Review Investment Recommendations: Financial Profile of a Client
Which recommendation is appropriate for a client who is subject to the AMT (Alternative Minimum Tax)?
"Don't exercise any incentive stock options granted by your employer"
A customer in the 28% tax bracket has $9,000 of capital losses and $5,000 of capital gains. How much loss is deductible from this year's tax return?
$3,000
A customer has $10,000 in passive losses from a limited partnership investment. If the customer has $3,000 of passive income for that tax year, the customer may deduct:
$3,000 Passive losses (which are derived from direct investments in real estate and limited partnership investments) can only be offset against other passive income. Since there is $3,000 of passive income for this tax year, only $3,000 of passive losses can be deducted. The unused $7,000 of passive losses are carried forward and can be offset in later years against passive income generated in those years.
A customer has $7,000 of capital losses and $3,000 of capital gains in a tax year. On that year's tax return, the investor has a:
$3,000 capital loss deduction and a $1,000 loss carryforward The tax law allows capital gains and losses to be netted each year. Net capital gains are fully taxable at the tax bracket. However, only $3,000 of net capital losses can be deducted in any year. Any losses above this amount can be carried forward to the next tax year. This customer has a net $4,000 capital loss, of which $3,000 can be deducted this year and $1,000 must be carried over to next year
In January, 20XX a customer buys 100 shares of ABC stock at $30 per share and pays a $2 commission per share. The customer receives $1 in cash dividends during the year. The customer's cost basis in the stock is:
$32 per share
Which statement is TRUE about trust taxation?
A Form 1041 must be filed reporting income, gain and loss
An older customer, age 63, that is in the lowest tax bracket, seeks an investment that will give him an income stream. The BEST recommendation would be:
AAA Corporate bond
Which statement is TRUE regarding mutual fund distributions?
All capital gains distributed by the fund are taxable to the recipient based on the fund's holding period, even if the recipient has held the shares for less than 1 year
Which of the following is a capital need for a medical student?
Buying medical imaging equipment 5 years from now
When comparing a C corporation to an S corporation, which statement is FALSE?
C corporations are treated similar to partnerships for federal tax purposes, while S corporations are federally taxable entities
All of the following are considered when evaluating a customer's tax status EXCEPT: Age Citizenship Total earnings as of the last day of the tax period Residency
Citizenship
A parent buys 100 shares of ABC stock for $4,000. 3 years later, the current market value is $5,000. If the parents give the shares to their son, the tax consequence to the son is:
Cost basis to the son of $4,000
The person who donates the assets into the trust is the:
Grantor
Passive income includes income received from: I Real estate investments II Real estate limited partnership investments III Real estate investment trust investments IV Collateralized mortgage obligation investments
I and II only
Which of the following are types of joint accounts? I Tenancy by Entireties account II Tenancy in Common account III Joint Tenants with Rights of Survivorship account IV Partnership account
I, II, III Partnership accounts are not joint accounts - only the designated partner(s) authorized in the partnership agreement can trade the account and draw checks - each individual partner is not permitted to do so.
Which of the following statements are TRUE regarding family limited partnerships?
Only general partners can assume management roles
A 60-year old man seeks an investment that gives liquidity and income. The best recommendation would be:
Short-term Treasury Note
A husband and wife hold a joint account at your firm with rights of survivorship. The husband manages the account, places orders, monitors account activity, and monitors account performance. The wife is not involved at all. The husband dies. What should representative do?
Talk to the wife
Dividends paid by a corporation that are reinvested in the purchase of additional shares are:
taxable at capital gains rates
All of the following would be found on a client's personal balance sheet EXCEPT:
term life insurance coverage
LLCs and S Corporations are similar in that:
the entity itself is not taxable and tax liability is passed through directly to the owners
The person that administers a trust is the:
trustee
Over the course of 10 years, a customer has accumulated a position of 5000 shares of ABC stock, purchased in 100 and 200 share lots. The stock has appreciated greatly in the last year and the customer places an order to sell 1,000 shares. The customer would minimize any capital gains tax liability by using which method for determining the cost basis of the shares sold?
