CFP Simulated exam

At their current rate of repayment, how many months will the Loudons need to pay off their car loans? 50 months 53 months 55 months 57 months

On a financial calculator, enter PV = $40,000 I/YR = 5.25 / 12 PMT = 9,600 /12 as the end-of-period payment and as a negative number to show it as an outflow Solve for N, which is 57 months.

Harry Thomas bought a newly issued six-year zero-coupon, 11% annual bond with a par value of $1,000. He paid $534.64 for the bond. How much income must Harry report for federal income tax purposes during the second year of this bond's life? $42.09 $65.28 $79.78 $86.11

Solution: The correct answer is B.

Which of the following statements concerning the coverage provided by the Loudons' homeowners policy is (are) correct? The Loudons carry too much coverage on the dwelling. The policy provides all-risks/replacement cost coverage on the dwelling. The policy provides all-risk replacement cost coverage on contents. (1) only (2) and (3) only (1) and (3) only (1) and (2) only Solution

Solution: The correct answer is D. The Loudons only need to carry $135,000 of coverage since their land is valued at $25,000. $150,000 is too much coverage. HO-3 policies provide all-risks/replacement cost coverage on the dwelling and actual cash value coverage on the contents. An HO-5 policy provides all-risks/replacement cost coverage on the contents.

If Dennis Loudon died on December 31st last year, what would have been the value of the assets subject to probate in his estate?

The probate assets would include assets owned by Dennis but would not include any portion of the jointly owned assets. The probate estate also would not include life insurance and IRA assets, which would be paid to beneficiaries directly, by reason of contractual obligations. The probate estate for Dennis would include the money market fund of $5,200, the certificate of deposit of $5,000, the stock valued at $8,800, the partnership interest valued at $160,000, and the boat valued at $12,000. The total would be $191,000. Editor's note: Know the difference between the Gross Estate and Probate Estate. You can find an infographic posted under Additional Resources.

The 5 and 5 powers

allow the holder of the power to exercise a general power over the greater of 5% or $5,000 of the trust assets. The aim of this technique is to give the holder some power to invade the trust for the holder's benefit while still avoiding the gift and estate tax consequences of a lapse of a general power. The 5 and 5 power can be combined with a Crummey power, but it is the Crummey power that makes a contribution to a trust a present interest gift and eligible for the annual exclusion.

Sprinkle provisions

allow the trustee to exercise discretion in making allotments of income or principal to the beneficiaries. These provisions do not affect the gift tax consequences of the gifts to the trust.

Designated Beneficiary

any individual designated as a bene by the employee, that is not an eligible designated bene

Crummey provisions in a trust

change a future interest gift into a present interest gift that will be eligible for the gift tax annual exclusion. The Crummey provisions give the beneficiaries of the trust the right for a limited time to withdraw the contributions from the trust, so the child is given a present right to enjoy the trust assets. This present interest meets the requirements for the gift tax annual exclusion so gifts up to the annual exclusion amount ($15,000 in 2021) are not taxable.

for an exchange to qualify for the tax benefits of a like-kind exchange, the property exchange must be

held for investment or in a trade or business An exchange of stocks, bonds, business inventory, and partnership interests are specifically excluded from eligibility for like-kind exchange treatment.

Joint and Last Survivor Annuity

is more expensive than a single life annuity because the life expectancy for two people is generally greater than one

An investor will buy a put for

protection against a market drop. The buyer of the put acquires the right to sell the security at the given price, so the value of the put will increase if the market declines, and the investor is protected. A bullish investor will buy a call or sell a put.

partnerships are not

tax paying entities and pass through their income and losses to the partners

NUA treatment will cause

the cost basis of the employer stock to be taxed as ordinary income, while the appreciation is a deferred long-term capital gain to be taxed upon sale of the employer stock. Since Julian is under age 59½, the amount taxed as ordinary income will also be subject to the 10% penalty tax. He is also separated from service prior to age 55, so the exception for separation from service will not apply. The additional $80,000 that is not in employer stock can be rolled into an IRA to maintain the tax deferral.

The efficient frontier shows all portfolios that offer

the highest rate of return for a given degree of risk or, conversely, the lowest degree of risk for a given rate of return.

When the client's situation changes,

the planner must determine which step in the planning process he or she must return to first. If the parties to the engagement or the scope of the engagement have changed, the planner would return to the agreement. If the scope has not changed, the planner should determine if a return to the engagement agreement is appropriate, and so on.

Eligible designated beneficiary (EDB)

- surviving spouse - child of IRA owner who has not reached majority (at age of majority becomes a designated bene) - chronically ill individual - any other individual who is not more than ten years younger than the employee or IRA owner

The limit on employer contributions to a money purchase okay is

25% of compensation or $58k but for an owner- employee the max money purchase plan contribution to a Keith plan is 20% of net earnings. The adjustment to the percentage is computed by the formula: Plan contribution %/1 + plan contribution % OR 25/1.25 = .2 or 20%

an immediate annuity for 50 yr old vs 60 year old

50 year old is more expensive due to the long life expectancy

what is the most restrictive type of coverage disability

Any occupation is the most restrictive type of coverage because the insured will receive no benefits if he or she can hold any job. Sarah's disability policy only pays 50% of her monthly gross salary. Since the premium payments are split between Sarah and the employer, benefits would not be 100% income-tax-free.

mortgage refinance

Begin by computing the new monthly payment for principal and interest. On a financial calculator, the PV is $114,845 (that is, the $111,500 unpaid balance plus 3% of that unpaid balance*). The 3% is the points on the new mortgage referenced in the case facts under Economic Information. The new N is 180 (that is, 15 × 12). The new I/YR is .5417% (that is, 6.5% ÷ 12). The end-of-period payment is thus $1,000.4233. Next, use the amortization function to determine how much of the second payment will be applied against principal. For example, if you use the HP-10B II, press 1, INPUT, shift, AMORT, =, =, =, 2, INPUT, shift, AMORT, and =, to produce the answer, $380.3956. NOTE: From the case facts under Economic Information*: Lenders are requiring three "points" for mortgage loans. The points are added to the amount of the loan.

If Julian were to take a $10,000 distribution from his IRA to pay for Carla's college tuition, which of the following best describes the tax treatment? $10,000 taxed as ordinary income, plus a 10% penalty $3,333 tax-free and $6,667 taxed as ordinary income, plus a 10% penalty $10,000 taxed as ordinary income $3,333 tax-free and $6,667 taxed as ordinary income Solution

Julian has $40,000 of nondeductible contributions out of a total IRA value of $120,000, which equals 33%. Any distributions are prorated for return of basis, so he will receive $3,333 income-tax-free, and the remaining $6,667 will be taxed as ordinary income. The 10% penalty is waived due to use for qualified higher education expenses

what is the most generous type of disability coverage

Own occupation is the most generous type of coverage because the definition is the most stringent. If the insured does not fit the very narrowly defined specifics of his or her occupation, then the insured can collect benefits and continue to work in another area if need be. Therefore, collecting disability and a salary. For example, a surgeon injures their hand, cannot perform surgery, but can teach at a local college in their medical program.

Paul DiGiacomo is 48 years of age and has a successful law practice. Paul is risk tolerant and has been aggressive in his investments. He has set up investment accounts with his CFP® professional that have been allocated 80% in stock and 20% in bonds. Paul has also set aside a separate fund of $50,000 for more speculative investments. Paul would like to invest a portion of the money from this fund in a company that he has heard is working on an important new product. Paul expects the product to make large profits for the company if it is successful. If the product is not successfully developed, then the company will lose money and may fail. So either this company's ship comes in or it sinks. What should the CFP® professional recommend as a technique for Paul's investing in this company? Buy a straddle Buy a call Create a collar Buy the stock and sell a call Solution

Solution: The correct answer is A. A long straddle is a combination of buying a put option and a call option on the same stock and is used when a very volatile market is expected. In this case, the investor expects widely different outcomes, so the straddle provides the possibility of gain from either outcome. The client can gain from the call if the new product is successful, and the client can gain from the put if the new product is a failure. The client will only lose with the straddle if the stock does not rise or fall much. A collar is created by selling a call and buying a put. The collar is used typically when an investor wants to lock in a price and does not expect the stock to move much higher. The investor locks in the gain by purchasing the put, and the investor gains premium income from selling the call. The collar strategy would not be recommended to the client in this case because if the product is successful, the investor will lose money from the sale of the call. Similarly, buying the stock and selling a call will not provide gains if the stock rises substantially. The purchase of a stock and sale of a call is only designed to make the investor a small gain and premium income. It provides little protection against the possibility that the new product is unsuccessful.

A client is concerned about losing health care coverage at the time he changes jobs. The CFP® professional can advise the client that under COBRA, an employer will not be required to provide continued health insurance coverage for all qualified beneficiaries under the plan in which of the following circumstances? The employee fails to pay 102% of the cost of coverage. The employee becomes entitled to Medicare benefits. The employee's child ceases to be a dependent under the plan. The employee becomes insured under another medical care plan that excludes preexisting conditions.

Solution: The correct answer is A. An employer can require a former employee or beneficiary to pay 102% of the cost of the coverage. If the employee or beneficiary fails to pay the premium, coverage can be terminated. Coverage can also be terminated when an employee or beneficiary becomes covered under another plan unless the new plan excludes preexisting conditions. In that case, the employee must be permitted to continue coverage for the period provided under COBRA. A child ceasing to be a dependent is one of the qualifying events that triggers COBRA coverage for qualified beneficiaries. Another qualifying event is an employee becoming entitled to Medicare benefits. Once the employee is eligible for Medicare, their spouse and dependents are able to choose COBRA to continue benefits.

Question Assume that the initial margin requirement for the purchase of securities is 60%, and the maintenance margin requirement is 35%. An investor wishes to buy 1,000 shares of Redneck Corporation stock, currently selling for $24.25. In this situation, which of the following statements is correct? (Ignore all transaction costs.) If the investor buys the stock on margin, he or she will be borrowing $9,700 from the broker. If the investor buys the stock on margin, he or she will be borrowing $14,550 from the broker. If the investor buys the stock on margin, he or she will be borrowing $15,762.50 from the broker. If the stock's market price rises to $27.50, a margin call will be made by the broker.

