Unit 6 - Taxation
A loss derived from a limited partnership may be offset against income from: A) other limited partnerships. B) dividends received from common stocks. C) capital gains from municipal bonds. D) bonuses received in addition to regular salary.
Answer: A A limited partner may use only passive income to offset the loss derived from a limited partnership. A passive loss cannot be used to offset dividends received from common stocks. Passive loss from partnerships may be used to offset passive gains from partnerships, not gains from municipal bonds.
Which of the following is federally tax exempt for a corporation? A) Municipal bond interest. B) Preferred stock dividends. C) Foreign corporate stock dividends. D) Capital gains.
Answer: A Municipal bonds are tax exempt for corporations as well as for individuals. Preferred stock dividends are taxable but at a reduced rate for corporations due to the 70% dividend exclusion. That break does not apply to the dividends on foreign securities. Regardless of the security, capital gains are taxable.
Property included in a deceased's gross estate is generally valued for estate tax purposes at: A) its fair market value (FMV) on the date of the deceased's death. B) its original cost less depreciation. C) its fair market value (FMV) on any date the estate chooses to use. D) the amount the deceased paid for it.
Answer: A Property included in the gross estate is generally valued at its fair market value (FMV) on the date the deceased died. An estate can also elect to value property on the alternate valuation date, which is usually 6 months after the date of death.
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 $147,000 per year B) An unlimited amount C) No more than $14,000 per year D) No more than $28,000 per year
Answer: B The gift tax marital deduction permits an individual to give a spouse an unlimited amount of property without incurring a gift tax. However, if the spouse is not a U.S. citizen, the maximum marital gift is $147,000 (2015).
Most taxes in the U.S. fit into one of two categories. They are either progressive or regressive. Which of the following taxes are known as progressive taxes? Sales. Cigarette. Income. Estate. A) II and IV. B) III and IV. C) I and II. D) I and III.
Answer: B With a progressive tax, the percentage amount increases as the taxable amount increases such as income and estate taxes. Sales and cigarette taxes are regressive because all persons pay the same percentage tax regardless of their income.
Julie owns 100 shares of CCC at $25. CCC declares a 25% stock dividend. After the ex-date, what will she own? 125 shares. 100 shares. Cost basis of $25. Cost basis of $20. A) I and II. B) II and III. C) II and IV. D) I and IV.
Answer: D Stock dividends make the number of shares owned increase and the cost per share decrease. The overall value should remain unchanged. 125 shares × $20 = $2,500; 100 shares × $25 = $2,500.
Which of the following groups of taxpayers is most affected by a regressive tax? A) Low-income. B) Middle-income. C) High-income. D) Passive income.
Answer: A A regressive tax (for example, a sales tax) takes a larger percentage from a person with a low income than it does from a person with a high income.
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. A) I, II and III. B) I only. C) II only. D) II and III.
Answer: A Interest on foreign bonds is taxed in the United States by federal, state, and local governments.
If an investor is in the highest federal income tax bracket and is subject to the alternative minimum tax, which of the following securities should an agent recommend? A) General obligation bond. B) Corporate bond. C) Treasury bond. D) Industrial revenue bond.
Answer: A Municipal bonds are suitable for the portfolio of an investor who is in a high tax bracket because the interest is exempt from federal income tax. A general obligation (GO) bond is a better recommendation than an industrial revenue bond because the interest on industrial revenue bonds is likely subject to the AMT.
An advisory client of yours dies, and you transfer the $1.4 million of securities in the individual's name to the estate account. You will: A) 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) inform the executor that you need to keep sufficient liquid funds in the account because estate taxes will be due in 6 months. D) tell the executor that he will be receiving a Form 1099 for tax purposes, representing the transfer of account over to the estate account.
Answer: 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 $5.34 million (the amount exempt from taxation for 2014).
If an investment adviser's client wishes to save current income taxes by placing certain investments in a charitable trust, ethically, the investment adviser should: A) urge the client to consult with an attorney who pays a referral fee to the investment adviser. B) recommend the client consult with a qualified attorney. C) refuse to discuss the trust with the client because the adviser is not an attorney. D) help the client draft the appropriate documents following a discussion of the advantages of the arrangement.
Answer: B Presuming the adviser is not a licensed attorney, he should recommend the client see a qualified attorney. However, it is ethical to discuss the nature of a charitable trust with the client.
