Misc/HotQuestions

Question 1

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?

Answer 1

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.

Question 2

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.

Answer 2

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.

Question 3

Which of the following actions are appropriate for the FOMC?

Increase deficit spending.
Decrease income tax rates.
Purchase treasury securities.
Increase the debt limit.

Answer 3

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.

Question 4

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?

Answer 4

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.

Question 5

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?

Answer 5

$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.

Question 6

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

Answer 6

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

Question 7

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?

Answer 7

Question 8

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?

Answer 8

$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).

Question 9

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?

Answer 9

$6,800

Question 10

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?

Answer 10

$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).

Question 11

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?

Answer 11

$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

Question 12

each step in the financial planning process

Answer 12

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.

1. Understanding the Client’s Personal and Financial Circumstances
2. Identifying and Selecting Goals
3. Analyzing the Client’s Current Course of Action and Potential Alternative Course(s) of Action
4. Developing the Financial Planning Recommendation(s)
5. Presenting the Financial Planning Recommendation(s)
6. Implementing the Financial Planning Recommendation(s)
7. Monitoring Progress and Updating

Question 13

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.)

Answer 13

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

Question 14

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?

Answer 14

$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.

Question 15

All of the following are calculated as a weighted average except?

portfolio standard deviation
portfolio beta
portfolio expected return
portfolio duration

Answer 15

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.

Question 16

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?

Answer 16

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.

Question 17

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.

Answer 17

$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.

Question 18

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.

Answer 18

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.

Question 19

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

Answer 19

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.

Question 20

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?

Answer 20

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

Question 21

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

Answer 21

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.

Question 22

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?

Answer 22

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.

Question 23

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

Answer 23

The correct answer is C.

The other three are nonforfeiture options in most life insurance contracts

Question 24

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?

Answer 24

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

Question 24

300/500/300 split liability limits

Answer 24

The split limits in the policy are $300,000 per person, but not more than $500,000 in total for the accident, plus up to $300,000 of property damage.

Question 25

Joe and Holly have a 30-year mortgage. They borrowed $500,000 at 6%, 9 years ago and have 21 years remaining on their current mortgage. They are considering refinancing their mortgage over 15 years, at a rate of 4%. What amount would they save in total by refinancing their current mortgage?

Answer 25

Current Mortgage

N = 30 × 12 = 360

I = 6 / 12 = .5

PV = <500,000>

PMT = ?

FV = 0

Current Mortgage Payment

$2,997.75

Amortize the loan for 9 years, remaining principal outstanding

(final step is below calculator specific AMORT steps)

Last thing:
New mortgage payment

3,172.90

Total Amount Remaining Under Current Mortgage

$2,997.75 × 21 × 12 = $755,433

Total Amount to be Paid if Refinanced

3,172.90 × 15 × 12 = $571,122

Savings

755,433 – 571,122 = 184,311

Question 26

You are a CFP® certificant working with Lamar Jones, a 64-year-old client who is about to retire. You and Lamar have determined that he should take distributions from a Roth 401(k) which he has been contributing to for the past 3 years. Lamar has contributed $20,000 to the Roth 401(k). It is valued at $30,000. Lamar will take a distribution of $4,000 this year. What amount of the distribution will be subject to tax this year?

Answer 26

This is a nonqualified distribution because Lamar did not start contributions to the Designated Roth Account at least 5 years ago. Nonqualified distributions are treated as a pro-rata distribution of basis and earnings. Since ⅓ of the total account is earnings, ⅓ of the distribution will be taxable.

Be careful not to confuse the Roth 401k distribution rules with the Roth IRA distribution rules. Roth 401k will be a pro-rata distribution, not the “best first” that the Roth IRA is.

Question 27

Justin converted $5,000 into Japanese yen at an exchange rate of 140 yen per dollar. He invested in Japanese stock and earned a 12% return on his investment. He converted the yen back to U.S. dollars when the exchange rate was 151 yen per dollar. What was the holding period return on Justin’s investment?

