s66 quizes: fin profiles/ ret. & educ savings plans

A customer in the 28% tax bracket has $6,000 of capital gainsand $10,000 of capital losses. How much unused loss is carried forward to the next tax year? 0 $1,000 $2,000 $3,000

$1,000 The customer has a capital gain of $6,000 and a capital loss of $10,000 for a net capital loss of $4,000. Only $3,000 of net capital losses can be deducted in a tax year, so $1,000 of the loss is carried forward to the next tax year.

Which is NOT a feature of a safe harbor 401(k) plan? Mandatory annual employer matching contributions No annual "top heavy" benefits testing Immediate 100% vesting of employer-paid benefits 100% of eligible employees must choose to participate

100% of eligible employees must choose to participate A safe harbor 401(k) relieves the employer of having to perform annual benefits testing to show that the plan does not favor highly compensated employees (a so-called "top-heavy" plan). To get the safe harbor, the employer must agree to make annual matching payments into the plan of either 4% of salary of participating employees or 3% of salary of all eligible employees (it is not mandatory that each eligible employee participate). These employer-paid benefits must 100% vest immediately.In contrast, in a Traditional 401(k), the employer can choose whether to make matching contributions and these can vest over a number of years (typically 5 years). Also, in a Traditional 401(k), the employer must complete an annual "top heavy" benefits test.

An employee is participating in a 403(b) plan, where 50% of contributions are paid by the employee and 50% of contributions are paid by the employer. The employee withdraws $5,000 at age 60. The withdrawal is: not taxable to the employee 50% taxable to the employee 50% taxable to the employer 100% taxable to the employee

100% taxable to the employee Contributions made to 401(k) and 403(b) plans are deductible to the person making the contribution. If an employer matches an employee contribution, this is tax deductible to the employer. However, when the employee takes distributions, the employee is liable for tax on 100% of the dollars withdrawn.

An account is opened for three individuals as "Tenants in Common". If one of the individuals dies, the: A) account must be liquidated to facilitate the division of assets among the surviving tenants and the deceased's estate B) estate assumes the tenancy of the deceased individual in the account C) account becomes the property of the two remaining survivors as Tenants in Common D) account becomes the property of the two remaining survivors as Joint Tenants with Rights of Survivorship

B) estate assumes the tenancy of the deceased individual in the account In an account opened "Tenants in Common," if one participant dies, that person's share in the account goes to the estate. The disposition of the deceased person's interest is handled by the estate. There is no requirement to liquidate the account, nor does the account become the sole property of the remaining tenants. (This would be the case if the account were owned as "Joint Tenants with Rights of Survivorship.")

Many years ago, a customer bought 100 shares of ABC stock at $40. The customer dies and wills the stock to her son when it is valued at $50. The son sells the security at $55. The tax consequence to the son is: no capital gain or loss $5 per share capital gain $15 per share capital gain $55 per share capital gain

$5 per share capital gain For estate tax purposes, securities are valued at the current market value at the date of death. Estate tax is due based upon the market value of all assets held at this date - with the tax paid by the estate. The beneficiary of the estate receives the asset at this market value - $50 per share in this case. Since the stock was later sold for $55 per share, there is a $5 per share capital gain.

A customer buys $20,000 of ABC stock in March of 20XX. On December 31, 20XX, the stock is valued at $16,000. The customer will be able to deduct how much on this year's tax return? 0 $1,000 $3,000 $4,000

0 Though the customer has realized a loss on the securities, the loss is not "recognized" for tax purposes until the securities are sold. Thus, none of the loss is deductible on this year's tax return.

A customer that is 55 years old has 5 years until retirement and an expected life span of 75 years. An investment adviser that is constructing a portfolio for this customer should use what time horizonwhen considering appropriate investments? 5 years 10 years 15 years 20 years

20 years This customer is age 55 and is expected to live until age 75. This 20-year time horizon is the appropriate basis for making investment recommendations to the client.

A corporation buys the stock of another company. Which percentage of dividends received from the investment in the acquired company's shares are excluded from tax to the corporate purchaser of those shares? 0% 30% 50% 100%

50% If a corporation buys the stock of another company as an investment, 50% of the dividends received are excluded from tax, meaning that 50% of the dividends received are taxable. (Note: If the corporate investor owns 20% or more of the stock of the other company, this exclusion increases to 65%. The question does not mention whether this is the case, and none of the choices fit this rule, so 50% is the best answer offered.)

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 basisof the shares sold? A) "Specific identification" allowing the customer to select the shares with the highest cost basis B) LIFO(Last-In/First Out) accounting, requiring the customer to use the cost basis of the last shares acquired C) FIFO(First-In/First Out) accounting, requiring the customer to use the cost basis of the first shares acquired D) The average per share cost of all 5,000 ABC shares acquired by the customer

A) "Specific identification" allowing the customer to select the shares with the highest cost basis The Tax Code allows the use of "specific identification" when selling securities. Thus, a customer with a large holding of appreciated stock can "choose" the more expensive shares as the ones that were sold, reducing any potential capital gain. If specific identification is not used, then the IRS requires FIFO (First In / First Out) accounting.