Frank and Joe Hardy have formed Hardy Investigative Services, (HIS), with each owning 50% of the stock in the company. HIS is organized as an S corporation. Unless receiving an extension, the Form 1120S is due A) April 15 B) 90 days after the end of their fiscal year C) March 15 D) January 15
Answer: C All business returns, with the exception of sole proprietorships, partnerships, and LLC's (including multiple member LLCs that do not elect to be treated as corporations), are due 2½ months after the end of the year (always a calendar year for businesses other than a C corporation).
If a father makes a gift of securities to his 10-year-old daughter, gift taxes would be based on the: A) market value of the securities as of April 15 of the year in which the gift is made. B) market value of the securities as of December 31 of the year in which the gift is made. C) market value of the securities on the date of gift. D) cost of the securities.
Answer: C 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.
Which of the following statement(s) regarding gift taxes for a gift made in 2015 are TRUE? Gifts of $14,000 per person per year can be given without a tax liability. Gifts in excess of $14,000 per person per year may be subject to tax. The donor, not the recipient, is responsible for any tax liability. The tax rate increases with the size of the gift. A) II and III. B) III and IV. C) I, II, III and IV. D) I and II.
Answer: C In accordance with current gift tax regulations, an individual may give a gift of up to $14,000 per person in one year with no gift tax liability. If the gift exceeds $14,000, it is the donor who is responsible for any tax. The gift tax is a progressive tax, which means that as the size of the gift increases, the percentage of applicable tax will also increase.
Investors looking to minimize the effects of taxation on their investments would probably receive the least benefit from A) an S&P 500 index fund B) a growth stock C) a corporate bond D) an apartment building
Answer: 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.
Last year, an investor had a $5,000 loss after netting all realized capital gains and losses. This year the investor has a $1,000 capital gain. After netting his gains and losses, what will be his tax situation this year? A) He will have a $1,000 loss to carry over to the next year. B) There will be no tax consequences. C) He will offset $1,000 ordinary income this year. D) He will have a $1,000 gain.
Answer: C 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.
A customer has just died. If his wife asks you what amount of federal estate tax will be imposed on the transfer of their personal property to her name, which of the following responses would be best? A) The amount of tax will depend on your late husband's tax bracket. B) The amount may be prorated over the next 4 years. C) Consult a qualified tax specialist. D) The amount of tax will depend on the size of the estate to be transferred.
Answer: C Specific tax advice should be referred to a qualified tax adviser such as an accountant or tax attorney. No federal estate tax is imposed as a result of the marital exclusion as long as the spouse is a U.S. citizen.
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) $99.25. C) $98.25. D) $60.5.
Answer: C The cost basis to the recipient of inherited securities is the fair market value on the date of the owner's death. In this case the fair value is the market value of $98.25.
Which of the following statements regarding the alternative minimum tax is TRUE? A) The tax bracket will determine whether the regular tax or the alternative tax is paid. B) The lesser of the regular tax or the alternative tax is paid. C) The excess of the alternative tax over the regular tax is added to the regular tax. D) The alternative minimum tax is added to the regular tax.
Answer: C 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.
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) 20 days. B) There is no waiting period. C) 31 days. D) 5 days.
Answer: C When a customer sells a security at a loss, he may not buy back the same (or substantially identical) security from 30 days before to 30 days after the sale that established the loss, without having the loss disallowed.
John and Martha, both in their early 40s, were divorced 2 years ago. Because Martha is unemployable, the terms of the divorce require John to pay Martha $300 per month in alimony and $1,000 per month in child support for their 4 children. Given that information, which of the following statements is CORRECT? A) Martha could contribute a maximum of $5,500 this year to an IRA. B) Martha has reportable taxable income of $12,000 for the year. C) John is able to deduct $12,000 from his taxable income. D) John is able to deduct $3,600 from his taxable income.
Answer: D Alimony is considered eligible income for an IRA to Martha and tax deductible to John. Child support is neither income to Martha nor deductible to John. Because Martha receives $3,600 in alimony, that would be her maximum allowable IRA contribution.
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 2014 without incurring gift tax consequences? A) A limited amount because her spouse is not a U.S. citizen. B) $14,000. C) $100,000. D) Unlimited.
Answer: A Under current tax regulations, there is a limit to the amount of a gift that may be made to a noncitizen spouse. For 2014, that limit is $145,000.
