Unit 21 Series 65 tax
Which of the following offers the opportunity to realize a capital gain rather than ordinary income? A) Stock dividends B) Deferred annuities C) Cash dividends D) Section 529 plans
A Stock dividends, unlike cash dividends, are not taxable in the year of receipt. Instead, they reduce the owner's cost basis and, when sold at a price above that cost basis, are treated as capital gain rather than ordinary income. Deferred annuities never generate anything but ordinary income, and qualified withdrawals from Section 529 plans result in no taxation on the earnings. If they are not qualified, there is ordinary income tax plus a penalty.
An example of an interest-on-interest reinvestment program is A) reinvesting the dividends distributed on a bond fund B) interest left to compound on a bank-insured certificate of deposit C) reinvesting the earnings on a bond UIT D) reinvesting the interest received on a bond
B
A Schedule K-1 would be received by an individual with an ownership interest in all of the following except A) a partnership. B) an LLC. C) a C corporation. D) an S corporation.
C
Under the current gift tax marital deduction, how much can an individual give a spouse who is a U.S. citizen without incurring a gift tax? A) No more than $15,000 per year B) No more than $152,000 per year C) No more than $30,000 per year D) An unlimited amount
D The gift tax marital deduction permits an individual to give a spouse an unlimited amount of property without incurring a gift tax. However, if the spouse is not a U.S. citizen, the maximum marital gift is $155,000 (2019).
Each of the following could cause an investor to be subject to the alternative minimum tax EXCEPT A) accelerated depreciation taken on certain property B) interest received on private activity municipal bonds C) excess intangible drilling costs D) interest received on school district GO bonds
D
Sally Sherman purchased 100 shares of Chocolate Manufacturers Corporation for $19 per share on February 12. She received a 10% stock dividend on May 18. She sold all of her CMC at $13 per share in June of the same year. What were her tax results? A) $470 short-term loss B) $575 short-term loss; $105 long-term gain C) $575 long-term gain, $105 short-term loss D) $575 long-term loss
A Sally paid $1,900 for 100 shares and sold 110 shares for $1,430 (13 at 110). Because the transactions all took place in less than a year, the transaction was a short-term loss
Three years ago, a customer bought 200 shares of ABC for $60.50 per share. Upon her death, she left the shares to her husband when ABC was trading at $98.25. If her husband sells the shares for $99.25, what is his cost basis for tax purposes? A) $99.25 B) $60.5 C) $98.25 D) $79.38
C
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) 20 days B) 5 days C) There is no waiting period D) 31 days
D
A loss derived from a limited partnership may be offset against income from A) bonuses received in addition to regular salary B) dividends received from common stocks C) capital gains from municipal bonds D) other limited partnerships
D
A Schedule K-1 would be received by an individual with an ownership interest in all of the following except A) an LLC. B) a partnership. C) an S corporation. D) a C corporation.
D C corporations pay tax on their earnings; the other business types listed here flow through the income to their owners. The owner's share of income (or loss) is reported to them on the Schedule K-1. A shareholder in a C corporation who receives dividends will have that reported on a Form 1099.
Which of the following is federally tax exempt for a corporation? A) Municipal bond interest B) Capital gains C) Foreign corporate stock dividends D) Preferred stock dividends
A
Ebony sets up a revocable trust, naming her daughter, Sylvia, as the sole beneficiary. Ebony has appointed the Pacific Atlantic Trust Institution (PATI) as the trustee. Any income to the trust will be taxable to A) the beneficiary B) the grantor C) the trust D) the trustee
B
Which of the following is not included in adjusted gross income on an individual's federal income tax return? A) Income from a sole proprietorship B) State income tax refunds C) Stock dividends D) Wages and tips
C
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 loss to carry over to the next year. B) There will be no tax consequences. C) He will offset $1,000 ordinary income this year. D) He will have a $1,000 gain.
C 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.
