514 All module 2 Q bank

Question ID: 1247306 Which of the following statements correctly describes the method for calculating the exclusion ratio for a fixed annuity? A)The investment in the annuity contract is divided by the total expected return. B)The total expected return is divided by the investment in the annuity contract. C)The investment in the annuity contract is divided by the number of expected payments. D)The number of expected payments is divided by the investment in the annuity contract. Explanation The exclusion ratio for a fixed annuity contract is not calculated by dividing the total expected return by the investment in the contract. It is calculated by dividing the investment in the contract by the total expected return. LO 2.1.2

A

Question ID: 1247310 Three years ago, Myla received a gift of 100 shares of public utility stock from her aunt. The fair market value of the stock on the date of the gift was $20 per share. Her aunt had purchased the stock six years earlier at $6 per share. Myla sold this stock for $24 per share last week. What was Myla's basis in the stock when she sold it? A)$6 per share B)$14 per share C)$20 per share D)$24 per share Explanation The only time that the gifted asset takes the sale price as the basis is when the fair market value on the date of the gift is less than the donor's basis and the asset is sold at a price between the fair market value on the date of the gift and the donor's basis. LO 2.1.3

A

Question ID: 1247311 Four years ago, Mark received a gift of 500 shares of common stock from his grandfather. The fair market value of the stock on the date of the gift was $335 per share. His grandfather had purchased the stock three years earlier at $425 per share. Mark sold this stock for $200 per share last week. What was Mark's basis in the stock when he sold it? A)$335 per share B)$225 per share C)$200 per share D)$425 per share Explanation When the fair market value on the date of the gift is less than the donor's basis in the asset and the sale price is less than the fair market value on the date of the gift, then the fair market value on the date of the gift is used as the donee's basis.

A

Question ID: 1247308 Which of the following is NOT a form of an annuity? A)Deferred annuity B)Fixed annuity C)Selective annuity D)Variable annuity Explanation A selective annuity is not a recognized category of annuities. LO 2.1.2

C

Question ID: 1247314 Mike has interest and short-term capital gain income of $9,000 in the current tax year. He paid broker commissions on security purchases of $1,000, paid $1,800 for investment adviser fees, and had $8,500 of investment interest expense. His AGI is $225,000. What amount of investment interest expense may be deducted as an itemized deduction? A)$8,500 B)$6,200 C)$7,700 D)$8,000 Explanation Investment interest expense is deductible up to the amount of net investment income, which is $9,000. The net investment income is simply the investment income (interest and short-term capital gains) of $9,000. Remember that the investment adviser fees were a Tier II miscellaneous itemized deduction, which are no longer deductible under the TCJA. The commissions are not a deductible item. The commissions increase the basis of the securities upon purchase and reduce the gain realized upon sale. LO 2.2.1

A

Question ID: 1247317 Martha borrowed $40,000 from a bank, using the money for investment purposes. Of that $40,000, she invested $20,000 in tax-exempt municipal bonds and $20,000 in taxable corporate bonds. Which of the following statements regarding Martha is CORRECT? A)Martha can deduct the interest on $20,000 of the loan for tax purposes. B)Martha can deduct none of the interest on the loan for tax purposes. C)Martha can deduct the interest on $40,000 of the loan for tax purposes. D)Martha is engaging in an illegal activity. Explanation The IRS does not allow taxpayers to deduct interest on borrowed funds when those funds are used to generate tax-exempt income. Because Martha used $20,000 of the loan to purchase taxable securities, the interest on that $20,000 is deductible as an investment interest expense. LO 2.2.1

A

Question ID: 1247323 All of the following deductions are allowable in arriving at adjusted gross income except A)100% of self-employment tax paid. B)qualifying contributions to Keogh-qualified and self-employed tax-advantaged plans. C)alimony paid. D)student loan interest (limited). Explanation The deduction for self-employment tax paid is generally limited to the calculated employer share, or 50%, not 100%. LO 2.4.1

A

Question ID: 1247546 Jim Jannsen purchased a deferred variable annuity several years ago. His investment in the annuity contract was $48,000. His current life expectancy, based on IRS tables, is 20 years. During the current year, he received annuity payments totaling $5,400. What amount of the annuity payments is taxable to Jim? A)$3,000 B)$2,400 C)$0 D)$5,400 Explanation The investment in the contract ($48,000) is divided by the life expectancy (20 years) to equal the amount of the variable annuity excluded ($2,400 per year). Thus, of the $5,400 received, $2,400 is excluded, and the remaining $3,000 is taxable. LO 2.1.2

A

Question ID: 1247550 Which one of the following does NOT correctly state a characteristic of a commercial annuity? A)With an annuity, there is a maximum annual contribution per year, which is adjusted yearly for inflation. B)An annuity is a contract in which investments are made in exchange for a promise of regular frequent payments for the rest of a taxpayer's life or for a fixed period of time. C)Annuity contracts may vary regarding the payment time period and the frequency of the payments. D)An annuity payment is generally part return of capital and part interest payment. Explanation There is no set maximum annual contribution that may be made to a commercial annuity. LO 2.1.2

A

Question ID: 1247585 Which of the following statements regarding the dividends-received deduction is CORRECT? The amount of the dividends-received deduction is based on the percentage owned of the dividend-paying corporation by the corporation receiving the dividend. The dividends-received deduction is specific to corporations. A)Both I and II B)II only C)I only D)Neither I nor II Explanation Both of these statements are correct. LO 2.2.2