For tax purposes, the sale of an investment at a profit will result in A) passive income. B) alternative minimum tax liability. C) capital gain. D) ordinary income.
Answer: C Realizing a profit when selling an investment generates a capital gain, while dividend and interest income are taxed as ordinary income.
If an investor swaps identical issues of stock to establish a loss that is disallowed, the transaction is known as: A) a reverse stock split. B) a stock swap. C) a wash sale. D) a stock cross.
Answer: C The wash sale rule disallows claiming a tax loss on the sale of stock if the investor purchases a substantially identical security within 30 days either before or after the date of such sale.
If a client has realized a capital gain from the sale of a municipal bond, to reduce tax liability, the capital gain can be offset against a capital loss in: GOs. equity securities. corporate bonds. REITs. A) I, II, III and IV. B) I only. C) I and II. D) II and III.
Answer: A 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.
A highly compensated customer owns 200 shares of Datawaq. He bought it 20 years ago, and it is now trading at 90. If he donates the stock to a not-for-profit corporation, how much can he claim as a tax deduction for this donation? A) $18,000.00 B) $0.00 C) $6,000.00 D) $12,000.00
Answer: A 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.
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) $575 long-term gain, $105 short-term loss. B) $470 short-term loss. C) $575 short-term loss; $105 long-term gain. D) $575 long-term loss.
Answer: B 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.
Which of the following statements are NOT true? The kiddie tax applies to any income received by a child under the age of 19. IRAs have advantages over other estate assets when left to charity. Simple trusts have to distribute income annually. For U.S. citizens, there is an unlimited marital estate tax deduction. A) I and II. B) I, II and III. C) II, III and IV. D) I, II, III and IV.
Answer: A The kiddie tax applies to unearned income only such as that received in an UTMA account. Leaving IRA assets to a charity offers the same estate tax benefits as any other asset. Simple trusts must distribute income annually, and there is an unlimited marital estate tax deduction between spouses who are U.S. citizens.
The gain on the sale of a security held as an investment will be treated as a long-term capital gain if the security was held for: A) more than 12 months. B) more than 1 month. C) more than 3 months. D) more than 6 months.
Answer: A The sale of a capital asset will result in a long-term capital gain only if the asset was held for more than 12 months. In other words, the holding period for long-term capital gains is 12 months.
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) obtain an appraisal from a qualified jeweler and use that as the cost basis B) use the original cost of the ring C) use a cost basis of zero because it was a gift D) ignore the profit for tax purposes because precious metals are not subject to capital gains taxation
Answer: B Regardless of the nature of the asset, the cost basis of any asset acquired as a gift is that of the donor.
When are estate taxes due? A) 9 months after death. B) 6 months after valuation. C) 6 months after death. D) 9 months after valuation.
Answer: A Estate taxes are due 9 months after death. The taxes are based on either the value at death or the alternative valuation 6 months after death.
Which of the following business entities has an income tax filing due date (disregarding possible extensions) of March 15th? Sole proprietorship Single member LLC Multiple member LLC electing to be treated as a corporation S corporation A) I and IV B) III and IV C) I and II D) II, III and IV
Answer: B Filing of an income tax return for businesses is generally 2 ½ months after the end of the fiscal year. In the case of S corporations and LLC's with more than one member electing to be treated as a corporation, that is always March 15. C corporations are able to choose their fiscal year so, if theirs ended June 30th, then the tax filing deadline would be September 15th. In the case of sole proprietorships, partnerships, and LLC's with only one member, the return dates are the same as for the individual tax return, April 15th.
If a husband makes a gift of $100,000 to his wife, a U.S. citizen, how much of the gift is subject to gift taxes? A) $100,000.00 B) $0.00 C) $50,000.00 D) $90,000.00
Answer: B Interspousal gifts to citizens of the United States, regardless of amount, are not subject to gift taxes.
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) $5,000.00 D) $3,000.00
Answer: D The maximum deduction of net capital losses against other income in any one year is $3,000; any remaining loss can be carried forward into the next year.
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 fair market value of the asset on the day the decedent died. B) the amount the recipient ultimately sells the asset for. C) the amount the decedent originally paid for the asset. D) the fair market value of the asset on the day the decedent acquired it.
Answer: A Generally, a taxpayer's basis in an asset is the amount the taxpayer paid for the asset. When an asset is acquired by inheritance, however, the asset's basis is generally the fair market value of the asset on the date of the decedent's death (or 6 months after the date of death if the estate elects the alternate valuation date). Because this value is often higher than the price the decedent originally paid for the asset, this kind of basis is called a stepped-up basis.