Answer 27

$5,000 × 140 yen = 700,000 yen; 700,000 yen × 1.12 = 784,000 yen; To convert yen to dollar: 784,000/151 = 5192.05; holding period return = [(5,192.05/5,000)-1] = .0384 = 3.84%

Question 28

Consider the following characteristics of L’Russell, Inc. bonds;

Original maturity: 30 years

Par Value: $1,000

Coupon rate: 6.5 percent

Original call protection period: 10 years

Issued at par value

Call price: $1,065

Four years have passed since the bond was issued. Interest rates have decreased by 50 basis points (i.e. one-half of one percent) since the bond was issued. If an investor purchases the bond today, what is the yield to call?

Answer 28

Solution: 6.095%

Coupon bonds pay semi-annually unless it is stated otherwise.

Step One: determine current bond price

FV = 1,000

PMT = 65/2 = 32.50

I = 6 ÷ 2 = 3 (since the bond was issued at par, we know the original YTM was 6.5%)

N = 52 (30-4 = 26, 26 × 2=52)

Solve for PV = 1065.42

Step Two: solve for ytc

FV = 1065

PV = (1065.42)

PMT = 32.5

N = 12 (10-4=6, 6×2=12)

Solve for I = 3.047, the account for semi-annual amount 3.047 × 2 = 6.095

Question 29

Which items are deductible before AGI?

1 Medical expenses.
2 Real estate taxes.
3 The employer portion of Social Security taxes for an S Corp owner.
4 Capital losses.

Answer 29

3 and 4.

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.

Question 30

Joe wants to retire in 20 years when he turns 70. Joe wants to have enough money to replace 75% of his current income less what he expects to receive from Social Security at the beginning of each year. His Social Security benefit is $20,000 per year in today’s dollars at his normal age retirement of age 67. However, he will begin collecting Social Security benefits when he retires. Joe is conservative and wants to assume a 7% annual investment rate of return and assumes that inflation will be 3% per year. Based on his family history, Joe expects that he will live to be 95 years old. Joe currently earns $100,000 per year and he expects his raises to equal the inflation rate. He has accumulated $199,571 towards retirement. How much does he need to save every year to fulfill his retirement goals?

Answer 30

$17,500
The answer is calculated as follows:

*Social Security must be increased by 24% to account for delayed benefits at 8% per year for the 3 years he delayed benefits;

Step 1: Determine amount to be funded
Income today $100,000.00
WRR 75%
Needs $75,000.00
Less Social Security* & Pension $(24,800.00)
Amount to be funded $50,200.00
Step 2: Inflate funds to retirement age
PV $(50,200.00)
N 20
i 3.00%
Pmt 0
FV $90,666.78
Step 3: PV of retirement annuity (BEG mode)
PMT $90,666.78
N 25
i 3.8835% (real return)
FV -
PV ($1,489,697.78)
Step 4: Annual funding amount (END Mode)
FV $1,489,697.78
N 20
I 7.00%
PV ($199,571)
Pmt ($17,500.00)

Question 31

Which of the following transfers will qualify for the estate tax marital deduction?

a. Tanya leaves her husband the right to receive income from her bond portfolio for his life, with the bond portfolio passing to their daughter at the husband’s death.

b. Stan leaves his wife $50,000 in a specific bequest, but directs the executor to use the money to purchase a straight life annuity with no refund feature.

c. David leaves his Colorado vacation home to his wife, until the time she remarries, at which time the property passes to David’s son.

d. Mary leaves her art collection to her husband for use during his life, with the remainder passing to his estate at the time of his death.

Answer 31

The correct answer is D.

Even though a life estate is considered a terminable interest, this transfer will qualify for the marital deduction since the husband’s estate is the remainder person.

A is incorrect. A life estate is considered a terminable interest, which is not eligible for the marital deduction.

B is incorrect. Although the bequest was left specifically for the use of the surviving spouse, a marital deduction will not be allowed because the executor was directed to purchase a straight life annuity for the surviving spouse. The straight life annuity is considered a terminable interest.

