Financial Profile Of A Client

Question 1

Which statement is true regarding mutual fund distributions?

A. All dividends distributed by the fund our taxable to the recipient at the same tax rate as for ordinary income.

B. All capital gains distributed by the funds are taxable to the recipient based on the funds holding period, even if the recipient has held the shares for less than one year.

C. All distributions reported on form 1099-DIV are excluded from tax if they are automatically reinvested.

D. All distributions for municipal bond funds are excluded from taxation because of the federal tax exemption applied to the underlying securities.

Answer 1

B. Taxation of mutual fund distributions is based on the length of time that the fund has held the underlying securities.

Question 2

Which of the following statements concerning a distribution reported by a mutual fund is a capital gain on form 1099-DIV is correct?

A. The distributions are usually nontaxable return of principal

B. Shareholder pays no capital gains tax on the distribution because the fund pays this tax.

C. Shareholder pays for short term capital gains tax if the mutual fund shares were purchased within one year.

D. The shareholder generally pays long-term capital gains tax regardless of when the shareholder purchased the mutual fund

Answer 2

D.

Question 3

A customer purchases securities on April 30, 2016 the securities appreciate and the customer wants to donate the securities to get a tax deduction. Customer will be able to deduct the full market value without incurring any other tax if the securities are donated on which date?
A. October 30, 2016
B. April 29, 2017
C. April 30, 2017
D. May 1, 2017

Answer 3

D.
In order to donate appreciated securities at fair market value and have no tax consequences on the game, the securities must be held “long-term” meaning over one year.

Question 4

A customer owns 200 shares of ABC, purchased two years ago at $50 per share. The current market value of ABC stock is $80 per share. If the customer gifts the stock to his son, the result is what?
A. The donor may have gift tax liability
B. The recipient may have gift tax liability
C. The cost basis to the gift recipient is $50 per share
D. The cost basis to begin percipient is $80 per share.

Answer 4

Both A and C are correct.

Question 5

A parent buys 100 shares of ABC stock for $4000. Three years later the current market value is $5000. If the parent gives the shares to their son, the tax consequence to the son is what?
A. Cost basis to the son is $4000
B. Cost basis to the son is $5000
C. Taxable capital gains of $1000
D. Taxable capital gains of $5000

Answer 5

A.
When I gift of securities is given to anyone other than Charity, the recipient of the gift assumes the cost basis of the donor. If the son were to sell the securities, he would have a $1000 taxable capital gain since the securities are not worth $5000.

Question 6

All of the following statements are true regarding gift and estate taxes except:
A. Gift and estate taxes are regressive
B. Estates of married person is a better world to the surviving spouse are eligible for an unlimited exclusion from tax.
C. Gift valued up to $14,000 in 2016 are excluded from tax.
D. Tax liability rest with the donor or estate.

Answer 6

A.
Estates of Mary persons are eligible for an unlimited spousal exclusion. GIFs up to $14,000 per person in 2016 are excluded from tax. Tax liability rest with the donor or at state since they have the money. Tax rates on gifts and Estates increase with the size of the gift or estate this is known as a progressive tax

Question 7

Which of the following statements are true regarding gift and Estate taxes?
A. Gift and estate taxes are progressive taxes.
B. Gift valued up to $14,000 in 2016 are excluded from tax.
C. The first 5,450,000 of an estate in 2016 is excluded from tax.
D. Text liability rest with the donor or estate.

Answer 7

All are true

Question 8

In 2016, a husband gives a $100,000 gift to his spouse. How much of the gift is subject to gift tax?
A. Zero dollars
B. $14,000
C. $86,000
D. $100,000

Answer 8

A

There is no gift tax due because the unlimited marital exclusion applies to both gifts and estates

Question 9

A father gives $5000 gift of securities to his son, and a $22,000 gift of securities to his daughter. Which statement is true?
A. The father has no gift tax liability
B. The father has gift tax liability on the gift to his son
C. The father has gift tax liability on the gift to his daughter.
D. The father has gift tax liability on both gifts

