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Series 52 Group Share > FC CH 3 > Flashcards

FC CH 3 Flashcards

1
Q

What is the tax consequence if a municipal Original Issue Discount (OID) bond is sold prior to maturity?

A

A capital gain or loss determined by the difference between the adjusted basis and the proceeds on the sale

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2
Q

What types of municipal bonds are most likely subject to the Alternative Minimum Tax?

A

Private Activity bonds

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3
Q

Grandparents contributing to a grandchild’s 529 plan may give how much money and still avoid gift tax consequences?

A

Front-loading five years of contributions is allowed; therefore, each could contribute $75,000 for a total of $150,000.

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4
Q

An OID is sold prior to maturity. Is the capital gain (or loss) based on the original cost basis or accreted value?

A

The accreted value of the bond.

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5
Q

The process of adjusting the basis of a premium bond down to par over its life is called _______________.

A

The process of adjusting the basis of a premium bond down to par over its life is called amortization.

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6
Q

Is there an income threshold for 529 College Savings Plan contributors?

A

No. There are no income limits imposed for these plans.

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7
Q

Municipal bond interest is exempt from __________ tax.

A

Municipal bond interest is exempt from federal tax.

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8
Q

A father establishes a 529 plan for his son. Who is the owner of the account?

A

The father is the owner, while the son is the beneficiary.

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9
Q

True or False: An OID that is greater than the de minimis exemption must be accreted.

A

True

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10
Q

Prices on long-term debt are ____ sensitive to changes in interest rates than short-term debt.

A

Prices on long-term debt are more sensitive to changes in interest rates than short-term debt.

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11
Q

Who receives the benefit from a 529 plan?

A

The beneficiary

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12
Q

True or False: The accretion of the cost basis on a municipal original issue discount is tax-free.

A

True

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13
Q

Bonds subject to the AMT will trade with a _________ yield.

A

Bonds subject to the AMT will trade with a higher yield.

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14
Q

Mack, in the 35% tax bracket, is earning 5.4% on a tax-free municipal bond. What is his taxable equivalent yield?

A

The formula is: Tax-Free Yield ÷ (100% - Tax Bracket %). 5.4% ÷ 65% = 8.3%

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15
Q

True or False: 529 plans allow for a five-year front-end contribution of $75,000, which avoids gift tax.

A

True ($15,000 x 5 years)

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16
Q

When using the constant yield method for accretion, what is added to a bond’s cost basis to determine the adjusted cost

A

The bond’s compound accreted value

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17
Q

The formula for taxable equivalent yield is: __________ ÷ (________ - ________)

A

The formula for taxable equivalent yield is: Tax-Free Yield ÷ (100% - Tax Bracket %)

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18
Q

True or False: For a person saving for future college expenses, 529 plans allow for the highest annual contributions.

A

True. Although other plans exist, 529 plans allow for the highest contributions.

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19
Q

Describe the tax treatment of contributions made to a 529 Plan.

A

They are after-tax contributions that may possibly grow tax-free.

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20
Q

True or False: Interest rate risk is greater on short-term debt than on long-term debt.

A

False

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21
Q

May an aunt set up a 529 plan for her niece?

A

Yes. The donor is not required to be a parent.

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22
Q

A muni. bond is bought at a secondary market discount and sold for a gain before maturity. What is the tax consequence?

A

The gain is taxable as ordinary income up to the accreted value, and a capital gain for any amount above that.

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23
Q

A private activity bond is also referred to as a(n) _______________________ bond.

A

A private activity bond is also referred to as an alternative minimum tax (AMT) bond.

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24
Q

What may be the result of purchasing municipal bonds at a price other than par?

A

Investors may be subject to unique tax implications which may result in an adjusted basis

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25
Q

Is a broker-dealer involved in the distribution of a 529 plan required to provide an official statement to its customers?

A

Yes, an official statement or other form of disclosure document must be provided.

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26
Q

Who funds a 529 plan?

A

The donor

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27
Q

True or False: When a 529 plan is funded, an irrevocable gift is made.

A

False. The contributor (account owner) may revoke the gift.

28
Q

During periods of rising interest rates, an investor should purchase bonds with _____ maturities.

A

During periods of rising interest rates, an investor should purchase bonds with short maturities.

29
Q

Interest paid on bonds issued by U.S. territories or possessions is ___________________.

A

Interest paid on bonds issued by U.S. territories or possessions is triple-tax-exempt.

30
Q

To determine whether a wash sale violation has occurred, what is the total time period used?

A

61 days; which includes the trade date and 30 days both before and after the trade date.

31
Q

When is the OID on a municipal bond required to be accreted?

A

When the OID is more than .25% of the principal multiplied by the number of years to maturity

32
Q

How is the phantom interest on an OID treated for tax purposes?

