Questions from Mock Exams Flashcards

Question

QUESTION: Arthur, age 63 regrets retiring early. He’s single and bored. Arthur found a job at Walmart as a greeter. The job will pay $15,000 per year. Arthur doesn’t need the money because he is currently receiving $6,000 per month from his former employer’s money purchase pension plan plus early Social Security retirement benefits of $1,000 per month. Arthur lives in a comfortable apartment, has full medical coverage and makes no charitable contributions. He normally claims the standard deduction. Which of the following is true if he takes the job with Walmart? A. He will remain in a 22-24% income tax bracket. B. He should find a job that pays him more than the minimum wage ($15.00/hour). C. The impact of the earned income will be a very marginal increase in income tax. D. His Social Security Retirement benefits could be reduced because of his earned income.

Answer 1

ANSWER: A, Arthur will be in the 22-24% bracket. If he works the same hours for better pay, Arthur will exceed the 1-2 rule ($19,560) which would reduce his current Social Security retirement benefits. For now, Arthur remains with Walmart.

Answer 2

ANSWER: E. Under COBRA rules, Sara will get 36 months of continuation coverage in the group medical insurance plan (due to divorce). Debbie is still Joe's daughter and will continue to be covered by his group health plan (family plan). The plan is subject to COBRA requirements because Plant Parenthood has 22 full-time employees

Answer 3

ANSWER: A. After the business closes, it is reasonable that each owner then owns the policy on her own life. Because the business is closed, there is no reason to maintain the current arrangement of ownership of the policies. Answers C and D trigger “transfer for value”.

Answer 4

ANSWER: A. Exercising nonqualified stock options will increase his regular income which thus reduces his AMT payable. The mortgage interest deduction associated with a larger mortgage will decrease his taxable income. Purchasing public purpose bonds will have no effect.

Answer 5

ANSWER: A. Gifts in trust are future interest gifts. No Crummey powers are included. The income is taxable to Bugsy. This is a 2503(b) trust. The trust is not tainted; nothing indicates that Toby is the trustee. Toby transferred the money into the trust. Nothing indicates a split gift. There is no Crummey provision.

Answer 6

ANSWER: B. ESOPs and 401(k) plans with no employer matching contributions cannot be integrated with Social Security. Item I does indicate a pure 401(k) with no match or profit sharing contribution plan. Defined benefit and money purchase pension plans can be integrated. Stock bonus plans can be integrated.

Answer 7

ANSWER: C. Bill has all of Sally’s data. He just completed a plan. Sally is upset, she needs advice now. Making her wait might make her more upset. In creating the plan, Bill did assess Sally’s current lifestyle and expenses. Sally can’t file for unemployment insurance benefits because she terminated voluntarily. Sally clearly does not want to take the newly offered position.

Answer 8

C. This situation creates a serious conflict of interest for you because you were hired by both Caleb and Cindy. The account is joint property Due to federal money laundering rules, brokerage firms generally will not facilitate substantial distributions in cash. Obviously, Caleb does not want Cindy to learn about his request for the money.

Answer 9

ANSWER: C. One advantage of a zero-coupon is the elimination of reinvestment rate risk because there is no coupon to be reinvested. The zero-coupon bond is generally subject to market risk, interest rate risk, and, if the zero is not a Treasury security,

Answer 10

ANSWER: C. No 3-year throwback rule applies to stock. Because it was a taxable gift it will be added to the taxable estate rather than be included in the gross estate. The stock was gifted to the daughter. Thus, the daughter’s carryover basis is $1 million, which, given the $2 million in sales proceeds produces a capital gain of $1 million. The GRAT (5 year) and the life insurance (3-year rule) are included in the gross estate. The GRAT assets would be included in Mrs. Kalish’s gross estate likely at date of death FMV because she died before the end of the term of the trust. The life insurance policy would be included in her gross estate at face value because Mrs. Kalish had held incidents of ownership in the three-year period prior to her death.

Answer 11

ANSWER: D. He can be a participant in Eggcellent Egg’s plan for profit sharing contributions but not elect any more deferrals. Answer C is incorrect because his annual additions limit (for both plans combined) is the lesser of 100% of compensation or $61,000 in 2022 (Bacon and Eggs are related employers).

Answer 12

ANSWER: B. The municipal bond was held for the long- term and is eligible for stepped up basis upon Byron’s death. The tax deferred accounts such as an annuity (and retirement accounts, generally do not step up in basis.) The CD is cash. There is no stepped up basis; a dollar is a dollar.

Answer 13

ANSWER: D. Calculating was not needed to answer this question. There is no limit as to the number of years of return outcomes used to determine the standard deviation of a stock. The information necessary to calculate the standard deviation for PDQ, namely return outcomes, is shown in the question data. Answer A is incorrect because standard deviation cannot be negative.

Answer 14

ANSWER: B. As in other IRA-type arrangements, for SIMPLE plans, the RBD is always the April 1st of the year following the calendar year in which the covered participant attains age 72. Although he continues to work for the employer providing the SIMPLE plan, Brad may not delay his first distributions beyond that date.

Answer 15

ANSWER: C. A single premium policy purchased after 1988 is a MEC. Current CV $50,000 - basis $30,000 = $20,000 gain. Dividends in a MEC become taxable when borrowed or withdrawn. Joan’s gain is $20,000; $10,000 is her true basis in the policy. Dividends under a MEC are generally taxed. Only the gain is subject to the 10% penalty in addition to tax at ordinary rates.

Answer 16

ANSWER: D. If the owners who had been covered under the corporation’s stock redemption (entity) buy –sell agreement wish, they may buy the policies on their own lives that were acquired to fund that arrangement. Since the sales of the policies will be to the insureds, there is no exposure to transfer-for-value income taxation of the death proceeds. Answer A will trigger transfer-for-value problems. In answer C, surrendering the policies is not an option as they still need the buy/sell policies. Answer D is true, the new tax law eliminated the corporate AMT.

