full mix quiz miss 2

Question 1

what risk is eliminated using a “buy and hold” strategy with regard to fixed income securities

Answer 1

Interest rate risk - as we know that holding till maturity will pay out at interest rate.

Stand alone risk is N/A as it refers to single assets ownership.

reinvestment risk still exists as owner will still reinvest interest paid, thus not eliminating such risk.

Question 2

what credits are available to individual taxpayers

Answer 2

refundable and non-refundable -
- EIC is the only refundable credit.
There are many non-refundable credits including, but not limited to, child care and credit for estimated tax pmts.

Question 3

What are Earned Income Credit and AGI Levels

Answer 3

Earned income and adjusted gross income (AGI) must each be less than:
AGI (AGI MFJ) = Credit / w/ Qualifying children
$47,747 ($53,267 MFJ) = $6242 w3+ qualifying children

$44,454 ($49,974 MFJ) = $5548 w/2 qualifying children

$39,131 ($44,651 MFJ) = $3359 w/1 qualifying child

$14,800 ($20,330 MFJ) = $503 w/ no qualifying children

Question 4

considerations when deciding whether to deduct the adjusted basis or the fair market value

Answer 4

• The fair market value of the donated property.
• The donor’s current and projected adjusted gross income for the 5 years after the contribution, as the extra can be carried forward for up to 5 years
• Interest is relevant because of the time value of money issue and the interest earned on any possible tax deduction/refund (and, if considering long carry forward).

Question 5

what is / is not included in Gross Income

Answer 5

Excluded - Loan Proceeds, US Govt Bond Interest, child support
Included - wages, cap gains/losses, alimony, ne rental expenses/income

Question 6

characteristics of constructive receipt

Answer 6

• Unfunded benefit plans generally avoid constructive receipt because there is a substantial risk of forfeiture.
• May occur when funds or benefits are available or accessible to the employee, regardless of whether the funds are actually received.
• Salary reduction benefit plans generally avoid constructive receipt if the agreement was executed prior to the performance of services.
• Funded non-qualified retirement plans incur constructive receipt if the agreement was executed prior to the performance of services.

Question 7

What are top heavy Defined Benefit Pension Plan contribution rules/ limits

Answer 7

while a DB Plan will assign a rate per year, the minimum rate/year in a top heavy plan must be at least 2% for NHCE.
the total contribution still caps at $210k too.

Question 8

Characteristics of At Risk and Passive Activity Losses

Answer 8

Losses are first limited to the amount at risk invested by a non-materially participating partner.
After that, the passive activity losses are limited to passive activity gains and remaining passive activity losses must be suspended too

Question 9

HO-6 Policy Characteristics

Answer 9

• an open peril policy with a face value of $XXX.
• Contents covered on a named peril basis up to $XXX.
• Also has an XX% coinsurance requirement.
• covers all interior walls for a condo.
• does not provide coverage for the building or roof
  (covered by the condo association policy, which covers all exterior walls and roof)

Question 10

Physical assets might be suitable as an investment in the portfolio of an investor looking for:

Answer 10

Long term Capital Gains
… Hard assets are generally considered a hedge against inflation, which will lead to price appreciation and potential capital gains.

Question 11

Characteristics of Unrelated Business Taxable Income (UBTI)

Answer 11

• Income from any type of borrowing within a plan.
• Any business enterprise run by a qualified plan
• However, statutory exemptions exist for rental income. – Rental of raw land is also exempt.

Question 12

TSA characteristics

Answer 12

• TSA contributions are subject to payroll taxes
  (Medicare + Social Security) but NOT income taxes.
• TSAs = tax sheltered annuity or 403(b) retirement plan. - TSAs are a form of deferred compensation.
• Only employees of public education systems and nonprofits can participate.
• TSAs are funded through employee contributions.

Question 13

Direct Recognition Program definition

Answer 13

Any amount of cash that is removed from the policy is reflected in a decrease in the amount of dividends and interest paid on that policy.

Question 14

(COBRA) mandates employers EXCLUDE continuation coverage for what items?

Answer 14

I. Employer has fewer than 20 employees.
II. Employee retires at the age of 65.
III. Involuntary termination of employment due to gross misconduct.

NOTE - if employee dies, Employers must continue medical coverage to pay for final medical expenses after the death of the employee.

Question 15

Bond Volatility is caused by?

