CRPC Damage Control: Test 1 & 2

Mary Cartheon inherited 500 shares of stock from her uncle, Ted, three years ago. Ted had purchased half the stock 12 years ago for $14 per share, and the remainder 11 years ago for $13 per share. The stock price had declined to $10 per share when Ted died. What is Mary's per share basis in the stock, assuming that she sells it this year for $16 per share? $13 $14 $16 $10

$10 The basis of an asset acquired by inheritance generally is the fair market value on the date of the decedent's death. This is commonly referred to as a "stepped-up" basis, although in this case, the effect is a step down in basis. (LO 8-9)

If an investor wants to accumulate $250,000 over the next 12 years, can invest $8,000 at the end of each year, and expects to earn an 11% compound return over the 12 years, what lump sum must she deposit today in the investment to meet her goal?

$19,521 The correct calculator inputs are $8,000, +/-, [PMT]; 11 [I/YR] 12 [N]; $250,000 [FV]; Solve for PV = $19,521. (LO 1-4)

Susan Reynolds, age 47, who is married and files jointly, contributes 5% of her salary to her employer's 401(k) plan. Susan and her husband have modified AGI of $111,222. If Susan makes a full $6,000 contribution to an IRA, how much of this contribution will be deductible in 2019?

$3,540 The following formula can be used to calculate the deductible amount of the Susan's IRA contribution (bumped up to the nearest $10) for 2019: UL = Upper dollar limit of the phaseout range for married individuals filing jointly = $121,000 (for 2019) Phaseout range for married filing jointly = $20,000 (for 2019) $6,000 × [($123,000 - $111,222)/$20,000] = $3,533, which is bumped up to the nearest $10, which would be $3,540. Notice that the $3,533 is not rounded to the nearest $10. It is bumped up to the next $10. Thus, any answer that does not end in "0" will always be wrong. (LO 4-2)

Over a period of 10 years, Mike Bowman contributed a total of $20,000 to a nondeductible IRA. The current value of his IRA is $32,000, and Mike, who is 50 years old, has decided to use his IRA assets toward the purchase of a second home in the mountains. Assuming Mike's marginal tax bracket is 24%, how much will he owe in taxes and penalties?

$4,080 Mike must pay income taxes on $12,000 ($32,000 - $20,000 of after-tax contributions). Mike's effective tax rate is 34% (24% + 10% early withdrawal penalty = 34%). Remember, penalties in a nondeductible IRA apply only to earnings. Mike will have to pay $4,080 in taxes and penalties (34% × $12,000 = $4,080). Mike is not a first-time homebuyer in this question because he is buying a vacation home. (LO 4-1)

Sam, age 62, begins receiving his Social Security income. His PIA is $1,500 per month. Because he has filed at age 62, his payment will be reduced by 25% to $1,125. His wife Linda, age 67, would like to begin spousal benefits. Her monthly income would be

$750.00. Because Linda has attained FRA, she would be eligible for 50% of Sam's full PIA, or $750.00. (LO 3-4)

Over a period of 10 years, Mark Edmunds contributed a total of $20,000 to a nondeductible IRA. The current value of Mark's IRA is $40,000, and Mark, who is now age 45, has decided to use all of his IRA assets for the down payment on a second home. Assuming Mark's marginal tax bracket is 35%, how much does he owe in taxes?

$9,000 Mark's effective tax rate is 45%; i.e., 35% plus the 10% early withdrawal penalty. 45% × $20,000 tax-deferred earnings = $9,000. The $20,000 basis in the IRA is not subject to income tax or the early withdrawal penalty.

Assume your client has a 5% bond, par value of $1,000, and 15 years to maturity. Comparable bonds are yielding 6%. What is the value of this bond?

$902 If the calculator is set for 1 P/YR, then all factors, other than FV, need to be adjusted for semiannual payments. The keystrokes would be: 1,000 [FV], 25 [PMT], 3 [I/YR], 30 [N], then solve for [PV] = 902. If the calculator is set at 2 P/YR, then [I/YR] is 6 and [N] is entered as 15 [SHIFT] [N]. (LO 2-8)

John and Nancy, married taxpayers filing jointly, have $600,000 of taxable income, including $14,000 of qualified dividends. Which of the following rates apply to the qualified dividends?

20% Qualified dividends (and net long-term capital gains) that are part of taxable income greater than $488,850 (for 2019) are taxed at 20%. Qualified dividends are subject to a 15% tax rate when they fall into taxable income between $78, 750 and $488,850. Qualified dividends (and net long-term capital gains) that are part of taxable income under $78,850 (for 2019) are taxed at 0%. These figures are all for the married filing jointly filing status. You will not need to memorize these taxable income breakpoints. A 25% long-term capital gains rate applies to unrecaptured Section 1250 income (the portion of the gain from the sale of realty that was attributable to depreciation, but was not treated as Section 1250 recapture).

