Series 66 Chapter 21

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

B

There are a number of different ways in which a business may be structured. For tax purposes, which form is taxed on its income? A) S corporation B) General partnership C) Sole proprietorship D) LLC

C

All of the following are progressive taxes except A) gift taxes. B) personal income taxes. C) estate taxes. D) excise taxes on cigarettes.

D

Which of the following statement(s) regarding gift taxes for a gift made in 2019 are TRUE? Gifts of $15,000 per person per year can be given without a tax liability. Gifts in excess of $15,000 per person per year may be subject to tax. The donor, not the recipient, is responsible for any tax liability. The tax rate increases with the size of the gift.

1, 2, 3, 4

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 cross D) a stock swap

A

Which of the following entities would issue a Schedule K-1? A) Limited partnership B) C corporation C) Sole proprietorship D) REIT

A

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 offset $1,000 ordinary income this year. B) There will be no tax consequences. C) He will have a $1,000 gain. D) He will have a $1,000 loss to carry over to the next year.

A 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.

William died in 2019 with the following assets and liabilities: $200,000 in securities left to his wife, $650,000 home left to his wife (the home cost $150,000), $250,000 life insurance policy with his daughter named as beneficiary, and $75,000 in debts and estate expenses. What is William's net estate? A) $175,000 B) $750,000 C) $625,000 D) $0; it is below the $11.4 million exemption equivalent

A The question is asking for the net estate, not the amount of estate tax due. The market value of all assets that William has an incident of ownership in will be included in the gross estate. All assets left to the spouse and the debts/expenses are allowable reductions to arrive at the net or taxable estate. The math goes like this. The $1.1 million gross estate (add together the assets ($200,000 + $650,000 + $250,000) is reduced by the $850,000 left to his wife. That brings the net estate down to $250,000 ($1,100,000 minus $850,000). The net estate is further reduced by the $75,000 in debt and expenses. Subtracting $75,000 from $250,000 leaves a net estate of $175,000. That is well below the estate tax exemption of $11.4 million in assets for 2019.

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) long-term capital gain of $10,600 B) long-term capital gain of $11,118 C) short-term capital loss of $800 D) long-term capital loss of $800

A 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.

A Schedule K-1 would be received by an individual with an ownership interest in all of the following except A) an LLC. B) a C corporation. C) an S corporation. D) a partnership.

B

A business organized as which of the following pays federal income tax on its income? A) Partnership B) Sole proprietorship C) LLC D) S corporation

B

A customer is selling inherited stock. The decedent originally paid $50 per share and on the date of the decedent's death, the stock was worth $60 per share. On the day the customer sells the stock, the price per share is $62. What is the investor's cost basis in the stock? A) 55 B) 60 C) 62 D) 50

B

A taxpayer's marginal tax rate is A) the rate of tax paid on total taxable income B) the rate of taxation on any additional taxable income received C) the rate of tax paid on margin account interest D) generally lower than the effective tax rate

B

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

B

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

B

If a high-income taxpayer is subject to AMT, which of the following preference items must be added to adjusted gross income to calculate his tax liability? A) Interest on a general obligation municipal bond B) Interest on a private purpose municipal bond C) Distributions from a corporate bond mutual fund D) Dividends paid on preferred stock

B

A U.S. citizen owns stock in a Canadian company and receives dividends. The Canadian government withholds 15% of the dividends as a tax. As a result, the investor reports A) a reduction in the investor's ordinary income B) a tax credit on the investor's U.S. tax return C) a nonrecoverable loss on the investor's U.S. tax return D) a tax credit on the investor's Canadian tax return

B An investor receives a credit for taxes withheld on investments by countries with which the United States has diplomatic relations; the tax credit directly decreases the investor's American tax liability.

A client owns a taxable bond with a coupon rate of 5%. His marginal tax rate is 28%. What is the after-tax yield he will receive on this investment? A) 1.40% B) 6.94% C) 3.60% D) 6.40%

C

A high net worth individual wishes to know when a gift can be made this year without being obligated to pay gift tax. You would respond that there is no gift tax when the gift is made to A) a grandchild of the donor. B) a sibling of the donor. C) the American Red Cross. D) a non-citizen spouse.

C

A married couple has lived in the same home for 40 years and now, with the children all gone, they've decided to sell and move to a retirement village. They purchased the home for $80,000 and have accepted a contract for $800,000. The tax consequences of this sale is A) $0 capital gain. B) $470,000 capital gain. C) $220,000 capital gain. D) $720,000 capital gain.

