA contributions are deductible?
All of their contributions would be deductible
If a taxpayer is covered by an employer sponsored plan and participates in the plan, how much of their IRA contributions are deductible?
It depends on their MAGI. If single phase out begins at $62k and ends at $72k. If married phase out begins at $99k and ends at $119k. If one spouse is active and the other is not the active spouse is subject to the $99 - $119k phase out, but the non active spouse is subject to a $186k - $196k phaseout.
A simplified employee pension (SEP) plan:
- uses an IRA as a funding vehicle
- must follow the rule regarding non-discriminatory contributions.
- may include a loan provision.
- requires a specific employer contribution each year.
1 and 2
employer contributions are discretionary, but if made must be non discriminatory
Calculate the maximum benefit that may be funded for in the current year for Winona, who participates in her employer’s traditional defined benefit pension plan. Her highest 3 consecutive years’ salaries are shown below. Winona will have more than 10 years of service with the same employer at retirement.
Highest Salaries
Current year (−2) $ 90,000
Current year (−1) $100,000
Current year $110,000
$100k
Which of the following statements regarding loans from qualified plans is(are) CORRECT?
- As a general rule, the maximum loan amount cannot exceed $50,000.
- The limit on the term of a loan is generally 5 years.
- After-tax employee contributions are available for loans.
- Generally, loans to a 100% owner employee are permissible as long as they are not discriminatory.
1, 2, and 4
Sharon, single and age 54, retired 2 years ago and is receiving a $600 monthly pension from her previous employer’s qualified pension plan. She recently accepted a position in a small CPA firm that has no pension plan. She will receive $5,000 in annual compensation from the CPA firm and will continue to receive $7,200 in annual pension benefits. What is Sharon’s maximum deductible contribution to a traditional IRA for 2017?
$5,000
she can’t contribute more than her earned income
Only ________ ___________ plans can provide funding flexibility
profit sharing
What is an age based profit sharing plan?
a plan where a company is allowed to make more generous contributions for older employees, so the benefits they receive when they retire are equivalent to those that will be received by younger employees who earn the same salaries
Which of the following retirement plans must provide for both a qualified preretirement survivor annuity and a qualified joint and survivor annuity for a married plan participant?
- Traditional defined benefit pension plan.
- Target benefit pension plan.
- Profit-sharing plan.
- Cash balance pension plan.
1, 2, and 4
Pension plans must provide for both a qualified preretirement survivor annuity and a qualified joint and survivor annuity for a married participant. Generally, a profit-sharing plan does not provide a QPSA or QJSA.
Which of the following are characteristics of property owned as tenants by the entirety?
- Can only be owned by spouses.
- Each owner has an equal ownership interest in the property.
- Transfer of property does not require the consent of the other owner.
- Includes a right of survivorship.
1, 2, and 4
Any transfer of the property under tenants by entirety requires the approval of both spouses acting as one.
Which of the following property would be included in a decedent’s probate estate?
- Solely owned securities held in a brokerage account.
- An interest in property held as tenants in common with a brother of the decedent.
- Life insurance policy death proceeds made payable to the decedent’s estate.
- A condo owned jointly (JTWROS) with the decedent’s spouse.
1, 2, and 3
RST stock does not trade on a regular basis. Carl makes a gift of the stock on Thursday, October 5 and the most recent trades for RST stock are as follows:
Date Price October 2 $240 October 4 $180 October 9 $265 October 10 $290 What is the value that should be used for the federal gift tax return?
$208.33
If the stock is not traded on the date of gift, the gift tax value of the stock is the price following the date of the gift multiplied by the number of days from the stock trade before the date of the gift. Added to this is the stock price directly preceding the gift date multiplied by the number of days (trading days) between the date of the gift and the next trading day. This sum should be divided by the sum of the days before and after the date of the gift. In this case, [(1 × $265) + (2 × $180)] ÷ 3 days (2 + 1) = $208.33.
Which of the following statements regarding a self-canceling installment note (SCIN) is(are) CORRECT?
- To be effective, a self-canceling installment note must reflect a risk premium to compensate the seller for the possibility of cancellation.
- A seller who accepts a self-canceling installment note may require security for the note without jeopardizing the estate planning advantages of the SCIN.
- At the seller’s death, the present value of any remaining self-canceling installment note balance is excluded from the seller’s gross estate.
- A self-canceling installment note is a debt that ordinarily is extinguished at the seller’s death.
All are correct
Which of the following statements regarding private annuities is(are) CORRECT?
