Practice Question Blocks

Question 1

How are Charitable contributions of land treated for the deduction?

Answer 1

They’re treated as “Capital Gains property” and not subject to USE RELATED or not.

You can use FMV, at 30% if a public charity.

Question 2

Safe-Harbor 401(k) matches

Answer 2

4% (1-1 for first 3%, and 1-2 for the next 2%)

Safe harbor is 3%, non-matching.

Question 3

Benefits Not Funded via a VEBA

Answer 3

Retirement and Deferred Compensation

```
Look up additional VEBA benefits
- Legal
- severance
- child care
- education
…
~~~

Question 4

Life Insurance policies owned by closely help businesses, included in estate of owners?

Answer 4

Likely / Possible.

Better off removing it from the estate another way, than selling to a business interest owned by the insured.

Question 5

After 70, can you still contribute to a SIMPLE IRA, for a business that you own?

Answer 5

YES. You are forced to take RMD payments, but you can still contribute.

Question 6

Can you sue ERISA plan sponsors for monetary punitive damages?

Answer 6

NO! You can recover some of the losses, but not punitive damages.

Question 7

Bob works for Technotalk, Inc.Bob’s salary is $100,000. He makes an elective deferral of $18,500 to the company’s 401(k) plan. If Technotalk is a large company, what is the maximum it could contribute and deduct as a match and a profit-sharing contribution for Bob in 2018?

Answer 7

Section 415 of the Internal Revenue Code limits the annual addition to a maximum of 100% of compensation or $55,000. $55,000-$18,500=$36,500. The company may contribute and deduct more than 25% of salary in addition to the elective deferral of an individual employee/participant (not to exceed $55,000) providing that the plan deduction for total includible compensation does not exceed 25% (elective deferrals).

WTF???

Question 8

Plant Parenthood is a landscaping company. It has 18 full-time employees participating in its group health plan, and 4 full-time employees who are not participating in the plan. Joe, a participating employee with family medical coverage under Plant Parenthood’s group health insurance plan, just divorced Sara. How long will COBRA cover Sara and Debbie (Joe’s 12-year-old daughter)?
I. Sara is entitled to 18 months of continuation in the group plan.

II. Sara is entitled to 36 months of continuation in the group plan.

III. Debbie is entitled to 18 months of continuation in the group plan.

IV. Debbie is entitled to 36 months of continuation in the group plan.

V. Debbie is still covered under the group medical insurance plan.

Answer 8

Sara gets 36 months

BUT.

Debbie is just still covered under her Father’s plan.

Question 9

What happens to Alimony payments when the payor dies?

Answer 9

They STOP.

Often life insurance is put in place for this purpose.

Question 10

In a taxable termination, who pays GSTT?

Answer 10

The TRUSTEE pays the tax!

Question 11

Can a stock bonus plan be integrated with Social Security?

Answer 11

YES.

ESOP is the only one that cannot be integrated!. Don’t confuse these.

Question 12

What restrictions exist for the education tax credits?

Answer 12

AGI, but also:

Both the American Opportunity credit and Lifetime Credit programs specify certain exclusions. For the American Opportunity Credit only, an otherwise eligible student can be excluded if convicted of a felony (in this case distributing a controlled substance). This restriction DOES NOT APPLY to the Lifetime Learning Credit.

Question 13

Does the QDRO exception from penalty apply to both IRAs and Qualified Retirement Accounts?

Answer 13

NO. Only Qualified plans.

Question 14

Does Code Section 6166 not apply to any business types?

Answer 14

It applies to most. Sole propriteorships included. Section 303 is the restrictive one (C or S corps only)

Question 15

Does all Capital Gain property step up at death?

Answer 15

NO.

ST Capital Gains do NOT step-up.

Only LTCG property steps up.

Question 16

What’s another name for 529 Plans?

Answer 16

Qualified Tuition Programs

Question 17

What’s a big difference in how the AOC and Lifetime Learning credits are claimed?

Answer 17

The AOC is per student maximum (2500 per eligible student). Only for first 4 years though of post-secondary.

The LLC is a maximum across all eligible. (2,000 for everyone). Can be used for graduate too.

Question 18

When is a 1040 EZ appropriate?

