Diagnostic Exam and Book 1

Question 1

How does the federal reserve control the money supply?

Answer 1

a. adjusting the discount rate b. open market operations i.e. buying government securities

Question 2

Calculate Next year Dividend (D1)

Answer 2

D1 = D0(1+g)

Question 3

Forecasted Total Return

Answer 3

[(Forecasted stock $ - Current Price) / Current $] + Dividend yield Dividend yield is shown as a percentage. It’s calculated by dividing the dollar value of dividends paid in a certain year per share of stock held by the dollar value of one share of stock. It equals the annual dividend per share divided by the stock’s price per share. For example, if a company’s annual dividend is $1.50 and the stock trades at $25, the dividend yield is 6 percent: $1.50 / $25 = 0.06. Yields for a current year can be estimated using the previous year’s dividend yield or by using the latest quarterly yield, multiplying it by 4, then dividing by the current share price.su

Question 4

Expected Return (CAPM)

Answer 4

Rf + Beta (risk premium)

Question 5

Risk Premium

Answer 5

Market return - risk free rate

Question 6

If the forecasted return is greater than the expected return then you should _____ the security

Answer 6

buy

Question 7

If the forecasted return is less than the expected return then you should ______ the security

Answer 7

not buy/sell

Question 8

What is the double basis rule?

Answer 8

No gain is realized if the donee sells the property for a price between the adjusted basis and the fmv on the date of the gift. Example: Mom gives son property with adjusted basis of $35k and fmv of $30k…the son then sells at $33k…this results in no gain

Question 9

Are SSI benefits reduced if at FRA and have earned income?

Answer 9

No the benefits aren’t reduced, but a greater portion will likely be taxable - NOT BASED ON EARNED INCOME ALONE…(such as wages, self-employment, interest, dividends and other taxable income that must be reported on your tax return). Up to 50% or even 85% of your Social security benefits are taxable if your “provisional” or total income, as defined by tax law, is above a certain base amount. Your Social Security income may not be taxable at all if your total income is below the base amount. If you’re married and filing jointly with your spouse, your combined incomes and social security benefits are used to figure your total income. Combined Income = Adjusted Gros Income + Non-taxable Interest + 1/2 of your Social Security benefits Individual - - 50% of benefits are taxed when your combined income is between $25,000 and $34,000 -85% of benefits are taxed when your combined income is more than $34,000 File Joint Return - - 50% of your benefits are taxed when you and your spouse have a combined income that is between $32,000 and $44,000 -85% of benefits are taxed when your combined income is more than $44,000

Question 10

Do CFP’s have to be registered as an investment adviser?

Answer 10

No

Question 11

Name four organizations that rate the financial strength of life insurance companies

Answer 11

Standard and Poors, Fitch, Moody’s, and AM Best Standard and Poors AAA (Highest) AA+ (Second Highest) BBB- (Last Investment Grade) Fitch AAA (Highest) AA+ (Second Highest) BBB- (Last Investment Grade) Moody Aaa (Highest) Aa1 (Second highest) Baa3 (Last Investment Grade)

Question 12

Under Medicare Part A, do skilled nursing facilities benefits provide any coverage for custodial care?

Answer 12

No Because custodial caregivers for seniors aren’t required to have any formal medical training, these providers typically are limited to performing certain basic duties. Primarily, they can help with the activities of daily living (ADLs) such as bathing, dressing, grooming, eating, going to the bathroom and offering ambulatory assistance. Medicare: Medicare typically doesn’t cover custodial care benefits, but it may for a short period (100 days or less) if it is combined with skilled medical care that is prescribed by a physician. When utilized in unison with private insurance, Medicare can be a useful supplement in certain situations. Medicaid: One must meet strict financial requirements to qualify for state-administered Medicaid services to pay for custodial care. Furthermore, this program typically requires that beneficiaries be under care within an approved facility such as a nursing home or assisted living. While benefits vary from state-to-state, some will cover adult day care and homemaker services for seniors who qualify. Long Term Care Insurance: Long term care insurance (LTC) is one of the best options for paying for senior custodial care, especially when combined with supplemental Medicare coverage. These fixed-priced policies vary in coverage, but often provide reimbursement for care for several years.

Question 13

Which of the following types of student financial aid is(are) need-based? Subsidized Stafford Loan. Unsubsidized Stafford Loan. Parent Loan for Undergraduate Students (PLUS) Loan. Perkins Loan.

Answer 13

Subsidized Stafford Loans and Perkins Loans or undergraduate students who have financial need; U.S. Department of Education generally pays interest while the student is in school and during certain other periods; a student must be enrolled at least half-time.Interest rates for new Direct Subsidized Loans can change every year. Loans made to undergraduate students during the 2018–19 award year have the rate fixed at 5.05% for the life of the loan. Up to $5,500 depending on grade level and dependency status. Stafford loans, also known as Federal Family Education Loans (FFEL), are federal student loans available to college students. Subsidized loans are based on need; this is determined by evaluating your available resources. You won’t be charged any interest on the loan while you’re in school or during a deferment period. The federal government makes these payments as long as you are in school. Unsubsidized loans aren’t based on need. Interest begins to accrue as soon as the loan is disbursed and is added on to the loan balance after graduation It must be used to pay for tuition and fees, room and board, and other school charges. If any money remains, you’ll receive the remaining funds by check or a direct deposit to your bank account, unless you ask the school to hold the funds to apply towards the next enrollment period. Important: Under federal law, the authority for schools to make new Perkins Loans ended on Sept. 30, 2017, and final disbursements were permitted through June 30, 2018. As a result, students can no longer receive Perkins Loans. A borrower who received a Perkins Loan can learn more about managing the repayment of the loan by contacting either the school that made the loan or the school’s loan servicer. The Federal Perkins Loan program allowed schools to make loans to students at a relatively low interest rate. These low-interest loans were made on the basis of need but have been discontinued by the U.S. Department of Education. The last disbursements were made on June 30, 2018. Unsubsidized Stafford loans - For undergraduate and graduate or professional students; the borrower is responsible for interest during all periods; a student must be enrolled at least half-time; financial need is not required.For undergraduate students: Interest rates for new Direct Unsubsidized Loans canchange every year. Loans made to undergraduate students during the 2018–19award year have the rate fixed at 5.05% for the life of the loan.For graduate or professional students: Interest rates for new Direct UnsubsidizedLoans can change every year. Loans made to graduate or professional studentsduring the 2018–19 award year have the rate fixed at 6.6% for the life of the loan. Up to $20,500 (less any subsidized amounts received for same period), depending on grade level and dependency status.

Question 14

How long do patients have in a skill nursing benefit period before they must pay the remaining cost?

Answer 14

100 days You pay: Days 1–20: $0 for each benefit period . Days 21–100: $170.50 coinsurance per day of each benefit period. Days 101 and beyond: all costs Your doctor or other health care provider may recommend you get services more often than Medicare covers. Or, they may recommend services that Medicare doesn’t cover. If this happens, you may have to pay some or all of the costs. Ask questions so you understand why your doctor is recommending certain services and whether Medicare will pay for them.

Question 15

How many days does the skilled nursing facility pay for the entire cost of the patient’s stay?

Answer 15

the skilled nursing facility pays the entire cost of the patient’s stay in a skilled nursing facility for only the first 20 days after certain conditions are met Medicare

Part A (Hospital Insurance) covers skilled nursing care provided in a SNF in certain conditions for a limited time (on a short-term basis) if all of these conditions are met:

1. You have Part A and have days left in your benefit period to use.
2. You have a qualifying hospital stay.
3. Your doctor has decided that you need daily skilled care.
4. It must be given by, or under the supervision of, skilled nursing or therapy staff.
5. You get these skilled services in an SNF that’s certified by Medicare.
6. You need these skilled services for a medical condition that’s either:
   
   1. A hospital-related medical condition.
   2. A condition that started while you were getting care in the skilled nursing facility for a hospital-related medical condition .

Your costs in Original Medicare You pay:

1. Days 1–20: $0 for each benefit period .
2. Days 21–100: $170.50 coinsurance per day of each benefit period.
3. Days 101 and beyond: all costs.

What it is Skilled care is nursing and therapy care that can only be safely and effectively performed by, or under the supervision of, professionals or technical personnel. It’s health care given when you need skilled nursing or skilled therapy to treat, manage, and observe your condition, and evaluate your care. Medicare-covered services include, but aren’t limited to:

1. Semi-private room (a room you share with other patients)
2. Meals
3. Skilled nursing care
4. Physical therapy (if needed to meet your health goal)
5. Occupational therapy (if needed to meet your health goal)
6. Speech-language pathology services (if they’re needed to meet your health goal)
7. Medical social services
8. Medications
9. Medical supplies and equipment used in the facility
10. Ambulance transportation (when other transportation endangers health) to the nearest supplier of needed services that aren’t available at the SNF
11. Dietary counseling
12. Swing bed services

Question 16

Kevin wishes to purchase a yacht in 20 years when he retires. If the yacht currently costs $450,000 and inflation is 2% annually, how much should he deposit at the beginning of each year to have enough to purchase the yacht at the end of 20 years? Assume that Kevin will earn an average compounded after-tax annual return of 5% on his investments.

Answer 16

Pay attention it says beginning of year!

Part 1 = Find the Future Value based on Inflation

1. N = 20
2. PV = 450,000
3. I = 2
4. PMT = 0
5. FV?
   
   1. FV = $668,676

Part 2 =

1. FV = $668,676
2. N = 20
3. I = 5%
4. PV = 0
5. PMT = ?
   
   1. PMT = $19,260

NOTE - First figure out what the current cost will be as adjusted for inflation. Then find the payment to get there.

Question 17

Do tax payers get an exemption for giving financial support to a non US citizen?

Answer 17

HELL NO Exemptions are no longer availabe.

Question 18

How much of a rental real estate loss can a taxpayer deduct and what are the rules?

Answer 18

25K Rental Loss allowed against Ordinary Income

THREE Requirements:

1. 10%,
2. Active, and
3. Not Phased Out
   
   1. (100K - 150K; same for all filers except married filing separately)
   2. If MAGI is between $100k and $150k then you can only deduct 50% of the difference between there (i.e. for every 2 dollars of income, you lose a dollar of the deduction)
      
      1. (MAGI is $120 then can deduct $15k or 50% of $150k - $120k).

Active Participation:

1. Active participation is a less stringent requirement than material participation
2. You may be treated as actively participating if, for example, you participated in making management decisions or arranged for others to provide services (such as repairs) in a significant and bona fide sense
3. Management Decisions:
   
   1. Approving new tenants,
   2. Deciding on rental terms,
   3. Approving capital or repair expenditures, and
   4. Other similar decisions.

Question 19

What is a 2-6 year graduated vesting schedule?

Answer 19

Your Matching Contribution Account is subject to a 2-6 year graded vesting schedule (20% per year starting with two years of vesting service).

1. 20% vested after 2 years
2. 20% each of the following years
   
   1. Year 3 = 20%
   2. Year 4 = 20%
   3. Year 5 = 20%
   4. Year 6 = 20%

Cliff Vesting - This usually occurs after one to three years of employment. Example:

1. Year 1 = 0%
2. Year 2 = 0%
3. Year 3 = 100%

Though cliff vesting and graded vesting are the typical vesting schemes, there are two exceptions to the rule.

All employees must be 100% by the time:

1. All employees attain normal retirement age under the plan, or
2. When the retirement plan is terminated by the employer

NOTE = You don’t have to be concerned about your 401(k) vesting schedule when you make a contribution to your 401(k) plan. But the same isn’t true when it comes to your employer’s matching contributions

Question 20

What is the minimum vesting requirement for a defined contribution plan?

Answer 20

3 year cliff (100% on year 3) or 2-6 year graduated (20% on year 2 and 20% each year until year 6) Qualified defined contribution plans (for example, profit-sharing or 401(k) plans) can offer a variety of different vesting schedules that are determined by the plan document. These can range from immediate vesting, to 100% vesting after 3 years of service (as defined by the plan, generally 1,000 hours worked over 12 months), to a vesting schedule that increases the employee’s vested percentage for each year of service with the employer. This sounds easy enough, but it can get complicated. Employers can choose to use different methods of counting service. Different vesting requirements apply to employer contributions depending on the type of plan the employer sponsors. SEP, SARSEP, and SIMPLE IRA (and other IRA-based) plans require that all contributions to the plan are always 100% vested.

Question 21

Constant Growth Dividend Model (Intrinsic Value of Stock)

How do you compare the current price of the stock vs the price determined by the Constant Growth Dividend Model?

How do you determine the Required Date of Return (RRR)?

Answer 21

P = D1 / r-g

Price of Stock = Estimated Dividend for Next Period / (Required Rate of Return - Growth Rate)

The dividend growth model determines if a stock is overvalued or undervalued assuming that the firm’s expected dividends grow at a value g forever, which is subtracted from the required rate of return (RRR) or k. Dividend Growth Rate cannot be higher than the RRR because that results in a negative in the denominator and the

EXAMPLE:

Let’s assume XYZ Company intends to pay a $1 dividend per share next year and you expect this to increase by 5% per year thereafter. Let’s further assume your required rate of return on XYZ Company stock is 10%. Currently, XYZ Company stock is trading at $10 per share.

1. P = 10
2. D1 = 1.00
3. Required Rate of Return = 10%
4. Growth rate = 5%

Using the formula above, we can calculate that the intrinsic value of one share of XYZ Company stock is:

1. P = $1.00/(.10-.05) = $20
2. ANSWER = Based on the dividend growth model, the company is overvalued.

Required Rate of Return= Two ways to determine:

FIRST = CAPM

1. Expected Rate of Return = Risk- Free Rate + Beta of Stock(Return of Market - Risk-Free Rate)
2. NOTE = Investors expect to be compensated for risk and the time value of money.
3. You may find the required rate of return by using the capital asset pricing model (CAPM), which requires certain inputs including:
   
   1. The risk-free rate (RFR)
      1. YTM of a 10-year Treasury Bill
   2. The stock’s beta coefficient
      
      1. Covariance of Stock and Market / Variance of Market
      2. Basically = How sensitive or volatile is the stock’s price movement with respect to the market or the benchmark
   3. The expected market return
      
      1. For most calculations, the expected market return rate is based on the historic return rate of an index such as the S&P 500, the Dow Jones Industrial Average, or DJIA, or the Nasdaq.

Second = Cost of Equity

1. Cost of Equity = (Next Year’s Annual Dividend / Current Stock Price) + Dividend Growth Rate

Question 22

HCE Ratio Test

Answer 22

A Highly Compensated Employee (HCE) is defined as an employee that

1. owns more than 5% of the company or
2. received at least $120,000 in compensation for the previous two years.

The amount of compensation used for determination may be adjusted each year depending on inflation. Coverage testing is established to ensure that each plan is covering enough of the NHCEs. Sounds pretty simple, right? While the underlying concept is easy to understand, the calculations can be a bit more confusing.

The test compares the percent of benefiting NHCEs to the percent of benefiting HCEs in a plan. The magic number to keep in mind is 70%.

(NHC Benefit / Total NHC) / (HCE Benefit / Total HCE ) Has to be greater than or equal to 70% to past test The purpose of the test is to make sure a given plan covers enough non-highly compensated employees. That sounds straightforward enough, but some of those terms are loaded. We will get into more detail below, but the magic number to keep in mind when it comes to the minimum coverage test is 70%.

Each contribution type is considered a separate “plan.” In other words, if a plan offers

1. 401(k) deferrals,
2. a company match and
3. company profit sharing contributions,

the minimum coverage test must be applied three times — once for each type of contribution.

This is to ensure a plan is not designed to cover everyone in the employee-funded 401(k) portion while covering only the owners and officers in the company-funded profit sharing contribution.

EXAMPLE - Let’s take a look at company X again for an example of how the testing is done. Due to specific exclusions of employee classifications in the plan, only 5 of the 9 Non-HCEs are eligible to participate and 2 of the 3 HCEs are eligible. The calculations would go like this:

1. 5 / 9 = 55.6%
2. 2 / 3 = 66.7%
3. 55.6% / 66.7% = 83.3%

Since the ratio that compares NHCEs to HCEs is greater than 70%, Company X has passed the testing. But, if there was not an exclusion for any HCEs, then Company X would have failed coverage. Coverage testing is slightly different from the other tests in that all plans must satisfy the requirements regardless of Safe Harbor status.

Question 23

How does the Test Work Example: ABCCompany has 35 employers, but only 25 have met the age and service requirements. So those 25 making up the testing group. There are 5 HCEs and 20 non-HCEs The plan excludes salespeople, and the testing group includes 3 salespeople, 1 of which is an HCE. Benefitting NHCEs = 18 Benefitting HCEs = 4 TOTAL Benefitting Employees = 22 TOTAL NHCES = 20 Not Benefitting NHCEs = 2 Not Benefitting HCEs = 1 TOTAL Not Benefitting Employees = 3 TOTAL HCEs = 5

Answer 23

Example Non-HCE Ratio 18 / 20 = .9% HCE Ratio 4 / 5 = .8% Ratio Percentage .9% / .8% = 112.5% Since the plan’s ratio percentage is 70% or greater, this plan passes the minimum coverage test. The first step is to identify which employees must be considered. This generally includes not only the employees of the company sponsoring the plan but also the employees of any companies that are related to the plan sponsor Step two is to apply the plan’s eligibility requirements. So, if a plan requires an employee to be at least age 21 and complete one year of service to join the plan, anyone not meeting those criteria is set aside for purposes of the test. We will refer to those who are left as the testing group Next, we divide the testing group into four subsets: (1) Highly compensated employees (HCEs) who benefit, (2) HCEs who do not benefit, (3) Non-HCEs who benefit, and (4) Non-HCEs who do not benefit

Question 24

What type of retirement plan is best to use when there are fluctuating cash flows in the business? What is the Maximum Contribution Amounts?

Answer 24

Profit sharing plan. With a profit sharing plan, contributions from the employer are discretionary. Four initial steps for setting up a profit-sharing plan: (i) Adopt a written plan document, If you do make contributions, you will need to have a set formula for determining how the contributions are divided. This money goes into a separate account for each employee. (ii) Arrange a trust for the plan’s assets, (iii) Develop a recordkeeping system, and (iv) Provide plan information to eligible employees. EMPLOYER ONLY CONTRIBUTIONS Profit-sharing plans allow for employer contributions only. In the event that a salary deferral feature is added to a profit-sharing plan, it would then be defined as a “401(k) plan.” While there is no set amount that must be contributed to a profit-sharing plan each year, there is a maximum amount that can be contributed to a profit-sharing plan for each employee. The amount fluctuates over time with inflation. The maximum contribution amount for a profit sharing plan is the lesser of 25% of compensation or $56,000 ($62,000 including catch-up contributions) in 2019. Flexibile contributions – contributions are strictly discretionary Good plan if cash flow is an issue Administrative costs may be higher than under more basic arrangements (SEP or SIMPLE IRA plans) Need to test that benefits do not discriminate in favor of the highly compensated employees. EXAMPLE One common method for determining each participant’s allocation in a profit-sharing plan is the “comp-to-comp” method. Under this method, the employer calculates the sum of all of its employees’ compensation (the total “comp”). To determine each employee’s allocation of the employer’s contribution, you divide the employee’s compensation (employee “comp”) by the total comp. You then multiply each employee’s fraction by the amount of the employer contribution. Using this method will get you each employee’s share of the employer contribution.

Question 25

Can ESOPs be integrated with SSI?

Answer 25

No An integrated pension plan is an employer-based pension plan where the employer counts Social Security benefits as part of the total benefit that the plan participant receives. Said another way, employers that use an integrated plan reduce the pension benefits that their employees receive by a percentage of the amount that they receive in their social security check. If the pension plan were not integrated, employees would receive a greater sum of money from their employer. There are many reasons for the use of an ESOP, including tax savings by the underlying corporation and motivation of its employees through “skin in the game.” There are some truly unique tax rules, though, that individuals interested in forming an ESOP must understand.

Question 26

Uses & Major Tax Benefits of ESOPs

Answer 26

ESOP = Employee Stock Ownership Plan. Employee ownership can be accomplished in a variety of ways. Employees can buy stock directly, be given it as a bonus, can receive stock options, or obtain stock through a profit-sharing plan. Some employees become owners through worker cooperatives where everyone has an equal vote. But by far the most common form of employee ownership in the U.S. is the ESOP, or employee stock ownership plan. Instead, ESOPs are most commonly used to provide a market for the shares of departing owners of successful closely held companies, to motivate and reward employees, or to take advantage of incentives to borrow money for acquiring new assets in pretax dollars. In almost every case, ESOPs are a contribution to the employee, not an employee purchase USES OF ESOPs 1(a) - To buy the shares of a departing owner: Owners of privately held companies can use an ESOP to create a ready market for their shares. Under this approach, the company can make tax-deductible cash contributions to the ESOP to buy out an owner’s shares, or it can have the ESOP borrow money to buy the shares (see below). 1(b) - Deductibility - C-Corp Employer contributions to the ESOP generally are tax-deductible up to a limit of 25% of covered payroll (this limit also includes employer contributions to other defined contribution plans). For a C corporation with a leveraged ESOP, the 25% limit does not include contributions to pay interest on the loan. The law appears to allow a C corporation to also contribute up to an additional 25% that is not used for payments on an ESOP loan (discussed below). 1(c) - Deductibility - S-Corp The contribution and deduction limits for an S corporation ESOP are the same as for a non-leveraged C corporation ESOP. However, even if the S corporation ESOP is leveraged, the company is not entitled to exclude the loan’s interest expense from the 25% limit. 1(d) - Deductibility - LIMIT The 2017 bill limits net interest deductions for businesses to 30% of EBITDA (earnings before interest, taxes, depreciation, and amortization) for four years, at which point the limit decreases to 30% of EBIT (not EBITDA). In other words, starting in 2022, businesses will subtract depreciation and amortization from their earnings before calculating their maximum deductible interest payments. 2 - To borrow money at a lower after-tax cost: ESOPs are unique among benefit plans in their ability to borrow money. The ESOP borrows cash, which it uses to buy company shares or shares of existing owners. The company then makes tax-deductible contributions to the ESOP to repay the loan, meaning both principal and interest are deductible. 3 - To create an additional employee benefit: A company can simply issue new or treasury shares to an ESOP, deducting their value (for up to 25% of covered pay) from taxable income. Or a company can contribute cash, buying shares from existing public or private owners. In public companies, which account for about 5% of the plans and about 40% of the plan participants, ESOPs are often used in conjunction with employee savings plans. Rather than matching employee savings with cash, the company will match them with stock from an ESOP, often at a higher matching level. TAX BENEFITS 1 - Contributions of stock are tax-deductible: That means companies can get a current cash flow advantage by issuing new shares or treasury shares to the ESOP, albeit this means existing owners will be diluted. 2 - Cash contributions are deductible: A company can contribute cash on a discretionary basis year-to-year and take a tax deduction for it, whether the contribution is used to buy shares from current owners or to build up a cash reserve in the ESOP for future use. 3 - Contributions used to repay a loan the ESOP takes out to buy company shares are tax-deductible: The ESOP can borrow money to buy existing shares, new shares, or treasury shares. Regardless of the use, the contributions are deductible, meaning ESOP financing is done in pretax dollars. 4 - Sellers in a C corporation can get a tax deferral: In C corporations, once the ESOP owns 30% of all the shares in the company, the seller can reinvest the proceeds of the sale in other securities and defer any tax on the gain. 5 - In S corporations, the percentage of ownership held by the ESOP is not subject to income tax at the federal level (and usually the state level as well): That means, for instance, that there is no income tax on 30% of the profits of an S corporation with an ESOP holding 30% of the stock, and no income tax at all on the profits of an S corporation wholly owned by its ESOP. Note, however, that the ESOP still must get a pro-rata share of any distributions the company makes to owners. 6 - Dividends are tax-deductible: Reasonable dividends used to repay an ESOP loan, passed through to employees, or reinvested by employees in company stock are tax-deductible. 7 - Employees pay no tax on the contributions to the ESOP, only the distribution of their accounts, and then at potentially favorable rates: The employees can roll over their distributions in an IRA or other retirement plan or pay current tax on the distribution, with any gains accumulated over time taxed as capital gains. The income tax portion of the distributions, however, is subject to a 10% penalty if made before normal retirement age.

