Practice Quiz 18

Question 1

Which of the following are exceptions to terminable interest rules qualifying for the marital deduction?

1. A bequest to the surviving spouse conditioned upon his or her surviving for up to 6 months after the decedent’s death (as long as the spouse does survive the specified period.)
2. An interest for life if the surviving spouse also receives a general power of appointment.
3. Life insurance proceeds payable in installments to the surviving spouse but only until she remarries.
4. Property for which the QTIP election is made.

Answer 1

1, 2, and 4

Question 2

Mary owned 2 houses. She lived in one and rented the other to tenants for $1,000 per month. When Mary died, she left both of her houses to charity, but specified that her daughter, Jean, was to receive the rental income from the rental house for 10 years after Mary’s death. Additionally, Mary left Jean $40,000 in cash, $20,000 of which was to be paid to Jean immediately after Mary’s death, and the remaining $20,000 to be paid 1 year later. How much of her inheritance will Jean have to report as gross income in the year of her mother’s death?
A)
Only $40,000.
B)
$20,000 plus the amount of rent she receives.
C)
The net amount of rent she receives.
D)
$20,000 plus the amount of rent she receives, plus the net present value of the $20,000 payment she is to receive in the future.

Answer 2

C

The $40,000 is not taxable because it is a lump sum cash gift, which is distributed in 3 or fewer installments. The rental income, however, is taxable income to Jean.

Question 3

Baxter purchased a small business. The business purchase included a trademark and a copyright. In the same year he made the following purchases to be used in that business:

1. Several new computers for his office
2. Land on which he will be building a warehouse
3. A sports utility vehicle (SUV) to go to client work sites (the SUV is fitted for the specialty tools he needs)
4. A small office building he will rent to others
5. Trademark
6. Copyright

Which of the listed assets are amortizable for federal income tax purposes?

Answer 3

5 and 6 only

Copyrights and trademarks are intangible assets and are available to be amortized. The rest of the assets, except the land, are depreciable assets used in a trade or business. Land is never available for a depreciation deduction.

Question 4

Which of the following statements regarding Section 179 property is NOT correct?

A)
A new office desk is a type of property that would qualify as Section 179 property.
B)
Depreciable tangible personal property that is purchased by the taxpayer for business or trade qualifies as Section 179 property.
C)
Property held for the production of income qualifies as Section 179 property.
D)
The cost of the property may be deducted as an expense rather than depreciated over its useful life if certain conditions are met.

Answer 4

C

The choice to expense property as Section 179 property is only available when the property involved is an otherwise depreciable tangible item of personal property. Property that is held for the production of income (inventory) and other specified assets do not qualify for Section 179 treatment.

Question 5

Denise is a single parent with 3 daughters, all under the age of 13. While Denise works at a clothing store, she pays a babysitter to care for her daughters. Denise has an adjusted gross income of $45,000. She paid the babysitter $6,000 during the year for childcare. How much of a tax credit is Denise allowed for the childcare expenses?
$1,200.
 B)
$6,000.
 C)
$4,800.
 D)
$3,000.

Answer 5

A

The child care tax credit cannot exceed 35% of eligible expenses incurred by a taxpayer with an adjusted gross income of $15,000 or less. The percentage allowed is reduced by 1% for each $2,000 of adjusted gross income greater than $15,000, with a minimum of 20%. Because Denise earns $45,000, her allowable tax credit is 20% of the eligible expenses. The maximum limit on the eligible expenses to which the percentage can be applied is $6,000 for 2 or more dependents. Denise is entitled to a tax credit that equals 20% of $6,000, or $1,200.

Question 6

Which of the following statements regarding charitable deductions by corporations is (are) CORRECT?

1. The corporate statutes of most states permit corporations to make charitable contributions and the Internal Revenue Code permits a charitable deduction for contributions by a corporation.
2. The charitable deduction is limited to a maximum of 20% of the corporation’s adjusted taxable income. In the event the contribution is in excess of 20% of the corporation’s adjusted taxable income, the balance can be carried forward for up to 5 years.

Answer 6

1 only

Statement II is incorrect because the charitable deduction is limited to a maximum of 10% of the corporation’s adjusted taxable income.

Question 7

The disadvantages of a convertible bond include:

1. A yield that is less than that of a non-convertible bond with similar risk and maturity.
2. The holder may be forced into conversion if the bond is callable.
3. The bonds do not have to be retired if they are not converted.
4. They are doubly cursed in times of high interest rates and low stock prices.

Answer 7

1, 2, and 4

Question 8

In a Section 401(k) plan, which of the following must be considered in complying with the maximum annual additions limit?

1. Employee after-tax contributions.
2. Catch-up contributions for an employee age 50 or older.
3. Dividends paid on employer stock held in the Section 401(k) plan.
4. Qualified nonelective contributions.
5. Qualified matching contributions.