For tax purposes, the sale of an investment at a profit will result in A) passive income B) alternative minimum tax liability C) ordinary income D) capital gain
D
Question ID: 1181398 The alternative minimum tax becomes a consideration when a taxpayer has so-called tax preference items. Included in that definition is A) interest from U.S. Treasury bonds B) overtime pay from a job C) tips received while working at a restaurant D) interest from private activity bonds
D
Using industry jargon, the tax on the last dollar of income is at A) the effective rate B) the average rate C) the final rate D) the marginal rate
D
Which of the following statements regarding taxation is NOT true? A) 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. B) Passive income is derived from rental property, limited partnerships, and enterprises in which an individual is not actively involved. C) Portfolio income includes dividends, interest, and net capital gains derived from the sale of securities. D) Earned income includes salary, bonus, and income as an owner of a limited partnership.
D
Which of the following statements regarding grantor trusts is NOT correct? A) If the grantor can control the beneficial enjoyment of the trust, he is treated as the owner of the trust. B) If the grantor has the power to revoke the trust, he is treated as the owner of the trust. C) If the grantor can receive income from the trust, he is treated as the owner of the trust. D) The grantor may be taxed on trust income only if the grantor actually received the income.
D As long as the grantor has the power directly or indirectly to control the trust, he is treated as the owner. The grantor may be taxed on trust income if the grantor either actually or constructively receives the income
One of your ultra-high net worth clients would like to give some low cost basis stock as gifts to her adult grandchildren. It would be prudent for you to tell her that A) it would be wise for her to use a TOD account to avoid probate. B) for purposes of the gift tax, her cost basis will be used. C) making the gift under the Uniform Transfer to Minors Act is generally the most advantageous for the child. D) unlike an inheritance, there is no stepped-up cost basis.
D One of the benefits of inheriting low cost basis securities is the stepped-up basis and that does not apply to gifts. Although the donor will not be the one subject to capital gains tax, it would be the right thing to do to let her know that the donees (her grandchildren) will be receiving the stock at her cost basis. TOD would not apply to stock that is the subject of a gift; it is only when the stock remains in the grandmother's name and has been designated for the grandchildren after her death. When computing the value of a gift to determine if there is a gift tax obligation, it is the fair market value of the gift that is used. Finally, the question states these are adult grandchildren - UTMA would not apply to them.
An investor inherits 1,000 shares of the ABC Global Growth Fund when NAV is $9.50 and POP is $10.00 and elects to receive all distributions in cash. Two years later, sells all when NAV is $14.25 and POP is $15.00. What are the tax consequences of this sale? A) Long-term capital gain of $5,000 B) Long-term capital gain of $4,250 C) Long-term capital gain of $5,500 D) Long-term capital gain of $4,750
D Upon death, the beneficiary inherits mutual funds at their NAV ($9.50). Sale (redemption) takes place at the NAV ($14.25) for a profit of $4.75 per share (times 1,000 shares).
A taxpayer's marginal tax rate is A) the rate of tax paid on margin account interest B) the rate of taxation on any additional taxable income received C) the rate of tax paid on total taxable income D) generally lower than the effective tax rate
B
All of the following are progressive taxes except A) estate taxes. B) excise taxes on cigarettes. C) gift taxes. D) personal income taxes.
B
Oscar and Hilda, a married couple, are collecting Social Security. They speak to their financial planner for advice on taxation of those benefits. At what level do their benefits become subject to income tax? A) When 50% of their benefits added to all their other income, including tax-exempt interest, exceeds $25,000 B) When 50% of their benefits added to all their other income, including tax-exempt interest, exceeds $32,000 C) When 50% of their benefits added to all their other income, excluding tax-exempt interest, exceeds $25,000 D) When 50% of their benefits added to all their other income, excluding tax-exempt interest, exceeds $32,000
B
The alternative minimum tax (AMT) A) is assessed against high annual income earners and gives them special deductions to take that lower income earners do not get. B) is assessed against low annual income earners and allows special deductions for them to be taken. C) is assessed against high annual income earners and disallows some deductions and exemptions used to calculate adjusted gross income. D) is assessed against all self-employed individuals.