Answer 9

C.
The first $10,000(indexed for inflation, in 2016 this number is 14,000) of a gift other than to a spouse is excluded from tax. Any amount above this is subject to gift tax, to be paid by the donor. Since the gift to the sun is $5000 in value this fits the exclusion. Any amount above the gift limit exclusion is subject to gift tax paid by the father

Question 10

A married couple, age 60 and 62 are doing their estate tax planning. Which bequest would be subject to the generation-skipping tax?
A. A bequest to a child
B. A bequest to a grandchild
C. A bequest to a great grandchild

Answer 10

Both B and C

The idea behind the estate tax is that if there is a sizable estate that is left from generation to generation, it will be taxed each time it is left to the next generation. It really is a wealth destruction tax. A strategy to get around the application of this tax when bequeathing assets is to skip a generation. For example if an elderly parent instead of willing his or her assets to a child, wills them to a grandchild. This means the government will miss collecting one generation of the estate tax

Question 11

All of the following are deductible from a taxable estate except:
A. Funeral and estate administrative expenses.
B. Claims against the estate and mortgages against real property owned by the estate.
C. State death tax liability.
D. The difference between cost basis and fair market value for depreciated assets owned by the estate

Answer 11

D.
A taxable Estate is one that is valued over $5.45 million in 2016. The executor files in a state tax form 706 for estates were taxes due. When accumulating the values of the estate that is taxable, executor gets to deduct funeral and the executors administrative expenses, as well as the cost of the estate attorney.

Question 12

Which of the following are deductible from a taxable estate?
A. Funeral and administrative expenses
B. Claims against the estate
C. State death taxes
D. Mortgages against real property owned by the estate.

Answer 12

All of the above.

Question 13

An individual buys 100 shares of ABC stock and $40. Years later this person gifts the stock to her daughter when the stock is trading at $52. The daughter cells the stock wanted is trading at $55. The daughters cost basis in the stock is what?
A. Zero dollars
B. $40
C.  $52
D. $55

Answer 13

B.

When A gift is made the recipient assumes the cost basis of the donor. Thus the cost basis to the daughter is $40. The daughter cells the stock at $55 she will have a $15 per share capital gain.

Question 14

A married couple has a combined net worth of $5 million. If one dies in 2016 the taxable amount of the estate to the surviving spouse is?
A. Zero
B $500,000
C. $1,500,000
D. $5 million

Answer 14

A

And unlimited marital exclusion applies to spouse when one party dies.

Question 15

All of the following statements are true about a state or gift tax due except:
A. The amount of tax due is based on the size of the gift or estate.
B. The larger the size of the gift or estate the higher the tax rate.
C. A lifetime unified credit is applied against any tax due
D. Gifts or bequests made by an individual under age 59 1/2 or subject to a penalty tax.

Answer 15

D.

Question 16

The unified credit applies to:
A. Income tax only
B. Estate tax only
C. Gift tax only
D. Both estate and gift tax

Answer 16

D.
Each donor is given an exclusion from gift and estate taxes. The first $14,000 of gifts given each year are excluded from tax. The first $5,450,000 of an estate is excluded from tax. The way this is handled in the tax code is a lifetime unified tax credit is given to each donor for all gifts.

Question 17

An individual buys 100 shares of ABC stock and $40. This person dies when the stock is trading at $52, and leaves the shares to his son. The son sells the stock when it's trading at $55 per share. The sons cost basis in the stock is what?
A. Zero dollars
B. $40
C. $52
D. $55

Answer 17

C.

For estate tax purposes, securities are valued at the current market value at the date of death. Estate taxes due based upon the market value of all assets held at this date. With the tax paid by the state. The beneficiary of the estate receives the assets at this market value, $52 per share in this case.

Question 18

A customer bought ABC stock at $10. Many years later when the stock is worth $50 the customer wills the stock to his daughter. The daughter cells the shares when they're worth $45. The tax consequence to the daughter is what?
A. No capital gain or loss
B. Five dollar per share capital loss
C. $35 per share capital gain
D. $40 per share capital gain

Answer 18

B.

