Practice Exam 1 Flashcards
Derek Bogart has consulted a CFP® professional for financial planning, and they have discussed education planning for Derek’s 5 year old son. Derek wants to save for his son’s college education but feels he cannot select a particular school to use for estimating costs. Instead, he has selected an amount that he wants to have available when his son is ready to start college at age 18. Derek thinks $200,000 will be a good education fund to set for a goal because he can supplement it, if necessary, out of current income or loans when his son is in college. Derek plans to invest the money in conservative investments that will earn about 6% annually and will not be taxable. The CFP® professional explains to Derek that while inflation might run about 3%, education costs are probably going to continue increasing at about 6% annually. Approximately what amount will Derek need to save each year for his son’s college education fund?
Derek’s son will start in 13 years, Derek can earn 6% on the money while invested, and he wants a fund of $200,000. You will only need to account for inflation if you’re trying to determine what the desired future amount needed for college is. In this case, that amount is stated as $200,000 so you don’t need to inflate for future dollars. The client is choosing to save a flat amount and states he will supplement as necessary at the time he starts school.
The keystrokes on a financial calculator are:
13, N
6, i
0, PV
200,000, FV
Then, press PMT and the calculator will display 10,592.
A client is concerned about losing health care coverage at the time he changes jobs. The CFP® professional can advise the client that under COBRA, an employer will not be required to provide continued health insurance coverage for all qualified beneficiaries under the plan in which of the following circumstances?
A. The employee fails to pay 102% of the cost of coverage.
An employer can require a former employee or beneficiary to pay 102% of the cost of the coverage. If the employee or beneficiary fails to pay the premium, coverage can be terminated.
Coverage can also be terminated when an employee or beneficiary becomes covered under another plan unless the new plan excludes preexisting conditions. In that case, the employee must be permitted to continue coverage for the period provided under COBRA.
A child ceasing to be a dependent is one of the qualifying events that triggers COBRA coverage for qualified beneficiaries.
Another qualifying event is an employee becoming entitled to Medicare benefits. Once the employee is eligible for Medicare, their spouse and dependents are able to choose COBRA to continue benefits.
Joy Linowitz is 72 years of age and has obtained financial planning from a CFP® professional who has recommended that she sell some of her bond portfolio for her current expenses. Which of the following transactions will result in the most interest income for Joy?
-Cash in the Series EE bonds she has held for 25 years
-Sell the corporate bonds she has held for 25 years
-Sell Series HH bonds she obtained from exchange of Series EE bonds purchased 25 years ago
-Sell U.S. Treasury bonds she has held for 25 years
The correct answer is A.
The Series EE bonds accumulate interest until the bonds are cashed in, so the 25 years of interest will be received at the time the bonds are cashed.
The corporate bonds, Series HH bonds, and U.S. Treasury bonds pay interest semiannually, so the amount of income received at the time of sale is only a part of a semiannual interest payment. Consequently, the income from the Series EE bonds will be much greater.
A CFP® professional has been advising a client on ways to increase income from his portfolio by writing options. The CFP® professional explains to the client that he can write a call option on Merck stock for a $4 premium, and the strike price for the call is $40. His purchase price for the Merck stock in his portfolio was $40. If the option is exercised when Merck stock is selling at $45, what is the total amount of income the client will recognize on the option?
$400
The client is the writer of the option and receives the premium of $4 per share, or a total of $400, because option contracts are for 100 shares. The stock is called away at $40, so the gain will go to the call option holder.
Further Details:
An option is not exercised at the current price. It is exercised at the strike price.
Bob sold a Call at $4, with a strike price of $40. This equals his receipt of $400 in premium. He now has an obligation to sell someone shares of stock at $40 if the call is exercised.
The owner of the call, let’s call him John, choses to exercise the option. He calls the stock from Bob at $40.
Bob owns the stock, that he purchased at $40. He sells it to John at $40. He has no gain, no loss in fulfilling John’s option.
If John gets the shares at $40, John can turn around and sell them at $45 in the open market. Bob is no longer part of the transaction.
A CFP® certificant has provided a client with financial planning services, including investments and income tax planning. The CFP® certificant is preparing an income tax return as part of the on-going services for the client and has been provided with the client’s tax information. The client is single and has a salary of $55,000. The client has received dividends of $3,000 and has capital gains of $2,500. In addition, the client has a $35,000 loss on a residential rental unit that he owns and manages. What is the client’s AGI?