C

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) $0.00 B) $2,500.00 C) $3,000.00 D) $5,000.00

C

An investor purchases 1,000 shares of ABC at $42 per share. One year later, the stock is trading at $50 per share and the investor receives 50 shares of ABC as a stock dividend. How will this dividend be currently taxed? A) As $2,500 ordinary income B) As a $2,100 capital gain C) The shares are not subject to taxation D) As a $2,500 capital gain

C

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

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

A client buys 100 shares of a mutual fund on December 28, 2016, for $4,000 and receives a capital gains distribution of $2.40 per share on March 6, 2017, which is taken in cash. He sells his 100 shares for $4,300 on June 19, 2017. For tax purposes, this transaction will result in A) a $60 short-term capital gain B) a $240 long-term capital gain and a $60 short-term capital gain C) a $300 short-term capital gain D) a $240 long-term capital gain

C The June sale of the shares purchased in December results in a short-term capital gain of $300. The distribution represents a long-term gain of $240, but this question only deals with the client's transaction.

After receiving some money from an inheritance, an individual purchases a rare gold coin for $10,000. Five years later, he gives the coin to his daughter-in-law after receiving an appraisal showing the coin is worth $15,000. The daughter-in-law's cost basis of the coin is A) $15,000. B) $0.00. C) $5,000. D) $10,000.

D

If a customer of your firm receives stock from the estate of her mother, the stock's cost basis in the hands of the customer is A) the market value at date of distribution to the customer B) the original cost of the stock adjusted for any estate taxes paid C) the original cost of the stock D) the market value at date of death

D

Tax preference items are used for the purpose of computing the alternative minimum tax. They include all of the following except A) accelerated depreciation. B) certain incentive stock options. C) excess intangible drilling costs. D) straight-line depreciation.

D

Under the current gift tax marital deduction, how much can an individual give a spouse who is a U.S. citizen without incurring a gift tax? A) No more than $30,000 per year B) No more than $15,000 per year C) No more than $152,000 per year D) An unlimited amount

D

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

D

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) $1,500 B) $4,500 C) $10,000 D) $6,500

D 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. The computation is: $1,500 in taxable interest + $2,000 in dividends (reinvestment means nothing here) + $3,000 in tax-exempt interest. This is a total of $6,500 of DNI. When distributed, only $3,500 will be taxable.

During the previous fiscal year, The Kaplan Family Trust received $24,000 in dividends and $35,000 in interest from corporate bonds. Securities transactions during the year resulted in long-term capital gains of $48,000, $20,000 of which were reinvested in the corpus. The DNI for the Kaplan Family Trust is A) $107,000 B) $79,000 C) $11,000 D) $87,000

D Distributable Net Income (DNI) is dividends and interest plus capital gains that have not been reinvested back into the trust. In this case, $24,000 + $35,000 + $28,000 = $87,000.

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

D 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.

You have a client who was divorced 3 years ago, maintains a home, and has custody of the children. More than likely, the most advantageous tax filing status for your client is A) divorced parent. B) single. C) joint. D) head of household.

D When qualifying for head of household status (the technical qualifications are beyond the exam), the individual has the lowest tax burden. There is no such status as "divorced parent" and one cannot file jointly unless married. Filing as a single carries the highest tax burden.

A U.S. citizen purchases a bond issued by the government of Sweden. The interest payments received are taxed at which of the following levels? Federal State Local

1, 2, 3

Howard is the owner of 4 different insurance policies. Which of the following policies have death benefits proceeds that are NOT subject to income tax upon death of the insured? Policy 1; his wife is the insured. Policy 2; his business partner is the insured. Policy 3; his daughter is the insured. Policy 4; he is the insured.

1, 2, 3, 4

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

If an employed client has $12,000 of capital gains and $15,000 of capital losses in the most recent taxable year, how much unused loss, if any, is carried forward by the client to the following tax year? A) $0.00 B) $3,000.00 C) $15,000.00 D) $12,000.00

A

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

A

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

A

If a father makes a gift of securities to his 10-year-old daughter, gift taxes would be based on A) the market value of the securities on the date of gift B) the market value of the securities as of December 31 of the year in which the gift is made C) the cost of the securities D) the market value of the securities as of April 15 of the year in which the gift is made

A If a gift tax is due, it is paid by the donor and based on the gift's value on the date it is given.

One of your clients invested $10,000 into a mutual fund. The client elected to reinvest all dividends. As a consequence of this, A) the dividends will be taxed as capital gains once the shares are liquidated B) the investor's basis is increased by the amount of the reinvested dividends C) the reinvestments will purchase shares at a discount from the NAV D) taxes are deferred until those shares are redeemed

B Because the reported dividends are taxed each year, when the shares are ultimately liquidated, they have already been taxed. So, the investors cost basis is increased by the amount of the reinvestment.