"Specific identification" allowing the customer to select the shares with the highest cost basis
On December 10th, 2021, a mother gives a gift to her daughter of 1,000 shares of PDQ stock. The stock was purchased 6 months earlier at a cost basis per share of $48 per share. The market value at the date of the gift was $64 per share. On January 18th, 2022, the mother dies and bequeaths 1,000 shares of DEF to the daughter. The market value of DEF at the date of death is $40 per share and the shares were purchased 2 months earlier by the mother at $35 per share. On February 1st, 2022, the daughter sells the PDQ stock at $70 per share and sells the DEF stock at $50 per share. The tax consequence to the daughter upon selling PDQ and DEF is:
$22 per share short term capital gain on PDQ; $10 per share long term capital gain on DEF
A customer in the 35% tax bracket has $6,000 of capital gains and $10,000 of capital losses. How much loss is deductible from this year's tax return?
$3,000
A grandmother purchased 100 shares of ABC stock for $1,000. She gifts it to her granddaughter when the stock is worth $3,000. 2 years later, the granddaughter sells the stock for $5,000. What is the tax consequence when the granddaughter sells the stock?
$4,000 Long Term Capital Gain
An individual client purchased his residence 5 years ago for $200,000. For 3 of the last 5 years, the client rented out the property for income, and lived in the house of 2 of those years. The client sells the house for $500,000. How much of the gain is taxable?
$50,000
A customer buys $23,000 of ABC stock in March of 20XX. On December 31, 20XX, the stock is valued at $20,000. The customer will be able to deduct how much on this year's tax return?
0
A married couple purchased their residence 5 years ago for $500,000. For 3 of the last 5 years, they rented out the property for income, and lived in the house of 2 of those years. The clients sell the house for $800,000. How much of the gain is taxable?
0
A customer has purchased 1,000 shares of ABC stock at $30 per share, paying a commission of $1 per share for the transaction. ABC stock declares a 5% stock dividend. When the dividend is paid, the tax status of the investment is:
1,050 shares held at a cost basis of $29.52 per share
An individual that has made a passive investment has bought into a:
DPP A "DPP" is a Direct Participation Program - another name for a limited partnership tax shelter investment. In such an investment, the customer is a "passive investor" and has no management role. Management is performed by the general partner (each limited partnership must have at least 1 general partner and can have multiple limited partners). In a sole proprietorship, general partnership or limited liability company, each "owner" is an "active" participant in the business, making day-to-day business decisions.
Which of the following is NOT defined as "portfolio income" under IRS guidelines?
Distributive share of income from limited partnership holdings
Which of the following are taxable in the year of receipt? I Interest earned from investments II Cash dividends from investments III Stock dividends from investments
I and II
A young housewife is the beneficiary of a trust, as are her 2 children, who have also been appointed as trustees. What MUST the investment adviser do when managing the assets of the trust? I The investment adviser should review the trust document thoroughly II The investment adviser should select the portfolio investments balancing the objectives and needs of the wife and the 2 children III The investment adviser is limited to selecting portfolio investments that are on the State's legal list IV The investment adviser is allowed to split the advisory fees with the plan trustees
I and II only
An investor in a limited partnership generating passive losses can offset these against: I Passive income generated from other limited partnership investments II Income generated from direct investments in real estate III Dividends received from blue chip corporations IV Capital gains generated from the sale of securities
I and II only
If a security was held for more than one year and it is donated to a charity by the investor, which of the following statements are TRUE about the tax consequence of the event? I The investor gets to deduct the fair market value of the security as a donation II The investor gets to deduct his original cost basis of the security as a donation III The investor has no tax liability on the appreciation IV The investor has tax liability on the appreciation
I and III
An investor holds shares of a stock that declares a 10% stock dividend. Which of the following statements are TRUE regarding the stock position after the dividend is paid? I The cost basis per share is adjusted II The cost basis per share remains the same III The distribution is taxable IV The distribution is not taxable
I and IV
Which item(s) is (are) needed to determine tax filing status? I Marital status on the last day of the year II Age of the filer III Residency on the last day of the year IV Citizenship of the filer
I only
A corporate investor may exclude from taxation, part of: I dividends received from common stock investments II dividends received from preferred stock investments III dividends received from convertible preferred stock investments IV interest received from convertible bond investments
I, II, III