The AGI will include the client’s salary, the dividends, and the capital gains. The client can also deduct above the line the amount of the loss on the residential rental unit but only up to a maximum of $25,000. The client can deduct the full $25,000 because the client’s AGI is below $100,000.
The client’s AGI, therefore, will be $55,000 + $3,000 + $2,500 – $25,000 = $35,500.
During the year, Mr. Chambliss paid $1,800 in margin interest on his brokerage account. His brokerage records show that he realized $5,450 in long-term capital losses during the year, earned $2,400 in municipal bond interest, and had taxable interest income of $950. These were his only investment activities. His AGI was $85,000, and he had itemized deductions of $13,500 before considering his investment activities. How much investment interest can Mr. Chambliss deduct on his return?
$950
He can deduct the interest paid, to the extent of his investment income.
That includes his taxable interest income of $950, but not his nontaxable municipal bond interest.
A CFP® professional is reviewing tax documents provided by a client for her various business interests. The CFP® professional would expect to find estimated tax payments reported for all of the following, EXCEPT:
Partnership
Sole proprietor
Corporation
Trust
The correct answer is A.
Partnerships are not taxpaying entities and pass through their income and losses to the partners. The partnership files an informational tax form (Form 1065). The partners file individual estimated tax reports and make individual estimated payments as part of their 1040 filing. Sole proprietors file individual estimated taxes, and corporations, trusts, and estates must pay estimated taxes.
Judy Meserschmit is a partner in an accounting firm where she specializes in tax audits. Judy is a 1/3 partner and her adjusted basis in the partnership is $25,000. The partnership decided to take out a loan during the year for $45,000 to pay its expenses. For the year, the partnership reported a loss of $180,000. How much loss from the partnership can Judy claim for the past year on her federal income tax return?
$40,000
The loan taken out by the partnership during the year increased Judy’s basis by her 1/3 share of the $45,000 loan or $15,000. Judy’s basis, therefore, increased from $25,000 to $40,000. Judy cannot deduct a loss from the partnership in excess of her basis (the amount she has “at risk”), so she can claim only a $40,000 loss.
Note: It would state non-recourse debt if that was the intent of the question.
Anne Simpson is 28 years of age and has been an employee of the Telford Furniture Company for 5 years. Her income for the 5 years has been $32,000, $33,000, $34,000, 35,000, and $36,000. The company retirement plan has 6-year graded vesting. The plan contributes 7.5% of an employee’s compensation after one year.
What is Anne Simpson’s vested benefit after 5 years
Anne Simpson is eligible for contributions after one year, and no contribution was made for Anne for her first year of employment. The first contribution was at her income of $33,000 × .075 = $2,475. She was not vested at the time this contribution was made.
Subsequent contributions were in the amounts of $34,000 × .075 = $2,550, $35,000 × .075 = $2,625, and $36,000 × .075 = $2,700.
The total contributions are $10,350. With a 6-year graded vesting schedule, there is no vesting in the first year, and then the vesting increases 20% per year. Simpson is 80% vested after 5 years.
The vested benefit is 80% of $10,350 = $8,280.
Ben Fuentes is a teacher who is 55 years of age and has taught in a private elementary school for the past 25 years. His annual salary is $35,000. During the initial data gathering session Ben mentioned to the CFP® professional that the school advised him that he could contribute over $30,000 to the retirement plan for this year. What kind of plan must be provided by the school?
403b
Read the question fact pattern carefully. He can contribute over $30,000 to a retirement plan and works for a school.
Under a 403(b) plan the employees at public and private schools are permitted to make salary reduction contributions of up to $22,500 in 2023, plus catch-up contributions up to $3,000 for employees with 15 years of service, plus additional catch-up contributions up to $7,500 for those age 50 and over, for a total of $33,000.
The 401(k) would permit the salary reduction of $22,500 and catch up of $7,500 but not the additional $3,000, for a maximum total of $30,000 (not over $30,000).
A 457 plan in a non-governmental tax-exempt organization would be for a select group of highly compensated individuals and not for a teacher.
A 412(e) plan is funded by employer contributions.
A client is unsure whether his employer provides a 401(k) plan or a 403(b) plan for employees. The CFP® professional can advise the client that all of the following organizations are eligible to adopt a 403(b) plan for employees, EXCEPT:
State hospital
Federal government
Private school
Public school
B…
A 403(b) plan may be adopted by an employer that is a tax-exempt organization or that is a public school system. Organizations that are wholly owned by a state or local government are usually not eligible employers, but a state hospital organized as a separate 501(c)(3) organization will be eligible. Also eligible is an agency of a state that is part of a public school system and an educational organization, such as a college or private school.