Question 27

1 Do pension plans limit investment in employer securities? 2 Do pension plans offer flexible funding

Answer 27

1 Yes 2 No

Question 28

Are payments made directly to health care providers considered gifts?

Answer 28

No

Question 29

Interest free loans under what amount result in no gift consequences?

Answer 29

100,000

• With a larger below-market loan, the $100,000 loophole may save you from tax-related grief. You’re eligible for this loophole as long as the aggregate balance of all outstanding loans (with below-market interest or otherwise) between you and the borrower is $100,000 or less.
• Income tax consequences under this loophole: The taxable imputed interest income to you is zero as long as the borrower’s net investment income for the year is no more than $1,000.
• If the borrower’s net investment income exceeds $1,000, your taxable imputed interest income is limited to his or her actual net investment income.

10,000

• For small below-market loans, the IRS lets you ignore the imputed gift and imputed interest income rules. To qualify for this loophole, any and all loans between you and the borrower in question must aggregate to $10,000 or less. If you pass this test, you can forget all the nonsense about imputed gifts and d interest.
• Beware: The $10,000 aggregate loan limit applies to all outstanding loans between you and the borrower, whether or not they charge interest equal to or above the AFR.
• Key Point: You cannot take advantage of the $10,000 loophole if the borrower uses the loan proceeds to buy or carry income-producing assets.

EXAMPLE

Income Tax

• You make a $100,000 interest-free loan to your beloved niece who has $200 of net investment income for the year. Your taxable imputed interest income is zero. However if your niece’s net investment income is $1,200, your imputed interest income is $1,200. In most cases, the borrower will have under $1,000 of net investment income. If so, you’ll have zero imputed interest income under the tax rules. Good!

Gift Tax

• Gift tax consequences under this loophole: The gift tax results under the $100,000 loophole are tricky, but they will almost never have any meaningful impact under the current federal gift and estate tax regime. Reason: the unified federal gift and estate tax exemption for 2019 is $11.4 million, and the exemption is scheduled be even bigger next year thanks to an inflation adjustment. Such ultra-generous exemptions mean almost a zero percent chance of any negative gift tax consequences from making a below-market loan. But if the Sanders-Warren ticket wins in 2020, you might want to check back with me for an update.

I

Question 30

What is a charitable remainder trust?

Answer 30

An irrevocable trust that pays a % of trusts assets each year and allows for the PV to be deducted as a charitable income tax deduction for the current year (i.e. when the trust was established)

You can name yourself or someone else to receive a potential income stream for a term of years, no more than 20, or for the life of one or more non-charitable beneficiaries, and then name one or more charities to receive the remainder of the donated assets.

Income tax deductions: With a CRT, you have the potential to take a partial income tax charitable deduction when you fund the trust, which is based on a calculation on the remainder distribution to the charitable beneficiary.

Beneficiary: the named income beneficiary will pay income tax on the income stream received.

Preserve the value of highly appreciated assets: For those with significantly long-term appreciated assets, including non-income-producing property, a CRT allows you to contribute that property to the trust and when the trust sells it is exempt from tax. By donating the assets in-kind to the CRT, you’ll preserve the full fair market value of the assets rather than reduce it by large capital gains taxes, allowing more money for the income and charitable beneficiaries.

Question 31

During the current year, Mr. Kabel made gifts of the following items to his son: A bond with an adjusted basis of $12,000 and a fair market value of $40,000. Stock with an adjusted basis of $22,000 and a fair market value of $33,000. An auto with an adjusted basis of $12,000 and a fair market value of $14,000. An interest-free loan of $6,000 for a computer (personal use) on January 1 of the current year; the loan was repaid by the son on December 31 of the current year. Assume the applicable federal rate was 8% per annum. What is the gross amount of gifts includible on Mr. Kabel’s gift tax return for the current year?

Answer 31

$87k - Gifts loans of $10,000 or less are not subject to gift tax unless the donee uses the proceeds to purchase income-producing property.

Basis only relevant to determine carryovers

Question 32

Assume you bought 100 shares of XYZ stock for $60 per share with an initial margin of 50% and a 30% maintenance margin. What will be the amount of the margin call if the stock drops to $40 per share?

Answer 32

$200

40*100= $4,000 (current value)

5*60*100= $3,000 (Initial Margin)

$4k (current value) - $3k (borrowed amount) = $1k (Current Equity)

$4k*.3 = $1,200 (Required Equity)

$1,200 - $1,000 = $200 (cash required)

Question 33

Randy, age 40 and not a key employee, has employer-provided group term life insurance equal to twice his salary of $75,000. He makes a monthly contribution to pay for the insurance of $5. Randy’s wife Pamela is the sole beneficiary. The employer’s actual cost for Randy’s life insurance protection is $0.25 per month per $1,000 of death benefit, and the uniform premium for group term under the Internal Revenue Code is $0.17 per month per $1,000 of death benefit. What annual amount must Randy report for federal income tax purposes as a result of his group term insurance benefit?

Answer 33

Need to know that group term premiums are tax exempt up to $50k in coverage. Find excess coverage over $50k = $75k*2 - $50k = $100k IRC cost per $1k = $.17 Monthly cost = $100k/$1k *.17 = $17 Yearly cost = $17*12 $204 Taxable amount = IRC Cost - annual employee contribution ($60) = $144

Question 34

Mark, a financial professional, has been providing financial planning services to Peter for 25 years. Peter is widowed and has an adult son who lives in the same city as Peter. When Mark began his professional relationship with Peter, Peter was 50 years old and mentally sharp. Recently, however, Mark has noticed that Peter sometimes seems confused during their meetings and is unable to remember details about his own financial status. Despite his confusion, Peter has asked Mark to update his estate plan and to make major changes to several key provisions of his will. Which of the following actions is(are) appropriate for Mark in this situation? 1. Advise Peter’s son of Peter’s requests concerning his estate plan and ask him to accompany Peter on any future meetings. 2. Counsel Peter on the advisability of appointing someone, such as his son or an attorney-in-fact, to assist him in handling his affairs. 3. Refer Peter to other professionals, such as medical providers or eldercare specialists, who may be able to help Peter address his diminished capacity.

Answer 34

2 and 3 only

Question 35

Lance, age 60, has been investing $350 in a tax-deferred fixed annuity at the end of each month for the last 10 years and has been earning a compound return of 6%. If Lance withdraws all of the money from his account today, will he have enough money after paying taxes at 15% to purchase a motor home for $56,000?

A)Yes, because he has $57,358 to purchase the motor home.

B)Yes, because he has $59,200 to purchase the motor home.

C)No, because he has only $55,054 to purchase the motor home.

D)No, because he has only $48,754 to purchase the motor home.

Answer 35

C Cost Basis = 350 x 12 x 10 = 42,000

Future Value = - End - 12 P / YR - N = 10 - I% = 6 - PV = 0 - PMT = -350 - FV = 57,357.77

Tax = 57,357.77 - 42,000 = 15,357.77 x .15 =2,303.67

don’t forget cost basis

Question 36

John and Patty have newborn twin boys. John, a financial professional, knows the importance of planning ahead and wants to begin saving for their boys’ college education. John and Patty estimate the annual tuition to be about $25,000 (in today’s dollars) per child. Although inflation has averaged 4% overall, the cost of education has been increasing at an average rate of 6% per year. To fund 4 years of college for each boy beginning in 18 years, how much must John and Patty save at the end of each year for the next 18 years? Assume that John and Patty invest in equities and can earn an after-tax annual return of 9%. (Round to the next multiple of $100.) A)$4,600. B)$6,700. C)$13,300. D)$9,200.

Answer 36

C

Step 1

• FV = ?
  
  • 54,696
• N = 18
• PMT = 0
• PV = - 50,000
• I = 6%

Step 2 (Need to use beginning mode) to calculate school costs

• PMT = $142,717 (FV From step 1)
• N = 4
• I = (1.09 / 1.06) - 1 (Remember - Real Rate of Return = [(1 + Nominal Rate) / (1 + Inflation Rate)] - 1
• FV = 0
• PV = ?
  
  • PV = -547,729.52

Step 3 (switch back to end mode)

• N = 18
• I = 9%
• PV =
• FV =

Question 37

Robert has a net worth of $200,000 before any of the following transactions: Paid off credit cards of $10,000 using funds from his savings account. Transferred $4,000 from his checking account to his IRA. Purchased $2,000 of furniture on credit. What is Robert’s net worth after these transactions?

Answer 37

$200k

Question 38

Which of the following statements regarding Coverdell Education Savings Accounts (ESAs) are CORRECT?: 1. Contributions to an ESA are tax deductible. 2. Distributions from an ESA are tax free if used for qualified education expenses. 3. The ability to make ESA contributions is phased out at higher levels of modified adjusted gross income (MAGI). 4. Contributions to an ESA are limited to $2,000 per year per child.

Answer 38

2, 3, and 4 They are NOT tax deductible Any individual (including the designated beneficiary) can contribute to a Coverdell ESA if the individual’s MAGI for the year is less than $110,000. For individuals filing joint returns, that amount is $220,000. Coverdell Advantages Self-Directed - overdell’s are self-directed, whereas 529 plans are limited to the state’s selected investment options (much like an employer has limited investment options in a 401K). 529 Advantages Contribution Limit: The $2,000 annual maximum is much lower than 529’s, which often don’t set limits (varies by state). The money you put in a 529 account is considered a gift and, as such, qualifies for the annual $15,000 (2018/2019) gift tax exclusion. That is, you can contribute up to $15,000 annually, per beneficiary, without incurring any gift tax. Income Limit: See above Tax Credits and Deductions: If your state offers a state income tax deduction or credit for contributions to its 529 plan (as many do) you should definitely take advantage of that prior to putting any money away in a Coverdell (as they do not offer state benefits). Age Limit: Coverdell balances must be spent by age 30 or taxes and penalties could apply. They can, however, be transferred to another beneficiary or rolled in to a 529 plan. 529’s have no age limit

Question 39

It is important that financial planners used open-ended questions whenever possible. Which of the following questions is(are) open-ended? 1. Do you have an IRA? 2. What are your financial goals in terms of retirement? 3. What are your feelings about investing in the stock market?

Answer 39

2 and 3

Question 40

Rob built a house several years ago in New Orleans. The replacement value has increased to $200,000. Rob originally purchased insurance on the house under a homeowners broad form HO-2 policy in the amount of $150,000. The policy contains an 80% coinsurance clause. The roof of the house has been damaged by fire. Since the home was built, the roof had depreciated by 25%. The cost to replace the roof will be $20,000. How much will Rob collect from his policy? A)$0; Rob did not meet the coinsurance requirement B)$20,000 less the deductible. C)$15,000 less the deductible. D)$18,750 less the deductible.

Answer 40

D Amount carried / Should have carried ($150k / ($200k*.8) = $150 / $160 = 93.75% 93.75% * $20,000 = $18,750

Question 41

BCD Corporation is in the process of promoting a new bond issue to a wealthy potential private investor. The bonds will feature a 5.5% coupon, a par value of $1,000, a 30-year maturity, and an A rating. The issue is callable in 10 years for 103% of par value. Assuming the bond will be priced at par, which of the following statements is(are) CORRECT? 1. With an A rating, the bond is not considered investment grade. 2. The yield to call is 5.73%. 3. The call price is $1,030.

Answer 41

2 and 3 Call price = Par Value * 103% = $1,030 Yield to call = FV = $1,030 PV = - $1,000 I/Y = ? * 2 PMT = $55/2 N = 10 *2

Question 42

Which of the following investment strategies could be considered a protective strategy? A)Selling a stock short. B)Selling a call option on a stock you own. C)Purchasing stock index futures. D)Buying a put on a stock already owned.

Answer 42

D

Question 43

Janice, age 50, wants an investment that will offer her the opportunity for long-term growth with moderate risk. She wants a customized portfolio based on an asset-based fee structure. Which of the following would be the best choice for Janice? A)S&P 500 Index exchange-traded fund. B)Growth and income mutual fund. C)Large-cap growth separately managed account. D)Balanced mutual fund.

Answer 43

C The best choice for Janice is the large-cap growth separately managed account. This type of investment account offers a customized portfolio approach and an asset-based fee structure for portfolio management services

Question 44

Which of the following statements regarding bonds is(are) CORRECT? 1. Lower coupon bonds are more volatile than higher coupon bonds as interest rates change. 2. Bond prices and changes in interest rates have an inverse relationship. 3. A direct relationship exists between coupon rates and duration.

Answer 44

1 and 2

Question 45

The greater a bond’s duration, the ______ the price volatility

Answer 45

greater

Question 46

The coupon rate and duration of a bond have a ______ relationship

Answer 46

inverse

Question 47

When bond prices increase, interest rates must be ____

Answer 47

decreasing

Question 48

Lower coupon bonds are ____ volatile than higher coupon bonds as interest rates change

Answer 48

more

Question 49

Recently, Vance inherited a large amount of one stock from his late Aunt Carol. Vance’s basis in the stock is $500,000. He is concerned that the stock may decline in value in the near future. What is the best investment strategy that he could use to protect the stock from substantial downside risk? A)Stock index futures B)Zero-cost collar C)Purchase a put option D)Write a call option

Answer 49

C A - Stock Index Futures - Index futures are futures contracts whereby investors can buy or sell a financial index today to be settled at a date in the future. Index futures are used to bet on the direction of an index such as the S&P 500. Investors and investment managers also use index futures to hedge their equity positions against losses. An investor decides to speculate on the direction of the S&P 500. Index futures for the S&P 500 are valued at $250 multiplied by the index value. The investor buys the futures contract when the S&P index is valued at 2,000, resulting in a contract value of $500,000 (or 2000 x 250). Since index futures contracts don’t require the investor to put up 100% of the contract, the investor is only required to maintain a small percentage in a brokerage account. Scenario 1: The S&P index falls to 1900, and the futures contract is now only worth $475,000 (or 1900 x 250). The investor has incurred a $25,000 loss. Scenario 2: If the index increases to 2100, the futures contract is now worth $525,000 (or 2100 x 250). The investor has earned a $25,000 profit. B - A zero cost collar is a form of options collar strategy to protect a trader’s losses by purchasing call and put options that cancel each other out. The downside of this strategy is that profits are capped, if the underlying asset’s price increases. A zero cost collar strategy involves the outlay of money on one half of the strategy offsetting the cost incurred by the other half.

Question 50

Which of the following statements regarding employee elective deferrals under a Section 401(k) plan is(are) CORRECT? A)These contributions are not subject to federal income tax or FICA. B)These contributions are not subject to FICA but are subject to federal income tax. C)These contributions are subject to FICA but not to federal income tax at the time of contribution to the plan. D)The actual deferral percentage (ADP) for highly compensated employees in a Section 401(k) plan cannot be more than the ADP of the nonhighly compensated employees multiplied by 1.50.

Answer 50

C Employee Elective Salary Deferrals - Pre-Tax (1) FICA and Medicare Withholding - YES (2) Federal Income Tax - NO Employee Elective Salary Deferrals - Roth (1) FICA and Medicare Withholding - YES (2) Federal Income Tax - YES Employer Matching and NonElective Contributions (1) FICA and Medicare Withholding - NO (2) Federal Income Tax - NO

Question 51

Vicki, age 62, has a net worth of $540,000. Her home has a fair market value of $250,000. She recently had a stroke and is paralyzed. Vicki has 2 children and 6 grandchildren. As her financial planner, which of the following would you recommend? 1. Transfer the house to an irrevocable trust in an effort to qualify for Medicaid immediately. 2. Transfer both the house and contents to a revocable living trust to avoid probate. 3. Give 1 of the adult children a durable power of attorney for health care. 4. Gift $14,000 to every child and grandchild each year.

Answer 51

2 and 3 Medicaid - Establishing an irrevocable Medicaid trust can help protect assets from liquidation when the need for an extended nursing home stay arises. When this strategy works, a loved one’s admission to a long-term care facility does not result in a substantial spend-down of investments, and wealth can be preserved and transferred to the next generation. But a strategy involving placing assets into an irrevocable arrangement should not be entered into lightly, especially if there are viable alternative protection strategies available. How the Strategy Works Establishing an irrevocable Medicaid trust can help protect assets from liquidation when the need for an extended nursing home stay arises. When this strategy works, a loved one’s admission to a long-term care facility does not result in a substantial spend-down of investments, and wealth can be preserved and transferred to the next generation. But a strategy involving placing assets into an irrevocable arrangement should not be entered into lightly, especially if there are viable alternative protection strategies available.

Question 52

The Severn Partnership has 4 partners. The partners have entered into a binding buy-sell agreement that requires the surviving partners to purchase the partnership interest of the first partner to die. The partners used a cross-purchase agreement, but the agreement remains unfunded. If the partners decide to use life insurance as a funding vehicle, how many policies will be required? A)4. B)12. C)1. D)16.

Answer 52

B Each Partner needs to own 3 policies, thus 4 x 3 = 12 Term life insurance is affordable and straightforward Whole life doesn’t expire but is more expensive

Question 53

On January 15, of last year, Tim transferred property to a trust, which he retained the right to revoke. The trust pays Amy 5% of the trust assets valued annually for her life, with the remainder to be paid to a qualified charity. What type of arrangement did Tim create? A)None of these. B)CRAT. C)CRUT. D)CLAT.

Answer 53

A - Revocable CRUT (Charitable Remainder Unity Trust) Charitable are irrevocable not revocable CRAT (Charitable Remainder Annuity Trust) CLAT (Charitable Lead Annuity Trust)

Question 54

A client consults a financial professional for help in formulating an estate plan. The client is in poor health and expects to die within the next 3 to 4 years. He has a large estate and would like to begin taking steps to reduce any estate tax that might be due at his death. The client is a widower with 1 adult daughter. The client owns the following property in his name alone: A life insurance policy insuring his own life, with a death benefit of $5 million A personal residence with a market value of $6 million A brokerage fund with a balance of $10 million Which of the following steps should the client implement first to meet his objectives? A)Transfer ownership of the life insurance policy to his daughter. B)Transfer his residence to an irrevocable living trust. C)Add his daughter’s name to the brokerage account as JTWROS. D)Gift the residence to his daughter.

Answer 54

A Life insurance of a client is included in their gross estate if the client dies and the policy lists he/she as owner. To avoid this the client would need to transfer ownership of the policy more than 3 years prior to his/her death The 3-year rule does not apply to gifts of residence to an irrevocable trust or residence to someone else directly In a Goodman triangle, three parties are involved: the insured, the policy owner, and a beneficiary of the insurance policy who is not the policy owner. In the event of the insured’s death, the death benefit is considered a taxable gift from the policy owner to the beneficiary.

Question 55

Megan has a financial planning practice in Atlanta, Georgia. She is meeting with her clients, Mason and Della Sinclair, to present them with a financial plan she has developed for them. Mason and Della had communicated to Megan that one of their goals is to follow their families’ southern tradition and throw their pre-teen daughter, Dixie, a very expensive debutante party in four years. Megan, having grown up in the Midwest, does not understand the purpose of these kinds of celebrations and feels they are a waste of money. What is the best way for Megan to proceed with her clients? A) Megan should advise the Sinclairs how this goal will impact their overall financial plan. B) Megan should offer Mason and Della her opinion regarding the extravagance of the debutante party. C) Because this is not a good use of the Sinclairs’ money, Megan should not include it in their plan as a goal. D) Megan should offer alternatives that would be less expensive.

Answer 55

A

Question 56

Edwin, age 83, is a wealthy investor with a net worth of $10 million. He wants to begin gifting his assets to friends and family members, as long as he can do so without incurring any generation-skipping transfer tax (GSTT) or using any of his lifetime GSTT exemption. The people to whom he would like to make gifts include the following: His ex-wife, Lisa, age 40 His former daughter-in-law, Sheila, age 35, who was married to his son, Doug, until 2 years ago His granddaughter, Claire, age 22 All of Edwin’s children are still living. Which of the following recommendations will achieve Edwin’s objectives of avoiding any generation-skipping transfer tax (GSTT) and not using any of his lifetime GSTT exemption? 1. Make a cash gift of $100,000 to Lisa 2. Make a cash gift of $100,000 to Sheila 3. Make a cash gift of $100,000 to Claire

Answer 56

1 and 2

Question 57

Which of the following are required to register with the SEC as registered investment advisers? A)Publishers of business and financial publications of general and regular circulation. B)Lawyers or accountants who provide limited advice regarding securities. C)Individuals who advise clients on only Treasury bills, Treasury notes, and Treasury bonds. D)None of these.

