Rec - Tax Considerations
Wade Kimmons purchased 200 shares of ABC common stock on March 9, 2009, paying $32 per share. Since the date of the purchase, Mr. Kimmons has received $518 in dividends. With the stock selling for $89 per share on July 27, 2016, Wade gives all 200 shares to his niece, Kendra. One week later, Kendra sells all of the ABC stock for $85 per share. The tax consequences of this are A)short-term capital loss of $800 B)long-term capital loss of $800 C)long-term capital gain of $10,600 D)long-term capital gain of $11,118
C)long-term capital gain of $10,600 When securities are the subject of a gift, the donee (recipient) acquires the donor's cost basis and holding period. That means that Kendra's cost was $32 per share and the holding period was over 7 years. That is a gain of $53 per share or a total of $10,600, and it is long term. The dividends have nothing to do with the question.
An investor in the 28% tax bracket has a $5,000 loss after netting all capital gains and losses realized. How much may the investor deduct from income that year? A)$5,000. B)$0. C)$2,500. D)$3,000.
D)$3,000. The maximum deduction of net capital losses against other income in any one year is $3,000; any remaining loss can be carried forward into the next year.
Which of the following items are NOT included in the gross estate of a decedent? A)Proceeds from a life insurance policy held in a revocable trust B)Property held in an account registered tenants in common C)The first $250,000 of a primary residence if owned singly, $500,000 if owned jointly with spouse D)Proceeds from a life insurance policy owned by the deceased's spouse
D)Proceeds from a life insurance policy owned by the deceased's spouse One popular estate planning technique is to have life insurance owned by (and premiums paid by) someone other than the insured. In that case, proceeds are generally excluded from the gross estate of the deceased. If the trust was irrevocable, that same benefit might be achieved, but not with one that is revocable. There is an exclusion for income tax purposes on the sale of a primary residence, but that has nothing to do with the estate. Finally, when property is owned tenants in common, the percentage belonging to the deceased is part of the gross estate.
DNI =
Interest + Dividends - any capital gain
Sole Pro fills out
Schedule C of Form 1040
Deducting capital loss
max of $3,000 per year
When are estate taxes due
9 months after death
Which of the following would have the effect of reducing a taxpayer's taxable income? Net capital loss. Traditional IRA contribution. Public purpose municipal bond interest. Earnings in a deferred variable annuity. A)I and II. B)III and IV. C)I and IV. D)II and III.
A)I and II. Up to $3,000 in net capital losses can be deducted against ordinary income. Contributions to a traditional (but not Roth) IRA are deductible against ordinary income (unless the taxpayer is above certain income limits and is covered by an employer plan). Municipal bond interest is not taxable, but is not deductible; earnings in a variable annuity are deferred, not deductible.
A highly compensated customer owns 200 shares of Datawaq. He bought it 20 years ago, and it is now trading at 90. If he donates the stock to a not-for-profit corporation, how much can he claim as a tax deduction for this donation? A)$0. B)$18,000. C)$6,000. D)$12,000.
B)$18,000. Securities can be gifted to charity and deducted at their fair market value, as long as they have been held more than one year. The fair market value of the deduction allowed for 200 shares is 200 multiplied by the current market price of the stock, or $18,000.
When looking at an individual's income statement, which of the following would be included: A)child support. B)alimony. C)jewelry. D)stocks and bonds.
B)alimony. An individual receiving alimony as part of a divorce decree must report that as income for tax purposes. The ex-spouse paying the alimony treats that as a deduction from income. There are two problems here. First, we're not told which side this individual is on - paying or receiving the alimony. Second, if we are doing a profile for a client, the receipt of child support is considered income in terms of figuring any discretionary income, even though it is not taxed. But, NASAA doesn't always think of these things so we have to give them the answer the way they want it.
A client has just finalized her divorce and intends to sell her gold wedding band. Because the price of gold has risen significantly since she married 20 years ago, she will be able to realize a profit on the sale, but she does not know what to use as the cost basis. You suggest she speak to a tax specialist who will tell her to A)ignore the profit for tax purposes because precious metals are not subject to capital gains taxation B)use the original cost of the ring C)obtain an appraisal from a qualified jeweler and use that as the cost basis D)use a cost basis of zero because it was a gift
B)use the original cost of the ring Regardless of the nature of the asset, the cost basis of any asset acquired as a gift is that of the donor. Although not tested, the maximum rate on capital gains from collectibles, such as a gold ring, is 28% (higher than the rate for securities).
Under current tax law (2017), how much can a married couple give to their adult son and his wife without incurring a gift tax obligation? A)$14,000 B)Unlimited C)$28,000 D)$56,000
D)$56,000 The current gift tax exclusion (2017) is $14,000 per donor to each recipient. A married couple can give $28,000 to a single individual and qualify for the exclusion. In this case, the married couple can give $28,000 to their son and $28,000 to their daughter-in-law without paying any gift tax.
A customer who sold a bond at a loss must wait how long before he can buy back a substantially identical bond and not have the sale classified as a wash sale? A)31 days. B)There is no waiting period. C)5 days. D)20 days.
A)31 days. When a customer sells a security at a loss, he may not buy back the same (or substantially identical) security from 30 days before to 30 days after the sale that established the loss, without having the loss disallowed.