Dan, age 58, has decided to begin periodic withdrawals from his IRA. In order to avoid the 10% early withdrawal penalty, distributions must continue until at least what age? 59½ 59½ 60 63 70½

63 Distributions must continue for at least five years, or until the individual reaches age 59½, whichever is later. (LO 7-4)

Assume that a worker's Social Security full retirement age is 66. What percentage of the worker's full retirement age benefits will be paid to her at age 62? 50% 65% 75% 80%

75% A worker can begin receiving Social Security retirement benefits at age 62, but at a 25% reduction from the full amount that would be received at full retirement age 66. The percentage of this worker's full retirement age benefits that will be paid to her at age 62 is 75% [(five-ninths of 1% per month for each of the first 36 months prior to full retirement age = 20%) + (plus five-twelfths of 1% × 12 months = 5%); 20% + 5% = 25%]. Note: while this calculation is beyond the scope of the exam, the concept is important to understand. (LO 3-2)

Your client owns a bond fund with a duration of 6.5. If interest rates increase 1.5%, what is the expected change in price for this fund? 6.5% increase 9.75% increase 6.5% decrease 9.75% decrease

9.75% decrease 1.5% × 6.5 = 9.75%. Recall that duration needs to have a negative sign in order to represent the inverse relationship between bond prices and interest rates. In this case, an increase in rates means the bonds or bond funds will fall in price. Therefore, this fund will decrease in price about 9.75%. Also, you can remember that bond prices move opposite to interest rates. An increase in interest rates means the price of bonds will go down.

When are living wills applicable? A living will is applicable at any time the declarant is unable to make a decision regarding his or her medical treatment. A living will is applicable when the declarant is in a terminal or similar condition. A living will is applicable when the declarant is incapacitated.

A living will is applicable when the declarant is in a terminal or similar condition. A living will is applicable only when the declarant is in a terminal or similar condition. If the declarant is not in a terminal or similar condition, the medical provider is not required to comply with a patient's living will. (LO 5-2)

Which one of the following statements is true regarding nonperiodic distributions from an annuity contract prior to the annuity start date?

A nonperiodic distribution is taxed first as a taxable interest payment until the interest/earnings are completely exhausted and then as a tax-free return of principal. A nonperiodic distribution (withdrawal) from an annuity is not prorated equally between a tax-free return of principal and a taxable interest payment; it is first considered a taxable interest payment and then a tax-free return of principal (LIFO). (LO 8-4)

Which one of the following is correct regarding tax-exempt interest and the taxation of Social Security benefits? None of the tax-exempt interest is included in the computation of the taxation of Social Security benefits. 50% of the tax-exempt interest is included in the computation of the taxation of Social Security benefits. 85% of the tax-exempt interest is included in the computation of the taxation of Social Security benefits. All of the tax-exempt interest is included in the computation of the taxation of Social Security benefits.

All of the tax-exempt interest is included in the computation of the taxation of Social Security benefits. All tax-exempt interest income is included in computing the portion of Social Security benefits that are subject to taxation. Tax-free Roth distributions are not counted when determining provisional income. A maximum of 85% of the Social Security benefits are subject to taxation. (LO 3-3)

Which one of the following is correct regarding taxation of mutual funds? A distribution of interest income from public-purpose municipal bonds may create and alternative minimum tax problem. The use of the FIFO method of basis determination generally will result in the lowest gain during a bull market. An exchange of shares in one fund to shares of another fund within the same family will create a taxable event. LIFO is the method assumed by the IRS if the taxpayer fails to select another method.

An exchange of shares in one fund to shares of another fund within the same family will create a taxable event. An exchange of share in one fund to share of another fund within the same family is a taxable event. This is commonly referred to as a "telephone transfer." A nontaxable distribution based on interest from a private-activity, not public purpose, municipal bond may create an AMT issue. FIFO will generally create the largest gain during a bull market, because the oldest, lowest cost basis shares are the ones treated as being first sold. FIFO is the method assumed by the IRS if the taxpayer fails to select another method. LIFO is not an allowable method for basis calculations. (LO 8-1)

Which of the following are correct statements about the effect that income and asset ownership have on Social Security benefit payments? I. The value of assets owned by a worker does not affect the amount of Social Security benefits that he or she will receive. II. The reduction is $1 of benefits for each $1 of income earned above the allowable limit for an individual who begins receiving Social Security benefits prior to the year he or she attains full retirement age. III. Investment income received by a worker does not affect the amount of Social Security benefits that he or she will receive. IV. The reduction is $1 of benefits for each $2 of income earned above the allowable limit for individuals who begin receiving Social Security benefits in the year they attain their Social Security full retirement age, but prior to the month in which they actually attain that age.

I and III only Unearned income, such as income from investment assets, has no effect on the amount of Social Security benefits that will be paid to a worker. Similarly, the value of assets owned by the worker does not affect eligibility for Social Security benefits. Option II is incorrect. The reduction is $1 of benefits for each $2 of income earned above the allowable limit for an individual who is under his or her Social Security full retirement age for the entire year and begins receiving Social Security benefits. Option IV is incorrect. The reduction is $1 of benefits for each $3 of income earned above the allowable limit for an individual who begins receiving Social Security benefits in the year he or she attains his or her Social Security full retirement age, for the months prior to the month in which Social Security full retirement age is attained. (The reduction in benefits does not apply to the month in which an individual attains his or her Social Security full retirement age.) (LO 3-3)

Which of the following are factors to consider when making the decision on when to receive Social Security benefits? I. earnings of dependents II. income benefit provided III. additional sources of income IV. condition of health

I, II, III, and IV Each of these is a worthwhile consideration. What children or other dependents earn usually has no impact on the decision of when to receive Social Security benefits because most retirees do not have children under 18 in their home. However, many grandparents today have grandchildren who are their dependents. Also, second marriages to a younger spouse can mean someone eligible for Social Security retirement benefits has a child who is eligible for child retirement benefits. If that child earned more than $17,640 in 2019, the child's retirement benefit would be cut accordingly.