A customer has invested in a Direct Participation Program and is a limited partner with a 10% interest. In November 2021, the partnership sold assets and realized a gain. It made a cash distribution to the partners using the proceeds generated from the asset sale in January 2022. How is this reported for tax purposes on the K-1 distributed to the customer/partner? A) 10% of the gain is reported as ordinary income in 2021 B) 10% of the gain is reported as a capital gain in 2021 C) 10% of the gain is reported as ordinary income in 2022 D) 10% of the gain is reported as a capital gain in 2022

B) 10% of the gain is reported as a capital gain in 2021 Under partnership taxation rules, each item of income and loss to the partnership "flows through" directly on a pro-rata basis onto the partner's tax return for that tax year. Because the partnership realized the gain on the sale of the asset in November, it will be reported on the K-1 sent to the limited partner by the partnership for that year ending December 31st. Because this was a gain from the sale of an asset, it is a capital gain. The fact that a cash distribution resulting from the gain was made in the next tax year is irrelevant.

A father is writing his will (the testator) and is naming as beneficiaries his 2 adult sons - Son A and Son B. Each one will get an equal share of the father's estate "per capita" upon the father's death. Each of the sons has children (the grandchildren of the testator) who are not yet adults. Son A has 2 young children - Grandchild A1 and Grandchild A2 and Son B has 2 children, Grandchild B1 and Grandchild B2. If Son A predeceases the testator, then: A) Son A's 1/2 share goes into his estate B) Son A's share goes to Son B C) Grandchild A1 gets 25% and Grandchild A2 gets 25% of the estate's assets upon the death of the testator D) the deceased son's share reverts back to the father's estate

B) Son A's share goes to Son B When a will is created, the estate can be distributed either "per capita" or "per stirpes." These 2 ways deal with the issue of a named beneficiary dying before the testator. "Per capita" is Latin for "by the head." What this means is that each NAMED living family member gets an equal share of the estate. So if the father has 2 sons, Son A and Son B, each gets 1/2 of the father's estate upon the father's death. If Son A dies before the father, the 1/2 share now goes to living Son B - so Son B inherits 100% of the estate. The grandchildren are not named as beneficiaries, so they get nothing. If the testator had NAMED both the 2 adult sons and their 4 children "per capita," then there would have been 6 names, with each getting 1/6th of the estate. If 1 of them predeceased the testator, then the estate would be divided "per capita" 1/5th each among the remaining 5 living descendants.

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 IMMEDIATEconcern should be the: A) investment outlook for XYZ Corporation over the upcoming 7 years B) fact that the customer is concentrated in one stock and lacks diversification in his portfolio C) dividend rate paid by XYZ and whether it is sufficient to meet the customer's need for income in retirement D) the possibility that XYZ Corporation could go bankrupt prior to the death of the customer

B) fact that the customer is concentrated in one stock and lacks diversification in his portfolio This is the client's sole investment to fund his retirement. The immediate concern should be the customer's lack of diversification. If the customer were to sell a portion of the XYZ stock and reallocate it to other investments, the client will reduce overall risk. Choices A, Cand Dare also concerns, but they are longer term concerns in this situation.

An investment adviser recommends that 10% of a customer's portfolio be allocated to small capstocks. The customer disagrees with the adviser over this recommendation. The investment adviser should: A) explain to the customer that the benefit of asset allocation is to diversify the portfolio across all asset classes B) reduce the small cap allocation to 0% and further investigate the customer's financial situation and needs C) maintain the small cap allocation at 10% and explain to the customer why this is the most beneficial portfolio construction D) make an offer to reduce the small cap allocation to 5% and if the customer does not agree, terminate the advisory contract with the customer

B) reduce the small cap allocation to 0% and further investigate the customer's financial situation and needs Since the customer is not comfortable with a portion of his portfolio being allocated to Small Cap stocks, which have a higher risk level, then follow the customer's wishes - after all, it is his account, not yours.

What type of real estate can be held in an Individual Retirement Account? Primary residence Secondary residence Time share Business property

Business property Real estate can be owned in an IRA as an investment only. Personal use real property cannot be owned in an IRA - this is a "so-called" prohibited transaction. Therefore, a primary residence, secondary residence, and a time share are all prohibited. Business property is a permitted investment.

Which of the following does NOTallow for a flow-through tax benefit? C Corporation S Corporation Limited Partnership General Partnership

C Corporation A Corporation is a taxable company. It computes income or loss at the corporate level and pays corporate income taxes on net income. Any dividend distributions to shareholders are made from after-tax income and are taxed again at the shareholder level. In contrast, all partnerships, S Corporations and LLCs (Limited Liability Companies) are not taxable. Each item of income and loss flows through onto each owner's individual tax return and is only taxed at the shareholder level. A single level of taxation is a big tax benefit as compared to the tax status of C Corporations.