One of your clients runs a small business, currently organized as a sole proprietorship. Among the primary reasons why the client might consider changing to an LLC is A)limiting his personal liability B)reducing paperwork C)prestige D)changing the due date of his tax filing
A)limiting his personal liability The Ls in LLC stand for limited liability. As a sole proprietor, all of your personal assets are exposed to the creditors of the business. With an LLC, there is no personal liability. As it happens, a one-member LLC (as this question indicates would be the case), is treated the same as a sole proprietorship for the tax filing due date. There would be slightly more paperwork involved with an LLC.
Max Gift tax deduct to non-Us citizen spouse
$147,000
An investor purchases 500 shares of stock on January 10th at $50 per share and sells it on August 4th of the following year for $40 per share. As a result, the investor has realized a: A)long-term capital gain. B)long-term capital loss. C)short-term capital gain. D)short-term capital loss.
B)long-term capital loss. Buying stock at $50 per share and selling it for $40 per share creates a capital loss of $10 per share. In this case, because the holding period was more than a year and one half, the loss is long term.
ILIT
Irrevocable Life insurance trust
Estate taxes account min
- $5.25 mill
For an individual earning $150,000 per year, which of the following would be the highest rate? A)The marginal tax rate B)The qualifying dividend tax rate C)The median tax rate D)The effective tax rate
A)The marginal tax rate Because we have a progressive income tax system (the higher the taxable income, the higher the tax rate), the marginal tax rate, which represents the tax on the last dollar received, is the highest rate one will pay.
If a husband makes a gift of $100,000 to his wife, a U.S. citizen, how much of the gift is subject to gift taxes? A)$100,000.00 B)$50,000.00 C)$0.00 D)$90,000.00
C)$0.00 Interspousal gifts to citizens of the United States, regardless of amount, are not subject to gift taxes.
Which groups have the same tax filing deadline
LLC, Partnerships, S corporations
Who files K-1
- entitities using flow through - S and LLC
Louise Lawson, one of your high net worth clients, calls you and tells you her friend mentioned something about having to pay a special tax called AMT. When reviewing her extensive portfolio with her, you would explain that the only securities she is holding that could lead to an AMT issue are the A)$100,000 of Atlanta Airport Revenue bonds due 1/2030 B)$100,000 of City of Decatur School District bonds due 7/2031 C)$100,000 of GEMCO cumulative preferred shares D)$100,000 of KAPCO debentures due 8/2029
A)$100,000 of Atlanta Airport Revenue bonds due 1/2030 When an individual has tax preference items, AMT becomes an issue. One of the securities that generates preference income is a private activity bond, a revenue bond that is issued to benefit certain facilities such as airports, sports facilities and hospitals. School district bonds are GO bonds and those are not subject to AMT. Income from corporate securities, whether they be debt or equity, is never considered for AMT.
Sally Sherman purchased 100 shares of Chocolate Manufacturers Corporation for $19 per share on February 12. She received a 10% stock dividend on May 18. She sold all of her CMC at $13 per share in June of the same year. What were her tax results? A)$470 short-term loss. B)$575 long-term gain, $105 short-term loss. C)$575 short-term loss; $105 long-term gain. D)$575 long-term loss.
A)$470 short-term loss. Sally paid $1,900 for 100 shares and sold 110 shares for $1,430 (13 at 110). Because the transactions all took place in less than a year, the transaction was a short-term loss.
All of the following would be included in the DNI of a trust EXCEPT: A)capital gains reinvested in the corpus. B)rental income. C)dividends. D)interest.
A)capital gains reinvested in the corpus. According to the IRS instructions for completion of Form 1041, capital gains added to the corpus of the trust are not included in DNI (distributable net income).
Property included in a deceased's gross estate is generally valued for estate tax purposes at: A)its fair market value (FMV) on the date of the deceased's death. B)the amount the deceased paid for it. C)its original cost less depreciation. D)its fair market value (FMV) on any date the estate chooses to use.
A)its fair market value (FMV) on the date of the deceased's death. Property included in the gross estate is generally valued at its fair market value (FMV) on the date the deceased died. An estate can also elect to value property on the alternate valuation date, which is usually 6 months after the date of death.
This year, a trust has received $2,500 in interest from Treasury bonds and $2,500 in dividends from domestic preferred stocks. The trust has also reinvested $10,000 in capital gains into the corpus. For tax purposes, the DNI of the trust was: A)$2,500. B)$5,000. C)$15,000. D)$10,000.
B)$5,000. A trust's DNI (distributable net income) is the sum of the interest and dividends received as well as any capital gains not reinvested back into the body (corpus) of the trust. In this case, the $2,500 of interest and the $2,500 of dividends total $5,000 of DNI.
Grandma has decided to give her grandson some stock that she bought many years ago. When the grandson sells the stock, how is the tax liability figured? A)Her date of purchase is used, but the cost basis is from the date of the gift. B)Her cost basis and date of purchase is used. C)Both the cost basis and holding period are determined from the date of the gift. D)Her cost basis is used, but the holding period begins on the date of the gift.
B)Her cost basis and date of purchase is used. When stock is given as a gift, the donee (recipient) takes over the cost basis and the holding period of the donor.
The interest on corporate bonds is taxable at: the federal level. the state level. the local level. A)I only. B)I and II. C)I, II and III. D)II and III.
C)I, II and III. Interest on corporate bonds is considered ordinary income and is taxable at all levels.