A

Question ID: 1247593 Which of the following statements regarding the 0.9% additional Medicare tax is NOT correct? A)The tax is calculated on all income in excess of the taxpayer's threshold based on filing status. B)The tax is in addition to the 2.9% Medicare tax that is assessed on the taxpayer's compensation and self-employment income. C)If a taxpayer expects to have income above the threshold for the taxpayer's filing status when combined with a spouse's income and/or any self-employment income, the taxpayer may ask for additional federal income tax withheld by the employers. D)The tax is paid by the employee only; it has no employer contribution. Explanation An individual is liable for the additional Medicare tax if the individual taxpayer's wages, other compensation, or self-employment income (combined with a spouse if filing as married filing jointly) exceeds the thresholds for the taxpayer's filing status. LO 2.3.1

A

Question ID: 1247595 Terry and Jan are married taxpayers filing a joint tax return. Their AGI is $265,000, and their net investment income (included in the AGI) is $70,000. What is the amount, if any, of the Medicare contribution tax? A)$570 B)$0 C)$15,000 D)$2,660 Explanation The answer is $570. ($265,000 - $250,000 = $15,000. $15,000 × 3.8% = $570.) LO 2.3.1

A

Question ID: 1247609 Fred and April Johnson are married and file a joint income tax return. Their AGI (without the student loan interest deduction) is $103,000. They properly treat their son, Bill, a full-time student, as a dependent. Bill has incurred student loan debt over the years and is the sole borrower on the loans. Bill paid $3,100 of student loan interest in the current year. His AGI (without the student loan interest deduction) is $11,000. Which one of the following is CORRECT regarding the student loan interest deduction? A)No one may deduct the student loan interest. B)Bill may deduct $3,100 of student loan interest. C)Fred and April may deduct $2,500 of student loan interest. D)Bill may deduct $2,500 of student loan interest. Explanation The maximum student loan interest deduction is $2,500 for a given year. However, the deduction may only be taken by the taxpayer legally obligated to make the payments. In addition, a taxpayer who may be claimed as a dependent on another's return may not claim the student loan interest deduction. LO 2.4.1

A

Question ID: 1247610 Which one of the following is accurate regarding the Lifetime Learning Credit? A)The maximum credit of $2,000 is per tax return. B)The maximum credit of $2,000 is per student. C)The credit may only be used during the first four years of postsecondary education. D)Qualified higher-education expenses typically include tuition, books, and supplies. Explanation The maximum credit of $2,000 is per tax return. LO 2.4.1

A

Question ID: 1247562 On what form are capital gains and losses calculated? A)Schedule A B)Schedule B C)Schedule C D)Schedule D Explanation Schedule D is used to calculate capital gains and losses. Schedule A is used to itemize deductions. Schedule B is used to report interest and ordinary dividends. Schedule C is used to calculate profit or loss from business. LO 2.1.3

D

Question ID: 1273777 Lauren has investment interest expense from her margin account of $9,000. She had municipal bond interest income of $3,000, corporate bond interest income of $5,000, and qualified dividends of $2,000. She has elected to use her available 15% capital gain tax rate on the dividends. What is her investment interest deduction? A)$5,000 B)$9,000 C)$7,000 D)$12,000 Explanation Lauren is limited to a $5,000 investment interest deduction or only the amount of taxable bond interest, which is her investment income. She may not offset qualified dividend income for which she elected the long-term capital gain rate, nor can she offset nontaxable municipal bond interest with an investment interest deduction. LO 2.2.1

A

Question ID: 1273788 Your client, Kurt, has a child, Bryce, who is about to begin college full time in the fall. Bryce has a felony drug conviction. He has heard of some of the education incentives built into the Code and has asked you to give him some information regarding the education incentives. Which of the statements are CORRECT regarding the education incentives? If Kurt purchased EE bonds and placed them into a Uniform Gift to Minors Act (UGMA) account or a Uniform Transfers to Minors Act (UTMA) account for Bryce, there is no possibility of the bonds qualifying for the education exclusion. Bryce would be ineligible for the American Opportunity Tax Credit. If Bryce has a Coverdell Education Savings Account, distributions would be allowable to cover his room and board expenses. The American Opportunity Tax Credit would be allowable on expenses incurred for textbooks and room and board. A)I, II, and III B)III and IV C)II and III D)I and IV Explanation There is no exclusion available for EE bonds unless they are held by the individual who purchases the bonds, or unless they are held jointly with the purchaser's spouse. The student is ineligible for the American Opportunity Tax Credit if he has a felony drug conviction. Room and board is an allowable expense for distributions from a Coverdell account. Neither the American Opportunity nor Lifetime Learning Credit are allowed for room and board expenses. LO 2.4.1

A

Question ID: 1343072 Which of the following rates apply to qualified dividends that fall above the $501,600 (2021) taxable income breakpoint for a married couple filing jointly (MFJ)? A)20% B)28% C)15% D)25% Explanation Qualified dividends (and net long-term capital gains) that fall into the taxable income above $-501,600 (for MFJ) are taxed at a 20% rate. LO 2.2.2

A

Question ID: 1343074 Lindsey is age 2 and her total income was $4,000 in qualified dividends in 2021. Her parents are in the 12% marginal tax bracket. What is her total tax on the dividends? A)$0 B)$585 C)$216 D)$600 Explanation Because these are qualified dividends, they qualify for long-term capital gains rates. Lindsey's taxable unearned income is calculated as follows: $4,000 − $1,100 (2021) standard deduction − $1,100 taxed at the child's rate = $1,800 of taxed at her parents' marginal rates. Therefore, her tax rate on the qualified dividends received is 0%. LO 2.2.2

A

Question ID: 1343079 John and Sheryl are married taxpayers filing a joint tax return. In 2021, their AGI is $360,000, and their investment income (included in the AGI) is $80,000. They have investment interest expense of $9,000. What is the amount, if any, of Medicare contribution tax that they must pay? A)$2,698 B)$0 C)$3,040 D)$4,180 Explanation They will pay the 3.8% Medicare contribution tax on $71,000. This is the lesser of the net investment income ($71,000) or the AGI in excess of the threshold amount ($360,000 - $250,000, or $110,000). The net investment income is the investment income of $80,000, reduced by the allowable investment expenses of $9,000. In this situation, all $71,000 of the net investment income is subject to the Medicare contribution tax. John and Sheryl will pay a $2,698 Medicare contribution tax (3.8% on $71,000). LO 2.3.1

