Practice Quiz 1 (REVIEW MORE) Flashcards
Justin, age 55, earns $50,000 annually working for Stone, Inc., an S corporation. He owns 10% of Stone, Inc.’s stock. Justin is a participant in the Stone, Inc., profit-sharing plan. His spouse, Meghan, is 50 years old and is employed by JP Co. She earns $40,000 annually and participates in JP’s Section 401(k) plan, under which JP will make matching contributions of up to 3% of covered salary. Assuming that both the Stone, Inc. plan and JP plan have loan provisions, which of the following statements is(are) NOT correct?
- If Justin takes a loan from the Stone, Inc. plan, he will be assessed a 10% penalty tax because he is younger than age 59½.
- Justin cannot take a loan from the Stone, Inc. plan because he is a greater than 5% shareholder of the company.
- If Meghan’s Section 401(k) vested account balance is $10,000, she may borrow the entire amount.
- Both qualified plans must limit participant loans to no more than 50% of the participant’s compensation.
1, 2, and 4
Assume a taxpayer is in the 35% marginal income tax bracket and has enough deductions to itemize. Calculate the equivalent tax credit that would provide the same tax benefit as a $3,000 itemized deduction.
$3,000 x 35% = $1,050
William Sanders, age 38, earns $250,000 a year and wants to establish a profit-sharing plan for his business. He has 3 employees, who each earn a salary of $20,000, are between ages 22 and 26, and have been employed with the company for approximately 4 years. Which of the following vesting schedules would be the best choice for the company?
A)3-year cliff.
B)2-to-6-year graded vesting.
C)Immediate vesting.
D)5-year cliff.
B
Which of the following statements concerning the Consumer Credit Protection Act are CORRECT?
- Bait and switch advertising is prohibited.
- Credit terms must be disclosed for evaluation purposes.
- Interest must be reported in terms of annual percentage rate (APR).
- Consumers must be made aware of any prepayment penalties.
2, 3, and 4
John and Kate, ages 28 and 26 respectively, want to start to save for their retirement. They both are eligible for Section 401(k) plans through their employers. The plans offer a dollar for dollar match up to 3% of salary. If they consider themselves moderate to aggressive risk tolerant investor with a long-term time horizon, which of the following portfolios would be most suitable for their CFP® professional to recommend for their retirement plans?
A)
Portfolio 1 - 50% S&P 500 Index Fund, 30% Science Research Fund, 20% Corporate Bond Fund.
B)
Portfolio 4 - 40% S&P 500 Index Fund, 15% International Stock Fund, 15% International Bond Fund, 10% Science and Technology Stock Fund, 20% Money Market Fund.
C)
Portfolio 2 - 50% Corporate Bond, 25% U.S. Government Securities Fund, 25% Money Market Fund.
D)
Portfolio 3 - 80% S&P 500 Index Fund, 10% International Stock Fund, 10% Emerging Market Fund.
D
Mike exchanged an old machine in a like-kind exchange: adjusted basis of old machine, $5,000; fair market value (FMV) of new machine, $10,000; FMV of boot received, $4,000; FMV of boot given, $0. What gain must be recognized by Mike, and what is his adjusted tax basis in the new asset, respectively? A) $5,000 $5,000 B) $4,000 $5,000 C) $0 $5,000 D) $4,000 $10,000
B
Calculation: FMV new machine $10,000 − Boot given 0 \+ Boot received 4,000 = FMV old machine $14,000 − Adjusted basis (old) (5,000) = Potential gain (PG) $9,000 − Boot received (4,000) = Remaining gain $5,000
FMV new machine $10,000
− Unrecognized gain (5,000)
= New basis $5,000
Jack would like to donate his collection of impressionist paintings to a private impressionist art museum. The museum, in turn, will sell the paintings to generate income. Jack’s original purchase price of the paintings was $50,000. The FMV of the paintings when he contributes them is $300,000. His adjusted gross income for the year is $1 million. Jack has come to you, a CFP® professional, for information regarding the tax effects of the proposed transaction. He has heard from friends that if the museum sells the collection, he will only be able to use basis to value the donation. After reviewing the documentation for the pending transfer, you tell Jack he will have a total deductible donation for the gift of:
A) $0. B) $250,000. C) $300,000. D) $1 milliion
C
Bob is a fisherman with the local fish market. He and his wife Mary want to retire in 20 years. They expect to live approximately 25 years after retirement and need $40,000 (in today’s dollars) annually during retirement. Unfortunately, they have just spent their savings on refurbishing their boathouse and have only $12,000 in retirement savings. Inflation is currently 2% and is expected to continue indefinitely. Bob believes he can earn an 8% rate of return before retirement but expects to earn only 6% during retirement because of the change in his portfolio’s asset allocation at retirement. How much does Bob need to save at the end of each year to meet his retirement needs?
Step 1: Inflate needs until retirment:
PV = −40,000 n = 20 i = 2 FV = 59,437.90 Step 2: Discount annual needs to beginning of retirement:
BEG mode
PMT = 59,437.90
n = 25
i =[(1.06 ÷ 1.02) − 1} × 100 (inflation-adjusted discount rate)
PVAD = 973,006.62
Step 3: Determine the annual funding requirement:
FV = $973,006.62 PV = −12,000 n = 20 i = 8 PMT = 20,040.11, or $20,040.11
Janet, a full-time student, is age 18 and claimed as a dependent on her parents’ tax return. She is a sophomore who is enrolled as a full-time student at State University. She has $20,000 in unearned income this tax year. Her education expenses are as follows:
Tuition $10,000 Books 1,000 Laptop required by the university 1,500 Fees 650 Room and board 4,000 Transportation 1,000
What American Opportunity Tax Credits and Lifetime Learning Credits can she claim on her tax return this year for education expenses?