At his death, on January 1, 2012, Morris owned shares of ABC Corporation common stock, with a fair market value of $50 per share, which he had purchased in 2001 for $25 per share. If Morris' executor elected to value the estate by using the alternate valuation date, but then sold the shares through a broker-dealer on May 15, 2012 at $40 per share, what is the estate's basis per share for estate tax purposes? A)$50. B)$15. C)$125. D)$40.
D)$40. If the executor elects to value the decedent's estate by using the alternate valuation date, the value per share is the value at the date six months after death, unless the property is sold prior. In this case, the value per share is the FMV on the date of sale, $40 in this example.
A Form K-1 would be used for tax reporting to the owners by which of the following business entities? Sole proprietorship S corporation C corporation LLC A)III only B)II, III and IV C)I, II and IV D)II and IV
D)II and IV Legal entities that pass through income or loss use the Form K-1 to indicate the amount of that income or loss attributable to the individual shareholder/member/partner. Sole proprietorships generally complete Schedule C of the individual Form 1040, and C corporations are taxed themselves by filing a Form 1120 (S corporations file a Form 1120s along with a K-1 for each shareholder).
If an investment adviser's client wishes to save current income taxes by placing certain investments in a charitable trust, ethically, the investment adviser should: A)urge the client to consult with an attorney who pays a referral fee to the investment adviser. B)help the client draft the appropriate documents following a discussion of the advantages of the arrangement. C)refuse to discuss the trust with the client because the adviser is not an attorney. D)recommend the client consult with a qualified attorney.
D)recommend the client consult with a qualified attorney. Presuming the adviser is not a licensed attorney, he should recommend the client see a qualified attorney. However, it is ethical to discuss the nature of a charitable trust with the client.
Irrevocable Life insurance trust
gift premiums to the trust. no tax to bene
C tax file date
4th month after fiscal year end, aka April 15th if use calendar year
Which of the following statement(s) regarding gift taxes for a gift made in 2017 are TRUE? Gifts of $14,000 per person per year can be given without a tax liability. Gifts in excess of $14,000 per person per year may be subject to tax. The donor, not the recipient, is responsible for any tax liability. The tax rate increases with the size of the gift. A)III and IV B)I and II C)II and III D)I, II, III and IV
D)I, II, III and IV In accordance with current gift tax regulations, an individual may give a gift of up to $14,000 per person in one year with no gift tax liability. If the gift exceeds $14,000, it is the donor who is responsible for any tax. The gift tax is a progressive tax, which means that as the size of the gift increases, the percentage of applicable tax will also increase.
If a client has realized a capital gain from the sale of a municipal bond, to reduce tax liability, the capital gain can be offset against a capital loss in: GOs. equity securities. corporate bonds. REITs. A)I only. B)I and II. C)II and III. D)I, II, III and IV.
D)I, II, III and IV. A realized capital gain on a security may be offset by a capital loss realized from the sale of any type of security, including municipal bonds, equities, corporate bonds, or REITs.
LLC tax file due date
March 15
Partnership tax file due date
March 15
s corp tax file date
March 15
If an investor swaps identical issues of stock to establish a loss that is disallowed, the transaction is known as: A)a wash sale. B)a reverse stock split. C)a stock swap. D)a stock cross.
A)a wash sale. The wash sale rule disallows claiming a tax loss on the sale of stock if the investor purchases a substantially identical security within 30 days either before or after the date of such sale.
Which of the following is federally tax exempt for a corporation? A)Foreign corporate stock dividends. B)Preferred stock dividends. C)Capital gains. D)Municipal bond interest.
D)Municipal bond interest. Municipal bonds are tax exempt for corporations as well as for individuals. Preferred stock dividends are taxable but at a reduced rate for corporations due to the 70% dividend exclusion. That break does not apply to the dividends on foreign securities. Regardless of the security, capital gains are taxable.
Which of the following business entities has an income tax filing due date (disregarding possible extensions) of March 15th? Sole proprietorship Single member LLC Multiple member LLC electing to be treated as a corporation S corporation A)III and IV B)II, III and IV C)I and II D)I and IV
A)III and IV For S corporations, the filing date is March 15 (assuming it is a weekday). For partnership returns (including LLCs with more than one member), the due date is also March 15. For C corporations, the due date is the 15th day of the fourth month following the close of the corporation's year; this date is April 15th for a calendar-year filer. One effect of this is that LLCs, partnerships, and S corporations all have the same filing deadline.
The most advantageous tax benefit available to a taxpayer is: A)a short-term capital loss. B)a tax deduction. C)a tax credit. D)straight-line depreciation.
C)a tax credit. A tax credit permits a dollar-for-dollar reduction in a person's tax liability. A tax deduction only reduces the client's taxable income by the amount of the deduction; it is not a dollar-for-dollar reduction in tax liability. Straight-line depreciation functions like a tax deduction in reducing taxable income only. A capital loss, short or long term, may be used to reduce capital gains and, if losses are greater, reduce income up to $3,000 per year. But, once again, that is a deduction, not a credit.
Which of the following is (are) advantages of irrevocable insurance trusts? Provide estate liquidity. Insurance proceeds are removed from the estate of the insured for tax purposes. The insured has the flexibility to alter the trust arrangements. Once set up, no changes may be made. A)I and III. B)III and IV. C)II and IV. D)I and II.
