Section 4: Tax Strategies and Planning - quiz questions
Taxpayer purchased stock April 1 of the current year for $25,000. By November 15 of that same year, the stock was worth $60,000 and he donated it to the local United Way. The taxpayer's AGI that year was $150,000. Assuming there were no other charitable gifts that year, what is the taxpayer's tax deduction for this gift?
a) $25,000.00 b) $35,000.00 c) $60,000.00 d) $75,000.00 The deduction of "basis" would be subject to 50% of AGI for this particular gift by rule. The basis of $25k however is less than 50% of AGI or $75,000. See pages 394-395 of Private Wealth (Hallman) or "Charitable Contribution Limitation Rules" chart on eCampus under LO 4.04.
What is the maximum tax rate applied to long- term capital gain property upon the sale of a collectible?
a) 15% b) 20% c) 28% d) taxpayer's marginal income tax rate Per IRS. See online article: Tax Facts Quick Reference 2015
If an individual taxpayer contributes long term capital gain property to a qualified private foundation and wants to deduct fair market value of the stock, the deduction would be subject to which of the following limits?
a) 20 percent of the taxpayer's AGI b) 30 percent of the taxpayer's AGI c) 40 percent of the taxpayer's AGI d) 50 percent of the taxpayer's AGI The deduction of fair market value for qualified appreciated long-term gain stock is subject to 20% of AGI for this particular gift by rule. See pages 394-395 of Private Wealth (Hallman) or "Charitable Contribution Limitation Rules" chart on eCampus under LO 4.04.
A taxpayer has the following transactions during the year: a $5,000 short-term capital gain, a $3,000 long -term capital gain and a $1,000 long-term capital loss. She also came into the year with an $11,000 short - term capital loss carryover. Which statement best describes her capital gain/loss position for the year:
a) A $3,000 deductible loss for the year and no loss carryover to the next year b) A $4,000 deductible loss for the year and no loss carryover to the next year c) A $3,000 deductible loss for the year and a $1,000 loss carryover to the next year d) A $2,000 taxable gain for the year and a $6,000 loss carryover to the next year See "Capital Gains" pages 340-341(2015Field Guide) for netting rules. $5,000 STCG -$5,000 STCL carryover = no STCG. $3,000 LTCG -$1,000 LTCL = $2,000 LTCG. Apply $2,000 of STCL carryover to wipe out the LTCG. This leaves $4,000 STCL left of which taxpayer can use $3,000 to offset income. The STCL carry forward is now $1,000.
"Which of the following items are considered when computing a taxpayer's adjusted gross income (AGI): I. Alimony income received II. Health insurance premiums paid by a self-employed individual III. State income taxes paid IV. Municipal interest income V. Social Security benefits
a) I, II, V b) II, III, IV c) III, IV, V d) I, III, V See page 1 of IRS Form 1040.
Which of the following statements regarding the AMT is most accurate:
a) The AMT calculation uses higher tax rates than the regular tax system, but on the same amount of taxable income. b) The AMT calculation uses higher tax rates than the regular tax system, but on a lower amount of taxable income. c) The AMT calculation uses lower tax rates than the regular tax system, but on a larger amount of taxable income. d) The AMT calculation uses lower tax rates than the regular tax system, but on a lower amount of taxable income. See reading (pages 212-214) of Private Wealth(Hallman) Note -this is a concept question and the fact that AMT rates change periodically does not change the conclusion.
The tax structure of the individual AMT is a two-tier progressive tax where:
a) The first $182,500 of AMT base is taxed at a 15 percent rate and any excess over that amount is taxed at 20 percent b) The first $182,500of AMT base is taxed at a 26 percent rate and any excess over that amount is taxed at 28 percent c) The first $182,500 of AMT base is taxed at a 28 percent rate and any excess over that amount is taxed at 35 percent d) The first $182,500of AMT base is taxed at a 35 percent rate and any excess over that amount is taxed at 39.6 percent Per IRS. See online article: Tax Facts Quick Reference 2015
Which of the following items is the most difficult to determine by only reviewing a taxpayer's income tax return?
a) The overall performance of the taxpayer's investment portfolio based on the capital gains and losses reported b) Whether tax-exempt bond investments might be more appropriate for the taxpayer than taxable bond investments c) Whether the taxpayer is maximizing their retirement savings opportunities on their self-employment income d) Whether the taxpayer is managing their tax payments appropriately and avoiding underpayment penalties or significant tax refunds Each of the choices with the exception of determining the performance of the investment portfolio can be deduced from reviewing a client's tax return and supporting documents.
Which of the following transactions would not be considered a wash sale:
a) You sell an S&P 500 Index ETF at a loss and then purchase an S&P 500 Index mutual fund with in two weeks. b) Selling a stock at a loss and then purchasing an actively-managed mutual fund that also owns that stock 21 days later. c) Client sells a stock at a loss in her taxable account and then repurchases the same stock in her IRA one week later. d) Buying a call option on a stock that was sold at a loss just 14 days earlier. See reading in eCampus "2014 U.S. Master Tax Guide 1935, Wash Sales of Stock or Securities". The rules appear simple but there are many scenarios that can make this more complicated. Be able to identify transactions that do and do not qualify as wash sales. Various examples may be found on www.fairmark.com - search "wash sale rules".