Answer 57

D

Question 58

Which of the following items would NOT be included on a statement of financial position? 1. Adjusted tax basis of a real estate investment 2. Investment income 3. Fair market value of automobiles 4. Mortgage payments

Answer 58

1, 2, and 4

Question 59

Louie, a representative for a large pharmaceutical corporation, would like to purchase a home. Up to this point, he has been renting a condo in fear that he may have to relocate within the next three to five years. However, he would like to own a place of his own. If Louie finds the right home for himself, which mortgage should he choose? A)30-year fixed FHA B)5-year adjustable rate mortgage C)None of these choices are appropriate D)15-year fixed conventional

Answer 59

B If expecting to be in home for a short time period then an adjustable rate mortgage (ARM) should be considered

Question 60

Adjustable rate mortgages usually have __________ interest rates than 30 year conventional mortgages

Answer 60

lower

Question 61

What is a major downside risk to Adjustable Rate Mortgages?

Answer 61

If interest rates increase, your mortgage payment could also increase

Question 62

A young, single client approaches a financial planner with $12,000 stating that she would like to develop a financial plan and invest in the stock market. This is her first experience investing and she would like help choosing an appropriate account. What is the financial planner’s most appropriate course of action? A)Recommend suitable investments B)Determine whether the client has any consumer debt C)Open and fund a Roth IRA for the current year D)Open a brokerage account

Answer 62

B

Question 63

Ryan and Kim have a 2-year old son, Michael. One of their goals is to begin saving now for Michael’s high school education at River Oaks Academy. After analyzing Ryan and Kim’s financial statements and other relevant information, you conclude that they should save $2,000 at the beginning of the year for the next 12 years. Which of the following education planning vehicles is the most appropriate recommendation for Ryan and Kim? A)Section 529 plan B)Coverdell Education Savings Account C)Series EE savings bonds D)Lifetime Learning Credit

Answer 63

A or B In 2018, President Trump expanded the ability for people to use 529 plan money to pay for private elementary and secondary school. This addition to the Tax Cuts and Jobs Act allows up to $10,000 per year to be withdrawn tax free if used for qualifying tuition expenses. There are two types of 529 plans: prepaid tuition plans and education savings plans. All fifty states and the District of Columbia sponsor at least one type of 529 plan. In addition, a group of private colleges and universities sponsor a prepaid tuition plan. Unlike IRAs or 401(k)s, there are no annual contribution limits for 529 plans. However, there are maximum aggregate limits, which vary by plan. Under federal law, 529 plan balances cannot exceed the expected cost of the beneficiary’s qualified higher education expenses. Limits vary by state, ranging from $235,000 to $529,000.Individuals may contribute as much as $75,000 to a 529 plan in 2019 if they treat the contribution as if it were spread over a 5-year period. The 5-year election must be reported on Form 709 for each of the 5 years. For example, a $50,000 529 plan deposit in 2019 can be applied as $10,000 per year, leaving $5,000 in unused annual exclusion per year. This is often a great estate-tax planning strategy for parents and grandparents. They’re able to shelter a large amount of assets from estate taxes, while retaining control of the funds in the 529 account. However, if you do end up changing your mind down the road and revoking the funds in the account they will be added back to your taxable estate Coverdell Education Savings Account- At its most basic level, Coverdell ESA’s are self-directed custodial investment accounts that can be used to pay for qualified education expenses. Coverdell ESA’s are not tax-deductible, but earnings grow tax deferred, and distributions are tax-free so long as they are used for qualified education expenses.

Question 64

What is the lifetime learning credit

Answer 64

tax credit that may be used for post secondary education Eligibility: Student does not need to be pursuing a degree or other recognized education credential. Credit Amount: up to $2,000 of the cost of tuition, fees and course materials paid during the taxable year per tax return. How to Claim: Determine your eligibility, credit amount, and claim the credit by filling out IRS Form 8863. Refundability: This credit is non-refundable. This means you cannot get a refund if you owe zero tax. Income Limits: a taxpayer whose modified adjusted gross income is $57,000 or less ($114,000 or less for joint filers) in 2018 can claim the credit for the qualified expenses on a tax return. The credit is reduced if a taxpayer’s modified adjusted gross income exceeds those amounts. A taxpayer whose modified adjusted gross income is greater than $67,000 ($134,000 for joint filers) cannot claim the credit. These limits are indexed to inflation and change annually. School Eligibility: Available for all years of post-secondary education and for courses to acquire or improve job skills. Does not need to be an accredited institution. Credit can be Received for: Tax credit can be received for 20% of the first $10,000 for tuition, and required fees and course materials. Ineligible Expenses: You cannot receive a credit for: room and board, insurance, transportation, expenses paid with tax-free assistance, medical expenses, expenses used for another deduction or credit, and student fees that are not required as condition of enrollment or attendance. Compare AOTC vs. LLC (1) You cannot claim both the American Opportunity Credit and the Lifetime Learning Credit within the same calendar year for the same student (although you could claim both for two different students). (2) Year Limit AOTC = for same student, only 4 years Lifetime = no yearly limit based on same student’s expenses (3) Refundable? AOTC = Partially Lifetime = No (4) Credit Amount AOTC = 2,500 Lifetime = 2,000

Question 65

John, age 55, is unmarried and retired. He has the following liquid assets on deposit at Allworld Bank, an FDIC-insured financial institution: Account Ownership Balance Certificate of deposit John $225,000 Savings account Joint with son $70,000 Rollover traditional IRA John $150,000 Checking account John $80,000 What amount is insured by the FDIC?

Answer 65

$470,000 = (225,000 + 80,000) = 250,000 (70,000) = 70,000 (150,000) = 150,000 All categories of accounts can be insured up to $250k But similar accounts are aggregated together (checking, savings, CDs, etc. Joint accounts are separately insured for $250k The standard deposit insurance amount is $250,000 per depositor, per FDIC-insured bank, per ownership category. Single Account - All single accounts owned by the same person at the same bank are added together and insured up to $250,000. (1) An account established by an agent or custodian for one person (2) A business account for a sole proprietorship (3) An account representing a deceased person’s funds Retirement Account -All retirement accounts listed below owned by the same person at the same bank are added together insured up to $250,000. (1) Individual Retirement Accounts (IRA) (2) Self-directed defined contribution plans such as a 401k or profit-sharing plan (3) Self-directed Keogh plan accounts Joint Account - Each co-owner’s shares of every joint account at the same insured bank are added together and insured up to $250,000. (1) Be living people (2) Have equal rights to make withdrawals (3) Sign the deposit account signature card (unless the account is a CD)_. Electronic signatures meet this requirement. Revocable Trust - All revocable trust accounts owned by the same person at the same bank are added together, and the owner is insured up to $250,000 per beneficiary. (1) A revocable trust can be revoked, terminated or changed at any time, at the discretion of the owner(s).The account title must disclose trust relationship with phrases such as Living/Family Trust, Payable on Death (POD), In Trust For (ITF). (2) Beneficiaries must be people, charities, or non-profit organizations, and must either be named in the bank records or identified in the trust document. Irrevocable Trust - Irrevocable trusts typically have contingent interests which results in the trust being insured for a maximum of $250,000, regardless of the number of beneficiaries designated. However, the non-contingent interests of a beneficiary in all irrevocable trusts established by the same owner and held at the same bank are added together and insured up to $250,000. (1) The owner contributes deposits or other property to the trust and gives up all power to cancel or change the trust. Employee Benefit Account - A deposit of a pension plan, defined benefit plan or other employee benefit plan that is not self-directed. $250,000 for the noncontingent interest of each plan participant Corporation, Partnership, or Unincorporated Association Account - Coverage Limit:$250,000 per corporation, partnership or unincorporated association (1) Deposits owned by corporations, partnerships, and unincorporated associations – including for-profit and not-for-profit organizations

Question 66

Ed is employed by ABC Trucking, where he is covered by a health insurance plan, a contributory long-term disability insurance plan, and a pension plan. Ed pays $40 per quarter and ABC pays $60 per quarter for a monthly disability benefit of $1,000 following a 60-day elimination (waiting) period. During the current year, Ed was disabled for 5 months. How much, if any, of the disability insurance benefits are taxable to Ed in the current year? A)$0. B)$3,000. C)$1,200. D)$1,800.

Answer 66

D - Disability Insurance Benefits are taxable to the extent of employer contributions 60 day elimination period means he only got benefits for 3 months $1,000*3 = $3k $3k * % of employer paid premium $3k * 60% = $1,800

Question 67

Sally purchased a single premium deferred annuity in 1980 at a cost of $42,000. Her lifetime annuity distributions of $833.33 per month will begin on September 1st of the current year, at which time her life expectancy will be 21 years. How much must Sally include in her gross income from this SPDA in the current year? (Round to the nearest dollar.) A)$2,000. B)$667. C)$8,000. D)$2,667.

Answer 67

D $833.33 * 12 * 21 = $210,000 $42k / $210k = 20% That makes 80% taxable 80% * $833.33 * 4 = $2,667 REMEMBER TO READ QUESTION - Only 4 months for current year.

Question 68

Which of the following statements regarding the death benefit of a universal life (UL) insurance policy is(are) CORRECT? 1. UL policies generally give the policyowner an option to adjust the death benefit. 2. Option A is known as the level death benefit option. 3. Most UL policies allow the policyowner to change insureds as needs change. 4. Option B is known as the increasing death benefit option.

Answer 68

1, 2, and 4 Universal life insurance is permanent life insurance with an investment savings element and low premiums like term life insurance Most universal life insurance policies contain a flexible premium option. However, some require a single premium (single lump-sum premium) or fixed premiums (scheduled fixed premiums). A universal life insurance option provides more flexibility than whole life insurance. Policyholders have the flexibility to adjust their premiums and death benefits. Universal life insurance premiums consist of two components: a cost of insurance (COI) amount, and a saving component, known as the cash value. As the name implies, the cost of insurance is the minimum amount of a premium payment required to keep the policy active. It consists of several items rolled together into one payment. COI includes the charges for mortality, policy administration, and other directly associated expenses to keeping the policy in force. COI will vary by policy based on the policyholder’s age, insurability, and the insured risk amount. Collected premiums in excess of the cost of insurance accumulate within the cash value portion of the policy. Over time, the cost of insurance will increase as the insured ages, however, if sufficient, the accumulated cash value will cover the increases in the COI

Question 69

UL Option A provides for a ____ Death Benefit

Answer 69

Level A level death benefit is a life insurance payout that is the same whenever the insured person dies, whether shortly after purchasing the policy or many years later. Compared to a policy that provides an increasing death benefit, one that provides a level death benefit will be less expensive (that is, the premiums will be lower for the same amount of initial benefit). However, inflation will diminish the value of the level death benefit over time. A whole life policy has two components: a cash value component and a pure insurance component. When the policy holder chooses the level death benefit, the value of the pure insurance component decreases over time to keep the death benefit the same while the policy’s cash value increases. If the policy holder chooses the increasing death benefit option, the pure insurance component will remain the same over time; so as the policy’s cash value increases, the death benefit increases. Term life insurance policies also offer a level death benefit; whether the policyholder dies five years into the term or 20 years into the term, the death benefit will be the same. Generally when under age 60, an increasing death benefit is better. When a policy purchaser is over age 60, a level death benefit works better simply because it’s more cost effective. Those in higher income brackets usually should also opt life insurance policies with an increasing death benefit. In a $500,000 whole life insurance policy with a level death benefit, as the premium is paid, fees and sales charges are deducted, and the remaining amount is credited to the cash value. The cost of insurance is then deducted from the cash value each month. Over time, as premiums are paid, the cash value of a policy increases, and the amount of insurance purchased each month gradually decreases. For example, in year two, a $500,000 policy has a cash value of $1,500 so only $498,500 of insurance is being purchased. Upon the death of the insured, the insurance company pays a death benefit that is partly insurance and partly a return of policy’s cash value. For example, assume the owner paid the premium for 15 years, and the policy had an accumulated a cash value of $65,000. The insurance company would pay $435,000 for insurance and return the $65,000 of cash value for a total benefit of $500,000.

Question 70

UL Option B provides for a _____ Death Benefit

Answer 70

Increasing The universal life insurance option B definition means that the potential policy proceeds gradually increase and equal the death benefit plus the accumulated cash value. Therefore, the net amount at risk to the insurance company remains the same over time – even as the cash value grows inside the contract. Conversely, if the policy is a UL with an increasing death benefit, upon the death of the insured, the beneficiary would receive $500,000 of insurance plus any accumulated cash value. In UL policies with an increasing death benefit, the owner is always buying $500,000 of insurance. However, the growth of the cash value depends on the amount of premium paid. If the premium is the same as a levelized death benefit policy premium would be, the cash value in the policy with an increasing death benefit would likely be lower since more insurance is being purchased each month. Terms of WL policies are distinct in that dividends are used to buy additional insurance, thus increasing death benefit by small increments as additional insurance is purchased each year.

Question 71

Can you change insureds on UL policies?

Answer 71

no

Question 72

Do UL policies allow the policy owner the option to adjust the DB?

Answer 72

yes

Question 73

Lisa is 40 years old, but her youthful looks allow her to pass for 35. She just applied for a $20,000 life insurance policy and stated on her application that she was 35 years old. The premium for a 35 year old is $15 per $1,000, which resulted in an annual premium of $300. Had she not misrepresented her age, the premium would have been $25 per $1,000 resulting in an annual premium of $500 for the same policy. Lisa dies unexpectedly just 1 year later at age 41. Assuming the insurance company discovers that she misstated her age on the application, what amount will be paid to Lisa’s beneficiary/beneficiaries? A)$10,000. B)$19,800. C)$12,000. D)$0.

Answer 73

C Real coverage = fake premium / real premium * fake benefit $300 / $500 * $20,000

Question 74

Until yesterday, Fred was employed by Avias Company. The company has a group health insurance plan that covers 24 employees. Fred’s health coverage included his spouse and 2 dependent children, ages 5 and 7. Which of the following events would qualify Fred, his spouse, or his dependents for COBRA coverage and for how long? 1. Fred’s death (36 months). 2. Termination of employment as a result of dismissal due to downsizing (36 months). 3. Divorce (29 months). 4. Legal separation (36 months).

Answer 74

1 and 4 Divorce, legal separation or termination of employment due to death qualifies the individual for 36 months of COBRA coverage. Qualifying events include death of the covered employee, termination of employment, including retiring, voluntary resignation, being laid off, and being fired for anything except gross misconduct, a change in status (e.g., full time to part time), divorce or legal separation causing the spouse and/or dependent children to lose coverage, child reaching an age where the child is no longer eligible to be covered, employee reaching Medicare age, and spouse and/or dependent child losing coverage as a result. Voluntary or involuntary termination qualifies the individual for 18 months of COBRA coverage. Employers are only obligated to offer COBRA coverage if: (1) they offer an employer-sponsored health insurance plan and, (2) they have at least 20 employees If you didn’t take part in your employer’s insurance plan, you will not qualify for coverage.

Question 75

Jack, age 36, is a self-made millionaire and enjoys taking financial risks. He would like to retire by age 60. He has amassed a sizable portfolio, but he is concerned the allocation is not maximizing growth. He is willing to take risks to achieve higher long-term returns. Which of the following portfolios would be most suitable for Jack to meet his retirement goal? A)Portfolio 1 - 20% S&P 500 Index Fund, 50% Small-Cap Growth Fund, 25% International Stock Fund. B)Portfolio 2 - 50% Russell 2000 Index Fund, 20% Corporate Bond Fund, 20% Biotechnology Fund, 10% Energy Sector Fund. C)Portfolio 4 - 60% S&P 500 Index Fund, 10% Small-Cap Growth Fund, 10% Foreign Stock Fund, 10% Pacific Rim Growth Fund, 10% Corporate Bond Fund. D)Portfolio 3 - 40% Small-Cap Growth Fund, 20% Corporate Bond Fund, 15% Utilities Stock Fund, 15% Foreign Stock Fund, 10% Municipal Bond Fund.

Answer 75

C Portfolio 4 is the best choice for Jack based on his age and risk tolerance. A mix of 90% stocks and 10% bonds is appropriate for an investor who is willing to take risks to achieve higher long-term returns.

Question 76

Which of the following types of orders might an investor use to purchase stock on an exchange? 1. Stop order. 2. Good-til-cancelled (GTC) order. 3. Stop-limit order.

Answer 76

All of these Stop - limit loses Limit - lock in prices, if executed (no guarantee), then it will execute at a certain price or better. (1) Stop Order - Buy If price climbs above X, buy it! (2) Stop Order - Sell If the price falls below X, sell it! (3) Limit Order - Buy Buy at X or lower (4) Limit Order - Sell Sell at X or higher EXAMPLE Stop-Limit Buy Order (i) Stop = 45 (ii) Limit = 46 (iii) Current = 40 (iv) Once 45 is hit, the buy order becomes a limit order and will fill UNDER 46

Question 77

MB Mutual Fund had an alpha of 3% and a beta of 1.5 over the past year. If the risk-free rate has been 5% and the actual return for MB Mutual Fund has been 17%, what has been the market risk premium over this same period according to Jensen’s alpha?

Answer 77

6%

Question 78

Non-U.S. Government zero-coupon bonds may be subject to which of the following types of risk? 1. Default risk. 2. Reinvestment rate risk. 3. Purchasing power risk. 4. Interest rate risk.

Answer 78

1, 3 , and 4 Reinvestment rate risk is the risk that interim cash flows cannot be reinvested at a rate of return equal to the yield expected of the underlying investment. This risk does not apply to zero-coupon bonds because cash flows are received only at sale or maturity. Non-U.S. government zero-coupon bonds are subject to default risk, purchasing power risk, and interest rate risk. Default Risk = is the chance that companies or individuals will be unable to make the required payments on their debt obligations Purchasing Power Risk = is the chance that the cash flows from an investment won’t be worth as much in the future because of changes in purchasing power due to inflation. Interest Rate Risk = refers to the chance that investments in bonds – also known as fixed-income securities – will suffer as the result of unexpected interest rate changes. However, investors can somewhat mitigate interest rate risks by diversifying portfolios to include a multitude of different bonds that have varying maturation schedules. Investors may also thwart interest rate risk by hedging their fixed-income investments with interest rate swaps and other instruments

Question 79

The risk that interim cash flows cannot be reinvested at a rate of return equal to the yield expected of the underlying investment

Answer 79

Reinvestment Rate Risk

Question 80

Darby is single and has 2 dependents. Financial records show the following were received by Darby in the current year: Gift from a friend $12,000 Cash dividends received from domestic common stock $1,200 Prize won in state lottery $1,000 Salary from employer $35,000 Child support received from ex-spouse $6,000 Alimony receieved from ex-spouse $12,000 Long term capital loss $5,000 What is Darby’s adjusted gross income (AGI) for the current year?

Answer 80

$34,200 You can only deduct $3k of the LTC loss Gifts, Child Support, and Alimony received for divorces after 2019 will not be included in the income People who are already divorced will be grandfathered in, but if their agreements are modified in 2019 or beyond, they could be subject to the new rules, too.. If the modification states that it is to be governed by the new rules, then the new rules will apply. If the modification says nothing, however, the old rules will apply.

Question 81

Which of the following is included in AMTI for calculating the alternative minimum tax for an individual taxpayer? 1. Excess accelerated depreciation over straight line on equipment. 2. Excess of depletion deduction over the adjusted basis. 3. Excess of fair market value above the exercise price if exercised for freely transferable ISOs. 4. Net appreciation on long-term capital gain property donated to a public charity.