Which of the following are correct statements about the capital utilization strategy? I. It produces an annual retirement income over a finite number of years. II. Assuming the yield remains the same, the larger the retirement income that is paid, the shorter the number of years over which it will be paid. III. When the capital utilization approach is used, the planner must be careful in making assumptions about the life expectancy of the client. IV. The effect of taxes on retirement savings and distributions should be considered when the before-tax approach is used to calculate the future value of retirement assets.

I, II, III, and IV All of the options are true. A capital utilization strategy would make it possible to produce a larger annual income for a client but over a finite number of years, after which the principal is exhausted. Therefore, a planner must make a good estimate of a client's life span; otherwise, a client may outlive his or her income. Assuming that the yield would remain the same, the larger the income, the shorter the number of years. The before-tax approach for calculating the future value of retirement assets doesn't take into account the shrinkage of retirement assets due to taxes. The amount of tax shrinkage may be significant; therefore, the impact of taxes will need to be taken into consideration. In contrast, the formula for calculating an inflation-adjusted yield takes the effect of inflation into account. The inflation-adjusted yield formula is [(1 + r) ÷ (1 + i)] - 1 × 100 where r = Investment return, and i = Inflation rate. (LO 1-4)

Which of the following are correct statements about the legal requirements for a loan to a participant from a retirement plan? I. The term of a loan for a medical emergency must not exceed five years. II. Loans from SEP IRAs are not permitted. III. The term of a loan used to acquire a principal residence may exceed five years. IV. Loans from a SIMPLE 401(k) plan are permitted

I, II, III, and IV All of the statements are true. The term of the loan must not exceed five years; however, loans to acquire the participant's principal residence may be for a longer (unspecified) period. If a loan requiring repayment within five years is not repaid in five years, it may be treated as a distribution and taxed (and penalized) as such. Loans from IRAs, SEP IRAs, and SIMPLE IRAs are not permitted under current tax law; however, loans from a qualified plan, including a SIMPLE 401(k) plan, are permitted. (LO 7-1)

Which of the following statements accurately describe basic provisions of Medicare Part B? I. Coverage includes benefits for physicians' services. II. Individuals who are eligible for Part A are automatically eligible for Part B. III. Coverage includes benefits for inpatient hospital services. IV. Participants pay a monthly premium.

I, II, and IV only Medicare Part B includes coverage for physicians' services; Part A covers hospital charges. Part A is provided to eligible individuals at no charge, but participants must pay a premium for Part B. Individuals who are eligible for Part A are automatically eligible for Part B, and receive it if they pay the related premium. (LO 5-3)

Michael Bowden has asked you what sources exist for long-term care insurance. Which of the following generally are considered potential sources for the funds to cover at least some of the cost of long-term custodial care? I. Medicaid II. health insurance III. Medicare IV. group long-term care insurance offered through employers

I, III, and IV All are possible sources of LTC except health insurance. Medicaid and long-term care insurance provide recipients with benefits such as nursing home care. Medicare provides only 20 days of skilled nursing care at full cost and 80 days thereafter with a substantial copay, in only a limited number of situations. It is designed only to provide temporary care while patients improve enough to go home, but it does provide some level of LTC coverage.

Which of the following are examples of the second step of the retirement planning process? I. prioritize goals II. disclose compensation arrangements III. examine a person's tax situation IV. determine important time horizons

I, III, and IV only The second step in the retirement planning process is to gather client data, including goals and expectations. The first step is to establish and define the client-counselor relationship which includes disclosing the counselor's compensation arrangement. (LO 1-2)

An income-tax-penalty-free distribution cannot be made from a tax-sheltered annuity (TSA) until the employee does which of the following? I. separates from service after attaining age 55 II. attains age 55 III. becomes disabled or dies IV. takes a distribution under most hardship withdrawal rules

I, and III only Penalty-free distributions can be made from a TSA or 401(k) when an employee separates from service after attaining age 55, attains age 59½, becomes disabled or dies, or takes a hardship distribution for deductible medical expenses only. All other hardship withdrawals are subject to early withdrawal penalty rules. Attaining age 55 means the worker is 55 on December 31 of the year of separation—not that the worker was 55 on the day of separation.

. Your client, Susan, age 60, cannot afford to retire until age 62 when she becomes eligible for Social Security and company pension benefits. Susan no longer feels appreciated by her company and was recently passed over for a promotion. Her husband Brent, age 63, lost his company health care plan and dependent coverage when he retired, but Susan has been able to cover the two of them on her company's plan. If Susan takes early retirement at age 62, her company benefits plan stipulates that her health care coverage will end. Susan's health is excellent, but Brent's health is just fair. About which of the following issues regarding retirement should Susan be concerned? I. Is now the right time? II. Brent won't be eligible for Medicare for almost two more years. III. How will my spouse/family be affected?

II and III only Susan knows now is not the right time for retirement. She cannot afford to retire until she turns 62. The right time may be when clients feel that they are losing their ability to perform up to standards, the economics of working become less favorable, or the worker's personal health is an issue. If Susan retires, neither she nor Brent will have health care coverage; also, neither will qualify for Medicare until age 65 (almost two more years for Brent). Although Susan's health is excellent, Brent's health is fair. Susan is very concerned about how her spouse and family situation will be affected. A client who doesn't feel appreciated by his or her company is typically asking whether he or she wants to be retired, is the work satisfying, and does he or she have control over working conditions. (LO 6-2)

Which of the following personal expenses are likely to decrease following an individual's retirement? I. travel II. education III. utilities IV. income taxes V. home repairs

II and IV only Travel and recreation costs escalate for many retirees. Even if retirees have their mortgage paid-off, they will still be faced with the following expenses: real estate taxes, utilities, insurance, and repairs. Retirees tend to spend less on education than do non-retirees. Total income taxes are likely to diminish as earned income declines.