Which of the following activities would not be a violation of the ethical standards to be followed by investment advisers and their representatives? Recommending an estate planning attorney to clients who have inquired about ways to potentially reduce their estate tax liability. Rewarding one of your college fraternity brothers with a cash gift for each client he refers to you. Preparing trust documents for clients using forms you acquired on the Internet. Describing the possible tax ramifications of repurchasing a security shortly after selling it at a loss A) I and IV. B) I and II. C) II and III. D) III and IV.
Answer: A It would not be a violation to recommend the appropriate professional for your client's legal needs. If you were to be compensated for the referral, disclosure would have to be made. When one sells a security at a loss and then repurchases it within a 30-day period, the wash sale rules apply and it is incumbent upon you as a fiduciary to make the client aware of that possibility. Cash gifts to friends for referrals are not permitted, unless a formal solicitor's agreement has been entered into. Under certain circumstances, this would involve registration as an IAR by the individual. Legal documents should be prepared by attorneys, not IAs.
A tax, often described as a parallel tax to the regular federal income tax, that disallows certain deductions and exemptions, is the A) alternative minimum tax B) capital gains tax C) personal property tax D) intangible assets tax
Answer: A Originally created as part of the Tax Reform Act of 1969, the alternative minimum tax (AMT) was designed to capture income taxes from a small number of individuals (less than 200) who made more than $200,000 in 1968, but paid no income tax. Today's version, by eliminating the tax benefit of certain tax preference items, such as accelerated depreciation and long-term capital gains, as well as common deductions, such as state income tax and real estate taxes, makes it almost impossible to escape without paying at least some income tax. However, today, the AMT affects far more than the original miniscule number. According to TurboTax, in 2010, 29.3% of taxpayers earning between $75,000 and $100,000 were required to pay the AMT. The IRS requires middle- and high-income taxpayers to run two sets of numbers when filing income taxes: the regular income tax calculations on Form 1040 and the AMT method on Form 6251. Whichever number is higher is the amount the taxpayer must pay. Technically, the statement is: The taxpayer pays the regular income tax plus the amount by which the alternative tax exceeds the regular income tax. Of course, that just means you pay whichever is the higher amount.
Which of the following is not included in adjusted gross income on an individual's federal income tax return? A) Stock dividends B) Wages and tips C) Income from a sole proprietorship D) State income tax refunds
Answer: A 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.
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) Identified shares. B) Wash sale rules. C) LIFO. D) FIFO.
Answer: D When a customer does not choose a method, the IRS uses FIFO (first in, first out). This will likely result in shares with the lowest cost basis being redeemed first, which creates a greater taxable gain.
An investor would have to pay the alternative minimum tax when A) the investor's capital gains exceed 10% of total income. B) there are tax preference items reported on the tax return. C) the investor has received income from a limited partnership. D) it exceeds the investor's regular income tax.
Answer: D A taxpayer must pay the alternative minimum tax in any year that it exceeds regular tax liability. Tax-preference items are re-input in figuring AMT, but the AMT is paid only if that amount is higher than the regular income tax.
An investor purchases 500 shares of stock on January 10th at $50 per share and sells it on August 4th of the following year for $40 per share. As a result, the investor has realized a: A) long-term capital loss. B) short-term capital loss. C) short-term capital gain. D) long-term capital gain.
Answer: A Buying stock at $50 per share and selling it for $40 per share creates a capital loss of $10 per share. In this case, because the holding period was more than a year and one half, the loss is long term.
An investor purchases 100 shares of a stock at $100 per share on January 1st. On the following July 1st, the shares are sold for $120 per share. The tax consequences are: A) $2,000 long-term gain. B) $2,000 short-term loss. C) $2,000 long-term loss. D) $2,000 short-term gain.
Answer: D 100 shares sold for $120 per share that were purchased for $100 per share results in a capital gain of $2,000. Because the holding period did not exceed one year, the gain is considered short-term for tax purposes.
A 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) 50 B) 55 C) 62 D) 60
Answer: D The IRS allows a step-up in basis for inherited stock. The customer's cost basis is the fair market value of the stock on the date that the decedent died.