D)I and II. As with all life insurance, the proceeds are available almost immediately upon death providing estate liquidity. When done properly, the proceeds of the policy are not included in the deceased's estate thereby saving estate taxes. The trust is irrevocable - no changes can be made, and this is one of the few disadvantages.
An investor would have to pay the alternative minimum tax when: A)it exceeds the investor's regular income tax. B)there are tax preference items reported on the tax return. C)the investor has received income from a limited partnership. D)the investor's capital gains exceed 10% of total income.
A)it exceeds the investor's regular income tax. A taxpayer must pay the alternative minimum tax in any year that it exceeds regular tax liability. Tax-preference items are re-input in figuring AMT, but the AMT is paid only if that amount is higher than the regular income tax.
Jean owns a $1 million life insurance policy on her mother, Clara. Jean is named as sole beneficiary, and so far she has paid $150,000 in premiums. If Clara dies, which of the following will occur? The proceeds will be exempt from income tax. $850,000 of the proceeds will be subject to income tax. The proceeds will be included in Clara's estate for estate tax purposes. The proceeds will not be included in Clara's estate. A)II and IV B)I and IV C)II and III D)I and III
B)I and IV Life insurance proceeds are generally free from income taxes and will be free from estate taxes, if the insured possesses no incidence of ownership. In other words, a beneficiary other than the deceased's estate has been named, and the owner is someone other than the insured.
If a married couple establishes a JTWROS account with a balance of $1 million and the wife dies, what is the husband's estate tax liability? A)He pays federal and state taxes on the entire balance. B)He pays federal and state taxes on $500,000. C)He pays no estate tax. D)He pays federal taxes only on $500,000.
C)He pays no estate tax. Establishing a joint tenants with right of survivorship account allows for the transfer of assets to the survivor upon death. The surviving spouse is not taxed on assets transferred in this manner because under current tax law, there is an unlimited marital deduction.
Which of the following would be least likely to offer tax advantages to an investor? A)Limited partnership investing in real estate. B)Municipal bond fund. C)Index fund. D)Corporate bond fund.
D)Corporate bond fund. The only one of these that is not considered to offer any tax advantages is the corporate bond fund. In the case of the index fund, they are generally more tax efficient than other mutual funds.
An investor purchases 100 shares of a stock at $100 per share on January 1st. On the following July 1st, the shares are sold for $120 per share. The tax consequences are: A)$2,000 short-term gain. B)$2,000 long-term gain. C)$2,000 short-term loss. D)$2,000 long-term loss.
A)$2,000 short-term gain. 100 shares sold for $120 per share that were purchased for $100 per share results in a capital gain of $2,000. Because the holding period did not exceed one year, the gain is considered short-term for tax purposes.
A complex trust has the following income for the year: $1,500 in taxable interest, $2,000 in dividends (reinvested in the stock), and $3,000 in tax-exempt interest. In addition, the portfolio realized $3,500 in capital gains that were reinvested in the corpus. What is the distributable net income (DNI) for the trust? A)$6,500 B)$10,000 C)$1,500 D)$4,500
A)$6,500 All investment income, regardless of source, will be considered DNI and will be included in the taxable income calculation to the trust unless distributed. That portion of the DNI representing tax-exempt interest maintains its tax-free status. Reinvested capital gains are not part of a trust's DNI.
Which of the following is not included in adjusted gross income on an individual's federal income tax return? A)Stock dividends B)Wages and tips C)Income from a sole proprietorship D)State income tax refunds
A)Stock dividends Stock dividends (dividends paid as additional shares of stock rather than in cash), adjust the investor's cost basis and don't come into play until the stock is sold.
Which of the following statements regarding the alternative minimum tax is TRUE? A)The excess of the alternative tax over the regular tax is added to the regular tax. B)The tax bracket will determine whether the regular tax or the alternative tax is paid. C)The alternative minimum tax is added to the regular tax. D)The lesser of the regular tax or the alternative tax is paid.
A)The excess of the alternative tax over the regular tax is added to the regular tax. The excess of the alternative tax over the regular tax is added to the regular tax amount. The taxpayer does not have the option of paying the alternative tax or the regular tax depending on his tax bracket. The purpose of the alternative minimum tax is to ensure that certain taxpayers pay a tax consistent with their wealth and income.
An example of an interest-on-interest reinvestment program is A)reinvesting the dividends paid on a bond fund B)interest left to compound on a bank insured certificate of deposit C)reinvesting the earnings on a bond UIT D)reinvesting the interest received on a bond
B)interest left to compound on a bank insured certificate of deposit Interest-on-interest reinvestment is, as the term implies, the practice of compounding earnings by reinvesting them. This is traditionally the way a bank savings account or certificate of deposit builds in value. Reinvesting the dividends on a bond fund is dividend reinvestment, even though most, if not all, of the fund's income is generated by interest. Same with the UIT and there is no program for reinvesting bond interest similar to a DRIP for reinvesting dividends.
A mother makes a gift of appreciated securities to her 10-year-old son. The son's cost basis in the stock is the: A)market value of the securities on the date of the gift. B)original cost of the securities to the mother. C)market value of the securities on December 31 of the year the gift is made. D)market value of the securities on April 15 of the year the gift is made.
B)original cost of the securities to the mother. When a gift of securities is made while the donor is alive, the original cost of the securities is the cost basis, not the value of the security on the date of the gift. Market value at date of gift is used to determine if gift taxes are applicable.