A

It is considered interest income on a municipal bond, and therefore, tax exempt.

33
Q

Banks receive a special deduction when they invest in ______________ issues.

A

Banks receive a special deduction when they invest in bank qualified issues.

34
Q

Name the two types of 529 plans.

A

Pre-paid college tuition plans and college savings plans

35
Q

May clients invest in an out-of-state 529 plan?

A

Yes. Clients may choose to invest either in-state or out-of-state.

36
Q

For wash sale purposes, what would cause the loss on the sale of a municipal bond to be disallowed by the IRS?

A

Purchasing a substantially identical bond at any point within the wash sale period

37
Q

What is the tax consequence if a municipal Original Issue Discount (OID) bond is held to maturity?

A

Since the basis must be accreted up to par, there is no capital gain or loss when an OID is held to maturity.

38
Q

True or False: Funds invested in a college savings plan may be used in any state.

A

True

39
Q

What is the tax consequence if a municipal bond is purchased at a secondary market discount and held to maturity?

A

The gain is taxed as ordinary income.

40
Q

In a 529 plan, if the funds are not used by the beneficiary, to whom may the funds be transferred?

A

Other family members

41
Q

What is the maximum annual contribution to a 529 plan?

A

For exam purposes, the federal gift tax exclusion (currently $15,000) should be used as the maximum contribution.

42
Q

How often may a 529 plan be rolled over?

A

Once per year

43
Q

True or False: The same state tax benefits are provided when investing in out-of-state 529 plans.

A

False. State tax benefits may be lost or reduced when investing in out-of-state 529 plans.

44
Q

What is the IRS method for accreting the basis of a bond?

A

Constant yield or constant interest method

45
Q

How is the discount on a municipal secondary market discount bond treated for tax purposes?

A

As ordinary income

46
Q

The formula for net (after-tax) yield is: __________ x (________- ________)

A

The formula for net (after-tax) yield is: Taxable Yield x (100% - Tax Bracket %)

47
Q

_____ Plans are college savings plans with high contribution limits set by the state sponsor.

A

529 Plans are college savings plans with high contribution limits set by the state sponsor.

48
Q

What is the tax consequence if a municipal bond is purchased at a premium and sold prior to maturity?

A

A capital gain or loss determined by the difference between the adjusted basis and the proceeds of the sale

49
Q

If a gift to a 529 plan is made from joint property, what is the maximum amount that may be spread over a 5-year period?

A

$150,000 ($75,000 times 2)

50
Q

Who may issue bonds that offer interest that is triple tax-exempt?

A

Commonwealths, territories, and possessions (e.g., Puerto Rico)

51
Q

If not needed for a child’s education, may the funds in a 529 Plan be transferred to a relative’s 529 Plan?

A

Yes

52
Q

What is a municipal OID?

A

An Original Issue Discount (OID) bond.

53
Q

What bond factors should be altered to avoid triggering a wash sale violation?

A

The bond’s issuer, coupon rate, or maturity date

54
Q

Bonds with ______ maturities should be purchased when interest rates are falling.

A

Bonds with longer maturities should be purchased when interest rates are falling.

55
Q

What condition must exist for a municipal bond’s interest to be exempt at the state and local level?

A

Investors must buy the bond from the state in which they reside.

56
Q

The process of adjusting the basis of an Original Issue Discount bond up to par over its life is called ____________.

A

The process of adjusting the basis of an Original Issue Discount bond up to par over its life is called accretion.

57
Q

What are the other names for the official statement of a 529 plan?

A

The plan disclosure document, program description, or disclosure statement

58
Q

How is interest on municipal bonds treated for tax purposes?

A

Federally tax-exempt, but may be subject to state and local tax

59
Q

May a person contribute to her own 529 plan?

A

Yes

60
Q

What is the tax consequence if a municipal bond is purchased at a premium and held to maturity?

A

Since the basis must be amortized down to par, there is no capital gain or loss when a premium bond is held to maturity.

61
Q

True or False: Bonds with longer maturities are generally more liquid than those with shorter maturities.

A

False

62
Q

In a 529 Plan, what happens if the funds are withdrawn, but not used for qualified education expenses?

A

The earnings would be subject to ordinary income tax plus a 10% penalty.

63
Q

What is the net yield for an investor in the 28% tax bracket who owns an 8.5% corporate bond?

A

The formula is: Taxable Yield x (100% - Tax Bracket %). 8.5 x 72% = 6.12%.

64
Q

What is the concern of an investor who purchases an out-of-state municipal bond?

A

His state potentially taxing the interest of the out-of-state bond

65
Q

A tax swap is generally done to realize a ____________.

A

A tax swap is generally done to realize a capital loss.

Series 52 Group Share (24 decks)

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