Answer 81

1 , 2, and 3 (I) LIMITATION ON OVERAL ITEMIZED DEDUCTIONS Years before 2018 and after 2025: For years before 2018 and after 2025, the overall limitation on itemized deductions is an adjustment for AMT. Tax payers subject to the limitation subtract the limitation amount in calculating AMTI. Years 2018 through 2025: The 2017 Tax Cuts and Jobs Act suspended the overall limitation on itemized deductions for the years 2018 through 2025, so this adjustment is not necessary for years 2018 through 2025. (II) MISCELLANEOUS ITEMIZED DEDUCTIONS Years 2018 through 2025: The 2017 Tax Cuts and Jobs Act eliminated the deduction for miscellaneous itemized deductions subject to the 2% of AGI floor (as defined in Code Sec. 67(b)) for the years 2018 through 2025. Therefore, no AMT adjustment for miscellaneous itemized deductions is necessary in those years (III) STATE, LOCAL, AND FOREIGN TAXES No deduction is allowed in calculating AMTI for the taxes listed in Code Secs. 164(a) and 164(b)(5)(A). Therefore, an individual taxpayer must add back deductions for these taxes in calculating AMTI. These taxes include: (I) State, local, and foreign income, war profits, and excise taxes. (II) State, local, and foreign real property taxes. (III) State and local personal property taxes. (iv) State, local, and foreign taxes paid or accrued in carrying on a trade or business or an activity for the production of income. (v) State and local sales taxes deducted in lieu of income taxes. (IV) STANDARD AND PERSONAL EXEMPTIONS The 2017 Tax Cuts and Jobs Act reduced the personal exemption amount to zero for the years 2018 to 2025, so no adjustment for personal exemptions is necessary in these years. However, the adjustment for the standard deduction remains in force in 2018 through 2025, and taxpayers taking the standard deduction must still add it back in calculating AMTI. (V) MEDICAL EXPENSES Medical and dental expenses in excess of 7.5% of AGI were deductible for regular tax, but were only deductible in excess of 10% for AGI for AMT. The difference between the deduction for regular tax and for AMT was added back in calculating AMTI. Years 2013 through 2016For 2013 through 2016, for most taxpayers, the deduction for medical and dental expenses was subject to the same floor (10% of AGI) for regular tax and AMT, so no adjustment was generally necessary. However, in these years, a transitional rule in Code Section 213(f) allowed taxpayers 65 years and older to continue deducting medical and dental expenses in excess of 7.5% of AGI for regular tax purposes. However, this rule did not apply in determining the AMT deduction. Therefore, taxpayers subject to the transitional rule might have an adjustment for medical and dental expenses in 2013 through 2016 Years 2017 and 2018: Under changes made by the tax cuts and jobs Act, medical and dental expenses are deductible for regular tax and AMT to the extent they exceed 7.5% of a taxpayer’s AGI. Therefore, no adjustment is necessary for medical and dental expenses for 2017 and 2018. Years after 2018: Under the 2017 Tax Cuts and Jobs Act, the floor for the medical and dental expense deduction reverts to 10% of AGI for regular tax and AMT. Therefore, no adjustment will be necessary for medical and dental expenses for years after 2018. (VI) INTEREST EXPENSE The rules for deducting mortgage interest are more restrictive for AMT than for regular tax. If a taxpayer can deduct more mortgage interest for regular tax than for AMT, the difference is an adjustment that the taxpayer adds back in calculating AMTI. Mortgage interest, years 2018 through 2025: For 2018 through 2025, due to changes made by Tax Cuts and Jobs of 2017, only interest on acquisition indebtedness of $750,000 is deductible as QRI. Because this limitation amount is the same for regular tax and AMT, QRI that is deductible for regular tax will generally be deductible for AMT. However, an AMT adjustment may still be required for some taxpayers because the “qualified dwelling” requirement described above still applies in these years for the deduction of interest on a taxpayer’s second residence for AMT. If the second residence is a qualified residence but not a qualified dwelling, the interest may be QRI that is deductible for regular tax, but not QHI that is deductible for AMT. If so, an adjustment will be necessary. Another change for years 2018 through 2025 is that the separate regular tax deduction for home equity indebtedness interest is suspended. Because of the suspension of the home equity interest deduction, interest on a home equity loan is only deductible for regular tax if the taxpayer uses the loan proceeds to buy, build, or improve a qualified residence that secures the loan. Consequently, if the interest on a home equity loan is deductible for regular tax, it is also deductible for AMT and no AMT adjustment will be necessary for the interest. EXAMPLE: The facts are the same as the previous example, except the year is 2018. For regular tax, T will be able to deduct the interest of the original mortgage loan for his home and the loan for his boat, but not the interest on the home equity loan because the proceeds of the loan were not used to buy, build or improve T’s qualified residence that secures the loan. For AMT, T will only be able to deduct the interest on the original home loan. T must add back the interest on the boat loan in calculating his AMTI. Investment interest: The difference between the regular tax deduction for investment interest and the AMT deduction for investment interest is an AMT adjustment. For regular tax purposes, an individual taxpayer can deduct investment interest to the extent of his or her net investment income. A taxpayer also can deduct investment interest to the extent of net investment income for AMT purposes, but the amount deductible may be greater or smaller than the amount deductible for regular tax, because of the following differences in the AMT investment interest rules:  AMT items taken into account: In determining net investment income for AMT purposes, the taxpayer must take into account AMT adjustment items under Code Secs. 56, 57 and 58, as well as the preference for interest on specified private activity bonds.  Interest on debt used to purchase specified private activity bonds: Interest on borrowed funds used to purchase specified private activity bonds are investment interest for AMT, up to the amount of the interest earned on the bonds.  Mortgage interest: For regular tax purposes, investment interest does not include qualified residence interest (i.e., deductible home mortgage interest for regular tax purposes). For AMT purposes, investment interest does not include qualified housing interest (i.e., deductible home mortgage interest for regular tax purposes). NOTE: For the regular tax and AMT, investment interest that a taxpayer cannot deduct in the current year due to the net investment income limitation can be carried forward and deducted (subject to the limitation) in the next tax year. However, because of the difference in the investment interest rules for regular tax and AMT, a taxpayer’s carryforward amount may be different for regular tax and AMT. (VII) INCENTIVE STOCK OPTIONS For regular tax, under Code Sec. 421, a taxpayer that exercises an incentive stock option is not required to include the difference between the option price and the fair market value of the underlying stock at the time of exercise in income in the year of exercise. For AMT, this difference must be included in income in the year of exercise. Thus, the amount of the difference is an AMT adjustment. NOTE: This adjustment does not apply if the taxpayer sells the stock received in the ISO exercise in the same tax year he or she exercises the ISO. EXAMPLE: R exercises 100 ISOs in 2018 when the FMV of the stock underlying the options is $10 per share. R pays $5 per share when she exercises the ISOs. R does not recognize any income for regular tax in 2018 due to the exercise of the ISOs. In calculating AMTI, R must add $500, the difference between the amount she paid when she exercised the ISOs and the FMV of the stock she receives. For AMT purposes, a taxpayer adds the amount of the adjustment to the basis of the stock. EXAMPLE: The facts are the same as in the preceding example. R has a regular tax basis of $500 in the stock she receives when she exercises the ISOs, the price she paid to exercise the options. Her AMT basis in the stock is $1000, the price she paid to exercise the options plus the amount of her AMT adjustment. The difference in basis caused by the ISO adjustment will usually cause an AMT adjustment on the disposition of the stock in the year the stock is sold. The AMT adjustment for the disposition of property is discussed below. (VIII) DEPRECIATION In general, unless a taxpayer elects to use the same method of calculating depreciation for regular tax and AMT on post-1986 assets, depreciation is calculated differently for regular tax and for AMT on those assets. In most cases, the differences in the depreciation rules for the two systems results in a greater depreciation deduction for a particular asset for regular tax in the earlier years of the asset’s recovery period and a lower deduction for regular tax in the later years. The difference between the aggregate amount of depreciation deductions for regular tax and for AMT is an adjustment that is added back or subtracted in the calculation of AMTI. NOTE: See the instructions for Form 6251, under the heading “Post-1986 Depreciation” for more information on the specific differences in the calculation of regular tax and AMT depreciation. For a taxpayer that owns an interest in a partnership or shares in an S corporation, the K-1 the taxpayer receives from the partnership or S corporation frequently includes a passthrough of an AMT depreciation adjustment amount. (IX) DISPOSITION OF PROPERTY The gain or loss recognized on the disposition of property may be different for regular tax and AMT because the property the taxpayer disposes of has a different basis for regular tax and AMT. This can occur for a number of reasons, including differences in depreciation deductions taken under the two systems for the property and in the case of stock received through the exercise of an ISO, the difference in basis caused by the ISO AMT adjustment discussed above. Because basis may be higher or lower for regular tax than it is for AMT, this adjustment may be positive or negative. NOTE: It is important to remember that the $3,000 limitation on the deduction of capital losses that applies to individual taxpayers for regular tax also applies for AMT. Except for adjustments passed through from partnerships, LLCs, and S corporations, these are all comparatively rare adjustments for individuals. More detail on these adjustments can be found in the instructions for Form 6251. NOTE: If you own a sole proprietorship business and report any of these types of expenses on Schedule C, you should generally consult with a qualified tax professional when determining the amount of the AMT adjustment.

Question 82

In the current year, Garrett invested $100,000 for a 20% partnership interest in an activity in which he is a material participant. The partnership reported a loss of $400,000 in the current year and $200,000 in the next year. Garrett’s share of the partnership’s loss was $80,000 in the current year and $40,000 in the next year. How much of the loss from the partnership can Garrett deduct? A)$80,000 in the current year, $20,000 in the next year. B)$50,000 in the current year, $50,000 in the next year. C)$80,000 in the current year, $40,000 in the next year. D)$0 in the current year, $0 in the next year.

Answer 82

A

Question 83

At Risk Rule

Answer 83

can’t deduct losses greater than the capital you put in

Question 84

Which of the following statements regarding the income tax treatment of involuntary conversion of real property is(are) CORRECT? 1. Gain may be deferred if the taxpayer reinvests the amount realized from the converted property in another property. 2. The period for reinvestment is 2 years from the end of the year in which the realization took place for conversion events caused by nature (e.g., fire, earthquake). 3. The reinvestment period for conversion acts caused by government (eminent domain) is 3 years from the end of the year in which realization of the conversion took place. 4. If the conversion was into cash, the nonrecognition treatment is mandatory, not elective.

Answer 84

1, 2, and 3 Gain may be deferred if the taxpayer reinvests the amount realized from the converted property in another property. The period for reinvestment is 2 years from the end of the year in which the realization took place for conversion events caused by nature. The reinvestment period for conversion acts caused by government/eminent domain is 3 years from the end of the year in which realization of the conversion took place. If the conversion is into cash, nonrecognition is elective.

Question 85

A calendar-year taxpayer made the following charitable contributions in the current year: Basis Fair Market Value Cash to church $5,000 $5,000 Unimproved land to the city of Kenner, Louisiana $40,000 $70,000 The land had been held as an investment and was acquired 5 years ago. Shortly after receipt, the city of Kenner sold the land for $90,000. If the taxpayer’s AGI is $120,000, the maximum allowable charitable contribution deduction in the current year is: A)$75,000 if the reduced deduction election is made. B)$25,000 if the reduced deduction election is not made. C)$36,000 if the reduced deduction election is not made. D)$45,000 if the reduced deduction election is made.

Answer 85

D The maximum allowable charitable deduction for the current year is $45,000 if the reduced deduction election is made. The taxpayer has 2 options with respect to the contribution deduction. First, she can deduct the FMV of the land limited to 30% of her AGI. In this case, the total deduction would be $41,000 [$5,000 cash + $36,000($70,000 FMV limited to 30% of $120,000)]. The carryover for the next 5 years is $34,000 ($70,000 FMV − $36,000 current year deduction). Alternatively, she can deduct the adjusted basis, limited to 50% of AGI. The total deduction would be $40,000 for the land and $5,000 for the cash, for a total of $45,000. There would be no carryover with this option but the deduction for the current year would me maximized.

Question 86

Reduced Deduction Election

Answer 86

allows you to deduct the basis of an asset being gifted to charity up to 50% of your agi

Question 87

Does the Reduced Deduction Election allow for carry over?

Answer 87

No

Question 88

What is the maximum deduction allowed for land if the Reduced Deduction Election is not selected?

Answer 88

30% of a taxpayer’s agi

Question 89

William is a 17-year-old high school student who has $3,200 of investment income from mutual funds and $5,000 of earnings from a part-time job. His parents claim him as a dependent. How much of William’s income is taxed at his parents’ highest marginal income tax rate? A)$2,850. B)$0. C)$1,100. D)$2,000.

Answer 89

C Non earned income - kiddie tax allowable amount $3,200 - $2,100 = $1,100

Question 90

Kidde Tax

Answer 90

The IRS’s kiddie tax rules limit parents’ ability to transfer investment assets to a minor child in order to take advantage of the child’s lower marginal tax bracket. The kiddie tax applies to the following groups: (1) Children younger than 18 (2) Children age 18 whose earned income does not exceed one-half of their support (3) Children at least age 19 but younger than 24 who are full-time students and whose earned income does not exceed one-half of their support (A student is considered full-time if he or she is a full-time student during any part of at least five months during the year.) Prior to the Tax Cuts and Jobs Act of 2017 (TCJA), if a child’s net unearned income was above an indexed threshold, it would be taxed at the parents’ tax rate (if the parents’ rate was higher). Under the TCJA, if a child’s unearned income is above the specified threshold, it will be taxed at rates comparable to trust tax rates included in the chart below. For 2019, the threshold amount is $2,200. If taxable income is: $2,600 and under, the tax is 10% of the taxable income Over $2,600 but not over $9,300, the tax is $260 plus 24% of the excess over $2,600 Over $9,300 but not over $12,750, the tax is $1,868 plus 35% of the excess over $9,300 Over $12,750, the tax is $3,075.50 plus 37% of the excess over $12,750 STRATEGIES (1) Consider investments that potentially generate tax-exempt income, such as municipal bonds*; investments that defer tax, such as U.S. savings bonds; or growth-oriented stocks and growth securities. (2) If taxable investment income is below the indexed threshold, consider electing to report U.S. savings bond interest each year. (3) If the child has earned income, consider investing the assets that are generating taxable investment income in a Roth IRA. Roth IRA qualified distributions generally aren’t subject to income tax. bear in mind that your contributions are not tax deductible because you can invest only after-tax dollars in a Roth IRA. If you meet certain conditions, your withdrawals will be free from federal income tax, including both contributions and investment earnings *Municipal bonds are federally tax free but may be subject to state and local taxes, and interest income may be subject to federal alternative minimum tax (AMT).

Question 91

Duane, a financial planner, is meeting with Lisa, who wants information regarding how several investment sales she has completed this year will impact her income tax return. Lisa has sold the following properties: Section 1202 stock, which Lisa purchased December 12, 2014, for $50,000 and sold December 15, 2017, for its FMV of $65,000. A vacation home Lisa inherited from her uncle, who died in 2015 and who had a basis of $95,000 in the home. The home had a FMV of $135,000 in his gross estate. Lisa sold it for $160,000 July 1, 2017. Lisa has used the vacation home only 4 weeks since she inherited it; otherwise it was vacant. Stock Lisa inherited from another uncle, who also died in 2015. His basis in the stock was $20,000 and the FMV in his gross estate was $15,000. Lisa sold it November 1, 2017, for $17,000. What should Duane tell Lisa? 1. 100% of the gain on the sale of the Section 1202 stock is excluded from Lisa’s income for both regular income tax and AMT purposes. 2. Lisa must recognize a $2,000 gain on the sale of the stock she inherited from her uncle. 3. Lisa’s gain on the vacation home is all capital gain. 4. Lisa must recognize a total gain of $27,000 on the sale of her investments.

Answer 91

2 and 3 Statement 1 is incorrect. Section 1202 stock must be held for 5 years in order for Lisa to exclude the gain from her taxable income. Statement 4 is incorrect. The total gain Lisa must recognize is $42,000 ($15,000 on the Section 1202 stock + $25,000 on the vacation home sale + $2,000 from the stock sale). Note that the vacation home does NOT qualify for the Section 121 gain exclusion, which applies to the sale of a personal residence only.

Question 92

How long must section 1202 stock be held in order for an individual to exclude the gain from their taxable income?

Answer 92

5 years

Question 93

What is section 121 gain exclusion rule?

Answer 93

allows a taxpayer to exclude up to $250,000 ($500,000 for certain taxpayers who file a joint return) of the gain from the sale (or exchange) of property owned and used as a principal residence for at least two of the five years before the sale.

Question 94

In the current year, Pamela, who is single, had the following capital gains and losses: Short-term capital gains $40,000 Short-term capital losses $32,000 Long-term capital gains $15,000 Long-term capital losses $27,000 What is Pamela’s net capital gain or loss for the current year, and how is it treated on her current year’s tax return? A) She has a net capital loss of $4,000, fully deductible in the current year. B) She has a short-term capital gain of $8,000 and a $12,000 long-term capital loss. C) She has a short-term capital gain of $8,000 and a $3,000 long-term capital loss with a $9,000 carryover. D) She has a $3,000 deductible long-term capital loss with a $1,000 long-term capital loss carryover.

Answer 94

D Net the long term capital gain consequences - $27k loss + $15k gain = - $12k loss Net the short term capital gain consequences $40k gain - $32k loss = $8k gain Net the total gain consequences - $12k loss + $8k gain = -$4k loss max loss per year = - $3k meaning there is $1k in loss carry forward

Question 95

Bill and Curt have entered into an exchange of property. Bill gives Curt a fishing boat that has an FMV of $15,000. In exchange, Curt forgives a $20,000 debt that Bill owes him. Bill acquired the boat in an estate auction for a bargain price of $6,000. What is Bill’s realized gain in this transaction? A)$14,000 B)$6,000 C)$15,000 D)$9,000

Answer 95

A FMV of Boat - Basis of Boat = $9k gain Debt forgiven - FMV Boat = $5k gain Total = $14k

Question 96

On January 10 of the current year, Mark sold stock with an adjusted tax basis of $6,000 to his son Les for $4,000 (fair market value). On July 31 of the next year, Les sold the same stock for $5,000 in a bona fide arms-length transaction to Sara, who is unrelated to Les or Mark. What is the proper tax treatment for these transactions? A)Les has a recognized gain of $2,000 in the current year. B)Les has a recognized gain of $1,000 in the next year. C)Mark has a recognized loss of $2,000 in the current year. D)Neither Mark nor Les has a recognized gain or loss in either year.

Answer 96

D This is an application of the related party rules. Neither Mark nor Les has a recognized gain or loss in either year. Mark has a $2,000 realized loss in the first year, but cannot recognize it because of the related party rule. Mark forever loses the ability to take a deduction for the loss because it is the result of a related party transaction. Les has a realized gain of $1,000 in the second year. He can reduce his gain by Mark’s loss (up to the amount of gain). Les has no gain or loss in the second year. The remaining $1,000 loss is no longer available to either of them.

Question 97

What is the related party rule?

Answer 97

If you sold an asset to a related party (spouse, child, etc.) at a loss, you will never be able to deduct the loss on your tax return. Without such a provision, related parties could create fictitious tax losses that lack economic substance since the related parties continue to enjoy the benefits of the property subject to the loss sale. Generally, and for this purpose (disallowance of a loss), the IRS defines related parties to be [Code Section 267(b)]: • The seller’s immediate family: brothers or sisters (whole or half-blood), spouses, ancestors, and lineal descendants. In-laws are not considered members of the seller’s family. • Controlled corporations: Control is defined by the IRS in this case to be more than 50% direct or indirect ownership. A corporation controlled by a trust for the benefit of the taxpayer is also treated as related. • Controlled group member: If a corporation is a member of a controlled group of corporations and a transaction occurs between members, the loss is deferred. • A corporation and a partnership are related if the same persons own more than 50% of the outstanding stock and more than 50% of the capital interests or profit interest in the partnership. • One Sub-S corporation and another Sub-S corporation with the same persons owning a greater than 50% interest in outstanding stock value of both corporations. • Similarly, a Sub-S corporation and a C corporation having the same persons owning a greater than 50% interest in outstanding stock value of both corporations. • An estate and a beneficiary of that estate. • Trustees, grantors, and beneficiaries of trusts. • An exempt organization and a person controlling the exempt organization directly or indirectly.

Question 98

Can the receiver of a related party transaction realize a loss if the asset is sold to an unrelated party in the future? If so, how much loss can be realized?

Answer 98

Yes they can realize a loss, but only up to an amount equal to the gain they received when selling the asset. Example: Mark sells stock to his son with basis of $6k and FMV of $4k. Son then sells stock to an unrelated party for $5k. Son has $1k in gain, but can use the loss that Mark never got to realize to offset this gain, but only up to $1k. So the Son would never realize any gain on his tax return nor would he realize a loss due to the offsetting

Question 99

Richard, who is single, has a traditional IRA that contains a portfolio of mutual funds with a current value of $107,000. He is expected to incur approximately $9,600 in medical bills in the next couple of months. Assuming he qualifies to maintain and fund a HSA and he has not made any contributions to the HSA in the current year, could Richard simply transfer the $9,600 from his IRA into an HSA and pay his medical bills with qualified tax free distributions from his HSA? A)Richard could make a one-time trustee-to-trustee transfer of the maximum amount of $15,000 from his traditional IRA to his HSA. B)No, this type of transfer is not allowed by the Tax Code. C)No. Richard could make a one-time, trustee-to-trustee transfer from his traditional IRA to his HSA, but the estimated medical expenses of $9,600 exceeds the maximum allowable contribution for the current year to a HSA for an insured with single coverage, therefore, Richard’s transfer is limited to the maximum contribution allowable. D)Yes, Richard could make a one-time trustee-to-trustee transfer of $9,600 from his traditional IRA to his HSA.

Answer 99

C Only once do you get IRA to HSA rollover Moving funds from an IRA to a health savings account can only be done if you are eligible to make contributions to your HSA. In other words, you need to make the transfer while you are covered by a high-deductible health plan and otherwise eligible to have an HSA. What’s more, the IRA to HSA rollover includes a “testing period” requirement that you rmust stay in your HDHP for 12 months following the transfer. SELF-ONLY For 2018, someone with a self-only high-deductible health plan (HDHP) can roll over a maximum of $3,450, or $4,450 if you are age 55 or older (2019 limits are $3,500 and $4,500, respectively) FAMILY COVERAGE If your HDHP provides family coverage, your HSA contribution limit is $6,900, or $7,900 for those 55 or older (2019 limits are $7,000 and $8,000, respectively). Any personal contribution you make to your HSA reduces the amount you can roll over. Finally, HSAs and IRAs are individual accounts. There is no such thing as a joint IRA or a joint HSA. This means that you and your spouse can each roll over funds from your respective IRAs to your own HSAs, but not to each other’s. You can, however, pay healthcare expenses for each other (or family members) out of either account.

Question 100

Which of the following employee(s) is(are) highly compensated for qualified plan nondiscrimination testing purposes in the current year? 1. Stephen, a 6% owner of an incorporated law firm. 2. Franklin, who earned $135,000 last year and he was the top-paid employee. 3. Jerome, whose salary was the 10th highest of 50 employees and who earned $75,000 last year. 4. Margo, a corporate vice president of marketing and 1% owner of the company, whose salary last year was $68,000.

Answer 100

1 and 2 So, what exactly is an HCE? The definition states that it’s an employee who meets one of the following scenarios: (1) He or she owns 5 percent of the company providing the benefits plan (2) She or he earned more than $120,000 during the previous tax year

Question 101

Who is considered a highly compensated employee for 2017 purposes?

Answer 101

5% or more owner or salary over $120k

Question 102

Which of the following statements regarding nonqualified stock options (NQSOs) and incentive stock options (ISOs) is(are) CORRECT? 1. NQSOs will not create an AMT adjustment upon exercise, but ISOs will. 2. Gain may be included in W-2 wages upon exercise for NQSOs but not ISOs. 3. Once vested, both NQSOs and ISOs can be exercised and the stock can be sold immediately. 4. Typically, on the date of the option grant, W-2 compensation income, which is a type of ordinary income, is created for an NQSO but not for an ISO.