Solution: The correct answer is A. An initial margin requirement of 60% means that 60% of the purchase price is paid in cash, and 40% is borrowed from the broker: 1,000 × $24.25 × .4 = $9,700 borrowed B is incorrect because it assumes an initial margin requirement of 40%: 1,000 × $24.25 × .6 = $14,550 C is incorrect because it uses the maintenance margin requirement, not the initial margin requirement, to compute the amount borrowed: 1,000 × $24.25 × .65 = $15,762.50 D is incorrect because an increase in the market price of the stock will not trigger a margin call; only a substantial decrease in the stock's market price will do so. Only if the stock's market price declines below $14.92 will the maintenance margin requirement be violated because at a price of $14.92, the requirement is still barely met. $14,920 - $9,700 = $5,220 $5,220 ÷ $14,920 = .35

Steven Myers, age 47, is married and has two children and is President of Myers Associates, Inc., a graphic arts design company. Steven has consulted a CFP® professional for comprehensive financial planning. The CFP® professional has obtained documents from Steven concerning his employee salary and benefits at his company. The Myers company has a disability income plan which provides long-term disability coverage for its employees. Under the plan, the company pays half of the premium, and the employee pays half. Steven Myers, who has an annual income of $90,000, is insured under the plan for replacement of one-half of his monthly income. If Steven Myers is disabled and receives Social Security disability benefits of $12,000 during the year, how much of this $12,000 will be includible in Steven's gross income for federal income tax purposes? None 0-50% 50-85% 50-100%

Solution: The correct answer is A. Generally, for a taxpayer who files a joint return and whose "combined income" (AGI + foreign income + tax exempt income + ½ of Social Security benefits) is above $32,000, up to 50% of Social Security benefits are included in income. If a MFJ taxpayer's combined income exceeds $44,000, up to 85% of Social Security benefits may be subject to taxation. In this case, Steven Myers will have to report one-half of the $45,000 he will receive as disability income insurance benefits because his employer paid one-half of the premiums. Since his combined income will be only $22,500 + $6,000 (which is ½ of his Social Security benefit), for a total combined income of $28,500, he will be below the $32,000 minimum and none of the Social Security benefits will be included in his gross income.

Richard Peterman retired at age 65 and began taking distributions from his IRA. In case of his death, Richard would like to name a beneficiary for the IRA assets so that income taxes will be deferred as long as possible. If Richard dies in the next year, the start of distributions can be deferred longest when Richard names which of the following beneficiaries? His spouse, who is age 62 His child, who is age 41 His brother, who is age 57 His grandchild, who is age 10

Solution: The correct answer is A. If an IRA owner has begun receiving distributions and dies before the entire interest is distributed, the distributions to a eligible designated beneficiary or a designated beneficiary must start no later than December 31st of the year following the owner's death. Answer choice A is correct. The spouse, however, has the option of rolling over the IRA assets into his or her own account and treating the IRA assets as his or her own. Richard's spouse would not need to begin distributions until the year after she reaches age 72. (SECURE Act 2019). She could delay payments for 10 years if Richard died while she was age 62. Answer choice B is incorrect. His child is not a minor and is greater than 10 years younger and would be considered a designated beneficiary and would need to take the full balance by the 10th anniversary of Richard's death. Answer choice C is incorrect. Although Richard's brother is less than 10 years younger than him, he would not be eligible to roll the IRA to his own and delay distributions. He would need to start distributions the year after Richard dies. Answer choice D is incorrect. Only a minor child of the the account holder can be considered a designated eligible beneficiary (or non-eligible designated beneficiary) until they are the age of majority. The grandchild would need to take the full balance by the 10th anniversary of Richard's death. Editor's Note: The eligible/designated beneficiary has the ability to roll over qualified plans (not IRAs) to an inherited IRA. However, the non-eligible designated beneficiary must still take distributions starting the year after death from the inherited IRA and must distribute the account balance by the 10th anniversary of the account owner's death.

Steven Myers, age 47, is married and has two children and is President of Myers Associates, Inc., a graphic arts design company. Steven has consulted a CFP® professional for comprehensive financial planning. The CFP® professional has obtained documents from Steven concerning his employee salary and benefits at his company. The Myers company has a disability income plan which provides long-term disability coverage for its employees. Under the plan, the company pays half of the premium, and the employee pays half. Steven Myers, who has an annual income of $90,000, is insured under the plan for replacement of one-half of his monthly income. Which of the following statements concerning the Myers company disability income plan is correct? The company could provide the disability income plan for its executive employees only and pay the entire premium for each executive. If Steven Myers is totally and permanently disabled, he will receive a tax credit to reduce the impact of taxes on the disability income. If Steven Myers is totally and permanently disabled and receives benefits under the company disability plan, the benefit payments will be fully taxable income. If Steven Myers is totally and permanently disabled in an accident, he will receive benefits equal to his monthly income.

Solution: The correct answer is A. Long-term disability income plans are not subject to nondiscrimination rules, so such plans may be provided for only a select group of executives. The tax credit for disabled persons is available only for persons of low income. Steven Myers has income over the maximum for this credit. If Steven Myers receives disability benefits, they will be one-half taxable income because the employer pays half of the premium. Steven's plan will only pay him 50% of his monthly salary if he should become disabled for any reason.

Following the collection and analysis of the client's financial information, a CFP® professional prepares a comprehensive financial plan for her client. At their next meeting, the CFP® professional presents the recommendations, and then at the conclusion of the presentation, the CFP® asks for feedback from the client. After a moment, the client begins to express some concerns about the budgeting issues and the savings that will be required. The CFP® professional wants to find out more about the client's concerns. Which of the following responses would be most appropriate for the CFP® professional to employ? Reflection-of-feelings response Interpretive response Suggestive response Explanatory response

Solution: The correct answer is A. Reflection-of-feelings response is a technique a counselor uses during active listening to encourage additional discussion. The counselor responds to the client by attempting to reflect back to the client in words the underlying feelings presented by the client's statements of concern. The counselor communicates understanding and empathy for the client's distress. The other responses presented in this question are responses a counselor uses to signal that she is moving away from active listening and in a new direction beyond the client's statements.

Your client has just inherited $100,000 and has no need for the money until three years from now. She is debating between a CD that pays 6% per year, compounded quarterly, and a CD that pays 5.9%, compounded weekly. Which CD should she select? The one paying 6% compounded quarterly The one paying 5.9% compounded weekly It makes no difference because the interest earnings are the same. Neither, because a $100,000 CD is too risky

Solution: The correct answer is A. Use a financial calculator to convert the nominal annual rate to an effective annual rate. on the HP-10B II, press 6, shift, NOM%, 4, shift, P/YR, shift, and EFF%. The answer is 6.1364%. (Be sure now to reset the HP-10B II to one payment per year.) Comparable keystrokes for 5.9% compounded weekly will produce an effective rate of 6.0740%. Therefore, the CD with the 6% nominal annual rate is preferable. Alternatively, you can figure out which account would have a higher balance at the end of the three year period by inputting the following variables for the two investment options: CD that pays 6% compounded quarterly n = 3 × 4 = 12 i = 6/4 = 1.5 PV = 100,000 PMT = 0 Solve for FV, which is $119,562. CD that pays 5.9% compounded weekly n = 3 × 52 = 156 i = 5.9/52 = .1135 PV = 100,000 PMT = 0 Solve for FV, which is $119,351. The CD that pays 6% compounded quarterly is the better investment option due to the higher ending account balance. D is incorrect because a $100,000 CD can be FDIC-insured.

This question refers to the Loudon Case facts which can be located on the screen above. As you review the insurance coverages maintained by the Loudons, which of the following areas of concern should you point out to them? The need to add a scheduled personal property endorsement to their homeowners policy for jewelry The need for Sarah to add to her group life insurance the same settlement option as Dennis has on his whole life policy The need to replace the "own occupation" definition in both disability income policies with the "any occupation for which suited" definition, which is more liberal to the insured The need to decrease the deductible on the automobile policy Solution

Solution: The correct answer is A. A is correct because the endorsement will provide open-perils (all-risks) coverage for the full value of Sarah's jewelry. The HO-3 covers jewelry for only $1,500 if the loss is due to theft. B is incorrect. A life-income option pays only as long as the beneficiary is alive. Although it provides the most periodic income per $1,000 of death proceeds, it would provide nothing for the children or others if either beneficiary should die soon after the insured. A pure life-income option is inappropriate for either policy. C is incorrect because the own occupation definition is more liberal to the insured (though more expensive) than the any occupation for which suited definition. D is incorrect because their automobile deductible is already low at $250.

A CFP® professional is reviewing tax documents provided by a client for her various business interests. The CFP® professional would expect to find estimated tax payments reported for all of the following, EXCEPT: Partnership Sole proprietor Corporation Trust

Solution: The correct answer is A. Partnerships are not taxpaying entities and pass through their income and losses to the partners. The partnership files an informational tax form (Form 1065). The partners file individual estimated tax reports and make individual estimated payments as part of their 1040 filing. Sole proprietors file individual estimated taxes, and corporations, trusts, and estates must pay estimated taxes.

Homeowners Insurance The Loudons have a homeowners HO-3 policy, providing $150,000 of coverage on the dwelling. The personal liability coverage has a $100,000 limit, and medical payments coverage has a $1,000 limit per person. The premium is included in their monthly mortgage payment. Automobile Insurance Both of the Loudons' cars are insured under a personal auto policy (PAP) with bodily injury liability limits of $100,000/$300,000 and a $50,000 limit for property damage liability. The medical payments coverage is $5,000 per person per accident. Uninsured motorist coverage is in the amount of $50,000 per accident. The deductible on their collision coverage is $250, and the deductible on the other-than-collision coverage is $250. Their annual premium is $1,100.' Umbrella Insurance At your recommendation, the Loudons purchased a personal liability umbrella policy with a $500 self-insured retention. The policy specifies that the Loudons must maintain in force a PAP with limits of at least $100,000/$300,000/$25,000 and personal liability coverage through their homeowners policy of at least $300,000. How much will be paid by the homeowners insurer and the umbrella insurer for the accident during a cocktail party at the Loudons? $100,000 by the homeowners insurer and nothing by the umbrella insurer $125,000 by the homeowners insurer and nothing by the umbrella insurer $100,000 by the homeowners insurer and $24,500 by the umbrella insurer Nothing by the homeowners insurer and nothing by the umbrella insurer

Solution: The correct answer is A. The Loudons did not carry the required underlying liability amount on their HO-3. Therefore, the umbrella insurer will pay only the amount for which it would have been liable - namely, zero - if the required amount had been carried on the HO-3 policy. The HO-3 insurer, on the other hand, is responsible for the loss, but only up to its $100,000 limit of liability. Note that the self-insured retention is irrelevant in this case. It applies only to losses not covered by an underlying policy, but covered by the umbrella policy.

Joy Linowitz is 72 years of age and has obtained financial planning from a CFP® professional who has recommended that she sell some of her bond portfolio for her current expenses. Which of the following transactions will result in the most interest income for Joy? Cash in the Series EE bonds she has held for 25 years Sell the corporate bonds she has held for 25 years Sell Series HH bonds she obtained from exchange of Series EE bonds purchased 25 years ago Sell U.S. Treasury bonds she has held for 25 years

Solution: The correct answer is A. The Series EE bonds accumulate interest until the bonds are cashed in, so the 25 years of interest will be received at the time the bonds are cashed. The corporate bonds, Series HH bonds, and U.S. Treasury bonds pay interest semiannually, so the amount of income received at the time of sale is only a part of a semiannual interest payment. Consequently, the income from the Series EE bonds will be much greater.