A US 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) tax credit on the investor's U.S. tax return. B) reduction in the investor's ordinary income. C) tax credit on the investor's Canadian tax return. D) non-recoverable loss on the investor's U.S. tax return.
Answer: A 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.
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) $15,000.00 B) $0.00 C) $3,000.00 D) $12,000.00
Answer: B After netting the $12,000 capital gains and $15,000 capital losses, the client has a net capital loss of $3,000. Because all of this capital loss may be used to offset ordinary income in any one taxable year, there is no amount of loss to carry forward.
William died in 2015 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 as beneficiary, $75,000 in debts and estate expenses. What is William's taxable estate? A) $175,000 B) $0; it is below the $5.43 million exemption equivalent C) $625,000 D) $750,000
Answer: A The question is asking for the taxable estate, not the amount of estate tax due. The market value of all assets which 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 taxable estate. In this case, the $1.1 million gross estate is reduced by the $850,000 left to his wife and then by the $75,000 in debt and expenses. Technically, there is still a taxable estate. However, any estate tax due is reduced by a credit equivalent to $5.43 million in assets for 2015.
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. A) II and III. B) I and III. C) I and IV. D) II and IV.
Answer: A When making a gift of securities, the market value at date of gift is used to determine if any gift taxes are due. However, when making a noncharitable gift of securities, the donor's cost basis is passed to the recipient.
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 the: A) market value at date of death. B) original cost of the stock. C) original cost of the stock adjusted for any estate taxes paid. D) market value at date of distribution to the customer.
Answer: A When securities are inherited, the heir receives a cost basis calculated as of the deceased party's date of death.
Which of the following statements about capital gains are TRUE? The minimum holding period required to qualify for long-term capital gains treatment is one 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. A) II and III. B) I, II and III. C) I and II. D) I and III.
Answer: B If an investor holds stock for more than 12 months and sells it for a gain, the gain will be treated as a long-term capital gain. The advantage of long-term capital gains is that the maximum tax rate on long-term capital gains is lower than the maximum rate on ordinary income. If an investor holds stock for 12 months or less, though, any gain will be considered a short-term capital gain and will be taxed at the same rate as ordinary income.
Client inherits 1,000 shares of ABC mutual fund when NAV is 9.50 and POP is $10.00 and elects to receive all distributions in cash. Two years later, sells all when NAV is 14.25 and POP is 15.00. What are the tax consequences of this sale? A) Long-term capital gain of $5,000. B) Long-term capital gain of $5,500. C) Long-term capital gain of $4,750. D) Long-term capital gain of $4,250.
Answer: C Upon death, the beneficiary inherits mutual funds at their NAV ($9.50). Sale (redemption) takes place at the NAV ($14.25) for a profit of $4.75 per share (times 1,000 shares).
If a married couple establishes a JTWROS account with a balance of $1 million and the wife dies, what is the husband's estate tax liability? A) He pays federal and state taxes on the entire balance. B) He pays federal and state taxes on $500,000. C) He pays federal taxes only on $500,000. D) He pays no estate tax.
Answer: D Establishing a joint tenants with right of survivorship account allows for the transfer of assets to the survivor upon death. The surviving spouse is not taxed on assets transferred in this manner because under current tax law, there is an unlimited marital deduction.
Which of the following would have the effect of reducing a taxpayer's taxable income? Net capital loss. Traditional IRA contribution. Public purpose municipal bond interest. Earnings in a deferred variable annuity. A) I and IV. B) II and III. C) III and IV. D) I and II.
Answer: D Up to $3,000 in net capital losses can be deducted against ordinary income. Contributions to a traditional (but not Roth) IRA are deductible against ordinary income (unless the taxpayer is above certain income limits and is covered by an employer plan). Municipal bond interest is not taxable, but is not deductible; earnings in a variable annuity are deferred, not deductible.
Under current tax law (2015), how much can a married couple give to their adult son and his wife without incurring a gift tax obligation? A) $28,000 B) Unlimited C) $56,000 D) $14,000
Answer: C The current gift tax exclusion (effective January 1, 2013) is $14,000 per donor to each recipient. A married couple can give $28,000 to a single individual and qualify for the exclusion. In this case, the married couple can give $28,000 to their son and $28,000 to their daughter-in-law without paying any gift tax.
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) $5,000. B) $9,000. C) $11,000. D) $3,000.