- The transfer of property under a private annuity does not trigger immediate recognition of all gain to the seller.
- If the present value of the annuity payable to the seller is at least equal to the fair value of the property transferred, there is no gift and, as a result, no gift tax due.
- Each annuity payment will generally consist of a partial return of basis, capital gain, and ordinary income.
- Private annuities cannot be secured by collateral.
All are correct
True or False?
The transfer of property under a private annuity does not trigger immediate recognition of all gain to the seller.
True
True or False?
Private annuities cannot be secured by collateral.
True
Which of the following statements regarding qualified disclaimers is(are) CORRECT?
- They must be in writing.
- The disclaiming party cannot have previously benefited from the interest being disclaimed.
- They generally must be made within 9 months of the creation of the interest.
- The disclaiming party cannot direct the disclaiming interest to other parties.
All are correct
Mr. Ortego died on December 29 of last year. The assets in his estate were valued on his date of death and alternate valuation date as follows:
Asset Date of Death Valuation Alternate
Residence $300,000 $350,000
Common stock $6,400,000 $6,450,000
Municipal bonds $180,000 $90,000
Patent $80,000 $65,000
The patent had 8 years of life remaining at the time of Mr. Ortego’s death. The executor sold the residence on March 1 of this year for $325,000. If Mr. Ortego’s executor properly elects to use the alternate valuation date, what is the value of Mr. Ortego’s gross estate?
$6,945,000
The alternate valuation date is 6 months from the date of death. When using the alternate valuation date, the election applies to all assets, with 2 exceptions. One exception is for wasting assets, such as patents, annuities, and installment notes, which must be valued at the date of death. The second exception is for assets disposed of after the date of death, but before the alternate valuation date. These assets are valued as of the date of disposal. Therefore, the calculation would be: residence $325,000 + stock $6,450,000 + bonds $90,000 + patent $80,000 = $6,945,000.
Matt gifts Jim securities in the current year. Matt’s adjusted basis for the securities is $48,000, and the fair market value is $40,000. Matt pays $2,000 in gift tax. What is Jim’s basis for the stock for gain and for loss?
A)$0 for gain and $0 for loss.
B)$50,000 for gain and $42,000 for loss.
C)$40,000 for gain and $40,000 for loss.
D)$48,000 for gain and $40,000 for loss.
D
Because the FMV of the property at the time of the gift was less than Matt’s adjusted basis, Jim’s basis depends on whether he sells the property for a gain or for a loss. His basis for determining gain is Matt’s adjusted basis, which is $48,000. His basis for determining loss is the FMV of $40,000. Because this is a gift of loss property, none of the gift tax paid will be added to Jim’s basis.
i.e. if you are gifted an asset with adjusted basis that is higher than fvm then the adjusted basis is used to determine future gains but the fmv is used for future losses
Rick and Fran were divorced in 2015. Under the divorce agreement, Fran was to receive alimony of $100,000 in 2015, $85,000 in 2016, and $60,000 in 2017 and beyond. Payments were to cease upon death or remarriage. How much alimony, if any, must Rick recapture in 2017?
A)$27,500.
B)$0.
C)$15,000.
D)$30,000.
A
Front-loading (also referred to as alimony recapture) is a measure to discourage disguising property settlements as alimony. If a $15,000 decrease in alimony payments occurs between any of the first 3 years, alimony recapture may be required.
Shortcut for calculating alimony recapture in Year 3:
R3 = P1 + P2 − 2P3 − $37,500
R3 = $100,000 + $85,000 − 2($60,000) − $37,500
R3 = $185,000 − $120,000 − $37,500
R3 = $27,500
Mary Sue’s salaries from 2003-2016 are shown below. What is the maximum annual compensation that may be used to determine Mary Sue’s annual benefit under a traditional defined benefit pension plan for 2017?
Salaries: 2003 - 2008 $65,000 2009 $100,000 2010 $120,000 2011 $90,000 2012 $125,000 2013 $110,000 2014 $90,000 2015 $90,000 2016 $90,000
$111.67
Which type of bankruptcy filing allows for the reorganization of persons, firms and corporations? A)Chapter 11 bankruptcy. B)Chapter 7 bankruptcy. C)Chapter 13 bankruptcy. D)Bailout bankruptcy.
A. Chapter 11
What is chapter 7 bankruptcy?
Liquidation
What is chapter 13 bankruptcy?
Debt adjustment
What is chapter 11 bankruptcy?
Reorganization of persons, firms and corporations
Which of the following are steps in the financial planning process?
- Establish financial goals.