Peter Piper established a revocable living trust which provides for income to be paid annually to his wife Pat for life, and at her death, the corpus will be paid to their three children per stirpes. Peter's will was written before the trust was created and provided for a credit bypass trust with the residue going into a marital trust. Peter transferred to the revocable trust the title to three investment properties valued at $250,000 each and his $400,000 stock brokerage account. In addition, four years before he died, Peter transferred a $500,000 life insurance policy to the revocable trust and kept his wife as the designated beneficiary. Peter's home with his wife, valued at $300,000, was titled in tenancy by the entireties. Peter's account balance in a defined-contribution retirement plan through his employer was $400,000. Peter's wife is named as the beneficiary. Peter also had bank CDs with a combined value of $50,000, and he had a joint checking account worth $10,000 with his wife. Which of the following statements is correct if Peter dies today and his wife dies 10 months later? All assets passing under Peter's will go to the credit bypass trust. Peter's use of the revocable trust will help reduce his estate taxes. Peter's estate will avoid probate due to the revocable trust. Peter's life insurance policy will not be included in his gross estate since he transferred it four years before his death.

Solution: The correct answer is A. The only assets passing under the will are the CDs. Since they are less than the unified credit equivalent, Peter's entire estate passing under the will goes to the credit bypass trust. These CDs will require the probate process, so Peter's estate will not be able to avoid probate entirely. The $50,000 from the CDs will be the only assets to fund the credit shelter trust. These assets are passing to the children, subject only to a life estate in Peter's wife, so these assets do not qualify for the marital deduction. The revocable trust is, in effect, a bypass trust. The revocable trust does not reduce Peter's estate taxes because the assets are includible in Peter's gross estate. Revocable trusts are not used to reduce estate taxes, but to avoid probate. The life insurance policy will be included in Peter's gross estate because he transferred the policy to a revocable trust, rather than to an irrevocable trust. Editor's note: residue is a small amount of something that remains after the main part has gone or been taken or used.

A CFP® professional wants to review with a client the retirement benefits that will be provided by his employer. The client has provided documents showing a benefit under a nonqualified plan that will be funded by a rabbi trust. The CFP® professional wants to evaluate the likelihood of the client receiving benefits under this plan and the protections provided for benefits. Which one of the following provisions should the CFP® professional tell his client is not permitted under an effective rabbi trust? In the event of a merger or acquisition of the employer, the trust will become irrevocable. In the event of the employer's insolvency, the employer will make irrevocable contributions sufficient to pay required benefits. In the event of the employer's liquidation or bankruptcy, the plan assets will be available to the employer's creditors. The employer may make contributions in employer stock, and the trustee may be authorized to hold stock of the employer company.

Solution: The correct answer is B. A rabbi trust may not provide a solvency trigger, i.e., in the event of the employer's insolvency, the employer will be required to make irrevocable contributions sufficient to pay required benefits. The rabbi trust may provide that in the event of a merger or acquisition, the trust will become irrevocable or that the employer is required to make irrevocable contributions. In the event of the employer's liquidation or bankruptcy, the plan assets must be available to the employer's creditors. The employer may make contributions in employer stock, and the trustee may be authorized to hold stock of the employer company.

Assume for this question that the family maximum for retirement and survivor benefits under OASDI is $1,800 per month and that a worker retired at age 65 with a PIA of $1,300. If the worker later died at age 66, leaving a spouse, age 55; a dependent, unmarried child, age 17; and another dependent, unmarried child, age 15, what will be the spouse's monthly Social Security survivor benefits? $375 $600 $975 $1,300

Solution: The correct answer is B. A surviving spouse under 60 years of age, who is caring for a child under age 16, is entitled to Social Security survivor's benefit equal to 75% of the deceased worker's PIA. In this case, 75% of $1,300 is $975. Each dependent, unmarried child under age 18 is also entitled to 75% of the worker's PIA. Since the deceased is survived by two dependent, unmarried children under 18 years of age, there are three family members who are entitled to a $975 monthly benefit. Their combined monthly benefit would total $2,925, which would exceed the maximum family benefit of $1,800 by $1,125. Therefore, the total excess is divided by 3, to calculate the amount by which each family member's benefit must be reduced, to stay within the limit, or $1,125/3 = $375. The monthly benefit for the spouse and each dependent child is $975 - $375 = $600, for a total of $1,800 in benefits for the family per month.

An investor has a well diversified portfolio of investments but is worried about an unexpected decline in the stock market. She does not want to sell the investments and incur taxable capital gains, as well as transaction costs. Which of the following recommendations will be most helpful to this investor? Buy an index future. Buy an index put. Buy an index call. Sell an index put.

Solution: The correct answer is B. An investor will buy a put for protection against a market drop. The buyer of the put acquires the right to sell the security at the given price, so the value of the put will increase if the market declines, and the investor is protected. A bullish investor will buy a call or sell a put.

Clarissa is 85 years of age and a widow. She has made transfers of $14,000 to her daughter each year for the past 10 years as part of her gift and estate planning. Clarissa needs to enter a nursing home for her care and the average costs of nursing home care in her state are $5,000 per month. The home where Clarissa has applied will cost approximately the same as the state average. Clarissa has $77,000 of assets at the time of applying for and entering the nursing home and applying for Medicaid. How long before Clarissa will be eligible for Medicaid payment of her nursing home care? 24 months 29 months 43 months 60 months

Solution: The correct answer is B. Before Clarissa will be eligible for Medicaid, she must spend her assets for nursing home care except for $2,000. She will expend $75,000 for the first 15 months. At the end of the 15 months, she will be ineligible due to the transfers to her daughter of $14,000 in each of the 5 years before her application. The transfers will cause a penalty of 14 months. The transfers more than 60 months before her application will not result in a penalty period.

Bill Peabody is 42 years of age, and his wife Pat is 40. Bill is employed by an architectural firm that maintains a 401(k) plan for its employees. Bill has elected salary reduction of $800 per month, and his employer contributes 50 cents for every dollar contributed by employees. Bill will be 60% vested at the end of this year. Bill's wife Pat is not regularly employed outside the home but will earn about $3,200 doing substitute teaching. Bill's income for this year will be $130,000. What is the maximum amount of deductible contributions to IRAs that the Peabodys can make this year? Bill $6,000, Pat $6,000 Bill nothing, Pat $6,000 Bill nothing, Pat $3,200 Bill nothing, Pat nothing

Solution: The correct answer is B. Bill cannot make a deductible contribution to an IRA because he is an active participant in an employer-sponsored retirement plan and their AGI is above the phaseout range for the participant-spouse ($105,000 to $125,000 in 2021). His wife Pat can make a $6,000 deductible contribution to an IRA because their joint income is greater than $6,000 and less than $198,000 (2021).

Question Derek Bogart has consulted a CFP® professional for financial planning, and they have discussed education planning for Derek's 5 year old son. Derek wants to save for his son's college education but feels he cannot select a particular school to use for estimating costs. Instead, he has selected an amount that he wants to have available when his son is ready to start college at age 18. Derek thinks $200,000 will be a good education fund to set for a goal because he can supplement it, if necessary, out of current income or loans when his son is in college. Derek plans to invest the money in conservative investments that will earn about 6% annually and will not be taxable. The CFP® professional explains to Derek that while inflation might run about 3%, education costs are probably going to continue increasing at about 6% annually. Approximately what amount will Derek need to save each year for his son's college education fund? $9,900 $10,600 $12,900 $15,400

Solution: The correct answer is B. Derek's son will start in 13 years, Derek can earn 6% on the money while invested, and he wants a fund of $200,000. You will only need to account for inflation if you're trying to determine what the desired future amount needed for college is. In this case, that amount is stated as $200,000 so you don't need to inflate for future dollars. The client is choosing to save a flat amount and states he will supplement as necessary at the time he starts school. The keystrokes on a financial calculator are: 13, N 6, i 0, PV 200,000, FV Then, press PMT and the calculator will display 10,592.

If Julian decides to retire as planned and begin taking Social Security right away, what will be the impact on his Social Security benefits? His benefits will not be reduced since he has reached his full retirement age. His benefits will be permanently reduced by 25%. His benefits will be reduced $1 for every $3 of earned income he has over $48,600. His benefits are unlikely to be taxable.

Solution: The correct answer is B. Julian's full retirement age is 67 because he is 55 years age and in the age group born in 1960 or later. He plans to retire at age 63 and begin taking his Social Security at that time. This will result in a permanent reduction in benefits equal to 5/9 of 1% for the first 36 months that he retires before FRA, and 5/12 of 1% for each month in excess of 36 months, for a total permanent reduction in benefits of 25%.

A CFP® certificant has provided a client with financial planning services, including investments and income tax planning. The CFP® certificant is preparing an income tax return as part of the on-going services for the client and has been provided with the client's tax information. The client is single and has a salary of $55,000. The client has received dividends of $3,000 and has capital gains of $2,500. In addition, the client has a $35,000 loss on a residential rental unit that he owns and manages. What is the client's AGI? $25,500 $35,500 $55,000 $60,500

Solution: The correct answer is B. The AGI will include the client's salary, the dividends, and the capital gains. The client can also deduct above the line the amount of the loss on the residential rental unit but only up to a maximum of $25,000. The client can deduct the full $25,000 because the client's AGI is below $100,000. The client's AGI, therefore, will be $55,000 + $3,000 + $2,500 - $25,000 = $35,500.

Which of the following is not a factor in the determination of a client's retirement need? Taxes Risk preference Health Life expectancy

Solution: The correct answer is B. The calculation of retirement need requires a determination of the amount of income needed in the first year of retirement and then later years, based on life expectancy. The determination of the income need will include reduced taxes and other reduced expenditures for a retired person. Health will also be taken into account. Risk preference is not taken into account in determining retirement need; instead, risk preferences are part of the calculation of the amount to be saved each year and invested to reach the retirement need.

Sheryl Kramer inherited stock that her mother purchased for $25,000. At her mother's death, Sheryl lived in a community-property state with her husband David, and the stock was valued at $50,000. Two years later, the Kramers moved to a state that followed common-law principles of property ownership, and the stock was then valued at $60,000. Five years later, in 2021, the stock was valued at $100,000, and Sheryl gave the stock to the Kramers' two children. Sheryl and David agreed to split gifts. What is the amount of Sheryl's taxable gifts? $15,000 $20,000 $30,000 $50,000

Solution: The correct answer is B. The value of the gift is $100,000 on the date the gift is made. Sheryl and her husband split gifts, so Sheryl will report one-half of the gift, or $50,000. She can take one annual exclusion for each child, so the taxable gift is reduced by $30,000 to $20,000. Remember that for each child, Sheryl's husband will also take an annual exclusion on his gift tax return. Here is a more detailed breakdown: Gift value is 100k, each child gets 50k Sheryl gives: Child 1: 25,000 - 15,000 annual exclusion = 10,000 taxable gift Child 2: 25,000 - 15,000 annual exclusion = 10,000 taxable gift Sheryl's taxable gifts = 20,000 David gives: Child 1: 25,000 - 15,000 annual exclusion = 10,000 taxable gift Child 2: 25,000 - 15,000 annual exclusion = 10,000 taxable gift David's taxable gifts = 20,000

Brent (age 54) and Laurel (32) have been married for 8 years. In their home, they care for their 3 children, ages 9, 5 and 2 and Brent's 72 year old dad, Jared. Malynn, (age 60) is Brent's previous wife of 22 years. Malynn is not married and she and Brent share custody of their 2 high school sons, ages 16 and 18. Brent is currently and fully insured through Social Security. He plans to start drawing a benefit at age 62. Brent was in an accident performing home repairs and dies of his injuries. Which of the following statements concerning survivorship benefits is false? Laurel is eligible to receive a surviving spouse benefit because she is caring for their 3 children. Malynn is eligible for a surviving spouse benefit because she has joint custody of their 2 sons. Jared is eligible for a survivorship benefit because he is a dependent. The 2 sons are eligible for a survivor benefit because they are eligible age and in school.