C is incorrect. If a bequest to a surviving spouse will terminate upon the surviving spouse’s remarriage, this is considered a terminable interest that is not eligible for the marital deduction

Question 32

Mel and Diana are a married couple in their late 30s. Mel is an attorney and earns $350,000 per year. Diana works part-time. They have assets of approximately $2,000,000, and are considering investing in fixed income securities. Their current federal income tax rate is 35% and they are subject to a 6% state tax rate. Which of the following investments would be the most appropriate based on after-tax yield?

Treasury bond yielding 6.25%.
Corporate bond yielding 6.50%.
Municipal bond in state of residence yielding 4.00%.
Municipal bond outside of state of residence yielding 4.00%.

Answer 32

The correct answer is A.

After-tax yield = Yield x (1 – tax rate)

Treasury bond (not subject to state income tax) - After-tax yield

6.25% x (1 – .35) = 4.06%

Corporate bond - After-tax yield =

6.50% x (1 – .41) = 3.84%

Muni bond (state of residence) - After-tax yield

4.00% x (1 – 0) = 4.00%

Muni bond (outside state of residence) - After-tax yield

4.00 x (1 – .06) = 3.76%

Question 33

Julio is a 48-year-old advertising executive with a current salary of $125,000. He owns a condo in Colorado that he rents out to tourists for six months each year, generating a net rental profit of $20,000. He lives in the condo the other six months of the year. Assuming Julio purchased $50,000 of new furniture for the condo, what is the amount of Section 179 expense deduction he could take on his personal income tax return this year?

Answer 33

$0

Section 179 expense is only available for property used in a trade or business. Property used for the production of income, such as rental property furniture, is not eligible for the Section 179 expensing deduction.

Question 34

If the return on a security is normally distributed, with a mean rate of return of 10% and a standard deviation of 9%, the probability of a rate of return being less than 1% is approximately:

Answer 34

16%

If the mean rate of return is 10%, and the standard deviation is 9%, a return of 1% would represent 1 standard deviation from the mean. The probability of a rate of return within 1 standard deviation of the mean is 68% and 32% probability outside 1 standard deviation.

Therefore, there is a 16% probability that the return will be below 1% (and there is a 16% probability that the return will be above 19%).

32%/2 = 16%

Question 35

Jimmy wants to start his own business in six years. At that time, he will need $200,000 in today’s dollars. Assuming an inflation rate of 4%, and a 9% return on investments, what serial payment should Jimmy invest at the end of the first year to attain his goal?

Answer 35

Serial payment:

FV=$200,000

N = 6

I = [(1.09/1.04)]-1 x 100

PMT= 29546.11 x 1.04 = $30,728

The first serial payment is made at the end of the year. Inflation needs to be account for from today until the end of the period when the first payment is made. The calculator only account for inflation from the first payment forward.

Question 36

Laura has been thinking about her need for life insurance. If she were to die today, she would want to leave her husband Scott with enough to pay off their $440,527 mortgage. Additionally, she would like to establish a scholarship that provides $8,000 annually in today’s dollars to her current University. Assume the scholarship would grow at 6% annually and education costs inflation is 5% on an annual basis. Under the capital needs analysis approach, approximately how much life insurance does Laura need to purchase?

Answer 36

Under the capital needs analysis approach, the earnings from the capital balance should be sufficient to provide cash needed, without liquidating the capital. The annual cash need is $8,000 in today’s dollars.

The amount of capital needed under the capital needs analysis approach can be determined using the following formula:

Capital needed = Annual Income Need / Interest Rate

However, the interest rate must be adjusted for inflation, using the following formula:

Inflation Adjusted interest rate = [(1 + 6%) / (1 + 5%)] - 1

Inflation Adjusted interest rate = .009523

Capital needed = $8,000 / .009523 Capital needed = $840,071

Laura also wants Scott to be able to pay off the mortgage, which has a current balance of $440,527.

Therefore, the total life insurance need is $1,280,598 ($440,527 + $840,071), or approximately $1,281,000.