A

Question ID: 1343081 Which of these is the 2021 threshold on earnings for the additional Medicare tax for a single taxpayer? A)$200,000 B)$250,000 C)Unlimited D)$127,200 Explanation Single taxpayers are subject to the additional Medicare tax when earned income exceeds $200,000 in the tax year. LO 2.3.1

A

Question ID: 1343083 In 2011, Jack Meyers, a married taxpayer filing jointly, purchased U.S. Series EE savings bonds for $4,000. During 2021, when Jack was 40 years old, he redeemed the bonds to help pay for his dependent son's college tuition. The accrued value at the time of redemption was $5,000. Assume Jack pays $9,200 of tuition expenses during the year. The 2021 AGI is $100,000. What are the tax consequences upon the redemption of the bonds? A)All the interest may be excluded. B)A portion of the interest may be excluded. C)There is insufficient information given to determine the tax consequences. D)All accrued interest is taxable in the current year. Explanation The exclusion begins to phase out at an AGI of approximately $125,000 ($124,800) for joint filers for 2021. The phaseout information will be provided on the examination. The other requirements for exclusion of the interest are also met: purchased by an individual 24 years of age or older, redeemed to pay for qualifying higher-education expenses of a dependent, taxpayer, or spouse. The other limitation, EE redemption proceeds greater than qualified expenditures, does not apply here. LO 2.4.1

A

Question ID: 1357672 Victoria Glass has $6,500 of investment interest expense and net investment income of $6,000 in the current tax year. She paid broker's commissions of $1,000 during the tax year. How much investment interest expense, if any, may Victoria deduct in the current tax year? A)$6,000 B)$5,000 C)$5,500 D)$6,500 Explanation Investment interest expense is deductible only to the extent of net investment income. LO 2.2.1

A

Gabe files as married filing jointly with his wife, Monica. It is September of the current year and his year- to-date compensation working at Jack Sprat, Inc., is $225,000 for this last payroll period. How much of his compensation is subject to payroll tax withholding for the additional Medicare tax so far this year? A)$0 B)$25,000 C)$225,000 D)$200,000 Explanation Even though taxpayers who file as married filing jointly do not incur the additional Medicare tax until their income exceeds $250,000, employers are required to begin withholding the tax when an employee first has compensation exceeding $200,000, disregarding the employee's filing status. The 0.9% tax is withheld on the excess above $200,000, in this case $25,000. LO 2.3.1

B

Question ID: 1247537 Which one of the following statements about life insurance products and their tax attributes is CORRECT? A)Modified endowment contracts (MEC) do not provide a tax-free death benefit if the policyholder dies before age 59½. B)If a person purchased a life and 20-year term-certain immediate annuity at age 50, there would be no premature distribution penalty. C)Permanent life insurance owned by a pension plan is 100% income tax free to the beneficiary of the plan. D)Deferred annuities owned by a corporation are eligible for tax-deferred accumulation. Explanation An immediate annuity is one that is purchased by a single payment (premium), where payments commence no later than one year from the contract date, and which provides for a series of substantially equal periodic payments (paid at least annually). As such, immediate annuities avoid the 10% premature withdrawal penalty. Death benefit tax status of a MEC is the same as for any other non-MEC contract. Non-death-benefit distributions from a MEC will most likely be taxable as ordinary income to the extent that the cash surrender value exceeds the investment in the contract. With some exceptions, annuity contracts owned by a corporation are not treated as an annuity for tax purposes; thus the annual increase in value is subject to income tax. Part of the death benefit paid from life insurance owned by a pension may be taxable. Normally, any amount in excess of the cash value will be treated as death proceeds from a life insurance policy, and amounts equal to the cash value will be treated as a pension plan distribution. Nonperiodic (lump-sum) distributions from deferred annuity contracts issued after August 14, 1982, are treated on a last-in, first-out (LIFO) basis—taxable earnings are first distributed. LO 2.1.1

B

Question ID: 1247574 Fred has investment income (interest and dividends) of $9,000 in the current tax year. He paid $1,000 in broker commissions on security purchases and $1,800 in investment adviser fees, and he has incurred $8,500 of investment interest expense. His AGI was $25,000. What amount of investment interest expense may be deducted as an itemized deduction? A)$6,200 B)$8,500 C)$7,700 D)$9,000 Explanation Investment interest expense is deductible up to the amount of Fred's investment income. Because there is only $8,500 of investment interest expense, it is completely deductible. LO 2.2.1

B

Question ID: 1247611 Ryan and Jeanie Hill are married and file a joint income tax return. Their AGI (without the student loan interest deduction) is $115,000. They properly claim their son, Anthony, a full-time student, as a dependent. Anthony has incurred student loan debt over the years and is the sole borrower on the loans. Ryan and Jeanie made all the student loan payments during the year and paid $3,100 of student loan interest in the current year. Anthony's AGI (without the student loan interest deduction) is $8,000. Which of the following is CORRECT regarding the student loan interest deduction? A)Ryan and Jeanie may deduct $2,500 of student loan interest. B)No one may deduct the student loan interest. C)Anthony may deduct $2,500 of student loan interest. D)Ryan and Jeanie may deduct $3,100 of student loan interest. Explanation The maximum student loan interest deduction is $2,500 for a given year. However, the deduction may only be taken by the taxpayer legally obligated to make the payments. In addition, a taxpayer who may be claimed as a dependent on another's return may not claim the student loan interest deduction. LO 2.4.1