A couple owns a home purchased for $200,000 and files for bankruptcy. The home has a $125,000 mortgage and is sold by the trustee in bankruptcy for $175,000. Which statement is TRUE? A) The holder of the mortgage receives $175,000 from the sale of the property B) The holder of the mortgage receives $125,000 from the sale of the property and the extra $50,000 goes to the debtor couple C) The holder of the mortgage receives $125,000 from the sale of the property and the extra $50,000 can be claimed by any additional creditors D) The couple receives the $175,000 from the sale of the property and has a $25,000 capital loss

C) The holder of the mortgage receives $125,000 from the sale of the property and the extra $50,000 can be claimed by any additional creditors A home is an asset included in the bankruptcy estate. Typically, the home is sold for less than the amount of the outstanding mortgage - and the entire proceeds of the sale go to pay off the mortgage, with any remaining unpaid principal balance discharged in the bankruptcy. In the case where the home is sold for more than the amount of the mortgage, the mortgage balance is paid in full, so the mortgagee (usually a bank) is repaid in full and has no more claim. Any excess funds go to a State Trustee, and any remaining creditors can file claims against these funds.

All of the following are requirements of ERISA Rule 404(c) EXCEPT the plan is required to: A) offer sub accounts with at least 3 diversified investment alternatives that have materially different return and risk characteristics B) on request, provide a plan participant with a statement of the value of a share or unit of each investment alternative and the date of valuation C) provide at least 1 investment option consisting of the stock of the company that sponsors the plan, if the company is exchange listed D) give plan participants the ability to change investments among the investment options at least quarterly

C) provide at least 1 investment option consisting of the stock of the company that sponsors the plan, if the company is exchange listed ERISA Rule 404(c) applies to retirement plans that offer "self-directed" investment, such as 401(k) plan. It requires that the plan sponsor offer: at least 3 investment alternatives that are diversified; that have materially different risk and return characteristics; and that when combined with each other, tend to minimize risk through diversification (e.g., an equity fund, a fixed income fund, and a capital preservation fund); participants the opportunity to diversify their accounts sufficiently to avoid large losses; and participants the opportunity to change investments with a frequency appropriate to the volatility of the investments, but no less than every 3 months. On request, the plan sponsor must provide a plan participant with a prospectus for each investment option; the annual operating expenses of each investment option; and the past and current performance, net of expenses of each investment option, along with the current value of units or shares. Note that the sponsor can offer its own stock as an asset class (e.g., an employee of GE can be offered GE stock as an investment option), as long as the stock is publicly traded and the participant gets the voting rights. However, this is NOTa requirement.

Which of the following statements is true for BOTHcollege savings plans and UTMA accounts? Contributions are made with after-tax dollars Earnings accumulate on a tax deferred basis State tax benefits are available on distributed earnings used to pay for qualified education expenses Earnings are tax-free at the Federal level when used to pay for qualified education expenses

Contributions are made with after-tax dollars There is no tax deduction for contributions to UTMA (Uniform Transfers to Minors Act) accounts, nor for contributions to 529 Plans - all contributions are made with after-tax dollars. Earnings in 529 Plans build tax deferred; but in UTMA accounts, the earnings are taxed each year. If earnings in a UTMA account are used to pay for qualified education expenses, they are still taxed. Regarding State tax rules, 529 Plan earnings are typically not taxed at the State level; UTMA account earnings, on the other hand, are taxable at the State level.

Non-profit organizations are permitted to establish tax deferred retirement plans for their employees called a 401(k) plan Tax sheltered annuity Profit Sharing Plan Defined Benefit Plan

Tax sheltered annuity 403(b) retirement plans are for employees of non-profit institutions such as hospitals and universities. Contributions are excluded from taxable income, and must be used to purchase "tax sheltered" annuities or mutual funds.

An aunt and her niece have opened a joint account at an investment advisory firm. Which statement is TRUE? A) The aunt has control of the account and the niece can only access the account with the aunt's permission B) The niece has control of the account and the aunt can only access the account with the niece's permission C) Both the aunt and the niece have control of the account, but the niece can only access the account with the aunt's permission D) Both the aunt and the niece have control of the account and both the aunt and the niece can access the account without each other's permission

D) Both the aunt and the niece have control of the account and both the aunt and the niece can access the account without each other's permission Each tenant can enter an order and each tenant can draw a check on a joint account. There is no requirement to get approval of the other account owner(s) to do this. Note that any check drawn must be made out to full account name. So, if the niece asks for a check to be drawn, it would be made out to both the names of the aunt and the niece. To cash this check, both the aunt and the niece would have to endorse the check.

What is a difference between a Limited Partnership and a C Corporation? Flow through of income and loss Limit on the number of owners Unlimited liability for owners Ability of owners to make management decisions

Flow through of income and loss Limited partnerships allow for flow though of income and loss to owners - they are not taxable entities. In contrast, C Corporations are taxable entities and do not allow for such flow through. There is no limit on the number of owners for both (either shareholders or limited partners). Both have limited liability for owners (either limited partners or shareholders). And both do not allow owners to make management decisions.