Solution: The correct answer is B. Answer choice B is a false statement. Malynn not eligible for a benefit once the children are 16 or older unless they are disabled. Choice A is a true statement. Survivorship benefits are available to spouses and divorced spouses caring for a child whom is under age 16 or is disabled. Choice C is a true statement. Parent's of a deceased worker are eligible if the deceased worker was the primary means of support. Choice D is a true statement. A child of a deceased worker is eligible if unmarried, under age 18 or under age 19 if still in school, or age 18 or older and is disabled.

Margot and Benji Callyn are married and relocated to a new state 5 years ago. At that time, Margot was able to transfer her employment to the new state and she purchased their new residence fee simple. Ben continued to work in the old state for approximately a year while also trying to sell their family home. The old house sold for $260,000, their basis in the property was $170,000 and they were able to exclude the capital gain on the home. Their current home was purchased for $310,000. Their current city has been a hub for new construction development due to people relocating for a better quality of life. Based on demand in their area, they received an offer of $1.2 million for their home that sits on three acres of land. The Callyn's are concerned with the tax consequences if they decide to sell the property. Which of the following statements is false in qualifying for the exclusion of capital gains for a personal residence? The Callyn's are required to file married filing joint and meet the ownership and use test. The Callyn's do not qualify for the exclusion because Benji does not own the property. The Callyn's can qualify to claim the exclusion if they have lived in the property for the last 3 years. The Callyn's will qualify for the exclusion and will be responsible for capital gains on the sale of the personal residence. Solution

Solution: The correct answer is B. Choice B is a false statement. One spouse is required to own the residence for two of the previous 5 years. Choices A, C, and D are true statements.

During the year, Mr. Chambliss paid $1,800 in margin interest on his brokerage account. His brokerage records show that he realized $5,450 in long-term capital losses during the year, earned $2,400 in municipal bond interest, and had taxable interest income of $950. These were his only investment activities. His AGI was $85,000, and he had itemized deductions of $13,500 before considering his investment activities. How much investment interest can Mr. Chambliss deduct on his return? $0 $950 $1,450 $1,800

Solution: The correct answer is B. He can deduct the interest paid, to the extent of his investment income. That includes his taxable interest income of $950, but not his nontaxable municipal bond interest.

You are working with a 62-year-old client, Robert, concerning retirement distribution planning. Robert is concerned about his ability to maintain his lifestyle throughout his retirement years and is increasingly upset over the prospect of not having enough income to live comfortably. Your analysis shows that Robert has done an excellent job in saving for retirement and you wish to ease his fears during your next meeting. According to behavioral finance principles, which of the following is likely to be the best way for you to communicate Robert's situation to him? Explain that in order to meet his goals, he only needs to generate a 6% average return throughout his retirement years. Explain to Robert that based on your evaluation he can meet his goal of $50,000 of after-tax income while taking on only minimal risk. Explain to Robert that the Monte Carlo simulation predicts a 90% probability of success based on a moderately conservative portfolio with an average return of 6%. Recommend that Robert invest in a fixed income portfolio designed to generate a 6% return.

Solution: The correct answer is B. In behavioral finance, people tend to respond to the way information is framed or presented. For example, framing a statement that there is a "60% chance of gain" will often be interpreted as more favorable (choosing to go forward with the investment) than the exact same information being stated as a "40% chance of loss". In this case, the framing is in terms that are most relevant to the customer. He wants to know that he will have enough income. The rate of return is irrelevant to him, so framing the conversation around the return will not be meaningful and is unlikely to alleviate his fears. Telling the client that there is a 90% probability of success may have the effect of communicating more than Robert needs to know and may cause him to feel uncertainty rather than confidence in his situation.

A CFP® professional has been updating the income tax planning for the Wiggins, who have been clients for many years. The Wiggins' daughter Sally is 18 years of age and will go to college this year. While at college, she will get a job to earn some money. Sally will earn $4,350, and her parents will pay her support of $12,900. Sally will put $1,500 of her earnings in a money market fund. She will use the remainder of her earnings to pay her first semester tuition for $2,700. Which of the following statements concerning income tax planning for the Wiggins are correct? Sally's parents will get a qualified dependent (family) tax credit for her. Sally's parents will not get a qualified dependent (family) tax credit for her. Sally's earnings are subject to tax. Sally's earnings are not subject to tax. (1) and (3) only (1) and (4) only (2) and (3) only (2) and (4) only Solution

Solution: The correct answer is B. Sally's parents will not be able to take a dependency exemption for Sally because TCJA set them to zero for 2018 - 2025. The support includes the cost of education, but the tuition cost is $2,700, which is less than one-half of the total support. Although Sally's earnings are more than the income tax exemption amount of $4,300 in 2021, she is a full-time student under age 24, so her parents will be able to claim her as a dependent. Sally's earnings will not be subject to tax because she can take the standard deduction equal to her earned income plus $350, up to the maximum of $12,550 for 2021.

Question Ray and Susan DeMedio are 74 and 72 years of age and are finding their budget a little tight in retirement. The bonds that were to provide them with income are not earning as much interest as they used to earn so their cash flow is reduced. They would like some assistance in finding ways to increase their cash flow. They are also concerned about their granddaughter who is 5 years old and being raised by their daughter as a single parent. They want to help their granddaughter by setting up a life insurance policy that would provide the policy proceeds for the child's education and future expenses when they die. They do not want to be saddled with making premium payments but have $26,000 that they have set aside that could be used to buy the policy with a single payment. They would like the CFP® professional to recommend a policy and the best way to set up the life insurance. Which alternative would be the most appropriate for the CFP® professional to recommend to the DeMedios? Give the money to their daughter to arrange for the life insurance and make the premium payments. Purchase a second-to-die policy and establish a trust to receive the policy proceeds for the granddaughter. Purchase a whole life policy and name the granddaughter as the beneficiary. Purchase a 7-pay universal life policy that is a MEC with the proceeds payable to the daughter

Solution: The correct answer is B. The second-to-die policy does not pay the policy proceeds until the second death so the premiums are lower; alternatively, the DeMedios could buy a larger policy with their $26,000 if it is a second-to-die policy. In addition, establishing a trust will be a way to protect the proceeds for their daughter so the money is not expended inappropriately and is conserved for the child's education and future. If the money were given to the daughter, there would be a risk that the premiums might not get paid and the policy might lapse. If the granddaughter is named as the beneficiary, there is no safekeeping or supervision of the proceeds as there would be with a trust in which a trustee manages the assets. The management by a trustee would be helpful for the granddaughter. The use of a 7-pay policy is not consistent with the requests of the DeMedios to buy a single payment policy and not make additional premium payments. There is no important adverse effect of the policy becoming a MEC because the death benefit is not taxable income, but the best arrangement is not to have the proceeds payable to the daughter.

A CFP® professional has been reviewing income tax returns that a client has provided during their meetings. The CFP® professional observed that the client has in some years been required to pay AMT and appears likely to incur additional AMT in the future. In order to suggest ways that the client might avoid AMT in the future, the CFP® professional has selected ways that the client has been able to reduce the AMT in the past. Which of the following methods has the client been able to use to reduce the AMT that otherwise might have been required? Exercise ISOs Make charitable contributions Pay state income tax in advance Invest in private activity municipal bonds

Solution: The correct answer is B. Gifts to charity are deductible for both the regular income tax and the AMT, so charitable contributions will reduce the client's taxes even when AMT may otherwise be required. For example, state income taxes and real estate taxes will be added back, and miscellaneous itemized deductions are all added back. The payment of state income tax in advance, therefore, will not reduce AMT because the state taxes are added back. Exercising ISOs will result in additional AMT to the extent of the bargain element. Interest on private activity municipal bonds is taxable for AMT purposes.

Southside Video Productions, Inc. (SVP) has experienced a decline in its business and has filed for bankruptcy. While in bankruptcy, SVP terminated its defined-contribution pension plan and will distribute account balances to the plan participants. Arthur Melrose, who is 52 years of age and an employee of SVP, has an account balance of $100,000 in the SVP pension plan. Arthur has an outstanding loan of $40,000, and his account balance is security for the loan. SVP has requested repayment of the loan, and Arthur cannot repay it. Arthur has consulted you about the loan and the likely outcome for him. Which of the following statements concerning the SVP pension plan is appropriate to tell Arthur? Arthur's pension plan balance will be reduced by the amount of the loan, and Arthur can roll over the $60,000 balance into an IRA, without income tax liability. Arthur's pension plan balance will be reduced by the amount of the loan; the $60,000 balance can be rolled over into an IRA; and Arthur will incur income tax plus a 10% penalty on the amount of the loan. Arthur's pension plan balance will be reduced by the amount of the loan; he cannot roll over the balance; and he will incur income tax liability plus a 10% penalty on his $100,000 account balance. Arthur's pension plan balance of $100,000 will be rolled over without reduction for the loan, and he must make payments according to a reasonable schedule, with no additional income tax liability.

Solution: The correct answer is B. The defaulted loan is deemed a distribution that is subject to income tax and penalty. Even though the account balance is used to pay back the loan and the $60,000 balance is rolled over, the defaulted loan is deemed a distribution. Since Arthur is under age 59½, the distribution is subject to the 10% penalty. The TCJA does allow you to replace the loan amount in the rollover IRA up until the due date of the tax return (including extensions) for the year of the distributions, and be permitted to treat it as a rollover. For example, if Arthur's loan offset occurred in 2021 and he could come up with the $40,000 from some other account and add it to his rollover IRA before the due date of the tax return (October 15, 2022 if he files an extension), he could then avoid the tax and penalty.

Joseph and Florence Seltzer are 67 years of age and are retired. They have consulted a CFP® professional previously for retirement planning and want her assistance in arranging an investment for their son. The Seltzers' son is starting a business, and they want to help him by investing in the business. They will not be involved in the operation of the business, and their son will run the business. The business is projected to have losses for the first three years before becoming profitable. The Seltzers have some money in an investment fund that they can invest in the new business and have income from pensions, IRAs, Social Security, and other investments that will be sufficient for their needs. Which of the following forms of business should the CFP® professional recommend to the Seltzers? Corporation Partnership LLC Limited partnership

Solution: The correct answer is C. A limited liability company (LLC) will provide both the Seltzers and their son with the protection of limited exposure to liability losses and will allow for tax losses to flow through to them in the first three years of operations. The Seltzers will be able to take deductions for the losses on their income tax returns just as they would with a partnership or limited partnership (They may be subject to passive activity rules). The corporation form of business does not offer the flow through of losses to investors. The partnership form does not offer limited liability protection for the Seltzers or their son. The limited partnership form would provide protection from liability to the Seltzers but not to their son.