Ebony sets up a revocable trust, naming her daughter, Sylvia, as the sole beneficiary. Ebony has appointed the Pacific Atlantic Trust Institution (PATI) as the trustee. Any income to the trust will be taxable to A) the beneficiary B) the grantor C) the trustee D) the trust

B In almost all cases, income received into a revocable (grantor) trust, whether distributed or not, is taxable to the grantor. Things are different when the trust is irrevocable, but much more complicated and not likely to be tested.

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) Ordinary income tax is due on the $1,000 that exceeds the original cost. C) No tax is due. D) Ordinary income tax is due on $21,000.

C 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.

A customer in the 25% tax bracket bought 200 shares of ABC at $93 per share plus commission of $50. Considering the customer's cost basis, when she sold 100 shares six months later at $96 per share, less commission of $50, her after-tax net was A) $300.00. B) $150.00. C) $56.25. D) $168.75.

D Because the purchase and sale were of different lots, you must compute the net proceeds on a per share basis. Dividing the cost of $93 + commission of .25 ($50 ÷ 200 shares) gives you a total per share cost of $93.25. Selling for $96.00 - 0.50 ($50 ÷ 100 shares) = $95.50 proceeds per share. $95.50 - $93.25 = $2.25. $2.25 multiplied by 100 shares sold = $225.00. In a 25% tax bracket, this is a taxable short-term gain and 25% of $225.00 = $56.25. Therefore, her after-tax net was $168.75 ($225 - 56.25).

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) Both the cost basis and holding period are determined from the date of the gift. B) Her date of purchase is used, but the cost basis is from the date of the gift. C) Her cost basis is used, but the holding period begins on the date of the gift. D) Her cost basis and date of purchase is used.

D When stock is given as a gift, the donee (recipient) takes over the cost basis and the holding period of the donor.

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.

1, 2

Which of the following vehicles make use of the unified estate tax credit? Bypass trust Generation-skipping trust Living trust Simple trust

1, 2 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 $5.34 million for 2014) to heirs other than the spouse, usually grandchildren in the case of the GST.

Which of the following statements about capital gains are TRUE? The minimum holding period required to qualify for long-term capital gains treatment is 1 day longer than 12 months. The highest federal income tax rate on long-term capital gains is less than the highest federal income tax rate on ordinary income. If an investor holds stock for 12 months or less and has no other transactions, any gain on the sale of the stock is taxed at the same rate as ordinary income.

1, 2, 3

Which of the following statements about the gift tax annual exclusion are TRUE? The annual exclusion is the amount that an individual may give to other individuals each year without incurring a gift tax. The annual exclusion is currently (2019) set at $15,000. A separate annual exclusion is available for each donee.

1, 2, 3 All these statements are true. The annual exclusion that an individual donor may give to another individual (donee) each year without incurring a gift tax is currently (2019) $15,000. A separate annual exclusion is available for each donee. So, if an individual gives $15,000 to 4 donees in 1 year, the annual exclusion will shelter all $60,000.

There are many sources of taxable income to an individual. Included might be money received from which of the following? Sole proprietorship Subchapter S corporation Investments Life insurance death benefit

1, 2, 3 An individual can generate income from running a sole proprietorship or being a shareholder in an S corporation (the exam will possibly 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.

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

1, 2, 3, 4 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.

Under current federal tax law, which of the following would have an effect on the amount of taxes your client would pay? Age Citizenship Marital status as of the last day of the year Residency

1, 2, 3, 4 Each of these can affect your tax rate. Taxpayers age 65 and older get an extra exemption, so that lowers their tax. If you are not a U.S. citizen, and are considered a nonresident alien, you are taxed somewhat differently than others. Only married persons can file a joint return, which usually, but not always, results in lower taxes. Residency determines if you will also have to pay a state income tax and receive deductions for that (or a state sales tax) on your federal income tax.

An investment adviser representative specializes in the senior market. A number of his clients have reached the age where they are contemplating selling their homes and moving into an assisted living facility. The profit made on the sale of their homes will be used to defray the costs of their new residence. Under current tax laws, which of the following are TRUE? A single person pays no tax on the first $250,000 of net profit realized on the sale of a primary residence that has been occupied for at least 2 of the past 5 years. A single person pays no tax on the first $500,000 of net profit realized on the sale of a primary residence that has been occupied for at least 2 of the past 5 years. A married couple pays no tax on the first $250,000 of net profit realized on the sale of a primary residence that has been occupied for at least 2 of the past 5 years. A married couple pays no tax on the first $500,000 of net profit realized on the sale of a primary residence that has been occupied for at least 2 of the past 5 years.

1, 4

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.