C
There are many sources of taxable income to an individual. Included might be money received from which of the following? Sole proprietorship Subchapter S corporation Investments Life insurance death benefit A) I, II, and III B) I and II C) I, II, III, and IV D) II and III
A
There are many sources of taxable income to an individual. Included might be money received from which of the following? Sole proprietorship Subchapter S corporation Investments Life insurance death benefit A) I, II, III, and IV B) I, II, and III C) I and II D) II and III
B
would be least likely for dividends paid on which of the following investments to meet the requirements to be considered qualified? A) Equity mutual funds B) REITs C) Preferred stock D) Common stock
B
Benefits of structuring a business as a general partnership would include A) that general partners are only liable to the extent of their investment B) the ability to raise large sums of money C) longevity D) avoidance of taxation at the entity level so the partners are not taxed twice
D
Which of the following statements regarding the alternative minimum tax is TRUE? A) The lesser of the regular tax or the alternative tax is paid. B) The alternative minimum tax is added to the regular tax. C) The tax bracket will determine whether the regular tax or the alternative tax is paid. D) The excess of the alternative tax over the regular tax is added to the regular tax.
D
Under current tax law (2019), how much can a married couple give to their adult son and his wife without incurring a gift tax obligation? A) $60,000 B) $15,000 C) Unlimited D) $30,000
A
Dr. Howard dies. Which of the following life insurance policies will be included in his gross estate? Policy I—owned by Dr. Howard; he is the insured and his wife is the beneficiary. Policy II—owned by Mrs. Howard; she is the beneficiary. Policy III—originally owned by Dr. Howard; Mrs. Howard is the insured and he gave the policy to his daughter 5 years ago. Policy IV—owned by Dr. Howard; Mrs. Howard is the insured and he is the beneficiary. A) I and II B) I and IV C) I, II, III, and IV D) II and III
B
One of the benefits of owning a home is the tax treatment of a sale of a primary residence. Under current IRS regulations, A) a married couple is permitted to exclude the first $500,000 of gain as long as the proceeds are reinvested in another home. B) a married couple is permitted to exclude the first $500,000 of gain. C) a married couple is permitted to exclude the first $250,000 of gain. D) all gains from the sale of a primary residence are excluded from taxation.
B As long as the requirements are met, a married couple is permitted to exclude the first $500,000 of gain on the sale of a primary residence. The exclusion for singles is $250,000. Years ago, the gain was deferred if the proceeds were reinvested in a new home, but that no longer applies.
vestors looking to minimize the effects of taxation on their investments would probably receive the least benefit from A) a growth stock B) a corporate bond C) an apartment building D) an S&P 500 index fund
B 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.
Which of the following statements about capital gains are TRUE? The minimum holding period required to qualify for long-term capital gains treatment is 1 day longer than 12 months. The highest federal income tax rate on long-term capital gains is less than the highest federal income tax rate on ordinary income. If an investor holds stock for 12 months or less and has no other transactions, any gain on the sale of the stock is taxed at the same rate as ordinary income. A) II and III B) I and III C) I, II, and III D) I and II
C
When comparing the tax treatment of C corporations, S corporations, and LLCs, it would be CORRECT to state that A) all 3 of these have the same tax filing date B) only the C and S corporations offer the benefit of "flow-through" C) registered personnel opening a brokerage account for any of these would follow similar suitability procedures D) the C corporation is the only one that pays taxes
D
If an employed client has $12,000 of capital gains and $15,000 of capital losses in the most recent taxable year, how much unused loss, if any, is carried forward by the client to the following tax year? A) $0.00 B) $15,000.00 C) $3,000.00 D) $12,000.00
A
Which of the following statements about the gift tax annual exclusion are TRUE? The annual exclusion is the amount that an individual may give to other individuals each year without incurring a gift tax. The annual exclusion is currently (2019) set at $15,000. A separate annual exclusion is available for each donee. A) I and III B) I, II, and III C) I and II D) II and III
B
When looking at an individual's income statement, which of the following would be included? A) Stocks and bonds B) Alimony C) Child support D) Jewelry
B An individual receiving alimony as part of a divorce decree entered into prior to January 1, 2019, must report that as income for tax purposes. The ex-spouse paying the alimony treats that as a deduction from income. There are two problems here. First, we're not told which side this individual is on—paying or receiving the alimony. Second, if we are doing a profile for a client, the receipt of child support is considered income in terms of figuring any discretionary income, even though it is not taxed. But, NASAA doesn't always think of these things so we have to give them the answer the way they want it.