Answer 102

1, 2, and 3 The qualification refers to eligibility for special tax treatment When you exercise either stock option, there is a spread between the exercise price and the current Fair Market Value (FMV) that is subject to Tax and are exempted from ordinary income tax on the spread. Things to consider: (1) AMT or Ordinary Income Tax on Exercise of Option, (2) Expiration, (3) When Taxes are Due, (4) Withholding Taxes, (5) Disqualifying Disposition, (6) Double Taxation, (7) Qualifying Dispositions and Capital Gains Tax, (8) Payroll Taxes, (9) Reducing AMT, (10) 100K Limit Exercise Stock Option (1) ISO - Subject to AMTAdjustment (2) NSOs - Subject to the higher ordinary income tax on the spread as well as the payroll taxes (Medicare and FICA) for both the employee and employer. Note- Employers also have to pay FUTA early in tax year. Expiration ISOs only apply while you are still employed at the company that issued the grant and cannot be extended beyond 90 days after you leave. NSOs don’t require employment and can be extended well beyond 90 days. Moreover, ISO grants can only last 10 years before they must be exercised regardless of whether the holder is still employed at the company When Taxes are Due A major difference is that the NSO tax is withheld at the point of exercise whereas the potential AMT on ISOs isn’t due until you file taxes next April. You won’t know if you are even subject to AMT until after your taxes have been calculated. However, the disqualifying disposition of the ISOs by selling during the same tax year as the exercise will trigger ordinary income tax, which is required to be serviced by quarterly estimated tax payments. NSOs do have the possibility of an IRS Section 83(i) election where you can defer taxes for 5 years. Withholding Taxes The minimum NSO exercise withholding requirement is only 22% for up to $1 million in spread value (37% if over $1 million). Many companies try to estimate the right amount but it isn’t very easy. Companies are required to withhold NSO taxes for employees, but contractors can be given a 1099 instead, which means they handle their own payments via quarterly estimated taxes. Regardless of whether the company withholds taxes or you make estimated payments, you will true it up to the required amount when you actually file taxes. That could result in a refund or additional taxes. Even lottery winners are surprised that they often owe more taxes despite the mandatory withholding at the beginning. If you sold ISO shares, you are also responsible for paying quarterly estimated taxes which you calculate yourself. If you don’t pay enough, there are interest penalties when you file next April. Disqualifying Disposition If the ISOs are sold during the same tax year as the exercise, then you will pay ordinary income tax on the spread between the exercise price and the actual sale price. This will be a disqualifying disposition and you will no longer be subject to AMT on the spread between the exercise price and the FMV. Moreover, you aren’t subject to payroll taxes either even though you are taxed at the ordinary income rate. If you sell shares resulting from an ISO after the year of exercise but within a year of exercise or within 2 years of the grant, it is also a disqualifying disposition subject to OIT but you are still on the hook for AMT in the tax year of the exercise. This another form of Double Taxation Double Taxation If you sell ISOs after the tax year of the exercise, then you will be subject to AMT for the year of the exercise AND be subject to capital gains tax and/or ordinary income tax on the profits from the sale for that subsequent tax year. Those taxes are calculated based on the spread between the final sale price and the exercise price and the FMV at the time of exercise even if you have already paid AMT on the spread between the FMV and the exercise price. Recovering the AMT via credits on an ordinary income tax return could take a long time Qualifying Dispositions and Capital Gains Tax When shares resulting from an ISO are sold at least 1 year after the exercise and 2 years from the grant date, then the sale qualifies for long term capital gains treatment on the spread between the exercise price and the final sale price. When ISOs are sold in a disqualifying disposition, then ordinary income tax is paid on the spread between the final sale price and the exercise price. NSOs are similar when sold within a year of exercising. For NSOs, ordinary income tax was paid on the original exercise but short term capital gains was paid on the spread between the final sale price and the FMV at the time of exercise. Since the STCG rate is currently the same as the ordinary income tax rate, it is almost a wash with selling ISOs except 2 factors. ISO’s are not subject to medicare and social security taxes and the short term capital gains on the portion of the income above the FMV from the sale of NSOs can be offset by other capital losses you may have that tax year. There is no similar offset for the ordinary income tax gains from selling your ISOs except for the maximum $3000 ($1500 if married filing separately) allowance of capital losses against ordinary income Payroll Taxes Another subtle difference involves payroll taxes. Medicare, Social Security taxes, and Federal Unemployment Tax are charged on NSO exercises but not on the ordinary income tax associated with ISO disqualifying dispositions. This impacts both the employer and the employee although only the employer pays FUTA. If a company net exercises all option holders at an M&A event, the payouts for both ISOs and NSOs are subject to ordinary income tax and payroll taxes. However, holders of ISOs can exercise prior to the M&A payout and save on payroll taxes. Both ISOs and NSOs are subject to capital gains taxes if exercised and held sufficiently long, although social security taxes are gone the medicare taxes can sneak back in for both ISOs and NSOs in the form of Net Investment Income Tax. NIIT equals the employer + employee portions of the Medicare tax plus the 0.9% surcharge for high incomes. This negates some of the benefit of investing since the employer’s portion of the Medicare tax becomes the employee’s responsibility. Reducing AMT If you exercised the NSOs and paid the proper amount of taxes, your Alternative Minimum Tax (AMT) on any ISOs exercised the same year goes down. This makes your overall optimization challenge to be a good spreadsheet problem. This last scenario means that in a given year, you may want to exercise and sell NSOs and use the money to exercise ISOs for long term capital gains eligibility because the AMT will be lower or zero. Rather than losing all future benefits from the NSOs sold, many ESO clients leverage the Employee Stock Option Fund to exercise the expensive NSOs and cover the taxes while they exercise the less expensive ISOs on their own 100K Limit Because of their favorable tax treatment for most people, the amount of ISOs eligible for exercise each year is limited to $100,000. This is calculated by multiplying the number of shares eligible for exercise in any given year by the exercise price. The rules are especially troublesome to companies who utilize a 1-year cliff on their option grants because the entire first year’s worth of shares plus all shares vesting in the 2nd year will apply towards the $100K Limit. This limit causes larger grants to be split into ISOs and NSOs. Individuals who have both should consider item (10) to maximize their benefits

Question 103

Which of the following pension plans must be covered by Pension Benefit Guarantee Corporation (PBGC) insurance? 1. Cash balance pension plan. 2. Money purchase pension plan. 3. Target benefit pension plan. 4. Traditional defined benefit pension plan.

Answer 103

1 and 4 - Cash Balance Pension Plan and Traditional Defined Benefit Pension Plan are the two types of defined benefit plan. The other two are not the same defined benefit. PBGC insures defined benefit plans offered by private-sector employers. Most promise to pay a specified benefit, usually a monthly amount, at retirement. Others, including cash-balance plans, may state the promised benefit as a single value. PBGC does not insure defined contribution plans, which are retirement plans that do not promise specific benefit amounts, such as profit-sharing or 401(k) plans Money purchase plans are like other defined contribution plans, such as 401(k) and 403(b) plans, in that both the employer and employee make contributions to the plan. Defined-benefit pensions are plans where an employer or plan sponsor promises a specified pension amount upon an employee’s retirement. The pension is determined by a formula that is defined and known in advance, and usually based on the employee’s earning history, years of service and a multiplier. The formula typically does not change. Target benefit plans are exactly that – a target – they provide a general sense of what the final pension amount will be. But that target can move if the pension plan does not perform well.

Question 104

Only ___ benefit pension plans and ___ ____ pension plans are covered by PBGC

Answer 104

Defined, cash balance

Question 105

Bob had a cumulative IRA account balance of $450,000 as of December 31 of last year, turned age 70 on April 1 of this year, received a distribution of $15,000 from his IRA on December 31 of this year, and had a life expectancy of 23.5 years as of the same date. Which of the following statements regarding Bob’s required minimum distributions is CORRECT? A)Bob will incur a penalty because he failed to take the required minimum distribution by December 31 of the current year. B)Bob’s distribution of $15,000 is sufficient to meet his required minimum distribution requirement. C)Bob is not subject to the required minimum distribution rules. D)Bob will not have a penalty for the current year, but he will need to withdraw the balance of his required minimum distribution for the current year by April 1 of next year.

Answer 105

D Generally, your RMD for a given year must be withdrawn by December 31 of that year, either in a lump sum or in installments. However, if you’re taking an RMD for the first time, you may delay withdrawing the RMD until April 1 of the year after the year you turn age 70½ (or, in some cases, until after the year you retire). If you decide to delay taking your first RMD until the next year, you’ll have to take two minimum distributions during that calendar year. This can put you in a higher tax bracket for that year, significantly increasing the tax you owe. Your RMD amount is determined by applying a life expectancy factor set by the IRS to your account balance at the end of the previous year. To calculate your RMD: – Find your age in the IRS Uniform Lifetime Table – Locate the corresponding life expectancy factor. – Divide your retirement account balance as of December 31 of the prior year by your life expectancy factor.

Question 106

If a taxpayer has is covered by an employer sponsored plan, but doesn’t participate in the plan, how much of their IRA contributions are deductible?

Answer 106

All of their contributions would be deductible For 2019, your total contributions to all of your traditional and Roth IRAs cannot be more than: $6,000 ($7,000 if you’re age 50 or older), or your taxable compensation for the year, if your compensation was less than this dollar limit. For 2015, 2016, 2017 and 2018, your total contributions to all of your traditional and Roth IRAs cannot be more than: $5,500 ($6,500 if you’re age 50 or older), or your taxable compensation for the year, if your compensation was less than this dollar limit. The IRA contribution limit does not apply to: Rollover contributions Qualified reservist repayments v NOTE - https://www.efile.com/ira-401k-maximum-contributions-limits/

Question 107

If a taxpayer is covered by an employer sponsored plan and participates in the plan, how much of their IRA contributions are deductible?

Answer 107

It depends on their MAGI. If single phase out begins at $62k and ends at $72k. If married phase out begins at $99k and ends at $119k. If one spouse is active and the other is not the active spouse is subject to the $99 - $119k phase out, but the non active spouse is subject to a $186k - $196k phaseout. NOTE – WE are talking about deductions not contributiosn.

Question 108

A simplified employee pension (SEP) plan: 1. uses an IRA as a funding vehicle 2. must follow the rule regarding non-discriminatory contributions. 3. may include a loan provision. 4. requires a specific employer contribution each year.

Answer 108

1 and 2 employer contributions are discretionary, but if made must be non discriminatory

Question 109

Calculate the maximum benefit that may be funded for in the current year for Winona, who participates in her employer’s traditional defined benefit pension plan. Her highest 3 consecutive years’ salaries are shown below. Winona will have more than 10 years of service with the same employer at retirement. Highest Salaries Current year (−2) $ 90,000 Current year (−1) $100,000 Current year $110,000

Answer 109

$100k Contributions to a defined benefit plan are based on what is needed to provide definitely determinable benefits to plan participants. Actuarial assumptions and computations are required to figure these contributions. In general, the annual benefit for a participant under a defined benefit plan cannot exceed the lesser of: (1) 100% of the participant’s average compensation for his or her highest 3 consecutive calendar years, or (2) $225,000 for 2019 ($220,000 for 2018)

Question 110

Which of the following statements regarding loans from qualified plans is(are) CORRECT? 1. As a general rule, the maximum loan amount cannot exceed $50,000. 2. The limit on the term of a loan is generally 5 years. 3. After-tax employee contributions are available for loans. 4. Generally, loans to a 100% owner employee are permissible as long as they are not discriminatory.

Answer 110

1, 2, and 4 Loans are not permitted from IRAs or from IRA-based plans such as SEPs, SARSEPs and SIMPLE IRA plans. Loans are only possible from qualified plans that satisfy the requirements of 401(a), from annuity plans that satisfy the requirements of 403(a) or 403(b), and from governmental plans. (IRC Section 72(p)(4); Reg. Section 1.72(p)-1, Q&A-2) A qualified plan may, but is not required to provide for loans. If a plan provides for loans, the plan may limit the amount that can be taken as a loan. The maximum amount that the plan can permit as a loan is (1) the greater of $10,000 or 50% of your vested account balance, or (2) $50,000, whichever is less. A plan that provides for loans must specify the procedures for applying for a loan and the repayment terms for the loan. Repayment of the loan must occur within 5 years, and payments must be made in substantially equal payments that include principal and interest and that are paid at least quarterly. Loan repayments are not plan contributions. The participant’s relationship to the plan (e.g., being an owner of the plan sponsor) does not affect the participant’s ability to take a loan, as long as all participants are equally able to take loans under the plan’s loan provisions.

Question 111

Sharon, single and age 54, retired 2 years ago and is receiving a $600 monthly pension from her previous employer’s qualified pension plan. She recently accepted a position in a small CPA firm that has no pension plan. She will receive $5,000 in annual compensation from the CPA firm and will continue to receive $7,200 in annual pension benefits. What is Sharon’s maximum deductible contribution to a traditional IRA for 2017?

Answer 111

$5,000 she can’t contribute more than her earned income This limit must be aggregated for these plan types: 401(k) 403(b) SIMPLE plans (SIMPLE IRA and SIMPLE 401(k) plans) SARSEP The amount you can defer (including pre-tax and Roth contributions) to all your plans (not including 457(b) plans) is $19,000 in 2019 ($18,500 in 2018). Although a plan’s terms may place lower limits on contributions, the total amount allowed under the tax law doesn’t depend on how many plans you belong to or who sponsors those plans. If you are age 50 or older by the end of the year, your individual limit is increased by $6,000 in 2015 - 2019 (the catch-up contribution amount). This means your individual limit increases from $19,000 to $25,000 in 2019 ($18,500 to $24,500 in 2018) even if neither plan allows age-50 catch-up contributions (IRC Section 414(v) and Treas. Regs. 1.402(g)-2).

Question 112

Only ________ ___________ plans can provide funding flexibility

Answer 112

profit sharing A lot of flexibility is built into 401k and profit sharing plans. Certain 401k plans, however, have requirements different from other plans. In a traditional 401k plan, an employer can contribute a percentage of an employee’s compensation to a 401k account. This is called a nonelective contribution. An employer can also match what an employee contributes up to an amount set by law, or do both. In a Safe Harbor 401k, an employer can make a matching contribution or a nonelective one. With a SIMPLE 401k, employers can do dollar-for-dollar matches or a nonelective contribution

Question 113

What is an age based profit sharing plan?

Answer 113

a plan where a company is allowed to make more generous contributions for older employees, so the benefits they receive when they retire are equivalent to those that will be received by younger employees who earn the same salaries Traditional profit sharing plan contributions are determined based upon compensation without reference to the participant’s age. Age-based profit sharing plans use age and compensation in order to allocate contributions. Age-based profit sharing plans permit older and highly paid owners to receive a greater contribution than traditional profit sharing plans. N

Question 114

Which of the following retirement plans must provide for both a qualified preretirement survivor annuity and a qualified joint and survivor annuity for a married plan participant? 1. Traditional defined benefit pension plan. 2. Target benefit pension plan. 3. Profit-sharing plan. 4. Cash balance pension plan.

Answer 114

1, 2, and 4 Pension plans must provide for both a qualified preretirement survivor annuity and a qualified joint and survivor annuity for a married participant. Generally, a profit-sharing plan does not provide a QPSA or QJSA.

Question 115

Which of the following are characteristics of property owned as tenants by the entirety? 1. Can only be owned by spouses. 2. Each owner has an equal ownership interest in the property. 3. Transfer of property does not require the consent of the other owner. 4. Includes a right of survivorship.

Answer 115

1, 2, and 4 Any transfer of the property under tenants by entirety requires the approval of both spouses acting as one.

Question 116

Which of the following property would be included in a decedent’s probate estate? 1. Solely owned securities held in a brokerage account. 2. An interest in property held as tenants in common with a brother of the decedent. 3. Life insurance policy death proceeds made payable to the decedent’s estate. 4. A condo owned jointly (JTWROS) with the decedent’s spouse.

Answer 116

1, 2, and 3

Question 117

RST stock does not trade on a regular basis. Carl makes a gift of the stock on Thursday, October 5 and the most recent trades for RST stock are as follows: Date Price October 2 $240 October 4 $180 October 9 $265 October 10 $290 What is the value that should be used for the federal gift tax return?

Answer 117

$208.33 If the stock is not traded on the date of gift, the gift tax value of the stock is the price following the date of the gift multiplied by the number of days from the stock trade before the date of the gift. Added to this is the stock price directly preceding the gift date multiplied by the number of days (trading days) between the date of the gift and the next trading day. This sum should be divided by the sum of the days before and after the date of the gift. In this case, [(1 × $265) + (2 × $180)] ÷ 3 days (2 + 1) = $208.33.

Question 118

Which of the following statements regarding a self-canceling installment note (SCIN) is(are) CORRECT? 1. To be effective, a self-canceling installment note must reflect a risk premium to compensate the seller for the possibility of cancellation. 2. A seller who accepts a self-canceling installment note may require security for the note without jeopardizing the estate planning advantages of the SCIN. 3. At the seller’s death, the present value of any remaining self-canceling installment note balance is excluded from the seller’s gross estate. 4. A self-canceling installment note is a debt that ordinarily is extinguished at the seller’s death.

Answer 118

All are correct The transaction works by having a client sell an asset to a family member or trust in exchange for a promissory note that includes a self-cancellation feature, which terminates the note and cancels the outstanding balance if the client dies during the term of the note If the client survives, he’s wholly repaid on the note with the additional consideration of the risk premium. If he doesn’t survive, the asset and the remaining note balance are removed from the client’s estate, and value has been shifted transfer-tax free to the buyer without any additional obligation on the note. Estate of Moss is the seminal case that excludes the unpaid balance of a SCIN from the seller’s gross estate. There, the seller sold stock in a funeral corporation, and real estate, to the corporation for notes due within his life expectancy. The seller’s physical condition was average. The court observed that the cancellation upon death feature was bargained for and was reflected in the sales price of $800 pe share, compared to a price of $440 per share used in a buy-sell agreement among employee shareholders. The arrangement was found to be comparable to an annuity, and inclusion in the estate under Section 2033 was rejected. Wilson, where no gift tax was found, points out the desirability of securing a SCIN by pledge. The SCIN there was secured by the property sold to Wilson’s children. The face amount of the note was approximately $12 million, while the fair market value of the property sold was stipulated by the parties to be approximately $4 million, far less than the family probably originally contemplated. Although the children did not have sufficient funds of their own to pay the note, the court found genuine intent to resell the property and pay the note. The court rejected the contention that a gift occurred because the fair market value of the note was less than the value of the property. The note was secured by a pledge of the property sold, and the face amount of the note exceeded the value of the property. According to the court, this, in itself, was sufficient to remove any doubt that the seller would receive less than the value of the property at the time of sale.

Question 119

Which of the following statements regarding private annuities is(are) CORRECT? 1. The transfer of property under a private annuity does not trigger immediate recognition of all gain to the seller. 2. If the present value of the annuity payable to the seller is at least equal to the fair value of the property transferred, there is no gift and, as a result, no gift tax due. 3. Each annuity payment will generally consist of a partial return of basis, capital gain, and ordinary income. 4. Private annuities cannot be secured by collateral.

Answer 119

All are correct Annual payments comprise an annuity amount (ordinary income) and a capital amount (which is broken down further between a recovery of basis and capital gain)

Question 120

True or False? The transfer of property under a private annuity does not trigger immediate recognition of all gain to the seller.

Answer 120

True

Question 121

True or False? Private annuities cannot be secured by collateral.

Answer 121

True

Question 122

Which of the following statements regarding qualified disclaimers is(are) CORRECT? 1. They must be in writing. 2. The disclaiming party cannot have previously benefited from the interest being disclaimed. 3. They generally must be made within 9 months of the creation of the interest. 4. The disclaiming party cannot direct the disclaiming interest to other parties.

Answer 122

All are correct The disclaimed property is then passed to the “contingent beneficiary” by default, that is, to a party other than the original stated beneficiary of the gift or bequest. Basically, the property passes to the contingent beneficiary without any tax consequence to the person disclaiming the property, provided the disclaimer is qualified. The disclaimer is made in writing and signed by the disclaiming party. In addition, s/he must identify the property or interest in property that is being disclaimed. The disclaimed interest must then be delivered, in writing, to the person or entity charged with the obligation of transferring assets from the giver to the receiver(s) The writing is received by the transferor of the interest, his legal representatives, or the holder of legal title to the property to which the interest relates in less than nine months after the date the property was transferred. In the case of a disclaimant aged under 21, the disclaimer must be written less than nine months after the disclaimant reaches 21. The disclaimant does not accept the interest or any of its benefits. In effect, once an individual has accepted the property, s/he cannot disclaim it. As a result of such refusal, the interest passes without any direction on the part of the person making the disclaimer and passes either to the spouse of the decedent, or to a person other than the person making the disclaimer If a disclaimer does not meet the four requirements listed above, then it is a nonqualified disclaimer. In this case, the disclaimant, rather than the decedent, is treated as having transferred his or her interest in the property to the contingent beneficiary. Additionally, the disclaimant is treated as the transferor for gift tax purposes and will need to apply the gift tax rules to determine whether s/he made a taxable gift to the contingent beneficiary.

Question 123

Mr. Ortego died on December 29 of last year. The assets in his estate were valued on his date of death and alternate valuation date as follows: Asset Date of Death Valuation Alternate Residence $300,000 $350,000 Common stock $6,400,000 $6,450,000 Municipal bonds $180,000 $90,000 Patent $80,000 $65,000 The patent had 8 years of life remaining at the time of Mr. Ortego’s death. The executor sold the residence on March 1 of this year for $325,000. If Mr. Ortego’s executor properly elects to use the alternate valuation date, what is the value of Mr. Ortego’s gross estate?

Answer 123

$6,945,000 You must elect to use the alternate valuation date within one year of the due date of the federal estate tax return, IRS Form 706, including extensions. There’s no way to request an extension for making the election, and it’s irrevocable after it’s made. The alternate valuation date is 6 months from the date of death. When using the alternate valuation date, the election applies to all assets, with 2 exceptions. One exception is for wasting assets, such as patents, annuities, and installment notes, which must be valued at the date of death. The second exception is for assets disposed of after the date of death, but before the alternate valuation date. These assets are valued as of the date of disposal. Therefore, the calculation would be: residence $325,000 + stock $6,450,000 + bonds $90,000 + patent $80,000 = $6,945,000.