Answer 18

When someone is very simple (AKA, just a w2 and no itemized expenses, etc.)

“She has no dependents or investment income gains. Nor does it appear that she has costs that could be itemized deductions. If she did, you would need to file her federal income tax using Form 1040.”

Question 19

SEC registered advisers with AUM at least $100 million – are required to file annual updates to their ADV within _____ days of the end of their fiscal year.

Answer 19

90 Days!

Question 20

Which of the following statements is (are) true about profit-sharing plans?
I. They may be integrated with Social Security.

II. They may receive contributions for individual employees in excess of 25% of that participant’s eligible compensation.

III. They generally peremit the employer to make flexible contributions.

IV. They may be age-weighted.

Answer 20

All of them!

They can even be AGE WEIGHTED

Question 21

Millie Tilley has the following income. How much of it would be treated as earned income for federal income tax purposes?
I. $50,000 in wages from Plant Parenthood, an S corporation. Millie works for Plant Parenthood as a landscaper.

II. $5,000 in dividends from stock held in Millie’s investment account (non-qualified)

III. K-1 income of $10,000 from an S corporation in which Millie owns 20% of the equity and is an active participant in the business

IV. Proceeds from the sale of an oil painting inherited from her great aunt that generated a $5,000 long-term capital gain

Answer 21

50K! (Only I)

III. doesn’t count, because it’s still K1 income from an S-Corp. Her salary from the S corp, however, would be included.

Question 22

Mrs. Tilden, a widow, has gifted extensively to her daughter, Sally. She used her entire gift property exemption amount and actually paid federal gift tax on her most recent gifts. Mrs. Tilden recently married Bill Widner. She is considering gifting him $1,000,000 with the understanding that he will then gift the $1,000,000 to Sally. How would you respond after she explains her strategy?

Answer 22

It appears that the gift will not qualify for the marital deduction. To qualify for the deduction, the donee spouse must be given the property outright or must have at least a right to the income from the property and a general power of appointment over the principal. The IRS would consider this to be a step transaction and thus a fraudulent transfer.

STEP TRANSACTIOn.

Question 23

How much FDIC coverage for a revocable trust?

Answer 23

Up to 250K per beneficiary!

Question 24

Can creditors attach ERISA plan distributions?

Answer 24

YES. When the account is in RMD mode, those RMDs become an individually owned asset.

Question 25

Another name for a bypass trust?

Answer 25

Family Trust,
Unified Credit
B Trust
Credit Shelter

Question 26

How is a life insurance surrender taxed?

Answer 26

Always a gain above basis, as Ordinary Income.

Question 27

General rule for correcting returns

Answer 27

He can file a refund claim on Form 1040X within three years from the time his original return was filed, or within two years from the time he paid the tax for that return.

Question 28

What is the charitable contribution amount for inventory?

Answer 28

COST. No profit is included in the deductible amount.

Question 29

What is a SERP?

Answer 29

I. It is a supplemental executive retirement plan.

II. It is an informally funded plan to provide benefits that greatly exceed those provided by a normal retirement plan.

III. It is also called a “top hat” plan.

(ALL CORRECT)

Question 30

How much of a charitable deduction is available for a painting created for $25, and sold for $10,000

Answer 30

The tax deduction for a work of art created by the taxpayer is limited to basis.

$25

Question 31

Are death benefits paid directly by companies taxable or tax-free?

Answer 31

They’re now taxable (used to be)

Question 32

During the year, Fred Smith had the following expenditure for his rental house. The expenditures are listed below. Fred has a full-time job and files a Schedule E (active participation) for the rental house. Which of the expenditures must be depreciated rather than deducted as an expense on his Schedule E?
I. Replaced a screen in a window

II. Replaced the air conditioning system

III. Built a swimming pool

IV. Installed a new water heater

V. Hired a lawn service to cut the grass

Answer 32

Which are capitalized, and which are expenses?

Screen and Law Service are expenses. The other 3 are all capitalized (even though Replaced / Installed are different)

Question 33

Section 1244 Loss Allowance

Answer 33

Section 1244 allows for a $100,000 ordinary loss for married filing jointly and a $50,000 ordinary loss for single persons.

This only is used for a small closely held corporation, with this election. Losses are only used when the company goes out of business.