1, 4

Dr. Howard dies. Which of the following life insurance policies will be included in his gross estate? Policy I—owned by Dr. Howard; he is the insured and his wife is the beneficiary. Policy II—owned by Mrs. Howard; she is the beneficiary. Policy III—originally owned by Dr. Howard; Mrs. Howard is the insured and he gave the policy to his daughter 5 years ago. Policy IV—owned by Dr. Howard; Mrs. Howard is the insured and he is the beneficiary.

1, 4 The question asks which will be included in the gross estate, not which policies will be part of the taxable estate. Any policies that are owned by the decedent at the date of death will be included in the decedent's gross estate. Of course, there may be a deduction from the gross estate for anything left to a spouse. Policy II was never owned by the decedent, therefore it is not included. Policy III is not included because it was given away more than 3 years before Dr. Howard's death.

A customer buys 100 XYZ at $30. Two years later, with the stock trading at $70, the customer makes a gift of the securities to his son. Which of the following statements are TRUE? For gift-tax purposes, the value of the gift is $3,000. For gift-tax purposes, the value of the gift is $7,000. The son's cost basis on the stock is $3,000. The son's cost basis on the stock is $7,000.

2, 3

Which of the following business entities has an income tax filing due date (disregarding possible extensions) of March 15? Sole proprietorship Single-member LLC Multiple-member LLC electing to be treated as a corporation​ S corporation

3, 4 For partnership returns (including LLCs with more than 1 member) and S corporation returns, the due date is March 15. One effect of this is that LLCs, partnerships, and S corporations all have the same filing deadline. For C corporations, the due date is the 15th day of the 4th month following the close of the corporation's year; this date is April 15 for a calendar-year filer.

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

A

One of your new clients has only been working for 3 years but is already interested in retirement planning. In order to be fully eligible for Social Security, the client must A) have a minimum of 40 covered quarters of employment. B) have at least 40 years of employment. C) have minimum credited earnings of at least $20,000 per year. D) be at least age 62.

A

The main purpose of dividend reinvestment in a mutual fund accumulation plan is to A) compound the growth of a mutual fund investment B) avoid commissions or sales charges C) avoid taxes D) protect against capital loss

A

There are number of potential sources of income to a client that would have to be reported on their Form 1040 tax return. Among them could be all of these EXCEPT A) death benefit received from a life insurance policy B) interests in a DPP C) ownership of stock in an S corporation D) operation of a sole proprietorship

A An individual can generate income from running a sole proprietorship or being a shareholder in an S corporation (the exam will possibly use the obsolete term, Subchapter S). And, if units of a DPP throw off income, that would be reported as well. Of course, taxable income can be generated by investments in the form of dividends, interest, and capital gains from any source. The death benefit is from a life insurance policy and those, unlike the death benefit from an annuity, are not subject to income tax. Depending on how the ownership is structured, the death benefit could be subject to estate tax, but that would be reported on the Form 706 and is generally not considered income.

A client purchases 1,000 shares of the ABC Global Growth Fund when the NAV is $8.75 and the POP is $9.21. Three years later, the client makes a gift to her daughter when NAV is $9.50 and POP is $10.00, and the daughter elects to receive all distributions in cash. Two years later, she sells all shares when the NAV is $14.25 and POP is $15.00. What are the tax consequences of this sale? A) Long-term capital gain of $5,040 B) Long-term capital gain of $4,750 C) Long-term capital gain of $5,500 D) Long-term capital gain of $5,000

A In the case of a gift of securities, the donee acquires the donor's cost basis, $9.21 per share. Sale (redemption) takes place at the NAV ($14.25) for a profit of $5.04 per share (times 1,000 shares).

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

A Interest received from municipal bonds and municipal bond funds is generally income tax free on a federal basis, but taxable in states other than the state of issue. State-specific funds avoid that problem. These investments are subject to capital gains taxes if sold at prices above investors' cost.

It would be least likely for dividends paid on which of the following investments to meet the requirements to be considered qualified? A) Bond mutual funds B) Common stock C) Equity mutual funds D) Preferred stock

A Qualified dividends are those eligible for reduced income tax rates. Those rates can be as low as 0% and as high as 23.8%, with most falling within the 15% or 20% bracket. We don't expect the exam to test on the requirements for a dividend to be considered qualified or how you reach that 23.8% rate. Dividends on bond funds and money market funds are not qualified because the majority of those dividends represent interest earned by the fund and the tax break does not apply to earnings from interest.

Sally Sherman purchased 100 shares of Chocolate Manufacturers Corporation for $19 per share on February 12. She received a 10% stock dividend on May 18. She sold all of her CMC at $13 per share in June of the same year. What were her tax results? A) $470 short-term loss B) $575 short-term loss; $105 long-term gain C) $575 long-term loss D) $575 long-term gain, $105 short-term loss

A Sally paid $1,900 for 100 shares and sold 110 shares for $1,430 (13 at 110). Because the transactions all took place in less than a year, the transaction was a short-term loss.

