Practice Quiz 8 (REVIEW MORE)

Question 1

Mary and her sister Della purchased several acres of land in Montana several years ago. They titled the property as joint tenants with right of survivorship (JTWROS). At the time of purchase, Mary paid $120,000 and Della paid $60,000 toward the $180,000 purchase price. Della died when the fair market value of the land was $240,000. Assuming Mary can substantiate her contribution toward the purchase price, what amount is included in Della’s gross estate?

A)
$80,000.
 B)
$60,000.
 C)
$120,000.
 D)
$240,000.

Answer 1

A

(60 / 180) x $240,000 = $80k

Question 2

A Section 401(k) plan allows plan participants the opportunity to defer taxation on a portion of compensation simply by electing to defer compensation to the plan instead of receiving it in cash. Which of the following rules apply to Section 401(k) elective deferrals?

1. Section 401(k) elective deferrals are immediately 100% vested and cannot be forfeited.
2. A Section 401(k) plan may allow in-service distributions.
3. Plans may allow loan provisions.
4. The maximum elective deferral contribution for 2017 is $18,000 with an additional $6,000 catch-up for individuals age 50 or older.

Answer 2

All rules apply to section 401k elective deferrals

Question 3

Beverly purchased a painting for $10,000. Years later, when the painting had a FMV of $5,000, she gave it to her mother, Peggy, as a gift. Six months later, Peggy sold the painting at auction for $4,000. Assuming no gift taxes were paid on the gift when Peggy received it, what is her net gain or loss on the sale of this painting?
A)
$0 gain, $0 loss.
 B)
$4,000 gain.
 C)
$1,000 loss.
 D)
$6,000 loss.

Answer 3

C

Question 4

Which of the following are implications of the AMT, as it applies to real estate transactions?

1. Depreciation and long-term capital loss deductions are reduced.
2. Net operating losses are adjusted and deductions are limited.
3. Some itemized deductions are eliminated and some passive activity losses are added back.
4. The installment sales method is not allowed in AMT calculations.

Answer 4

all of the statements are implications

Question 5

Frank received a lump-sum distribution of employer stock (10,000 shares) from his employer’s qualified plan. The stock was valued at $1,000,000 at the time of distribution. The date-of-purchase value of the stock contributed to the trust over the years is $200,000. Which of the following statements is(are) CORRECT?

1. Frank’s adjusted tax basis in the 10,000 shares is $200,000.
2. $200,000 is considered return of basis and is not taxed upon distribution.
3. $800,000 is treated as net unrealized appreciation and is not taxed upon distribution.
4. If Frank sells shares of stock, he must report any amount received in excess of $20 per share as a capital gain.

Answer 5

1, 3, and 4

Question 6

Steve, an accrual-basis taxpayer, performed services for a customer and collected the amount due, $2,000, in 2017. Later that year, the customer told Steve that he had not performed the services properly and the customer wanted a refund. The dispute was still in process at the end of 2017. Steve paid the customer $100 in 2018 to settle the suit. Which of the following statements regarding these transactions is CORRECT?

A)
Steve is required to recognize as income in 2017 his best estimate of the amount he will have left after satisfying the customer’s claim.
B)
Steve is required to recognize the $2,000 in 2017.
C)
Steve is required to recognize $1,900 income in 2017.
D)
Steve is not required to recognize any income until 2018, when the suit is settled.

Answer 6

B

The amount received by Steve, even though still in dispute at the end of the year, is included in his 2017 gross income because he has received the $2,000. Steve may deduct $100 in 2018 to adjust his income for the refund once paid.

Question 7

Which of the following is(are) objectives of the Employee Retirement Income Securities Act (ERISA)?

1. To establish selection criteria for investments in qualified retirement plan portfolios.
2. To require plan sponsors (employers) to provide full and accurate information about qualified retirement plan activity and funding to plan participants and appropriate regulatory agencies (e.g., IRS).
3. To establish minimum funding, eligibility, coverage, and vesting requirements.
4. To guarantee future benefits at a minimal level from defined contribution pension plans under the Pension Benefit Guaranty Corporation (PBGC).