Jean owns a $1 million life insurance policy on her mother, Clara. Jean is named as sole beneficiary, and so far she has paid $150,000 in premiums. If Clara dies, which of the following will occur? The proceeds will be exempt from income tax. $850,000 of the proceeds will be subject to income tax. The proceeds will be included in Clara's estate for estate tax purposes. The proceeds will not be included in Clara's estate. A) II and IV B) II and III C) I and IV D) I and III
C
Which of the following is not included in adjusted gross income on an individual's federal income tax return? A) Income from a sole proprietorship B) State income tax refunds C) Stock dividends D) Wages and tips
C Stock dividends (dividends paid as additional shares of stock rather than in cash) adjust the investor's cost basis and don't come into play until the stock is sold.
Many different investments offer the opportunity to reinvest income. If one were to compare the difference between interest-on-interest reinvestment plans and dividend and capital gain reinvestment plans, A) in the case of interest on interest plans, taxes are deferred until liquidation B) in both cases, all income is deferred until liquidation C) in the case of dividend and capital gains reinvestment plans, taxes are deferred until liquidation D) in both plans, all income is taxable in the year received, whether reinvested or not
D
If a married couple establishes a JTWROS account with a balance of $25 million and the wife dies, what is the husband's estate tax liability? A) He pays federal estate taxes only on the amount that exceeds the estate tax credit. B) He pays federal estate taxes on $12.5 million. C) He pays federal estate taxes on the entire balance. D) He pays no estate tax.
D Establishing a joint tenants with right of survivorship account allows for the transfer of assets to the survivor upon death. The surviving spouse is not taxed on assets transferred in this manner because under current tax law, there is an unlimited marital deduction.
The alternative minimum tax is designed to ensure that certain high-income taxpayers do not avoid all income tax through the use of various tax preference items. Those preference items are added back to the taxpayer's ordinary income on IRS Form 6251 and would include A) intangible drilling costs in connection with an oil drilling program. B) long-term capital gains in excess of $3,000 annually. C) straight-line depreciation taken on investment real estate. D) interest received from specified private purpose municipal revenue bonds.
D The Internal Revenue Code provides that interest on specified private activity bonds is an item of tax preference. Therefore, this interest must be added to a taxpayer's regular taxable income in order to compute the taxpayer's AMTI. Accelerated depreciation and excess intangible drilling costs are preference items. In the real world, it is not only those with high incomes that are caught by the AMT, but the exam is not likely to go that deep.