Regarding the treatment of estates by the IRS, it would not be correct to state any of the following EXCEPT A) the maximum tax rate on estates is the same as that on gifts B) estates may be valued either at date of death or 9 months later using the alternative valuation option C) a deceased person may reduce the value of the estate by taking advantage of the annual gift tax exclusion D) income received by the estate is reported on Form 1040

A The maximum tax rate on estates and gifts is 40% (the number is not tested; only that the rates are the same). The alternative valuation date is 6 months after death; 9 months after death is when the tax is due. Dead people can't make gifts and any income received by the estate before it is liquidated is reported on Form 1041.

Mr. Wright died with the following assets and liabilities: $200,000 in securities left to his wife, a $650,000 home left to his wife (the home cost $150,000), a $250,000 life insurance policy with his daughter as beneficiary, and $75,000 in debts and estate expenses. What is Mr. Wright's gross estate? A)$1,100,000.00 B)$600,000.00 C)$250,000.00 D)$1,025,000.00

A The question asks for the gross estate, not the adjusted gross estate or taxable estate. The market value of all assets in which Mr. Wright possessed an incident of ownership at the time of death are included in the gross estate. The amount is therefore $1,100,000. The adjusted gross estate would be less the $75,000 of debt and expenses.

A deceased client's trust account has over 90% of its value invested in a single common stock whose recent performance has been outstanding, resulting in a very large unrealized capital gain at the time of death. What action would most likely be taken by the investment adviser handling this account? A) Liquidating a portion of that stock to take advantage of the tax savings offered by the stepped-up basis at death B) Selling all of that stock in order to rebalance the trust's assets C) Exchanging a portion of that stock for a suitable security held in the adviser's trading account D) Continuing to hold that stock position if it is felt that it meets the objectives of the trust

A Under current tax law, a beneficiary inherits assets at their fair market value as of the time of death. This is known as a stepped-up basis (probably because these assets are generally at a higher price than when originally purchased). In this question, we are told that there is a large unrealized gain. Therefore, with a portfolio that is overconcentrated in 1 security, it would make sense to diversify while, at the same time, avoiding or minimizing capital gains taxes. It would be against the provisions of the UPIA for a fiduciary to ever engage in trading from his own account.

An advisory client of yours dies in 2019, and you transfer the $1.4 million of securities in the individual's name to the estate account. You will A) continue to manage the account unless the advisory contract called for termination upon death or informed otherwise by the executor B) 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 C) tell the executor that he will be receiving a Form 1099 for tax purposes, representing the transfer of account over to the estate account D) inform the executor that you need to keep sufficient liquid funds in the account because estate taxes will be due in 6 months

A 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 $11.4 million (the amount exempt from taxation for 2019).

In order for an individual to receive Social Security benefits based on the earnings of the ex-spouse, the couple must have been married for at least A) 2 years. B) 10 years. C) 1 year. D) 5 years.

B

Property included in a deceased's gross estate is generally valued for estate tax purposes at A) the amount the deceased paid for it B) its fair market value (FMV) on the date of the deceased's death C) its fair market value (FMV) on any date the estate chooses to use D) its original cost less depreciation

B

The basis of an asset received from a decedent's estate is referred to as a stepped-up basis. This means that the asset's basis is generally A) the amount the decedent originally paid for the asset B) the fair market value of the asset on the day the decedent died C) the amount the recipient ultimately sells the asset for D) the fair market value of the asset on the day the decedent acquired it

B

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

B

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) Proceeds from a life insurance policy owned by the deceased's spouse C) Property held in an account registered tenants in common D) The first $250,000 of a primary residence if owned singly, $500,000 if owned jointly with spouse

B

Which of the following would generally NOT result in any income tax liability? A) Qualified dividends from common stock B) Death benefit proceeds from a life insurance policy C) Profits generated by an S corporation D) Profits generated by a sole proprietorship

B

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

B Earned income includes salary and bonus but not income as an owner of a limited partnership. Passive income is derived from rental property, limited partnerships, and enterprises in which an individual is not actively involved. Each of the other choices is true.

The separate account subaccounts 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) There is a cash withdrawal in excess of the cost basis B) A loan is taken equal to 95% of the policy's cash value C) The policy is surrendered D) The death benefit is paid

B 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.

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 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).

Which of the following is not included in adjusted gross income on an individual's federal income tax return? A) Wages and tips B) Stock dividends C) Income from a sole proprietorship D) State income tax refunds

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

B Stock dividends, unlike cash dividends, are not taxable in the year of receipt. Instead, they reduce the owner's cost basis and, when sold at a price above that cost basis, are treated as capital gain rather than ordinary income. Deferred annuities never generate anything but ordinary income, and qualified withdrawals from Section 529 plans result in no taxation on the earnings. If they are not qualified, there is ordinary income tax plus a penalty.