Answer 7

2 and 3

Question 8

Which of the following are covered by comprehensive coverage under a PAP?

1. Breakage of glass.
2. Storm damage.
3. Fire.
4. Theft.

Answer 8

all are covered

Question 9

Which of the following statements regarding Section 403(b) plans is(are) CORRECT?

1. Section 403(b) plans are eligible for rollover treatment to IRAs.
2. Section 403(b) plans permit investment in individual securities.
3. Employer matching contributions to a Section 403(b) plan must be immediately 100% vested to the employee.

Answer 9

1 only

Question 10

All of the following are advantages of establishing a buy-sell agreement funded with life insurance EXCEPT:
A)
the plan provides for the continuation of a business.
B)
the business is more attractive to creditors because of the continuation plan of the business.
C)
life insurance premiums paid as part of a buy-sell agreement are tax deductible.
D)
there is a guaranteed market for the business interest.

Answer 10

C

Generally, the premiums on life insurance policies used in business succession planning are not deductible.

Question 11

All of the following statements concerning put and call options are correct EXCEPT:
A)
one call option is an option to buy 100 shares of a particular common stock at a specified price any time prior to a specified expiration date.
B)
options may be used as a hedge against a portfolio position by establishing an opposite position in the options contracts.
C)
a put option permits investors to speculate on a rise in the price of an underlying common stock without buying the stock itself, and a call option allows investors to speculate on a decline in the stock price without short selling the common stock.
D)
one put option gives the buyer the right to sell 100 shares of a particular common stock at a specified price prior to a specified expiration date.

Answer 11

C

Question 12

Which of the following are included as adjusted taxable gifts in calculating a decedent’s tentative tax base?

A)
Post-1976 gifts that are less than the annual exclusion amount.
B)
Gifts made to a spouse that qualified for the gift tax marital deduction.
C)
Taxable gifts made after 1976 that are not included in the decedent’s gross estate.
D)
Gifts that qualified for the gift tax charitable deduction.

Answer 12

C

Question 13

A client’s employer has recently implemented a Cash or Deferred Arrangement (CODA) as part of his profit-sharing plan to provide incentive to his employees. The client is advised not to elect to receive the bonuses in cash but to defer receipt of them until retirement for which of the following reasons? (CFP® Certification Examination, released 11/94)

1. The client will not pay current federal income taxes on amounts paid into the CODA.
2. The client will not pay Social Security (FICA) taxes on amounts paid into the CODA.
3. The accrued benefits derived from elective contributions are nonforfeitable
4. The accrued benefits from non-elective contributions are nonforfeitable.

Answer 13

1 and 3

Elective deferrals are both subject to FICA and are nonforfeitable. Nonelective contributions are subject to forfeiture if the worker leaves employment before being fully vested.

Question 14

Donna’s employer withheld $4,200 in state income taxes from her salary in the current year. Donna also paid an additional $1,200 in estimated state income tax payments. She filed her previous year’s state income tax return in April of the current year and received a state tax refund of $700 in the current year. She claimed the standard deduction on her federal return for the previous year. Which of the following statements about Donna’s income tax situation is CORRECT?
A)
If she itemizes, she can deduct $4,700 in state income tax on her current year federal income tax return.
B)
She is required to report the $700 state income tax refund as income in the current year.
C)
None of these.
D)
If she itemizes, she can deduct $5,400 in state income tax on her current year federal income tax return.

Answer 14

D

Question 15

Which combination of the following statements about the marital deduction is true? (CFP® Certification Examination, released 12/96)

1. The marital deduction has the effect of treating the husband and wife as one economic unit for gift and estate taxes.
2. Property that qualifies for the marital deduction is excluded from the surviving spouse’s estate.
3. Qualifying all of the decedent’s property for the marital deduction may result in more estate tax being paid.
4. A qualified domestic trust is used to provide for the spouse when there has been a second marriage.

Answer 15

1 and 3

Property that qualified for the marital deduction is included in the surviving spouse’s estate. A QDOT is used to establish the marital deduction for an alien surviving spouse.