The tax basis for an investor in a limited partnership that establishes the maximum loss deduction includes: I original investment II partnership debt assumed III distributive share of partnership gains IV distributive share of partnership losses
I, II, III, IV
Which of the following statements are TRUE regarding gift and estate taxes? I Gift and estate taxes are progressive taxes II Gifts valued up to $16,000 in 2022 are excluded from tax III The first $12,060,000 of an estate (in 2022) is excluded from tax IV Tax liability rests with the donor or estate
I, II, III, IV
A sole proprietor: I cannot do business as a DBA II can do business as a DBA III must file an individual return Form 1040 with a Schedule C attached IV must file an individual return Form 1040 with a Schedule E attached
II and III
Limited liability companies: I are limited as to the number of investors II are unlimited as to the number of investors III give limited liability to investors IV give unlimited liability to investors
II and III
Which statement is TRUE regarding calculating cost basis for tax purposes for stocks versus calculating cost basis for corporate bonds? I The cost basis calculation for stocks takes into account amortization of premiums paid or accretion of any discount II The cost basis calculation for stocks does not take into account amortization of premiums paid or accretion of any discount III The cost basis calculation for bonds takes into account amortization of premiums paid or accretion of any discount IV The cost basis calculation for bonds does not take into account amortization of premiums paid or accretion of any discount
II and III
An elderly customer seeking extra income who has $100,000 to invest could be recommended which of the following? I The $100,000 purchase of a variable annuity II The $100,000 purchase of dividend paying blue chip stocks in a cash account against which calls are sold III The $200,000 purchase of dividend paying blue chip stocks at 50% margin in a margin account IV The $100,000 purchase of Treasury bonds
II and IV
An investment adviser set up an investment plan for a client which included enough life insurance held in an irrevocable trust to fund the remainder of the plan if the client were to die prematurely. The client dies before fulfilling the investment plan. Which of the following statements are TRUE? I The life insurance proceeds are included in the client's taxable estate II The life insurance proceeds are not included in the client's taxable estate III The amount of insurance needed to fulfill the investment plan needs to be increased to cover any tax liability IV The amount of insurance needed to fulfill the investment plan doesn't need to be increased to cover any tax liability
II and IV
Which of the following BEST describes S corporations? I S corporations have a limited life II S corporations have an unlimited life III S corporations are taxable entities IV S corporations are not taxable entities
II and IV
Which statements are TRUE about mutual fund distributions that are automatically reinvested? I Dividend distributions that are automatically reinvested are not taxable until the shares are redeemed II Dividend distributions that are automatically reinvested are taxable in the year the distribution is made III Capital gains distributions that are automatically reinvested are not taxable until the shares are redeemed IV Capital gains distributions that are automatically reinvested are taxable in the year the distribution is made
II and IV
Which of the following are included in the taxable income of a corporation? I Proceeds received from the issuance of common stock II Dividends received from domestic investments III Interest received from foreign investments IV Gain on the sale of a capital asset
II, III and IV
Which of the following are defined as "portfolio income" under IRS guidelines? I Distributive share of income from limited partnership holdings II Proceeds from the sale of securities in excess of the tax basis of those securities III Interest income received from bond holdings IV Dividends received from preferred stock holdings
II, III, IV
Which of the following would be defined as "earned income" under IRS regulations? I Social Security payments II Tips III Royalty payments IV Bonus payments
II, III, IV
All of the following accounts avoid probate upon death of an owner EXCEPT: Totten trust JTWROS Individual Payable on Death
Individual
Which item is NOT included in a client's income statement?
Insurance policy amount
A husband and wife wish to open an account that allows either party to trade or draw checks; and that becomes the property of the surviving spouse if one should die. The proper ownership form is:
Joint Tenants with Rights of Survivorship
An investment adviser would recommend to a client that he or she should buy which of the following in order to properly fund an investment plan if the client dies prematurely?
Life insurance
An 85-year old client owns a portfolio that is yielding 1.2%. His expenses have increased by 15% this year, and he is worried about having sufficient income to pay his increased expenses. Other than his portfolio, his only asset is his fully paid house. Upon his death, he wishes to bequeath his assets to his children. His portfolio consists of: 40% Money Market Fund 10% Equities 50% Intermediate Term Bonds There is a new issue corporate bond available with a 5 year maturity, AA rated, yielding 2.4%. Also available are 20 year Treasury Bonds yielding 4%. What is the best recommendation to the customer?