Answer 17

ANSWER: A. Answer B is incorrect. The AOC is per eligible student, per year. If a family has three children in college in the same year, each is eligible for the full AOC. Lifetime is maximum per year. The AOC is available only for the first four years of post-secondary education. No age limit applies to the Lifetime Learning Credit.

Answer 18

ANSWER: B. When, given the cash flows of an investment its NPV is zero, the investment met the buyer’s required rate of return. An investment can be profitable even its NPV is negative. A positive or a negative NPV tells whether the client achieved his required rate of return, but not the amount of the profit.

Answer 19

ANSWER: C. Property subject to general powers of appointment is included in the gross estate of the holder of that power. The life insurance policy is owned by Roberta. The taxable gifts are added to the taxable estate. Transfers to Bob’s ex –wife may or may not be taxable gifts however, they are added to the taxable estate rather than included in the gross estate.

Answer 20

ANSWER: B. When policy dividends from modified endowment contracts (MECs) are used like cash, they are distributed under FIFO rules such as those applicable to annuity distributions. Cash distributions, and dividends used to pay off policy loans are considered to be income first distributions. The interest accruing on a policy loan from a MEC is treated the same way for federal tax purposes. Dividends used to buy paid up (permanent) additions are not treated as income-first distributions. The loan interest was not distributed: It was added to the outstanding loan balance.

Answer 21

ANSWER: E. The revocable trust will become irrevocable and will operate as a family trust for Rusty’s benefit thereafter. It is rare that a revocable trust would name its beneficiary as a 2503(c) children's trust. 2503(c) trusts generally terminate when the minor beneficiary turns age 21.

Answer 22

ANSWER: C. Federal covered advisers must update their ADV forms no later than 90 days following the close of their fiscal year. Smaller advisers that have registered with states securities regulators will comply with state specific deadlines for annual updates to their ADVs or equivalents.

Answer 23

ANSWER: A. A gift of cash to an irrevocable living trust is irrevocable and removed from their gross estates for federal estate tax purposes. While both George and Linda will have made taxable gifts of $21,000, that is not reflected in their gross estate (s). Rather, it is added to their taxable estate(s) to arrive at the tax base. ($106,000 - [$64,000 ($16,000 x 4)] = $42,000. 42,000 / 2 = $21,000 each.

Answer 24

ANSWER: D. The Section 121 exclusion may be elected every two years. The Iversons only owned their second home for a year and a half. Since the question did not indicate that the Iversons sold their second home because of a job change, divorce, or unforeseen circumstance, they could not prorate the exclusion amount.

Answer 25

ANSWER: B. The time-weighted return is the geometric mean calculation. The dollar-weighted return is the IRR.

Answer 26

ANSWER: D. Non-cancellable policies provide premium rates that are guaranteed not to increase in the future. Insurance is a unilateral contract, which means that the insured pays the premium to the insurance company to cover the perils, but that does not answer this question.

Answer 27

ANSWER: A. Qualified profit-sharing plans feature flexible employer contributions. They may be age weighted and integrated with Social Security. While the employer may contribute and deduct up to 25% of its overall payroll, the contribution for an individual participant may exceed that percentage.

Answer 28

ANSWER: B. High ratings from two or three rating agencies should indicate that the insurance company is well able to pay its claims. The size of an insurance company is not necessarily an indicator of its financial strength. The experience and reliability of the insurance agent matters. The NAIC prohibits language indicating that the whole life premiums will vanish or the UL will last to age 95. In fact, the NAIC prohibits such language.

Answer 29

ANSWER: B. Because the face value of the group life insurance exceeds $50,000, the premium on the face value exceeding that amount is treated as compensation and becomes part of Chris’s gross income. The SEP contribution and the health insurance premiums for Chris and his wife are deductions for AGI (above the line deductions). The net profit from this unincorporated business represents income to Chris: It is part of his gross income. Chris’s income, which clearly exceeds phaseout limits, makes his wife ineligible for the spousal IRA deduction.

Answer 30

ANSWER: A. The unrealized appreciation is taxable as long-term capital gain to Bill when the ESOP shares are sold, even if they sold immediately. If Bill holds the shares for a period of time after distribution, any additional gain (above the net unrealized appreciation) is taxed as long or short-term capital gain, depending on the holding period. The $25,000 gain above the distribution price of $125,000) and the sale price of $150,000 is STCG because Bill held the shares for only 6 months after they were distributed to him.

Answer 31

ANSWER: E. A 125 is a flexible spending account (FSA) into which contributions are elected before the employee compensation is actually earned. All the other plans shown require FICA and FUTA tax on employee deferrals.

Answer 32

ANSWER: D. Paul’s gain from the sale of the stock bought with his performance bonus produces a short-term capital gain of $10,000. The gain on the amount of the stock that Paul inherited is LTCG.

Answer 33

ANSWER: B. The policy was sold to someone other than the insured or to a business in which the buyer is an owner or partner. Whether the policy is term or permanent insurance is immaterial to the rule. Transfer for value rules makes the policy’s death benefits income taxable to the beneficiary to the extent that it exceeds basis. The 3-year rule doesn’t apply when a sale (transfer for value occurs).

Answer 34

ANSWER: E. Only Millie’s salary would be classified as earned income. The other answers indicate investment income which is, by nature unearned. K-1 from an S corporation represents a distribution of profits and thus, is treated as investment income. Although Millie is an active participant in the S corporation’s activity, this is true.