Henry King, a fully insured worker for Social Security purposes, will retire next month at the age of 62. Henry is concerned that he may lose some of his Social Security benefits because of the earnings limitation test. Which of the following sources of Henry's income are counted for purposes of the earnings limitation test? I. IRA withdrawals II. self-employment earnings III. pension annuity payments IV. inheritance payments V. dividend income

II only "Excess" earned income by Social Security beneficiaries who are under Social Security's full retirement age results in a partial or full loss of benefits, depending on the age of the person, the amount of Social Security benefit, and the amount of earned income. "Earned income" generally includes wages, salary, and self-employment earnings; investment income is not included in this definition. The following non-work sources of income do not count as wages for the earnings test: IRA withdrawals; pension annuity payments; inheritance payments; and dividend income.

Which of the following are correct statements about survivor benefits from a qualified retirement plan? I. Profit sharing plans that accept direct transfers from pension plans are not required to provide a QJSA. II. The qualified joint and survivor annuity (QJSA) may be waived if the spouse gives written consent to the effect of the election and the naming of another beneficiary. III. Defined benefit, money purchase, and target benefit plans must provide a QJSA. IV. A pension plan is not required to provide a survivor annuity if the plan participant and spouse have been married for less than one year. V. The QJSA payable to the spouse must be at least 50%, but not more than 100%, of the annuity amount payable during the joint lives and actuarially equivalent to a single life annuity over the life of the participant.

II, III, IV, and V only The spouse may waive the qualified joint and survivor annuity (QJSA) option via written consent, which includes acknowledging the effect of the waiver and the naming of another beneficiary. If the participant and spouse have been married for less than one year, the plan does not have to provide a survivor annuity. The QJSA must be actuarially equivalent to a single life annuity over the life of the participant and at least 50%, but not more than 100%, of the annuity payable during the joint lives of the participant and spouse. Profit sharing plans that accept direct transfers from pension plans are subject to the QJSA requirements. (LO 7-5)

Which one of the following statements is correct regarding managing a taxable account?

Qualified dividends are generally subject to a preferential tax rate of 0%, 15%, or 20%. Qualified dividends are subject to preferential long-term capital gain rates. Net capital losses of $3,000 per year are deductible and any additional losses can be carried forward to a future year. Dividends are subject to taxation, even if reinvested. In a taxable account, traders certainly do need to take into account the timing and taxability of their security transactions. (LO 8-1)

Which of the following are exempt from the 10% penalty on qualified plan distributions made before age 59½? I. distributions made to an employee because of "immediate and heavy" financial need II. in-service distributions made to an employee age 55 or older III. distributions made to a beneficiary after the participant's death IV. substantially equal periodic payments made to a participant following separation from service, based on the participant's remaining life expectancy

III and IV only The 10% premature distribution penalty does not apply to distributions on account of death or annuitized payments based on an individual's remaining life expectancy. Options I and II are incorrect. The law does not recognize heavy and immediate financial need as an exception to the penalty. The age 55 exception does not apply to in-service distributions; i.e., the employee must have separated from the service of the employer. (LO 7-1)

Harry, a single professor who is age 36, started his Roth IRA three years ago, contributing $5,000. He has since made a contribution of $5,500 each year and converted a traditional IRA of $17,000 to the Roth IRA last year. His total contributions are $16,000 plus the $17,000 conversion, and the account is now worth $36,497. Harry would like to make a complete withdrawal so that he can buy a new car. He wants to know what his options are and what the tax consequences would be. Which one of the following statements would be the correct information for Harry?

If a withdrawal of converted IRA funds is made from the Roth account subsequent to the conversion but before five years has elapsed, such a withdrawal may be subject to the 10% penalty. Contribution amounts always come out of a Roth IRA account first, and then conversion amounts, if any. Because taxes have already been paid on these amounts, there are no income taxes. In this case, Harry can withdraw up to $33,000 income-tax-free. If he withdrew all $36,497 he would only owe income taxes on $3,497. However, if a withdrawal of converted IRA funds is made from the Roth account subsequent to the conversion but before five years has elapsed, such a withdrawal may be subject to the 10% penalty. Thus, he would be subject to the 10% early withdrawal penalty on the $17,000 from last year's conversion. If the Roth IRA earnings are withdrawn and the distribution is not "qualified," the earnings will be subject to income taxation and may be subject to the 10% penalty. If he withdrew the entire amount, he would owe income tax on $3,497 and the 1% early withdrawal penalty on $20,497. (LO 7-4)

Which one of the following statements regarding Henry White, who recently married for the first time, is correct? In a community property state, Henry's spouse is deemed to have a vested 50% interest in all of the property Henry owned at the time of the marriage. In a community property state, Henry's earnings from his job subsequent to the date of his marriage will be considered community property. In a community property state, any property Henry owns at death will go to his spouse by right of survivorship.

In a community property state, Henry's earnings from his job subsequent to the date of his marriage will be considered community property. Only property acquired after marriage is considered community property unless separate property acquired before marriage is later commingled with community property. Community property does not have a right of survivorship feature. Also, spouses can own property in their sole names in a community property state.

