Series 65 - Unit 15 Quiz #1 & 2

Which of the following offers the opportunity to realize a capital gain rather than ordinary income? A) Section 529 plans B) Stock dividends C) Deferred annuities D) Cash dividends

B. Stock dividends

Your customer redeemed 200 of her 500 Kapco common shares without designating which shares were redeemed. Which of the following methods does the IRS use to determine which shares she redeemed? A) Identified shares B) Wash sale rules C) FIFO D) LIFO

C. FIFO

Which of the following is an example of a regressive tax? A) Gift tax B) Income tax C) Estate tax D) Sales tax

D. Sales tax

A customer who sold a bond at a loss must wait how long before he can buy back a substantially identical bond and not have the sale classified as a wash sale? A) 31 days B) 0 days C) 5 days D) 20 days

A. 31 days

A U.S. citizen purchases a bond issued by the government of Sweden. The interest payments received are taxed at which of the following levels? I. Federal II. State III. Local A) I, II, and III B) I only C) II and III D) II only

A. I, II, and III

For tax purposes, the sale of an investment at a profit will result in A) a capital gain. B) passive income. C) alternative minimum tax liability. D) ordinary income.

A. a capital gain.

Investors who buy shares in state-specific municipal bond funds may be subject to A) capital gains tax. B) no taxation. C) out-of-state property tax. D) federal income tax.

A. capital gains tax.

The alternative minimum tax (AMT) is assessed against A) high annual income earners and disallows some deductions and exemptions used to calculate adjusted gross income. B) all self-employed individuals. C) high annual income earners and gives them special deductions to take that lower income earners do not get. D) low annual income earners and allows special deductions for them to be taken.

A. high annual income earners and disallows some deductions and exemptions used to calculate adjusted gross income.

Using industry jargon, the tax on the last dollar of income is at A) the marginal rate. B) the final rate. C) the average rate. D) the effective rate.

A. the marginal rate.

Under current federal tax law, which of the following would have an effect on the amount of taxes your client would pay? I. Age II. Citizenship III. Marital status as of the last day of the year IV. Residency A) I, III, and IV B) I, II, III, and IV C) I and III D) II and IV

B. I, II, III, and IV Explanation Each of these can affect a client's tax rate. Taxpayers age 65 and older get an extra exemption, so that lowers their tax. If a client is not a U.S. citizen and is considered a nonresident alien, they are taxed somewhat differently than others. Only married persons can file a joint return, which usually—but not always—results in lower taxes. Residency determines if a client will also have to pay a state income tax and receive deductions for that (or a state sales tax) on their federal income tax. LO 15.a

Investors looking to minimize the effects of taxation on their investments would probably receive the least benefit from A) an S&P 500 Index fund. B) a corporate bond. C) an apartment building. D) a growth stock.

B. a corporate bond. Explanation When Investors receive interest income from corporate bonds, that income is fully taxable at ordinary income rates. Real estate ownership has certain tax benefits, such as depreciation and a deduction for operating expenses. Index funds are known for their high tax efficiency, and investors in growth stocks anticipate long-term capital gains, which are taxed at a lower rate than ordinary income. LO 15.b

An advisory client of yours discusses a business project she is involved with where the partnership is using accelerated depreciation to maximize losses in the early years. It would be prudent of you to inform the client that A) accelerated depreciation leads to a reduction in the partnership's cash flow. B) accelerated depreciation could trigger the alternative minimum tax. C) a maximum of $3,000 in losses can be taken against ordinary income in any year. D) a maximum of $3,000 in losses can be taken against passive income in any year.

B. accelerated depreciation could trigger the alternative minimum tax.

A loss derived from a limited partnership may be offset against income from A) bonuses received in addition to a regular salary. B) other limited partnerships. C) dividends received from common stocks. D) capital gains from municipal bonds.

B. other limited partnerships.

Which of the following statements regarding taxation is not true? A) Passive income is derived from rental property, limited partnerships, and enterprises in which an individual is not actively involved. B) Portfolio income includes dividends, interest, and net capital gains derived from the sale of securities. C) Earned income includes salary, bonus, and income as an owner of a limited partnership. D) Items that must be added back into taxable income for calculation of the alternative minimum tax (AMT) include accelerated depreciation on property placed in service after 1986; local taxes and interest on investments that do not generate income; and incentive stock options exceeding the fair market value of the employer's stock.