Answer 35

ANSWER: C. Her payments increase her basis. When Joan sold the life insurance policy to Linda, that sale triggered transfer for value rules making the death proceeds in excess of basis taxable to the beneficiary who is now Linda. Linda will receive the death proceeds subject to federal income tax. When Joan dies, nothing attributable to the life insurance policy will be included in her gross estate. The 3-year throwback rule does not apply when a life insurance policy is sold.

Answer 36

ANSWER: A. Both B and C are true statements, but answer A is the best planning. The UTMA invested in municipal securities appears to be sensible while the transfer of the $50,000 to Jimmy’s custodial account is a taxable gift, Uncle Joe can use his gift tax property exemption of $12,060,000 to avoid current gift tax. Under kiddie tax rules, earnings generated by the UTMA may be taxed at 37% plus the 3.8% Medicare investments tax. In that light tax-free interest from municipal bonds make sense. The tax-free income should enable the account to have a FMV of $65,000 in 10 years.

Answer 37

ANSWER: B. 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.

Answer 38

ANSWER: The profit-sharing plan best fits the objectives and preferences of Esquires Ball and Desmond. They do not want a plan that requires mandatory annual funding. The defined-benefit plan would not fit their model. The attorneys do not want to defer personal income. This eliminates the 401(k). The SEP is not a qualified plan. The SEP would probably have to cover part-time employees. Relative to the profit-sharing arrangement, the ERISA 1,000-hour rule would exclude the part-time employees from participating.

Answer 39

ANSWER: C. The ABC and the XYZ transactions violate the wash sale rules --ABC's basis is $10 cost plus $5 recognized loss. (December 1st and December 31st) --XYZ's basis is $52 cost plus $10 recognized loss. (February 15 and March 16) There are only 28/29 days in February. -LMN was sold for a gain. The deduction is disallowed for any loss from any sale or other disposition of stock within a period beginning 30 days before and ending within 30 days after the date of the sale or disposition. A gain cannot create a wash sale.

Answer 40

ANSWER: D. Hal will not be eligible for Medicare until age 65 (Answer I). Claiming benefits 36 months early would result in a 20% permanent reduction in Hal’s benefits (36/180). If Hal works part-time, before the year in which he reaches his full retirement age (FRA) his benefits will be reduced $1 for every $2 he earns above a specific threshold. During his FRA year only he will lose $1 in benefits for every $3 by which his earned income exceeds that threshold. Hal’s Social Security retirement benefits will be subject to federal income tax if his AGI plus ½ of his benefits (provisional income) exceed $25,000+. Given that we do not know Hal’s provisional income indeed his Social Security benefits may (or may not) be subject to federal income tax.

Answer 41

ANSWER: C. Profitability projections should not be included in corporate annual reports. The SEC believes that such projections could mislead shareholders and others.

Answer 42

ANSWER: A. If the beneficiary of a prepaid tuition (529) plan attends a private or out-of-state college, the program will determine the value of the contract. If the QHEEs are equal to, or greater than, the total distribution, they are tax-free. Prepaid tuition plans pay for tuition and mandatory fees. They do not cover room and board. Prepaid tuition plans do affect the expected family contributions.

Answer 43

ANSWER: C. The anti-alienation provision only applies during the accumulation period, not after the account goes into pay status. Once the distributions are paid out, they become an asset of the participant, subject to any creditor’s claims that may be pending when the benefits are received.

Answer 44

ANSWER: D. If any portion of the trust income is, or may be, used to purchase insurance on the life of the grantor or grantor's spouse, then the trust is a grantor trust. The trust is/was also used to benefit his dependent children (support). 25% is to purchase insurance and the remainder is used for support.

Answer 45

ANSWER: B. Many well written wills include disclaimer trust provisions which give the surviving spouse the ability to put specific disclaimed assets into the trust by disclaiming ownership of a portion of the estate. Disclaimed property interests are transferred to the trust, without being taxed. Provisions can be written into the trust that provide for regular payouts from the trust to support survivors, or in the case of the Hardings, the right to occupy (but not own) property. The trust can also be written so that surviving minor children can also be provided for, as long as the surviving spouse elects to disclaim inherited assets, passing them on to the trust. To keep the assets from being included in Clarisse’s estate, the trust would have to be a family trust rather than a marital trust. If a disclaimer trust is used, the full extent of the tax planning occurs upon the death of the first spouse. At that point, the surviving spouse can either accept the trust assets or disclaim them. I f he or she disclaims them into the disclaimer trust, the trust will function like a credit shelter trust that will shelter the assets from inclusion in the surviving spouse’s estate. But if there is no tax reason to use credit shelter planning, the spouse can simply receive the assets outright. This allows tax-planning flexibility without creating unnecessary complication. Using answer D will mean for the life of the QPRT it could be brought back into her estate. It is not a bad answer. With Answer B, the house uses the exemption.

Answer 46

ANSWER: B. The account is in joint names, both are clients. She never says she wants to divorce him. Also, to do Answer C, she has to get a divorce before you can proceed with the account titling. Do you have enough of a relationship with Glen to select Answer D? Doubtful. Answer A depends on Answer B.

Answer 47

ANSWER: C. In D, you never address her objective and discuss options on how to qualify; you only give recommendations apart from it. A is a good answer however you should let her determine if she is willing to go to lengths to qualify, you shouldn’t be making the decision for her by dismissing the option. B would be a great answer, but it is unclear if the attorney is competent in the subject. In this meeting, you should review the client’s options as she requested, answer C. Once that is done you may then decide to advise a more suitable solution (Answer D). Subjective. If you answered B, I am not saying you are wrong. This is a practice question.

Answer 48

ANSWER: Life insurance surrender gain above basis is always taxed as ordinary income.

Answer 49

QUESTION: B. Answer C is a good answer. The difficulty is in determining what discount rate (client’s required rate of return) to use for the investment.