A)
She may claim a $2,000 Lifetime Learning Credit and a $2,500 American Opportunity Tax Credit.
B)
She can claim a $2,500 American Opportunity Tax Credit only.
C)
She can claim either the $2,000 Lifetime Learning Credit or the $2,500 American Opportunity Tax Credit but not both.
D)
None. She is a dependent and her parents must claim any education credits.
D
Doug has a PAP covering his personal automobile. His Part A policy limits are 200/300/50, and his Part B coverage is $10,000 per person. He does not have Part D coverage. One winter night, Doug and his wife are driving home from dinner when Doug takes his eyes off the road and drives into an unoccupied parked car. The other car sustains $20,000 in damages as a result of the collision. Doug and his wife both suffer bodily injuries and incur medical bills of $15,000 each. Doug’s car suffers $10,000 in property damage. Which of the following statements regarding Doug’s coverage under his PAP for this accident is (are) CORRECT?
- Doug’s PAP covers all of the $30,000 in medical bills.
- Doug’s PAP covers the $20,000 in damages to the other car.
- Doug’s PAP covers the $10,000 in property damage to his car.
2 only
Statement 2 is correct because the $20,000 in property damage to the other car falls within Doug’s $50,000 policy limit for property damage under Part A - Liability Coverage. Statement 1 is incorrect because the coverage for the $30,000 is medical bills for Doug and his wife is limited to $10,000 per person under Part B - Medical Payments Coverage. Statement 3 is also incorrect; the damage to Doug’s car is not covered because he does not have coverage under Part D - Damage to Your Auto Coverage.
Roger, age 56, is the owner and president of ABC Widget Co. He has operated the firm successfully since he first established the business 15 years ago. His son, Brett, is the company vice president. Profits over the past 5 years have increased at an average 15% per year. Roger has been thinking about retirement and is concerned that he won’t have enough money to achieve his goal of retiring at age 65. He has asked your advice about setting up a retirement plan that would provide the most benefits for him. The employee census is as follows:
EMPLOYEE AGE SALARY SERVICE Roger 56 $130,000 15 yrs. Brett 31 50,000 5 yrs. David 45 40,000 10 yrs. Chris 42 35,000 8 yrs. Beth 38 30,000 7 yrs. Robert 30 25,000 5 yrs. Margaret 36 28,000 6 yrs. Bill 26 25,000 5 yrs. James 23 23,000 2 yrs. Based on this information, which of the following plans would provide the maximum retirement benefit to Roger?
A) Traditional defined benefit pension plan. B) Section 401(k) plan. C) Profit-sharing plan. D) Money purchase pension plan.
A
Because Roger is the oldest, has the highest salary, and the fewest years remaining until retirement, he would receive the greatest benefit from a traditional defined benefit pension plan.
Penelope has qualified education expenses of $10,000 for the spring semester of college, but she wants an additional $2,000 for her spring break vacation. She takes a $12,000 distribution from her Section 529 plan. The distribution includes both contributions and earnings. Which of the following statement(s) regarding the tax treatment of the distribution is(are) CORRECT?
- $2,000 of the distribution will be included in Penelope’s gross income.
- An additional 10% tax penalty will be applied to an entire distribution made for nonqualified expenses.
- Qualified expenses include tuition, fees, and books.
3 only
Bradley loaned his friend, Karl, $25,000 for a down payment on a home in a zero-interest loan early in the current year. Bradley had investment income of $750 and Karl had investment income of $1,200 in the same year. The Federal interest rate is 3.5%. Karl has been making payments each month. What recommendations do you,a CFP® professional, make for accounting for the loan made to Karl by Bradley?
A)
Because this is a gift loan greater than $10,000 but less than or equal to $100,000, no interest will be imputed to the loan.
B)
Because Bradley’s investment income is less than $1,000 this year, no interest is imputed to the loan.
C)
Imputed interest is calculated on the loan to Karl and is considered a gift to Karl from Bradley.
D)
Bradley must develop an amortization schedule using the Federal rate of 3.5% to account for Karl’s payments of principal and interest.
C
The Watsons are recently retired and are ready to take a European vacation to celebrate their 40th wedding anniversary. When they return, they would like to meet with their financial planner to discuss setting up a family foundation to continue their lifelong philanthropic endeavors. The Watsons are currently in which life cycle phase? A) Distribution phase B) Conservation phase C) Protection phase D) Asset accumulation phase
A
Joe and Cathy are married and are active participants in rental real estate. They have earned income of $125,000, $5,000 of unearned income, $30,000 in deductions and exemptions, and $20,000 in losses related to their real estate holdings. How much will the couple claim as taxable income?
A) $80,000. B) $90,000. C) $85,000. D) $95,000.
B
Rental and real estate passive losses are allowed up to $25,000 for taxpayers not filing as MFS, which can be used to offset non-passive income. The $25,000 is reduced (but not below zero) by 50% of the amount by which the taxpayer’s AGI exceeds $100,000. Joe and Cathy have income of $130,000. The passive real estate maximum allowable loss deduction must be reduced by $15,000 to $10,000 or [(130,000 − 100,000) × .5]; therefore, the maximum rental activity passive loss they can claim is $10,000 ($25,000 − $15,000). The couple’s taxable income is $130,000 less deductions and allowable losses of $40,000 ($30,000 + $10,000), which leaves a taxable income of $90,000. Note that any unused loss may be carried forward. Note here that if the loss was $9,000, it would have been entirely deductible because it is below the adjusted allowable maximum. The allowable maximum deduction is calculated before considering how much of the loss is deductible.
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