Question 34

Gail Goodrich, single, owned a small corporation, GG, Inc. Due to business reversals, she had to close the business, and the stock became worthless. Which of the following is true if the loss is $120,000?

• If she meets the requirements of Section 1244, she can take an ordinary loss of $100,000 and a capital loss of $3,000. The remaining $17,000 is a carry-forward loss.
• She can take a $103,000 short-term loss.
• She can take a $53,000 long-term loss.
• None of the above

Answer 34

None of the above!

Answer: for single is $50,000 ordinary loss plus $3,000 capital loss and a $67,000 carry forward.

Question 35

QDRO Application to Qualified Plans vs. IRAs

Answer 35

LOOK IT UP.

Basically, QDRO does NOT apply to IRAs. Don’t forget that at least.

Question 36

Mr. Golden bought a $1 million life insurance policy 10 years ago. He has paid $150,000 in premiums over 10 years. The current cash value is $175,000. The cost of the insurance over 10 years was $10,000. Mr. Golden has no use for the policy anymore. A life settlement company has offered him $400,000 in cash to buy the policy. If he sells the policy, what will be the taxable event to him? Hint: Remember the trick to life settlements.

Answer 36

The cost of insurance affects the premiums paid . $150,000 - 10,000 = $140,000 basis. Mr. Golden will have to recognize income of $260,000 (400,000 - 140,000). The income is characterized as ordinary income to the extent the cash value exceeds the premiums paid ($175,000 - 150,000) or $25,000. The balance will be treated as capital gains $260,000 - 25,000 or $235,000. HINT: With this type of question always back into the answer.

Life Settlement Trick: LOOK FOR CAPITAL GAINS

Question 37

What are the purposes of immunizing a bond portfolio?

Answer 37

If interest rates rise, interest rate risk causes the value of the bonds to drop, but the client can earn more on coupon payments that are reinvested.

If interest rates decline, interest rate risk causes the value of the bonds to rise, but the client will earn less on coupon payments that are reinvested.

The typical method of immunizing involves assembling and appropriately managing a diversified portfolio of bonds.

Question 38

While on a trip, Sandra’s wedding ring disappeared. The ring was worth $10,000. She has an HO-3 policy. Which one of the following statements is true?

Answer 38

The ring is only covered if its disappearance is due to theft. The dollar amount shown is not important. See Insurance prestudy lesson 3. It is a concept question (theft). There is no coverage unless a theft occurred. The theft must be reported to the police. It is a common sense question/answer. Some policies cover jewelry up to $5,000.

Question 39

Is the rotary club a charitable organization?

Answer 39

Rotary is a not-for-profit. It isn’t a public or private charity. The Rotary Club would have to obtain IRS approval to receive tax deductible contributions.

Question 40

Mary Tuttle, a single mother, has a dependent child, John. John tries to help out his mother. This year he netted $4,200 doing odd jobs receiving 1099s and also received $200 in interest on his savings account.

No income tax was filed. Did John have to file an income tax return?

• No. His standard deduction, $4,550, covers his earned and unearned income.
• Yes, his exemption is less than the total of his earned and unearned income.
• No
• Yes

Answer 40

If you do freelance work as an independent contractor, you are self-employed and use a Schedule C to file. John will have to pay self-employment tax. He must file a Schedule SE if net earnings are $400 or more.

Question 41

Which of the following is (are) true of an existing Medical Savings Account (MSA)?
I. An MSA may receive contributions from any person, including an employer or family member, on behalf of an eligible person.

II. Contributions by the eligible individual are deductible even if that person does not itemize.

III. Employer contributions are not included in the eligible person’s income.

IV. Both the employer and eligible person may contribute to the MSA in the same tax year.

Answer 41

II and III are correct.

Statements I and IV are wrong because the only parties that can contribute are the eligible person or the employer – but not both in the same year. Contributions by the eligible individual go on the front of the 1040 (adjustments to income).

(Need more MSA information)

Question 42

Your client Susuan bought a deluxe refridgerator 10 years ago. It cost Susan $1,200 when new. A current model of the same refridgerator would now cost $1,500. The appliance was expected to last 15 years. However, it was totally destroyed by a grease fire that started in Susan’s kitchen. How much would the insurance carrier pay if Susuan’s policy provided for actual cash value coverage?