Answer 50

ANSWER: C. For self-employed individuals, partnerships, and Subchapter S corporations, the contribution amount for inventory must be reduced by the amount, which would have been recognized as gain if the property had been sold by the donor at its fair market value at the time of its contribution to the charitable organization. In other words, the charitable contribution of inventory is limited to its cost.

Answer 51

ANSWER: C. Well, if he takes a lump sum Answer A he will pay 12% on $85,000 ($110,000 - 25,000 basis) or $10,200. ($110,000 -10,200) x 6% = $5,988/year. $725 x (1 - 12.00%) = $638.00, $638.00 x 12 = $7,656/year. Answer C has a higher net of tax payout. Answer B is wrong. He is over 59½ so there is no 10% penalty. Answer D is wrong as the payments continue after 20 years but are 100% taxable.

Answer 52

ANSWER: B. A group life policy is normally owned by the company. The company pays the premium, but the benefits (up to $50,000) are tax-free. The $5,000 death benefit paid the company used to be tax-free (a De Minimis fringe benefit) but is now taxable.

Answer 53

ANSWER: C. Items I and V are expenses. The others are improvements even though II says replace and IV says install. There is no list of what are expenses and what are improvements.

Answer 54

ANSWER: D. Answer A is wrong because she is single, not married. Section 1244 allows for a $100,000 ordinary loss for married filing jointly and a $50,000 ordinary loss for single persons. Answers B and C are wrong because we do not know how long she was in business. The correct answer for single is $50,000 ordinary loss plus $3,000 capital loss and a $67,000 carry forward.

Answer 55

ANSWER: A. 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.

Answer 56

ANSWER: A. Rental income is income even though passive. Section 162 insurance premiums are charged to the employee. Tax-exempt (public or private) affects MAGI.

Answer 57

ANSWER: B. The ring is only covered if its disappearance is due to theft. The dollar amount shown is not important. See Insurance pre-study 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 commonsense question/answer. Some policies cover jewelry up to $5,000.

Answer 58

ANSWER: C. Rotary is a non-profit (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.

Answer 59

ANSWER: C. Statement IV is wrong because it does not specify qualified medical expenses.

Answer 60

ANSWER: C. Investment interest ($50,000) is tax deductible up to investment income ($50,000). Investment interest is any interest incurred to purchase property that is held for investment, such as raw land.

Answer 61

ANSWER: C. In answer A and B there are salary caps that limit what qualifies for Social Security benefits and retirement contributions. But compensation is subject to unlimited Medicare taxes (disadvantages). That is why Answer C is a better answer. Unearned is not subject to Medicare. Answer D is incorrect, an S corporation does not pay corporate taxes (conduit entity). You may have chosen Answer D because it is an advantage for an S corporation owner. Yes, S owners reduce their wages to pay less FICA taxes by taking the maximum unearned income. This is why many people do an S corporation - avoid FICA taxes. But that is not what Answer D says. You have to answer the question as written.

Answer 62

ANSWER: B. 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).

Answer 63

ANSWER: D. Very tough question/answer. All the answers are good but educating her is best.

Answer 64

ANSWER: A. 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.

Answer 65

ANSWER: D. The question says it is a deep-in-the money call. For example, if the market value is $30, then the exercise price must be less, like $15 - 20. He will have to pay at least $10-15 to buy the option. The call and put options leave Mr. Teig in the same position as if he owned the stock. Mrs. Teig’s purchase of the stock would probably fall under the related party rules causing it to be a wash sale. Answer D is the best answer.

Answer 66

ANSWER: A. This is simply a form of margin or investment interest. It doesn’t matter that the stock isn’t publicly traded.

Answer 67

ANSWER: C. Answer C is referring to I bonds. Tax reporting is similar to EE bonds. TIPS are adjusted for deflation as well as inflation. In deflation, the principal is adjusted downward and interest payments are less than they would be. This answer, as written, came from Treasury direct website.

Answer 68

ANSWER: D. 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. It is possible to exclude commissions and bonuses from includable compensation provided that doing so does not discriminate against a non-highly compensated participant. For example, if commissions are not counted as includable compensation and the key employees never receive commissions, the non-key employees have been discriminated against because their includable compensation is being reduced (by the amount of commissions earned) while the key employees compensation is not reduced at all. Very involved question and answer.

Answer 69

ANSWER: B. 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 frequently asked questions. The financial planning process steps may occur in connection with other activities. Examples include gathering client data as part of a suitability analysis.

Answer 70

ANSWER: C. 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.

Answer 71

ANSWER: C. Prior to death, the five-out-of-eight-years rule applies.

Answer 72

ANSWER: C. NO EARNED INCOME. He does not have any compensation to do an IRA or Roth. Answer B is true, but it does not answer the question. He has no compensation. The pension distributions cannot be rolled into a Roth. NOTE: The question says grow tax-free. Grow makes a difference.

Answer 73

ANSWER: B. This is purely a definition question. The gift is not necessarily a taxable gift. It is a gift of a present interest. Answer C doesn’t apply to the question.

Answer 74

ANSWER: D. Answer A applies to qualified plans. Answer B applies to SIMPLE plans. Answer C applies to IRAs.

Answer 75

ANSWER: B. There is no indication in the question that Terry owns more than 5% of Software, Inc. She can delay distributions from the 401(k) until the year following the year she retires, regardless of her age. This exception does not apply to her IRA. The still working exception does not apply to the 403(b) because she is not currently a teacher. She falls under the IRA rules. She did not roll the 403(b) funds into her employer's 401(k). This is no different than if she had an IRA. She would have to take distributions.