Liquidate 75% of the money market fund holding and invest it in the corporate bond issue
Which of the following would be defined as "portfolio income" under IRS regulations?
Long term capital gains
Which of the following is EXCLUDED from Adjusted Gross Income on a tax return? Salary and commission income Social Security payments received Municipal bond interest income Municipal bond capital gains
Municipal bond interest income
An Investment Adviser Representative (IAR) is helping a client structure a portfolio to pay for the higher education costs of their child. All of the following are items that should be considered in determining the amount of funding needed in the portfolio EXCEPT: Tuition cost Housing cost Anticipated inflation rate Parent's income level
Parent's income level
Which of the following business structures has unlimited liability? S corporation Sole proprietorship C corporation Limited liability company
Sole proprietorship
Many years ago, a trust was set up for the benefit of a client. The client passes away. The trustee is notified by the IRS of possible tax problems and is separately notified that a family member is protesting the trustee's actions. Based on this information, what should be the most heavily weighted factor when recommending a portfolio investment to the trust?
Taxes
At the initial discussion phase with a customer about portfolio planning, which of the following is NOT necessary? Testamentary letter Listing of customer brokerage accounts Life insurance coverage held by the customer Listing of assets owned by the customer
Testamentary letter
Which statement is TRUE regarding calculating cost basis for tax purposes for stocks versus calculating cost basis for corporate bonds?
The cost basis calculation for bonds takes into account amortization of premiums paid or accretion of any discount earned, while the cost basis calculation of stocks does not
A father gives a $10,000 gift of securities to his son; and a $10,000 gift of securities to his daughter. Which statement is TRUE?
The father has no gift tax liability
A father is writing his will (the testator) and is naming as beneficiaries his 2 adult sons - Son A and Son B, and their children. Son A has 2 children - A1 and A2. Son B has 1 child - B1. Each one will get an equal share "per capita" of the father's estate upon the father's death. Son B predeceases the testator. This means that:
The grandchild B1 gets 25% of the assets of the estate upon the death of the testator
Which of the following statements concerning a distribution reported by a mutual fund as a "capital gain" on Form 1099-DIV is correct?
The shareholder generally pays long term capital gains tax regardless of when the shareholder purchased the mutual fund
Which statement is TRUE regarding family limited partnerships?
The venture must have a legitimate business purpose other than tax avoidance
A husband and wife wish to open a joint account. The husband is concerned that if he is sued, that the assets of the account could be subject to claim and wishes to avoid this. Which statement is TRUE?
This possibility is avoided if the account is opened as Tenants by Entireties
A couple owns a home together and they file for bankruptcy. If there is an excess of funds from the sale of the home, where does the extra money go?
To the additional creditors
A customer wishes to open an account at a bank and name her son as beneficiary. She has $4,500 to deposit and wishes to maintain control of the account and be able to use the funds as she wishes. What type of account can be opened?
Totten trust account
Which of the following securities are likely to be on a State's "Legal List"?