To open an account for an individual customer, an investment adviser representative should do all of the following EXCEPT: A) determine that the customer has an adequate liquid emergency fund B) determine that the customer has adequate insurance coverage to meet expected needs C) investigate and discuss the customer's investment goals and needs over the investment time horizon D) require the customer to pay off all credit card balances prior to making investment recommendations

D) require the customer to pay off all credit card balances prior to making investment recommendations The first 3 choices are reasonable. To open an account for an individual customer, an adviser representative should determine that the customer has adequate emergency funds; has adequate insurance coverage; and should investigate and discuss the customer's investment goals and needs. Requiring the customer to pay off credit card balances, while probably a good thing, has no relevance.

What type of employee benefit plan given to executives has no limit on the amount of contribution that can be made annually? 457 plan Deferred compensation plan 401(k) plan Roth IRA

Deferred compensation plan Deferred compensation plans can be established by corporate employers, allowing top-level employees who are high earners to defer taking all of their income, reducing current tax liability. The deferred amount is specified in the agreement between the company and the executive, is recorded on the company's books and earns a rate of return tied to a benchmark index, like the S&P 500 Index. Note that there is no limit on the amount that can be deferred under these plans, since the contribution amount is established by private agreement. When the employee retires, the deferred compensation amount plus growth is paid out as specified in the agreement and is taxable. Such plans are discriminatory, because they are only offered to high-earning top level employees, so these plans are not subject to ERISA. In contrast, a 457 plan is an additional salary reduction compensation plan offered to executives of governmental and not-for-profit employers where the dollar contribution is limited ($19,500 in 2021). A 401(k) plan is a corporate sponsored salary reduction plan, with the same contribution limit as a 457 plan. Roth IRAs have a maximum contribution of $6,000 in 2021.

Which of the following would NOT be included in Adjusted Gross Income on a tax return? Social security payments Foreign bond interest Distributions from non-qualified retirement plans attributable to cost basis Distributions from mutual funds subject to Subchapter M

Distributions from non-qualified retirement plans attributable to cost basis Adjusted gross income on a tax return includes all sources of taxable income, including wages, commissions, royalties, social security payments, pension plan payments (except for payments attributable to the cost basis in non-qualified plans), investment income (and this includes mutual fund distributions and income from foreign investments) and capital gains. Excluded from Adjusted Gross Income is municipal bond interest (which is not federally taxable) and retirement plan distribution amounts from non-qualified plans attributable to the cost basis (non-deductible investment dollars) in the plan.

Dividend payments made by which of the following are qualified? I Equity mutual funds II Real Estate Investment Trusts III Foreign companies that are listed in the United States IV Master Limited Partnerships

I Equity mutual funds III Foreign companies that are listed in the United States Dividends paid by U.S. corporations generally qualify for the lower 15% tax rate, and this includes equity mutual fund dividends. Dividends paid by foreign corporations to U.S. security holders qualify for the lower rate if: The corporation is incorporated in a country that has a comprehensive tax treaty with the United States; The corporation is incorporated in a U.S. possession; or The corporation has its shares listed on an established trading market in the United States. Non-qualified dividends, which are taxed at rates up to 37% include dividends received from Real Estate Investment Trusts and Master Limited Partnerships. These are viewed as a pass-through of income, rather than being a true dividend.

A customer has purchased shares of stock over an extended period of time at varying prices. The customer now sells some of the shares. Which statements are TRUE regarding the tax treatment of the sale? I The Tax Code allows specific identification of the shares being sold II The Tax Code prohibits the specific identification of shares being sold III FIFO accounting must be used to establish the cost basis of the shares sold, if no other tax election is available IV LIFO accounting must be used to establish the cost basis of the shares sold, if no other tax election is available

I The Tax Code allows specific identification of the shares being sold III FIFO accounting must be used to establish the cost basis of the shares sold, if no other tax election is available The IRS allows stockholders to select which shares they are selling when computing capital gains tax liability. Thus, the taxpayer can choose the higher cost shares to reduce any potential capital gain upon sale. If specific identification is not used, the shareholder must use FIFO - first in, first out - accounting.

Internal Revenue Code Section 1031: I applies to real estate held for investment II applies to real estate held for either personal use or for investment III defers capital gains tax due on appreciated property sold if the proceeds are invested in another property IV permits a capital loss to be deducted on a depreciated property if the proceeds are invested in another property

I applies to real estate held for investment III defers capital gains tax due on appreciated property sold if the proceeds are invested in another property Section 1031 of the Internal Revenue Code allows investment real estate that has appreciated to be sold and the proceeds invested in another piece of investment real estate, without capital gains tax being due at that point. This is known as a "like-kind" exchange. To qualify for this treatment, the replacement investment property must be purchased within 6 months of the sale date of the appreciated property. And also note that a "like-kind" exchange is not available for personal use real property - it is only available for investment property.

