Practice Quiz 4 Flashcards
Given the following data for Daphne Jones:
Checking account $1,000 Mutual funds $60,000 Mortgage balance $95,000 Money market account $10,000 Sailboat $7,000 Stock portfolio $10,000 Automobile $35,000 Jewelry $5,000 Vested Section 401(k) $55,000 Auto loan balance $20,000 Personal assets $50,000 Credit card balance $5,000 90-day CD $2,000 Personal residence $150,000
What is her net worth? A) $260,000. B) $200,000. C) $265,000. D) $505,000.
C
All of the following statements are correct regarding the taxation of capital gains and losses EXCEPT:
A)
taxable gain equals the purchase price less the sales price.
B)
short-term gains are taxed as ordinary income, whereas long-term gains are subject to a maximum tax rate of 0%/15%/20%, depending on the taxpayers AGI.
C)
capital gains and losses arise whenever capital assets, such as stocks and bonds, are bought and sold for different amounts.
D)
gains only become taxable if and when they are realized.
A
The taxable gain equals the net sales price (minus commissions) less the adjusted basis (i.e., purchase price plus commissions).
A local businessperson approaches a CFP practitioner for assistance with an investment-related tax problem. The client’s previous tax preparer had suggested the purchase of a variety of tax-advantaged investments to reduce the client’s current and future tax burden. Time passed, the client’s income dropped, and the tax laws changed. The client does not feel the tax preparer misrepresented the situation on the initial sale, but would still like to know what recourse is available with respect to the tax preparer. The CFP licensee should: (CFP® Certification Examination, released 01/99)
- Explain to the client that this issue is beyond the scope of the CFP® practitioner’s professional expertise.
- Advise the client that no recourse is available.
- Advise the client to contact an attorney.
- Contact the tax preparer.
1 and 3
Statement I is correct as nonlawyers should not practice law. Statement II is wrong for the same reason. Statement III is correct when a legal issue arises. Statement IV is incorrect; you would contact the tax preparer only if the client requested.
Build Corporation communicated several goals to their financial advisor when they decided to implement a qualified retirement plan for their company. After reviewing these goals, their adviser recommended Build Corporation implement a defined benefit pension plan. Which of the following statements regarding employers who are candidates for a defined benefit pension plan are CORRECT?
- Typically they have the objective of instituting a plan with highly predictable costs.
- They indicate that the desire to provide a tax shelter for key employees outweighs the need for an administratively convenient plan.
- They want benefit levels guaranteed.
- They want a simple and inexpensive plan
2 and 3
Employers who sponsor defined benefit pension plans typically do not have highly predictable costs, because funding is subject to an annual actuarial determination. Highly paid employees receive a tax shelter with a defined benefit plan in the sense that their compensation includes large contributions to the defined benefit and they are not subject to current income tax on this compensation. The Pension Benefit Guaranty Corporation (PBGC) and the employer guarantee benefit levels. Defined benefit pension plans are complex to design and expensive to install and maintain.
Which of the following is a disadvantage of using corporate-owned life insurance (COLI) to fund a nonqualified plan?
A)
Life insurance policies can be borrowed against to help pay the cost of future premiums.
B)
Life insurance policies can be used to provide a supplemental disability benefit.
C)
Life insurance payable to the corporation may be subject to the alternative minimum tax.
D)
The tax-free buildup that occurs in a life insurance policy is important to a nonqualified plan because, unlike those of a qualified plan, earnings on nonqualified plan assets are not tax deferred.
C
Bill has a paid-up life insurance policy in which he has paid $12,000 in total premiums. The cash value of the policy is $30,000 with a death benefit of $50,000. This year, he received a cash dividend of $500 from the insurer. This is the first such dividend he has ever received under the policy. Which of the following statements regarding Bill’s situation is CORRECT?
A)
The $500 payment is taxable as dividend income.
B)
The $500 payment must be treated as a capital gain.
C)
The $500 payment must be treated as ordinary income.
D)
The $500 payment is not taxable.
D
Which of the following items is(are) NOT characteristics of a SIMPLE IRA?
- A SIMPLE IRA is not subject to top-heavy rules.
- Must match 3% of employee deferrals each year.
- Allows 5-year cliff vesting of matching contributions.
- Allows employee deferrals up to $18,000 (2017).