Answer 76

ANSWER: A. $12,060,000 will go to Marty tax free. He gets the exemption amount. The other $5,000,000 would by-pass estate taxes until he dies. It all goes into the QDT she would lose her exemption at her death. This is similar to a question in the Live Review book.

Answer 77

ANSWER: A. Answer B is incorrect because of Answer A. An income tax refund is not IRD.

Answer 78

ANSWER: D. This is the correct way to answer the question. The amount will be greater than the cash value. Replacement value isn't a correct answer. He died owning a policy on his wife. She was the insured; he was the owner.

Answer 79

ANSWER: A. 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. Answer A is the best choice to answer the question. The services that may be excluded are not limited to information regarding the employer's qualified plan. It can include general advice.

Answer 80

ANSWER: C. This is the simplest and fastest recommendation. Increasing the auto liability will allow the umbrella to work properly. We don’t know enough about the client to do A, B, or D. Is he/she working, retired, married, etc.? What is his/her health? The client is 50 years old. Disability insurance is subject to both health and financial underwriting. It will take time to accomplish.

Answer 81

ANSWER: B. He will be 72 this year. He must take an RMD from both his IRA and 401(k) but it is not required until next year. He is more than a 5% owner. After he takes his RMD he can roll the IRA into a Roth. Although answer D is true, this question is an RMD question. Answer C would also be acceptable.

Answer 82

ANSWER: B. Five securities are not a diversified portfolio. Some textbooks say 10-15 securities, or more are generally necessary for a portfolio to be diversified. Therefore, the portfolio has both systematic and unsystematic risk. This is a different type Treynor, Sharpe, Jensen question.

Answer 83

ANSWER: C. New home equity indebtedness is limited to $750,000 including a home equity loan.

Answer 84

ANSWER: D. The penalty only applies to distributions that were made before 59½ (answer B). But the question is only asking about the year five penalty. The penalty only applies to distributions that were made before age 59½. Yes, the first 4 years would be subject to a 10% penalty, but that is not what the question is asking.

Answer 85

ANSWER: C. Answer C is the definition of NPV. NPV, while not a perfect valuation tool provides the planner with a reasonably reliable model from which to make assessments and projections. The calculation should factor both positive and negative entries.

Answer 86

ANSWER: A. Investing in the rental apartment building enables depreciation deduction to offset rental income on an asset that can appreciate in value over time. The single premium annuity shown does not indicate if it is immediate or deferred. Municipal bond interest is tax exempt rather than tax deferred. Interest on Certificates of Deposit is currently taxable.

Answer 87

ANSWER: D. The bargain element of exercised ISOs, local and state income tax are “add-back” items. Answers I and V indicate preference items. Answer III is no longer deductible.

Answer 88

ANSWER: A. The strategy to gift cash then have the donees acquire common stock means that the donee's basis will be the purchase price ($15,000) whereas under answer D, the donee's basis is the donor's(carry–over) basis ($6,000). Answers B and C have no growth capacity and could trigger kiddie tax relative to the grandchildren.

Answer 89

ANSWER: If Aaron and Linda purchase the bonds in their names to pay Stephanie’s "qualified higher education expenses" the amount of their adjusted gross income at the time of redemption would be a factor in determining the tax treatment of the redemption. If the adult owner’s AGI is below a given threshold, to the extent that redemption proceeds are used for college tuition and fees, they are free from Federal income tax exposure. Answer C is incorrect because a taxpayer may defer interest on EE bonds until the bonds mature. However, the EE bonds could be subject to the kiddie tax when redeemed. Answer D is not correct because of the word “ever”.

Answer 90

ANSWER: C. Under this 1031 exchange, Tommy receives no boot, therefore, his basis ($200,000 at his parents’ death) becomes his basis in the newly acquired (by exchange) Florida land.

Answer 91

ANSWER: D. A profit- sharing 401(k) program can accomplish both of Maxine’s goals, namely flexible, and relatively large contributions. Given that up to 25% of eligible compensation may now be contributed to a profit-sharing plan, there is no longer a need for the combination of a money-purchase plan and a profit-sharing plan with 401(k) provisions. If an employer maintains a SIMPLE 401(k) plan, it cannot offer any other employer-sponsored retirement plan.

Answer 92

ANSWER: B. Reallocating to growth stocks and reducing short-term trading should lower Todd’s federal income tax liability. Gains produced from short-term trading are subject to ordinary income tax and often, the AMT. While Answer D is reasonable, it appears that Todd prefers the equity market.

Answer 93

ANSWER: A. The interests transferred to family members will be limited partner interests. Thus, they should qualify for both lack of marketability and lack of control (minority) discounts as they are valuated for federal gift tax purposes. Norman will not benefit from gifting P.A. stock to non-professionals. Answer D does not accomplish Norman’s objective because it is generally used to transfer income, rather than assets alone, to other family members. Further, the gift leaseback technique offers no discounting.

Answer 94

ANSWER: D. When Mr. Dorsey paid the lump sum, the policy became a MEC. His basis is $50,000, the cash value amount is now $80,000. ($80,000 - $50,000 = $30,000) The $30,000 will be taxed as ordinary income plus a 10% penalty. Non death distributions, including withdrawals, loans, or surrender, will come out under LIFO rules.

Answer 95

ANSWER: A. The preferred share value will be determined based on the stated dividends. The common stock value would then be the difference between the FMV of the corporation and the aggregate value of the preferred shares

Answer 96

ANSWER: A. After John’s death, Mary will be entitled to the greater of her benefits or 100% of John’s benefits. John and Mary had matching amounts at or over $3,000 per month. That amount will continue.

Answer 97

ANSWER: B. Presuming that the Fullers have children, they may need a bigger house. The home usually an effective inflation hedge. One generally can’t pay down a mortgage to reduce PITI. PITI remains relatively constant even as the mortgage is paid down. The loan will be paid off faster, but the mortgage agreement (PITI) would remain relatively unchanged. The $225,000 home does not seem extravagant.