An investor purchased $10,000 of a 15 year AA rated corporate bond with a 6% coupon in the secondary market 3 years ago at par. The bond matured last week and the investor has just received a check for $10,300. Which of the following is a true statement? A)$300 is considered a return of principal. B)The investors cost basis has been reduced to $9,700. C)$300 is taxed as ordinary income. D)$300 is taxed as long-term capital gain.
C)$300 is taxed as ordinary income. At maturity, the bondholder receives both the principal ($10,000) and the final interest check (6% of $10,000 = $600 per year/paid semi-annually) of $300. This interest, like all corporate bond interest, is ordinary income.
Last year, an investor had a $5,000 loss after netting all realized capital gains and losses. This year the investor has a $1,000 capital gain. After netting his gains and losses, what will be his tax situation this year? A)He will have a $1,000 loss to carry over to the next year. B)He will have a $1,000 gain. C)There will be no tax consequences. D)He will offset $1,000 ordinary income this year.
D)He will offset $1,000 ordinary income this year. Only $3,000 of last year's loss can be deducted against that year's income. Therefore, the losses carried forward from the previous year are the remaining $2,000. These losses are netted against the gain of $1,000 for a net loss of $1,000. That loss can be used to offset $1,000 of ordinary income. There are now no longer any losses to carry forward.
John and Martha Smith, both in their early 40s, were divorced two years ago. Because Martha is unemployable, the terms of the divorce require John to pay Martha $400 per month in alimony and $1,000 per month in child support for their four children. Given that information, which of the following statements is CORRECT? A)Martha has reportable taxable income of $12,000 for the year. B)John is able to deduct $12,000 from his taxable income. C)Martha could contribute a maximum of $5,500 this year to an IRA. D)John is able to deduct $4,800 from his taxable income.
D)John is able to deduct $4,800 from his taxable income. Alimony is considered eligible income for an IRA to Martha and tax deductible to John. Child support is neither income to Martha nor deductible to John. Because Martha receives $4,800 in alimony, that would be her maximum allowable IRA contribution.
Which of the following vehicles make use of the unified estate tax credit? bypass trust. generation skipping trust. living trust. simple trust. A)I and II. B)III and IV. C)I and IV. D)II and III.
A)I and II. Both the bypass trust and the generation skipping trust are tools used by estate planners to reduce estate taxes. They do so by passing the amount in the unified credit (currently $5.45 million for 2016) to heirs other than the spouse, usually grandchildren in the case of the GST.
With respect to taxation, an investment adviser representative should NOT: A)draft tax and estate documents to insure compliance with current law to provide substantial after-tax returns. B)explain the taxable status of particular investments. C)discuss the tax implications of investments. D)consider tax implications as a way of improving a client's after-tax returns.
A)draft tax and estate documents to insure compliance with current law to provide substantial after-tax returns. An investment adviser representative must not draft legal documents; they should only be drafted by an attorney because doing so constitutes practicing law. An investment adviser representative should, however, discuss all relevant tax implications of recommended investments, including how the recommended investments might improve a client's after-tax returns.
From a tax standpoint, when analyzing the appropriateness of an investment strategy for a client, it is considered to be most important to determine the client's: A)average tax rate. B)minimum tax rate. C)effective tax rate. D)marginal tax rate.
D)marginal tax rate. The investor's marginal tax rate is the rate of income tax levied against the next (or top) dollar received. Therefore, if the recommendation is going to generate taxable income, it will be taxed at that rate. This information is also used to determine the tax benefit of investing in municipal bonds or making a tax-deductible contribution to a retirement plan.
A customer has just died. If his wife asks you what amount of federal estate tax will be imposed on the transfer of their personal property to her name, which of the following responses would be best? A)The amount of tax will depend on your late husband's tax bracket. B)The amount may be prorated over the next four years. C)Consult a qualified tax specialist. D)The amount of tax will depend on the size of the estate to be transferred.
C)Consult a qualified tax specialist. Specific tax advice should be referred to a qualified tax adviser such as an accountant or tax attorney. No federal estate tax is imposed as a result of the marital exclusion as long as the spouse is a U.S. citizen.
Under the current gift tax marital deduction, how much can an individual give a spouse who is a U.S. citizen without incurring a gift tax? A)An unlimited amount B)No more than $147,000 per year C)No more than $28,000 per year D)No more than $14,000 per year
A)An unlimited amount The gift tax marital deduction permits an individual to give a spouse an unlimited amount of property without incurring a gift tax. However, if the spouse is not a U.S. citizen, the maximum marital gift is $147,000 (2015).
One of your customers purchased a variable life insurance contract through your firm. After 14 years, he had deposited $15,000 in premiums, and his death benefit had grown to $80,000. Shortly after taking out a loan against cash value of $10,000, he was killed in an automobile accident. What will be the consequences of this situation to the death benefit? His beneficiary must agree in writing to pay off the loan before collecting the death benefit. His beneficiary will receive the death benefit minus the value of the loan. His beneficiary need not pay taxes on the death benefit. His beneficiary must pay taxes on the amount of the death benefit that is over and above the cost base of $15,000. A)I and IV. B)II and III. C)I and III. D)II and IV.
B)II and III. A death benefit payable on a life insurance policy or contract is not subject to taxation. The insurance company will deduct the balance of the $10,000 loan before it releases the death benefit to the beneficiary.