David and Lenore Amaya have two children enrolled in private colleges. Their son James is 20 is living on his own, and will be a junior; their daughter Kylie is 18 and will be a freshman. They have a third child who will be ready for college in two more years. David is a stock broker and earns $195,000 annually, and Lenore is a dentist and earns $135,000 annually. The Amayas' AGI is $350,000. James worked during the summer in a research lab and earned $15,000 for the summer and will earn an additional $6,000 during the school year, and this amount represents more than 50% of his support. Kylie worked at the swim club and earned $2,500. The college tuition and expenses for James are $35,000 annually but he has a partial scholarship for $10,000. Kylie will have college tuition and expenses of $38,000. The Amayas have set up a 529 plan for James that holds $20,000 and another 529 plan for Kylie that has $50,000. Which of the following methods should be used for paying the higher education expenses for the Amaya children? The parents should take the American Opportunity Tax Credit (AOTC) and both children can take distributions from the 529 plans The parents should take the Lifetime Learning Credit for James, AOTC and 529 plan distributions for Kylie James should take the AOTC; both children can take 529 plan distributions James and Kylie should take AOTC credits, and both children should take 529 distributions Solution

Solution: The correct answer is C. David and Lenore cannot take the AOTC or Lifetime Learning Credit because their AGI is above the phaseout level. James can take advantage of the AOTC due to the income he has earned to that covers more than 50% of his living costs. James can obtain reduction of his income taxes by claiming the AOTC. Kylie did not earn enough income to benefit from using AOTC, and her parents will benefit from using the qualified dependent credit for her. Distributions can be taken from the 529 plans, and James can use the 529 plan for the expenses above the amount needed to qualify for the credit.

A CFP® professional is helping William Schmidt with his retirement planning and is gathering information about his expected retirement. William turned 72 on July 22, 2021 and in continuing to work at the advertising firm where he has worked for 25 years. William wants to work until he is 74 and the employer is willing for him to continue working. William has a 401(k) plan in which he has a balance of $450,000 plus he has a 3.5% interest in his employer's stock through an ESOP. The current market value of the interest in the employer stock is approximately $200,000. William also has a traditional IRA to which he made deductible contributions and which is now worth $150,000. When must William begin to take distributions from his 401(k) and from the IRA? April 1, 2022 for both April 1, 2022 for the 401(k) and April 1, 2024 for the IRA April 1, 2022 for the IRA and April 1, 2024 for the 401(k) April 1, 2024 for both

Solution: The correct answer is C. Distributions from qualified plans must begin by April 1 of the year following the later of either (1) the year in which the employee turned 72 (2) the year the employee retires if the employee is not a 5% owner. In this question, the employee is a 3.5% owner so the distributions can be delayed until April 1 of the year following the year of retirement. The IRA distributions, however, must begin by April 1 of the year following the year in which the employee turns 72. Since William was 72 in 2021, his distributions from the IRA must begin April 1, 2022. William will retire when he is 74 in 2023, so the distributions from the 401(k) must begin April 1, 2024.

Elaine Anderson purchased five corporate bonds, each with a $1,000 par value, for a total of $4,225. The bonds have a ten-year maturity date and a 7% annual coupon rate, payable semiannually. If Elaine holds the bonds till they mature, what will be her annual yield to maturity? 4.65% 5.88% 9.43% 9.65% Solution

Solution: The correct answer is C. Enter -$845 as the PV (that is, $4,225 ÷ 5), 20 as the N (that is, 10 years × 2), $35 as the end-of-period payment (that is, $70 ÷ 2), and $1,000 as the FV. Solve for the interest rate, which is 4.714% per six-month period. Double this, to an annual basis of 9.43%.

Virginia Shotsky is 60 years of age and has worked with a CFP® professional to prepare a plan for retirement. Virginia had expected to retire at age 62, but she learned recently that she has pancreatic cancer and is expected to live no more than 24 months. Virginia has a substantial estate and is divorced. She has one daughter age 26. What actions can the CFP® professional recommend to reduce Virginia's estate? Give a cash value life insurance policy to charity Transfer a cash value life insurance policy to a trust for her daughter Set up an ILIT Make gifts to charity and to her daughter of marketable securities (1) and (3) only (2) and (4) only (4) only (1), (2), (3), and (4)

Solution: The correct answer is C. Gifts to charity of marketable securities will reduce the assets that will be included in Virginia's gross estate. Virginia will also be able to take an income tax deduction in the year of the gift to charity. The gifts to her daughter of marketable securities will not be brought back into the gross estate even though the taxable gifts are added back to the tentative tax base. The gifts of life insurance whether to charity or to her daughter will be brought back into the estate if Virginia dies within 3 years of the gifts, so those gifts are not likely to reduce her estate. The gift of life insurance to the charity will result in a tax deduction for the proceeds passing to the charity, so Virginia's taxable estate will be reduced. Since the same result can be accomplished simply by naming the charity or her daughter as the beneficiaries of these policies, there does not appear to be a good reason to transfer ownership of the policies for estate tax purposes. The ILIT is also unlikely to reduce Virginia's estate because any life insurance policy transferred to the trust within 3 years of death will be included in the gross estate. Virginia is unlikely to be able to get a new policy issued insuring her after having received the diagnosis of pancreatic cancer so she will not be able to set up an ILIT with a new policy.

Ian McClair is 45 years of age and his wife Sally is 42 years of age. They have two children ages 9 and 7. The McClairs consulted a CFP® professional primarily for education and investment planning but accepted the planner's suggestion that they undertake comprehensive financial planning. The McClairs had done no estate planning, and the planner recommended that they obtain wills. After the planner completed her presentation of the plan, Sally mentioned that she was going to be visiting her parents in Canada where she was born. The planner then asked whether Sally had become a U.S. citizen, and she answered that she had not. Ian stated that he was a U.S. citizen. What is the effect of Sally's citizenship on estate planning for the McClairs? If Sally dies first, her estate must use a QDOT to obtain a marital deduction. If Sally dies first, only a unified credit may be used by her estate. If Sally dies first, her estate can take advantage of an unlimited marital deduction. If Sally dies first, her estate will not be subject to estate tax in the U.S.

Solution: The correct answer is C. If Sally dies first, then Sally's estate will be entitled to take the unlimited marital deduction because Ian is a U.S. citizen. If Ian dies first, his estate will be required to use a QDOT to obtain a marital deduction because Sally is not a U.S. citizen. Sally's estate will be subject to estate tax in the U.S. because she is a resident of the U.S.

A CFP® professional has reviewed information provided by a client during data gathering on investments, income tax returns, and retirement accounts. The client is 50 years of age, married, and has two children. The client and wife have a modified AGI of $130,000 and file a joint income tax return. The CFP® professional observed that the client has invested in a real estate limited partnership that has generated losses of $8,000 last year, and the client has not taken any deduction for the losses. The client also owns an investment in residential real estate that the client manages and rents out. This investment produced losses of $12,000 last year. The client did not deduct those losses. What action should the CFP® professional recommend for the client? File an amended return and seek a refund for an additional $20,000 in deductions for losses. File an amended return and seek a refund for an additional $12,000 in deductions for losses. File an amended return and seek a refund for an additional $10,000 in deductions for losses. File an amended return and seek a refund for an additional $8,000 in deductions for losses.

Solution: The correct answer is C. Losses from the real estate limited partnership are passive losses that cannot be deducted against the client's active income. The losses from the residential real estate rented by the client can be deducted in part due to the real estate exception for active participation. The maximum deduction is $25,000 but this maximum is reduced by one dollar for every two dollars that the client's modified AGI exceeds $100,000. Since the client's modified AGI is $130,000, the maximum deduction is reduced by ½ × $30,000 = $15,000. The client can deduct the maximum of $25,000 - $15,000 reduction = $10,000 max deduction.

Next year, Tom Traxler is planning to sell the commercial property on which he operated his business to his daughter Sally, for $300,000. Tom's adjusted basis in the property will be $100,000. The sale will be structured as an installment sale, with Sally to make a down payment of $60,000 and make installment payments annually for 12 years. Sally will pay 10% interest on any unpaid balance. Tom wants to know what will happen if he died after Sally had made the second installment payment. Tom's will leaves his estate to his wife. Which of the following statements concerning the estate tax treatment of the installment payments due after Tom's death is correct? The unpaid installments will not be included in Tom's gross estate. The unpaid installments will be included in Tom's gross estate at their face value of $200,000. The present value of the unpaid installments will be included in Tom's gross estate. The unpaid installments plus the interest payable on the balances will be included in Tom's gross estate. Solution

Solution: The correct answer is C. The unpaid installments should be included in Tom's gross estate, discounted to present value, using the Sec. 7520 interest rate for the month of Tom's death.

If Sandy were to die today, which of the following best describes the tax treatment of her IRA? Julian may roll it into his own IRA and defer distributions until he reaches age 72. Distributions must begin by December 31 of next year and must be fully distributed within 5 years. Distributions must be paid out by the 10th anniversary of Sandy's death. Distributions must begin by December 31 of next year and can be spread over Robert's life expectancy, and the other half over Carla's life expectancy.

Solution: The correct answer is C. Under SECURE Act rules, Sandy's account balance must be paid to the beneficiaries by the 10th anniversary of her death.

Cindy Thorworth is 68 years of age and a widow. She has substantial assets and would like to remove some assets from her estate to reduce taxes at her death. She would like to see her children receive an inheritance, and she wants to leave some money to the Metropolitan Art Museum. She also wants to have a monthly income that will adjust with inflation. Which of the following options should a CFP® professional recommend to Cindy? CRAT Pooled-income fund CRUT Charitable lead trust

Solution: The correct answer is C. With a charitable remainder unitrust, Cindy can place money in trust for the benefit of the Metropolitan Art Museum and obtain a charitable deduction in the year the trust is established. Cindy will remove assets from her estate because assets have been given away by placing them in trust, and the remainder interest passes to the charity. The income that Cindy will receive will adjust for inflation because the payout is determined by taking a specified percentage of the trust's assets each year. As investments increase in value, the monthly income will increase. With a CRUT, invasion of principal is also permitted, to maintain payments. With the tax refund that Cindy will get in the year the trust is established, she can buy a life insurance policy to provide her children with an inheritance. A CRAT will provide all of these same benefits, except that the annuity payout does not adjust for inflation. The annuity consists of fixed payments that would remain the same each year for Cindy's life. A pooled-income fund is also similar to the CRUT but does not provide for invasion of principal when trust income is insufficient to make the annual payments. Topic 69; Domain 4

Question A CFP® professional is explaining how Section 303 can assist in estate planning. She wants to explain to the client some of the requirements for the application of Section 303. The CFP® professional can tell the client that a Sec. 303 redemption will be appropriate for all of the following estates, EXCEPT: At his death, the decedent owned stock of a closely held corporation in joint tenancy WROS with his wife. Before his death, the decedent had transferred his stock in a closely held corporation to a revocable trust. By will, the decedent bequeathed his stock in a closely held corporation to his daughter and provided for estate and death taxes to be paid by the residue. Before his death, the decedent's adjusted basis in his closely held stock was almost zero.

