Practice Quiz 20 Flashcards
Which of the following are characteristics of a SIMPLE?
- Employees are permitted to make after-tax contributions to the SIMPLE.
- The ACP test is not required for a SIMPLE.
- Distributions from a SIMPLE IRA used to pay higher education costs are exempt from the early withdrawal penalty.
- An employer can combine a SIMPLE 401(k) with a money purchase pension plan to maximize the employer’s income tax deduction.
2 and 3
Carol, age 30, received a salary of $35,000 this year. In addition, she received a gift of $1,000 from her brother. She also made a contribution of $3,500 to her traditional IRA. Her filing status is single and in addition to her itemized deductions of $4,500, she had unreimbursed medical expenses from major surgery on her knees of $7,600. Which of the following best defines Carol’s taxable income?
A)
Gross income less adjustments to income, less long-term capital losses.
B)
Adjusted gross income less the standard deduction less personal exemption amounts.
C)
All cash compensation received during the tax year, less medical expenses in excess of 10% of AGI.
D)
Adjusted gross income less the amount of itemized deductions, less her personal exemption amount.
D
Carol’s taxable income is calculated by deducting personal exemption, the itemized deductions, and other deductions from adjusted gross income. The combination of her itemized deductions and the unreimbursed medical expenses (less 10% of her AGI) is greater than the standard deduction for a single taxpayer.
Sam and Sue paid $100,000 for their home 5 years ago. Its fair market value was $150,000 when Sam died. What was Sue's basis in the home after Sam's death if the home was held as community property? (CFP® Certification Examination, released 01/99) A) $100,000. B) $50,000. C) $150,000. D) $75,000. order as in the original CFP Board released questions.
C
Both halves of community property receive a stepped-up basis equal to the to fair market value at the death of the first spouse.
Betty owns a shopping mall. She has instructed her tenants to make their rent checks payable to her boyfriend, who is unemployed and is in a lower income tax bracket than Betty. Which of the following statements about Betty is NOT correct?
A)
She must pay taxes on the rental payments even though she will never actually receive the money.
B)
She constructively received the income and then constructively gifted to another party.
C)
She can avoid taxation of the rent payments because she will never receive the funds. The boyfriend will have to include the payments in his gross income.
D)
She has assigned her income to another party.
C
Which of the following statements regarding participating and nonparticipating life insurance is CORRECT?
A)
Participating life insurance is a policy in which no annual dividends are paid to the policyowners.
B)
Stock companies are owned by the stockholders and usually offer nonparticipating policies.
C)
Mutual companies are owned by their stockholders and usually offer nonparticipating policies.
D)
Nonparticipating life insurance is a policy in which dividends are paid only on the excess of premium.
B
Which of the following plans may be appropriate for a for-profit general partnership with stable cash flows?
- ESOP.
- Money purchase pension plan.
- Section 403(b) plan.
- Stock bonus plan.
5 . Age-weighted profit-sharing plan.
2 and 5
An ESOP and a stock bonus plan can be established only by S corporations and C corporations. Partnerships cannot establish an ESOP or stock bonus plan because they do not have stock. A tax-deferred annuity, or Section 403(b) plan, is available only to tax-exempt organizations. A money purchase pension plan and an age-weighted profit-sharing plan would both be appropriate plans for a partnership.
Which of the following statements regarding rabbi trusts are CORRECT?
- Participants in a rabbi trust will be considered active participants for purposes of determining deductibility of traditional IRA contributions.
- Funds held in a rabbi trust cannot be reached by the employer’s general creditors.
- The trust is irrevocable and may not be rescinded by the employer.
- Employees are taxed when the benefits are paid from the trust.
3 and 4
Karl loaned Jason $5,000 that was to be repaid, with interest, by monthly payments over 3 years. The interest was the Federal rate plus 1% at the time of the loan. Jason made payments for 10 months and then stopped due to catastrophic medical bills. Three months later, Jason filed for bankruptcy and the debt was discharged by the bankruptcy court at the end of this year. Karl has asked you, his planner, how he can treat this bad debt for tax purposes. Which of the following statements regarding the deductibility of non-business bad debts by an individual taxpayer is CORRECT?
A)
Karl has an ordinary, not a capital, loss.
B)
Such a loss is a short-term capital loss and the deduction must be taken in the year the debt becomes worthless.
C)
Karl’s non-business bad debt will be treated as a long-term capital loss.
D)
Karl may take a partial deduction in the year incurred if he or she realizes that some portion of the debt will not be repaid.
B
Which of the following statements regarding taxation of life insurance proceeds from a policy on the decedent’s life is(are) CORRECT?
- Proceeds payable to the decedent’s estate are not included in the decedent’s gross estate for estate tax purposes.
- Proceeds payable to a spouse must be included in the decedent’s gross estate if the decedent had the power to change beneficiaries.
2 only
Which of the following statements regarding the estate tax charitable deduction is(are) CORRECT?
- An estate tax charitable deduction is allowed for the value of property transferred to a qualified charity if the property is included in the donor’s gross estate.
- It is possible for a charitable contribution made during the donor’s lifetime to generate both an income tax deduction and an estate tax deduction if the value of the property is included in the donor’s gross estate.
both are correct
Amy bought a factory for $40,000. In the current year, as a result of depreciation deductions taken on previous income tax returns, her adjusted basis for the factory was $38,000. Also in the current year, she added a new wing to the factory, which cost $40,000. What is her adjusted basis for the building in the current year after the addition to the building?
A) $80,000, less the actual cost of construction of the new addition. B) $78,000, less the actual cost of construction of the new addition. C) $78,000. D) $80,000.
C
Blake, a sole proprietor, is selling several business assets. He has been told that the items he is selling are not capital assets and are subject to the ordinary income tax rate. You are his financial planner and tell him that the gains on Section 1231 assets can be treated as capital gains for income tax purposes subject to certain rules. Which of the assets Blake sold are Section 1231 assets?
A)
The building and land sold when Blake’s business moved to a new location.
B)
Accounts receivable.
C)
Blake’s inventory of electric guitars his business maufactures.
D)
A copyright on the theme song Blake’s company uses in its advertising that Blake wrote.
A
Assume a company’s goal is to maximize retirement benefits to the highly compensated employees, who also happen to be the oldest employees. Which of the following best accomplishes this goal if the company is installing a new plan?
A) A traditional defined benefit pension plan. B) A target benefit pension plan. C) An age-based profit-sharing plan. D) A money purchase pension plan.
A
Which of the following statements regarding lifetime gifts are CORRECT?
- Annual exclusion gifts will escape gift taxation and will not be included in the donor’s gross estate.
- Future appreciation in the value of gifted property will escape estate taxation in the donor’s estate.
- Income from gift property will generally be taxed to the donee for income tax purposes.
- Generation-skipping transfer taxes do not apply to lifetime gifts.
1, 2, and 3
Which of the following requires the insured to pay a certain percentage of eligible medical expenses in excess of the deductible? A) Loss utilization. B) Stop-loss limits. C) Coordination of benefits. D) Coinsurance.
D