Client inherits 1,000 shares of ABC mutual fund when NAV is 9.50 and POP is $10.00 and elects to receive all distributions in cash. Two years later, sells all when NAV is 14.25 and POP is 15.00. What are the tax consequences of this sale? A)Long-term capital gain of $5,000. B)Long-term capital gain of $4,750. C)Long-term capital gain of $5,500. D)Long-term capital gain of $4,250.
B)Long-term capital gain of $4,750. Upon death, the beneficiary inherits mutual funds at their NAV ($9.50). Sale (redemption) takes place at the NAV ($14.25) for a profit of $4.75 per share (times 1,000 shares).
One of your clients, No More Leaks Plumbing Company, is organized as a sole proprietorship. The owner would be responsible for: filing routine paperwork common to all forms of business. filing an annual K-1 for income tax purposes. completing a Schedule C. none of the company's liabilities over and above his original investment. A)I and II. B)III and IV. C)I and III. D)II and IV.
C)I and III. A business organized as a sole proprietorship is basically nothing other than the owner himself. As a business, routine paperwork must be completed, but in this case, the tax reporting is on the owner's Schedule C of Form 1040.
There are many sources of taxable income to an individual. Included might be money received from which of the following? Sole proprietorship. Subchapter S corporation. Investments. Death benefits. A)II and III. B)I, II, III and IV. C)I, II and III. D)I and II.
C)I, II and III. An individual can generate income from running a sole proprietorship or being a shareholder in an S corporation (the exam will probably use the obsolete term, Subchapter S). Of course, taxable income can be generated by investments in the form of dividends, interest and capital gains. The assumption here must be that the death benefits are from a life insurance policy because those, unlike the death benefit from an annuity, are not subject to income tax.
Three years ago, a customer bought 200 shares of ABC for $60.50 per share. Upon her death, she left the shares to her husband when ABC was trading at $98.25. If her husband sells the shares for $99.25, what is his cost basis for tax purposes? A)$99.25. B)$79.38. C)$60.50. D)$98.25.
D)$98.25. The cost basis to the recipient of inherited securities is the fair market value on the date of the owner's death. In this case the fair value is the market value of $98.25.
Your daughter is getting married and, to celebrate, you give her fiancé a beautiful watch that you purchased for $5,575. What are the tax consequences of this gift? A)Anything over the FINRA gift limit of $100 per person per year would be considered taxable. B)No tax C)The fiancé would have to report this as ordinary income. D)Because they are not yet married, the fiancé is not actually a family member, so a gift tax would be levied.
B)No tax This very nice gift falls well within the annual exclusion, so no gift tax would be levied. As far as FINRA or the states, first of all, there is no indication that he is a client; and, even if so, the rules do permit gifts without concern for the $100 limit in a circumstance like this.
John Jones dies in June, 2014, leaving the proceeds of his $400,000 life insurance policy to his wife. When computing his gross estate A)none is included because the estate is less than $5.34 million B)all $400,000 is included C)none is included because the beneficiary is his wife D)only half is included in the gross estate because of the marital deduction
B)all $400,000 is included All of a deceased person's assets are included in the gross estate. Whether or not an asset is subject to estate tax is a different story and not part of this question. One way to have removed the policy from the gross estate would have been by using an ILIT.
The separate account sub-accounts chosen by the purchaser of a variable life insurance policy have had outstanding performance over the past 15 years. There would generally be no tax implications in which of the following situations? A)The policy is surrendered B)The death benefit is paid C)A loan is taken equal to 95% of the policy's cash value D)There is a cash withdrawal in excess of the cost basis
C)A loan is taken equal to 95% of the policy's cash value Funds obtained from a policy loan are not considered taxable income (same as any loan - you owe the money). If the amount received at policy surrender is greater than the cost basis, the excess is taxed as ordinary income. The same is true with the withdrawal. Although the death benefit will always be free of income tax, it could be subject to estate tax.
What happens if capital loss is > max you can deduct
they carry over to the next year
MAx gift tax deduction to spouse
unlimited
Using industry jargon, the tax on the last dollar of income is at A)the final rate B)the average rate C)the effective rate D)the marginal rate
D)the marginal rate The IRA defines marginal tax rate as "the highest rate that you will pay on your income." Basically, as you make more money, you pay tax at a higher rate incrementally. The effective tax rate is the average that you pay on all of your income.
Which of the following activities would not be a violation of the ethical standards to be followed by investment advisers and their representatives?? Recommending an estate planning attorney to clients who have inquired about ways to potentially reduce their estate tax liability. Rewarding one of your college fraternity brothers with a cash gift for each client he refers to you. Preparing trust documents for clients using forms you acquired on the Internet. Describing the possible tax ramifications of repurchasing a security shortly after selling it at a loss. A)I and IV. B)III and IV. C)I and II. D)II and III.
A)I and IV. It would not be a violation to recommend the appropriate professional for your client's legal needs. If you were to be compensated for the referral, disclosure would have to be made. When one sells a security at a loss and then repurchases it within a 30-day period, the wash sale rules apply and it is incumbent upon you as a fiduciary to make the client aware of that possibility. Cash gifts to friends for referrals are not permitted, unless a formal solicitor's agreement has been entered into. Under certain circumstances, this would involve registration as an IAR by the individual. Legal documents should be prepared by attorneys, not IAs.