B

Question ID: 1247612 Your clients, Jason and Marcela, have a 6-year-old daughter, Michelle. They want to start a savings plan for Michelle's college education. You are convinced that a Section 529 plan is the best option for Michelle's college education. What can you accurately tell Jason and Marcela about the 529 plan? A)Jason and Marcela would be able to change the investment mix within a particular 529 plan only once per year. B)Qualified higher-education expenses include tuition, fees, books, special needs services, and room and board if Michelle is at least a half-time student. C)There is ordinary income treatment and a 10% penalty on all 529 distributed funds that Michelle doesn't use for education. D)The maximum annual contribution to a 529 plan is currently $15,000. Explanation The $15,000 is the annual gift tax exclusion amount. While there is generally no annual maximum contribution, gifts of up to five times the annual gift tax exclusion may be made in a single year, essentially without gift tax implications. Funds not used for education may be rolled over to another beneficiary who is a family member. In addition, the ordinary income treatment and penalty would apply only to the earnings distributed. The investment mix within a 529 plan may be changed twice per calendar year. Qualified higher-education expenses (QHEE) include tuition, fees, books, equipment necessary for enrollment, and special needs services. In addition, room and board expenses are QHEE for a student who is at least half time. Expenses for the purchase of computer or peripheral equipment (printer, modem, etc.), computer software, or internet access and related services may also be treated as qualifying expenses if they are to be used primarily by the beneficiary during any of the years the beneficiary is enrolled at an eligible educational institution. Distributions of up to $10,000 annually may also be used for elementary and secondary school, as a result of the Tax Cuts and Jobs Act (TCJA). LO 2.4.1

B

Question ID: 1247615 Which one of the following is CORRECT regarding the American Opportunity Tax Credit? A)Qualified higher-education expenses include books, supplies, and reasonable room and board expenses. B)The maximum tax credit is $2,500 per student. C)The maximum tax credit is $2,500 per tax return. D)The credit may be taken for a student who is in his fifth year of undergraduate education. Explanation The maximum tax credit is $2,500 per student. LO 2.4.1

B

Question ID: 1273783 John Prentice owns 100 shares of Quantum Inc., a publicly held corporation. He receives a stock dividend of 10 shares of Quantum Inc. when the fair market value (FMV) of the stock is $10 per share. John originally paid $20 per share for the 100 shares of stock. Approximately what is John's new basis in each share of stock after the stock dividend? A)$19 B)$18 C)$17 D)$20 Explanation The effect of the stock dividend is to "dilute" the basis in the previously owned shares by establishing basis in the new shares. John now owns 110 shares with an aggregate basis of $2,000. This equals an approximate basis of $18 per share. LO 2.2.2

B

Question ID: 1273787 You are working with new financial planning clients, Dan and Patrice Harden, on educational funding issues for their three dependent children. Dan and Patrice will file jointly this year, as they have always done, and anticipate an AGI of $110,000. Their oldest child, Ben, age 23, is in his first year of graduate school studying to be a pharmacist. Ben graduated from college in three years, so the American Opportunity Tax Credit was claimed for three years of Ben's education. Their middle child, Margaret, age 19, had a conviction for felony drug possession last year. She's "cleaned up her act" and will be a full-time student at a community college this year. Their youngest child, Francis, age 7, is a good kid who wants to be a doctor when he grows up. Which of the following statements concerning educational tax credits and incentives is CORRECT? Ben and Margaret would each qualify for the American Opportunity Tax Credit (AOTC). Ben and Margaret would each qualify for the Lifetime Learning Credit. Dan and Patrice may make a contribution to a Coverdell account for Francis. Only Ben would qualify for the Lifetime Learning Credit. A)III and IV B)II and III C)II only D)I and III Explanation Ben and Margaret both qualify for the Lifetime Learning Credit. The Lifetime Learning Credit may be claimed for graduate studies, and may be claimed for a child with a felony drug conviction. Note that the Lifetime Learning Credit would allow a total of $10,000 of education expenses to be utilized on Dan and Patrice's tax return. (The Lifetime Learning Credit limitation of $10,000 is applied per return, whereas the AOTC limitation of $2,500 is per student.) The parent(s) who claims a child as a dependent is entitled to take the tax credit for the educational expenses of the child. The AGI is under the phaseout thresholds for the Lifetime Learning Credit. Even though the AOTC may generally be claimed for four years, Ben does not qualify for the AOTC because it may not be claimed for graduate work, only the first four years of undergraduate work. The AOTC may not be claimed for a child who has a felony drug conviction, so Margaret does not qualify for the AOTC. Dan and Patrice may make a Coverdell contribution for Francis, because their AGI does not exceed the phaseout limit of $190,000 to $220,000 for a married couple filing jointly. (The AGI limitations will be provided on the examination.) LO 2.4.1

B

Question ID: 1273789 Which of the following benefits provided by an employer is taxable to its employees? A)Undergraduate and graduate education assistance, up to a maximum of $5,250. B)A company car is used for personal mileage by an employee. C)Meals provided on the employer's premises that allow employees to attend a job related education seminar. D)Expenses for qualifying work-related education of the self-employed. Explanation Personal use of a company car is a taxable fringe benefit. The other education benefits listed are specifically excluded by the Code. LO 2.4.1

B

Question ID: 1343069 Your client is contemplating the sale of some of her holdings in her employer's stock. The stock was acquired in four separate purchases as follows: Purchase DateSharesCost Per ShareCostJune 1, 1996200$10$2,000June 1, 1998200$18$3,600June 1, 2000200$12$2,400June 1, 2006200$20$4,000Total800$12,000 What is the least amount of gain she would be required to report if she sold 500 shares for $12,500? A)$500 B)$3,700 C)$4,300 D)$5,000 Explanation To minimize the taxable gain, we would choose the shares with the highest cost basis. Thus we would sell the 200 shares that have a basis of $20 each, 200 of the $18 basis shares, and 100 of the $12 basis shares. This gives an aggregate basis of $8,800, resulting in a (long-term capital) gain of $3,700. The ability to use specific identification was not impacted by the Tax Cuts and Jobs Act (TCJA). LO 2.1.3