Solution: The correct answer is C. If stock is included in the decedent's gross estate, it can be redeemed under Sec. 303. One-half of the jointly owned stock will be included in the decedent's gross estate, so some of this stock can be redeemed from the wife to the extent that it bears a portion of estate taxes. Similarly, stock that was transferred to the revocable trust can be redeemed from the trustee to the extent that it bears a portion of estate taxes. A Sec. 303 redemption cannot occur where the stock has been transferred by a specific bequest and will not bear any of the taxes. A decedent's stock receives a step-up in basis at death, so a Sec. 303 redemption is appropriate when the basis was near zero before death. The estate can sell the stock at no capital gain.

You have been working with Sue Peters for a number of years, primarily in the areas of retirement, insurance, and investments. Sue is 52 years old, happily single and plans to stay that way. When you last met with Sue a year ago she had just received a $200,000 inheritance from her mother and was uncertain about what to do with it. You have projected that, if she continues to work to age 66, Social Security, her small pension from work, and income from her 401(k) and other taxable investments should be adequate for her needs; however, should she need long-term care, her assets could be depleted rather quickly. During the last meeting you mentioned that Sue could use income generated from the inheritance to purchase LTC insurance or life insurance with an LTC rider, but she was too distraught over her mother's death to make a decision. You and Sue agreed to place the inheritance money in a money market account until Sue was ready to make a decision. Today, Sue has come in all excited about an investment opportunity that she "ran into". She met a gentleman at the coffee shop last week who owns several apartments in Sue's neighborhood and is looking to sell one of them for $200,000. Which of the following identifies the most important information you need to help Sue make a decision regarding the purchase of the rental property? You need no additional information. Sue has no experience with owning rental properties and should not invest in additional real estate in the same neighborhood where she owns her home. Her main priority should be purchasing long-term care insurance. Gross rental income and the cost of property taxes and insurance. Gross rental income; the cost of property taxes, insurance, and other routine expenses paid for the property; estimate of any repairs needed in the near future; vacancy rate; and appropriate discount rate. You should obtain information regarding the average return on equity REITs and real estate limited partnerships, both of which would provide Sue with greater diversification and relieve her of the day-to-day management responsibilities of direct-ownership of real estate. Solution

Solution: The correct answer is C. In order to evaluate the rental property Sue is considering, the first step is to divide Net Operating Income (NOI) by the appropriate capitalization rate to determine the amount she should be willing to pay for the property in order to achieve the desired rate of return. NOI is found by computing the gross rental receipts, plus non-rental income, minus vacancy and collection losses, and minus cash operating expenses (including an allowance for periodic replacement of leasehold improvements). NOI should be calculated as an average over several years. The capitalization rate is subjective, but should represent an appropriate return given the level of risk. If the results of this evaluation are favorable, the planner may choose to also educate the client regarding other alternatives for real estate investing (answer choice D), but the question asks which is most important. The client's wishes should be given priority until they are proven to be unfavorable.

A CFP® professional met with Roger and Jan Trombowski who are 67 years of age and who retired two years ago after selling their business. At the time that they retired, the CFP® professional prepared a financial plan for the Trombowskis and helped them with their retirement income planning. Their expectation was that they would live to approximately age 85. The Trombowskis and the CFP® professional determined that they needed $90,000 annually during retirement. They are currently receiving $25,000 annually from Social Security. During the past two years, their assets have declined in value and now total $675,000. They feel that they can obtain 4% on their investments. How long can the Trombowskis maintain their present life style at the current rate of expenditure? 8.5 years 11 years 13 years 15 years

Solution: The correct answer is C. On a financial calculator, the keystrokes will be as follows: On a 10bII (in BEGIN mode): 4, I/YR, 675,000, PV, 65,000, (+/-), PMT, 0, FV, then compute N. The answer is 12.99 years on the 10bII and is rounded to 13 years on the 12c. Note: In retirement, retirees need money to spend during the month, that is why we factor in cashflow at the beginning of the month.

What level annual amount would the Loudons need to invest each year to reach their goal of buying the vacation home? $5,804 $6,006 $7,089 $7,657

Solution: The correct answer is C. The target amount the Loudons need to reach is $207,893 (that is, $100,000 is the PV, 15 is the N, and 5% is the I/YR). To reach that target would require a payment of $7,089 at the start of each year. Enter $207,893 as the FV, 8% as the I/YR, and 15 as the N. Solve for the beginning-of-period payment, which is $7,089. The problem uses begin mode since the Loudons want to start saving now. Note: The 8% comes from the case facts, under Investment Information. Under the Vacation Home Information it states, "The Loudons would like to begin saving now for their vacation home" which indicates you should use BEG mode to solve this question.

Cecil Trombly is 71 years of age and owns a horse farm on 150 acres of valuable land in a beautiful rural section of Virginia. Cecil's sons are working in the business and would like to continue to operate the farm for many years. Cecil has consulted a CFP® professional for advice on his estate planning. What should the CFP® professional tell Cecil about the benefits of special use valuation? Estate taxes can be postponed and paid in installments over 10 years. Estate liquidity is enhanced by converting some stock to cash. Estate taxes can be reduced by reducing the value of real estate used in a business. Estate taxes can be reduced by valuation discounts such as for lack of marketability

Solution: The correct answer is C. Special use valuation reduces estate taxes by allowing real estate used in a closely held business to be valued at its current use rather than at fair market value. The real estate must be used in a farm or closely held business, and the real estate must be at least 25% of the gross estate. The real estate must pass to a family member, and heirs must continue to use the land in the same farming operation or closely held business over the next 10 years.

If Caboto, DeFelice, and Grant wants to implement a qualified plan and assure that most of the contributions/benefits arefor the attorneys, as opposed to paralegals and administrative assistants, which of the following would best accomplish that goal? A defined-benefit plan with a 6-year graded vesting schedule An age-weighted profit-sharing plan with a 3-year cliff vesting schedule A defined-benefit plan with Social Security integration set at $125,000 A SEP with Social Security integration Solution

Solution: The correct answer is C. The defined-benefit plan can be structured with a unit benefit formula, which will provide greater benefits to those who are highly compensated and employed long-term. Integration with Social Security at $125,000 further increases the benefits to the attorneys. The integration level does not need to match the social security wage base. The age-weighted profit-sharing plan will not work as well because some of the attorneys are much younger. If a new comparability plan had been an answer choice, it would also have been better than the age-weighted profit sharing plan.

Clarence Dowd purchased a deferred single-life annuity for $50,000. In eleven years, when Clarence retires at age 65, the annuity will pay him $1,000 per month for life (expected to be 20 years). Approximately what amount will Clarence have to report as income from the annuity in the third year of payments? $0 $8,500 $9,120 $9,500 Solution

Solution: The correct answer is D. Clarence will receive $12,000 annually, and his life expectancy at age 65 is 20 years. His expected return, therefore, is $240,000. His investment was $50,000, so his exclusion ratio is $50,000/$240,000 = 0.208, or 20.8%. He must include in income 79.2% of the $12,000, or $9,504 ($9,500 rounded).

Which of the following benefits could be obtained for Julian Caboto by changing the business form of Caboto, DeFelice, and Grant to a limited liability partnership (LLP)? Julian's federal income taxes would be decreased due to the pass through taxation. The firm could add group life insurance as a tax free benefit to Julian. The premiums for disability income insurance provided by the firm will not be taxable to Julian. If Julian is disabled, his benefits from the firm's disability insurance will not be taxable.

Solution: The correct answer is D. If the firm is changed to an LLP and Julian becomes disabled, benefits from the firm's disability insurer to Julian will not be taxable. The premiums will be taxable to Julian because he will be a partner of the firm, and the payments will pass through as income to him. Since Julian will be taxed on the premiums, the disability income will be tax free. The firm will not pay taxes when it is a partnership due to the pass through taxation. Any income will pass through to the owners, including Julian, so his income and income taxes should increase from the change to an LLP. The LLP cannot offer the tax free group life insurance benefit, but his current professional corporation could offer it.

Question Next year, Tom Traxler is planning to sell the commercial property on which he operated his business to his daughter Sally, for $300,000. Tom's adjusted basis in the property will be $100,000. The sale will be structured as an installment sale, with Sally to make a down payment of $60,000 and make installment payments annually for 12 years. Sally will pay 10% interest on any unpaid balance. Tom wants to know what will happen if he died after Sally had made the second installment payment. Tom's will leaves his estate to his wife. If the installment note were given to Sally under a codicil to Tom Traxler's will, which of the following statements would be correct? Sally must recognize gain on the remaining installments. Sally must report the remaining installments as income in respect of a decedent. The remaining installments receive a step-up in basis. Tom's estate must recognize gain on the remaining installments.

Solution: The correct answer is D. If the installment note were bequeathed to Sally, Tom's estate must recognize the remaining gain immediately. The estate is treated as making a disposition of the note. There is no step-up in basis. Sally will not have to report the installments as income in respect of a decedent because she is now the obligor and owner of the note.

A CFP® professional wants to measure the investment results from a client's portfolio. The portfolio contains 8 uncorrelated stocks from different industries. The CFP® professional will use an index of risk adjusted performance to evaluate the portfolio's returns. How should the CFP® professional proceed with the evaluation? The CFP® professional should use the Sharpe ratio because the portfolio is not diversified. The CFP® professional should not use the Treynor ratio because the portfolio is not diversified. The CFP® professional should use the Sharpe ratio because the portfolio is diversified. The CFP® professional should use the Treynor ratio because the portfolio is diversified.

Solution: The correct answer is D. The CFP® professional should use the Treynor ratio because the portfolio is diversified. The Sharpe ratio is used when the portfolio is not diversified. A portfolio with 8 uncorrelated stocks will be sufficiently diversified to permit evaluation with the Treynor ratio. If a client is only investing $3,000 it would be difficult and expensive to have 8 - 12 assets classes. There are 9 asset major asset classes that morningstar tracks. Some asset classes will not be appropriate for some investors. It is best to evaluate each scenario presented and ensure "all your eggs are not in one basket".

Phil is a 30% owner/employee of an S-corporation. The corporation just implemented a group disability policy for employees last year. Phil is very happy to be covered under this plan because he has no individual disability protection. It is now February and Phil has arrived at your office with his income tax information, as you normally include tax preparation services as part of his fee. While reviewing his W-2, Phil has become concerned about an error on it because his salary is $75,000 but the W-2 shows income of $78, 800. You correctly advise him that: Since there is an error on the W-2, he should wait to file his taxes until an amended form is sent to him. He should file his taxes using the information from his final pay stub for the year instead of the W-2. The extra income is due to the S-Corp. "sting Tax". The extra income is due to the cost of the disability policy for him.