Frank and Joe Hardy have formed Hardy Investigative Services, (HIS), with each owning 50% of the stock in the company. HIS is organized as an S corporation. Unless receiving an extension, the Form 1120S is due A)March 15 B)January 15 C)April 15 D)90 days after the end of their fiscal year
A)March 15 For S corporations, the filing date is March 15 (assuming it is a weekday). For partnership returns (including LLCs with more than one member), the due date is also March 15. For C corporations, the due date is the 15th day of the fourth month following the close of the corporation's year; this date is April 15th for a calendar-year filer. One effect of this is that LLCs, partnerships, and S corporations all have the same filing deadline.
Your client owns a scheduled premium variable life insurance with a face value of $100,000. To date, the client has paid $23,400 in premiums; the cash value of the policy is $31,200 and the death benefit is $110,000. In which of the following instances would there be an income tax liability? A)Surrendering the policy and taking the cash value B)Borrowing $29,000 of the cash value C)Payment of the death benefit to the named beneficiary D)Withdrawing $20,000 of the cash value
A)Surrendering the policy and taking the cash value When a variable life insurance policy is surrendered, any cash value received in excess of the premiums paid into the policy is taxed as ordinary income. There is never a tax liability on money received as a result of a loan and if there is a partial withdrawal of funds, taxation is on a FIFO basis (unlike LIFO of variable annuities). The death benefit, at least for exam purposes, is always income tax free.
A deceased client's trust account has over 90% of its value invested in a single common stock whose recent performance has been outstanding, resulting in a very large unrealized capital gain. What action would most likely be taken by the investment adviser handling this account? A)liquidating a portion of that stock to take advantage of the tax savings offered by the stepped-up basis at death B)continuing to hold that stock position if it is felt that it meets the objectives of the trust C)selling all of that stock in order to rebalance the trust's assets D)exchanging a portion of that stock for a suitable security held in the adviser's trading account
A)liquidating a portion of that stock to take advantage of the tax savings offered by the stepped-up basis at death Under current tax law, a beneficiary inherits assets at their fair market value as of the time of death. This is known as a stepped-up basis (probably because these assets are generally at a higher price than when originally purchased). In this question, we are told that there is a large unrealized gain. Therefore, with a portfolio that is over-concentrated in one security, it would make sense to diversify while, at the same time, avoiding or minimizing capital gains taxes. It would be against the provisions of the UPIA for a fiduciary to ever engage in trading from his own account.
A client of yours dies, leaving an estate valued at $1.8 million. Of the total estate, there was a brokerage account at your firm with a value of $1.2 million. You will: A)tell the executor that he might wish to take advantage of an anticipated decline in the stock market by using the alternative valuation date of 6 months after death. B)inform the executor that you need to keep sufficient liquid funds in the account because estate taxes will be due in 6 months. C)offer to assist the executor in determining cost basis of the securities so that the heirs will be better able to determine their potential capital gains taxes. D)notify the executor of the estate that any rebalancing of the portfolio may take place without concern for income taxes.
A)tell the executor that he might wish to take advantage of an anticipated decline in the stock market by using the alternative valuation date of 6 months after death. The IRS permits an estate to value assets either as of date of death or 6 months later. In either case, estate taxes (if any) are due 9 months after the date of death. Cost basis is irrelevant because heirs acquire securities on a stepped-up basis. However, trading by the executor in the account is taxed in the same manner as any other person; only the heirs receive the tax break.
Which of the following losses would be disallowed by the IRS under wash sale rules? A)An investor sells 700 shares of OBL common stock at a loss, and 5 weeks later goes long 7 OBL Jan 40 calls at a premium of $3.25. B)An investor shorts 1,000 shares of Key Corp common at $17 per share. 26 days after closing this short position at $25 per share, the investor shorts another 1,000 shares of Key Corp common at $28. C)An investor sells Ben Corp nonconvertible preferred stock at a loss, and 3 weeks later purchases Ben Corp common stock. D)An investor sells the Financial Short-Term Corporate Bond Fund at a loss and purchases the Investors Advantage Short-Term Corporate Bond Fund the next day.
B)An investor shorts 1,000 shares of Key Corp common at $17 per share. 26 days after closing this short position at $25 per share, the investor shorts another 1,000 shares of Key Corp common at $28. Establishing a new and equally identical short position within 30 days from the day of the trade that creates the loss results in a violation of wash sale rules and the loss would not be allowed. With Ben Corp and with the Corporate Bond funds, the investor is trading different securities so the wash sale rule does not apply. The purchase of a call option contract after selling common stock at a loss in the case of OBL would be considered purchasing a substantially similar security. The loss would be limited by the wash sale rule. However, in this case the loss would not be limited by the rule, as the time of the option purchase is more than 30 days after the sale at a loss.
An individual purchased a variable life insurance policy 10 years ago with a guaranteed death benefit of $100,000. The annual premium for this policy was $2,000 per year. The individual dies and, due to outstanding performance of the separate account, leaves a death benefit to the beneficiary of $121,000. What are the income tax consequences to that beneficiary? A)There is a long-term capital gain of $1,000. B)No tax is due. C)Ordinary income tax is due on the $1,000. that exceeds the original cost. D)Ordinary income tax is due on $21,000.
B)No tax is due. One of the nice things about life insurance proceeds is that even when the death benefit is increased due to separate account performance, it is still free of income tax.