Answer 98

ANSWER: B. Ten years of call protection enable Mrs. Pratt to enjoy the relatively high rates for at least ten years. Bond premiums and discounts are not features. Given current “high rates,” Mrs. Pratt would not be anxious about rates rising soon. A put feature would matter if she feels interest rates will rise. Further, both the put feature and conversion feature would reduce yields.

Answer 99

ANSWER: B. The Coverdell contributions are not affected by the contribution to the qualified state tuition program. Answer A is wrong because of the word “ever”. Mrs. Sikes can contribute to a UTMA account, but she would have to use her applicable gift exemption amount ($12,060,000). It is available after the $16,000 annual exclusions are used up. Answer D is not true. Presuming that Mrs. Sikes lives for five full years following the transfer, she has not made a taxable gift. If she dies in the five-year post contribution period, part of the $80,000 transfer would be thrown back into Mrs. Sike’s gross estate.

Answer 100

ANSWER: D. Wesley’s tax rate is 24% and he will likely make too much to fund a Roth IRA. The emergency fund indicated in Answer A seems larger than it needs to be given Wesley’s age and income. The risk/return on the municipal securities seems too conservative. Without mention of family members the need for life insurance is unclear. Nothing indicated that Wesley has high investment risk tolerance: The focus on tech stocks is aggressive and poorly diversified. He is not in a plan at work. Therefore, he can do a deductible IRA.

Answer 101

ANSWER: E. A disgruntled client of a broker/dealer should generally begin the complaint process through that broker/dealer’s compliance function. If the firm is unresponsive or disagrees with the customer’s claim, arbitration should be pursued through FINRA. Mediation may also be available. The broker/dealer community is governed by FINRA directly under the supervision of the SEC. The CFP Board is not the regulator for broker/dealers.

Answer 102

ANSWER: E. A Series 6 limited securities representative licensed individual can sell mutual funds only. To sell variable products, the individual must also hold a state-issued insurance producer’s license. The question does not indicate any insurance license. ETFs are Exchange traded funds. They are normally traded on a national exchange without a prospectus. To earn commissions for sales of products not accompanied by a prospectus, one must hold the FINRA Series 7 general securities representative’s license.

Answer 103

ANSWER: A. Basis to a done is increased by the gift tax paid by the donor that is attributable to the appreciation of the gift.

Answer 104

ANSWER: A. Susan may participate in both plans. Employee status includes part time employees. There is no 1,000 ERISA requirement for participation in a 403(b) program. Susan can install a profit-sharing Keogh plan if her business is unincorporated and a traditional profit-sharing plan if her business is a corporation.

Answer 105

ANSWER: B. Under ERISA rules, a profit-sharing plan may exclude from participation employees working fewer than 1,000 hours per year. Eligibility to participate in an employer-provided group health insurance plan normally requires 32 hours per week. SEP eligibility falls under the 3-year rule which could force Sonia to cover certain returning part time workers, The SIMPLE (401k) implies employee deferrals. At this point it is not clear as to whether the employees would want to make elective deferrals. Her own maximum contribution would be lower than that under profit- sharing plan.

Answer 106

ANSWER: A. Both stocks are overvalued. Stock A r = 5% + (10%-5%) 1.2 = 5% + (5%) 1.2 = 11% A’s Price = $.90 (1 +.05) = 15.75 .11-.05 Stock B r = 5% + (10% - 5%) .7 = 8.5% B’s Price = $1.25 (1 + .06) = $53.00 .085 - .06

Answer 107

ANSWER: C. There will be no adverse tax consequences if Mr. Adams rolls the current account balance into his new employer’s 401(k) program. A qualified plan, like a 401(k), triggers no 10% penalty for separation from service after age 55. The age 55 exception does not apply to IRAs. Mr. Adams is now age 52; in four years he will be 56 not 59½, so the premature withdrawal penalty would apply unless he arranges substantially equal payments. In four years, Mr. Adams may need more money than that. He can also take out a loan from the 401(k).

Answer 108

ANSWER: B. Secured creditors such as mortgage bondholders and equipment trust certificate holders are senior. Second are unpaid wages, taxes, and trade creditors. Third are debenture bondholders followed by preferred shareholders. Common shareholders are the most junior and therefore last.

Answer 109

ANSWER: B. This growing family will need life insurance. This is especially true because Leslie and Tommy can’t rely on Mrs. Andrews for financial help. With term coverage they should be able to obtain a reasonably high death benefit. With two months before the baby comes and limited wages a six-month emergency fund does not seem reasonable. Further, they will have extra cash needs for baby-related expenses. Answer C is incorrect because Mrs. Andrews is not the client for whom the recommendation in the question is to be made.

Answer 110

ANSWER: B. The catch-up provision available with the Uni (Solo) 401(k) allows Alex to contribute a total of $67,000 for the current tax year. Given that they do not offer a catch-up contribution opportunity, the SEP and target benefit only allow $61,000. The Uni-(k) will be an ERISA plan. Fully funding actuarially determined contributions to a defined benefit plan will require more money than his current expenses allow.

Answer 111

ANSWER: B. By factoring the DDM, we know that the current market price of $100 is less than $108.00. V = $2 (1 + .08) = $2.16 = $108.00 .10 - .08 .02 In the formula above, the 2nd growth rate is used to calculate the intrinsic value with an adjustment upward or downward relative to whether the early years’ dividend is lower or higher than the later years’ dividend

Answer 112

ANSWER: Both statements A and C are correct. A subscription warrant may be issued with a bond or preferred stock offering. A warrant is usually issued as a sweetener to make the issue more attractive. It entitles the holder to buy a proportionate amount of the issuer’s common stock at a specific price. Presuming the corporation buying the preferred shares has no ownership in the distributing corporation, seventy percent of the dividends received are tax exempt. Preemptive rights are available to common, rather than to preferred shareholders. If the corporation wishes to issue more shares, common stockholders have the right to buy these shares before they are offered to the public.