Question 124

Matt gifts Jim securities in the current year. Matt’s adjusted basis for the securities is $48,000, and the fair market value is $40,000. Matt pays $2,000 in gift tax. What is Jim’s basis for the stock for gain and for loss? A)$0 for gain and $0 for loss. B)$50,000 for gain and $42,000 for loss. C)$40,000 for gain and $40,000 for loss. D)$48,000 for gain and $40,000 for loss.

Answer 124

D Because the FMV of the property at the time of the gift was less than Matt’s adjusted basis, Jim’s basis depends on whether he sells the property for a gain or for a loss. His basis for determining gain is Matt’s adjusted basis, which is $48,000. His basis for determining loss is the FMV of $40,000. Because this is a gift of loss property, none of the gift tax paid will be added to Jim’s basis. i.e. if you are gifted an asset with adjusted basis that is higher than fvm then the adjusted basis is used to determine future gains but the fmv is used for future losses. Sliding scale in between. When can you add gift tax? DETERMINED BY FMV ON DATE OF GIFT Parent gave Child stock worth $100,000. Parent had bought the shares for $40,000 and, accordingly, the appreciation at the time of gift was $60,000. If the gift tax attributable to this transfer is $10,000, the amount of $6,000 of the total $10,000 gift tax will be added to the tax basis for the shares in Child’s hands. This is the portion of the total gift tax attributable to the appreciation component of the gift property. In addition to the above transfer, Parent transfers to a second child other shares with a fair market value of $100,000 and a tax basis to Parent of $30,000. If, as a result of these gift transactions (totaling $200,000), gift tax is incurred for both transfers in the total amount of $50,000, then $25,000 of the gift tax is allocable to each gift. For the first child, 60% of that $25,000 (or $15,000) of gift tax is allocable as additional basis to the gift property, that $15,000 being the portion of the gift tax attributable to the appreciation element of the gift property. For the second child, 70% of that $25,000 of gift tax is allocable as additional basis to the gift property, being the portion of the gift tax attributable to the appreciation element of the gift property received by the second child.

Question 125

Rick and Fran were divorced in 2015. Under the divorce agreement, Fran was to receive alimony of $100,000 in 2015, $85,000 in 2016, and $60,000 in 2017 and beyond. Payments were to cease upon death or remarriage. How much alimony, if any, must Rick recapture in 2017? A)$27,500. B)$0. C)$15,000. D)$30,000.

Answer 125

A Front-loading (also referred to as alimony recapture) is a measure to discourage disguising property settlements as alimony. If a $15,000 decrease in alimony payments occurs between any of the first 3 years, alimony recapture may be required. Shortcut for calculating alimony recapture in Year 3: R3 = P1 + P2 − 2P3 − $37,500 R3 = $100,000 + $85,000 − 2($60,000) − $37,500 R3 = $185,000 − $120,000 − $37,500 R3 = $27,500

Question 126

Mary Sue’s salaries from 2003-2016 are shown below. What is the maximum annual compensation that may be used to determine Mary Sue’s annual benefit under a traditional defined benefit pension plan for 2017? Salaries: 2003 - 2008 $65,000 2009 $100,000 2010 $120,000 2011 $90,000 2012 $125,000 2013 $110,000 2014 $90,000 2015 $90,000 2016 $90,000

Answer 126

$111.67 Contributions to a defined benefit plan are based on what is needed to provide definitely determinable benefits to plan participants. Actuarial assumptions and computations are required to figure these contributions. In general, the annual benefit for a participant under a defined benefit plan cannot exceed the lesser of: (1) 100% of the participant’s average compensation for his or her highest 3 consecutive calendar years, or (2) $225,000 for 2019 ($220,000 for 2018) The dollar amounts are subject to cost-of-living adjustments in future years.

Question 127

Which type of bankruptcy filing allows for the reorganization of persons, firms and corporations? A)Chapter 11 bankruptcy. B)Chapter 7 bankruptcy. C)Chapter 13 bankruptcy. D)Bailout bankruptcy.

Answer 127

A. Chapter 11 Chapter 7 is also called straight bankruptcy or liquidation bankruptcy. It’s the type most people think about when the word “bankruptcy” comes to mind. In a nutshell, the court appoints a trustee to oversee your case. Part of the trustee’s job is to take your assets, sell them and distribute the money to the creditors who file proper claims. The trustee doesn’t take all your property. You’re allowed to keep enough “exempt” property to get a “fresh start.” Chapter 13 is less about elimination of debt and more about reorganization of an individual’s finances. The Chapter 13 process requires that the debtor (that’s what we call the person who files the bankruptcy case) make a monthly payment to a Chapter 13 Trustee for a period of 36 to 60 months. The Trustee then distributes that money to the debtor’s creditors who have filed proper claims..

Question 128

Differences between Bankruptcies

Answer 128

Chapter 11 lets people who don’t qualify for Chapter 13 or need some of the special protections that Chapter 11 provides reorganize their debt. (E.G. A chapter 13 debtor must be an individual who owes on the date of filing less than $383,175 in unsecured debt and less than $1,149,525 in secured debts. A chapter 13 debtor must have “regular income,” which is defined in the Bankruptcy Code to mean, “[I]ncome… sufficiently stable and regular to enable such individual to make payments under a plan…”In a chapter 11 case, there is no cap of any sort on the amount of debt a chapter 11 debtor may have (and, like all other chapters, no minimum amount of debt to be eligible to file). There is no regular income requirement. In fact, there is no income requirement whatsoever. Many chapter 11 cases are filed for individuals who have no income, but have assets that will be sold and used to fund a chapter 11 plan.) Chapter 7 bankruptcy tends to be the fastest option and in many cases, this type of bankruptcy case can be completed in just a few months. Chapter 13 cases, on the other hand, cannot exceed five years but usually last about that long. There is no time limit on Chapter 11 plans. Both Chapter 13 and Chapter 11 may allow you to keep certain assets you may lose under Chapter 7. For example, if you own a recreational boat without debt, you may have to surrender that in a straight bankruptcy under the codes of Chapter 7 bankruptcy. However, you may be able to keep it if you pay the trustee the value of the boat in your Chapter 13 bankruptcy plan. Both Chapter 11 and Chapter 13 may offer more help with car loans and mortgages and other types of unsecured debt. On the other hand, under a Chapter 7 bankruptcy, if you are behind on these payments and can’t catch up, you may wind up losing that property. Under Chapter 13, you may be able to catch up on those past due amounts over a specified amount of time. In some situations, homeowners can wipe out a second mortgage on an underwater home or negotiate a modification of their primary mortgage by filing for this type of bankruptcy. Chapter 11 may be especially helpful to small business owners or real estate investors with multiple properties by allowing them to restructure their debts or catch up on payments that are behind. Chapter 7 is generally a more affordable option when compared to Chapters 13 or 11. With the former, you must pay your attorney upfront. With the latter, you may be able to pay part of your fee over time as part of your repayment plan. Chapter 11 bankruptcy is generally the most expensive option due to the higher filing fees and the overall cost of the legal work involved.

Question 129

What is chapter 13 bankruptcy? What is chapter 7 bankruptcy?

Answer 129

Debt adjustment Liquidation

Question 130

What is chapter 11 bankruptcy?

Answer 130

Reorganization of persons, firms and corporations

Question 131

Which of the following are steps in the financial planning process? 1. Establish financial goals. 2. Gather relevant data. 3. Analyze the data. 4. Develop a plan for achieving goals.

Answer 131

All are steps in the financial planning process (1) Establishing and defining the client-planner relationship (2) Gathering client data including goals (3) Analyzing and evaluating the client’s current financial status (4) Developing and presenting recommendations and/or alternatives (5) Implementing the recommendations (6) Monitoring the recommendations

Question 132

Jerry and Sara are concerned because they have not yet begun saving for their son Paul’s higher education expenses. Jerry and Sara are both 30 years old, and Paul is 9 years old. Their combined income is $100,000, and they want to begin saving $5,000 per year in a tax-efficient manner. Which of the following is the best investment choice for Jerry and Sara? A)Section 529 plan. B)Coverdell Education Savings Account. C)Uniform Transfers to Minors Act (UTMA) account. D)Loans from the parents’ traditional individual retirement accounts (IRAs).

Answer 132

A Many financial advisors instead recommend saving about one-third of the cost of college, with the expectation that the rest will come from financial aid, scholarships, and current parent and/or student income (e.g., work-study). This can make the goal of saving for college feel more realistic and achievable. Let’s say for example, that your child was born in 2017 and you’re ready to start saving now (good for you!) In order to pay for ⅓ the projected cost of college, your end goal might be $73,700 for a public in-state university, $116,800 for a public, out-of-state school, and $145,100 for a private college.

Question 133

Which of the following items may be discharged in a Chapter 7 bankruptcy? 1. Child support. 2. Tort claim for negligence (nonintentional). 3. Federal taxes (past two years). 4. Consumer debt.

Answer 133

2 and 4 You’ll be able to discharge these debts in both Chapter 7 or Chapter 13: (1) credit card debt (2) medical bills (3) lawsuit judgments against you (but associated liens might not be wiped out) (4) most debts arising from car accidents (5) obligations under leases and contracts (6) personal loans (7) promissory notes, and (8) any other debt that doesn’t fit into one of the nondischargeable categories explained below. These additional types of debts are discharged in Chapter 13 bankruptcy, but not in Chapter 7 bankruptcy: (1) marital debts arising out of a divorce or settlement agreement (other than debts for support) (2) debt incurred to pay a nondischargeable tax debt (3) court fees (4) condo, coop, and HOA fees (5) debts for loans from a retirement plan, and (6) debts that couldn’t be discharged in a previous bankruptcy. NEVER DISCHARGED You’ll continue to owe these debts after your Chapter 7 bankruptcy case is over, and you’ll pay these debts in full in your Chapter 13 plan: (1) child support and alimony (2) fines, penalties, and restitution you owe for breaking the law (3) certain tax debts, and (4) debts arising out of someone’s death or injury as a result of your intoxicated driving.

Question 134

Can child support be discharged under chapter 7 bankruptcy?

Answer 134

No

Question 135

Can federal taxes be discharged under chapter 7 bankruptcy?

Answer 135

No, but only if taxes were within last 3 years

Question 136

Julie and Charlie are meeting with their financial advisor to discuss their current financial situation. They have brought all the required documents to the first meeting. During the discussion, they referred to a number of financial transactions that had taken place during the prior year. Which of the following would increase or decrease their net worth? 1. Repayment of a loan using funds from a savings account. 2. Purchase of an automobile that is 75% financed after a 25% down payment. 3. Increase in the S&P 500 Index when their holdings include an S&P 500 Index mutual fund. 4. Increase in interest rates when they have a substantial bond portfolio.

Answer 136

3 and 4

Question 137

Which of the following correctly states the relationship between NPV, IRR, and required return? 1. If NPV > 0, then IRR > required return. 2. If NPV = 0, then IRR = required return. 3. If NPV > 0, then IRR < required return. 4. If NPV < 0, then IRR < required return.

Answer 137

1, 2, and 4 Using internal rate of return and net present value for capital budgeting evaluations often end in the same result. But there are times when using NPV to discount cash flows makes more sense.IRR uses one discount rate, which is OK when evaluating projects that share a common discount rate, predicable cash flows, equal risk, and a shorter time horizon. But discount rates usually change over time. IRR does not account for changes, making it a poor option for longer-term projects with varying discount rates. IRR calculations are also ineffective for projects with a mix of positive and negative cash flows. Consider a marketing project that must be updated every couple of years to remain current. Its cash flows are negative $50,000 in Year 1 due to the initial outlay. It returns $115,000 in Year 2, and costs $66,000 in Year 3 when the project receives a new look. NPV can discount each cash flow separately, making it a better option. Using NPV also works better when a project’s discount rate is not known. The IRR has to be compared to the discount rate to gauge a project’s feasibility. If the IRR is higher than the discount rate, it’s a good project to pursue. If a project’s NPV is above zero, it’s financially worthwhile When calculating IRR, expected cash flows for a project or investment are given and the NPV equals zero. Put another way, the initial cash investment for the beginning period will be equal to the present value of the future cash flows of that investment. (Cost paid = present value of future cash flows, and hence, the net present value = 0). Disadvantages of IRR Unlike net present value, the internal rate of return doesn’t give you the return on initial investment in terms of real dollars. For example, knowing an IRR of 30% alone doesn’t tell you if it’s 30% of $10,000 or 30% of $1,000,000. Using IRR exclusively can lead you to make poor investment decisions, especially if comparing two projects with different durations. Let’s say a company’s hurdle rate is 12%, and one-year project A has an IRR of 25%, whereas five-year project B has an IRR of 15%. If the decision is solely based on IRR, this would lead to unwisely choosing project A over B. Another very important point about the internal rate of return is that it assumes all positive cash flows of a project will be reinvested at the same rate as the project, instead of the company’s cost of capital. Therefore, internal rate of return may not accurately reflect the profitability and cost of a project. A smart financial analyst will alternatively use the modified internal rate of return (MIRR) to arrive at a more accurate measure.

Question 138

A company is considering the purchase of a copier that costs $5,000. Assume a required rate of return of 10% and the following cash flow schedule: Year 1: $3,000 Year 2: $2,000 Year 3: $2,000 What is the project’s approximate IRR? A)17%. B)21%. C)14%. D)10%.

Answer 138

B Return on investment works for any time period. It is simply a reflection of the change from one point in time to another. That can be problematic when evaluating an investment over a long period of time. For example, a 100% ROI seems strong without knowing that it took 100 years to achieve that return. The internal rate of return solves this problem by calculating the percentage return on an annualized basis regardless of the actual investment period. Hold an investment for one year, three years, or 100 years, it doesn’t matter. Internal rate of return will tell you the annualized percentage returns of that investment over any period of time. For an investment that lasts exactly one year, the internal rate of return is the same as the return on investment. From the example above, our stock must grow 50% per year to grow from $50 to $75 over a one year period. That’s pretty simple. At the end of the day, each metric is useful in its own way. For monitoring your performance over the long term or against benchmarks like the S&P 500, the internal rate of return is more informative because it describes the performance in consistent, annual terms. However, for determining short term gains or understanding your cash-on-cash returns, the return on investment number gives you everything you need with a much simpler calculation.

Question 139

Which of the following is(are) considered qualified education expenses for the purpose of Coverdell Education Savings Accounts? 1. Private elementary school tuition 2. Room and board at a private boarding school for secondary education 3. College tuition

Answer 139

All are qualified expenses Expenses could include tuition, uniform, tutoring, books, supplies, and even technology (i.e. computers). This benefit applies not only to qualified higher education expenses, but also to qualified elementary and secondary education expenses

Question 140

Bob and Liz have a newborn son and want to make sure they have adequate funds to pay for his college education in 18 years. If they will need $75,000 for college costs in 18 years, approximately how much should they save at the end of each month to accumulate this amount? (Assume 8% interest compounded monthly.) A)$145. B)$156. C)$104. D)$123.

Answer 140

B N = 12 x 18 = 216 I% = 8 P/YR = 12 PV = $0 FV = 75,000 PMT = ? PMT = 156

Question 141

Which of the following statements regarding fiduciary responsibility are CORRECT? 1. Fiduciary relationships include attorney and client, and agent and principal. 2. The fiduciary is expected to act for the sole benefit of the principal. 3. No other interests should be placed before the duty a trustee has to a beneficiary.

Answer 141

All of these are correct A plaintiff, who prevails in a breach of fiduciary duty lawsuit typically will recover for actual damages incurred, but they also may recover punitive damages, if the breach can be proven to have been committed out of malice or fraud. However, calculating the exact amount of damages caused by the breach—or even proving a breach, in fact, occurred—is quite difficult

Question 142

Dean secures a 30-year, $350,000 mortgage with an annual interest rate of 6%. Approximately how much total interest will Dean have paid on the mortgage at the end of 25 years? A)$241,457. B)$388,070. C)$375,960. D)$108,542.

Answer 142

B First N = 360 I = 6% P/YR = 12 PV = 350,000 PMT = ? PMT = -2,098.43 Second OTHER - AMRT #P = 300 Interest = ? Interest = 388,070

Question 143

Which of the following statements regarding the decision to buy or lease a home are CORRECT? 1. Generally, many more costs are associated with leasing a home, especially if this arrangement is short term. 2. A client who will be residing in the home for a short period of time should lease the home. 3. The lower the marginal income tax bracket, the greater the advantage of owning a home. 4. The itemized tax deduction for mortgage interest costs is a benefit of home ownership.

Answer 143

2 and 4 You must itemize your deductions on Form 1040, Schedule A to claim mortgage interest. This means foregoing the standard deduction for your filing status—it’s an either/or situation. You can itemize, or you can claim the standard deduction, but you can’t do both. In 2017, the mortgage interest deduction included that which you paid on loans to buy a home, on home equity lines of credit, and on construction loans. But the TCJA eliminated the deduction for home equity debt beginning with the 2018 tax year—the return you’ll file in 2019—unless you can prove that the loan was taken out to “substantially improve your residence.” Loans used to buy or build a residence are called “home acquisition debt.” The term refers to any loan you take for the purpose of acquiring, constructing, or substantially improving a qualified home. You could deduct interest on home acquisition debts of up to $1 million for your main home and/or your secondary residence back in 2017, but the TCJA has reduced this to $750,000 beginning with tax year 2018. Let’s say you borrowed $800,000 against your primary residence and $400,000 against your secondary residence. Both loans were used solely to acquire or substantially improve the properties. Together, the loans add up to $1.2 million, exceeding the $750,000 limit under the terms of the TCJA. You can only claim a mortgage interest deduction for the percentage attributable to the first $750,000 you borrowed. Interest associated with that other $450,000 is just money that you spent. You don’t get a tax break for it.

Question 144

All of the following statements regarding the American Opportunity Tax Credit are correct EXCEPT: 1. The credit is available regardless of the taxpayer’s adjusted gross income. 2. The credit is available for the first four years of the student’s post-secondary education. 3. The maximum credit is $2,000 per eligible student per year. 4. The definition of eligible expenses includes course materials.

Answer 144

1 and 3 the credit is phased out at higher levels of AGI the maximum credit is $2,500 per student per year The AOC is worth up to $2,500 for the first $4,000 (100% of first 2,000 and 25% of next 2,000) you spend on qualifying educational expenses on behalf of you, your spouse, or your dependents. This means that you’ll receive less of credit if your MAGI is more than $80,000 (or $160,000 if you are filing jointly). The credit is not available to those with MAGIs over $90,000 or $180,000 (if filing jointly). It is phased out entirely at this point. Up to 40 percent of the AOC is refundable. The Internal Revenue Service will refund up to 40 percent of what’s left over, up to a cap of $1,000, if claiming the credit reduces your tax bill to zero. You can receive a refund of up to $1,000 even if your tax liability is zero when you file your return. The American Opportunity Credit is available for the first four years of a student’s post-secondary education—the years of education immediately after high school. Students who have already completed four years of college education, or those for whom you have already claimed the AOC four times on previously filed tax returns, are not eligible. Taxpayers can claim the AOC themselves or their dependents if the student is enrolled at least half-time in a college, university, or other accredited post-secondary educational institution. The student must be pursuing a degree or education credential. Anyone who has been convicted of a felony drug offense is not eligible. Qualifying educational expenses include course materials that are required for enrollment as well as tuition and some fees. The AOC is considered somewhat better than some other tax breaks for education in this respect. For example, the Lifetime Learning Credit (LLC) restricts expenses solely to tuition, and the tuition and fees deduction does the same Other course materials, such as books, lab supplies, software, and other class materials, can qualify for the AOC if they are required by the school for enrollment in a course. For example, you can include the cost of a computer if it is required for a student to take a tech-related class but not if it is used in the general course of their education. Room and board are not covered, nor are expenses you might pay for with tax-free education assistance. You cannot count the same expense twice for more than one educational tax credit or deduction.

Question 145

Edwina, age 48, owns a modified endowment contract (MEC). Her basis in the policy is $20,000, and the cash value is $35,000. This year, she takes out a policy loan of $10,000. Which of the following statements regarding the income tax consequences of this loan is CORRECT? A)Edwina must include $5,000 in her gross income; the $5,000 is also subject to a 10% penalty. B)Edwina must include $10,000 in her gross income; the $10,000 is also subject to a 10% penalty. C)Edwina incurs no income tax consequences as a result of the loan. D)Edwina must include $10,000 in her gross income, but the 10% penalty does not apply.

Answer 145

B Modified Endowment Contracts are subject to LIFO (last in, first out). Loans from MEC’s are considered to consist of taxable earnings until all the taxable earning have been withdrawn Edwina must include the entire $10k in her gross income and is subject to the 10% penalty because she is under 59.5 A modified endowment contract (MEC) is the term given to a life insurance policy whose funding has exceeded federal tax law limits. In other words, the IRS does not consider this to be a life insurance contract anymore. The change in classification was brought about to combat the use of the ‘life insurance’ designation for the purposes of tax avoidance. Specifically, a life insurance policy is considered an MEC by the IRS if it meets three criteria. The policy is entered into on or after June 20, 1988. It must meet the statutory definition of a life insurance policy. The policy must fail to meet the Technical and Miscellaneous Revenue Act of 1988 (TAMRA) 7-pay test.

Question 146

Cathy Grant, her husband Jack, and their daughter Kelly were in an automobile accident this year in which they all sustained various injuries. They were insured under Cathy’s group major medical policy that has a $250 per individual/$500 family deductible, a $5,000 per individual stop-loss limit, and an 80% coinsurance provision. The medical expenses were itemized as follows: Cathy - $12,000; Jack - $10,000; and Kelly - $13,000. Assuming no other medical expenses during the calendar year, how much of these medical expenses did the Grant family have to pay? A)$3,500. B)$6,750. C)$3,600. D)$15,750.