Answer: D The $11,000 passive income is offset by the $6,000 of passive loss giving the client $5,000 of passive income. Since 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
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 a $2,500 capital gain. B) As $2,500 ordinary income. C) The shares are not subject to taxation. D) As a $2,100 capital gain.
Answer: C Shares received per a stock dividend are not currently taxable. Instead, shareholders who receive stock dividends must adjust their cost basis in the shares downward. The total number of new shares, multiplied by their new adjusted basis, must equal the shareholder's total interest before the stock dividend was received.
With respect to taxation, an investment adviser representative should NOT: A) discuss the tax implications of investments. B) explain the taxable status of particular investments. C) consider tax implications as a way of improving a client's after-tax returns. D) draft tax and estate documents to insure compliance with current law to provide substantial after-tax returns.
Answer: D An investment adviser representative must not draft legal documents; they should only be drafted by an attorney because doing so constitutes practicing law. An investment adviser representative should, however, discuss all relevant tax implications of recommended investments, including how the recommended investments might improve a client's after-tax returns.
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 another individual each year without incurring a gift tax. The annual exclusion is currently (2015) set at $14,000. A separate annual exclusion is available for each donee. A) I and II. B) I and III. C) II and III. D) I, II and III.
Answer: D All of 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 (effective January 1, 2014) $14,000. A separate annual exclusion is available for each donee. So, if an individual gives $14,000 to 4 donees in one year, the annual exclusion will shelter all $56,000.
Which of the following statements regarding taxation is NOT true? A) Earned income includes salary, bonus, and income as an owner of a limited partnership. B) Passive income is derived from rental property, limited partnerships, and enterprises in which an individual is not actively involved. C) Portfolio income includes dividends, interest, and net capital gains derived from the sale of securities. D) 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.
Answer: A Earned income includes salary and bonus, but income received as an owner of a limited partnership is considered passive income. Passive income is derived from rental property, limited partnerships, and enterprises in which an individual is not actively involved.
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. Under the Uniform Prudent Investors Act, the investment adviser handling the account would be acting with proper fiduciary responsibility by A) liquidating a portion of that stock to take advantage of the tax savings offered by the stepped-up basis at death B) continuing to hold that stock position if it is felt that it meets the objectives of the trust C) selling all of that stock in order to rebalance the trust's assets D) exchanging a portion of that stock for a suitable security held in the adviser's trading account
Answer: 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 over-concentrated in one security, it would make sense to diversify while, at the same time, avoiding or minimizing capital gains taxes. It would be against the provisions of the UPIA for a fiduciary to ever engage in trading from his own account.
At his death, on January 1, 2012, Morris owned shares of ABC Corporation common stock, with a fair market value of $50 per share, which he had purchased in 2001 for $25 per share. If Morris' executor elected to value the estate by using the alternate valuation date, but then sold the shares through a broker/dealer on May 15, 2012 at $40 per share, what is the estate's basis per share for estate tax purposes? A) $15. B) $125. C) $50. D) $40.
Answer: D If the executor elects to value the decedent's estate by using the alternate valuation date, the value per share is the value at the date six months after death, unless the property is sold prior. In this case, the value per share is the FMV on the date of sale, $40 in this example.
You are working with a client who received her divorce earlier this year. She has two young children, ages 4 and 7 and both live with her. In general, it would be most advantageous for her to file her federal income tax claiming what status? A) Married, but separated. B) Joint. C) Single. D) Head of Household.
Answer: D Taxpayers claiming the Head of Household filing status benefit from a higher standard deduction and lower tax rates than single taxpayers. There are several requirements that must be met to qualify for HOH status. Some of them are: You are unmarried or "considered unmarried" on the last day of the year. A "qualifying person" lived with you in the home for more than half the year (except for temporary absences, such as school). This is generally your children. Since she is divorced, she can't claim married or joint and, as stated above, filing as HOH offers many tax advantages over single.
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) $250,000.00 B) $600,000.00 C) $1,025,000.00 D) $1,100,000.00
Answer: D 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.
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) Because they are not yet married, the fiancé is not actually a family member, so a gift tax would be levied. B) Anything over the FINRA gift limit of $100 per person per year would be considered taxable. C) The fiancé would have to report this as ordinary income. D) No tax
Answer: D This very nice gift falls well within the annual exclusion, so no gift tax would be levied. As far as FINRA or the states, first of all, there is no indication that he is a client; and, even if so, the rules do permit gifts without concern for the $100 limit in a circumstance like this.
