Hot Questions Flashcards
Question
Hannah owns a house that has a replacement value of $300,000. The home is 20 years old and is 25% depreciated. She has an HO3 policy with an 80/20 coinsurance requirement. She is carrying $225,000 insurance on the dwelling and has a $1,000 deductible. During a recent storm, the home incurred $40,000 of damage. How much will the insurance company pay?
$0
$36,500
$37,500
$39,000
Solution: The correct answer is B.
Greater of actual cash value: ($40,000 × 75% = $30,000) or
Coinsurance calculation: 225/(80% of $300) 240 × $40,000 = $37,500
Less the deductible: so $37,500-$1,000 = $36,500
Jim needs a loan for his business. He convinces Tamra, a business acquaintance, to loan him $75,000. Jim assigns his life insurance policy ($100,000 death benefit, $5,000 cash value) as collateral for the loan. Jim never makes any loan payments and dies years later. What is Tamra’s gain or loss, if any?
There is a $25,000 gain. The gain is taxed as ordinary income.
There is a $25,000 gain. The gain will receive capital gains tax treatment
There is a $20,000 gain. The gain is taxed as ordinary income.
There are no income tax consequences. Tamra is entitled to an amount equal to loan repayment, with the remainder going to Jim’s designated beneficiary.
Solution
Solution: The correct answer is D.
Dana is an executive of STEEL, Inc. She earns $500,000 during the year and defers $13,500 into the SIMPLE. STEEL, Inc uses the maximum match for SIMPLE Plans. How much would the matching contribution be for Dana?
$15,000
$13,500
$10,000
$8,700
Solution: The correct answer is B.
The matching contribution is 3 percent of an employee’s compensation up to $13,500 for 2021. The covered compensation limit does not apply with the match for a SIMPLE, but the match cannot be greater than the employee contribution.
On January 1 of Year 1, George was awarded 10,000 ISOs at an exercise price of $5 per share when the fair market value of the stock was equal to $5. On October 30th of Year 2, George exercised all of his ISOs when the fair market value of the stock was $15 per share. On August 13th of Year 3, George sold all of his shares for $20 per share. At the date of sale, what are the tax consequences to George?
$100,000 AMT adjustment
$200,000 employer deduction
$150,000 capital gain
$150,000 ordinary income
Solution: The correct answer is A.
The sale of the ISO shares is a disqualifying disposition because the 2 year and 1 year requirements were not met. This disposition results in ordinary income for George in the year of the disposition. The employer also receives a deduction for the same amount. The compensation equals the difference between the value on the date of exercise and the strike price. The remaining gain is treated as a capital gain. There is also a negative AMT adjustment in the year of the disqualifying disposition – in this case it equals $100,000 (# of shares times the difference between the exercise price and the FMV on the date of exercise).
The (short term) Capital gain would be $50,000
OI would be 100,000 and AMT Adjustment of 100,000
Year 1 – Jan 1 – grant $5. (10,000 shares)
Year 2 – Oct 30 – exercise $15. AMT adjustment of $10 ($100,000)
Year 3 – Aug 13 – Sold $20. Negative AMT Adjustment $10, and taxed at Ordinary Income rates.
Sold 10,000 at $20 = 200,000. Two years from grant? Yes. 1 Year from exercise? No = disqualifying disposition.
Basis at $5 = 50,000
Gain of $150,000 of which $100,000 is taxed at OI, and the remaining $50,000 is STCG.
Which of the following forms of the efficient market hypothesis support market anomalies?
Weak Form Semi-Strong Form Strong Form III only. II and III. I, II and III. None
Solution: The correct answer is D.
None of the forms of the efficient market hypothesis support market anomalies. If markets are truly efficient, anomalies should not exist.
Which of the following statements is/are correct concerning the CFP Board’s Financial Planning Practice Standards?
The Disciplinary Committee of the CFP Board relies upon the Code and Standards to determine if any Financial Planning Practice Standards have been violated.
The Practice Standards are organized based on the domains of financial planning
Only I is correct
Only II is correct
Both I and II are correct
Neither I nor II is correct
Solution: The correct answer is C.
On January 1, two years ago, Robin bought Machine X for $100,000. The machine is classified as 5 year property under MACRS. Machine X has a salvage value of $10,000. What is the amount of the third year depreciation for Machine X?
$19,200
$17,280
$10,400
$9,320
Solution: The correct answer is A.
The convention is double declining balance (DDB) half year first year and switch to straight line when straight line would be preferable to DDB. 1st Year is 100% / 5 × 2 = 40% × ½ = 20%
2nd Year is (100% - 20%) × 40% = 32%
3rd Year is (100% - 52%) × 40% = 19.2%
Salvage is ignored in the calculation but the taxpayer cannot depreciate more than a total of $90,000 when the salvage value is $10,000.
Joe has owned and operated Baseball Memories, Inc. for the last 20 years. His employees have been with him most of that time and he has set up a retirement plan and other benefits for them. Joe’s brother Landon is starting his own company, Landon’s Landscaping. Landon admires what his brother is building and believes it is a good time to start thinking about his future. He asks Joe to introduce him to his financial planner. Landon knows there are a lot of options out there for retirement planning. At Landon’s second meeting with his new planner Tom, Tom suggests a few options, one being a SEP plan. Which option is similar in funding to a SEP?
Cash balance plan
Profit sharing plan
SIMPLE
Defined benefit plan
Solution: The correct answer is B.
The SEP is employer funded up to 25% of an employees compensation. These characteristics are most similar to a profit sharing plan. The profit sharing plan would be beneficial for a startup since they will not have mandatory contributions each year.
Which of the following is not an appropriate match?
Classification by time: Spot markets.