Question 19

In early January, a grandmother buys shares of a company as an investment. At the end of February of the following year, the grandmother gives half of the stockholding to her granddaughter. On the gifted stock, the grandmothers cost basis was $1000 and a market value at the time of the gift was $2000. In March following the gift, the grandmother dies and bequeaths the remainder, the other half, of the stock in the company to the granddaughter. At the date of death the holding was worth $3000. Six months later the stock has doubled in value and the granddaughter sells the entire holding. What is the tax consequence?

A. $8000 short term capital gains
B. $8000 long-term capital gains
C. $3000 short term capital gains and $5000 long-term capital gains.
D. $5000 short term capital gains and $3000 long-term capital gain

Answer 19

B.

Question 20

The executor of an estate subject to federal estate tax is permitted to use an alternative valuation date:
A. For securities that have appreciated after the date of death
B. For securities that have depreciated after the date of death
C. That is six months from the date of death
D. That is nine months from the date of death

Answer 20

Both B and C
The basic rule for inherited securities is that they are transferred to the beneficiary at the fair market value at the date of death. However, the tax code allows an exception for us states that require a federal filing, those with over $5,450,000 of assets. In this case the estate can choose to use an alternative valuation date that is set six months after death. It would choose to do this if the securities have depreciated resulting in a lower estate tax liability

Question 21

If appreciated securities are inherited, the tax basis to the beneficiary is:
A. Cost of the securities
B. Fair market value at the date of death
C. Fair market value six months after death if values have fallen.
D. Either choice B or C

Answer 21

D.

Depending on the size of the estate. B if under 5,450,000. See if larger than 5,450,000 and the securities have depreciated in value since the date of death.

Question 22

Your client of many years his age 65 and has just been diagnosed with a short term terminal illness. He is well often has two adult children, ages 30 and 35. His investment portfolio is overweighted and small dollar low-cost stocks. You should talk to the client about:
A. Gifting the low cost basis stocks to the adult children
B. Selling the low cost basis stock immediately
C. Rebalancing the portfolio to reduce the overweighting of small dollar stocks.
D. Selling the low cost basis stock in investing the proceeds in treasury securities.

Answer 22

A.
We would actually talk to the client about whether his or her affairs were in order, is there a will? Where are the life insurance policy’s if any? Who is the executor? However that is not a choice! Based on the limited information given, selling the stock is not a great choice, because tax is due on any capital gains. Rebalancing the portfolio make sense, but to do so require selling below cost basis stock and paying capital gains tax.
The only choice that does not result in an immediate tax bill is A.

Question 23

Which of the following are included in the taxable income of a corporation?
A. Proceeds received from the issuance of common stock.
B. Dividends received from domestic investments.
C. Interest received from foreign investments.
D. Gain on the sale of a capital asset.

Answer 23

B, C, D

Dividends received from any investment domestic or foreign, and gains on any asset held for investment are taxable. Please note however that part of dividends received by corporate investors are subject to an exclusion from tax. Any interest income received, unless it is municipal interest income, is subject to federal tax. The proceeds received by a corporation from issuing debt or stock or not taxable

Question 24

A corporation buys the stock of another company. Which percentage of dividends received from the investment in the acquired companies shares are excluded from tax to the corporate purchaser of those shares?
A. 0%
B. 30%
C. 70%
D. 100%

Answer 24

C.
If a corporation buys the stock of another company as an investment, 70% of the dividends received our excluded from tax, meaning that 30% of the dividends received are taxable. Please note that if corporate investor owns 20% or more of the stock of the other company, this exclusion increases to 80%. The question does not mention whether this is the case and none of the choices fit this rule so 70% is the best answer offered.

Question 25

All of the following income received by a corporate investor is partially excluded from income tax except:
A. Common dividends received
B. Preferred dividends received
C. Convertible preferred dividends received
D. Convertible bond interest received

Answer 25

D.
Corporate investors may exclude 70% of dividends received, both common and preferred, from taxation. Interest income received is 100% taxable unless of course it is tax-free municipal interest income.