Answer 146

A Grant’s would pay the deductible = $500 and then 20% of the stop loss limit of $15,000 ($5k per person) Once your deductible has been met, many health insurance companies will pay for all of your medical expenses. On the other hand, many companies will pay for medical costs on a co-insurance basis. Many co-insurance provisions are stated in a percentage format such as 80/20, 70/30, etc. The first number is what the insurance company will pay after the deductible and the second number is what you will be responsible for. You will continue to pay that percentage (after the deductible) until you reach a stop-loss provision or out-of-pocket maximum. The stop-loss provision is the point where the insurance company will begin to pay 100% of a claim. Once your out-of-pocket expenses reach that limit, the insurance company will pay the rest. Without a stop-loss provision, you could be responsible for the co-insurance of an indefinite amount. For example, if you have medical bills of $500,000, your co-insurance clause is 80/20 and you do not have a stop-loss provision, you would be responsible for $100,000 of that particular bill. Make sure that your health insurance has a stop-loss provision for this reason! The higher the stop-loss, the lower the premium. Assume that John has an insurance policy with a $1,000 deductible, 80/20 co-insurance and a $5,000 stop-loss provision. Let’s also assume he has a hospital bill for $2,000. How much is he responsible for? He is responsible for the first $1,000 of the bill due to the deductible. He is then responsible for 20% of the remaining $1,000 bill or $200. His total out-of-pocket expenses for this bill are $1,200. Now let’s assume he has another bill for $25,000 (due to a surgery) in the same year. Since he has already paid his deductible, he will go straight to the co-insurance. He will be responsible for 20% of the bill or $5,000. However, he has a stop-loss provision of $5,000. Since he already paid $1,200 from a previous bill, he will only be responsible for $3,800 of the surgery bill. This is due to having met his $5,000 stop-loss. The insurance company will now pay any additional bills that come in during the same calendar year. Keep in mind that these provisions and deductibles are on a yearly basis and reset each year. So in this example, if John has the same bills next year, he will have to pay the same amounts again.

Question 147

Which of the following statements concerning employer-provided disability income insurance is (are) CORRECT? 1. To determine whether the benefits under the plan are taxable income, it is necessary to look at whether the employer or the employee pays the premiums. 2. If the entire cost is paid by the employee, benefits are included in gross income.

Answer 147

1 only There are two main types of disability insurance — short-term and long-term coverage. Both replace a portion of your monthly base salary up to a cap, such as $10,000, during disability. Some long-term policies pay for additional services, such as training to return to the workforce. If you are enrolled in a group disability insurance plan sponsored by your employer, the taxability of your benefits depends on who pays the premium. If you pay the total premium using after-tax income, then your benefits will be tax free. On the other hand, if your employer pays the total premium and does not include the cost of coverage in your gross income, then your benefits will be taxable. If your employer pays part of the insurance premium and you pay the rest, then your tax liability will be split as well. The part of the benefit you receive that is related to the employer-paid share of the premium is taxable; any part of the benefit related to your share of the premium is tax free. The rules surrounding taxation of individual disability income insurance benefits are generally simple. Because you pay the premiums with after-tax dollars, the benefits you receive are tax free. However, unlike health insurance premiums, you can’t deduct premiums paid for individual disability income insurance as a medical expense.

Question 148

Managed care plans developed out of which belief? A)Limiting the number of health care providers to individuals provided economies of scale. B)Capitation was a less expensive way to provide basic health care. C)The use of a gatekeeper could minimize health costs. D)Preventive care was less expensive than treating a serious illness.

Answer 148

D Managed Healthcare Plans are types of health insurance plans that emerged in the latter part of the 20th century. Managed health care plans provide a health insurance policy to individual members of a group or employer. The group or employer is the plan sponsor of the managed care plan. A managed health care plan will help beneficiaries (members of the plan) by getting them more favorable rates or discounted medical insurance services from their plan’s health provider network. Managed health care plans allow plan sponsors to negotiate reduced rates for their policyholders with hospitals, medical service providers and physicians, by including them in the network. Managed health care plans are a cost-effective alternative to traditional fee-for-service or indemnity health insurance plans because they share the medical cost financial risks between: (1) member individuals (2) their insurance plans (3) members of the managed care network. Since the HMO Act passed in 1973, managed care plans became available to most Americans by the late 80’s are one of the most popular health insurance coverages in the United States.

Question 149

Which of the following statements regarding qualified long-term care insurance policies is (are) CORRECT? 1. Premiums are always deductible. 2. Benefits may be received income tax free. 3. Benefits may not be provided for expenses that are reimbursable under Medicare. 4. The policy must be guaranteed renewable.

Answer 149

2, 3, and 4 Premiums for qualified long-term care insurance policies are tax deductible to the extent that they, along with other unreimbursed expenses such as Medicare premiums, exceed a specified percentage of the insured’s adjusted gross income

Question 150

Robert retires on May 31 of the current year and begins to receive a monthly annuity of $1,200 payable for life. His life expectancy at the date of retirement is 10 years. The first annuity payment was received on June 15. Robert contributed $24,000 to the cost of the annuity. He is confused as to the taxation of this payment. As a result, he decides to see Frank, his financial planner. Which of the following statements with regards to Robert’s annuity are CORRECT and can be used by Frank in his meeting with Robert? 1. If Robert lives beyond his 10-year life expectancy, every annuity payment received after ten years will be received tax-free. 2. If Robert lives beyond his 10-year life expectancy, every annuity payment he receives after ten years will be fully taxable. 3. Robert can exclude $1,400 of his monthly payments received this year from income tax and $2,400 a year going forward until his 10-year life expectancy is completed. 4. For the first 10 years, Robert cannot exclude any amount of his annuity payments from taxes because each payment is fully taxable.

Answer 150

2 and 3 All annuity payments received after life expectancy will be fully taxable. Because Robert will only receive 7 payments the first year, he will only be able to exclude $1,400 of the annuity payments the first year but he will be able to exclude $2,400 per year going forward until year 11. See calculation below: $24,000 ÷ $144,000 = 0.1666 or 1/6 exclusion ratio (1/6 × $1,200 = $200 exclusion amount) Current year: 7 payments × $200 (exclusion amount) = $1,400 Year 2: (12 payments × $1,200) × ⅙ = $2,400 Year 3 : (12 payments × $1,200) × ⅙ = $2,400 Shortcut: $24,000 ÷ 120 = $200 per month nontaxable

Question 151

Which of the following perils is (are) ordinarily covered in an open-perils HO-3 policy? 1. Ice damage 2. Lightning 3. Flood 4. Earthquake

Answer 151

1 and 2 What you are and aren’t covered for will depend on your specific policy, so it’s always wise to go over everything with your insurer. Earthquakes and floods are generally excluded from coverage on most HO-3 policies. The HO-3, or “special form,” policy is the most common type of homeowners insurance, namely because of its broad range of coverage and general affordability. It covers all the perils mentioned in the HO-2, or “broad form,” policy — but it also goes further than that. Because an HO-3 doesn’t limit coverage only to named perils, it often can provide more financial protection than an HO-2. That means that your typical HO-3 form can financially protect you against any and all perils unless your policy specifically mentions them in the exclusions — and if it doesn’t, you’re covered. The HO-3 policy typically insures your home and attached structures (like a garage or deck), as well as your belongings and your personal liability if you accidentally injure someone or damage their property. HO-3 versus HOB During your homeowners insurance search, you may have come across something called an HOB policy. Nearly identical to the HO-3, a HOB form typically provides more coverage against water damage for coastal areas of the U.S. A HOB policy may also cover things like garden tractors, boat and boat trailers, lawn mowers, and other similar accessories while they’re on your property. HO-2 Broad Form Covers all perils in HO-1 Plus the following: (1) Falling objects (2) Weight of ice, snow, or sleet (3) Freezing of household systems like AC or heating (4) Sudden and accidental tearing apart, cracking, burning, or bulging of pipes and other household systems (5) Accidental discharge or overflow of water or steam (6) sudden and accidental damage from artificially generated electrical current The HO-2 typically covers not only your home’s structure, but your belongings and sometimes even your personal liability as well. It’s important to note, though, that because the HO-2 is a “named peril” policy, any damage caused by events other than those listed on your policy will generally be excluded from coverage. HO-1 Basic Form Usually - 10 named perils (1) Fire or smoke (2) Explosions (3) Lightning (4) Hail and windstorms (5) Theft (6) Vandalism (7) Damage from vehicles (8) damage from air craft (9) riots and civil commotion (10) volcanic eruption

Question 152

Virginia had a basis of $350,000 in her nonqualified fixed annuity. Her life expectancy at age 60 is 25 years. The monthly payment is expected to be $2,700. How much of each monthly payment is going to be included in Virginia’s taxable income? A)$18,396. B)$14,004. C)$1,533. D)$1,167.

Answer 152

C

Question 153

Mrs. Hopkins has a major medical insurance policy with a $500 deductible and an 80% coinsurance clause. She becomes ill and is admitted to the hospital for several days. When she is discharged, her hospital bill is $7,500 and her doctor bills are $3,250. What amount will her insurance policy pay? A)$8,200. B)$10,250. C)$7,000. D)$9,250.

Answer 153

A Add losses together = $7,500 + $3,250 Subtract deductible = $10,750 - $500 Multiply by coinsurance % = $10,250 * 80% = $8,200

Question 154

Which of the following statements regarding the various definitions of disability are CORRECT? 1. Under an own occupation definition, an insured may be eligible for benefits even if employed in another occupation. 2. The Social Security definition of disability is more restrictive than those found in private disability income policies. 3. Under the presumptive definition of disability, an insured will be eligible for benefits due to the loss of sight in one eye. 4. A policy containing an any occupation definition of disability is generally the least expensive.

Answer 154

1, 2, and 4 An own-occupation insurance policy covers individuals who become disabled and are unable to perform the majority of the occupational duties that they have been trained to perform. This type of insurance policy is contingent on the individual being employed at the time the disability occurs. Own-occupation insurance policies are also known as a “pure own-occupational policy.” When an own-occupation policy goes into effect, the policyholder and the insurance carrier sign a contract that says the insurance carrier will pay the policyholder a monthly benefit if they become disabled. But what actually determines a disability? The key factor in an own-occupation policy is how “disabled” is defined in an insurance contract. Because the definition of own-occupation is very flexible, persons covered under an own-occupation policy may find another job and still receive full benefit payments. Consider Mark, a surgeon who loves to do home improvement projects when he’s not at the operating room. One weekend, Mark’s hand slips on a saw and his finger has to be amputated. Mark won’t be able to do surgery anymore, but may be able to work in another medical specialty, or even a profession outside the medical profession

Question 155

The Goldens are planning to purchase additional life insurance to meet the objectives stated in the case. They want to purchase policies that feature flexible premium payments and that will allow them to invest the cash value in various subaccounts. Which of the following types of life insurance will best meet the Goldens’ objectives? A)Variable life. B)Variable universal life (VUL). C)Whole life. D)Universal life.

Answer 155

B Advantage of Universal - Universal life insurance offers more flexibility than term life. Because it has a cash component, you could actually temporarily stop making premium payments as long as the cash value can cover the cost of insurance. In addition, you may also be able to increase or decrease the death benefit over time. Also, you can usually take tax-free loans against the cash value in the policy. Disadvantage of Universal - Because it’s permanent coverage, universal life tends to be more expensive than term life. While some of that added cost will be going into the account in the form of building cash value, the rates you earn on that money may not be as high as what you’d get from investing in stocks or mutual funds. That’s why many financial professionals recommend buying term and investing the difference. This allows you to still purchase a death benefit while having the flexibility to invest the difference anywhere you choose. Variable life insurance is very similar to universal life with one major difference. With this type of policy you aren’t earning a specific rate of interest in a cash-value fund, but instead, you can invest this portion in a variety of different investments like mutual funds. So, you get more control and potentially higher returns from your cash value. Advantages of Variable Life You’re still guaranteed the minimum death benefit as long as you keep up with the minimum premium. You also have the flexibility to invest the cash-value portion in a variety of investment vehicles. If you make wise investment decisions, you can take advantage of significant tax-deferred earnings on those investments. Disadvantages of Variable Life By investing part of your policy in possibly risky investments, you could put your policy in jeopardy if the market turns south. A significant drop in account value could force you to pay additional premiums just to keep your policy in force. In addition, the expenses associated with the investments in variable universal life may be significantly higher than you might pay elsewhere. Whole Life Insurance As the name implies, whole life is meant to cover you for your whole life. Like universal life, whole life has a cash-value component. In most cases with a whole life policy, the premium and death benefit are fixed. The younger you purchase coverage, the lower your premiums are likely to be. Whole life is often marketed to parents as an investment for young children, on the premise that they can lock in coverage while they’re young, making it more affordable once they become adults Advantages of Whole Life There are no surprises with whole life. You have a guaranteed premium, interest rate, and death benefit for the life of the policy. The cash value also grows tax-deferred and also typically allows for withdrawals and loans against the policy. Disadvantages of Whole Life Whole life is generally more expensive than both term and universal policies. This is largely due to the added guarantees that come with whole life. Also keep in mind that the policy is less flexible; changing your death benefit or premiums isn’t an option. Like universal life, the interest earned on the cash-value account may be less than you could get elsewhere.

Question 156

Which of the following statements regarding health savings accounts (HSAs) are CORRECT? 1. Up to 100% of account contributions are tax deductible up to a maximum limit. 2. A high deductible is required on the insurance policy. 3. An annual maximum out-of-pocket expense limit is associated with the account and insurance policy. 4. An individual can make a one-time, trustee-to-trustee transfer from a traditional IRA to an HSA.

Answer 156

All the statements are correct

Question 157

Wayne, age 55, owns a non-MEC universal life insurance policy. His investment in the contract is $10,000 and the policy’s cash surrender value (CSV) is $25,000. This year, he borrows $5,000 from the policy to go on an extended vacation. Which of the following statements regarding the income tax treatment of this loan is(are) CORRECT? 1. The $5,000 loan is subject to income tax. 2. The $5,000 loan is income tax free. 3. The $5,000 loan is subject to a 10% income tax penalty.

Answer 157

2 only when a life insurance policy is not classified as a MEC, a policy loan is generally tax and penalty free For just a minute imagine yourself in 1981 with $100,000 to invest. You could buy a 10 year government backed bond for 12%, you could invest in the stock market, or you could choose to take advantage of a permanent life insurance policy. So. you could put your $100,000 into a $500,000 permanent life insurance policy, and gain 10% a year for a couple years. Then you could withdraw or take a loan against your investment gain, without paying taxes. Technical and Miscellaneous Revenue Act of 1988 (TAMRA). This act is what created the Modified Endowment Contract and the rules that govern what policies are considered to be a MEC TAMRA created three criteria for life insurance policies becoming a MEC. The criteria is as follows: (1) The policy was entered into after June 20, 1988. (2) The policy meets the statutory definition of a life insurance contract. (3) The policy must fail to meet the 7-pay test.

Question 158

Which of the following statements concerning a personal liability umbrella policy (PLUP) is (are) CORRECT? 1. The personal liability umbrella policy (PLUP) is designed primarily to provide liability coverage for any legal claims or judgments. 2. The personal liability umbrella policy (PLUP) requires the policyowner to carry certain underlying liability coverages of specified minimum amounts.

Answer 158

2 only 1 is incorrect because PLUP policies are only designed to cover catastrophic legal claims or judgements (i.e. not the primary reason they’re designed) Umbrella insurance protects your assets if you are sued for an accident or something else catastrophic happens. It will cover expenses over the limits of coverage you have on your car and home insurance. It is easy for medical bills to add up to more than your coverage limits, especially if you there are more than one person involved in the accident. Umbrella insurance should not take the place of your car, home or business insurance, instead it should be considered supplemental insurance that you add to it.

Question 159

Jamie, age 54, just inherited $500,000. She currently manages the local grocery store and has a salary of $75,000 per year. She is looking for a tax-deferred investment vehicle that will help supplement her retirement income in 11 years and wants to have the opportunity to keep up with inflation. Jamie considers herself a moderate risk taker. She has a portfolio of individual stocks at her local brokerage office. Assuming she has adequate emergency funds outside of the $500,000, which of the following would be most suitable for Jamie to invest these funds? A)Whole life insurance. B)Variable annuity. C)Universal life insurance. D)Fixed annuity.

Answer 159

B Many folks, however, may not benefit that much from the tax deferral features of a variable annuity. While the earnings will have accumulated tax-free, when withdrawn they’ll be taxed at your ordinary income tax rate, which is usually higher than regular capital gains tax rates.

Question 160

Jose owns a 30-year corporate bond, with 22 years remaining until maturity, featuring a coupon rate of 6.25% (paid semiannually). If the comparable yield for this quality bond is currently 7%, what should be the intrinsic value of his bond? A)$1,000.00 B)$1,138.38 C)$916.44 D)$906.46

Answer 160

C N = 22*2 PMT = $62.50/2 FV = $1,000 I/Y= 7/2 PV = $916.44

Question 161

An investor buys 100 shares of stock at $75 per share, with a 60% initial margin requirement and 40% maintenance margin requirement. If the stock quickly falls to $40 per share, how much additional capital must the investor provide to cover a margin call? A)$200. B)$400. C)$800. D)$600.

Answer 161

D Current Market Value = 100 * 40 = $4k Loan Amount = 100 * 75 * 40% = $3k Current Equity = $1k Maintenance margin = 100 * 40 * 40% = $1,600 Additional capital needed = $1,600 - $1,000 = $600

Question 162

All of the following are characteristics of money market mutual funds EXCEPT: A)The investments within the fund usually mature within one year and have an average maturity of less than 60 days. B)Funds may be withdrawn from the account at any time without penalty by writing a check on the account. C)The rate of return on the fund is highly sensitive to changes in short-term interest rates. D)These funds typically invest in high quality, long-term investments, such as Treasury bonds, REITs, and promissory notes.

Answer 162

D The types of debt securities held by money market mutual funds are required by federal regulation to be very short in maturity and high in credit quality. All money market funds comply with industry-standard regulatory requirements regarding the quality, maturity, liquidity, and diversification of the fund’s investments. Investments can include short-term U.S. Treasury securities, federal agency notes, Eurodollar deposits, repurchase agreements, certificates of deposit, corporate commercial paper, and obligations of states, cities, or other types of municipal agencies—depending on the focus of the fund

Question 163

George has a 5-year bond with a coupon rate of 3.65% (paid semiannually). If the comparable yield for this quality bond is 4.85%, what should be the intrinsic value of his bond? A)$1,179.84 B)$1,054.39 C)$1,000.00 D)$947.28

Answer 163

D N = 5 *2 I/Y = 4.85/2 PMT = 36.5/2 FV= $1,000 PV= $947.28

Question 164

Jillian recently purchased a 30-year, investment-grade, state of Louisiana municipal bond, from her broker. She paid $972 plus commission for the bond, which has an annual coupon rate of 3.5% (paid semiannually). Which of the following statements is(are) CORRECT? 1. The bond will be subject to high purchasing power risk. 2. Interest paid by the bond will not be subject to federal income taxation. 3. If the bond is sold in three years for $1,000, the gain will be considered income tax-free. 4. The bond will be subject to a high level of default risk.

Answer 164

1 and 2

Question 165

Investment grade bonds are subject to _____ default risk

Answer 165

Low

Question 166

Longer term bonds are subject to ____ purchasing power risk

Answer 166

greater

Question 167

.Which of the following bonds has the greatest duration? A)20-year maturity, 8% coupon. B)20-year maturity, 12% coupon. C)10-year maturity, 8% coupon. D)10-year maturity, 12% coupon.

Answer 167

A

Question 168

The bond with the greatest duration will have the ____ term to maturity and ____ coupon.

Answer 168

longest, smallest

Question 169

Which of the following statements regarding the various performance measures are CORRECT? 1. A positive alpha indicates that the manager consistently underperformed the market on a risk-adjusted basis. 2. Jensen’s alpha indicates how much the realized return differs from the required return, as per the capital asset pricing model (CAPM). 3. The Sharpe ratio is not useful for evaluating the performance of non-diversified portfolios. 4. The Treynor ratio does not indicate whether a portfolio manager outperformed or underperformed the market portfolio.

Answer 169

2 and 4 Treynor - For negative values of Beta, the Ratio does not give meaningful values. When comparing two portfolios, the Ratio does not indicate the significance of the difference of the values, as they are ordinal. For example, a Treynor Ratio of 0.5 is better than one of 0.25, but not necessarily twice as good. A ranking of portfolios based on the Treynor Ratio is only useful if the portfolios under consideration are sub-portfolios of a broader, fully diversified portfolio. If this is not the case, portfolios with identical systematic risk, but different total risk, will be rated the same. But the portfolio with a higher total risk is less diversified and therefore has a higher unsystematic risk which is not priced in the market. Treynor ratio measures return per unit of systematic risk

Question 170

Is the sharpe ratio useful for measuring performance of both non-diversified and well-diversified portfolios?

Answer 170

Yes

Question 171

Greg buys a call option on the stock of LMN Corporation for an option premium of $1.50. Which of the following statements is(are) CORRECT? 1. Greg hopes that the price of LMN stock will decline. 2. Greg’s maximum loss on the option is $150.

Answer 171

2 only

Question 172

If you buy a call option, you want the price to ____

Answer 172

Increase

Question 173

What is the maximum loss when you buy a call option?

Answer 173

the premium paid

Question 174

what is the maximum loss when you buy a put option?

Answer 174

the premium paid

Question 175

If Mary earned a 3% return from dividend reinvestment, a 2% return from capital gain reinvestment, and a 9% return from share price appreciation on her mutual fund, what would be Mary’s total return? A)14%. B)5%. C)12%. D)3%.

Answer 175

A

Question 176

Harry has an investment that has produced the following returns: Year 1: 10%, Year 2: 5%, Year 3: -7%, Year 4: -3%, Year 5: 12%. What is the arithmetic mean return on this investment? A)3.40%. B)17.00%. C)6.75%. D)8.50%.

Answer 176

A Just find the average if it’s asking for the arithmetic mean

Question 177

FLY company is a publicly owned airline. The company has a capital structure consisting of 85% stock and 15% bonds. Investors in the common stock of FLY are subject to all of the following risks EXCEPT A)default risk. B)business risk. C)interest rate risk. D)market risk.

Answer 177

A Common stockholders of FLY are not subject to default risk because the company is not obligated to make dividend payments.

