Unit 4: Session 4: Tax Considerations

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)$40. B)$125. C)$15. D)$50.

A - 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.

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

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

A 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.

All 3 - Interest on foreign bonds is taxed in the United States by federal, state, and local governments.

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

All 4

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)No tax C)Anything over the FINRA gift limit of $100 per person per year would be considered taxable. D)The fiancé would have to report this as ordinary income.

B - 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.

All of the following statements about the gift tax annual exclusion are correct EXCEPT A)A separate annual exclusion is available for each donee. B)The annual exclusion is currently (2019) set at $15,000. C)Gift tax is always due on the excess over the annual exclusion. D)The annual exclusion is the amount that an individual may give to other individuals each year without incurring a gift tax.

C

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

C

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 alternative minimum tax is added to the regular tax. C)The excess of the alternative tax over the regular tax is added to the regular tax. D)The lesser of the regular tax or the alternative tax is paid.

C

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.

C

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.

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 client buys 100 shares of a mutual fund on December 28, 2011, for $4,000 and receives a capital gains distribution of $2.40 per share on March 6, 2012, which is taken in cash. He sells his 100 shares for $4,300 on June 19, 2012. For tax purposes, this transaction will result in a: A)$240 long-term capital gain. B)$240 long-term capital gain and a $60 short-term capital gain. C)$300 short-term capital gain. D)$60 short-term capital gain.

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

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

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

An investor purchased $10,000 of a 15 year AA rated corporate bond with a 6% coupon in the secondary market 3 years ago at par. The bond matured last week and the investor has just received a check for $10,300. Which of the following is a true statement? A) The investors cost basis has been reduced to $9,700. B)$300 is considered a return of principal. C)$300 is taxed as long-term capital gain.

D

When looking at an individual's income statement, which of the following would be included: A)jewelry. B)child support. C)stocks and bonds. D)alimony.

D

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

D - Under current tax regulations, there is a limit to the amount of a gift that may be made to a noncitizen spouse. For 2019, that limit is $155,000.

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)reduction in the investor's ordinary income. B)non-recoverable loss on the investor's U.S. tax return. C)tax credit on the investor's U.S. tax return. D)tax credit on the investor's Canadian tax return.

C - 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.

Which of the following is (are) advantages of irrevocable insurance trusts? - Provide estate liquidity. - Insurance proceeds are removed from the estate of the insured for tax purposes. - The insured has the flexibility to alter the trust arrangements. - Once set up, no changes may be made.

1 & 2

Which of the following vehicles make use of the unified estate tax credit? - bypass trust. - generation skipping trust. - living trust. - simple trust.

1 & 2

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.

1 & 4 - 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 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

3 & 4

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)March 15 B)90 days after the end of their fiscal year C)April 15 D)January 15

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

The separate account subaccounts chosen by the purchaser of a variable life insurance policy have had outstanding performance over the past 15 years. There would generally be no tax implications in which of the following situations? A)A loan is taken equal to 95% of the policy's cash value B)There is a cash withdrawal in excess of the cost basis C)The policy is surrendered D)The death benefit is paid

A - Funds obtained from a policy loan are not considered taxable income (same as any loan - you owe the money). If the amount received at policy surrender is greater than the cost basis, the excess is taxed as ordinary income. The same is true with the withdrawal. Although the death benefit will always be free of income tax, it could be subject to estate tax.

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 $4,750. B)Long-term capital gain of $5,500. C)Long-term capital gain of $4,250. D)Long-term capital gain of $5,000.

A - 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).

Grandma has decided to give her grandson some stock that she bought many years ago. When the grandson sells the stock, how is the tax liability figured? A)Her cost basis is used, but the holding period begins on the date of the gift. B)Her cost basis and date of purchase is used. C)Her date of purchase is used, but the cost basis is from the date of the gift. D)Both the cost basis and holding period are determined from the date of the gift.

B

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

B

With respect to taxation, an investment adviser representative should NOT A)discuss the tax implications of investments B)draft tax and estate documents to ensure compliance with current law to provide substantial after-tax returns C)explain the taxable status of particular investments D)consider tax implications as a way of improving a client's after-tax returns

B

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

B - Stock dividends (dividends paid as additional shares of stock rather than in cash), adjust the investor's cost basis and don't come into play until the stock is sold.

Which of the following items are NOT included in the gross estate of a decedent? A)Property held in an account registered tenants in common B)Proceeds from a life insurance policy held in a revocable trust C)The first $250,000 of a primary residence if owned singly, $500,000 if owned jointly with spouse D)Proceeds from a life insurance policy owned by the deceased's spouse

D

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)$50. B)$15. C)$40. D)$125

C - If the executor elects to value the decedent's estate by using the alternate valuation date, the value per share is the value at the date 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.

Louise Lawson, one of your high net worth clients, calls you and tells you her friend mentioned something about having to pay a special tax called AMT. When reviewing her extensive portfolio with her, you would explain that the only securities she is holding that could lead to an AMT issue are the A)$100,000 of Atlanta Airport Revenue bonds due 1/2030 B)$100,000 of City of Decatur School District bonds due 7/2031 C)$100,000 of GEMCO cumulative preferred shares D)$100,000 of KAPCO debentures due 8/2029

A - When an individual has tax preference items, AMT becomes an issue. One of the securities that generates preference income is a private activity bond, a revenue bond that is issued to benefit certain facilities such as airports, sports facilities and hospitals. School district bonds are GO bonds and those are not subject to AMT. Income from corporate securities, whether they be debt or equity, is never considered for AMT.

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.

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.

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

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

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

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

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

B - 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.

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)$750,000 B)$625,000 C)$175,000 D)$0; it is below the $5.43 million exemption equivalent

C - 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.