Question 16

Which of the following statements regarding qualified plan minimum funding rules is(are) CORRECT?
A)
For defined benefit pension plans, the IRS determines the employer’s required contribution to meet Employee Retirement Income Security Act (ERISA).
B)
All of these.
C)
For money purchase and target benefit pension plans, the employer must meet the annual minimum required contribution.
D)
For profit-sharing plans and employee stock ownership plans (ESOPs), specific annual contributions are required.

Answer 16

C

Question 17

Your client, who has a taxable income of $180,000, is concerned about being subject to the alternative minimum tax (AMT). Which of the following itemized deductions used in calculating your client’s taxable income are adjustments to regular taxable income in arriving at alternative minimum taxable income (AMTI)?

1. Casualty losses.
2. State income taxes paid.
3. Employee business expenses in excess of 2% of the employee’s AGI.
4. Donation made to the local university.

Answer 17

2 and 3

the question is asking what is included in regular income tax adjustments but not AMT adjustments

i.e. charitable donations and casualty losses are included in both

Question 18

Stan died recently, and his will left his investment real estate to his 35-year-old son, Oscar. Oscar executed a valid disclaimer refusing acceptance of the real estate. Stan’s will leaves all residual property to his spouse, Della. Which of the following statements regarding this arrangement is CORRECT?
A)
Oscar could retain the income from the investment real estate, while disclaiming the actual property.
B)
Oscar has made a taxable gift to Della.
C)
The investment real estate will be included in Oscar’s gross estate upon his death.
D)
The investment real estate will qualify for the marital deduction.

Answer 18

D

Question 19

Kevin owns a $1,000 par value corporate bond with three years remaining until maturity. This bond is currently trading for $1,020.91. The bond has a coupon rate of 4.5% (annual coupon payments) and a current YTM of 3.75%. What is the duration of this bond?

A)
2.8741
 B)
3.7500
 C)
1.0067
 D)
2.0910

Answer 19

A

Question 20

Which of the following forms of disability benefits is paid as a result of an injury which permanently reduces a person's ability to function, but still permits some working or other activity?
A)
Occupational.
 B)
Temporary.
 C)
Partial.
 D)
Residual.

Answer 20

C

Question 21

Which of the following statements regarding workers’ compensation is (are) CORRECT?

1. Workers’ compensation applies to all occupations.
2. Workers’ compensation provides benefits only if the employer was negligent.
3. Workers’ compensation is funded by contributions deducted from employees’ paychecks.
4. Workers’ compensation benefits are excluded from the employee’s gross income for tax purposes.

Answer 21

4 only

Question 22

Which of the following statements concerning the cost of long-term care and Medicare are CORRECT?

1. Medicare pays for a limited amount of skilled nursing care.
2. Medicare will pay 100% of the first 20 days of skilled nursing care.
3. After 20 days, Medicare will pay everything over a specified amount per day for 80 days of skilled nursing care.
4. Medicare benefits for long-term care are subject to substantial limitations.

Answer 22

all statements are correct

Question 23

A trust received $5,000 in capital gains from the sale of the trust assets and $10,000 from dividends on the stock it held. What is the trust's distributable net income (DNI)?
A)
$5,000.
 B)
$15,000.
 C)
$0.
 D)
$10,000.

Answer 23

D

Distributable net income (DNI) does not include capital gains. Capital gains are treated as additions to trust corpus, rather than income.

Question 24

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

1. A donor-decedent may create a charitable remainder trust and obtain both a charitable deduction and a marital deduction.
2. If the spouse and children are the only noncharitable income beneficiaries for life, the estate obtains a marital deduction for the income interest and a charitable deduction for the gift of the remainder interest to the charity.

Answer 24

1 only

Statement II is incorrect because the spouse must be the only noncharitable income beneficiary for the entire income interest to qualify for the marital deduction.

Question 25

Steve and Haley, ages 48 and 45 respectively, invest in large-cap stocks, international stock mutual funds, and real estate. They consider themselves moderately aggressive investors. Their investment portfolio is subject to which of the following investments risks?

1. Investment manager risk.
2. Financial risk.
3. Exchange rate risk.
4. Default risk.

Answer 25

1, 2, and 3