Answer 42

$500

Actual cash value is the current replacement value of $1,500 less depreciation of 10/15 of the current replacement value of $1,500 ($1,000) or $500.

Question 43

What can a FSA not pay for?

Answer 43

NO LTC PRemiums.

Question 44

Scholarship Payments.

Taxable or not?

Answer 44

Books, tuition, course-related fees, equipment, and supplies that are required for courses are tax-free.

Room, board, and incidental expenses are taxable. The same is true for a graduate student who is paid a stipend for teaching. A scholarship or fellowship given to a degree candidate who agrees to work for the federal government is taxable (Item IV).

Question 45

Do QDROs apply to both Qualified Plans and IRAs?

Answer 45

QDROs only apply to qualified plans not IRA accounts.

Yes, an IRA break-up can be part of the divorce settlement but a QDRO does not

Question 46

What does 2032A Valuation Discount do?

Answer 46

The election generally allows an executor to elect to value a farm for federal estate tax purposes based on actual current use, as opposed to the fair market value of the property if it was sold for development purposes.

Other:

• Base amount is 750K (indexed, over 1MM)
• Decedent must be US Citizen or Resident
• Qualified Heir must be a US citizen.
• 5/8 years prior to death must have materially participated in farm operation.
• 10 years after!

Question 47

Can the investment interest deduction be taken for interest paid for mortgages on investment properties?

Answer 47

YES. Nothing says it has to be for publically traded stuff.

Question 48

What’s the purpose of the Practice standards?

Answer 48

The Practice Standards establish the level of professionalism expected of CFP Board designees engaged in personal financial planning.

Question 49

Can contractors participate in a qualified plan for their client?

Answer 49

Participation eligibility in a qualified plan is contingent on employee status. (Sole-proprietors and partners may establish their own qualified plan.) An Independent contractor may participate in his own qualified plan but may not participate in another entity’s qualified plan unless he is also deemed to be a regular or “common law” employee of that entity.

Question 50

Can you exclude bonuses or comissions from “Includible compensation” for qualified plans?

Answer 50

As long as it doesn’t discriminate in FAVOR OF Non-HCE participants (AKA, if only rank/file receive commissions, it’s a problem)

Question 51

Does the CFP Board consider an engagement to be finanical planning solely because the CFP® professional used the six-step process?

Answer 51

The financial planning process steps may occur in connection with other activities. Examples include gathering client data as part of a suitability analysis. Question idea came from CFP Board’s Standards of Professional Conduct “frequently asked questions”.

Question 52

When will a QDRO be valid for purposes of changing the beneficiary on a Qualified Pension, etc.?

Answer 52

When the plan administrator has approved the QDRO that has been entered with court and signed by the judge.

The best practice is that a QDRO is entered with the court at the same time as the judgment of divorce and qualified by the plan administrator.

Question 53

Can a widow disinherited in a community property state have any recourse against the estate?

Answer 53

She can Elect against the will.

Allows the partner to choose whether to take 1/2 of his property outright, or to take the benefits provided under the will.

Question 54

When does a SEP need to be in place for a taxable year?

What about a SIMPLE?

What about a qualified plan?

Answer 54

SEP: By the due date of the business tax return, including extensions

SIMPLE: On or before the first date by which a contribution is required to be deposited

QUALIFIED: Within the tax year for which the employer wishes to take the tax deduction

Question 55

How is IRD treated for Estate Tax Purposes?

Answer 55

If the income is included in the gross estate, the estate tax attributable to that income item is generally deductible by the recipient of the income.

Look THIS SHIT UP.

Question 56

How do ABLE 529 arrangements work?

Answer 56

Amounts up to 100K do not affect government benefits

Disability must have occured before age 26

Can gift up to exclusion.

LOOK UP MORE

Question 57

Can retirement planning services be provided to qualified plan participants free of tax?

Answer 57

The Tax Act 2001 Act added a fringe benefit called “employer provided retirement planning services.” An employee and spouse can exclude from their income the value of certain retirement planning services provided by qualified retirement plans. The exclusion will not be available to highly compensated employees unless the services are also available to “each member of the group of employees.”