Question 26

Which statement is true about trust taxation?
A. A form 1025 must be filed reporting income gain and loss
B. A form 1040 must be filed reporting income gain and loss
C. A form 1041 must be filed reporting income gain and loss.
D. A form 1065 must be filed reporting income gain and loss

Answer 26

C
To form a trust, a tax identification number for the trust must be obtained and an annual tax filing on a form 1041 is required. Remember that the 1040 is the personal income tax return, the 1065 is a partnership tax return and there is no such thing as a form 1025

Question 27

The form 1040 is used for what?

Answer 27

Filing a personal tax return

Question 28

The form 1041 is used for what?

Answer 28

A trusts tax return

Question 29

A form 1065 is used for what?

Answer 29

A partnership tax return

Question 30

The tax basis for an investor in a limited partnership that establishes the maximum loss deduction includes:
A. Original investment
B. Partnership debt assumed
C. Distributive share of partnership gains
D. Distributive share of partnership loss

Answer 30

D.
An investor in a limited partnership establishes a tax basis that sets the limit for permitted tax deductions. The beginning basis is the amount invested, plus the partners share of any debt assumed by the partnership. For example, if an investor puts down $10,000 and signs a recourse note for $40,000, the investors beginning tax basis is $50,000. Each year, the basis is adjusted upwards for that partners share of income earned, and adjusted down words for that partners share of loss. Thus the basis keeps changing from year-to-year

Question 31

A customer has invested in a direct participation program and is a limited partner with a 20% interest. In November of that year the partnership sold assets and realized a game. It made a cash distribution to the partners using the proceeds generated from the asset sale in January. How is this reported for tax purposes on the K-1 distributed to the customer/partner?
A. 20% of the gain is reported as ordinary income in the year realized.
B. 20% of the gain is reported as a capital gain in the year realized
C. 20% of the gain is reported as ordinary income in the year distributed
D. 20% of the gain is reported as a capital gain the year distributed

Answer 31

B.

Under partnership taxation rules, each item of the income and loss to the partnership flows through directly prorated based on to the partners tax return for that tax year. Because the partnership realized the gain on the sale of the asset he November it will be reported on the K-1 sent to the limited partner by the partnership for the year ending December 31. The fact that the cash distribution resulting from the gain was made in the next tax year is a relevant

Question 32

The tax basis for an investor in a limited partnership that establishes the maximum loss deduction is:
A. Original investment only
B. Original investment plus partnership that assumed
C. Original investment plus partnership debt assumed plus partnership gains or minus partnership losses
D. Original investment minus partnership debt assumed, minus partnership gains or plus partnership losses

Answer 32

C.

And investor in a limited partnership establishes a tax basis that sets the limit for permitted tax deductions.

Question 33

Which item is needed to determine tax filing status?
A. Marital status on the last day of the year
B. Qualifications of the tax preparer
C. Residency on the last day of the year
D. Nationality of tax filer.

Answer 33

A.
When filing a tax return, a filing status must be chosen. There are five possible filing statuses:
Single
Married filing jointly
Married filing separately
Head of household
Qualifying widow(ER) with dependent child

Determination of marital status is based on the person’s marital status as of the last day of the year.

If one is not married at that date, that person cannot file using married filing joint or married filing separate status. If that person is not married that he or she must choose single, head of household, or qualifying widow(ER) with dependent child.

The last to get a higher standard deduction and lower tax rates then choosing single status.

To get Head of household status, that person must be unmarried at the year end, must pay for at least half of annual housing expenses, and that Home must be the principal home of that person’s child.

To get a qualifying widow(ER) with dependent child status, that person’s spouse must have died within the past two years (after two years from the spouses death, the status to no longer be used) that person must pay for at least half of annual housin expenses and that person must have a dependent child living at home

Question 34

The best income tax filing status for a married couple or both are high earners and at least one has large personal deductions is
A. Married filing jointly
B. Married filing separately
C. Head of household
D. Single filing two returns

Answer 34

B.
If there are two high earning spouses, then choosing married filing separately typically results in a lower tax liability where one or both have large itemize deductions. This occurs because there are ad backs that reduce itemized deductions based on reported adjusted gross income, and this ad back number is lower when income is split and reported separately.

