Misc/HotQuestions Flashcards
Zeko, who owns Z2 Consulting, wants to establish a SEP for the employees of his company. What is the latest date that the SEP can be funded if Z2 Consulting is an S corporation?
A SEP can be established and funded as late as the due date of the return. In this case, the return is due September 15th.
S-Corps issue K-1 statements to shareholders. The S-corp must file by 3/15 giving time for the shareholders to receive and report the K-1 on their 1040s. Latest an S-corp can file is 9/15.
Ella received nonqualified stock options (NQSOs) with an exercise price equal to the FMV at the date of the grant of $20. Ella executes a cashless exercise when the FMV of the stock was $30. Which of the following statements are true?
Ella has ordinary income at the time of the grant.
Ella has W-2 income at the time of exercise of $30.
Ella has capital gain of $10 when the stock is sold.
Ella will receive less than $10 due to withholding and transaction costs.
The correct answer is D.
Statement 1 is false – there is no income at the time of grant when the strike price equals the FMV on the date of grant.
Statement 2 is false. W-2 income equals $10 at the time of exercise.
Statement 3 is false since there is no capital gain.
Statement 4 is correct.
Which of the following actions are appropriate for the FOMC?
Increase deficit spending.
Decrease income tax rates.
Purchase treasury securities.
Increase the debt limit.
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.
These editors are employees of Grammar Gals and not MAD Dog. MAD Dog simply pays GG per the agreement that is in place. GG does not sponsor a retirement plan. Which of the following is correct?
These employees are leased employees and must be counted for purposes of meeting coverage rules, top-heavy rules, contribution and benefit rules. Leased employees fall under an agreement with the employer and the leasing organization, must be performing services on a substantially full time basis for at least one year and the services must be controlled by the employer. Option a is incorrect – only certain plans would result in them not being considered leased employees. Option b is incorrect – they do not have to be provided with benefits. Option d is incorrect since it is a safe harbor plan.
Jordan, age 16 and a dependent of James, has a part-time job and earned $4,500 this year. In addition, she had $600 of interest income and $1,000 in qualified dividends.
What is the amount of income that Jordan received that is taxed at the parent’s tax rate?
$0
Only the unearned income in excess of $2,500 (for 2023) is taxed at the parent’s tax rate. Since unearned income is only $1,600, none is taxed at the parent’s tax rate.
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
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
Your client wants to retire in 10 years. Upon retirement she wants to receive equal payments of $100,000 each year for 25 years (which is her life expectancy). Upon her death she wants to leave $1,000,000 to her children. Her current portfolio value is $715,000. What is the IRR?
Riley worked for Easton Equipment Enterprises (3E) for the last thirty years. 3E is a publicly traded company that sponsors a 401(k) plan with a company match. The company match is in the form of 3E stock. Riley has decided to retire this year. Her account balance in the plan consists of $450,000 in other marketable securities and $350,000 in 3E stock attributable to the company match. When she retired, she decided to rollover the $450,000 to a Roth IRA at her broker and take a full distribution of the 3E stock, which she will keep for several years. The total value of the 3E stock when it was contributed as a match over the thirty years equals $100,000. How much taxable income does she have this year attributable to the 3E 401(k) plan distribution and rollover?
$550,000 of ordinary income
The $450,000 is taxable because she rolled it to a Roth IRA. The cost basis of the 3E stock is taxable, which equals $100,000 of basis from employer contributions. The remaining $250,000 of the 3E stock will be taxable as a LTCG when the stock is sold, based on NUA rules (Net Unrealized Appreciation).
Bob and Sandy are happily married. Bob, who is 58 year old, retired 5 years ago and plays golf every day. Sandy, who is eight years younger, works as a waitress and earns $50,000 per year. She actually defers $3,000 in the restaurant’s 401(k) plan. They also receive $3,000 in qualified dividends each year. Bob has $45,000 in his Roth IRA, which he first contributed to in 2002. After discussing with Sandy, Bob decides to take out all $45,000 to pay for a golf trip to Pebble Beach with three of his best buds. Assume that he contributed $10,000, converted $20,000 last year and the rest of the account is from earnings. Also assume that he and Sandy are in the 22 percent marginal income tax bracket. How much tax and penalty is he subject to for this distribution?
$6,800
On January 1 of last year, 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 May 30th of this year, George exercised all of his ISOs when the fair market value of the stock was $15 per share. At the date of exercise, what are the tax consequences to George?