B

Question ID: 1343071 Which of the following are qualified interest expense deductible in arriving at an individual's AGI? Student loan interest Mortgage interest on a loan acquired for a personal residence in 2021 for $600,000 Interest on home equity loan indebtedness to buy an automobile Investment interest expense A)IV only B)I only C)II and III D)I, II, III, and IV Explanation Only item I, student loan interest, is deductible in arriving at an individual's AGI. Statements II and IV are incorrect and are deductions from AGI. Statement III is not a deductible expense. Home equity loan interest is not deductible for AGI and is only deductible from AGI to the extent the proceeds are used for home acquisition or improvement and not personal expenses. LO 2.2.1

B

Question ID: 1343077 Marge had net earnings from self-employment of $160,000 in 2021. What is her total self-employment tax? A)$19,691 B)$21,992 C)$20,308 D)$22,950 Explanation Marge's 2021 self-employment tax is calculated as follows: Self-employment income$160,000Less $160,000 × 0.0765($12,240)Equals net earnings$147,760Less 2021 taxable wage base($142,800)Equals SE income subject to Medicare tax$4,960Multiplied by 0.029× 0.029Equals Medicare portion of SE tax$144Add $142,800 × 0.153$21,848Total self-employment tax$21,992 LO 2.3.1

B

Question ID: 1343078 Larry and Mary are married taxpayers filing a joint tax return. In 2021, their AGI is $360,000, and their investment income (included in the AGI) is $100,000. They have investment interest expense of $7,000 and state income taxes attributable to the investment income of $5,000. What is the amount of Medicare contribution tax that they must pay? A)$3,534 B)$3,344 C)$3,800 D)$4,180 Explanation They will pay the 3.8% Medicare contribution tax on $88,000. This is the lesser of the net investment income ($100,000) or the AGI in excess of the threshold amount ($360,000 - $250,000, or $110,000). The net investment income is the investment income of $100,000, reduced by the allowable investment expenses of $12,000. In this situation, all $88,000 of the net investment income is subject to the Medicare contribution tax. Larry and Mary will pay a $3,344 Medicare contribution tax (3.8% on $88,000). LO 2.3.1

B

Question ID: 1343080 Theresa is a single taxpayer. In 2021, her AGI is $235,000, including a net long-term capital gain of $44,000. What is the amount, if any, of Medicare contribution tax that she must pay? A)$2,880 B)$1,330 C)$0 D)$1,672 Explanation She will pay the 3.8% Medicare contribution tax on $35,000. This is the lesser of the net investment income ($44,000) or the AGI in excess of the threshold amount ($235,000 - $200,000, or $35,000). Theresa will pay a $1,330 Medicare contribution tax (3.8% on $35,000). LO 2.3.1

B

Question ID: 1247312 Which of the following is a CORRECT statement regarding the wash sale rules? A)Small differences in the maturity dates of bonds will not cause them to be classified as substantially identical. B)Basis is generally decreased by the amount of the loss that is disallowed on a wash sale. C)The wash sale rules do not apply to dealers. D)The wash sale rules do not apply to sales and investments in mutual funds. Explanation The wash sale rules do not apply to taxpayers who are brokers or dealers of financial instruments. LO 2.1.3

C

Question ID: 1357671 Rob has an investment interest expense carryforward of $3,500 from a prior tax year. For the current tax year, he has an AGI of $75,000, $4,000 of investment interest expense, and $9,500 of investment income. He has investment adviser's fees of $5,000. How much investment interest expense, if any, may Rob deduct in the current tax year? A)$6,000 B)$7,500 C)$4,000 D)$3,500 Explanation Investment interest expense is deductible up to the amount of investment income. The investment income is $9,500. Rob has total investment interest expense of $7,500. All of that is currently deductible. The Tax Cuts and Jobs Act (TCJA) repealed the Tier II miscellaneous itemized deductions, so there is no adjustment necessary for the other investment expenses. LO 2.2.1

B

Question ID: 1247304 Under the modified endowment contract (MEC) rules, which of the following is NOT considered a distribution from the MEC? A)Dividends received as cash B)Withdrawals from the contract C)Dividends retained by an insurer to pay premiums D)Loans taken as cash or used to pay premiums Explanation Dividends retained by the insurer to pay premiums are not treated as distributions from a MEC. LO 2.1.1

C

Question ID: 1247305 Your client, Albert, purchased a life insurance policy. He wants you to determine if it is a modified endowment contract (MEC) for tax purposes. To be classified as a MEC, a policy must have which of the following qualities? Be a life insurance policy under state law Meet either the cash value accumulation test or the guideline premium and cash value corridor test Be a contract that was entered into on or after June 21, 1988 Fail to meet the seven-pay test A)I and II B)III and IV C)I, II, III, and IV D)I, II, and III Explanation To be classified as a MEC, a policy must encompass all of the choices: be a life insurance policy under state law; meet either the cash value accumulation test or the guideline premium and cash value corridor test; be a contract that was entered into on or after June 21, 1988; and fail to meet the seven-pay test. LO 2.1.1

C

Question ID: 1247315 A taxpayer intends to use a home equity loan to obtain funds to purchase municipal bonds. Which of the following is CORRECT regarding the income tax implications of this scenario? A)The interest on the home equity loan is fully deductible. B)The municipal bond interest becomes taxable. C)The interest on the home equity loan is not deductible. D)None of these choices apply. Explanation The interest on the municipal bond continues to be tax exempt. There is no deduction allowed for the interest on funds borrowed to purchase tax-exempt securities. LO 2.2.1