Which one of the following is correct regarding Medicaid? Medicaid eligibility begins at age 65. You must be retired in order to qualify for Medicaid. It is a government health insurance program designed for individuals with low income or minimal assets.

It is a government health insurance program designed for individuals with low income or minimal assets. Medicaid is a government health insurance program designed for individuals with low income or minimal assets regardless of age or employment status.

Which one of the following correctly describes the federal gift tax annual exclusion? It applies to completed gifts of whole or partial interests and present or future interests. It allows a donor to completely avoid tax liability on a qualifying transfer of any amount. It is available only to gifts made by married donors. It is the maximum amount of present interest gifts allowed to be transferred free of gift taxes per donee per year or the actual amount given to the donee, whichever is less.

It is the maximum amount of present interest gifts allowed to be transferred free of gift taxes per donee per year or the actual amount given to the donee, whichever is less. The federal gift tax annual exclusion is the maximum amount of present interest gifts allowed per donee per year or the actual amount given to the donee, whichever is less, and that amount of the gift to be free of gift taxes. To qualify for the federal gift tax annual exclusion, a donor must make a completed gift of a present interest, which may be either a whole or partial interest. An example of a partial interest would be the income recipient of an irrevocable trust. A completed gift of a future interest does not qualify for an annual exclusion. This exclusion amount is available regardless of marital status. If the amount given is less than the maximum annual exclusion amount, the donor can only exclude the actual amount given. For example, if the amount given is $8,000, only $8,000 is excluded. The maximum amount is indexed annually for inflation, but only changes in $1,000 increments. (LO 8-9)

Which one of the following statements regarding different forms of property co-ownership is correct? Joint tenancy with right of survivorship (JTWROS), tenancy by the entirety (TBE), and community property (CP) are all forms of co-ownership that can be used by a husband and wife. JTWROS, TBE, and CP are all forms of co-ownership that do not require a probate proceeding when one tenant dies. JTWROS, TBE, and tenancy in common are all forms of co-ownership that require the consent of other co-owners before an owner can sell his or her interest in the asset.

Joint tenancy with right of survivorship (JTWROS), tenancy by the entirety (TBE), and community property (CP) are all forms of co-ownership that can be used by a husband and wife. JTWROS can be used by anyone, including spouses; only spouses can use TBE and CP. (LO 8-8)

To understand the long-term care (LTC) market, a financial planner must be familiar with the wide array of financial products designed to serve the unique needs of this market. As such, which one of the following statements is correct? Because of medical screening, healthy people without a preexisting condition who want to purchase LTC now but may potentially suffer from Alzheimer's disease in the future cannot obtain a qualified LTC policy. Payments from a qualified LTC policy paying a $330/day charge of an LTC facility will be income-tax-free. Practically all current long-term care policies provide for all levels of care—skilled, intermediate, custodial, and/or home care—if the patient needs assistance with two of the six activities of daily living. Policies issued today generally require an individual to be eligible for Medicare nursing home benefits prior to receiving any insurance policy benefits.

Payments from a qualified LTC policy paying a $330/day charge of an LTC facility will be income-tax-free. Payments from a qualified LTC policy are income tax-free up to the per-day limit for policies that pay per diem benefits. The per-day cap on tax-free LTC benefits cannot exceed $370 (for 2019). While many LTC policies cover all levels of care, many provide only for home care or exclude any care provided outside of a long-term care facility. Policies sold in states that have adopted the National Association of Insurance Commissioners' Long-Term Care Insurance Model Regulation must cover Alzheimer's). Although medical screening might prevent a person with Alzheimer's disease from purchasing an LTC policy, it cannot prevent a healthy person from purchasing an LTC policy in states that have adopted the model regulation (i.e., a qualified policy). Medicare is not much help in financing long-term care; it covers relatively intense care during a brief period of convalescence that follows a covered hospital stay. (LO 5-7)

Annette, a single taxpayer, has lived in her principal residence in Seattle for 18 months, and is relocating to another part of the country due to health reasons. She will have a gain of $400,000 on the sale. She will qualify for an exclusion of $300,000 ($400,000 gain times 18/24). She will qualify for an exclusion of $400,000, because the two-year rule is waived if the move is due to health reasons. She will qualify for no exclusion because she did not use the home as the principal residence for two of the last five years. She will qualify for an exclusion of $187,500 ($250,000 maximum exclusion times 18/24) on the sale of the home.

She will qualify for an exclusion of $187,500 ($250,000 maximum exclusion times 18/24) on the sale of the home. The general rule is that a single person may exclude up to $250,000 in the sale of the home, provided the home has been used as the principal residence for two of the previous five years. A partial exclusion is available if the two-year rule is not met due to health, job, or other unforeseen circumstances. The exclusion is the percentage of the two-year period that the principal residence test is met, times the full exclusion amount.

The vested accrued benefit in George's tax-sheltered annuity is $87,500. He has never taken a loan from the plan but is interested in building an addition to his home. Which of the following statements correctly describes George's option?

The amount of the loan would be limited to $43,750 and the term would be limited to five years. George wants to remodel, not purchase, his home. The amount of the loan cannot exceed 50% of the vested amount in George's account, and the term of the loan would be limited to five years. (LO 7-1)

When performing bond calculations, which of the following general assumptions should be made unless stated otherwise? he face value of the bond is $10,000. The coupon rate is annualized but paid semiannually for U.S. bonds. The coupon payment is made at the beginning of the period.