Classification by type of claim: Equity markets.
Classification by participants: Mortgage markets.
Classification by products: Money markets.
Solution: The correct answer is D.
Money market securities are short-term instruments categorized by time considerations, not product. Look at this from the product to determine the classification. For example, money markets and spot markets are classified as according timing because they are either short term maturities or current price. The common component when classifying these type of securities is timing. Equity and debt markets can be classified as to the order of claims in the event of liquidation. “Type of claims” simply refers to debt vs. equity and which is more senior. Bond markets, which include mortgage bonds, are divided into short, intermediate and long term markets. Each market has participants that prefer different segments of the yield curve. A participant in this case is an insurance company, bank, manufacturing company, etc. Different participants will prefer mortgage bonds over shorter term maturities.
Allyson has a small law practice located in uptown New Orleans. Her practice is relatively small, but provides a modest amount of income to her and her husband John. She is considering setting up a SIMPLE but is uncertain of all the features, options and limitations. Which of the following is not correct regarding SIMPLE plans?
SIMPLEs can invest in real estate outside of REITs and mutual funds.
SIMPLEs, both IRAs and 401(k)s, must meet the minimum distribution rules.
For a high wage earner, the required employer contribution for the SIMPLE IRAs may be greater than for a SIMPLE 401(k).
SIMPLE IRAs and SIMPLE 401(k)s are very similar and both may offer loans to participants.
Solution: The correct answer is D.
Loans are not allowed in SIMPLE IRA plans. Option B - both have RMD rules. Option C is a correct statement because the 3% employer match is not limited by the covered comp limit for a SIMPLE IRA but is limited by the covered comp limit for a SIMPLE 401k.
Erin, a 31-year-old single mom with a gross income of $72,000 per year, has asked you to assist her with some financial planning. She is concerned about the investment allocation of her 401(k), saving for college for her twin sons (age 3), reducing taxes (she is in the 25% tax bracket, combined federal, state, and local), and disability income protection (she has no disability coverage through her employer). She currently has savings of $10,000 in a money market account and $15,000 in small cap stocks. Which of the following is the most important recommendation for her?
To invest her 401(k) in low-expense index funds with an appropriate strategic allocation.
To immediately begin saving for college in a 529 plan for each of the kids to gain tax advantages and allow as much time for growth as possible.
To purchase additional life insurance to provide for the children if something should happen to her.
To purchase a reasonably priced disability insurance policy with an elimination period no longer than her emergency funds will last.
Solution: The correct answer is D.
Since Erin is a single mom, the family is completely dependent on her income, making disability income protection the most important of the recommendations listed. Answer choice C is incorrect because it is not one of the objectives listed (students should be careful not to read into the question).
Which items are deductible before AGI?
Medical expenses. Real estate taxes. The employer portion of Social Security taxes for an S Corp owner. Capital losses. 3 only. 2 and 3. 1 and 4. 3 and 4.
Solution: The correct answer is D.
The employer portion of social security taxes is deductible by the S corp and will then flow through to the owner. Capital losses are for AGI.
Jorge Vasquez retires at age 65 and receives a lump-sum distribution worth $650,000. The market value of employer securities is $135,000, and the cost basis for the securities is $60,000. He is in the 32% income tax bracket. He has chosen to roll the company securities separately from the remainder of his retirement plan base on his financial planner’s advice. Three weeks after the transfer, he decides to sell all his shares of stock when it is valued at $140,000. What are his tax consequences for this transaction?
$21,100 LTCG
$25,600 STCG
$12,000 STCG
$11,250 LTCG and $1,600 STCG
Solution: The correct answer is D.
Jorge would roll $135,000 of employer stock to a brokerage account. The basis in the stock of $60,000 would be taxable to him at the time of the rollover. $60,000 at 32% is $19,200. This amount was paid at the time of distribution.
When he sells the stock three weeks after the distribution, the remainder is taxed at LTCG rates base on NUA rules. At distribution the stock had a FMV of $135,000, he paid tax on $60,000, leaving $75,000 locked in at LTCG rates.
At the time of sale, his shares were worth $140,000, the remainder of the NUA distribution (135,000-60,000 = 75,000) at 15% LTCG rate = 11,250.
The value above NUA is $5,000 and is STCG (32%) = 1,600.
Had he rolled the entire balance to an IRA, the full distribution would be at ordinary tax rates ($80,000 at 32%= 25,600).
The balance of $515,000 (650,000 - 135,000 in Employer Stock) will roll tax-deferred to an IRA
Which of the following are fiscal policy actions that may be taken to stimulate the economy?
Increase tax credits
Buy government securities
Decrease government spending
Decrease rate paid on excess reserves
Solution: The correct answer is A.
Taxation is a fiscal policy tool. Increasing tax credits essentially lowers tax liabilities. This is expected to have a positive impact on the economy. Statement C is incorrect as it will have the opposite expected effect. Statements B and D are monetary tools, not fiscal policy tools
Which of the following actions are appropriate for the FOMC?
Increase deficit spending. Decrease income tax rates. Purchase treasury securities. Increase the debt limit. Solution
Solution: The correct answer is C.
The FOMC implies the Federal Open Market Committee (or monetary policy). Answer choices, A, B and D are all fiscal policies.
Tom purchased the following callable bond:
Price: $851.23
Par: $1,000
Coupon: 4%
Term: 10 years
Callable in 5 years at $1,050
Which of the following represents the call penalty for this bond?
$50
$1,000
$1,040
$1,050
Solution: The correct answer is A.
The call penalty is the amount above the par value a company will pay to retire the bond issue early. The Call Penalty = Call Price – Par Value or $1,050 - $1,000 = $50