Solution: The correct answer is D. The IRS treats sole proprietors, partners, and >2% S-Corporation stockholders as owners rather than employees for fringe benefit purposes. This means that if the S-Corporation pays for insurance premiums on Phil's behalf he does not get the tax advantage of tax-free premium payments that employees get; instead, as an owner, the cost of the premium will be taxable income to him. This is not necessarily a bad situation, because it means that since he paid after-tax dollars for the premiums he can get tax-free benefits if he has a claim.

Assume Dennis and his brothers are all in their 50s. If Dennis and his brothers wish to adopt a qualified retirement plan for The Blue Elf, which of the following plans would allow the maximum contributions for the owners, with the least contribution expense for the other employees? SEP SIMPLE 401(k) plan Defined-benefit plan

Solution: The correct answer is D. The SEP and SIMPLE may require contributions for the part-time employees. The part-time employees can be excluded under the defined-benefit and 401(k) plans up until this year (2021). Long-term part-time employees can participate after accruing 3 years of service beginning in 2021 (prior years will not count), with their first contributions in 2024. The defined-benefit plan will allow greater contributions than the 25% and $58,000 (2021) limitation of a 401(k). The defined-benefit plan will permit funding for past service, and the owners have greater past service than do other employees. The owners are also older than the other employees who will be eligible for the contributions. Greater contributions can be made for older employees. The limitation on a compensation base of $290,000 (in 2021) will not be a factor because all of the earnings are far below this amount.

Roland Chaffey has been investing in a fund by making annual contributions over the past five years. The purchases and annual results have been as follows: Purchases $1,000 $2,000 $1,500 $2,500 $2,500 End of year values 1,100 2,900 4,750 7,100 12,150 What can the CFP® professional tell Roland are his dollar-weighted return (DWR) and his time-weighted return (TWR)? DWR 6.33%, TWR 7.26% DWR 7.14%, TWR 6.09% DWR 8.26%, TWR 6.22 % DWR 9.49%, TWR 6.55%

Solution: The correct answer is D. The dollar-weighted return is the easier of the two calculations so we perform that calculation first. We use the purchases as the cash flows and the last end of year value for the final cash flow. One important point about cashflow, it only accounts for end of year cashflows. This problem has beginning of year cashflows. To account for the beginning of year cashflows with end of year value in year 5, the end of year value is its own cashflow. The keystrokes on the HP 10BII are as follows: 1,000, +/-, CFj 2,000, +/-, CFj 1,500, +/-, CFj 2,500, +/-, CFj 2,500, +/-, CFj 12,150, CFj Shift, IRR, and the result displayed is 9.487 Note: A student can pick the correct answer without the calculation of the second part of this question, but we give it to you so you can see how it is done. For the time-weighted return, we have to determine the returns for each year. The first year return is $100/$1,000 = .10. The second year return is -200/3,100 = -.0645. The third year return is 350/4,400 = .0795. The fourth year return is -150/7,250 = -.0207. The fifth year return is 2550/9600 = .2656 (See attached for chart) We add 1.0 to each of these returns and then multiply the results: 1.10 × .9355 × 1.0795 × .9793 × 1.2625, then you take the fifth root and subtract 1. The keystrokes on the HP 10BII are as follows: 1.10, ×, .9355, ×, 1.0795, ×, .9793, ×, 1.2656, =, Shift, yx, .2, =, -, 1, = and the result displayed is .0660 Editor's Note: TWR can also be solved using the TVM keys. PV = -1, FV = (1.10 × .9355 × 1.0795 × .9793 × 1.2656), N = 5, solve for i.

The McGurk family has consulted a CFP® professional concerning financial planning for their daughter, Carson McGurk, age 12, a child actor who has acted and sung on Broadway. Carson's parents have placed her earnings in custodial accounts with mutual funds and banks. This year, the custodial bank accounts are expected to produce taxable income of $5,000, and the mutual funds are expected to produce taxable income of $4,000. Carson's parents have already earned enough income to place them in the 32% tax bracket for this year. Carson is expected to earn enough to put her in the 35% income tax bracket this year, as a result of her acting, but her parents have decided that next year, she will not be in any more shows. Assume that the custodial accounts will earn the same amount, both this year and next. Which of the following statements will be appropriate for the CFP® professional to tell the McGurks concerning the federal income taxes on the earnings from Carson's custodial accounts? The maximum income tax rate will be 32%, both this year and next. The maximum income tax rate will be 35%, both this year and next. The maximum income tax rate will be 32% this year and 12% next year. The maximum income tax rate will be 35% this year and 32% next year. Solution

Solution: The correct answer is D. The kiddie tax will not apply to Carson this year because she has earned income that will bring all of her unearned income into at least the 35% bracket. The kiddie tax applies only when the parents' income tax bracket will be higher than the child's. Next year, Carson will have no earned income, so the kiddie tax will apply. Carson's unearned income over $2,200 next year will be taxed at the parent's income tax rates. Her unearned income will, therefore, be taxed at a maximum rate of 32%.

A CFP® professional meets with a married couple who want advice on what to do with the assets in a 401(k) plan. The husband has worked for his employer for 25 years and has accumulated an account balance of $802,000. This retirement account contains $620,000 worth of appreciated employer stock. The couple is planning to retire and would like to know whether they should sell the employer stock. What should the CFP® professional recommend to these clients? Roll over the account balance to a Roth IRA Roll over the account balance to an IRA to take advantage of the NUA tax rules Roll over the account balance to an IRA and reduce the employer stock to 15% Roll over some of the employer stock and all of the other assets to an IRA and sell the employer stock in the IRA.

Solution: The correct answer is D. Under the NUA rules, the husband will not be taxed on the net unrealized appreciation contained in the employer stock that is distributed in a lump-sum to him. This NUA will be taxed at long-term capital gains rates. If the stock is rolled over to an IRA then the benefits of the NUA rules will be lost because all distributions from the IRA will be ordinary income. The husband will want to have some of the employer stock distributed to him so it can be retained in a taxable account, such as his brokerage account; therefore, the capital gains can be deferred. The adverse consequences are that the husband will have ordinary income to the extent of the original cost of the stock when contributed to his account. The employer stock that is rolled over to an IRA can be sold to allow for diversification. The tax on gains from these sales of employer stock will be deferred until it is distributed to the couple. The rollover to the Roth IRA would not afford tax deferral because the assets would be subject to tax at the time of the rollover. Keep in mind, as long as the entire balance leaves the qualified plan, the employer stock can be split between the IRA and a taxable account and utilize NUA on the portion rolled to the taxable account. Assets cannot be left in the qualified plan to utilize NUA.

For which of the following reasons may a CFP® certificant reveal information about a client under the Rules relating to Confidentiality and Privacy in the CFP Board's Code of Ethics and Standards of Conduct for CFP® Professionals? To carry out a transaction for the client To comply with legal requirements To defend the CFP® professional in a civil dispute with the client To defend the CFP® professional against charges of wrongdoing (1) and (2) only (2) and (3) only (2) and (4) only (1), (2), (3), and (4)

Solution: The correct answer is D. A CFP® professional is allowed to reveal information about a client for all four of the listed reasons.

Cantrell age 42, owns 4 day spas. She employs 17 full time employees and occasionally will allow her children to perform tasks around the shop such as cleaning and light book keeping. She acquired another spa and completed an extensive remodel and advertising campaign. She was able to have it operating the last two months of the year. She has maintained most of her receipts and keeps a log of her children working. She has never reported the children working or the income that she provides to them as it has not been a significant portion of her overall expenses. When she completes her taxes, she realizes that she is missing a couple contractor receipts totaling approximately $7,000. After an unsuccessful attempt to retrieve the receipts from the contractors she decides to complete her tax return and not include the expenses. Although the CFP® professional is unable to provide tax advice, the omission of wages to the children and the contractors may be viewed as: Tax evasion Tax avoidance Tax minimization None of the above

Solution: The correct answer is D. Choices A, B, and C are incorrect. All are methods of reducing the amount of taxable income and tax liability of the tax payer whether legally or illegally. In the scenario, the client reports he income but does not report all of her expenses and therefore likely paid more tax than required.

Sheldon is evaluating several stocks that he is thinking about adding to his portfolio. When plotted on a graph with the Security Market Line (SML), the graph looks as follows. According to CAPM, which of the following statements are true? Dots above the line are over-valued portfolios Dots below the line are under-valued portfolios Dots on the line at the lower end are better Dots on the line at the middle are better I and II only I, II, and III IV only None of the statements are true

Solution: The correct answer is D. Dots below the line are over-valued, because the security is not providing the amount of return that it should be yielding if correctly priced. Dots above the line are under-valued because they are yielding more than they should according CAPM. Dots on the line are all priced correctly, according to their level of risk. Also note that the slope of the line is determined by the market risk premium.

Martha Gault, a single mother, is employed as a teacher and received a salary of $58,000 this year after she was out of work for two months. Martha's school insures her for disability. Martha also receives $18,000 in alimony from her 2009 divorce, and $6,000 in child support from her ex-husband. A CFP® professional is helping Martha to do some income tax planning. How should the CFP® professional calculate Martha's adjusted gross income, based on the following information: Salary $58,000 Alimony received 18,000 Child support 6,000 Interest income 2,000 403(b) contributions 7,000 529 plan contribution 500 Disability income 8,000 IRA contribution 1,000 Medical expenses 2,000 Health insurance 4,000 Child care 1,200 State and local taxes 2,200 $60,000 $69,000 $70,000 $79,000

Solution: The correct answer is D. Martha Gault is not self-employed, so she is not entitled to adjustments for self-employment tax or self-employed health insurance. She is also not entitled to an IRA deduction because her income is above the threshold for persons who are active participants in an employer-sponsored retirement plan. She is an active participant because she contributes to a 403(b) plan. The deduction is completely phased out for single persons who are active participants with income of $76,000 (2021) or more. Child support received is not income for Martha. The other expenditures similarly do not provide adjustments. Martha will have gross income of $86,000 from salary, disability income, alimony, and interest income. She will reduce her income by the $7,000 in contributions to the 403(b) plan, so her AGI will be $79,000. TCJA of 2017 changed alimony inclusion in income/deductions for divorces finalized after 12/31/18.

Peter and Marcella Kilko are 67 years of age and have been retired for two years. They obtained assistance from a financial planner on determining their retirement income and investments. After two years, however, they find that their assets and investments have declined substantially, and they are worried about a reduction in their retirement income. They expect to live for at least another 20 years in retirement and want to be sure they do not run out of money. They have consulted a different planner, who is a CFP® professional, to help them with reviewing and revising their retirement income planning. What is the first priority for action by the CFP® professional? Provide client disclosures to the Kilkos. Describe the investment strategies that could be used to increase income. Explore with the Kilkos their financial goals, needs, and priorities. Explain the scope of services the CFP® professional offers.