A CFP® professional is working with a sophisticated investor who holds numerous types of investments. The client has inquired about what types of securities he might own that were not obligated to follow the registration requirements of the Securities Act of 1933. All of the following are exempt from the Act of ‘33, EXCEPT:
Open-end companies
Rule 144 securities
Sales to accredited investors
Securities of municipal, state, and federal governments
The correct answer is A.
The securities of open-end investment companies (commonly called mutual funds) must be registered under the ‘33 Act. The other securities are exempt.
Sheryl Kramer inherited stock that her mother purchased for $25,000. At her mother’s death, Sheryl lived in a community-property state with her husband David, and the stock was valued at $50,000. Two years later, the Kramers moved to a state that followed common-law principles of property ownership, and the stock was then valued at $60,000. Five years later, in 2023, the stock was valued at $100,000, and Sheryl gave the stock to the Kramers’ two children. Sheryl and David agreed to split gifts. What is the amount of Sheryl’s taxable gifts?
$16k
The value of the gift is $100,000 on the date the gift is made. Sheryl and her husband split gifts, so Sheryl will report one-half of the gift, or $50,000. She can take one annual exclusion for each child, so the taxable gift is reduced by $34,000 to $16,000. Remember that for each child, Sheryl’s husband will also take an annual exclusion on his gift tax return.
Here is a more detailed breakdown:
Gift value is 100k, each child gets 50k
Sheryl gives:
Child 1: 25,000 - 17,000 annual exclusion = 8,000 taxable gift
Child 2: 25,000 - 17,000 annual exclusion = 8,000 taxable gift
Sheryl’s taxable gifts = 16,000
David gives:
Child 1: 25,000 - 17,000 annual exclusion = 8,000 taxable gift
Child 2: 25,000 - 17,000 annual exclusion = 8,000 taxable gift
David’s taxable gifts = 16,000
A CFP® professional is explaining how Section 303 can assist in estate planning. She wants to explain to the client some of the requirements for the application of Section 303. The CFP® professional can tell the client that a Sec. 303 redemption will be appropriate for all of the following estates, EXCEPT:
-At his death, the decedent owned stock of a closely held corporation in joint tenancy WROS with his wife.
-Before his death, the decedent had transferred his stock in a closely held corporation to a revocable trust.
-By will, the decedent bequeathed his stock in a closely held corporation to his daughter and provided for estate and death taxes to be paid by the residue.
-Before his death, the decedent’s adjusted basis in his closely held stock was almost zero
The correct answer is C.
If stock is included in the decedent’s gross estate, it can be redeemed under Sec. 303. One-half of the jointly owned stock will be included in the decedent’s gross estate, so some of this stock can be redeemed from the wife to the extent that it bears a portion of estate taxes. Similarly, stock that was transferred to the revocable trust can be redeemed from the trustee to the extent that it bears a portion of estate taxes. A Sec. 303 redemption cannot occur where the stock has been transferred by a specific bequest and will not bear any of the taxes. A decedent’s stock receives a step-up in basis at death, so a Sec. 303 redemption is appropriate when the basis was near zero before death. The estate can sell the stock at no capital gain.
A CFP® professional has reviewed information provided by a client during data gathering on investments, income tax returns, and retirement accounts. The client is 50 years of age, married, and has two children. The client and spouse have a modified AGI of $130,000 and file a joint income tax return. The CFP® professional observed that the client has invested in a real estate limited partnership that has generated losses of $8,000 last year, and the client has not taken any deduction for the losses. The client also owns an investment in residential real estate that the client manages and rents out. This investment produced losses of $12,000 last year. The client did not deduct those losses. What action should the CFP® professional recommend for the client?
File an amended return and seek a refund for an additional $10,000 in deductions for losses.
….Losses from the real estate limited partnership are passive losses that cannot be deducted against the client’s active income. The losses from the residential real estate rented by the client can be deducted in part due to the real estate exception for active participation.
The maximum deduction is $25,000 but this maximum is reduced by one dollar for every two dollars that the client’s modified AGI exceeds $100,000. Since the client’s modified AGI is $130,000, the maximum deduction is reduced by ½ × $30,000 = $15,000. The client can deduct the maximum of $25,000 - $15,000 reduction = $10,000 max deduction.