C

Question ID: 1247318 Charles wants to invest $20,000 to generate income taxable at the capital gain rates and not at ordinary income tax rates. He will hold any investment for at least 18 months. Which of the following investments would achieve Charles's goal? Buy an office building and rent space to others. Buy stock in a Fortune 500 company. Purchase a quality artwork with appreciation potential. Purchase a speedboat for personal use only. A)I, II, III, and IV B)II and IV C)II and III D)I and III Explanation Statements II and III are correct. Any qualified dividends on the stock will be taxed at LTCG rates. A sale of the stock or the investment painting after the 18-month holding period will generate either a LTCG or a LTCL depending on the sale price. Rental income is taxed at the ordinary income tax rate. A speedboat for personal use will not generate any income and will likely decrease in FMV 18 months later. LO 2.2.2

C

Question ID: 1247319 Garret has the following items of income: $1,500 of interest income, $2,800 of qualified dividend income (he has not decided whether to have it taxed at the ordinary or capital gain rate), and a salary of $100,000. Which of these are classified as portfolio income? A)Interest income, dividend income, and salary B)Interest income only C)Interest income and dividend income D)Salary only Explanation Interest and dividends are portfolio income. Salary is active income. LO 2.2.2

C

Question ID: 1247322 Hardship withdrawals are only allowed from Section 401(k) plans if specifically stated in the plan document and typically for expenses including which of the following? Vacation costs Medical expenses College tuition costs Insurance premiums A)I and II B)I and III C)II and III D)II, III, and IV Explanation Hardship withdrawals are typically allowed for medical expenses, college tuition and fees, the purchase of a principal residence, burial expenses for a spouse or dependents, and to prevent eviction from one's principal residence or foreclosure on the mortgage of such residence. LO 2.4.1

C

Question ID: 1247534 A lump-sum payment of the proceeds of a life insurance policy that is made to the beneficiary upon the insured's death A)is taxable if from a modified endowment contract (MEC). B)is taxable if the proceeds exceed the net investment in the policy. C)is generally exempt from income taxation. D)is typically taxable. Explanation The lump-sum proceeds of a life insurance policy paid to a beneficiary at the death of the insured are exempt from income taxation. LO 2.1.1

C

Question ID: 1247539 Which one of the following is an exception to the general rule that life insurance proceeds are excluded from income? A)The cash guideline premium rule B)The cash value accumulation rule C)The transfer for value rule D)The corridor rule Explanation The only exception to the general rule that life insurance proceeds are excluded from income is the transfer for value rule, which applies when a life insurance contract is transferred for valuable consideration. LO 2.1.1

C

Question ID: 1247541 Pam paid $31,000 in premiums on an endowment life insurance policy with a face value of $90,000. In the current year, upon reaching age 70, Pam received the face value of the policy. For tax purposes, how much income, if any, will Pam report? A)$0 B)$90,000 C)$59,000 D)$31,000 Explanation The cancellation of the endowment policy causes taxation on the difference between the amount received, the cash surrender value, and the investment in the contract, the premiums paid. LO 2.1.1

C

Question ID: 1247545 Leslie Howard purchased a deferred variable annuity several years ago. Her investment in the annuity contract was $50,000. Her current life expectancy, based on IRS tables, is 20 years. During the current year, she received annuity payments totaling $4,100. What amount of the annuity payments is excludable by Leslie? A)$0 B)$4,100 C)$2,500 D)$1,600 Explanation The annual exclusion for a variable annuity is the investment in the contract ($50,000) divided by the life expectancy (20 years) to equal $2,500 per year. Thus, of the $4,100 received, $2,500 is excluded, and the remaining $1,600 is taxable. LO 2.1.2

C

Question ID: 1247548 Maxwell Gates is about to begin receiving payments from a deferred fixed annuity that he purchased many years ago. His investment in the annuity contract was $30,000. He is to receive $375 per month for the rest of his life. His current life expectancy, based on IRS tables, is 10 years. What amount, if any, of each monthly payment is excludable by Maxwell? A)$0 B)$125 C)$250 D)$150 Explanation The investment of $30,000 divided by the total expected return of $45,000 ($375 per month × 12 months × 10 years) gives an exclusion ratio of 0.667, which is multiplied by the $375 payment to equal an exclusion of $250. LO 2.1.2

C

Question ID: 1247556 Jill purchased stock four years ago for $15,000. The stock had a fair market value (FMV) of $13,000 on the last day of the prior year. If Jill sells the stock for $16,000 six months later, what is her recognized gain or loss? A)$1,000 short-term capital gain (STCG) B)$4,000 LTCG C)$1,000 long-term capital gain (LTCG) D)$0 Explanation Because Jill sold the stock after four years, her holding period is long term and her gain is $1,000 ($16,000 − $15,000). LO 2.1.3

C

Question ID: 1293905 Which of the following are deductions from AGI? Qualifying alimony paid to a former spouse Child support paid to a former spouse Investment interest expense incurred by an individual State and local income taxes paid A)I, II, and III B)II and IV C)III and IV D)III only Explanation Child support is not deductible. Alimony, if it meets certain tests, is an above the line deduction for AGI. Investment interest expense and State and Local Taxes are below the line deductions from AGI. LO 2.2.1

C

Question ID: 1247547 Which one of the following is a characteristic of a variable annuity contract? A)Variable annuity contracts are not tax advantaged, unlike other annuity contracts. B)A fixed annuity payment is guaranteed upon payment of flexible premiums. C)The annuitant pays now for future fixed or variable payments. D)The amount of the payments varies according to the investment performance of the underlying assets. Explanation The payments on a variable annuity contract are determined by the performance of the assets in which the contract is invested. There is no minimum guaranteed payment, nor is there a maximum. LO 2.1.2