Question 35

Which of the following tax filing status generally results in a lower tax rate?
A. Single
B. Head of household
C. Married filing jointly
D. Qualifying widow with dependent child

Answer 35

B and D

Question 36

Too young professionals each make $50,000 per year. They're getting married and meet with an investment advisor Representative for advice about how their tax status will change once they tie the knot. The investment advisor representative should inform them that they will likely:
A. Pay higher taxes
B. Pay lower taxes
C. Reduce future estate taxes
D. Increase future state taxes

Answer 36

A.

The marriage penalty is a term that is often used to describe a situation where two people earning about the same income get married. Under the tax code, they wind up paying more in taxes than when they were unmarried and filing separate. This occurs because tax rates increase as reported income increases (A progressive tax structure)

Question 37

The term marriage penalty refers to the:
A. Reduced estate tax exclusion for married couples
B. Higher tax rates applied to hire joint reported income.
C. Lower income exemptions for married couples
D. Alternative minimum tax that applies to couples filing jointly.

Answer 37

B

The marriage penalty is a term that is often used to describe a situation where two people earning about the same income get married. Under the tax code they wind up paying more in taxes than when they were unmarried and filing separate. This occurs because tax rates increase as reported income increases.

Question 38

Which statements are true about the alternative minimum tax computation?
A. The alternative minimum tax computation is required for all taxpayers
B. The alternative minimum tax computation is required only for investors in limited partnerships
C. If the alternative minimum tax amount is greater than the regular income tax amount, the larger amount must be paid
D. If the alternative minimum tax amount is greater than the regular income tax amount, the smaller amount must be paid.

Answer 38

A and C

Well the alternative minimum tax usually is an issue only for taxpayers who have invested in limited partnerships, items are included in the alternative minimum tax it affect our taxpayers such as very large charitable contribution deductions and interest income from nonessential use, private purpose municipal bond issues. Technically all taxpayers are subject to the alternative minimum tax, though it really only affects high income tax payers.

Question 39

All of the following are preference items included in the alternative minimum tax computation except
A. Excess intangible drilling costs
B. Straight-line depreciation
C. Excess depletion
D. Excess depreciation

Answer 39

B.
Excess intangible drilling costs deductions, Texas depletion, and excess depreciation (amounts over straight line) are all tax preference items included in the alternative minimum tax. Straight-line depreciation is not included nor are tax credits.

Question 40

A couple owns a home together and they file for bankruptcy. If there is an excess of funds from the sale of the home, where does the excess money go?
A. To secured creditors
B. To the additional creditors
C. To the couple
D.  To the lender

Answer 40

B.
A home is an asset included in the bankruptcy estate. Typically, the home is sold for less than the amount of the outstanding mortgage, and the entire proceeds of the sale go to pay off the mortgage, with any remaining unpaid principal balance discharged in the bankruptcy.

In the case where the home is sold for more than the amount of the mortgage, the mortgage balance is paid in full, so the mortgagee (usually a bank) is repaid in full and has no more claim. Any extra funds go to the state trustee, the remaining creditors can’t file claims against these funds.

Question 41

All the following are considered when creating a financial profile for the customer except:
A. Investment experience
B. Financial knowledge
C. Financial goals
D. Investment timing

Answer 41

D.
A customers previous investment experience is relevant in determining the types of investments that this customer is comfortable with.

Financial knowledge is relevant in determining how sophisticated the type of investment that can be recommended to the customer.

Financial goals are a primary consideration in creating the customers financial profile.

Investment timing is not relevant to creating the financial profile, it is relevant once the investment vehicle has been selected. One wishes to time the investments so they are made at the best possible prices

Question 42

The amount of money that a customer has available for additional investment based on that customers earning in a  specific year would be based on:
A. Adjusted gross income
B. Taxable income 
C.  Discretionary income
D. Portfolio income

Answer 42

C.

Question 43

Which customer would suffer the greatest harm from a loss of income on an investment?
A. A recent college graduate who has started his first job.
B. A retiree who’s main source of income is social security.
C. A middle aged women who is looking to renter the work place.
D. An older worker covered by a defined benefit plan

Answer 43

B.