Under current tax law (2019), how much can a married couple give to their adult son and his wife without incurring a gift tax obligation? A) $30,000 B) $60,000 C) $15,000 D) Unlimited

B The current gift tax exclusion (2019) is $15,000 per donor to each recipient. A married couple can give $30,000 to a single individual and qualify for the exclusion. In this case, the married couple can give $30,000 to their son and $30,000 to their daughter-in-law without paying any gift tax.

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

C

If a married couple establishes a JTWROS account with a balance of $25 million and the wife dies, what is the husband's estate tax liability? A) He pays federal estate taxes on the entire balance. B) He pays federal estate taxes only on the amount that exceeds the estate tax credit. C) He pays no estate tax. D) He pays federal estate taxes on $12.5 million.

C

One of the benefits of owning a home is the tax treatment of a sale of a primary residence. Under current IRS regulations, A) all gains from the sale of a primary residence are excluded from taxation. B) a married couple is permitted to exclude the first $500,000 of gain as long as the proceeds are reinvested in another home. C) a married couple is permitted to exclude the first $500,000 of gain. D) a married couple is permitted to exclude the first $250,000 of gain.

C

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) prestige B) reducing paperwork C) limiting his personal liability D) changing the due date of his tax filing

C

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

C

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) $79.38 B) $60.5 C) $98.25 D) $99.25

C

Which of the following is federally tax exempt for a corporation? A) Foreign corporate stock dividends B) Capital gains C) Municipal bond interest D) Preferred stock dividends

C

Your client purchased 1,000 shares of ABC common stock on February 28, 2017. When would that purchase qualify for long-term capital gain or loss treatment? A) February 28, 2018 B) February 29, 2018 C) March 1, 2018 D) March 1, 2017

C

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) The fiancé would have to report this as ordinary income. B) Anything over the FINRA gift limit of $100 per person per year would be considered taxable. C) No tax D) Because they are not yet married, the fiancé is not actually a family member, so a gift tax would be levied.

C

Which of the following statements regarding grantor trusts is NOT correct? A) If the grantor has the power to revoke the trust, he is treated as the owner of the trust. B) If the grantor can receive income from the trust, he is treated as the owner of the trust. C) The grantor may be taxed on trust income only if the grantor actually received the income. D) If the grantor can control the beneficial enjoyment of the trust, he is treated as the owner of the trust.

C As long as the grantor has the power directly or indirectly to control the trust, he is treated as the owner. The grantor may be taxed on trust income if the grantor either actually or constructively receives the income.

One of your very generous clients has used up her lifetime gift exclusion. Continuing to make gifts, she gives $50,000 to a grandchild and $18,000 to the child of a friend. What are the tax consequences of these gifts? A) Only the gift to the child of the friend will be taxed because one can make unlimited gifts to grandchildren. B) If the children use the money for tuition at a tax-qualified educational institution, there is no tax. C) The tax rate on the $50,000 gift will be higher than that on the $18,000 gift. D) The tax rate on both gifts will be the same.

C Gift taxes and estate taxes are progressive. Because the question tells us that the client has used the lifetime exclusion, everything above the annual exclusion ($16,000 beginning in 2022), will be taxable. The tax rate starts at 18%, and a gift of $50,000 (using the $16,000 annual exclusion to reduce the taxable amount to $34,000) is taxed at 22%. The gift to the grandchild exceeds the annual exclusion by $2,000, and that is taxed at the minimum 18% rate. Although the test will not ask you for the specific rates, we have used them here for illustration. The relationship (or lack thereof) between the donor and the donee is of no importance. If the gifts had been made directly to a tax-qualified educational institution instead of the children, no tax would have been due.

At his death, on January 1, 2017, 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's executor elected to value the estate by using the alternate valuation date, but then sold the shares through a broker-dealer on May 15, 2017, at $40 per share, what is the estate's basis per share for estate tax purposes? A) $15 B) $50 C) $40 D) $125

C 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 6 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.

One of your ultra-high net worth clients would like to give some low cost basis stock as gifts to her adult grandchildren. It would be prudent for you to tell her that A) for purposes of the gift tax, her cost basis will be used. B) making the gift under the Uniform Transfer to Minors Act is generally the most advantageous for the child. C) unlike an inheritance, there is no stepped-up cost basis. D) it would be wise for her to use a TOD account to avoid probate.