When an agent of an investment adviser prepares a client balance sheet, which of the following are considered to be personal possessions? I Checking account II Furniture III Jewelry IV Investments

II Furniture III Jewelry A "personal possession" of a customer is an item that is typically kept in the customer's home. These include furniture, artwork, jewelry, clothing, etc. This is basically an "insurance" definition for items that would be covered under a personal possessions insurance policy. A client's home itself is insured separately and is not a "personal possession." Finally, checking accounts, savings accounts and investment accounts are categorized separately as customer assets and are not included in the list of personal possessions.

A State's "Legal List" will typically consist of which of the following securities? I Low grade securities II High grade securities III Low risk securities IV High risk securities

II High grade securities III Low risk securities Many States establish a "Legal List" of permitted investments for fiduciaries. The legal list typically consists of ultra-safe securities - generally U.S. Government bonds, government agency bonds, and AAA rated corporate and municipal securities. These securities would be high grade; and low risk.

403(b) Plansare permitted to invest in which of the following? I Common stocks II Mutual Funds III Fixed Annuities IV Variable Annuities

II Mutual Funds III Fixed Annuities IV Variable Annuities The "big kahuna" of 403(b) plans is "TIAA-CREF" - Teacher's Insurance Annuity Association - College Retirement Equity Fund. TIAA-CREF administers retirement plans for not-for-profits, including school systems, universities and hospitals. Its name gives you the clue as to which investments are permitted in 403(b) plans. The permitted investments are life insurance, fixed annuities, variable annuities and mutual funds. Direct investments in common stocks are not allowed; the investments must be managed by a professional manager. Also note that TIAA-CREF has shortened its name to simply "TIAA," but knowing the "old" name helps with test questions!

Under which TWOof the following circumstances can a non-taxable distribution be made from a Section 529 Plan? I The beneficiary does not go to college II The beneficiary gets a full scholarship III The beneficiary goes to vocational school IV The beneficiary gets married

II The beneficiary gets a full scholarship III The beneficiary goes to vocational school Payments from Section 529 plans made to colleges, universities, vocational schools, and any other accredited post-secondary education institution are not taxable. In addition, refunds made because of death or disability of the beneficiary, or because the beneficiary received a scholarship, are not taxable. Distributions made for any other reason are taxable.

The executor of an estate subject to federal estate tax is permitted to use an alternate valuation date: I for securities that have appreciated after the date of death II for securities that have depreciated after the date of death III that is 6 months from the date of death IV that is 9 months from the date of death

II for securities that have depreciated after the date of death III that is 6 months from the date of death The basic rule for inherited securities is that they are transferred to the beneficiary at fair market value at the date of death. However, the tax code allows an exception for estates that require a federal filing (those with over $11,700,000 of assets in 2021). In this case, the estate can choose to use an "alternate valuation date" that is set 6 months after death. It would choose to do this if the securities have depreciated, resulting in a lower estate tax liability.

Which of the following statements are TRUEregarding the distributions from an Individual Retirement Plan? Distributions: I must start at age 59 1/2 II must start at age 72 III are 100% taxable at ordinary income tax rates only if the original contribution was non-deductible IV are 100% taxable at ordinary income tax rates only if the original contribution was deductible

II must start at age 72 IV are 100% taxable at ordinary income tax rates only if the original contribution was deductible Distributions from Traditional Individual Retirement Accounts can start at age 59 1/2; and must start by April 1st of the year after reaching age 72. Distributions from Traditional IRAs are taxable at ordinary income tax rates if the contributions in the account were deducted from income when they were made (this is the case with most IRA contributions). Note that if an individual is covered by another qualified retirement plan and if that individual earns too much, the contribution will not be tax deductible; and any distributions are taxed only on the amount received above the original contribution into the plan (which was made with already-taxed dollars, so taxing it again would be a "double tax").

All of the following would be defined as "earned income" under IRS regulations EXCEPT: Interest payments Commission payments Royalty payments Bonus payments

Interest payments Earned income includes wages, salary, tips, commissions, royalties received (such as royalties earned for writing a book), and bonuses. Interest income received is classified as "portfolio" income.

Which of the following is NOT a suitable investment for Individual Retirement Accounts? U.S. Government bonds Corporate bonds Municipal bonds Zero coupon bonds

Municipal bonds Municipal bonds are not suitable for tax deferred accounts such as pension plans and IRAs. These accounts are already tax deferred, so putting taxable investments in them that generate a higher rate of return than municipals is appropriate. Furthermore, these higher returns will compound tax deferred as long as they are held in the pension account. Municipals give a lower rate of return than governments or corporates because of the federal tax exemption on their interest income. They are a bad choice for retirement accounts. Finally, zero-coupon governments and corporates give a higher rate of return than municipals, since the annual accretion of the discount on these is taxable; and they are great investments to put in a retirement account; since then the annual accretion of the discount will build tax-deferred.