Question 58

Which portfolio risk adjusted return measure should be used for a portfolio of 7 securities?

Answer 58

It’s not diversified!

Use Sharpe (because St. Dev. has both Systematic and UN systematic risk, which hasn’t been diversified away.

Question 59

What’s it called when you have >750K worth of Mortgage Interest?

Answer 59

Excess qualified residence limitations

Question 60

What if your Section 179 deduction is > than your total net income?

Answer 60

You can’t create a loss.

You deduct up to profit, and the remainder is done using MACRs.

There’a 1MM limit on 179!

Question 61

Can you grant ISOs to a >10% shareholder?

Answer 61

As long as the exercise price is at least 110% of the FMV of the stock at grant date and the options vest within 5 years, a greater-than-10% shareholder may be granted ISOs. (WTF)

Also, ISOs cannot be transferred by the option holder during his/her lifetime. It’s a disqualifying event (separate topic)

Question 62

Ted pays alimony to his ex-wife, Lina, in the following amounts.  Has Ted made an "excess alimony payment"?
Year 1           $10,000   
Year 2           $30,000    
Year 3           $10,000
Year 4           $10,000

Answer 62

Yes, in the second post-separation year

To determine excess alimony, note the difference in the payment between years 2 and 3. Under the Internal Revenue Code, the excess alimony payment for the second year is the amount that exceeds the payment in the third year by more than $15,000. The excess is $5,000 [$30,000 - $10,000 + 15,000)].

Question 63

Form 706 vs. 709

Answer 63

Form 709 is the gift tax form!

706 is the Estate Tax form.

Question 64

Define NPV?

Answer 64

Its calculation discounts unequal cash flows at a required rate of return less the initial cost of an investment.

(can use both positive and negative cash flows)

Question 65

Does a rental apartment defer taxes?

Answer 65

Sort of. Depreciation deduction can offset rental income, on an asset that is appreciating in value.

An immediate annuity doesn’t actually defer taxes (you just start paying immediately.

Question 66

Why would a donor gift cash to next generation, with the instructions to buy a growth asset?

Answer 66

That way the gift / growth asset’s basis is the donee’s purchase price instead of a “Carry-over” basis (from giving the stock itself)

This is advantageous if your goal is to provide the greatest benefit to the recipient.

Question 67

Employer Maximum Deduction to Qualified Plans

Answer 67

100% or 55K (Maximum). However, only 25% of employee pay is maximum deductible. ?

Question 68

Tax form for tax problems / corrections?

Answer 68

1040X!

Question 69

What is the tax rate for depreciation on 1250 Property (or Real Estate)

Answer 69

Could be 25%! for recapture amount.

Question 70

Is a Letter of Admonition public or private?

Answer 70

IT is PUBLIC. Viewed on website.

Private letter of censure is a soft discipline form.

Question 71

For a ROTH IRA, can someone buying a home for the first time take 10K without paying a penalty?

Answer 71

Only if it’s earnings / conversion assets which have met the 5 year rule.

Question 72

Does PITI go down as you pay down chunks of a mortgage?

Answer 72

NO. You pay it off faster, but the payment is the same unless you refinance.

Question 73

For AGI questions calculations, what should I make sure to remember?

Answer 73

If a self-employed owner, remember to subtract 50% of .1413 self employment tax! (knucklehead!)

Question 74

Who are credits better for, vs. deductions?

Answer 74

Credits are best for low earners / low marginal tax rates.

Deductions are better for high earners!

Question 75

Can you still contribute to a Coverdell after maxing out the 529 75K / person?

Answer 75

YES. You can still contribute your 2K / year, but you’ll have to use part of your lifetime exemption.

Question 76

Is driving a car, unintentionally, into a tree collision or Other than collision coverage under your PAP

Answer 76

IT’s COLLISION. Other cars and stationary objects are both collision.

Question 77

What’s the issue with creating an “Unfunded” ILIT?

Answer 77

If you transfer / gift a policy to the ILIT, and die within 3 years, it’s included in your estate!

Question 78

IF your broker rips you off, and you want to seek damages, where do you start?

Answer 78

Start with the B/d compliance department before notifying FINRA or the SEC.