The coupon rate is annualized but paid semiannually for U.S. bonds. The face value of the bond should be assumed to be $1,000, not $10,000. The coupon rate is stated on an annual basis but is assumed to be paid semiannually for U.S. bonds and the coupon payment is always made at the end of the period, not the beginning. All bonds, even zero coupon bonds, are compounded semiannually. This makes all bond YTM quotes standardized for easy comparison. (LO 2-8)

Which one of the following is a characteristic of Treasury inflation-protected securities (TIPS)? The increase in principal is taxable each year. Their returns are tied to the producer price index. They are sold at a discount. They are issued with maturities up to 40 years.

The increase in principal is taxable each year. Any annual increase in principal is subject to federal taxation (unless in a tax-deferred account). Returns are tied to the consumer price index. TIPS are sold at par value and have maturities up to 30 years. (LO 2-2)

Frank is age 54 and married. Frank and his wife, Helen, have a daughter named Meredith attending college. Frank has been making salary reduction contributions to his employer-sponsored 401(k) plan for the past four years, and is considered a highly compensated employee. The current balance of his 401(k) account (nonforfeitable accrued benefit) of $21,500, which includes $3,500 account earnings. The plan provides for both hardship withdrawals and plan loans, and loans are available to all plan participants on an equal basis. Frank needs to use some of his plan assets to pay college tuition. Which of the following is a correct statement about how Frank could meet Meredith's college expenses?

The maximum plan loan Frank could take is $10,750. Frank can borrow up to 50% of the nonforfeitable accrued benefit of $21,500—i.e., $10,750. As long as loans are available to all plan participants on an equal basis, highly compensated employees may take loans. A hardship distribution from a 401(k) plan for education expenses would be subject to the 10% premature distribution penalty. (LO 7-1)

Which of the following is correct regarding the additional payroll tax for high wage earners that was brought about by the Affordable Care Act? The tax is split between the employer and employee. The tax applies to those with an AGI in excess of $500,000. The tax is 1.9%. The tax was designed to provide additional funding for Medicare.

The tax was designed to provide additional funding for Medicare. This tax is an additional Medicare tax. The 0.9% tax is employee paid and applies to high earners only (AGI in excess of $250,000 for joint filers and $200,000 for single filers, not indexed). (LO 3-1)

This year, your 63-year-old client had $17,025 of earned income and $30,000 of investment income. He was also drawing Social Security benefits. Which one of the following correctly describes the impact on his Social Security benefits? He loses $1 of benefits for every $1 above the "allowable limit." He loses $1 of benefits for every $2 above the "allowable limit." He loses $1 of benefits for every $3 above the "allowable limit." There is no reduction to his benefits.

There is no reduction to his benefits. The client's earnings (earned income) are below the allowable limit for the current year ($17,640 for 2019). Remember that according to the work penalty rule, only earned income is counted toward the "allowable limit." (LO 3-3)

Gift splitting allows

a married couple to double their allowable annual exclusions. Gift splitting is allowed only for married couples. It allows a non-donor spouse to become a "deemed donor" for half of the gift, and therefore permits twice the annual exclusions otherwise available for present interest gifts to third parties. Gift splitting does not apply to gifts from one spouse to the other spouse.

A Medicare Part A patient must pay all costs for a hospital stay beyond 150 days. the annual deductible for out-of-hospital doctor's services. all costs above the hospital deductible for a 30-day stay in a hospital. the approved costs of care in a skilled nursing facility for the first 10 days.

all costs for a hospital stay beyond 150 days. The patient must pay all costs related to a hospital stay beyond 150 days. Answer b. is wrong because it describes a gap in Medicare Part B coverage, not Part A. Answer c. is incorrect because it does not describe a gap; Medicare pays for the cost of the first 60 days in a hospital, but the patient must pay the Part A deductible. Answer d. is wrong because Medicare will pay the approved charges for the first 20 days in a skilled nursing facility. The gap results from the cost of care that exceeds 20 days (the patient pays the per day copayment) or the need for custodial care.

Which one of the following is a characteristic of the unified tax system that is not common to both federal gift taxation and federal estate taxation? availability of the marital deduction availability of an applicable credit amount availability of the charitable deduction availability of the annual exclusion amount

availability of the annual exclusion amount Federal taxation of wealth transfers allows an annual exclusion only for qualifying transfers. There are no similar exclusions for wealth transfers at death, only deductions for certain transfers and credits that apply against any tax that is due. (LO 8-9)

All of the following are ways that a person can voluntarily transfer estate assets to another person or entity at death except

by gift. Probate and will substitute are ways that a person can voluntarily transfer estate assets to another person or entity at death. Gifting is one of the two ways that a person can voluntarily transfer estate assets to another person or entity during life, not at death. (LO 8-9)

All of the following could stand alone as descriptions of the process of "estate planning" except planning for the conservation and distribution of the client's estate during life and at death. considering both tax and non-tax implications of estate transfer transactions. creating a will.

creating a will. "Creating a will" does not adequately describe the process of estate planning. Estate planning generally focuses on the conservation and distribution of the client's estate during life and at death and requires consideration of both tax and non-tax implications of estate planning transactions. (LO 8-7)

The basis that is used in determining gains from mutual funds sales may be calculated by using all of the following methods except the specific identification method. the average cost method. the first-in, first-out (FIFO) method. the last-in, first-out (LIFO) method.

the last-in, first-out (LIFO) method. The basis of mutual fund shares may be determined by using all of the methods listed except LIFO, which is not an option for mutual funds. (LO 8-1)