Answer 15

shorter maturity has less volatility /
longer maturity has higher volatility

smaller coupon has higher volatility
larger coupon has lower volatility

NOTE - Bonds with the lowest coupon will have the biggest duration. The bigger the duration, the price more sensitive the bond is to interest rate changes.

Question 16

automatic mileage method (as used to arrive at automobile expenses) characteristics

Answer 16

• You can still deduct parking fees and tolls,
• MACRS is not permitted–nor is bonus depreciation S179
• Can switch between the standard mileage method and the actual operating cost method.
• Can be used on leased autos but “If you want to use the standard mileage rate for a car you lease, you must use it for the entire lease period.”

Question 17

Insurance Agency Authority definitions

Answer 17

• Express authority is written in the contract.
• Implied authority are actions assumed to be part of an agent’s repertoire within his or her rights, including signs on the wall and letterhead.
• Apparent authority is when a 3rd party believes there is authority, but none exists.

Question 18

Qualified Fringe benefits include

Answer 18

$50k group life ins
major medical insurance
long term disability insurance
FSA / HSA reimbursement plans

Question 19

International investing benefits

Answer 19

• Less efficiency means greater potential for profitability.
• Anytime correlation is less than 1, risk is reduced.

BUT,
When money is exchanged internationally, exchange rate risk exists.
And, Taxes on capital gains must be paid by U.S. citizens, even in foreign investments.

Question 20

” no-fault” insurance characteristics

Answer 20

“no-fault” is NOT in any state in the U.S.
Modified no-fault allows suits when verbal or dollar thresholds have been crossed.
Dollar threshold is damage occurring above a certain amount, not a limit to actionable compensatory amounts.
Verbal threshold: Law suits may be allowed when there is a fatal injury.

Question 21

Medicare is a government-sponsored health care plan that has two primary components, namely:

Answer 21

Basic hospital insurance and supplementary medical insurance

Does not include any other items such as dental/ eye.
Nor does it contain more than basic hospital coverage.

Question 22

carrybacks and carryforwards associated with the general business credit must be used what specific order

Answer 22

business credit carryforwards to the current year; the amount of the current year business credit; and the business credit carrybacks to the current year.

carry forward to current year,
use current year business credit next, then
credit carrybacks to the current year

Question 23

Taxable estate calculation considers

Answer 23

mortgage and home value - and moves dollars to marital deduction for the value of the home … GET MORE DETAIL

Question 24

money purchase plans must contain what to be qualified

Answer 24

I. A definite and non-discretionary employer contribution formula.
II. Forfeitures can be reallocated to the remaining participants’ accounts in a non-discriminatory manner or used to reduce employer contributions.
III. An individual account must be maintained for each employee of employer contributions.

Since this is not a DB Plan, a normal retirement age does NOT need to be specified.

Question 25

Profit Sharing Plan characteristics

Answer 25

Defined Contribution plan
No Required contributions
should be substantial and recurring
hybrid plan that uses a discretionary contribution
Can adjust for age (age based) or other items…

Question 26

Casualty losses characteristics

Answer 26

I. Reduced by $100 per event if the asset loss was held for personal use. Must exceed 10% of AGI floor per event
II. Still Deductible if they are caused by flooding.
III. Reimbursements are not included in AGI, but
IV. Reimbursements reduce the loss.

Question 27

collateral source rule characteristics

Answer 27

The person who commits the tort will not benefit or be relieved of obligation and responsibility just because the victim has insurance.

The survival of a tort action means that even in the event of death of the victim or the tortfeasor, the tort will remain actionable.

Question 28

International Business Expense characteristics

Answer 28

Considered to be purely for business IF:
I. No control over the timing or arrangements for the trip.
II. Trip outside USA lasts for less than seven days.
III.

Question 29

open-end investment company characteristics

Answer 29

• may be both passively and actively managed.
• Only traded directly with the fund,
  not on the secondary market.

Question 30

survivorship benefits

Answer 30

LEARN THIS

Question 31

Substitute Basis characterization for LKE

Answer 31

Asset’s FMV minus the gain realized but not recognized.

Question 32

long term care policy tax benefits of premiums paid

Answer 32

Policy must be guaranteed renewable or non-cancelable for the premiums to be deductible.

IRS provides guidelines for the amount of premiums that are deductible based upon the insured’s age.