Answer 113

ANSWER: A. The two required holding periods to create long-term gain relative to an ISO reflects 1) grant to sale (2 years); 2) exercise to sale (1 year). Before selling the exercised ISO shares, Mr. Baldwin held them at least one year from the date of exercise and at least two years from the grant date. This is a qualified disposition. Mr. Baldwin exercised the ISOs at $10 per share creating a basis of $100,000. Nothing in the question indicates that the bargain element (an AMT preference item) actually triggered AMT to Mr. Baldwin. The long-term capital gain at the time of the sale is $90 per share.

Answer 114

ANSWER: Medicare Part A will cover home health visits that are part of a treatment plan and up to 100 days in an extended care facility presuming 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. Answer III is covered by Part B. Answer V is not covered by Medicare.

Answer 115

ANSWER: D. The American Opportunity Credit is limited to 100% of the first qualified expenses up to $2,000 and 25% of the next $2,000 of qualified expenses incurred for post-secondary education. Answer A is wrong because it is referring to Hope credit numbers. The Hope Credit is no longer available. Answer B is wrong because the AOC is currently a maximum of $2,500 maximum. Answer C is wrong because the AOC applies to the first $4,000 of expenses during all 4 years of undergraduate school.

Answer 116

ANSWER: B. Edwin’s attorney enjoys “client privilege” and cannot be forced to discuss Edwin’s condition with third parties. The question does not indicate that his investments are with your broker-dealer. Edwin’s children are not your clients. You do not want to violate Confidentiality in that way. Discussing Edwin’s condition with the investment advisor also breaches Confidentiality. You could also speak with Edwin’s physician but that is not among the answer choices.

Answer 117

ANSWER: B. Because we do not know what Barbara initially paid to acquire the business, use a zero in the first year to solve for the present value. HP12C 0 g CFo 400,000 g CFj 450,000 g CFj 550,000 g CFj 600,000 g CFj 700,000 g CFj 12 I f NPV

Answer 118

ANSWER: B. The provisions for Marilyn reflect a bypass trust (B trust). 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 lifetime exclusion.

Answer 119

ANSWER: C. Both Statements I and II are correct. CFP® certificants are required to disclose compensation to prospective and current clients.

Answer 120

ANSWER: D. APL is the abbreviation for the automatic premium loan. This provision will pay the premium if it remains unpaid beyond the grace period. If Mr. Pate had claimed disability waiver, there would be no premium due notice. A disability waiver of premium provision generally means that the insurer will then pay the premium for the life of the contract with no future premium notices. Exercising the reinstatement provision would mean that Mr. Pate he would have to provide proof of insurability (medical information) in order to reinstate the policy if it lapses. Due to Mr. Pate’s health reinstatement will probably not be available.

Answer 121

ANSWER: B. While many investors erroneously presume that investing in bonds does not carry risk to principal, that is not so. Bond prices fall with rising interest rates. If an investor cannot hold the bond to maturity and thus sells it when rates are higher relative to the coupon rate of the bond, that bondholder is likely to lose principal. If interest rates have risen sharply the loss of principal can be significant.

Answer 122

ANSWER: A. The money is a gift. Personal exemptions have been eliminated after 2017.

Answer 123

ANSWER: D. 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.

Answer 124

ANSWER: B. Improvements that add to the value of land (in this case by making it more marketable) or adapt it to new uses are capital improvements. Capital improvements generally increase basis.

Answer 125

ANSWER: D. Under the increasing B option for universal life insurance, the amount in the cash savings account is added to the base death benefit to, in this example produce a total benefit of $570,000. Because Adam owned the policy at the time of his death that amount would be included in his estate for federal estate tax purposes. MEC rules only affect distribution other than death benefits.

Answer 126

ANSWER: D. Gifts made before one spouse dies may be split even if that spouse dies before signing the appropriate consent and election on Form 709. On behalf of the deceased spouse, his executor can make the appropriate election. This is not per se an incomplete gift. The check was written from a joint checking account and Pamela (the mother) is still living.

Answer 127

ANSWER: A. With a wife and 3 small children above all, James needs medical insurance. The last priority is contributing to the 401(k). Disability insurance is the next highest priority because as of the moment, James is the only income earner. Yes, the emergency fund is also important.

Answer 128

ANSWER: A. Under current rules, distributions from tax-qualified retirement plans, TSAs [403(b)] and governmental 457s may be rolled directly into a Roth IRA. Samuel will have to pay tax on the amount that is rolled over. There would be no penalty because rollovers do not incur penalty and because Samuel is well over age 59½.

Answer 129

ANSWER: Advance Tech does not have the means to make cash contributions. But the corporation could contribute stock. The owners are comfortable to have employees share in the growth of the company. The profit-sharing plan would require a substantial and recurring (although not annual) cash contribution. The 401(k) provision would generally entail employer matching contributions of cash. NOTE: The 100+ employee population eliminates the SIMPLE.

Answer 130

ANSWER: C. A gifting strategy should be proceeded by careful cash flow analysis. Clara may have health problems, where the excess cash flow would be needed. There is no indication of Clara’s net worth or how long the patent rights will continue. Given her age, Clara may need some of her income for health related and other reasons.