Alicia, a calendar year taxpayer, purchased 100 shares of common stock in Mikup Inc. for $10,000 on December 1, 2012 and on December 15, 2012 she purchased 100 additional shares for $9,000. On January 3, 2013, she sold the 100 shares purchased on December 1, 2012 for $9,000. Which of the following statements is CORRECT? A)Alicia may claim the loss from the sale on her 2012 tax return. B)There is no capital loss in 2012 and Alicia's cost basis in the stock purchased December 15th is now $10,000. C)Alicia may claim the loss from the sale on her 2013 tax return. D)Alicia could claim the loss from the sale on her 2013 tax return if she had purchased an option on the stock rather than the stock itself on December 15, 2012.
B)There is no capital loss in 2012 and Alicia's cost basis in the stock purchased December 15th is now $10,000. This is a wash sale and the loss may not be deducted in the year of sale. The rules state that a purchase of the same or substantially identical security as the one being sold at a loss within a period of 30 days prior to or following that sale causes the loss to be disallowed at this time. The purchase of the additional 100 shares on December 15, 2012 occurred less than 30 days prior to the sale of the original stock on January 3, 2013. The purchase of an option to acquire stock or securities is the same as acquiring the stock or securities. As a result, since the $1,000 realized loss could not be deducted, it is added to the cost of the purchase that created the "wash". That makes the cost of the December 15th stock $10,000.
John and Martha, both in their early 40s, were divorced 2 years ago. Because Martha is unemployable, the terms of the divorce require John to pay Martha $300 per month in alimony and $1,000 per month in child support for their 4 children. Given that information, which of the following statements is CORRECT? A)Martha has reportable taxable income of $12,000 for the year. B)Martha could contribute a maximum of $5,500 this year to an IRA. C)John is able to deduct $3,600 from his taxable income. D)John is able to deduct $12,000 from his taxable income.
C)John is able to deduct $3,600 from his taxable income. Alimony is considered eligible income for an IRA to Martha and tax deductible to John. Child support is neither income to Martha nor deductible to John. Because Martha receives $3,600 in alimony, that would be her maximum allowable IRA contribution.
A professional tennis player seeking advice regarding the purchase of life insurance would like to avoid inclusion in her taxable estate at death, and would like the death proceeds to be income tax free to her beneficiary 9-year-old daughter. What do you suggest? A)Purchase the policy herself and gift the policy to an irrevocable trust (with her daughter as beneficiary) at least 3 years after purchase. B)Purchase the policy herself and sell it to her daughter at a price the daughter can afford when she is over 19 years old. C)Purchase the policy herself so that she will get the insurance. Then have her gift the policy and the premiums needed to pay for it to her daughter until she turns 19. D)Use an Irrevocable Life Insurance trust (ILIT) to purchase the policy. She will gift the premiums to the trust.
D)Use an Irrevocable Life Insurance trust (ILIT) to purchase the policy. She will gift the premiums to the trust. Only an ILIT can provide the features which she desires. A direct purchase will subject the proceeds to inclusion in the gross estate if she transfers or gifts the policy to the daughter within 3 years before she dies. A sale will trigger transfer for value rules and subject the beneficiary to income tax on the proceeds upon the death of the insured.
A tax, often described as a parallel tax to the regular federal income tax, that disallows certain deductions and exemptions, is the A)capital gains tax B)personal property tax C)intangible assets tax D)alternative minimum tax
D)alternative minimum tax Originally created as part of the Tax Reform Act of 1969, the alternative minimum tax (AMT) was designed to capture income taxes from a small number of individuals (less than 200) who made more than $200,000 in 1968, but paid no income tax. Today's version, by eliminating the tax benefit of certain tax preference items, such as accelerated depreciation and long-term capital gains, as well as common deductions, such as state income tax and real estate taxes, makes it almost impossible to escape without paying at least some income tax. However, today, the AMT affects far more than the original miniscule number. According to TurboTax, in 2010, 29.3% of taxpayers earning between $75,000 and $100,000 were required to pay the AMT. The IRS requires middle- and high-income taxpayers to run two sets of numbers when filing income taxes: the regular income tax calculations on Form 1040 and the AMT method on Form 6251. Whichever number is higher is the amount the taxpayer must pay. Technically, the statement is: The taxpayer pays the regular income tax plus the amount by which the alternative tax exceeds the regular income tax. Of course, that just means you pay whichever is the higher amount.
An advisory client of yours dies, and you transfer the $1.4 million of securities in the individual's name to the estate account. You will: A)tell the executor that he will be receiving a Form 1099 for tax purposes, representing the transfer of account over to the estate account. B)inform the executor that you need to keep sufficient liquid funds in the account because estate taxes will be due in 6 months. C)notify the executor of the estate that he is able to do any trades to rebalance the account, and that taxes will be of no consideration. D)continue to manage the account unless the advisory contract called for termination upon death or informed otherwise by the executor.
D)continue to manage the account unless the advisory contract called for termination upon death or informed otherwise by the executor. Unless the advisory contract has a termination upon death provision or the executor wishes to assume management of the account, the investor adviser may continue to manage the account of the estate. Trades made in the account must take into consideration tax implications as with any other account. Estate taxes are due 9 months after death, and unless there are other assets not listed here, no tax is due because this estate is less than $5.25 million (the amount exempt from taxation for 2013).