U.S. Government agency bonds
A bypass trust would be used by:
a married couple
A husband and wife have a joint account with a member firm. The wife calls the registered representative with instructions to liquidate their 500 share position of ABC stock. The registered representative should:
accept and execute the order as given
The unified credit applies to:
both estate and gift tax
In order to establish a retirement financial plan to meet a customer's goals, the most important consideration is:
capital needs
All of the following statements are true regarding joint accounts EXCEPT: mailing of account statements may be directed to any single party; checks drawn on the account may be made out in the name of any single party; orders may be entered into the account by any single party; open unexecuted orders may be canceled by any single party;
checks drawn on the account may be made out in the name of any single party
A father is writing his will (the testator) and is naming as beneficiaries his 3 adult sons. Each one will get an equal share "per stirpes" of the father's estate upon the father's death. Each of the sons has children (the grandchildren of the testator) who are not yet adults. If one of the sons predeceases the testator, then the:
deceased son's share passes to his children
The principal advantage of a Sole Proprietorship over a Limited Liability Company (LLC) is:
ease of preparing and filing tax returns
An account is opened for three individuals as "Tenants in Common". If one of the individuals dies, the:
estate assumes the tenancy of the deceased individual in the account
All of the following can be the same person in a trust EXCEPT: grantor trustee beneficiary executor
executor
A new client has been employed as a manager at XYZ Corporation (NYSE listed) for the last 20 years and has a defined contribution pension plan at his employer that he has chosen to invest 100% in XYZ Common stock. The value of the pension plan is now $750,000. The customer is 7 years from retirement and has asked for advice about what steps he should take regarding his retirement account. As the adviser to the customer, your IMMEDIATE concern should be the:
fact that the customer is concentrated in one stock and lacks diversification in his portfolio
The difference between a C Corporation and an S Corporation is:
flow-through tax status
An extremely wealthy family that is seeking to establish a lasting charitable legacy would be best advised to set up a:
foundation
Your client of many years is age 65 and has just been diagnosed with a short-term terminal illness. He is well-off and has 2 adult children, ages 30 and 35. His investment portfolio is overweighted in small dollar low cost stocks. You should talk to the client about:
gifting the low cost basis stock to the adult children The only choice that does not result in an immediate tax bill is Choice A - if the low cost basis securities are gifted to the kids, they transfer at the donor's cost basis and holding period and no tax is due on the appreciation until the kids sell them- which could be years in the future. But, the IRS has a rule about a "gift made in anticipation of death" - where it "claws back" that gift and includes it in the taxable estate (for gifts given in the 3 years prior to death). So, what will happen if the stock is given as a gift "in anticipation of death" is that it will be included in the deceased customer's estate and will be valued at fair market value in the estate. As long as the estate is under the $12,060,000 exclusion (in 2022), no estate tax is due. As an inheritance, the shares go to the adult children at a stepped-up cost basis equal to fair market value (so the kids do not have to pay tax on the appreciation to date) and any gain or loss when those shares are sold by the adult children would be long-term.
The Generation Skipping Tax applies to outright gifts or transfers in trust to:
grandchildren
The settlor of a trust is the:
grantor
Income in a revocable trust is taxed at the:
grantor's tax rate
A divorced single mother with 2 children is filing her federal tax return. The most advantageous tax filing status for this individual is:
head of household
The term "marriage penalty" refers to the:
higher tax rates applied to higher joint reported income
A C Corporation is NOT permitted to:
issue tax-exempt dividends
An investor buys stock on January 1st for $100 and sells it 1 1/2 years later on July 1st for $90. The investor has a:
long term capital loss
Investor likes and dislikes that must be taken into account when making a recommendation to a customer is an example of:
non-financial considerations
All of the following statements are true regarding family limited partnerships EXCEPT: the venture must have a legitimate business purpose other than tax avoidance; the partnership must have at least 1 general partner and 1limited partner; only general partners can assume a management role; only securitized assets can be held as investments;
only securitized assets can be held as investments
A customer holds 1,000 shares of ABC stock valued at 80 in a margin account. The debit balance in the account is $35,000. ABC declares and pays a 20% stock dividend. The tax consequence of the distribution to the investor will be:
reduction of cost basis per share
A Registered Investment Adviser (RIA) has managed $5,000,000 of a customer's funds successfully for many years. The customer asks the RIA to prepare a revocable trust for his children and tells the RIA to transfer $2,000,000 of his funds into the trust and trade the new account in the same manner as the existing account. The RIA should:
refer the client to an attorney that can set up the trust
A customer has total assets of $436,000 and total liabilities of $314,000. The customer has just signed a contract to buy a new car for $35,000; and will finance it by taking $5,000 from his existing checking account and borrowing the remaining $30,000 from the auto finance company. As a result of this transaction, the customer's net worth will:
remain unchanged
A married couple, the husband is age 27 and the wife is 25, have 2 young children, no retirement plan and no investments. Based on this information, an agent should:
talk to the clients about their financial goals
When managing the assets of a trust, an investment adviser would NOT be concerned with the:
tax considerations of the trust settlor
Cash dividends received are:
taxable as ordinary income at a preferential rate
Income in a non-revocable trust is taxed at the:
trust rate Income in a non-revocable trust is taxed at the rates scheduled for trusts - these are the similar to the rates as for individuals but the brackets "ratchet up" faster to a maximum rate of 40% (in 2022). In contrast, income in a revocable trust is taxed at the grantor's tax bracket (since the grantor still has control of the assets that generate the income).