egarding the treatment of estates by the IRS, it would not be correct to state any of the following EXCEPT A) the maximum tax rate on estates is the same as that on gifts B) estates may be valued either at date of death or 9 months later using the alternative valuation option C) income received by the estate is reported on Form 1040 D) a deceased person may reduce the value of the estate by taking advantage of the annual gift tax exclusion
A
If an investor is in the highest federal income tax bracket and is subject to the alternative minimum tax, which of the following securities should an agent recommend? A) General obligation bond B) Treasury bond C) Corporate bond D) Industrial revenue bond
A
An advisory client of yours dies in 2019, and you transfer the $1.4 million of securities in the individual's name to the estate account. You will A) continue to manage the account unless the advisory contract called for termination upon death or informed otherwise by the executor B) inform the executor that you need to keep sufficient liquid funds in the account because estate taxes will be due in 6 months C) notify the executor of the estate that he is able to do any trades to rebalance the account, and that taxes will be of no consideration D) tell the executor that he will be receiving a Form 1099 for tax purposes, representing the transfer of account over to the estate account
A
There are number of potential sources of income to a client that would have to be reported on their Form 1040 tax return. Among them could be all of these EXCEPT A) death benefit received from a life insurance policy B) ownership of stock in an S corporation C) operation of a sole proprietorship D) interests in a DPP
A
Which of the following statement(s) regarding gift taxes for a gift made in 2019 are TRUE? Gifts of $15,000 per person per year can be given without a tax liability. Gifts in excess of $15,000 per person per year may be subject to tax. The donor, not the recipient, is responsible for any tax liability. The tax rate increases with the size of the gift. A) I, II, III, and IV B) III and IV C) I and II D) II and III
A
A complex trust has the following income for the year: $1,500 in taxable interest, $2,000 in dividends (reinvested in the stock), and $3,000 in tax-exempt interest. In addition, the portfolio realized $3,500 in capital gains that were reinvested in the corpus. What is the distributable net income (DNI) for the trust? A) $4,500 B) $6,500 C) $1,500 D) $10,000
B
A client buys 100 shares of a mutual fund on December 28, 2016, for $4,000 and receives a capital gains distribution of $2.40 per share on March 6, 2017, which is taken in cash. He sells his 100 shares for $4,300 on June 19, 2017. For tax purposes, this transaction will result in A) a $240 long-term capital gain and a $60 short-term capital gain B) a $60 short-term capital gain C) a $300 short-term capital gain D) a $240 long-term capital gain
C
If a father makes a gift of securities to his 10-year-old daughter, gift taxes would be based on A) the market value of the securities as of April 15 of the year in which the gift is made B) the cost of the securities C) the market value of the securities on the date of gift D) the market value of the securities as of December 31 of the year in which the gift is made
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 GOs equity securities corporate bonds REITs A) I, II, III, and IV B) I and II C) I only D) II and III
A
Question ID: 1180312 A man divorces his spouse after 10 years of marriage and remarries. If the man is the sole provider, what part of the worker's Social Security benefits is the new spouse entitled to? A) She is entitled to the same Social Security benefits as the ex-spouse. B) The new spouse is entitled to more benefits than the ex-spouse. C) She will be entitled to the same Social Security benefits as the ex-spouse after 10 years of marriage. D) The new spouse is entitled to splitting the benefits with the ex-spouse.
A When an individual remarries, the new spouse is entitled to full Social Security benefits. As long as the previous marriage lasted at least 10 years, that ex-spouse (if not remarried) is also entitled to full benefits. That means it is possible for 2 people to receive full benefits at the same time.
A customer buys 100 XYZ at $30. Two years later, with the stock trading at $70, the customer makes a gift of the securities to his son. Which of the following statements are TRUE? For gift-tax purposes, the value of the gift is $3,000. For gift-tax purposes, the value of the gift is $7,000. The son's cost basis on the stock is $3,000. The son's cost basis on the stock is $7,000. A) I and IV B) II and III C) II and IV D) I and III
B
Investors who are subject to the alternative minimum tax (AMT) will lose the tax benefits normally associated with A) gains associated with variable annuity portfolios. B) tax preference items. C) capital losses. D) losses on options positions.
B
One of your very generous clients has used up her lifetime gift exclusion. Continuing to make gifts, she gives $50,000 to a grandchild and $18,000 to the child of a friend. What are the tax consequences of these gifts? A) The tax rate on both gifts will be the same. B) The tax rate on the $50,000 gift will be higher than that on the $18,000 gift. C) If the children use the money for tuition at a qualified educational institution, there is no tax. D) Only the gift to the child of the friend will be taxed because one can make unlimited gifts to grandchildren.