As a general rule, a Medigap insurance policy is designed to cover which one of the following Medicare-approved charges that are not paid by Medicare? Medicare Part D deductibles 100% of skilled nursing coinsurance Medicare Part B excess amounts deductibles or coinsurance amounts

deductibles or coinsurance amounts The costs not covered by either Part A or Part B of Medicare are referred to as Medicare gaps or Medigaps. Medigap insurance is designed to supplement Medicare's benefits by filling in some of what Medicare does not cover. A Medigap policy pays for Medicare-approved charges that are not paid by Medicare because of deductibles or coinsurance amounts for which the beneficiary is responsible. The cost and services covered by Medigap policies varies from vendor to vendor and from plan to plan. Some, but not all, Medigap policies cover such items as Part D deductibles, skilled nursing coinsurance amounts, and Medicare Part B excess amounts. (LO 5-4)

Which of the following are not used in technical analysis? moving averages graphs supply and demand of stocks financial statement ratios

financial statement ratios Moving averages, graphs and statistics regarding the supply and demand of stocks are used by technicians. Financial statement ratios are part of fundamental analysis. (LO 2-3)

A springing durable power of attorney

gives the attorney-in-fact authority only when the principal becomes incompetent. The very purpose of any durable power of attorney is to give the attorney-in-fact authority to act after the principal becomes incapacitated. However, such authority does not survive the principal's death. Such authority is created in an independent document (not part of a living will), and is effective immediately in this type of power of attorney. A springing durable power of attorney becomes effective when the principal becomes incompetent or incapacitated. (LO 5-2)

Mark, a financial adviser, has a client who has worked in two positions during his lifetime. The client's first position was not covered by Social Security but he is receiving a pension from that employment. His second position was covered by Social Security and he is eligible for Social Security retirement benefits. Mark should advise his client that any reduction in benefits resulting from his pension from his "uncovered position" will be reflected in his benefits estimate. any reduction in benefits resulting from his pension from his "uncovered position" will impact his spouse's survivor benefit. his eligibility for Social Security benefits may be reduced, or even eliminated, through the government pension offset provision (GPO). his eligibility for Social Security retirement benefits may be reduced due to the windfall elimination provision (WEP).

his eligibility for Social Security retirement benefits may be reduced due to the windfall elimination provision (WEP). If you have a client who has worked in a position that was not covered by Social Security, and the client is receiving a pension from that employment, his eligibility for Social Security benefits based on his own work history covered by Social Security may be reduced due to the windfall elimination provision (WEP). The government pension offset provision (GPO) impacts Social Security benefits owed to spouses, ex-spouses, or to survivor benefits. If he has one or more survivors entitled to a benefit, the Social Security Administration recalculates the benefit to omit the WEP, which results in a higher survivor benefit. Reductions due to the WEP are NOT reflected in Social Security benefit estimates. One way to differentiate between the two is focusing on the W in WEP. The W can remind you of worker. Thus, the WEP reduces Social Security retirement benefits based on your own work history. That leaves the GPO as the one that reduces a spousal Social Security benefit based on what the spouse is getting from a retirement plan based on employment that did not pay into Social Security (like public school teachers in several states).

Which one of the following is covered under Medicare Part A and Part B? most immunizations hearing aids most prescription drugs home health care

home health care Medicare Part A covers the following post-hospital home health care: 100 home health visits per benefit period. In general, Medicare Part A covers expenses such as inpatient hospital care, post-hospital skilled nursing care, post-hospital home health care, hospice care, psychiatric hospital care, and blood in excess of three pints. Medicare's Supplemental Medical Insurance (Part B) provides coverage for physicians' services and for the following services that are not already covered under Part A: home health care; medical services, which include physician services, therapist (physical, speech) services, supplies, and ambulances; outpatient hospital services; and certain costs for blood that are not covered by Medicare Part A. Medical expenses not covered by Part B include most routine physicals, most immunizations, eyeglasses (and eye exams), hearing aids (and hearing exams), cosmetic surgery, dental care, orthopedic shoes, and most prescription drugs. (LO 5-3)

Under the Affordable Care Act, "Platinum" plans offered on the exchanges vary in the services that they provide. how the insured and insurer share the costs of care. both a and b.

how the insured and insurer share the costs of care. Plans in each category (i.e., Platinum, Gold, Silver, Bronze, Catastrophic) all cover the same services. It is how the insured and the insurer share the costs of care that varies. (LO 5-1)

A lump sum payment of the proceeds of a life insurance policy that is made to the beneficiary upon the insured's deat

is generally exempt from income taxation. The lump sum proceeds of a life insurance policy (even if a MEC) paid to a beneficiary are generally exempt from taxation. Withdrawals and loans from a MEC may be taxable.

Sequence of return risk is thought to have the most potential impact on an individual who has

just retired and begun distributions from his or her account. If portfolio withdrawals occur during a time when investments are producing a negative return, the total value of the overall portfolio will be reduced at a faster rate than it would if returns were more favorable. Essentially, a bear market or period of market losses can significantly deplete the income-generating potential of a portfolio. This scenario is particularly detrimental to a person who is transitioning into retirement, because the ability of the portfolio to "catch up" during subsequent years is greatly diminished and the person's longevity risk will increase significantly. In other words, the shares redeemed to provide income will not exist in the future. Therefore, those shares cannot participate in any recovery and the newly retired person has a bigger chance of running out of money before passing away. This risk is not as destructive before retirement and if distributions are not being made. (LO 7-6)

Which one of the following is not a key element of an investment policy? the acceptable risk tolerance level a provision for periodic review a target asset allocation names of specific stocks to be in the portfolio

names of specific stocks to be in the portfolio The key elements in an investment policy are a clear statement of the client's goal, suitable investment vehicles and strategies, the acceptable risk tolerance level for the client, asset allocation guidelines, and a provision for periodic review. One way to remember the essential elements of an investment policy is the acronym GRASP (Goals, Risk, Asset Allocation, Strategies/Suitable Investment—meaning the investment categories that may or may not be used—and Periodic Review). Specific investments would be determined once the investment policy is created.