C. Earned income includes salary, bonus, and income as an owner of a limited partnership.

Last year, an investor had a $5,000 loss after netting all realized capital gains and losses. This year, the investor has a $1,000 capital gain. After netting his gains and losses, what will be his tax situation this year? A) He will have a $1,000 gain. B) There will be no tax consequences. C) He will offset $1,000 ordinary income this year. D) He will have a $1,000 loss to carry over to the next year.

C. He will offset $1,000 ordinary income this year. Explanation Only $3,000 of last year's loss can be deducted against that year's income. Therefore, the losses carried forward from the previous year are the remaining $2,000. These losses are netted against the gain of $1,000 for a net loss of $1,000. That loss can be used to offset $1,000 of ordinary income. There are now no longer any losses to carry forward. LO 15.c

If a client has realized a capital gain from the sale of a municipal bond, to reduce tax liability, the capital gain can be offset against a capital loss in which of these? I. GOs II. Equity securities III. Corporate bonds IV. REITs A) I only B) II and III C) I, II, III, and IV D) I and II

C. I, II, III, and IV

The term earned income would include A) alimony received as part of a divorce decree executed on January 15, 2019. B) the death benefit from a variable life insurance policy. C) a bonus paid as a result of your division exceeding its goals. D) the death benefit from a variable annuity policy.

C. a bonus paid as a result of your division exceeding its goals.

An investor purchased 500 shares of stock on January 10, 2020, at $50 per share and sold it on August 4 of the following year for $40 per share. As a result, the investor realized A) a long-term capital gain. B) a short-term capital gain. C) a long-term capital loss. D) a short-term capital loss.

C. a long-term capital loss.

The alternative minimum tax (AMT) is designed to ensure that certain high-income taxpayers do not avoid all income tax. This is done by adding back to the taxpayer's ordinary income, items such as accelerated depreciation and excess intangible drilling costs. The term used to describe these items used to arrive at the taxpayer's alternative minimum taxable income (AMTI) is A) AMT taxable items. B) tax preferred items. C) tax preference items. D) Form 6251 items.

C. tax preference items.

One of your clients buys 300 shares of RIF common stock in March at $25 per share. Three months later, the client purchases 200 shares of RIF at $30 per share. One month later, RIF pays a dividend of $1 per share. Then, five months later, another purchase of RIF is made—this time 400 shares at $35 per share. If the client were to sell all RIF at $30 per share, what is the client's capital gain or loss? A) $500 gain B) No gain or loss C) $400 gain D) $500 loss

D. $500 loss Explanation The investor's total cost is $27,500 for the 900 shares purchased. The proceeds of the sale are $27,000 (900 × $30). That results in a capital loss of $500. The cash dividend has nothing to do with capital gain or loss. LO 15.c Regarding dividends, they are not part of the capital gain or loss calculation. Dividends are taxed as ordinary income or qualified dividends, depending on the holding period and other factors. They do not affect the cost basis of the shares or the proceeds from the sale.

Which of the following statements regarding the alternative minimum tax is true? A) The tax bracket will determine whether the regular tax or the alternative tax is paid. B) The lesser of the regular tax or the alternative tax is paid. C) The alternative minimum tax is added to the regular tax. D) The excess of the alternative tax over the regular tax is added to the regular tax.

D. The excess of the alternative tax over the regular tax is added to the regular tax.

Taxation is an important part of investment planning. In general, it is correct to state that a taxpayer's effective tax rate A) is based on a different tax table than the marginal tax rate. B) and the marginal tax rate are the same. C) is more important than the marginal tax rate when considering tax-deductible contributions. D) is lower than the marginal tax rate.

D. is lower than the marginal tax rate.

Owners of private activity municipal bonds might find themselves A) receiving less interest than with a similar GO bond. B) in violation of MSRB rules if proper disclosures are not made. C) taking an extraordinarily high risk. D) subject to the alternative minimum tax.

D. subject to the alternative minimum tax.

Investors who are subject to the alternative minimum tax (AMT) will lose the tax benefits normally associated with A) losses on options positions. B) capital losses. C) gains associated with variable annuity portfolios. D) tax preference items.

D. tax preference items.