Which of the following statements about the taxation of nonqualified stock options (NQSOs) is incorrect?
a) at the time of grant NQSOs are generally not taxed to the employee provided they do not have a "readily ascertainable fair market value" b) when the option is exercised the difference between the exercise price and market value is referred to as the bargain element c) the bargain element is taxed to the employee as a long-term capital gain d) at the time of the exercise the employer is entitled to a corresponding compensation deduction See page 491 in the 2015 Field Guide to Estate Planning, Business Planning & Employee Benefits
What factors do not need to be considered when determining the amount of tax to be paid during the current year in order to avoid an underpayment penalty?
a) current year tax liability b) prior year tax liability c) prior year AGI d) expected income next year See Tax Research Consultant reading on "estimated tax payments". You should be familiar with the required payment the lesser of 90% of tax for this year or 100% of the tax from the prior year and the adjustment to this formula made by those with AGI above $150k MFJ which is the lesser of 110% of tax from last year or 90% of tax due in current year.
Which of the following statements is not accurate?
a) investment interest is generally deductible only to the extent of investment income b) qualified residence interest and home equity loans are generally deductible in full c) trade or business interest is generally deductible as a business expense d) personal interest is not deductible except for student loan interest See online CCH tax research consultant readings found under LO 4.05 and/or page 428 in the 2015 Field Guide to Estate Planning, Business Planning & Employee Benefits.
Which of the following statements regarding a like-kind exchange transaction is most accurate?
a) life insurance policies and annuities may be exchanged under IRC section 1031 b) loans associated with like-kind exchanges may be taxed upon exchange c) real estate properties that meet specified criteria may be exchanged under IRC section 1035 d) when cash is received in addition to like-kind exchange property, the cash is always taxed See page 568 of 2015 Field Guide to Estate Planning, Business Planning & Employee Benefits
Which of the following forms of business entity is the least tax efficient?
a) limited liability company (LLC) b) s-corporation c) c-corporation d) limited partnership (LP) C-corporations are subject to double taxation even though the burden has been reduced. See pages 214-216 from Private Wealth (Hallman).
Regarding incentive stock options (ISOs): provided the employee does not sell the stock until at least a year and a day after the stock is purchased (option exercised) and at least two years after the option is granted, any profit on the sale is treated as:
a) long-term capital gains b) short-term capital gains c) ordinary income d) pass-through income See page 420 of 2015 Field Guide to Estate Planning, Business Planning & Employee Benefits
The "bargain" element of incentive stock options is an adjustment item for AMT. How is the bargain element calculated?
a) market price on the exercise date -price on date of grant x number of shares b) market price on the exercise date -exercise price x number of shares c) sale price -price on date of grant x number of shares d) sale price -difference between exercise price and value at grant x number of shares See page 420 of 2015 Field Guide to Estate Planning, Business Planning & Employee Benefits
The following types of business entities are not taxable entities. Taxable income generated by these entities is measured and characterized at the entity level, and taxed directly to the partners.
a) partnerships and s-corporations b) limited liability companies and c-corps c) trusts and partnerships d) c-corporations and trusts See Financial Planning Answer Book - Planning for Business Entities: What is the income taxation of sole proprietorships and pass-through entities?
Which of the following expenses are deductible under the regular tax system but are NOT under the AMT?
a) property taxes b) charitable contributions c) investment interest expense d) qualified mortgage interest See reading (page 212-214) of Private Wealth (Hallman). Note -this is a concept question and the fact that AMT rates change periodically does not change the conclusion.
A partner's contribution of property to the partnership in exchange for a capital interest in the partnership:
a) results in a recognized gain or loss by the partnership at the time of contribution b) results in a recognized gain or loss by the contributing partner at the time of contribution c) represents the partner's ownership rights in the partnership upon his withdrawal from the partnership or upon liquidation of the partnership d) represents the partnership's realized but unrecognized gain or loss from this transfer of property Contributions to a partnership in exchange for a partnership interest do not typically trigger a taxable event. See the reading Tax Research Consultant 15,000 - overview of partnership basis, liabilities, and loss limitations.
Which of the following business entities includes each of these elements or characteristics? 1) members have limited liability for entity debts 2) can elect to be taxed as a partnership 3) all states now allow these entities 4) owners are called members
a) s-corporations b) limited liability companies (LLC) c) limited liability partnerships (LLP) d) c-corporations See reading in eCampus for LO 4.08-4.09 Financial Planning Answer Book - How to Plan for Business Entities: What is the income taxation of sole proprietorships and pass-through entities?
Which of the following statements is accurate?
a) taxpayers pay the lower of the AMT and regular tax liabilities b) tax payers deduct the regular tax liability from the AMT and pay the difference c) taxpayers deduct the AMT liability from the regular tax and pay the difference d) taxpayers pay the higher of the AMT and regular tax liabilities See reading (page 212-214) of Private Wealth (Hallman). Note - this is a concept question and the fact that AMT rates change periodically does not change the conclusion.