You have a client, age 56, who has decided to take early retirement. She would like to maximize distributions from her IRA without having to pay the 10% penalty tax on premature distributions. Which, if any, of the following words of advice should you give her? I. At age 59½, she can stop taking substantially equal periodic payments until age 70½, if she wishes. II. Use of the fixed annuitization method or the required distribution method will maximize the amount of substantially equal periodic payments she receives.

neither I nor II The client must take a series of substantially equal payments for the longer of five years (until age 61) or until she reaches age 59½, after which she can stop taking substantially equal periodic payments until age 70½, if she wishes. Of the three methods that may be used to calculate substantially equal periodic payments, use of the fixed amortization or fixed annuitization methods will maximize payments to your client. In contrast, use of the required distribution method will minimize payments to your client. (LO 7-4)

All of the following are correct statements regarding longevity annuities except owners can put no more than 25% of their retirement plan money into a longevity annuity with an overall cap of $130,000. accumulations in these annuities are exempt from minimum distribution rules. payments from longevity annuities are larger than those received from a regular annuity due to the delay in receipt of the annuity payments. owners must begin receiving income by age 75.

owners must begin receiving income by age 75. Owners must begin receiving income from a longevity annuity by age 85. All of the other statements are correct. (LO 4-5)

In order to be considered a "qualified" policy, a long-term care policy must include a determination of medical necessity by a physician. include a return of premium. provide for nonforfeiture options.

provide for nonforfeiture options. To be classified as a qualified policy, cognitive impairment must be covered, it must provide for nonforfeiture options, and it must be guaranteed renewable and conform to the National Association of Insurance Commissioners Model Act. It cannot include a determination of medical necessity by a physician nor can it include return of premium. (LO 5-7)

The valuation date for gifts is

the date on which the transfer is completed. The date of completion of the gift is the valuation date for gifts. (LO 8-9)

All of the following assets in a decedent's estate require probate except the decedent's interest in property held in tenancy in common. the decedent's interest in a family limited partnership. the decedent's interest in property held in joint tenancy with right of survivorship that the decedent left to his son in his will. the decedent's interest in property that he owned in fee simple when the decedent had no will.

the decedent's interest in property held in joint tenancy with right of survivorship that the decedent left to his son in his will. Right of survivorship property bypasses probate, while property held as a tenant in common or in which the decedent solely owned his interest does not.

What does Jensen's alpha tell you? the percentage of return that can be attributed to systematic risk the percentage a manager over or underperformed based on the amount of risk taken the percentage by which a manager beat the market the percentage of return that can be attributed to unsystematic risk

the percentage a manager over or underperformed based on the amount of risk taken Alpha is the percentage a manager over- or underperformed based on the amount of risk taken. The percentage of return that can be attributed to systematic risk is referred to as the coefficient of determination (R2). (LO 2-5)

All of the following assets would be included in a decedent's gross estate except

the proceeds from a life insurance policy on the decedent that was always owned by the decedent's spouse, with the spouse as the named beneficiary. Because the decedent never owned this policy, and his estate is not the beneficiary, these proceeds are not included in the decedent's gross estate. The decedent's retained right to income in option c. causes inclusion. The decedent owned an interest in the residence at death, and therefore his interest must be included in his gross estate. In option a., because the decedent assigned incidents of ownership in this policy within three years of death, the proceeds must be included in the decedent's gross estate. (LO 8-8)

Which one of the following is a correct statement about property that passes at death by the laws of intestate succession? the property passes by will substitute the property passes by means of the probate process the property passes by provisions in the decedent's will the property passes to the state where the decedent lives

the property passes by means of the probate process Intestate property passes by means of the probate process and not by will substitute. Property that passes by the laws of intestate succession is not affected by any will provisions. Intestate succession statutes give property to many other family members before transferring it to the state.

Reverse mortgages can be used for which one of the following purposes? to generate a monthly income guaranteed for life to guarantee a return of equity to the homeowners' survivors to generate additional income that does not need to be repaid to generate a lump sum that can be used to fund long-term care

to generate a lump sum that can be used to fund long-term care A reverse mortgage can be used to generate a lump sum that can be used to fund long-term care. Payments can continue for as long as the homeowner resides in their home—not necessarily until their death. Depending on the ultimate sale price of the home and the amount of equity that has been paid out, there may not be funds remaining for the beneficiaries. Reverse mortgage balances do not need to be repaid while at least one owner lives in the home, maintains it, and pays the taxes, insurance, and any HOA dues that are payable. But, when the home is no longer the primary residence due to moving or death, the balance is payable. (LO 4-8)

Which one of the following cannot achieve the estate planning goal of providing for incapacity? durable power of attorney trust disability insurance will

will A durable power of attorney and a trust can be used to manage the financial affairs of an incompetent person. Disability insurance can be used to replace income when an incapacitated person is no longer able to work. Because a will is only effective at death, it cannot be used for incapacity planning.