Answer 131

ANSWER: B. 35% of Lawrence’s $19 MM adjusted gross estate is $6,650,000. Thus, his estate qualified for 303 and 6166 (35% rule) at $15 million. Section 2032A requires that the real and personal property of the business represent 50% of his gross estate rule ($9.5 million) and 25% of his gross estate in respect to the real property ($4.75 million). Lawrence’s estate does meet the requirements for a Section 2032A election. The Alternate Valuation Date (AVD) is not appropriate because there is no indication of a decline in value of the ranching corporation.

Answer 132

ANSWER: B. Because this is an option A policy that provides a level death benefit, the amount in the cash value account is immaterial. The insurance company pays only the stated death benefit. The death benefit ($1,000,000) less the existing loan. He paid the penalty when he took out the loan

Answer 133

ANSWER: C. Bob had an out-of-pocket cost of $10 per share (the grant price). He also paid $2.80 per share in AMT. The AMT paid increases his basis. Thus, his basis becomes $12.80 per share or $128,000.

Answer 134

ANSWER: C. Internal rate of return (IRR) expresses the effective return on an investment considering all cash flows. Time weighted return expresses manager performance. Real return adjusts nominal return for inflation. Nominal return often fails to accurately express a particular investor’s return.

Answer 135

ANSWER: A. Both the 403(b) and the 457 plans offer the same deferral limits. However, because the 457 plan is not provided by a governmental employer no catch-up contribution is available. Janice may make a catch-up contribution to the 403(b) plan. She can only contribute to one plan. Answer D is wrong because there is only one employer.

Answer 136

ANSWER: B. Total W-2 income $375,000 Dividends $50,000 Capital Gains $75,000 Less total IRA Contributions -14,000 $486,000 There is no indication that either Tommy or Susan is an active participant in a workplace retirement plan. Thus, their AGI does not cause their IRA contributions to phase out for deductibility. Although dividends and capital gains have lower tax rates than most other sources of income, they are part of AGI.

Answer 137

ANSWER: A. Under the CFP Code of Ethics, written disclosure to prospective clients may be provided through any of the means shown.

Answer 138

ANSWER: B. With the 162 double bonus arrangement, the first bonus would go into the annuity/life insurance and the second would pay Jesse’s phantom tax. Due to its conduit taxation an S corporation cannot offer a non-qualified deferred compensation plan. Since we know little about how long other employees have worked for Doc, it is uncertain as to whether the SEP would eliminate most of the full and part-time employees. The deferred compensation arrangement through a secular trust would create undesirable phantom income for Jesse.

Answer 139

ANSWER: B. The $1,000,000 transfer is not subject to gift tax if the transfer of funds occurs within three years of the date of the divorce decree. It is still regarded as a marital gift and thus it is not subject to federal gift tax.

Answer 140

ANSWER: C. It makes sense that up to the exemption equivalent amount is allocated to the B trust. Carla may receive the IRA distributions through the trust. Amounts in the IRA that exceed the exemption equivalent, may then be allocated to a QTIP (C) trust. If $12 million from Jack’s IRA is allocated to a by-pass trust, that trust will be overfunded. Allocating the entire IRA to the QTIP misses the opportunity to maximize the exemption equivalent. If Carla receives the IRA outright, she can transfer it to her own name and change the beneficiary.

Answer 141

ANSWER. B. Choose the exact amount, not less. Using the higher rate 8% produces a lower number ($1,250,000). George would prefer to pay less to acquire the risky business. Using the 7% produces a maximum number. ($1,428,571) $100,000 = $1,250,000 .08

Answer 142

ANSWER: E. ISOs create AMT income, rather than gross income for Form 1040 purposes. Employer-provided death benefits are not life insurance benefits. The employer will pay and deduct the expense. The other items would be included in a taxpayer’s gross income.

Answer 143

ANSWER: B. The face value of the group life insurance for Chris is in excess of $50,000. The employer-provided premium that funds the excess is deemed to be compensation. The SEP contribution and the self-employed health insurance premiums are deductions for AGI. The net profit is taxable income. Chris’s IRA contribution is non-deductible because he is an active participant in the SEP and AGI is above the IRA contribution deductibility phaseout.

Answer 144

ANSWER: C. A CFP professional should explore all possible alternatives in order to help the client identify and achieve reasonable retirement objectives. This analysis might include a budget, comparing alternative investment vehicles, extending the retirement date and more. Pursuing arbitration is a long shot in increasing the Couch’s retirement income.

Answer 145

ANSWER: E. $750,000 proceeds x $200,000 basis = $150,000 $1,000,000 FMV The $750,000 in sales proceeds less $150,000 adjusted basis equals $600,000 However, under a bargain sale to charity the basis is adjusted because the difference between the FMV of the property ($250,000) represents a charitable gift rather than a sale.

Answer 146

ANSWER: C. A participant in an FSA plan must elect in writing the amount of the salary reduction in the calendar year prior to the year in which it that reduction is to take effect. Unused funds in medical expense FSAs cannot be used for dependent care. An FSA must not discriminate in favor of HCEs. However, there is no 70% participation testing. Forfeited funds in an FSA may not go directly to the employee for general operations but they can be used to defray future administrative expenses of the FSA itself.

Answer 147

ANSWER: C. Helen has a child “in care”. “In care” means that the mother performs personal services for child under age 16 or a disabled child. She is also the spouse of a disabled uninsured worker. Helen and her son are entitled to benefits. The information presented does not indicate whether her benefits will be tax-free or subject to federal income tax.

Answer 148

ANSWER: C. Naked call writing is also called shorting calls. The maximum profit is the premium income. Since the upside potential of a stock’s price is unlimited, the potential loss to the writer is unlimited. A shorter defined is someone who believes that the price of the underlying stock will drop or at worse will not rise (a flat market). Mr. Smart will be able to keep the premium income (reference Live Review Investments page 21).

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