D

Question ID: 1343064 Your clients, John and Mary Voight, spoke recently to their insurance agent regarding the purchase of a single premium whole life policy. The agent indicated that the policy would be a modified endowment contract. The Voights were unsure what that meant. Which of the following describe a modified endowment contract? Meets the requirements of a life insurance contract under state law Was entered into (or substantially modified) on or after June 21, 1988 Fails to meet the "seven pay test" Meets the guideline premium and corridor test or the cash value accumulation test A)II, III, and IV B)I, II, and III C)I, II, III, and IV D)II and III Explanation Statements I through IV are all elements of the IRC definition of a modified endowment contract. The contract fails to meet the seven-pay test if the cumulative amount paid under the contract at any time in the first seven years is greater than the seven net level annual premiums that would have been paid under a seven-pay, paid-up contract. LO 2.1.1

C

Question ID: 1343073 James and Julie are a married couple filing jointly. For the 2021 tax year, they have a taxable income of $400,000. Included in the taxable income is $35,000 of net long-term capital gains from the sale of securities and $15,000 of qualified dividends. At what tax rate will their net capital gains and qualified dividends be taxed? A)20% B)25% C)15% D)0% Explanation The long-term capital gains and qualified dividends are taxed at 15%. The long-term capital gains and qualified dividends fall into the taxable income range of $80,800 to $501,600 (2021) for a married couple filing jointly. LO 2.2.2

C

Question ID: 1343076 Alicia is age 16 and her total income was $3,000 in bank interest in 2021. Her parents' marginal tax rate is 24%. What is her total tax on the interest? (Round the answer to the nearest dollar.) A)$1,900 B)$585 C)$302 D)$720 Explanation Alicia is in the 10% marginal tax bracket. $1,100 is eliminated by her standard deduction for unearned income. The next $1,100 is taxed 10%, generating tax of $110. The remaining $800 is taxed at her parent's marginal rate of 24%, or $192. Therefore Alicia's total tax due is $302. LO 2.2.2

C

Question ID: 1343082 Ken Brandt (a single taxpayer), age 28, holds the following securities: StockPurchase DateFair Market ValueCost BasisABC (300 shares)Oct. 3, 2003$12,200$5,500DEF (500 shares)Feb. 15, 2021$22,600$15,600GHI (100 shares)June 2, 2006$4,350$6,250LMN (700 shares)Dec. 9, 2020$19,360$28,560XYZ small-cap fund (500 shares)Oct. 20, 2011$1,200$3,700VWL (750 shares, §1244)July 17, 2005$4,050$115,600 BondsPurchase DateFair Market ValueCost BasisEE savings bondsMay 1, 2014$8,500$6,000 Assume Ken incurs $7,500 of college expenses in the current year. If Ken redeems the EE bonds to pay these expenses, what are the tax consequences? A)There is insufficient information given to determine the tax consequences. B)A portion of the interest may be excluded. C)All accrued interest is taxable in the current year. D)All the interest may be excluded. Explanation The exclusion for interest on EE bonds redeemed to pay for qualifying higher-education expenses applies only to bonds purchased by an individual age 24 or older. Ken is 28 years old; the bonds were purchased approximately seven years ago, when Ken was approximately age 21. LO 2.4.1

C

Question ID: 1247309 Which of the following is a form of an annuity? A)Selective annuity B)Sustained annuity C)Quick annuity D)Fixed annuity Explanation Selective, quick, or sustained annuities are not recognized categories of annuities. Fixed, variable, immediate, and deferred are all categories of annuities. LO 2.1.2

D

Question ID: 1247316 Kerri, a single taxpayer who itemizes deductions, incurred $5,000 in management fees relating to her taxable investments. Her AGI is $100,000, which includes $20,000 of investment income. How much investment expense (Section 212 expense) can she deduct for this year? A)$5,000 B)$2,000 C)$4,000 D)$0 Explanation Investment expenses other than investment interest expenses are not deductible. LO 2.2.1

D

Question ID: 1247568 At a recent client meeting, you discovered that your client, Stan, utilized a home equity loan of $100,000 to obtain funds to purchase municipal bonds. This is the only home equity loan that Stan has. Which of the following is CORRECT regarding the income tax implications of this scenario? A)The interest on the home equity loan is fully deductible, but the interest on the municipal bonds becomes taxable. B)The interest on the home equity loan is not deductible, and the interest on the municipal bonds becomes taxable. C)The interest on the home equity loan is fully deductible, and the interest on the municipal bonds remains tax exempt. D)The interest on the home equity loan is not deductible, and the interest on the municipal bonds remains tax exempt. Explanation The interest on a home equity loan is not deductible unless the proceeds are used to build, purchase, or renovate a residence. LO 2.2.1

D

Question ID: 1247598 Terry and Jan are married taxpayers filing a joint tax return. Their AGI is $310,000, and their net investment income (included in the AGI) is $90,000. What is the amount of the Medicare contribution tax for the current tax year? A)$3,420 B)$4,180 C)$5,180 D)$2,280 Explanation $310,000 - $250,000 = $60,000. $60,000 × 3.8% = $2,280. $60,000 < $90,000. LO 2.3.1

D

Question ID: 1247608 Which one of the following statements regarding education provisions is CORRECT? A)The annual contributions to a Coverdell account may not exceed $2,000 per donor. B)Qualifying expenses for the American Opportunity Tax Credit (AOTC) include tuition, books, supplies, and room and board. C)The American Opportunity Tax Credit applies to undergraduate and graduate courses at an accredited, Title IV institution. D)Higher-education expenses for the Section 529 plan may include expenses for a computer, software, and internet access. Explanation Qualifying expenses for the AOTC do not include room and board. The AOTC may only be used for the first four years of undergraduate or vocational courses. Qualified higher-education expenses for Section 529 purposes include tuition, books, fees, and equipment for enrollment at an eligible educational institution; expenses for special needs services; and room and board costs for students who are at least half-time. In addition, expenses for the purchase of computer or peripheral equipment (printer, modem, etc.), computer software, or internet access and related services may be treated as qualifying expenses if the equipment, software, or services are to be used primarily by the beneficiary during any of the years the beneficiary is enrolled at an eligible educational institution. The annual contributions to a Coverdell account may not exceed $2,000 per beneficiary. LO 2.4.1