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

ONLY Marital status on the last day of the year When filing a tax return, a "filing status" must be chosen. There are 5 possible filing statuses: Single; Married Filing Jointly; Married Filing Separately; Head of Household; Qualifying Widow(er) With Dependent Child. Determination of marital status is based on the person's marital status as of the last day of the year. The IRS Form 1040 does not ask the age of the filer, nor does it ask citizenship or residency of the filer. Note, however, that the form does ask for home address, so that if the IRS wants to send you one of their nasty letters, they know where to send it!

A 25-year old single customer earns $80,000 per year at a corporation. He contributes the maximum amount to his company's 401(k) plan and wants to put money aside on a tax-deferred basis for the 1st time purchase of a house in 6 years. The best recommendation is that this individual make contributions to a: Traditional IRA Roth IRA Coverdell ESA 529 Plan

Roth IRA Coverdell ESAs and 529 plans are used to pay education expenses and offer no benefit when buying a home. The first $10,000 of 1st time home purchase expenses can be withdrawn from an IRA prior to age 59 1/2 without having to pay the 10% penalty tax. However, regular income tax is still due. The rules lay out as follows: *chart* The key to this question is that the individual wants to buy a house in 6 years. He is below the income phase-out range for a Roth, so he can contribute. As long as funds are held in a Roth for at least 5 years, and the withdrawal prior to age 59 1/2 is made for a "qualifying reason" (which is the case here), there is no tax due. If the contribution was made to a Traditional IRA, because this person earns $80,000 per year and is covered by another qualified plan, it would be a non-deductible contribution (it is above the $76,000 income limit for a deductible contribution in 2021). In that case, the $10,000 withdrawn would be subject to tax on any amount attributable to earnings in the account. This is a very picky question!

A business entity that has the legal protections of a corporation and the tax benefits of a partnership is a: general partnership limited partnership C Corporation S Corporation

S Corporation A Subchapter S Corporation gives its shareholders limited liability (liability limited to the investment made), along with the flow-through tax benefits of a partnership because the corporation itself is not taxable. However, these are designed for smaller companies, since they can only have a maximum of 100 shareholders. A C Corporation is taxable and then distributes after-tax income to shareholders as a dividend, which is taxed again at the shareholder level. There is no flow-through tax benefit. General partners have unlimited liability - they do not get the benefit of limited liability given to shareholders. In a limited partnership, the limited partners have limited liability, however the general partner (each limited partnership must have at least 1 general partner) still takes on unlimited liability.

2 adult brothers want to open a joint account. What ownership option is NOT available to them? Joint Tenants With Rights of Survivorship Tenants By Entireties Tenants In Common All of the above

Tenants By Entireties Tenants By Entireties is a method of joint ownership that is only available to a married couple and which is only available in a limited number of states. Like JTWROS, if one dies, the surviving spouse becomes the sole owner of the property. The transfer of ownership bypasses the will and probate. The big difference is that Tenants By Entireties treats the ownership of the account as one entity. If one of the spouses is sued and a judgement is obtained, the assets in the account cannot be seized. In contrast, with JTWROS, the joint tenants are not considered to be a single legal entity. If a single spouse was sued and a judgement was obtained, the creditor could get 50% of the assets in the account (if the judgement was that large).

How much can be contributed to a 529 Plan? $2,000 per designated beneficiary per year $15,000 per designated beneficiary per year $15,000 per donor per year The dollar limit established by that State

The dollar limit established by that State 529 plans are State-sponsored college savings plans. The maximum amount that can be contributed is set by each State and can be very high - often $200,000 - $300,000, since college is expensive. Note that if more than $15,000 is given by a donor to a beneficiary (in 2021), the excess above the $15,000 gift tax exclusion amount will be subject to Federal gift tax - but this is not part of the question.

A father gives a $22,000 gift of securities to his son; and a $22,000 gift of securities to his daughter. Which statement is TRUE? The father has no gift tax liability The father has gift tax liability on the gift to the son The father has gift tax liability on the gift to the daughter The father has gift tax liability on both gifts

The father has gift tax liability on both gifts The first $15,000 of a gift (other than to a spouse) is excluded from tax in 2021. Any amount above this is subject to gift tax, to be paid by the donor. Since the gift to both the son and the daughter was valued at $22,000 each, the amount above the gift limit exclusion is subject to gift tax, paid by the donor (the father).

Which statement is TRUE about the use of funds held in a 529 Plan? The funds can only be used to pay for higher education in the State where the account is established The funds can be used to pay for higher education anywhere in the United States The funds can be used to pay for higher education in the United States or in foreign institutions that qualify The funds can be used to pay for higher education anywhere in the world

The funds can be used to pay for higher education in the United States or in foreign institutions that qualify Funds in a 529 Plan can be used to pay for college or higher education in the United States and in foreign schools that qualify for Title IV federal student aid. There are about 800 foreign schools that are eligible. Also note that starting in 2018, up to $10,000 per year can be withdrawn from a 529 Plan to pay for below-college level education expenses, but that is not addressed in this question.