Answer 8

1, 4, and 5

Statement 1 is correct. Employee after-tax contributions are counted against the annual additions limit. Statement 2 is incorrect. Catch-up contributions for an employee age 50 or older are not counted against the annual additions limit. Note that catch-up contributions are also not taken into account for purposes of ADP testing or plan limits. Statement 3 is incorrect. Earnings on plan investments are not taken into account when computing the maximum annual additions limit. Statements 4 and 5 are correct. Qualified nonelective contributions and qualified matching contributions are methods that an employer may use to correct a violation of either the ADP or ACP tests. Both types of contributions, however, are counted against the annual additions limit. For 2017, the annual additions limit is the lesser of 100% of the employee’s compensation or $54,000.

Question 9

A client, age 55 and single, chose early retirement and is receiving a monthly pension of $500 from his former employer’s qualified pension plan. The client elects to work part-time for a small company and will receive $35,000 in annual compensation in 2017. He is not covered by any type of employer-sponsored retirement plan through his part-time employment. The client wants to contribute the maximum deductible amount to an individual retirement account (IRA). The maximum traditional IRA contribution that he can deduct for 2017 is:

A)
$6,500.
 B)
$0.
 C)
$5,000.
 D)
$5,500.

Answer 9

A

Question 10

Situations in which nonqualified deferred compensation plans should be used include:

1. An employer needs to augment the retirement income of key executives.
2. An employer wants to avoid qualified retirement plan contribution limits.

Answer 10

Both statements are correct

Question 11

Which of the following exchanges is NOT a tax-free exchange under IRC Section 1035?
A)
Exchange a variable annuity for a qualified long-term care contract.
B)
Exchange a universal life insurance policy for a variable life insurance policy.
C)
Exchange a variable annuity for a whole life insurance policy.
D)
Exchange a variable life insurance policy for a variable annuity.

Answer 11

C

Question 12

Jason, a CFP® professional, has a corporate client whose only 2 shareholders, ages 57 and 61, have asked for assistance with selecting a corporate retirement plan. His clients have annual compensation from the corporation of $145,000 each. They employ a staff of 9, ages 21 to 40, with annual compensation of $18,000 to $55,000. The clients want a qualified plan that offers maximum benefits for themselves, minimum benefits for the employees, contribution flexibility, and low administrative costs. Which of the following retirement plans should Jason recommend?
A)
Simplified employee pension (SEP) plan.
 B)
Traditional profit-sharing plan.
 C)
Age-weighted profit sharing.
 D)
Defined benefit pension plan.

Answer 12

C

Question 13

A financial planner shall obtain the client information necessary to fulfill his obligations. If the planner cannot obtain the necessary information, the planner shall inform the prospective client to any and all material deficiencies. To which Code of Ethics Principle does this rule relate?
A)
Professionalism.
 B)
Competence.
 C)
Fairness.
 D)
Diligence.

Answer 13

D

Question 14

Ten years ago, a donor gifted property worth $100,000 but retained a life estate in the property. The donor died last month when the property’s fair market value was $500,000. What amount will be included in the donor’s gross estate?

A)
$100,000.
 B)
$300,000.
 C)
$0.
 D)
$500,000.

Answer 14

D

The full fair market value of the property at death will be included in the donor’s gross estate because the donor retained a life estate in the property.

Question 15

Ronnie has a PAP policy with limits of 200/500/50. Which of the following statements regarding Ronnie’s coverage is (are) CORRECT?

1. Ronnie has liability coverage of up to $200,000 for bodily injury to one person resulting from a single accident.
2. Ronnie has $500,000 of uninsured motorist coverage resulting from a single accident.
3. Ronnie has $50,000 in medical payments coverage resulting from a single accident.
4. Ronnie’s lifetime coverage under the policy is limited to a total of $750,000.

Answer 15

1 only

Only Statement 1 is correct. A PAP with limits of 200/500/50 provides liability coverage of up to $200,000 for bodily injury to one person, coverage of up to $500,000 total for all persons injured in an accident, and $50,000 for property damage, all based on a single accident.

Question 16

Which of the following statements regarding insurance arrangements for corporate buy-sell agreements are CORRECT?

1. For a corporate stock redemption buy-sell agreement, the corporation should be the applicant, owner, and beneficiary of the policies.
2. For a corporate stock redemption buy-sell agreement, the corporation acquires life insurance on the life of each shareholder who is a party to the agreement.
3. The receipt of policy proceeds at a shareholder’s death provides the cash necessary to purchase the decedent shareholder’s stock.

Answer 16

all statements are correct

Question 17

Which of the following statements regarding COBRA rules for group health plans is CORRECT?
A)
COBRA rules allow an employer to charge up to 120% of the cost of an active employee to cover administrative costs.
B)
COBRA rules require the employee or dependent to elect coverage within 60 days of a qualifying event.
C)
COBRA rules apply to any employer with a health plan and 15 or more employees.
D)
COBRA protection does not apply to divorced spouses of covered employees.

Answer 17

B

COBRA rules apply to employers with 20 or more employees. The employer can charge up to 102%. A divorce or legal separation causing a spouse to lose coverage is a qualifying event under COBRA.

Question 18

Which of the following are characteristics of a SIMPLE?