D

Question ID: 1273771 Winona Fischer has a single premium whole life policy issued in 1989 on which she wants to take out a loan. Which one of the following would be the tax treatment on such a borrowing? A)There would be no taxes on the loan because only dividends from whole life policies are taxable. B)There would be taxes on the loan because it is not for a business purpose. C)There would be no taxes on the loan because loans on life insurance policies are not taxed. D)There would be taxes on the loan to the extent that the cash value immediately before the distribution exceeded 's the investment in the contract. Explanation Any single premium whole life policy issued after June 21, 1988, is a modified endowment contract (MEC) because it fails the seven-pay test. Borrowing is treated as a distribution; thus there is ordinary income to the extent that the cash surrender value exceeds the investment in the contract. In other words, a distribution from a MEC is treated on a last-in, first-out (LIFO) basis. LO 2.1.1

D

Question ID: 1273780 How are qualified dividend distributions taxed? A)Qualified dividends are taxed as short-term capital gain (STCG). B)None of these. C)Qualified dividends can only be taxed at the LTCG rate if the underlying stock has been held for a year plus one day. D)Qualified dividends are generally taxed at the 20%/15%/0% long-term capital gain (LTCG) rates. Explanation Qualified dividend distributions are eligible for the same 20%/15%/0% rate as long-term capital gains. Most dividends declared by a corporate board of directors of a domestic corporation are considered qualified dividends and are permitted the preferential rate. LO 2.2.2

D

Question ID: 1343068 Gary received a bequest of 100 shares of XYZ stock from a relative who died on March 1, 2021. The relative bought the stock at a total cost of $5,500. The value of the 100 shares of XYZ stock was $5,750 on March 1. Its value rose to $6,250 on July 1, 2021, on which day Gary sold it for $6,250, incurring expenses for the sale of $250. The taxable gain on the sale would be A)a $500 long-term capital gain. B)a $250 short-term capital gain. C)a $500 short-term capital gain. D)a $250 long-term capital gain. Explanation The amount realized on the sale is $6,000 (sale price of $6,250 reduced by the selling expenses of $250). This is compared to the fair market value (FMV) ($5,750) on the date of death, which is the recipient's basis. This generates a $250 gain. The issue then becomes one of holding period. The holding period of an asset acquired from a decedent is deemed to be long term. Thus, Gary has a $250 long-term capital gain. LO 2.1.3

D

Question ID: 1343070 Larry has owned 100 shares of Positive Publishing Inc. stock since September 15, 2017. His basis in the 100 shares is $15,000. Larry sold these shares on March 15, 2021, for $12,500. After hearing a positive earnings report for the Positive Publishing stock, he purchases 100 more shares on April 11, 2021, for $13,000. What is the basis in the shares purchased on April 11, 2021? A)$13,000 B)$25,500 C)$10,500 D)$15,500 Explanation The sale at a loss and the subsequent repurchase of substantially identical shares within a period of 30 days before 30 days after the date of the loss sale results in a wash sale. This causes a disallowance of the loss. The basis of the newly acquired security is increased by the amount of the disallowed loss from the wash sale. The $2,500 disallowed loss is added to the $13,000 purchase price to give a basis of $15,500. LO 2.1.3

D

Question ID: 1343075 Bob and Norma are married and have two dependent children. If the couple file their Form 1040 as married filing jointly and have taxable income of $70,000, what is their tax rate for qualified dividends in 2021? A)15% B)20% C)25% D)0% Explanation Because Bob and Norma make less than $80,800 (2021), they will use the 0% tax rate for qualified dividends in 2021. LO 2.2.2

D

Question ID: 1357668 Ron Phillips, age 43, and Sandy Phillips, age 41, are married with two children, Michael, age 12, and Victoria, age 8, who has been blind since her birth. Ron is an architect and general partner with XYZ partnership. Sandy is self-employed as an attorney and works out of a home office. Her home office is exclusively and regularly used for business, and the home office is her principal place of business. Their information for the tax year 2021 is as follows: Adjusted gross income: $217,300 Itemized deductions (including qualified residential mortgage interest, taxes paid, and charitable contributions): $33,000 Early in the current year, Sandy's father died. Sandy is the sole beneficiary of her father's entire estate. The estate is presently in the probate process. Sandy's mother, Lisa, age 68, has moved in with them but provides her own support. She was married to Sandy's father when he died earlier this year. This is Ron's second marriage. He makes monthly support payments to his former wife and his daughter. Because both Ron and Sandy are considered self-employed, they make quarterly estimated tax payments each year to cover both their income tax and self-employment tax obligations. Assume that in 2021, Sandy inherits land with a fair market value (FMV) of $500,000 from her father's estate and $200,000 in death benefits from a life insurance policy on her father's life. Based on the information provided in the case scenario for Ron and Sandy Phillips, how much must Sandy include in gross income as a result of receiving these amounts? A)$700,000 B)$200,000 C)$500,000 D)$0 Explanation Inheritances and life insurance proceeds paid because of death are both excluded from gross income. LO 2.1.1

D

Question ID: 1357670 Michelle has investment income (interest and dividends) of $23,000 in the current tax year. She paid broker's commissions of $2,000 on stock purchases and had $40,000 of investment interest expense. What amount, if any, of investment interest expense may be deducted as an itemized deduction? A)$40,000 B)$0 C)$42,000 D)$23,000 Explanation Michelle's interest expenses exceed her net investment income, so she can deduct only $23,000 because she can deduct these expenses only up to the net investment income amount. If her expenses were less than her net investment income, the entire investment interest expense would be deductible. LO 2.2.1

D