A father has set up a 529 Plan for his son in State A, where he and his family reside. The family moves to State B, and the father wishes to move the plan to State B because it offers a higher contribution amount which is deductible from income tax in State B. Which statement is TRUE about this? Once a 529 Plan is established in a State, it cannot be moved to another State The plan assets may be rolled over into a 529 Plan in State B as long as this occurs only once in 12 months The plan assets may be rolled over into a 529 Plan in State B only if the son gives approval, since he is the legal owner of the account The 529 Plan assets can be rolled over without restriction from State A to State B

The plan assets may be rolled over into a 529 Plan in State B as long as this occurs only once in 12 months 529 rollovers are permitted every 12 months without any tax penalty. The son has no control over the account - the donor retains control, making Choice C incorrect. Choice Dis incorrect because there is a restriction on rollovers to once every 12 months.

To open a new account for a non-revocable trust, which statement is true? The tax identification number of the trust must be obtained The tax identification number of the trusteemust be obtained The tax identification of the trust beneficiary must be obtained There is no requirement to obtain a tax identification number when opening a trust account

The tax identification number of the trust must be obtained Non-revocable trusts are legal entities that are taxed under the Internal Revenue Code, thus they have their own tax identification numbers.

For bonds trading at a premium, rank the yield measures from lowest to highest? Nominal Current Basis Yield to Call Basis

YTC basis --> Lowest basis current nominal(stated) --> highest When bonds are trading at a premium, the yield to call will be the lowest measure since the annual return is reduced by the annual amortized portion of the premium that will be "lost" over the life of the bond to the call date. The next highest yield will be the yield to maturity, since the premium will be lost over a longer "life" than if the bond is called early. Current yield will be higher than yield to maturity, since it does not include the annual premium loss. Stated yield will be the highest since it is the return based on par value.

An investor buys a $50,000, 10% corporate bond maturing in 2046 for $62,500. The bond is callable starting in the year 2021. What is the most appropriate measure for calculating yield? Total Return Current Yield Yield to Call Yield to Maturity

Yield to Call The best answer is C. This investor is paying $62,500 for a 10% bond with a face value of $50,000. Thus, the investor is paying 25% more than par for the bond. Because of the premium, these bonds are currently yielding 8% ($100 annual interest received / $1,250 purchase price per bond = 8%). This issuer would call these bonds, since the issuer is paying 10%; yet if the issuer were to sell new bonds in the current market, it would only have to pay 8%. This bond is very likely to be called, so using the call date is the appropriate time frame to be used to compute the yield on the bond.

Prior to recommending a specific 529 college savings plan to a customer, a representative should consider which of the following? I Customer's investment objective(s) II Age of the beneficiary III Number of years until the funds are needed IV Performance history of the recommended investment

all All of the choices should be considered when recommending a specific 529 college savings plan to a customer: investment objective(s); age of the beneficiary; number of years until the funds are needed; and the performance history of the recommended investment.

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 $15,000 in 2021 are excluded from tax III The first $11,700,000 of an estate (in 2021) is excluded from tax IV Tax liability rests with the donor or estate

all Gift and estate tax rates increase with the size of gift or estate - this is known as a progressive tax. Regressive taxes are flat taxes. Gifts of up to $15,000 in 2021 are excluded from tax. The first $11,700,000 of an estate is excluded from tax in 2021. Tax liability rests with the person who has the money - that is the donor or the estate!

Which of the following is (are) included in the cash flow analysis performed when determining the current financial status of a customer? I Interest income II Earned income III Dividends

all Sources of cash inflows are earned income, interest income, royalty payments received, as well as the proceeds from asset sales. Dividends received from security holding are also part of a customer's cash flow - which is simply cash coming in each year versus cash going out. Assets, liabilities, and equity in assets are not part of annual cash flow - these are balance sheet items of the customer.

Which of the following would be an asset on a client's personal balance sheet? dividends received from stock investments policy value of term insurance interest received from bond investments cash value of whole life insurance

cash value of whole life insurance Dividends and interest received are income items on a client's income statement. Term insurance has no investment component - it only pays if the insured person dies. Thus, it only becomes an asset on death. The cash value that builds in a universal life or whole life policy is a client asset. It is cash that can be withdrawn if the policy is surrendered. Alternatively, the customer can maintain the policy and borrow against the cash value in the policy.

All of the following are characteristics of 529 college savings plans EXCEPT: a one-time single contribution of up to 5 times the annual gift tax exclusion may be contributed in a single year eligibility of contributions is not affected by the income of the contributor contributors purchase tuition credits or units the plans are sponsored by States

contributors purchase tuition credits or units In a 529 college savings plan, shares are purchased. In contrast, in a prepaid tuition plan, contributors purchase units or credits, with each unit or credit representing a fixed percent of future tuition. All of the other statements are true regarding 529 college savings plans: A 1-time contribution of up to 5 times the annual gift tax exclusion can be contributed in a single year; the ability to make contributions is not dependent on the income of the contributor; and the plans are sponsored by States.