Deduction FROM AGI for expenses exceeding 10% of AGI

Question 33

Money Purchase Plan forfeitures impact on maximum annual contribution limits

Answer 33

Only Employer and employee contributions to all defined contribution plans need to be calculated
Forfeitures which are not allocated to individual accounts are not considered annual additions.
Earnings are never considered annual additions for Section 415 limits.
Rollovers are previous contributions and earnings, therefore are not calculated as “annual additions.”

Question 34

Injury Award impacts on Taxes

Answer 34

Punitive damage awards are taxable on gross income.

Workers compensation is NOT taxable. Similarly, damages for personal bodily injury are not included in taxable income

Question 35

fee simple separate property ownership characteristics

Answer 35

I. Not included in probate estate, but it is included in gross estate.
II. Can include personal property (chattel) of all types.
III. Is presumed in common law states.
IV. Is not presumed in community property law states.

Question 36

Cash balance plan characteristics

Answer 36

Cash balance plan provides a defined benefit
(returns are guaranteed by the employer)
and the employee receives an “account” to see how much they have
(giving it a feel like a defined contribution plan)

Question 37

401(k) plan characteristics

Answer 37

I. Employee elective deferrals are exempt from income tax withholding BUT,
Still subject to Social Security and Medicare tax
II. Employer’s deduction for cash or deferred contribution to 401(k) plans cannot exceed 25% of covered payroll reduced by employees’ elective deferrals.
III. A 401(k) plan cannot require, as a condition of participation, that an employee complete a period of service greater than one year.
IV. Employee elective deferrals may be made from salary or bonuses.

Question 38

Holding Period Return is calculated how?

Answer 38

sales price minus purchase price +/- cash flows
divided by the Purchase price
HPR = (SP - PP +/- CF) ÷ PP
REMEMBER to consider margin purchases (leveraging value of the holding period)…

Question 39

Leased Employee safe harbor rules for qualified plans

Answer 39

• Leasing company must provide a 10%, non-integrated money purchase plan with immediate vesting.
• No more than 20% of the employer’s non-highly compensated employees may be leased to qualify for the safe harbor rules.

Question 40

Yield curve normally slopes upward because?

Answer 40

Short-term rates are lower because of the lower risk associated with them.
The longer an investment ties up an investor’s capital, the higher the rate must be to offset this risk.

However, if inflation expectations are for lower rates in the future, it will result in a downward (inverted) sloping yield curve.

Question 41

funded deferred compensation plan characteristics

Answer 41

non-qualified
deferred compensation plan
provides key employee with a vested beneficial interest

the non-forfeitable beneficial interest is considered “funded”
once funded, it is subject to current income tax due because the employee has constructive receipt of the assets.

Question 42

Capital Asset Pricing Model (CAPM) characteristics

Answer 42

I. The Capital Market Line (CML) by itself does NOT determine the optimal portfolio for an investor.
II. Beta is used as a measure of risk on the Security Market Line (SML).
III. The required rate of return is determined by adding the risk premium (which is the market rate of return minus the risk free rate times the beta) to the risk free rate of return
IV. As investors replace risk-free assets with risky assets, the required return will rise.

Question 43

OASDHI earnings test criteria

Answer 43

• Does not apply after normal age retirement.
• Monthly exempt amount is $3,490 ($41,880 annualized) in 2015 for those months in the year of normal retirement age BEFORE you actually reach normal retirement age.
• some part time work is allowed under the threshold above.
• Uses only earned income.
• No passive or portfolio income is used in calculating the earnings.

Question 44

non-forfeiture rights of insurance characteristics

Answer 44

Non-forfeiture rights (or provisions) arrange an orderly legal structure to assure monies paid on an insurance policy are not simply absorbed by the company without recourse in the event that an insured decides to terminate coverage. Two other such provisions include “reduced paid-up” and “extended term.”

Question 45

what accounting method is required for a business with inventoried products

Answer 45

if a company generates its income from inventory, they must file under the accrual basis, even if their revenues are under the $5 million accrual basis

Question 46

qualified disclaimer characteristics

Answer 46

• must be written,
• irrevocable,
• received by the executor of the estate within 9 months, - must not direct the asset,
• can be for any interest partial or full.