2, 3, and 4
Only statement 1 is a characteristic of a SIMPLE IRA. Under a SIMPLE IRA, an employer is generally required to match the employee’s elective deferral contributions up to a limit of 3 percent of the employee’s compensation for the entire calendar year. However, the 3-percent limit on matching contributions may be reduced for a calendar year at the election of the employer, but only if: (1) the limit is not reduced below 1 percent; (2) the limit is not reduced for more than 2 years out of the 5-year period that ends with (and includes) the year for which the election is effective; and (3) employees are notified of the reduced limit within a reasonable period of time before the 60-day election period during which employees can enter into elective deferral agreements. Alternatively, the employer may choose to make a 2% of compensation nonelective contribution for each eligible employee. SIMPLE IRA employer contributions vest immediately. These plans also allow employee deferrals of up to $12,500 in 2017 (with an additional $3,000 catch-up contribution if over age 50).
All of the following statements regarding the basic provisions of a Section 457 plan are correct EXCEPT:
A)
the contribution limit is doubled in the 3 years prior to the plan’s normal retirement age.
B)
in 2017, an individual who has attained age 50 may make additional catch-up contributions of up to $6,000.
C)
a Section 457 plan is a qualified plan of governmental units or agencies, and nonchurch controlled, tax-exempt organizations.
D)
distributions from a government Section 457 plan are not subject to an early withdrawal penalty.
C
A Section 457 plan is not a qualified plan. This plan is a deferred compensation plan that may be established by governmental units or agencies and nonchurch-controlled, tax-exempt organizations. Section 457 plans have special catch-up rules. Premature distributions from a government Section 457 plan are not subject to an early withdrawal penalty.
Which of the following statements regarding retirement plans and death benefits is CORRECT?
A)
Death benefits under a retirement plan must be incidental because US tax law provides tax advantages to the qualified plan for retirement needs, not insurance needs.
B)
Although the primary purpose of a qualified retirement plan is to provide retirement benefits to employees, it can also be used to supplement the insurance needs of participants by providing both death and disability coverage in the preretirement period.
C)
All of these.
D)
A retirement plan will be deemed to meet the incidental death-benefit requirement if it passes either of two tests-the 25 percent test or the 100-to-1 ratio test.
C
Which of the following statements concerning the purpose of an investment policy statement is (are) CORRECT?
- An investment policy statement is a written document that establishes client objectives and sets limitations on the investment manager.
- The investment policy statement can be used as the basis to measure the manager’s performance against the stated objectives and constraints.
- Possible investment strategies that should be pursued by an investment advisor on behalf of the client begin with the formulation of a complete and thorough investment policy statement.
- An allocation among asset classes and their respective weights is a part of any investment policy statement.
All the statements are correct
Which of the following statements concerning medical expense plan provisions is (are) CORRECT?
- Most group medical expense plans contain a coordination of benefits provision under which priorities are established for the payment of benefits by each plan covering an individual with coverage in more than one plan.
- Benefits received under a group health insurance plan are not included in the employee’s gross income.
both statements are correct
William owns a diamond ring which he wears daily. Which of the following losses to the ring would be tax deductible?
A)
The diamond is lost when William’s best friend drops a lead pipe on William’s hand, causing the diamond to fly out of the ring.
B)
The ring loses some of its value because the price of diamonds drops.
C)
The ring is worth $40,000, but William sells it to his son for only $10,000.
A
Loss deductions for casualty and theft losses are deductible. To be deductible, the loss must arise from some sudden, outside cause. A decline in the value of property is not enough to declare a deductible loss; the loss must actually be realized through sale or exchange. Transactions between related parties are usually not deemed real transactions and, as such, there would be no deduction for the loss.
Joe has $60,000 of wages, $11,000 of deductions and exemptions, and $5,000 in passive losses this year. The passive loss did not arise from rental property or real estate. What is Joe’s taxable income this year?
A) $49,000. B) $60,000. C) $47,000. D) $44,000.
A
Joe’s taxable income is $49,000 ($60,000 − $11,000). Passive losses may only offset passive income so his $5,000 loss is not allowed, except for rental and real estate property. Rental and real estate passive losses are allowed up to $25,000 and are subject to the AGI phase out limitations.
If information is generated randomly and information announcements are independent:
A)
prices will change very quickly in response to the new random information.
B)
price changes will be influenced by the information about past prices and volume.
C)
price changes will be independent of each other and tend to move in a predictable fashion.
D)
prices will not reflect all fully available information.
A
If information is generated randomly and information announcements are independent, prices will tend to fully reflect all available information. In addition, price changes will be independent of one another and tend to occur random patterns.
Robin inherited 10 acres of land from her father, who died during the current year. A federal estate tax return was filed, and the land was valued at $25,000, its fair market value at the date of her father’s death. Her father had purchased the land several years ago for $5,000. What is Robin’s basis in the land?
A) $5,000. B) $25,000. C) $10,000. D) $15,000.
B
The basis for inherited property is the fair market value at the date of death or the alternate valuation date if it is elected. The alternate valuation date was not elected, so Robin’s basis in the land is $25,000.