- Gather relevant data.
- Analyze the data.
- Develop a plan for achieving goals.
All are steps in the financial planning process
Jerry and Sara are concerned because they have not yet begun saving for their son Paul’s higher education expenses. Jerry and Sara are both 30 years old, and Paul is 9 years old. Their combined income is $100,000, and they want to begin saving $5,000 per year in a tax-efficient manner. Which of the following is the best investment choice for Jerry and Sara?
A)Section 529 plan.
B)Coverdell Education Savings Account.
C)Uniform Transfers to Minors Act (UTMA) account.
D)Loans from the parents’ traditional individual retirement accounts (IRAs).
A
Which of the following items may be discharged in a Chapter 7 bankruptcy?
- Child support.
- Tort claim for negligence (nonintentional).
- Federal taxes (past two years).
- Consumer debt.
2 and 4
Can child support be discharged under chapter 7 bankruptcy?
No
Can federal taxes be discharged under chapter 7 bankruptcy?
No, but only if taxes were within last 3 years
Julie and Charlie are meeting with their financial advisor to discuss their current financial situation. They have brought all the required documents to the first meeting. During the discussion, they referred to a number of financial transactions that had taken place during the prior year. Which of the following would increase or decrease their net worth?
- Repayment of a loan using funds from a savings account.
- Purchase of an automobile that is 75% financed after a 25% down payment.
- Increase in the S&P 500 Index when their holdings include an S&P 500 Index mutual fund.
- Increase in interest rates when they have a substantial bond portfolio.
3 and 4
Which of the following correctly states the relationship between NPV, IRR, and required return?
- If NPV > 0, then IRR > required return.
- If NPV = 0, then IRR = required return.
- If NPV > 0, then IRR < required return.
- If NPV < 0, then IRR < required return.
1, 2, and 4
A company is considering the purchase of a copier that costs $5,000. Assume a required rate of return of 10% and the following cash flow schedule:
Year 1: $3,000
Year 2: $2,000
Year 3: $2,000
What is the project's approximate IRR? A)17%. B)21%. C)14%. D)10%.
B
Which of the following is(are) considered qualified education expenses for the purpose of Coverdell Education Savings Accounts?
- Private elementary school tuition
- Room and board at a private boarding school for secondary education
- College tuition
All are qualified expenses
Bob and Liz have a newborn son and want to make sure they have adequate funds to pay for his college education in 18 years. If they will need $75,000 for college costs in 18 years, approximately how much should they save at the end of each month to accumulate this amount? (Assume 8% interest compounded monthly.)
A)$145.
B)$156.
C)$104.
D)$123.
B
Which of the following statements regarding fiduciary responsibility are CORRECT?
- Fiduciary relationships include attorney and client, and agent and principal.
- The fiduciary is expected to act for the sole benefit of the principal.
- No other interests should be placed before the duty a trustee has to a beneficiary.
All of these are correct
Dean secures a 30-year, $350,000 mortgage with an annual interest rate of 6%. Approximately how much total interest will Dean have paid on the mortgage at the end of 25 years?
A)$241,457.
B)$388,070.
C)$375,960.
D)$108,542.
B
Which of the following statements regarding the decision to buy or lease a home are CORRECT?
- Generally, many more costs are associated with leasing a home, especially if this arrangement is short term.
- A client who will be residing in the home for a short period of time should lease the home.
- The lower the marginal income tax bracket, the greater the advantage of owning a home.
- The itemized tax deduction for mortgage interest costs is a benefit of home ownership.
2 and 4
All of the following statements regarding the American Opportunity Tax Credit are correct EXCEPT:
- The credit is available regardless of the taxpayer’s adjusted gross income.
- The credit is available for the first four years of the student’s post-secondary education.
- The maximum credit is $2,000 per eligible student per year.
- The definition of eligible expenses includes course materials.
1 and 3
the credit is phased out at higher levels of AGI
the maximum credit is $2,500 per student per year
Edwina, age 48, owns a modified endowment contract (MEC). Her basis in the policy is $20,000, and the cash value is $35,000. This year, she takes out a policy loan of $10,000. Which of the following statements regarding the income tax consequences of this loan is CORRECT?
A)Edwina must include $5,000 in her gross income; the $5,000 is also subject to a 10% penalty.
B)Edwina must include $10,000 in her gross income; the $10,000 is also subject to a 10% penalty.
C)Edwina incurs no income tax consequences as a result of the loan.
D)Edwina must include $10,000 in her gross income, but the 10% penalty does not apply.