Question 47

Funded deferred compensation plan characteristics

Answer 47

• non-qualified
• deferred compensation plan
• providing the key employee with a vested beneficial interest in an account

Question 48

COBRA exclusions NOT requiring continued service

Answer 48

• If an employer has terminated the plan available, there can be no COBRA benefit.
• If the employer has gone out of business, then no health plan is available.
• Gross misconduct will remove one from COBRA eligibility.

HOWEVER, gross incompetence is not enough to exclude an employee from service

Question 49

Markowitz Model characteristics

Answer 49

1 - The optimal portfolio is at the point of tangency
2 - The efficient frontier measures what portfolios are attainable and which are unattainable
3 - The indifference curve measures what level of risk an investor will accept for given levels of return.

Question 50

call options are impacted by dividends how?

Answer 50

Cash dividends will generally tend to drive the price of the underlying security lower and along with it, the call option prices.

Question 51

Written disclosures of conflicts of interest are required when?

Answer 51

Written disclosures of conflict of interest are required for any engagements where material elements of financial planning are being provided.

e.g. - refer his lawyer to one of his clients who was wishing to divorce his wife, whom was also a client of the CFP® professional.
BUT NOT when:
provide other’s names just for requests if not engaged with the person to whom we provided the name…

Question 52

Health Insurance Portability and Accountability Act of 1996 characteristics

Answer 52

• limits “pre-existing look-back period” to 6 months
• does not consider pregnancy pre-existing.
• Limits the pre-existing conditions exclusion to 12 mo’s.

Question 53

Incorporation expense deductibility characteristics

Answer 53

• The rule is the lesser of expenditures or $5,000
• incorporation fees and legal fees are deductible
• BUT, Expenses incurred in connection with issuing and selling stock are not deductible.

Question 54

QPRT characteristics

Answer 54

QPRTs can hold only one residence.
The donor retains all tax advantages.
There is no income generated (home held for later)

Question 55

VEBA options available

Answer 55

Life, sickness and accident benefits
Severance and supplemental unemployment
Job training

NO Retirement or Commuter benefits

Question 56

itemized deductions NOT subject to 2% AGI Floor

Answer 56

Gambling losses up to the amount of gambling winnings.
Casualty and theft losses from income-producing property.
Federal estate tax on income in respect of a decedent.
Amortizable premium on taxable bonds.
Impairment-related work expenses of persons with disabilities.
Repayments of more than $3,000 under a claim of right.
Unrecovered investment in an annuity.

Question 57

fully insured group health insurance plan characteristics

Answer 57

Benefits from a comprehensive medical expense plan are always tax free to the employee.
AD&D benefits are not taxable to the employee’s beneficiaries.
Premiums are always deductible to the employer.
In a self-funded plan which is discriminatory, some or all of the benefits may be taxable to key employees.

Question 58

nontaxable exchange treatment requirements for replacement after a casualty

Answer 58

• must invest the proceeds in a replacement property that has a similar use to the property that was destroyed
• must reinvest the insurance proceeds within two years from the end of the year in which the event occurred.
• replacement property must meet the taxpayer use test, not the functional use test IF owner did not use property directly (e.g. rented it out).
• if receiving cash as a result of the involuntary conversion, nonrecognition treatment is not mandatory even if all of the requirements are met.

Question 59

Closed-end fund characteristics

Answer 59

• generally sell at either a premium or a discount to par.
• If purchased at a discount, they afford investors an opportunity to realize up-side capital appreciation.
• other closed end fund characteristics…..

Question 60

Bonds - “riding the yield curve” involves?

Answer 60

Investing either short-term or long-term to take advantage of anticipated interest rate changes.

Question 61

Bonds - Callable bond characteristics/ issues:

Answer 61

• there is still uncertainty about the amount of payments to be made to the bondholders.
• similarly, there is reinvestment risk faced by the bond investor.
• While the purchasing power of the bond is affected might seem like a good choice, but because the bond is being held to call in this case, inflation risk is not a concern and liquidity risk is eliminated

When the bond is called, an investor does not need to worry about selling the bond.

Price risk is not a callable bond concern; in fact, often when called, a premium is paid.

Question 62

Tax - What is the maximum investment interest deduction?

Answer 62

taxpayer’s investment interest deduction is limited to the investment income. (no losses - passive)

Question 63

ADV is required to be delivered to the prospect when?

Answer 63

along with, and as part of, the engagement letter