1. Employees are permitted to make after-tax contributions to the SIMPLE.
2. The ACP test is not required for a SIMPLE.
3. Distributions from a SIMPLE IRA used to pay higher education costs are exempt from the early withdrawal penalty.
4. . An employer can combine a SIMPLE 401(k) with a money purchase pension plan to maximize the employer’s income tax deduction.

Answer 18

2 and 3

After-tax contributions are not permitted with a SIMPLE. The ACP test is not required with SIMPLEs. Distributions for higher education expenses from a SIMPLE IRA (or any IRA) are exempt from the early withdrawal penalty. An employer sponsoring a SIMPLE cannot also maintain a qualified plan.

Question 19

Which of the following statements regarding fiduciaries of a qualified plan is(are) CORRECT?

1. A fiduciary must manage plan assets solely in the interests of plan participants and beneficiaries.
2. A fiduciary who is a full-time, paid employee of the plan sponsor may also receive additional payment for services rendered to the plan.
3. A fiduciary cannot permit more than 10% of plan assets to be invested in employer securities or real property in a defined benefit pension plan.

Answer 19

1 and 3

Question 20

CDE, Inc., has recently started paying for the long-term care policies for their 45 employees. How are the payments treated for federal income tax purposes if the policies are qualified policies?
A)
Employer payments for group premiums are tax deductible to the employer but are taxable income to the employee on the basis of the coverage schedule.
B)
Employer payments for the group premiums are not tax deductible to the employer but are taxable income to the employee on the basis of the coverage schedule.
C)
Employer payments for the group premiums are not tax deductible to the employer and not taxable income to the employee.
D)
Employer payments for group premiums are tax deductible to the employer and not taxable income to the employee.

Answer 20

D

Question 21

Which of the following statements regarding rabbi trusts are CORRECT?

1. Participants in a rabbi trust will be considered active participants for purposes of determining deductibility of traditional IRA contributions.
2. Funds held in a rabbi trust cannot be reached by the employer’s general creditors.
3. The trust is irrevocable and may not be rescinded by the employer.
4. Employees are taxed when the benefits are paid from the trust.

Answer 21

D

Statement 1 is incorrect. A rabbi trust is a type of nonqualified deferred compensation plan. Participants in a rabbi trust are not considered active participants for purposes of the phaseout of deductions for contributions to traditional IRAs. Statement 2 is incorrect. Funds in a rabbi trust must be subject to the claims of the employer’s general creditors. Statement 3 is correct. Statement 4 is correct. The employee is not taxed when the employer contributes to the trust. Instead, the employee is taxed only when distributions are made from the trust.

Question 22

Which of the following statements regarding Crummey trusts is(are) CORRECT?

1. They usually provide a withdrawal right equal to the lesser of the amount of available annual exclusion or the value of the gift property transferred.
2. They require that beneficiaries receive notification of their withdrawal rights.
3. There are no gift tax consequences to the beneficiaries who allow a Crummey power to lapse.

Answer 22

B

Statement 3 is incorrect. There can be gift tax consequences to the beneficiaries if the right to withdraw lapses and the amount exceeds the greater of 5% of corpus or $5,000 annual amount

Question 23

Which of the following statements about the efficient market hypothesis (EMH) and associated anomalies are CORRECT?

1. An investor purchasing a high price-to-earnings ratio is exploiting the P/E effect anomaly.
2. An investor studying annual reports and analysts’ reports in his stock selection process believes that markets are weak-form efficient.
3. An investor who buys the securities of firms that are not followed by many analysts is trying to benefit from the neglected-firm effect.
4. An investor who befriends the chauffeur of a firm’s CEO to solicit information about the firm’s plans before making investment decisions believes the markets are strong-form efficient.

Answer 23

2 and 3

The P/E effect suggests that portfolios consisting of stocks with low price-to-earnings ratios have higher average returns than do portfolios consisting of stocks with high P/E ratios. Strong-form market efficiency suggests that all public and private information is included in market prices. A person who solicits private information believes that it is possible to profit by making trading decisions based on private information, and does not believe that the markets are efficient in the strong form. Weak-form efficiency suggests that all historical price and volume information is included in stock prices but that gains may be made by analyzing other publicly available information. An investor studying annual reports and analyst’s reports to make stock selections indicates that the person is conducting fundamental analysis, because the investor believes that the markets are weak-form efficient.

Question 24

Which of the following statements regarding executors fees is(are) CORRECT?

1. Executors who are also named beneficiaries may consider waiving executor fees, because they can receive a bequest that is income tax free.
2. If the executor’s fee is waived and instead received as a bequest, it is deductible by the estate for estate tax purposes.

Answer 24

1 only

Statement II is incorrect because a bequest is not deductible by the estate for either estate or income tax purposes.

Question 25

Which of the following objectives might be satisfied by an employer’s use of a nonqualified retirement plan?
A)
The employer desires to exceed the maximum benefit and contribution limitations of a qualified plan.
B)
The employer wants to provide a stand-alone benefit that allows higher compensated employees to defer current income as a means of supplementing retirement income.
C)
The employer desires to reduce the reporting and disclosure workload required by a qualified plan.
D)
All of these.

Answer 25

D