B
Modified Endowment Contracts are subject to LIFO (last in, first out).
Loans from MEC’s are considered to consist of taxable earnings until all the taxable earning have been withdrawn
Edwina must include the entire $10k in her gross income and is subject to the 10% penalty because she is under 59.5
Cathy Grant, her husband Jack, and their daughter Kelly were in an automobile accident this year in which they all sustained various injuries. They were insured under Cathy’s group major medical policy that has a $250 per individual/$500 family deductible, a $5,000 per individual stop-loss limit, and an 80% coinsurance provision. The medical expenses were itemized as follows: Cathy - $12,000; Jack - $10,000; and Kelly - $13,000. Assuming no other medical expenses during the calendar year, how much of these medical expenses did the Grant family have to pay?
A)$3,500.
B)$6,750.
C)$3,600.
D)$15,750.
A
Grant’s would pay the deductible = $500 and then 20% of the stop loss limit of $15,000 ($5k per person)
Which of the following statements concerning employer-provided disability income insurance is (are) CORRECT?
- To determine whether the benefits under the plan are taxable income, it is necessary to look at whether the employer or the employee pays the premiums.
- If the entire cost is paid by the employee, benefits are included in gross income.
1 only
Managed care plans developed out of which belief?
A)Limiting the number of health care providers to individuals provided economies of scale.
B)Capitation was a less expensive way to provide basic health care.
C)The use of a gatekeeper could minimize health costs.
D)Preventive care was less expensive than treating a serious illness.
D
Which of the following statements regarding qualified long-term care insurance policies is (are) CORRECT?
- Premiums are always deductible.
- Benefits may be received income tax free.
- Benefits may not be provided for expenses that are reimbursable under Medicare.
- The policy must be guaranteed renewable.
2, 3, and 4
Premiums for qualified long-term care insurance policies are tax deductible to the extent that they, along with other unreimbursed expenses such as Medicare premiums, exceed a specified percentage of the insured’s adjusted gross income
Robert retires on May 31 of the current year and begins to receive a monthly annuity of $1,200 payable for life. His life expectancy at the date of retirement is 10 years. The first annuity payment was received on June 15. Robert contributed $24,000 to the cost of the annuity. He is confused as to the taxation of this payment. As a result, he decides to see Frank, his financial planner. Which of the following statements with regards to Robert’s annuity are CORRECT and can be used by Frank in his meeting with Robert?
- If Robert lives beyond his 10-year life expectancy, every annuity payment received after ten years will be received tax-free.
- If Robert lives beyond his 10-year life expectancy, every annuity payment he receives after ten years will be fully taxable.
- Robert can exclude $1,400 of his monthly payments received this year from income tax and $2,400 a year going forward until his 10-year life expectancy is completed.
- For the first 10 years, Robert cannot exclude any amount of his annuity payments from taxes because each payment is fully taxable.
2 and 3
All annuity payments received after life expectancy will be fully taxable. Because Robert will only receive 7 payments the first year, he will only be able to exclude $1,400 of the annuity payments the first year but he will be able to exclude $2,400 per year going forward until year 11. See calculation below:
$24,000 ÷ $144,000 = 0.1666 or 1/6 exclusion ratio (1/6 × $1,200 = $200 exclusion amount)
Current year: 7 payments × $200 (exclusion amount) = $1,400
Year 2: (12 payments × $1,200) × ⅙ = $2,400
Year 3 : (12 payments × $1,200) × ⅙ = $2,400
Shortcut: $24,000 ÷ 120 = $200 per month nontaxable
Which of the following perils is (are) ordinarily covered in an open-perils HO-3 policy?
- Ice damage
- Lightning
- Flood
- Earthquake
1 and 2
Virginia had a basis of $350,000 in her nonqualified fixed annuity. Her life expectancy at age 60 is 25 years. The monthly payment is expected to be $2,700. How much of each monthly payment is going to be included in Virginia’s taxable income?
A)$18,396.
B)$14,004.
C)$1,533.
D)$1,167.
C
Mrs. Hopkins has a major medical insurance policy with a $500 deductible and an 80% coinsurance clause. She becomes ill and is admitted to the hospital for several days. When she is discharged, her hospital bill is $7,500 and her doctor bills are $3,250. What amount will her insurance policy pay?
A)$8,200.
B)$10,250.
C)$7,000.
D)$9,250.
A
Add losses together = $7,500 + $3,250
Subtract deductible = $10,750 - $500
Multiply by coinsurance % = $10,250 * 80% = $8,200
Which of the following statements regarding the various definitions of disability are CORRECT?