When an agent of an investment adviser prepares a client balance sheet, which of the following is a personal possession? residence furniture checking account investments

furniture A "personal possession" of a customer is an item that is typically kept in the customer's home. These include furniture, artwork, jewelry, clothing, etc. This is basically an "insurance" definition for items that would be covered under a personal possessions insurance policy. A client's home itself is insured separately and is not a "personal possession." Finally, checking accounts, savings accounts, and investment accounts are categorized separately as customer assets and are not included in the list of personal possessions.

Income in a revocable trust is taxed at the: corporate rate grantor rate trust rate AMT rate

grantor rate 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). In contrast, income in a non-revocable trust is taxed at the rates scheduled for trusts - these are the same rates as for individuals but the brackets "ratchet up" faster to a maximum rate of 40%. (in 2021).

In order to recommend a security to a customer, the MOSTimportant consideration is: investment experience investment objective and risk tolerance investment time horizon investment tax benefit

investment objective and risk tolerance The most important consideration when recommending a security to a customer is that customer's investment objective and risk tolerance.

All of the following are considered when creating the financial profile for a customer EXCEPT: investment experience financial knowledge financial goals investment timing

investment timing A customer's previous investment experience is relevant in determining the types of investments that this customer is comfortable with. Financial knowledge is relevant in determining how sophisticated the type of investment that can be recommended to the customer. Financial goals are a primary consideration in creating the customer's financial profile. Investment timing is not relevant to creating the financial profile; it is relevant once the investment vehicles have been selected. One wishes to time the investments so that they are made at the best possible prices.

The best income tax filing status for a married couple where one spouse earns substantially all of the income is: married filing jointly married filing separately head of household single filing 2 returns

married filing jointly For married couples, where one spouse earns the majority of the income, the lowest tax liability generally results by choosing "Married Filing Jointly." This occurs because the higher income gets "averaged down" when it is added to the lower income, where the joint amount is taxed at a lower joint tax bracket.

Under IRS regulations, a gain or loss upon current disposition of an asset is first considered to be long termif the asset has been held for: 6 months or less over 6 months 1 year or less over 1 year

over 1 year Under IRS rules, a security's holding period is short term if the security has been held for up to 1 year. Short term capital gains are taxed at a maximum rate of 37% (the maximum individual tax rate). If the position is held for over 1 year (1 year and 1 day), then any gain or loss is long term. Gains on assets held over 12 months are taxed at a maximum rate of 15% (this increases to 20% for individuals in the highest tax bracket).

A couple has been married for 30 years - the wife is 65 years old and the husband is 55 years old. The wife dies unexpectedly, and the husband inherits her IRA. He has no need for the money and wants to pass it along to his grandchildren upon his death. The best action for the husband to take is to: maintain his wife's IRA account take the proceeds from the wife's IRA account as a lump sum distribution roll the proceeds from the wife's IRA into his own IRA account transfer the assets into an inherited IRA account

roll the proceeds from the wife's IRA into his own IRA account Upon death of an IRA holder, there are generally 3 options for a surviving spouse: Transfer the assets into an inherited IRA Roll over the assets in the IRA into the beneficiary's IRA Disclaim the IRA The IRA account cannot be maintained after the owner dies, so Choice Ais not possible. If the proceeds are taken as a lump sum distribution, they are taxable at that point. This does not meet the husband's objective of giving the funds to his grandchildren upon his death. If the husband rolls over the IRA proceeds into his IRA, the funds remain tax-deferred. Since he is only 55, he has another 17 years of tax-deferred growth in the account before RMDs (Required Minimum Distributions) must be taken starting at age 72. This better meets his requirement to pass the funds to his grandchildren upon his death. If the husband transfers the assets into an inherited IRA account, distributions must be made over 10 years. These distributions are taxable, so they do not meet the husband's objective of giving the funds to his grandchildren upon his death. If the husband disclaims the bequest (not given as a choice), then the assets would go immediately to any other beneficiaries named in the wife's will.

Section 529 plans are established by the:

state State sponsored education savings programs are "Section 529" plans.

Mutual fund distributions that are automatically reinvested are: taxable based on the date of the distribution taxable when the shares are redeemed taxable upon reaching age 59 1/2 not taxable

taxable based on the date of the distribution The best answer is A. Mutual fund distributions are reported to shareholders on a Form 1099-DIV annually by the fund, whether they are reinvested or not. They are taxable each year.

Funds withdrawn from an IRA after age 59 1/2 are: not taxed if rolled over to another IRA within 90 days taxed at ordinary income tax rates taxed at ordinary income tax rates for distributions that are part of the build-up in the account and at capital gains rates for distributions that are the return of original capital contributed taxed at the same rate as long term capital gains

taxed at ordinary income tax rates Funds withdrawn from a Traditional IRA are taxed at ordinary income tax rates. If non-deductible contributions are made (which only occurs if an individual is not covered by another qualified retirement plan and he or she earns too much), then the tax is applied only to the build-up in the account - there would be no tax on the distribution amount that equaled the original non-deductible contribution. Choice A is incorrect because to maintain tax-free status, the rollover must be completed in 60 days - not 90 days.