Solution: The correct answer is D. The CFP® professional needs to explain the scope of services that he or she offers so the clients will know what the engagement will be. They need to know from the CFP® professional what they are entering into for an engagement. After this explanation is made, the planner will define the scope of the engagement and then provide the client disclosures. There would be no reason to provide the disclosures before there is an explanation of the services that the CFP® professional is providing. Before entering into the first step of the financial planning process the client engagement must be established. After that is completed, then the planner will proceed to the active financial planning steps; gathering of information, including exploration of the clients' financial goals, needs, and priorities. The description of investment strategies will be a later step of the financial planning process after the data gathering is completed.

What is the usual reason for a CFP® professional to recommend a QTIP, rather than other marital deduction transfers? A continuing income can be provided to the spouse for life. The decedent's estate can achieve reduced federal estate taxes. The decedent can obtain management by a trustee for estate assets. The estate owner can direct the remainder after the spouse's death.

Solution: The correct answer is D. The estate owner can direct the remainder after the spouse's death. With a QTIP, the estate owner can direct the disposition of the estate assets after the spouse's death. The management by a trustee can be obtained with other kinds of marital trusts, so the QTIP is not necessary to obtain this management. Other marital transfers can provide the same reduction in federal estate taxes. Other marital trusts can provide a life income to the spouse.

A client of modest means has described losses he has taken in the real estate and stock markets over the past few years, but he is 60 years of age and wants to plan for retirement at age 65. The client is committed to making substantial contributions to retirement plans, but his retirement goals exceed his projected assets. He has asked you to recommend some investments with higher returns so he can achieve the returns needed to reach his goals. You point out to him that higher returns will mean higher risk, that there is a risk-return tradeoff, and that you do not recommend such high risks for him at this stage in his life. He asks for investments that will not be high risk but that have high returns. In order to assist this client, you will need to make use primarily of what structured communication? Accurate empathy Advising Counseling Either/Or Questions

There are three kinds of structured communication: interviewing, advising, and counseling. In this question, the financial planning process has proceeded past the interviewing stage. The client has already received advice concerning the risk-return tradeoff and the higher risk that will accompany higher returns. The financial planner will need to provide counseling instead of more advising. The financial planner will need to make use of the attributes of a good counselor such as accurate empathy, but empathy is not a structured communication. Either/Or questions will probably not be helpful in this discussion since the financial planner does not need to get specific answers as much as provide counseling that will allow for rapport building and more collaboration on the client's problem.

Richard Peterman retired at age 65 and began taking distributions from his IRA. In case of his death, Richard would like to name a beneficiary for the IRA assets so that income taxes will be deferred as long as possible. If Richard dies in the next year, the start of distributions can be deferred longest when Richard names which of the following beneficiaries? His spouse, who is age 62 His child, who is age 41 His brother, who is age 57 His grandchild, who is age 10

correct answer = A if an IRA owner has begun receiving distributions and dies before the entire interest is distributed, the distributions to a eligible designated bene or a designated bene must start no later than dec 31st of the year following the owners death. Answer choice A is correct. The spouse, however, has the option of rolling over the IRA assets into his or her own account and treating the IRA assets as his or her own. Richard's spouse would not need to begin distributions until the year after she reaches age 72. (SECURE Act 2019). She could delay payments for 10 years if Richard died while she was age 62. Answer choice B is incorrect. His child is not a minor and is greater than 10 years younger and would be considered a designated beneficiary and would need to take the full balance by the 10th anniversary of Richard's death. Answer choice C is incorrect. Although Richard's brother is less than 10 years younger than him, he would not be eligible to roll the IRA to his own and delay distributions. He would need to start distributions the year after Richard dies. Answer choice D is incorrect. Only a minor child of the the account holder can be considered a designated eligible beneficiary (or non-eligible designated beneficiary) until they are the age of majority. The grandchild would need to take the full balance by the 10th anniversary of Richard's death. Editor's Note: The eligible/designated beneficiary has the ability to roll over qualified plans (not IRAs) to an inherited IRA. However, the non-eligible designated beneficiary must still take distributions starting the year after death from the inherited IRA and must distribute the account balance by the 10th anniversary of the account owner's death.

James Carlisle operates a successful construction company, that builds custom homes, named Carlisle Developments, Inc., which is an S corporation. He and his wife Sandy each own fifty percent of the stock in Carlisle Developments, and both are officers of the corporation. Both spouses are 45 years old, but recent health problems have caused Mr. Carlisle to consider retiring at the end of this year. He currently owns several pieces of investment real estate that generate rental income of $8,000 per month after mortgage payments, including interest and principal. Now that the Carlisles' two older children are married and on their own, they have only 16-year-old Joshua at home. As a result, their current residence is much larger than the family needs since they have lived there for almost 15 years. They estimate that the family's present home would sell for $700,000 (after selling expenses). They paid $325,000 for their present home and currently owe $135,000 on a first mortgage. Mr. Carlisle has come to you to determine how he could best structure his affairs to provide income for his early retirement, pay for Joshua's college education, and pass on the business to his children. Currently, Mr. Carlisle has approximately $200,000 invested in his name in a tax-deferred Individual Retirement Account. Which of the following techniques will help the Carlisles to reduce their income for this year so they can make a contribution to a Coverdell Education Savings Account for their son Joshua? Delay closings for houses built until next year. Defer needed repairs or improvements to real estate into next year. Pay their January home mortgage payment in the middle of December. Postpone paying salary to Mr. Carlisle until after the beginning of next year. Solution

correct answer= A postponing salary will not reduce income because profits from the S corp are passed through to the shareholders, and the amount that profits would go up exactly equal the amount of salary received by mr. Carlisle By postponing closing, the S corp would report lower income and postponing capital gains reduces AGI Accelerating repairs (rather than deferring repairs) can lower income from rental properties. Advance payment of the mortgage on the Carlisle's home would not reduce AGI because the mortgage interest deduction is an itemized deduction subtracted from AGI to compute taxable income. Note that advance mortgage payments for the rental property can reduce the income from the rental property and can reduce AGI.

Ascertainable standards will

determine whether a power under the trust is a general or special power. If a power is subject to an ascertainable power, it will not be included in the gross estate of the person holding the power. Thus, an ascertainable power affects the estate tax consequences in the future and not the current gift tax consequences.

The standard deviation of a portfolio cannot be known without

information on the degree of correlation among the returns on the stocks making up the portfolio. The provided formula sheet does provide the formula to calculate the standard deviation of a two-asset portfolio, and a look at that formula reveals the need for information regarding the covariance (or correlation coefficient) between the assets. To calculate the standard deviation of the portfolio in this question, you would need to know the covariance between each and every asset (what is the covariance between Stock F and G, between F and H, between, F and I, between G and H, etc.). Had the question simply provided historical returns for a single security, the simplified calculation using the ∑+ key on the calculator could be utilized to determine the standard deviation of that security.

is a deferred annuity less or more expensive than an immediate annuity

less expensive

a rabbi trust

may not provide a solvency trigger (i.e. in the event of the employers insolvency), the employer will be required to make irrevocable contributions sufficient to pay required benefits. The rabbi trust may provide that in the event of a merger or acquisition, the trust will become irrevocable or that the employer is required to make irrevocable contributions. in the event of the employer's liquidation or bankruptcy, the plan assets must be available to the employer's creditors. the employer may make contributions in employer stock and the trustee may be authorized to hold stock of the employer company.

The earnings for Dennis from the Blue Elf are $58,000 of Schedule E income from the partnership. To compute the self-employment tax on Schedule SE for Dennis,

multiply the self-employment earnings by .9235 (part of the self-employment calculation), to arrive at the new earnings of $53,563. This amount is multiplied by the 15.3% self-employment tax, and the tax is $8,195. The deduction for self-employment tax is one-half of this amount, or $4,098. After the deduction, the amount of income from which contributions can be made is: $58,000 - $4,098 = $53,902 The contribution can be 20% of this amount, or (.2) × ($53,902) = $10,780

Milly has decided that she will take a sabbatical from work for at least 2 years. She estimates that she will be able to cover her expenses from the rental income she receives but may need to supplement approximately $12,000 from one of her accounts. She has been working with her CFP® professional and is looking for some advice on any revisions she should make to her portfolio. Milly is 38, an aggressive investor, and has a 70% equities and 30% fixed income asset allocation target. She has decided to withdraw the funds this year so she does not have to worry about market volatility. She is in the 22% tax bracket and 15% capital gains rate. Of her accounts listed, which of the accounts will likely be the best option to withdraw the additional fund that will cause the least in penalties and taxes? Brokerage account valued at $82,000 ($12k basis) with 100% equity mutual fund. Nondeductible IRA valued at $17,000 ($15k basis) with 100% individual stock equities. Rollover IRA valued at $130,000 ($100k initial rollover amount) with 100% fixed income. A 403(b) valued at $217,000 with 100% equity stocks and mutual funds.

olution: The correct answer is B. Distributions from a nondeductible IRA are considered a return of basis and ordinary income taxed on the gains. The 10% early withdrawal penalty will apply proportionately to the growth of the account. In this case it will be 12% ($2,000/ $17,000) of the distributed amount. Choice A is incorrect but would be the second best option as the distribution would be subject to 15% capital gains. Choices C and D are incorrect, each would be subject to ordinary income tax rates and an early withdrawal penalty.

Which of the following portfolios would be most appropriate for a CFP® professional to recommend for a moderately aggressive investor with an intermediate-term time horizon? 50% money market securities; 5% real estate; 45% precious metals 40% money market securities; 10% real estate; 50% foreign securities 90% small-cap domestic equity securities; 10% collectibles 30% domestic equity securities; 30% fixed-income domestic securities; 20% real estate; 20% foreign securities

olution: The correct answer is D. In our judgment (and this type of question always calls for judgment), A is too heavily focused on the short term (50% money market securities) and too risky for other planning periods (45% precious metals). B is a slight improvement over A, but B still focuses on the short term (40% money market securities) and is still too risky for other planning periods (50% foreign securities). C is too risky because it focuses on only two, fairly narrow types of assets. We think D represents the most appropriate portfolio for a moderately aggressive investor with an intermediate-term time horizon.

cash refund annuity

promises to pay the bene the difference between the cost of the annuity and the payments made to the annuitant before death - requires immediate payments and so is more expensive than payment in installments bc the TVM

The gross estate would include one-half of the joint tenancy property owned by the spouses and all of the property owned separately. The life insurance death benefit and the IRA assets would also be includible. The gross estate would include the following assets:

q66

deferred annuity

the issuing company delays payment of benefits until a starting point in the future, thus giving the issuer the investment income during the period of deferment and reducing the cost of purchasing the benefit

While only naming a charity as a beneficiary of a life insurance policy will generally not permit an income tax deduction, there is an exception for an employee

who names a charity as the beneficiary of the death benefit above the $50,000 amount in a group term life plan (or the charity may be named beneficiary of all of the death benefit under the plan). Ted can exclude from income premiums attributable to the coverage for the charity, and the policy proceeds above $50,000 will be included in his gross estate. Ted's estate will be able to take a charitable deduction for the death benefit paid to the charity.