- Under an own occupation definition, an insured may be eligible for benefits even if employed in another occupation.
- The Social Security definition of disability is more restrictive than those found in private disability income policies.
- Under the presumptive definition of disability, an insured will be eligible for benefits due to the loss of sight in one eye.
- A policy containing an any occupation definition of disability is generally the least expensive.
1, 2, and 4
The Goldens are planning to purchase additional life insurance to meet the objectives stated in the case. They want to purchase policies that feature flexible premium payments and that will allow them to invest the cash value in various subaccounts. Which of the following types of life insurance will best meet the Goldens’ objectives?
A)Variable life.
B)Variable universal life (VUL).
C)Whole life.
D)Universal life.
B
Which of the following statements regarding health savings accounts (HSAs) are CORRECT?
- Up to 100% of account contributions are tax deductible up to a maximum limit.
- A high deductible is required on the insurance policy.
- An annual maximum out-of-pocket expense limit is associated with the account and insurance policy.
- An individual can make a one-time, trustee-to-trustee transfer from a traditional IRA to an HSA.
All the statements are correct
Wayne, age 55, owns a non-MEC universal life insurance policy. His investment in the contract is $10,000 and the policy’s cash surrender value (CSV) is $25,000. This year, he borrows $5,000 from the policy to go on an extended vacation. Which of the following statements regarding the income tax treatment of this loan is(are) CORRECT?
- The $5,000 loan is subject to income tax.
- The $5,000 loan is income tax free.
- The $5,000 loan is subject to a 10% income tax penalty.
2 only
when a life insurance policy is not classified as a MEC, a policy loan is generally tax and penalty free
Which of the following statements concerning a personal liability umbrella policy (PLUP) is (are) CORRECT?
- The personal liability umbrella policy (PLUP) is designed primarily to provide liability coverage for any legal claims or judgments.
- The personal liability umbrella policy (PLUP) requires the policyowner to carry certain underlying liability coverages of specified minimum amounts.
2 only
1 is incorrect because PLUP policies are only designed to cover catastrophic legal claims or judgements (i.e. not the primary reason they’re designed)
Jamie, age 54, just inherited $500,000. She currently manages the local grocery store and has a salary of $75,000 per year. She is looking for a tax-deferred investment vehicle that will help supplement her retirement income in 11 years and wants to have the opportunity to keep up with inflation. Jamie considers herself a moderate risk taker. She has a portfolio of individual stocks at her local brokerage office. Assuming she has adequate emergency funds outside of the $500,000, which of the following would be most suitable for Jamie to invest these funds?
A)Whole life insurance.
B)Variable annuity.
C)Universal life insurance.
D)Fixed annuity.
B
Jose owns a 30-year corporate bond, with 22 years remaining until maturity, featuring a coupon rate of 6.25% (paid semiannually). If the comparable yield for this quality bond is currently 7%, what should be the intrinsic value of his bond?
A)$1,000.00
B)$1,138.38
C)$916.44
D)$906.46
C
N = 22*2 PMT = $62.50/2 FV = $1,000 I/Y= 7/2 PV = $916.44
An investor buys 100 shares of stock at $75 per share, with a 60% initial margin requirement and 40% maintenance margin requirement. If the stock quickly falls to $40 per share, how much additional capital must the investor provide to cover a margin call? A)$200. B)$400. C)$800. D)$600.
D
Current Market Value = 100 * 40 = $4k
Loan Amount = 100 * 75 * 40% = $3k
Current Equity = $1k
Maintenance margin = 100 * 40 * 40% = $1,600
Additional capital needed = $1,600 - $1,000 = $600
All of the following are characteristics of money market mutual funds EXCEPT:
A)The investments within the fund usually mature within one year and have an average maturity of less than 60 days.
B)Funds may be withdrawn from the account at any time without penalty by writing a check on the account.
C)The rate of return on the fund is highly sensitive to changes in short-term interest rates.
D)These funds typically invest in high quality, long-term investments, such as Treasury bonds, REITs, and promissory notes.
D
George has a 5-year bond with a coupon rate of 3.65% (paid semiannually). If the comparable yield for this quality bond is 4.85%, what should be the intrinsic value of his bond?
A)$1,179.84
B)$1,054.39
C)$1,000.00
D)$947.28
D
N = 5 *2 I/Y = 4.85/2 PMT = 36.5/2 FV= $1,000 PV= $947.28
Jillian recently purchased a 30-year, investment-grade, state of Louisiana municipal bond, from her broker. She paid $972 plus commission for the bond, which has an annual coupon rate of 3.5% (paid semiannually). Which of the following statements is(are) CORRECT?