B Gift taxes and estate taxes are progressive. The tax rate starts at 18%, and a gift of $50,000 (using the $15,000 annual exclusion to reduce the taxable amount to $35,000) is taxed at 22%. Although the test will not ask you for the specific rates, we have used them here for illustration. The relationship (or lack thereof) between the donor and the donee is of no importance. If the gifts had been made directly to a qualified educational institution instead of the children, there would have been no tax.
A U.S. citizen owns stock in a Canadian company and receives dividends. The Canadian government withholds 15% of the dividends as a tax. As a result, the investor reports A) a reduction in the investor's ordinary income B) a tax credit on the investor's Canadian tax return C) a tax credit on the investor's U.S. tax return D) a nonrecoverable loss on the investor's U.S. tax return
C
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) a maximum of $3,000 in losses can be taken against passive income in any year. B) accelerated depreciation leads to a reduction in the partnership's cash flow. C) accelerated depreciation could trigger the alternative minimum tax. D) a maximum of $3,000 in losses can be taken against ordinary income in any year.
C
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) Wash sale rules B) LIFO C) FIFO D) Identified shares
C
William died in 2019 with the following assets and liabilities: $200,000 in securities left to his wife, $650,000 home left to his wife (the home cost $150,000), $250,000 life insurance policy with his daughter named as beneficiary, and $75,000 in debts and estate expenses. What is William's net estate? A) $0; it is below the $11.4 million exemption equivalent B) $750,000 C) $175,000 D) $625,000
C The market value of all assets that William has an incident of ownership in will be included in the gross estate. All assets left to the spouse and the debts/expenses are allowable reductions to arrive at the net, or taxable estate. In this case, the $1.1 million gross estate is reduced by the $850,000 left to his wife and then by the $75,000 in debt and expenses. That leaves a net estate of $175,000. That is well below the estate tax exemption of $11.4 million in assets for 2019.
An individual purchased a variable life insurance policy 10 years ago with a guaranteed death benefit of $100,000. The annual premium for this policy was $2,000 per year. The individual dies and, due to outstanding performance of the separate account, leaves a death benefit to the beneficiary of $121,000. What are the income tax consequences to that beneficiary? A) No tax is due. B) Ordinary income tax is due on the $1,000 that exceeds the original cost. C) There is a long-term capital gain of $1,000. D) Ordinary income tax is due on $21,000.
One of the nice things about life insurance proceeds is that even when the death benefit is increased due to separate account performance, it is still free of income tax.
If a father makes a gift of securities to his 10-year-old daughter, gift taxes would be based on A) the market value of the securities on the date of gift B) the market value of the securities as of December 31 of the year in which the gift is made C) the cost of the securities D) the market value of the securities as of April 15 of the year in which the gift is made
A
ade Kimmons purchased 200 shares of ABC common stock on March 9, 2009, paying $32 per share. Since the date of the purchase, Mr. Kimmons has received $518 in dividends. With the stock selling for $89 per share on July 27, 2016, Wade gives all 200 shares to his niece, Kendra. One week later, Kendra sells all of the ABC stock for $85 per share. The tax consequences of this are A) short-term capital loss of $800 B) long-term capital gain of $10,600 C) long-term capital gain of $11,118 D) long-term capital loss of $800
B hen securities are the subject of a gift, the donee (recipient) acquires the donor's cost basis and holding period. That means that Kendra's cost was $32 per share and the holding period was over 7 years. That is a gain of $53 per share or a total of $10,600, and it is long term. The dividends have nothing to do with the question.
Grandma has decided to give her grandson some stock that she bought many years ago. When the grandson sells the stock, how is the tax liability figured? A) Her cost basis and date of purchase is used. B) Her cost basis is used, but the holding period begins on the date of the gift. C) Her date of purchase is used, but the cost basis is from the date of the gift. D) Both the cost basis and holding period are determined from the date of the gift.