Question 79

Sally gifted property with a basis of $55,000 to her daughter, Alice. The FMV on the date of gift was $110,000. The gift was subject to gift tax at a 40% rate. What is Alice’s adjusted basis in the property for determining her gain or loss when she sells the property?

Answer 79

Alice’s basis will be increased by the gift tax paid by her mother that is attributable to the appreciation.

Basis to a donee is increased by the gift tax paid byt he donor that is attributable to the appreciation of the gift.
Alice’s basis in the property is its FMV as of the date of the completion of the gift..

Question 80

Participation requirement for 403(b) accounts:

Answer 80

There is no 1,000 ERISA requirement for participation in a 403(b) program!

Question 81

How is inventory valued for a gift to a charity?

Answer 81

For a charity, taking care of children, etc.

At the cost of the dresses to Freida’s Frocks plus one-half of its mark-up to retail pricing

Question 82

How fast to notify the CFP Board of a provessional license revocation?

Answer 82

within 10 days.

Question 83

How is holding period affected by whether a gift is of appreciated stock, or loss stock (double-basis)?

Answer 83

For Loss gifts with double basis, the donor’s holding period DOES NOT carry-over.

For appreciated property gifts, the basis carries over.

Question 84

What’s the advantage of buying preferred stocks?

Answer 84

Warrants can be attached, adding long-term value to the preferred stock.

50% of the dividends received by a domestic corporation are tax exempt.

Question 85

What is covered by Medicare part A, with regards to blood and home health services

Answer 85

Part A will cover home health visits that are part of a treatment plan and up to 100 days in an extended care facility for rehabilitative purposes. The patient must pay the hospital cost for the first 3 units of blood in a calendar year or have blood donated by the person or someone else.

Question 86

What do Coverdell ESAs not cover?

Answer 86

Computer software will only qualify if it is educational in nature. Uniforms are covered but not intramural sports equipment.

Question 87

What is a Section 179 Election?

Answer 87

It is an election to expense to tangible personal property (1245).

Question 88

Difference between QTIP and B Trust

Answer 88

The right to income limited to HEMS is not a right to all income from the trust as would apply with a QTIP trust. Also, the QTIP cannot use the $11,180,000 exemption.

Question 89

What is the Market Risk Premium?

Answer 89

It’s Required Return - Risk-Free Rate (BEFORE multiplying by Beta)

Question 90

Martha’s husband, Alex, died last month in February. Which of the following income tax filing statuses are available to Martha for the current year?
I. Single

II. Married filing jointly

III. Married filing separately

IV. Head of household

V. Qualifying widow

Answer 90

The return due in the year after death is the return for the year in which the husband died. Martha may file married, jointly or married, separately. She is not eligible to file as a qualifying widow until the year after Alex died (the next year). Martha may file as a qualifying widow if she meets one of the following four tests.

1) She maintains a home
2) She has a dependent child
3) She filed a joint return the prior year
4) She did not remarry.

Martha may also file as head of household, but she would have to have children actually living in the home.

Question 91

Which shots are free under Medicare B

Answer 91

Under Medicare Part B both annual flu shots and pneumonia shots are covered at no cost to the patient.

Question 92

What required distribution does a CLUT have?

Answer 92

Unlike the CRT (which requires a 5% minimum annual distribution to the grantor), there are no minimum or maximum required distribution percentages with a charitable lead trust. It is generally permissible to select any percentage, including less than 5%.

Question 93

What’s the largest risk in investing in Bonds?

Answer 93

Price volatility!

Question 94

How do 401(k) loans work?

Answer 94

A participant loan enables Josh to receive cash up to $50,000 representing 50% of his account balance. He must repay the loan within 5 years.

Question 95

The late Ronald Carlisle, a Canadian citizen was married to Judith, a U. S citizen. He was wealthy and owns a substantial portfolio of stocks which trade in both Canadian and American markets. He also owned precious metals and substantial real property (resorts) in both Canada and in Michigan. When Ronald died, can the U.S. impose estate tax on Ronald’s estate? Why or why not?

Answer 95

Although Mr. Carlisle is not a U. S. citizen any real property he owns that is situated in the U.S. as well as any U.S stocks he owns may be subject to federal estate tax in the US. A QDOT is appropriate when the transferor is a U.S. citizen. Ronald is not a U.S. citizen.