- The bond will be subject to high purchasing power risk.
- Interest paid by the bond will not be subject to federal income taxation.
- If the bond is sold in three years for $1,000, the gain will be considered income tax-free.
- The bond will be subject to a high level of default risk.
1 and 2
Investment grade bonds are subject to _____ default risk
Low
Longer term bonds are subject to ____ purchasing power risk
greater
.Which of the following bonds has the greatest duration?
A)20-year maturity, 8% coupon.
B)20-year maturity, 12% coupon.
C)10-year maturity, 8% coupon.
D)10-year maturity, 12% coupon.
A
The bond with the greatest duration will have the ____ term to maturity and ____ coupon.
longest, smallest
Which of the following statements regarding the various performance measures are CORRECT?
- A positive alpha indicates that the manager consistently underperformed the market on a risk-adjusted basis.
- Jensen’s alpha indicates how much the realized return differs from the required return, as per the capital asset pricing model (CAPM).
- The Sharpe ratio is not useful for evaluating the performance of non-diversified portfolios.
- The Treynor ratio does not indicate whether a portfolio manager outperformed or underperformed the market portfolio.
2 and 4
Is the sharpe ratio useful for measuring performance of both non-diversified and well-diversified portfolios?
Yes
Greg buys a call option on the stock of LMN Corporation for an option premium of $1.50. Which of the following statements is(are) CORRECT?
- Greg hopes that the price of LMN stock will decline.
- Greg’s maximum loss on the option is $150.
2 only
If you buy a call option, you want the price to ____
Increase
What is the maximum loss when you buy a call option?
the premium paid
what is the maximum loss when you buy a put option?
the premium paid
If Mary earned a 3% return from dividend reinvestment, a 2% return from capital gain reinvestment, and a 9% return from share price appreciation on her mutual fund, what would be Mary's total return? A)14%. B)5%. C)12%. D)3%.
A
Harry has an investment that has produced the following returns: Year 1: 10%, Year 2: 5%, Year 3: -7%, Year 4: -3%, Year 5: 12%. What is the arithmetic mean return on this investment?
A)3.40%.
B)17.00%.
C)6.75%.
D)8.50%.
A
Just find the average if it’s asking for the arithmetic mean
FLY company is a publicly owned airline. The company has a capital structure consisting of 85% stock and 15% bonds. Investors in the common stock of FLY are subject to all of the following risks EXCEPT
A)default risk.
B)business risk.
C)interest rate risk.
D)market risk.
A
Common stockholders of FLY are not subject to default risk because the company is not obligated to make dividend payments.
Which of the following is the definition of standard deviation?
A)Standard deviation is a computation of the relative measure of total risk per unit of expected return.
B)Standard deviation is an absolute measure of the variability of the actual investment returns around the average or mean of those returns.
C)Standard deviation measures the extent to which two variables move together, either positively or negatively.
D)Standard deviation measures the systematic risk associated with a Monte Carlo simulation.
B
The issuer-specific component of the variability in a stock’s total return that is unrelated to overall market variability is known as a type of:
A)nondiversifiable risk.
B)unsystematic risk.
C)fundamental risk.
D)systematic risk.
B
How do you reduce unsystematic risk?
By diversifying
Market Risk Synonyms
non diversifiable, systematic
All of the following statements concerning municipal securities are correct EXCEPT:
A)because municipals are exempt from federal taxes, a taxable equivalent yield (TEY) can be calculated to make the return on these bonds comparable to those of taxable bonds.
B)one type of municipal security is the revenue bond, which is repaid from the revenues generated by the underlying project.
C)one type of municipal security is the general obligation bond, which is backed by the ‘full faith and credit’ of the issuer.
D)because municipals are issued by political entities other than the federal government (such as states and cities), the bondholder is not able to avoid state and/or local taxes.
D
Some states encourage investors to purchase municipal bonds by not imposing state income tax on the interest payments.
Assume a taxpayer is in the 35% marginal income tax bracket and has enough deductions to itemize. Calculate the equivalent tax credit that would provide the same tax benefit as a $3,000 itemized deduction.
A)$1,950.
B)$8,571.
C)$1,050.
D)$3,000.
C
A tax credit is a dollar for dollar reduction against the individual’s tax liability, while a tax deduction decreases taxable income. The formula is: deduction × marginal tax rate or $3,000 × 0.35 = $1,050.