$100,000 AMT adjustment
Read what the question is asking carefully. This is an ISO and at the time of exercise we would not know if this is a qualifying disposition or not. That is determined at the time the stock is sold.
When an ISO is exercised, the appreciation in excess of the exercise price is an AMT adjustment. In this case, George would have an AMT adjustment equal to $100,000 (10,000 × $10 appreciation).
Jordan, age 16 and a dependent of James, has a part-time job and earned $4,500 this year. In addition, she had $600 of interest income and $1,000 in qualified dividends.
What is the amount of income that is taxable to Jordan?
$1,200
Step 1: calculate the standard deduction. The standard deduction for a dependent on another taxpayer’s return is the greater of $1,250 or earned income + $400 (up to a maximum of $13,850, the standard deduction for a single taxpayer in 2023), so her standard deduction is $4,900.
Step 2: deal with the unearned income. The unearned income that is taxable is $1,600. The first $1,250 is tax free because it is covered by the standard deduction under kiddie tax rules. The next $350 is taxed to child at his own rate. (note: 1,250 tax free, next 1,250 at the child rate, anything above is at the parent’s rate SECURE Act 2019)
You have now used $1,250 of the standard deduction, leaving $3,650 to be used against earned income.
Step 3: earned income is $4,500. Subtract the remaining $3,650 of standard deduction and that leaves $850 taxed to the child at her rate (she worked for it, so no kiddie tax).
Step 4: check yourself:
Total standard deduction $4,900
Total taxed at child rate $1,200 ($350 of unearned income + $850 earned income)
Total taxed at parent’s rate $0
Total $6,100 this accounts for all of the taxable income
each step in the financial planning process
It is important to understand each step in the financial planning process and be able to identify which step is taking place in each question.
- Understanding the Client’s Personal and Financial Circumstances
- Identifying and Selecting Goals
- Analyzing the Client’s Current Course of Action and Potential Alternative Course(s) of Action
- Developing the Financial Planning Recommendation(s)
- Presenting the Financial Planning Recommendation(s)
- Implementing the Financial Planning Recommendation(s)
- Monitoring Progress and Updating
Which of the following statements is true regarding the Capital Asset Pricing model?
-it determines the price an investor will pay for an asset given the amount of total risk
-it is a single factor model that explains the relationship between security returns and market risk
-it shows that assets with greater total risk (measured by standard deviation) should provide higher returns.
-it describes required return as a function of multiple factors (such as GDP, unemployment, interest rates, etc.)
The correct answer is B.
Statement a. is incorrect because CAPM determines a rate of return, not a price. Also, CAPM only considers systematic risk, not total risk. Statement c. is incorrect because of reference to total risk and standard deviation. Answer d. is incorrect as it describes APT, not CAPM
In September 2022, Connor turned 72. He was a participant in his former employer’s stock bonus plan. His stock bonus plan had an account balance of $200,000 on December 31, 2022, and $175,000 on December 31,2021. According to the Uniform Lifetime Table the factors for ages 72 and 73 are 27.4 and 26.5 respectively. What is the amount of Connor’s first required minimum distribution that he must take by the deadline?
$175,000/27.4 = $6,387
Connor turned 72 in 2022, so we need to use the prior year balance for 2021, and the factor for age 72. He can delay his first RMD (2022 tax year) until April 1, 2023. He will be required to take a second RMD by December 31, 2023 for the 2023 tax year.
All of the following are calculated as a weighted average except?
portfolio standard deviation
portfolio beta
portfolio expected return
portfolio duration
The correct answer is A.
Portfolio Standard Deviation cannot accurately be reflected in a weighted average. Standard Deviation takes into account all risk, which includes asset movement (COV) within the portfolio. A weighted average would not take into account the assets movement in relation to each other.
Jeter is 56 years old and owns Short Stop Sandwiches, a very successful deli in NY City. He sponsors a 401(k) plan with a dollar-for-dollar match up to four percent. The NHCEs deferred three percent this year, while the HCEs deferred six percent. Should he be concerned?
Yes. He can fix the problem with a qualified non-elective contribution
The plan does not meet the ADP test. If the NHCEs deferred 3%, then the HCEs could only defer 5%. The plan is not a safe harbor plan, even though it provides a benefit equal to that required by a safe harbor plan. The plan is not stated to be a safe harbor plan, which requires the employer to either match 100% of the first 3% contributed + 50% of the next 2% contributed, or provided a 3% non-elective contribution to all eligible employees. In a safe harbor plan, the employer contributions are 100% immediately vested (we don’t know if they are 100% vested immediately unless the question tells us that or tells us it is a safe harbor plan). He could fix the ADP issue with either a corrective distribution from the HCEs, or with a QNEC or a QMC.