C One of the benefits of inheriting low cost basis securities is the stepped-up basis and that does not apply to gifts. Although the donor will not be the one subject to capital gains tax, it would be the right thing to do to let her know that the donees (her grandchildren) will be receiving the stock at her cost basis. TOD would not apply to stock that is the subject of a gift; it is only when the stock remains in the grandmother's name and has been designated for the grandchildren after her death. When computing the value of a gift to determine if there is a gift tax obligation, it is the fair market value of the gift that is used. Finally, the question states these are adult grandchildren - UTMA would not apply to them.

An investor inherits 1,000 shares of the ABC Global Growth Fund when NAV is $9.50 and POP is $10.00 and elects to receive all distributions in cash. Two years later, sells all when NAV is $14.25 and POP is $15.00. What are the tax consequences of this sale? A) Long-term capital gain of $5,000 B) Long-term capital gain of $5,500 C) Long-term capital gain of $4,750 D) Long-term capital gain of $4,250

C SHE INHERITS THEM Upon death, the beneficiary inherits mutual funds at their NAV ($9.50). The IRS uses that number because it represents the price at which those shares could have been redeemed. The final sale (redemption) takes place at the NAV ($14.25) for a profit of $4.75 per share (times 1,000 shares). Had this question said the investor bought the shares, then the cost basis would have been the price paid for the shares, the POP. That would have made the answer $4,250 ($14.25 - $10 times 1,000 shares).

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 501(c)(3) charity, how much can he claim as a tax deduction for this donation? A) $12,000 B) $0 C) $18,000 D) $6,000

C 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.

The alternative minimum tax is designed to ensure that certain high-income taxpayers do not avoid all income tax through the use of various tax preference items. Those preference items are added back to the taxpayer's ordinary income on IRS Form 6251 and would include A) long-term capital gains in excess of $3,000 annually. B) straight-line depreciation taken on investment real estate. C) interest received from specified private purpose municipal revenue bonds. D) intangible drilling costs in connection with an oil drilling program.

C The Internal Revenue Code provides that interest on specified private activity bonds is an item of tax preference. Therefore, this interest must be added to a taxpayer's regular taxable income in order to compute the taxpayer's AMTI. Accelerated depreciation and EXCESS intangible drilling costs are preference items. In the real world, it is not only those with high incomes that are caught by the AMT, but the exam is not likely to go that deep.

One of your clients buys 300 shares of RIF common stock in March at $25 per share. Three months later, the client purchases 200 shares of the RIF at $30 per share. One month later, RIF pays a dividend of $1 per share. Then, 5 months later, another purchase of the RIF is made—this time 400 shares at $35 per share. If the client were to sell all the RIF at $30 per share, what is the client's capital gain or loss? A)No gain or loss B)$500 gain C)$500 loss D)$400 gain

C The investor's total cost is $27,500 for the 900 shares purchased. The proceeds of the sale are $27,000 (900 × $30). That results in a capital loss of $500. The cash dividend has nothing to do with capital gain or loss.

The Wrights live in Texas, where Maria Wright has had an extremely successful cattle business for a number of years. As a very generous person, how much money can Maria give to her spouse, a Canadian citizen, in 2019 without incurring gift tax consequences? A) $100,000 B) Unlimited C) A limited amount because her spouse is not a U.S. citizen D) $15,000

C Under current tax regulations, there is a limit to the amount of a gift that may be made to a noncitizen spouse. For 2019, that limit is $155,000, (the amount is never tested).

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) There is no waiting period B) 5 days C) 20 days D) 31 days

D

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

D

Which of the following business entities files a tax return on the 15th day of the 4th month after the end of the calendar (or fiscal) year? A) S corporations on Form 1120s B) C corporations on Form 1120 C) Partnership returns on Form 1065 D) Multiple member LLCs on Form 1065

D

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

D

One of your ultra-high net worth clients has extensive real estate holdings and is concerned about his children being forced to liquidate some of them in order to pay the estate taxes after his death. One tool that could be suggested to solve this problem would be A) registering the properties as JTWROS. B) placing the properties into a living trust. C) using a TOD account. D) purchasing a life insurance policy using an ILIT.

D Estate taxes must be paid within 9 months of death. If the client doesn't want to have to liquidate his real estate holdings, then another source for the tax payment must be found. A frequently-used tool is the irrevocable life insurance trust (ILIT) where a policy is purchased on the life of the client, but owned by the trust. When properly structured, this means that the death benefit is not included in the estate and passes tax free to the beneficiaries. Those funds can then be used to pay the estate taxes and the real estate assets pass to the beneficiaries. A living trust won't work because the only way the policy's proceeds aren't considered part of the estate is when the trust is irrevocable. TOD and JTWROS avoid probate, but do not avoid estate taxes.