Valerie and her husband, Mark, own a used car business. This year, they purchased a parcel of raw land for business expansion. They paid $150,000 for the land, incurred legal fees of $4,500 associated with the purchase, and paid a broker $4,000 for his services. What is their adjusted basis in the land?
A)$154,500.
B)$154,000.
C)$150,000.
D)$158,500.
D
The adjusted basis is calculated by starting with the original purchase price ($150,000) and increasing it by certain allowable costs. In this case, the allowable costs to increase basis are legal fees and broker commission (4,000 + 4,500). Therefore, the adjusted basis is 150,000 + 8,500 = 158,500.
Which of the following statements regarding adjusted gross income (AGI) is CORRECT?
A)It is the amount of income that is taxable.
B)It may result in a phaseout of certain deductions.
C)It is the first step in the process of calculating taxable income.
D)It represents a ceiling for certain deductions, such as medical expenses and miscellaneous itemized deductions.
C
Adjusted gross income equals gross income less certain items that are specifically allowed as adjustments to income. Taxable income equals adjusted gross income less allowable deductions (itemized or standard) and personal exemptions. The level of adjusted gross income does impact the deductibility of certain items, such as medical expenses and miscellaneous deductions by setting floors on the amount deductible.
Beverly purchased a painting for $10,000. Years later, when the painting had a FMV of $5,000, she gave it to her mother, Peggy, as a gift. Six months later, Peggy sold the painting at auction for $4,000. Assuming no gift taxes were paid on the gift when Peggy received it, what is her net gain or loss on the sale of this painting? A)$1,000 loss. B)$4,000 gain. C)$6,000 loss. D)$0 gain, $0 loss.
A
To determine the loss on the sale of a gift, the donee’s basis is the lower of the donor’s basis or the FMV of the property when the donee receives it. Although Beverly’s basis was $10,000, the value of the gift when Peggy received it was $5,000, which becomes her basis. Therefore, Peggy realized a net loss of $1,000 when she sold the painting for $4,000.
Mary Sue and Bob are married and file a joint return. They provided over 50% of the support for Becky, Rachel, and Vicki during the current year. Their daughter, Becky, a full-time college student, earned $4,100 during the year. Mary Sue and Bob’s married daughter, Rachel, filed a joint return with her husband. Vicki, who is Mary Sue’s mother, lives in a retirement community for which Mary Sue and Bob pay $18,000 per year. Vicki’s only income during the year was $5,200 of Social Security benefits, and she used that entire amount for her own support. Which of the following statements with respect to Mary Sue and Bob’s options is(are) NOT correct?
- Mary Sue and Bob can claim Becky as a dependent only if she is younger than 19 or is a full-time college student younger than 24.
- Mary Sue and Bob may claim Rachel as a dependent if neither Rachel nor her husband was required to file a return.
- Mary Sue and Bob may not claim Vicki as a dependent because Vicki’s gross income is too high.
3 Only
While Vicki’s Social Security benefits are not included in her gross income, if she used any amount for her own support, it is used to decide whether or not the taxpayer provided more than 50% of her support. The $18,000 in payments by the taxpayers for her home in the retirement community satisfies this test. Therefore, she does not fail the gross income test and may be claimed by Mary Sue and Bob as a dependent. Statement 1 is correct because Becky does not fail the gross income test if she is a student and under age 24. She would be a qualifying child. Statement 2 is correct because Rachel may file a joint return and qualify as long as neither Rachel nor her husband is required to file a return.
Can a married tax payer claim their child as a dependend if they are married as well?
Yes, as long as the child and their spouse didn’t have to file a return
Sara wishes to make an anonymous gift of $1 million to her alma mater. She is determined that no one know she made the gift. As her planner, you tell her there are rules that must be followed if she also wants a tax deduction for the gift. Which of the following factors determine the amount of the tax deduction allowed for Sara’s charitable gifts?
- The donee’s identity as a 30% or 50% organization.
- The fact that Sara is an individual and not a corporation.
- The type of property given away.
- Sara’s adjusted gross income.
All statements are correct. Charitable contributions are deductible, but only up to certain limits determined by the donor’s identity (individual vs. corporate) and the recipient’s identity (30% or 50% organizations). The donor’s adjusted gross income affects how much of a deduction is allowed in any one year. The type of property that is given away also determines the amount of the deduction. The charity can honor Sara’s wishes and tell the public the gift is anonymous but the charity must know her name in order to provide proper substantiation of the gift for tax purposes for Sara.
Which of the following statements regarding exclusion for gain realized upon the sale of a principal residence is (are) CORRECT?