A
An investor purchases 100 shares of ABCE common stock at $70 per share. Thirteen months later, the stock is sold when the market price is $50 per share. Which of the following activities made 20 days after the sale of the stock at $50 per share, would NOT violate the wash sale rule? A) Purchasing 5 ABCE convertible bonds with a conversion price of $50 B) Purchasing an ABCE call option C) Purchasing an ABCE put option D) Purchasing 100 shares of ABCE common stock
C The wash sale rule applies when the same or substantially identical security as a stock sold at a loss is acquired within the 30 day period prior to and after the sale. Buying a put is not a problem because the put only allows the holder to sell the stock, not buy it. Please note that a bond convertible at $50 is convertible into 20 shares, so 5 bonds will enable the investor to convert into 100 shares.
A deceased client's trust account has over 90% of its value invested in a single common stock whose recent performance has been outstanding, resulting in a very large unrealized capital gain at the time of death. What action would most likely be taken by the investment adviser handling this account? A) Selling all of that stock in order to rebalance the trust's assets B) Continuing to hold that stock position if it is felt that it meets the objectives of the trust C) Exchanging a portion of that stock for a suitable security held in the adviser's trading account D) Liquidating a portion of that stock to take advantage of the tax savings offered by the stepped-up basis at death
D Under current tax law, a beneficiary inherits assets at their fair market value as of the time of death. This is known as a stepped-up basis (probably because these assets are generally at a higher price than when originally purchased). In this question, we are told that there is a large unrealized gain. Therefore, with a portfolio that is overconcentrated in 1 security, it would make sense to diversify while, at the same time, avoiding or minimizing capital gains taxes. It would be against the provisions of the UPIA for a fiduciary to ever engage in trading from his own account.
Grandpa bought 100 shares of XYZ common stock 10 years ago for $10 per share. The stock split 2 for 1 several years ago and grandpa gave all of the stock to his grandson when the price per share was $20. Three months ago, grandpa passed away and left the grandson another 100 shares of XYZ that had been purchased one month earlier at $25 per share. At the date of death, the XYZ stock had already climbed to $30 per share. If the grandson sells the XYZ stock for $35 per share, the taxable consequences would be A) $2,500 long-term capital gain plus $1,000 short-term capital gain. B) $6,000 long-term capital gain plus $500 short-term capital gain. C) $4,000 long-term capital gain. D) $6,500 long-term capital gain.
D Gifted stock carries the donor's cost basis. In this case, 100 shares at $10 per share is $1,000. The stock split means there are now 200 shares, but that doesn't change the total cost basis. When that stock is sold at $35 per shares, the proceeds of $7,000 exceed the cost basis by $6,000, all of which is long-term capital gain. Inherited stock receives a stepped-up basis. That is, the cost basis is at date of death. In this case, the cost per share is $30. When that 100 shares is sold at $35 per share, a $500 profit is realized. In one of the quirks in the Internal Revenue Code, stock received as an inheritance always has a long-term holding period, even when, as in this question, the actual holding period was short-term. Adding the $6,000 of gain from the gift and the $500 of gain from the inheritance gives a total of $6,500 long-term capital gain.
A Form K-1 would NOT be used for tax reporting to the owners by which of the following business entities? A) Sole proprietorship B) LLC C) Limited partnership D) S corporation
A
Which of the following is an example of a regressive tax? A) Sales tax B) Gift tax C) Estate tax D) Income tax
A
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? Federal State Local A) II and III B) I, II, and III C) I only D) II only
B
When are estate taxes due? A) 9 months after valuation B) 6 months after valuation C) 9 months after death D) 6 months after death
C
An estate planning tool that may be used to take advantage of the lifetime estate tax exclusion is the A) complex trust B) testamentary trust C) living trust D) bypass trust
D