Question 37

A client, who is in the 24% marginal income tax bracket, just sold an apartment building for $800,000. He bought the building eight years ago for $550,000, and has taken tax depreciation of $100,000 over the years. What is the total tax due as a result of the sale, ignoring any net investment income tax?

Answer 37

$62,500

Section 1250 property is depreciable real property.

When Section 1250 property is sold at a gain, the gain will be taxed at 25% to the extent of depreciation taken. Any remaining gain will be taxed at regular capital gain rates (15% in this question).

The basis in the property is $450,000 ($550,000 cost less $100,000 basis). Therefore, the gain is $350,000 ($800,000 sales price less $450,000 basis). $100,000 of the gain will be taxed at 25% (because of depreciation recapture), and the remaining $250,000 gain will be taxed at 15%.

The total tax due is $62,500 [($100,000 x 25%) + ($250,000 x 15%)].

Question 38

Which of the following is/are mandatory benefits that must be offered by Medicaid programs?

I. Home Health Services.

II. Outpatient and Inpatient Hospital Services.

III. Transportation to Medical Care.

IV. Physician Services.

Answer 38

I, II, III and IV

Question 39

Mariette’s church sponsored a dinner, which included a raffle for a new computer. Mariette paid $50 for the dinner, and paid $25 to purchase a raffle ticket. Assuming the actual value of the dinner was $30, how much can Mariette claim as a charitable contribution deduction on her personal income tax return?

Answer 39

The purchase of a raffle ticket would not be considered a charitable contribution, even if the ticket was purchased from a church or other qualified charity. The raffle ticket would be considered a gambling loss.

With respect to the dinner, Mariette would only be allowed to claim a deduction for the excess of the amount she paid over the value of the dinner. Therefore, her deduction is $20 ($50 paid for the dinner less $30 value of the dinner).

Question 40

Marge was granted an incentive stock option 5 years ago for 1,000 shares of employer stock at $20 per share. Marge exercised the option this year and immediately sold the shares at $30 per share. Marge is in the 24% marginal tax bracket. She will pay federal tax this year on the transaction in the amount of:

Answer 40

An incentive stock option is eligible for favorable income tax treatment only if the underlying stock is held; (1) two years from the date of grant and (2) one year from the date of exercise. Tax determination of an ISO is not made until disposition. Selling the stock within one year of the date of exercise creates a disqualifying disposition and ordinary income tax treatment.

The bargain element of a nonqualified stock option is taxed as ordinary income at the time of exercise. The bargain element of the option is $10,000 [($30 fair market value less $20 strike price) x 1,000 shares].

Tax is $2,400 ($10,000 bargain element x 24% tax rate).

Question 41

Which of the following statements regarding long-term care insurance in a cafeteria plan is correct?

Answer 41

Long-term care insurance is NOT allowed in a cafeteria plan

Question 42

ABC Company stock is currently trading at $21 per share. ABC Company experiences constant dividend growth at a rate of 5% per year. Assuming ABC just paid a dividend of $2 per share, what is the required rate of return for ABC Company stock?

Answer 42

The required rate of return is 15%, based upon the following formula:

R = (D1/P) + g

R= required rate of return

D1= dividend projected for coming year

P = current value of stock

g = dividend growth rate

Therefore, the required rate of return is 15%

R = (D1/P) + g

R = [$2 x (1.05)]/$21 + .05

R = ($2.10/$21) + .05

R = .10 + .05 R = .15

Question 43

Which of the following is a requirement of a tax-qualified long-term care insurance policy?

A. The policy cannot offer a nonforfeiture option.

B. The policy cannot contain a cash surrender value.

C. The policy must be noncancelable.

D. The benefit must be offered on a reimbursement basis, rather than on a per diem basis.

Answer 43

The correct answer is B.

A tax-qualified long-term care policy cannot offer a cash surrender value.

A is incorrect. A nonforfeiture option can be offered in a qualified long-term care policy. C is incorrect. A qualified long-term care policy must be guaranteed renewable. D is incorrect. A qualified long-term care policy can provide benefits on either a per diem basis or a reimbursement basis.