Casey, age 42, received a distribution from his 401(k) Roth account of $80,000. He had an adjusted basis in the plan of $420,000 and the fair market value of the account as of the distribution date was $600,000. Assuming he took the distribution to pay for his daughter’s college education and that he had been contributing to the Roth account since 2008, calculate the taxable amount of the distribution and any applicable penalty.
$24,000 taxable; $2,400 penalty
The first step is to determine if this is a qualified distribution. It is not since the distribution is not due to age 59 ½, death or disability.
Therefore, the distribution is taxable on a pro-rata basis, just as any distribution from a qualified plan. To calculate the amount of the distribution that is taxable, the adjusted basis in the plan is divided by the fair market value of the plan as of the day of the distribution. This ratio is subtracted from one and then multiplied times the gross distribution amount. As such, $24,000 ((1-($420,000/$600,000)) × $80,000) of the distribution is taxable and will be subject to income tax and penalty. There is no exception for education from a qualified plan, thus, the penalty applies – 10% of the taxable amount or $2,400.
SMU establishes a private 457 plan for eligible employees of the university. Which of the following is correct?
The funds in the plan are subject to the claims of SMU general creditors.
The funds in the plan are subject to the claims of employee creditors.
The plan must be available to all employees of the university.
Employee funds in the 457 plan cannot be self directed.
The correct answer is A.
Choice A is correct because the assets are held in a private 457 plan, which are not protected by a trust. Choice B is false because the employee does not have access to the funds. Choice C is not correct because a private 457(b) plan will be limited to a select group of employees. Choice D is false – deferrals can be self-directed.
Your client is currently age 64 and looking forward to retiring next year. He is curious about what his coverage under Medicare will be like, specifically if his hearing aids will be covered, when he retires. Which of the following can you tell him Medicare Part B does cover?
Hearing Aids
Wheelchair
Ambulance
Lab Tests
II, III and IV
Medicare Part B does not cover hearing aids. Medicare Part B does cover an ambulance, lab tests and “Durable Medical Equipment” such as a wheelchair, hospital bed, walkers and oxygen.
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?
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
A client is planning to file for bankruptcy. Which of the following assets/accounts are exempt?
Taxable brokerage/investment account
Cash value of a life insurance policy
IRA rollover with $1.5 million in assets from a 401k plan
All of the above are exempt assets/accounts
The correct answer is C.
Clearly identified roll over funds that have not been contaminated are eligible for the same safeguards as qualified plans. They must remain only roll over funds, and have no annual contributions or other funds.
The taxable brokerage account is non-exempt. Rules regarding cash value in a life insurance policy depend on state-specific laws. A general rule is the cash value of a life insurance policy is an exempt asset if the beneficiary of the policy is a dependent (spouse or child). Otherwise, the cash value may be considered a cash asset and made available to pay creditors.
Dana is an executive of STEEL, Inc. She earns $570,000 during the year and defers $15,500 into the SIMPLE. STEEL, Inc uses the maximum match for SIMPLE Plans. How much would the matching contribution be for Dana?
The matching contribution is 3 percent of an employee’s compensation up to $15,500 for 2023. The covered compensation limit does not apply with the match for a SIMPLE, but the match cannot be greater than the employee contribution.
Alexa purchased a whole life policy 15 years ago. She has decided that she no longer needs the protection that this policy provides and plans to surrender the policy. A significant cash value has accumulated in the policy. All of the following are nonforfeiture options Alexa may consider except?
Cash surrender value
Reduced paid up insurance
Dividends paid in cash or reinvested
Extended-term insurance
The correct answer is C.
The other three are nonforfeiture options in most life insurance contracts
Jake and Allison have a three-year-old son, Carson. They want to start saving for Carson’s college education. They expect Carson to attend college for four years starting on his 18th birthday. The current cost of a 4-year college is $27,500 per year. It is expected that the cost of attending college will increase by 7 percent each year. Assuming they can earn a 10 percent return on their investments, how much do they need today to fund Carson’s education at age 18?
We are given the present value of the education today.
PV=27,500
N=15
I=7
FV=?
One year of education will be 75,873.37 in 15 years
PMT=75,873.37 (BEG mode)
N=4
I=1.10/1.07 - 1 ×100 = 2.8037
PV=?
The answer is 291,302.04 to fund all 4 years
FV = 291,302.04
n= 15
I = 10
PV =69,735.39