- To claim the exclusion, the taxpayer must have owned and used the home as a principal residence for an aggregate time period of 2 years out of the 5-year period immediately preceding the home’s date of sale and may claim the exclusion only once every 2 years.
- The maximum amount of realized gain that may be excluded from gross income is $300,000 for married individuals filing jointly and $150,000 for all other taxpayers.
1 only
Amount of gain eligible for exclusion on sale of a property for married taxpayers?
$500k
Your client, who has a taxable income of $180,000, is concerned about being subject to the alternative minimum tax (AMT). Which of the following itemized deductions used in calculating your client’s taxable income are adjustments to regular taxable income in arriving at alternative minimum taxable income (AMTI)?
- Casualty losses.
- State income taxes paid.
- Employee business expenses in excess of 2% of the employee’s AGI.
- Donation made to the local university.
2 and 3 only
Statement 1 is incorrect because casualty losses are deductible for both regular tax and AMT. Statement 2 is correct because state taxes are not deductible for AMT purposes. Statement 3 is correct because miscellaneous itemized deductions that exceed the 2% of AGI floor are only deductible for regular tax purposes, not for AMT purposes. Statement 4 is incorrect because charitable contributions are deductible for both regular tax and AMT.
Are casualty losses deductible for both regular tax and AMT?
Yes
Are state taxes deductible for AMT purposes?
No
Are charitable contributions deductible for both regualr tax and AMT?
Yes
True or False
miscellaneous itemized deductions that exceed the 2% of AGI floor are only deductible for regular tax purposes, not for AMT purposes
True
After 5 years of marriage, Beth and Rudy, who have 2 children, file for divorce. The court grants the divorce and orders Rudy to pay $1,000 per month in alimony and $1,500 per month in child support. How much is Beth required to include in gross income for each year she receives these payments?
A)$28,000.
B)$18,000.
C)$30,000.
D)$12,000.
D
Payments of alimony or separate maintenance are taxable to the payee spouse in the year received. Payments are deductible by the payor spouse, who does not have to itemize in order to receive the deduction. Child support is not taxable to the payee nor deductible by the payor.
True or False?
Student loan interest is an above the line deduction
True
True or False?
Union dues are below the line (itemized) deductions
True
True or False?
Charitable contributions are above the line deductions
False, they are below the line (itemized)
True or False?
Personal casualty losses are below the line (itemized) deductions
True
For the first time in his working life, Jake is self-employed. He has always had an employer who took care of things such as payment of payroll taxes but now it is Jake’s responsibility. He has come to you, his financial planner, for clarification on what he pays and what his employees pay for payroll taxes. Which of the following statements regarding FICA are correct?
- Both Jake and his employees will pay FICA on his employees’ earnings.
- Jake must pay both the employer and the employee portions of the self-employment payroll tax on his income from his business.
- The employer share of the payroll taxes on his employees’ earnings and on his self-employment income are both deductible by Jake.
- Because Jake is self-employed, he can deduct the total self-employment taxes paid on his net self-employment income.
1, 2, and 3
Do self employed individuals pay FICA taxes on their employees’ earnings?
Yes
Can self employed individuals deduct the employee share of the FICA taxes?
No, only the employer share
Christopher, who has an interest in multiple businesses, has the following income for 2017:
Net Schedule C income: $80,000
Dividends and interest: $11,000
General partnership K-1 income: $10,000
S corporation K-1 income: $29,000
What is Christopher’s total self-employment tax for 2017? (Round up to nearest dollar.)
$12,717
Christopher’s self-employment income is $90,000. The dividends and interest and the K-1 distributions from the S corporation are not self-employment income. The self-employment tax is calculated as follows: $90,000 × .9235 = $83,115 net self-employment earnings. Total self-employment tax is $12,717 ($83,115 × .1530).
Nancy donated a professional stove to a qualified charity that cooks and delivers meals for the elderly and disabled. The stove is not new and has a fair market value of $2,500. What does Nancy need in order to be able to take a charitable deduction for this donation?
- Nancy needs a receipt from the charity that describes the stove, has the date of the donation, and name of the charity.
- Nancy must have a professional appraisal of the fair market value of the stove on the date of donation.
1 only
An appraisal is not required for noncash property over $500 and less than or equal to $5,000. However, Nancy may wish to get an independent appraisal to support the deduction claimed.
At what value do you need to have an appraisal to prove the amount of charitable deduction you are taking?
Anything greater than $5,000 for 2017 (non cash gifts)