Grandpa bought 100 shares of XYZ common stock 10 years ago for $10 per share. The stock split 2 for 1 several years ago and grandpa gave all of the stock to his grandson when the price per share was $20. Three months ago, grandpa passed away and left the grandson another 100 shares of XYZ that had been purchased one month earlier at $25 per share. At the date of death, the XYZ stock had already climbed to $30 per share. If the grandson sells the XYZ stock for $35 per share, the taxable consequences would be A)$4,000 long-term capital gain. B)$6,000 long-term capital gain plus $500 short-term capital gain. C)$2,500 long-term capital gain plus $1,000 short-term capital gain. D)$6,500 long-term capital gain.

D Gifted stock carries the donor's cost basis. In this case, 100 shares at $10 per share is $1,000. The stock split means there are now 200 shares, but that doesn't change the total cost basis. When that stock is sold at $35 per shares, the proceeds of $7,000 exceed the cost basis by $6,000, all of which is long-term capital gain. Inherited stock receives a stepped-up basis. That is, the cost basis is at date of death. In this case, the cost per share is $30. When that 100 shares is sold at $35 per share, a $500 profit is realized. In one of the quirks in the Internal Revenue Code, stock received as an inheritance always has a long-term holding period, even when, as in this question, the actual holding period was short-term. Adding the $6,000 of gain from the gift and the $500 of gain from the inheritance gives a total of $6,500 long-term capital gain.

You have a client whose income from a real estate limited partnership is $11,000. During the same year, your client had net capital losses of $2,000 and losses from an oil and gas drilling program of $6,000. The effect of this investment activity would be to increase the client's taxable income by A) $9,000 B) $11,000 C) $5,000 D) $3,000

D The $11,000 passive income is offset by the $6,000 of passive loss giving the client $5,000 of passive income. Because capital losses up to $3,000 are deductible from taxable income, we can deduct the $2,000 in net losses giving a net increase to taxable income of $3,000.

XYZ, Inc. is a C corporation in the 21% federal income tax bracket. Which of the following investments offers the company the highest after-tax return? A) REIT paying a 6.5% dividend B) Municipal bond with a 5% coupon rate C) Corporate bond with a 6.75% coupon D) ABCD, Inc. preferred stock paying a 6% dividend

D The key to this answer is that corporations have a 50% dividend exclusion on dividends received from other companies. The math looks like this: Only half of the 6% dividend is taxable. That means 3% per year is tax free and the other 3% is subject to tax at the 21% rate. So, we have 3% + 79% of the taxable 3% = 3% + 2.37% = 5.37% after-tax return. The municipal bond is not taxed, but that only produces 5% after tax. The corporate bond is subject to 21% tax so the corporation gets to retain the other 79%. That computes to 6.75 x 79% = 5.33%, just a bit less than the preferred stock. In most cases, dividends paid to corporations by REITs are fully taxable. That makes the after-tax return on the 6.5% dividend only 5.14%.

​Oscar and Hilda, a married couple, are collecting Social Security. They speak to their financial planner for advice on taxation of those benefits. At what level do their benefits become subject to income tax?​ A) When 50% of their benefits added to all their other income, excluding tax-exempt interest, exceeds $25,000 B) When 50% of their benefits added to all their other income, including tax-exempt interest, exceeds $25,000 C) When 50% of their benefits added to all their other income, excluding tax-exempt interest, exceeds $32,000 D) When 50% of their benefits added to all their other income, including tax-exempt interest, exceeds $32,000

D These are the current numbers used by the IRS to determine if Social Security benefits are taxable. It is interesting that the computation indirectly can cause tax-exempt interest to become taxable. Once the couple's income under this computation exceeds $44,000, 85% of it is taxable. If the question dealt with a single person, the limit would be $25,000 rather than $32,000.

An investor inherits 1,000 shares of the ABC Global Growth Fund when the NAV is $9.50, the bid price is $9.00, and the ask price is $9.15. Two years later, the investor sells all shares when the NAV is $14.25, the bid is $14.50, and the ask is $14.60. What are the tax consequences of this sale? A) Long-term capital gain of $5,450 B) Long-term capital gain of $4,750 C) Long-term capital gain of $5,350 D) Long-term capital gain of $5,500

D Upon death, the beneficiary inherits closed-end funds at their bid price (what the estate could have sold them for), or $9.00 per share. The sale two years later takes place at the bid ($14.50) for a profit of $5.50 per share (times 1,000 shares). Remember, in the case of a closed-end fund, the NAV does not figure into any computations; prices are based on supply and demand and have a bid and ask price, the same as any stock. How did you know this was a closed-end company? Only in the case of a closed-end company can the ask price be lower than the NAV (ask = $9.15, NAV = $9.50).