Question 178

Which of the following is the definition of standard deviation? A)Standard deviation is a computation of the relative measure of total risk per unit of expected return. B)Standard deviation is an absolute measure of the variability of the actual investment returns around the average or mean of those returns. C)Standard deviation measures the extent to which two variables move together, either positively or negatively. D)Standard deviation measures the systematic risk associated with a Monte Carlo simulation.

Answer 178

B

Question 179

The issuer-specific component of the variability in a stock’s total return that is unrelated to overall market variability is known as a type of: A)nondiversifiable risk. B)unsystematic risk. C)fundamental risk. D)systematic risk.

Answer 179

B

Question 180

How do you reduce unsystematic risk?

Answer 180

By diversifying

Question 181

Market Risk Synonyms

Answer 181

non diversifiable, systematic

Question 182

All of the following statements concerning municipal securities are correct EXCEPT: A)because municipals are exempt from federal taxes, a taxable equivalent yield (TEY) can be calculated to make the return on these bonds comparable to those of taxable bonds. B)one type of municipal security is the revenue bond, which is repaid from the revenues generated by the underlying project. C)one type of municipal security is the general obligation bond, which is backed by the ‘full faith and credit’ of the issuer. D)because municipals are issued by political entities other than the federal government (such as states and cities), the bondholder is not able to avoid state and/or local taxes.

Answer 182

D Some states encourage investors to purchase municipal bonds by not imposing state income tax on the interest payments.

Question 183

Assume a taxpayer is in the 35% marginal income tax bracket and has enough deductions to itemize. Calculate the equivalent tax credit that would provide the same tax benefit as a $3,000 itemized deduction. A)$1,950. B)$8,571. C)$1,050. D)$3,000.

Answer 183

C A tax credit is a dollar for dollar reduction against the individual’s tax liability, while a tax deduction decreases taxable income. The formula is: deduction × marginal tax rate or $3,000 × 0.35 = $1,050.

Question 184

Valerie and her husband, Mark, own a used car business. This year, they purchased a parcel of raw land for business expansion. They paid $150,000 for the land, incurred legal fees of $4,500 associated with the purchase, and paid a broker $4,000 for his services. What is their adjusted basis in the land? A)$154,500. B)$154,000. C)$150,000. D)$158,500.

Answer 184

D The adjusted basis is calculated by starting with the original purchase price ($150,000) and increasing it by certain allowable costs. In this case, the allowable costs to increase basis are legal fees and broker commission (4,000 + 4,500). Therefore, the adjusted basis is 150,000 + 8,500 = 158,500.

Question 185

Which of the following statements regarding adjusted gross income (AGI) is CORRECT? A)It is the amount of income that is taxable. B)It may result in a phaseout of certain deductions. C)It is the first step in the process of calculating taxable income. D)It represents a ceiling for certain deductions, such as medical expenses and miscellaneous itemized deductions.

Answer 185

C Adjusted gross income equals gross income less certain items that are specifically allowed as adjustments to income. Taxable income equals adjusted gross income less allowable deductions (itemized or standard) and personal exemptions. The level of adjusted gross income does impact the deductibility of certain items, such as medical expenses and miscellaneous deductions by setting floors on the amount deductible.

Question 186

Beverly purchased a painting for $10,000. Years later, when the painting had a FMV of $5,000, she gave it to her mother, Peggy, as a gift. Six months later, Peggy sold the painting at auction for $4,000. Assuming no gift taxes were paid on the gift when Peggy received it, what is her net gain or loss on the sale of this painting? A)$1,000 loss. B)$4,000 gain. C)$6,000 loss. D)$0 gain, $0 loss.

Answer 186

A To determine the loss on the sale of a gift, the donee’s basis is the lower of the donor’s basis or the FMV of the property when the donee receives it. Although Beverly’s basis was $10,000, the value of the gift when Peggy received it was $5,000, which becomes her basis. Therefore, Peggy realized a net loss of $1,000 when she sold the painting for $4,000.

Question 187

Mary Sue and Bob are married and file a joint return. They provided over 50% of the support for Becky, Rachel, and Vicki during the current year. Their daughter, Becky, a full-time college student, earned $4,100 during the year. Mary Sue and Bob’s married daughter, Rachel, filed a joint return with her husband. Vicki, who is Mary Sue’s mother, lives in a retirement community for which Mary Sue and Bob pay $18,000 per year. Vicki’s only income during the year was $5,200 of Social Security benefits, and she used that entire amount for her own support. Which of the following statements with respect to Mary Sue and Bob’s options is(are) NOT correct? 1. Mary Sue and Bob can claim Becky as a dependent only if she is younger than 19 or is a full-time college student younger than 24. 2. Mary Sue and Bob may claim Rachel as a dependent if neither Rachel nor her husband was required to file a return. 3. Mary Sue and Bob may not claim Vicki as a dependent because Vicki’s gross income is too high.

Answer 187

3 Only While Vicki’s Social Security benefits are not included in her gross income, if she used any amount for her own support, it is used to decide whether or not the taxpayer provided more than 50% of her support. The $18,000 in payments by the taxpayers for her home in the retirement community satisfies this test. Therefore, she does not fail the gross income test and may be claimed by Mary Sue and Bob as a dependent. Statement 1 is correct because Becky does not fail the gross income test if she is a student and under age 24. She would be a qualifying child. Statement 2 is correct because Rachel may file a joint return and qualify as long as neither Rachel nor her husband is required to file a return.

Question 188

Can a married tax payer claim their child as a dependend if they are married as well?

Answer 188

Yes, as long as the child and their spouse didn’t have to file a return 2019 = No more personal and dependent exemptions. For 2019, the standard deduction amount for an individual who may be claimed as a dependent by another taxpayer cannot exceed the greater of $1,100 or the sum of $350 and the individual’s earned income (not to exceed the regular standard deduction amount).

Question 189

Sara wishes to make an anonymous gift of $1 million to her alma mater. She is determined that no one know she made the gift. As her planner, you tell her there are rules that must be followed if she also wants a tax deduction for the gift. Which of the following factors determine the amount of the tax deduction allowed for Sara’s charitable gifts? 1. The donee’s identity as a 30% or 50% organization. 2. The fact that Sara is an individual and not a corporation. 3. The type of property given away. 4. Sara’s adjusted gross income.

Answer 189

All statements are correct. Charitable contributions are deductible, but only up to certain limits determined by the donor’s identity (individual vs. corporate) and the recipient’s identity (30% or 50% organizations). The donor’s adjusted gross income affects how much of a deduction is allowed in any one year. The type of property that is given away also determines the amount of the deduction. The charity can honor Sara’s wishes and tell the public the gift is anonymous but the charity must know her name in order to provide proper substantiation of the gift for tax purposes for Sara.

Question 190

Which of the following statements regarding exclusion for gain realized upon the sale of a principal residence is (are) CORRECT? 1. To claim the exclusion, the taxpayer must have owned and used the home as a principal residence for an aggregate time period of 2 years out of the 5-year period immediately preceding the home’s date of sale and may claim the exclusion only once every 2 years. 2. The maximum amount of realized gain that may be excluded from gross income is $300,000 for married individuals filing jointly and $150,000 for all other taxpayers.

Answer 190

1 only The law permits a maximum gain exclusion of $250,000 ($500,000 for certain married taxpayers) Requirements (1) Automatic Disqualification - you acquired property through a like-kind exchange during the past 5 years OR you are subject to expatriate tax. (2) Ownership - owned home for at least 24 months out of last 5 years. or a married couple filing jointly, only one spouse has to meet the ownership requirement. (3) Residence - Unlike the ownership requirement, each spouse must meet the residence requirement individually for a married couple filing jointly to get the full exclusion. The 24 months of residence can fall anywhere within the 5-year period, and it doesn’t have to be a single block of time and all that is required is a total of 24 months (730 days) of residence during the 5-year period. (4) Look-Back - If you didn’t sell another home during the 2-year period before the date of sale (or, if you did sell another home during this period, but didn’t take an exclusion of the gain earned from it), you meet the look-back requirement. You may take the exclusion only once during a 2-year period. (5) Final Determination of Eligibility - If you meet the ownership, residence, and look-back requirements, taking the exceptions into account, then you meet the Eligibility Test. Your home sale qualifies for the maximum exclusion. Skip to Worksheet 1, later. If you didn’t meet the Eligibility Test, then your home isn’t eligible for the maximum exclusion, but you should continue to Does Your Home Qualify for a Partial Exclusion of Gain? .

Question 191

Amount of gain eligible for exclusion on sale of a property for married taxpayers?

Answer 191

$500k

Question 192

Your client, who has a taxable income of $180,000, is concerned about being subject to the alternative minimum tax (AMT). Which of the following itemized deductions used in calculating your client’s taxable income are adjustments to regular taxable income in arriving at alternative minimum taxable income (AMTI)? 1. Casualty losses. 2. State income taxes paid. 3. Employee business expenses in excess of 2% of the employee’s AGI. 4. Donation made to the local university.

Answer 192

2 and 3 only Statement 1 is incorrect because casualty losses are deductible for both regular tax and AMT. Statement 2 is correct because state taxes are not deductible for AMT purposes. Statement 3 is correct because miscellaneous itemized deductions that exceed the 2% of AGI floor are only deductible for regular tax purposes, not for AMT purposes. Statement 4 is incorrect because charitable contributions are deductible for both regular tax and AMT. For losses incurred in 2018 through 2025, the TCJA generally eliminates deductions for personal casualty losses, except for losses due to federally declared disasters. However, there’s an important exception: If you have personal casualty gains because your insurance proceeds exceeded the tax basis of the damaged or destroyed property, you can deduct personal casualty losses that aren’t due to a federally declared disaster up to the amount of your personal casualty gains.

Question 193

Are casualty losses deductible for both regular tax and AMT?

Answer 193

Yes For losses incurred in 2018 through 2025, the TCJA generally eliminates deductions for personal casualty losses, except for losses due to federally declared disasters. However, there’s an important exception: If you have personal casualty gains because your insurance proceeds exceeded the tax basis of the damaged or destroyed property, you can deduct personal casualty losses that aren’t due to a federally declared disaster up to the amount of your personal casualty gains. The Basics Calculating Personal Casualty Losses Damages to personal-use property can quickly add up, but the full amount of the loss isn’t deductible for federal income tax purposes. To calculate the casualty loss deduction for personal-use property in an area declared a federal disaster, you must take the following three steps: Subtract any insurance proceeds. Subtract $100 per casualty event. Combine the results from the first two steps and then subtract 10% of your adjusted gross income (AGI) for the year you claim the loss deduction. AGI includes all taxable income items and is reduced by certain deductions, such as the ones for student loan interest, health savings account (HSA) contributions, and deductible contributions to IRAs and self-employed retirement plans. You can potentially deduct the loss that remains after these subtractions as an itemized deduction. For example, suppose you sustained a $50,000 loss to your home (after considering insurance reimbursements) due to a federally declared disaster in 2018. Your AGI for last year was $150,000. Your deductible loss is $34,900 ($50,000 – $100 – $15,000). However, if your loss wasn’t due to a federally declared disaster, it wouldn’t be deductible under the Tax Cuts and Jobs Act (TCJA). See main article for details about this unfavorable TCJA change.

Question 194

Charitable Limits (AGI)

Answer 194

Tip - If your total contributions for the year are 20% or less of your AGI, you don’t need to worry about AGI limits CASH CONTRIBUTIONS (1) The limit of 60% of AGI is applied to cash contributions during the year to an organization described as a 50% organization. (2) “For the use of” contribution exception - A 30% limit applies to cash contributions that are “for the use of” the qualified organizations instead of “to” the qualified organization. A contribution is “for the use of” a qualified organization when it is held in a legally enforceable trust for the qualified organization or in a similar legal arrangement. NONCASH CONTRIBUTIONS (1) If you make noncash contributions to organizations described earlier under First category of qualified organizations (50% limit organizations), your deduction for the noncash contributions is limited to 50% of your adjusted gross income minus your cash contributions subject to the 60% limit. (2) A 30% limit applies to noncash contributions of the capital gain property if you figure your deduction using fair market value without reduction for appreciation

Question 195

Are charitable contributions deductible for both regualr tax and AMT? Are state taxes deductible for AMT purposes?

Answer 195

Yes No

Question 196

True or False miscellaneous itemized deductions that exceed the 2% of AGI floor are only deductible for regular tax purposes, not for AMT purposes

Answer 196

False Specifically, the TCJA suspended for 2018 through 2025 a large group of deductions lumped together in a category called “miscellaneous itemized deductions” that were deductible to the extent they exceeded 2% of a taxpayer’s adjusted gross income.

Question 197

After 5 years of marriage, Beth and Rudy, who have 2 children, file for divorce. The court grants the divorce and orders Rudy to pay $1,000 per month in alimony and $1,500 per month in child support. How much is Beth required to include in gross income for each year she receives these payments? A)$28,000. B)$18,000. C)$30,000. D)$12,000.

Answer 197

D Payments of alimony or separate maintenance are taxable to the payee spouse in the year received. Payments are deductible by the payor spouse, who does not have to itemize in order to receive the deduction. Child support is not taxable to the payee nor deductible by the payor. TCJA eliminates deductions for alimony payments required by post-2018 divorce agreements This TCJA treatment of alimony payments will apply to payments that are required under divorce or separation instruments that are: (1) executed after Dec. 31, 2018 or (2) modified after that date if the modification specifically states that the TCJA treatment of alimony payments (not deductible by the payer and not taxable income for the recipient) now applies. Requirements for deductible alimony - For a particular payment required by a pre-2019 divorce agreement to qualify as deductible alimony, all the following requirements must be met. (1) Written Instrument Requirement (2) Payment must be to or on behalf of spouse or ex-spouse (3) Payment cannot be stated to not be alimony (4) Ex-spouses cannot live in the same household or file joinly (5) Cash or Cash Equivalent Requirement (6) Cannot be child support - To be deductible alimony, a payment cannot be classified as fixed or deemed child support under the alimony tax rules. The rules regarding what constitutes child support–especially what constitutes deemed child support–for this purpose are complicated and represent a nasty trap for unwary taxpayers. (7) Payee’s Social Security number requirement (8) No obligations for payments to continue after recipient’s death

Question 198

True or False? Student loan interest is an above the line deduction

Answer 198

True

Question 199

True or False? Union dues are below the line (itemized) deductions

Answer 199

True For tax years 2018 through 2025, union dues – and all employee expenses – are no longer deductible, even if the employee can itemize deductions. However, if the taxpayer is self-employed and pays union dues, those dues are deductible as a business expense.

Question 200

True or False? Charitable contributions are above the line deductions

Answer 200

False, they are below the line (itemized)

Question 201

True or False? Personal casualty losses are below the line (itemized) deductions

Answer 201

True

Question 202

For the first time in his working life, Jake is self-employed. He has always had an employer who took care of things such as payment of payroll taxes but now it is Jake’s responsibility. He has come to you, his financial planner, for clarification on what he pays and what his employees pay for payroll taxes. Which of the following statements regarding FICA are correct? 1. Both Jake and his employees will pay FICA on his employees’ earnings. 2. Jake must pay both the employer and the employee portions of the self-employment payroll tax on his income from his business. 3. The employer share of the payroll taxes on his employees’ earnings and on his self-employment income are both deductible by Jake. 4. Because Jake is self-employed, he can deduct the total self-employment taxes paid on his net self-employment income.

Answer 202

1, 2, and 3 It’s confusing to talk about FICA tax and self-employment tax as if they were different, but the terms are actually talking about the same thing: Social Security and Medicare tax on earned income. FICA tax is Social Security/Medicare tax on employment; Self-employment tax (sometimes called SECA) is Social Security/Medicare tax on self-employment. Also note that your employer pays half of the FICA tax due, while you as a self-employed individual must pay the entire amount of Social Security/Medicare on your self-employment income. Your employment income and FICA tax paid is determined first. Your employer withholds Social Security and Medicare tax from your paychecks as an employee. The Social Security tax is capped at a maximum each year at a specific income level. When your income for the year exceeds that level, you stop paying the Social Security tax. The Medicare tax is not capped. If you are self-employed, you pay self-employment tax (SECA) based on your net income (profit) from your business. You pay this tax the rate of 12.6% of that income. You don’t have to pay this tax as you go since you don’t have to withhold it from your business income. To show you how employment and self-employed are considered for Social Security and Medicare taxes, here is the (vastly over-simplified) process for calculating self-employment tax on Schedule SE: EXCLUSION - To calculate your net earnings from self-employment, subtract your business expenses from your business revenues, then multiply the difference by 92.35%. (This odd multiplication figure is the result of the fact that you’re allowed to deduct 50% of your self-employment tax when calculating the income upon which the tax will be charged.) DEDUCTION FOR ONE-HALF - Each year, when calculating your income tax, you are allowed an “above the line” deduction equal to 50% of the amount you pay as self-employment tax. That is, after using Schedule SE to calculate your self-employment tax, you’ll enter an amount equal to one-half of your self-employment tax on line 27 of your Form 1040 as a deduction to arrive at adjusted gross income. You don’t get a paycheck from your business since you are not an employee. This tax is not calculated until your net business income is determined at tax time. The form used to calculate self-employment tax is Schedule SE. If you are a sole proprietor, member of an LLC, or a partner in a partnership, you are considered to be self-employed, and your portion of earnings from your business is subject to self-employment tax.

Question 203

Do self employed individuals pay FICA taxes on their employees’ earnings?

Answer 203

Yes

Question 204

Can self employed individuals deduct the employee share of the FICA taxes?

Answer 204

No, only the employer share

Question 205

Christopher, who has an interest in multiple businesses, has the following income for 2017: Net Schedule C income: $80,000 Dividends and interest: $11,000 General partnership K-1 income: $10,000 S corporation K-1 income: $29,000 What is Christopher’s total self-employment tax for 2017? (Round up to nearest dollar.)

Answer 205

$12,717 Christopher’s self-employment income is $90,000. The dividends and interest and the K-1 distributions from the S corporation are not self-employment income. The self-employment tax is calculated as follows: $90,000 × .9235 = $83,115 net self-employment earnings. Total self-employment tax is $12,717 ($83,115 × .1530). In 1997, the Treasury Department issued Proposed Regulations 1.1402(a)-2, which provided that an LLC member’s distributive share would NOT be subject to self-employment tax unless the member had: (1) Personal Liability for the LLC’s debts; (2) Authority to contract for the LLC; or (3) Participated in the LLC’s business for more than 500 hours per year In addition, “service partners” in a service partnership were automatically excluded from claiming limited partner status; all their distributive share of income would be subject to self-employment taxes. Congress subsequently passed a one-year moratorium prohibiting Treasury from finalizing the regulations (Section 935 of the Taxpayer Relief Act of 1997, P.L. 105-34). Treasury has yet to finalize the regulations some 20 years later. This failure to issue final self-employment tax regulations has provided some taxpayers with support for a reporting position to claim that distributive income allocated to an LLC member, even a service partner, is excludable for self-employment tax purposes. The IRS has historically disagreed with this position and has recently begun to litigate perceived abusive fact patterns in the courts to counteract this otherwise unchecked reporting position. In attempting to discern who should be treated as “limited partners” for self-employment tax purposes, the courts have examined the legislative intent underlying the Sec. 1402(a)(13) exception and found that members or owners who provide services to a business, who have management authority, or who possess other characteristics inconsistent with those of traditional limited partners should be subject to self-employment tax. In this regard, these decisions seem to have come full circle in that they are judicially reviving two of the three original factors included in the 1997 proposed regulations used to determine the status of LLC members for self-employment tax purposes: management control and participation. LLC members wanting to avoid self-employment tax may want to consider a few options. First, they may want to avoid member-manager status perhaps by carving managerial rights out into a separate interest or by avoiding member-managed structures entirely. Second, LLC members providing services should consider opportunities for segregating their involvement into separate interests or separate entities (see Hardy, T.C. Memo. 2017-16). Interestingly, in doing these things, LLC members would essentially be complying with the proposed regulations issued in 1997. Finally, members may want to instead consider forming an S corporation to better manage self-employment taxes in situations where the S corporation eligibility requirements are satisfied and state law permits the business to be organized in corporate form.

Question 206

Nancy donated a professional stove to a qualified charity that cooks and delivers meals for the elderly and disabled. The stove is not new and has a fair market value of $2,500. What does Nancy need in order to be able to take a charitable deduction for this donation? 1. Nancy needs a receipt from the charity that describes the stove, has the date of the donation, and name of the charity. 2. Nancy must have a professional appraisal of the fair market value of the stove on the date of donation.

Answer 206

1 only An appraisal is not required for noncash property over $500 and less than or equal to $5,000. However, Nancy may wish to get an independent appraisal to support the deduction claimed.

Question 207

At what value do you need to have an appraisal to prove the amount of charitable deduction you are taking?

Answer 207

Anything greater than $5,000 for 2017 (non cash gifts)

Question 208

When calculating income tax liability the individual taxpayer arrives at taxable income by: A)deducting the greater of itemized deductions or the standard deduction from gross income, then reducing that result by allowable adjustments, such as alimony paid. B)reducing gross income by allowable adjustments, such as alimony, to arrive at adjusted gross income, then deducting the greater of the standard deduction or itemized deductions, as well as personal and dependency exemptions. C)consulting the tax tables accompanying IRS Form 1040. D)None of these.

Answer 208

B

Question 209

Which of the following statements regarding the net unrealized appreciation (NUA) portion of employer stock received in a lump sum distribution is CORRECT? The NUA portion is: A)taxed as ordinary income in the year of the distribution. B)taxed at the capital gains rate when the stock is sold. C)taxed as ordinary income when the stock is sold. D)received tax free.

Answer 209

B The NUA portion of the distribution is taxed at the capital gains rate when the stock is sold. The adjusted basis of the stock to the qualified plan trust is taxed as ordinary income to the participant in the year of the distribution.

Question 210

Which of the following services are covered under Part A of Medicare? 1. Skilled nursing facility services. 2. Home health care services. 3. Hospice care. 4. Outpatient hospital services.

Answer 210

1, 2, and 3 Outpatient hospital services are covered under Medicare Part B, not Part A. In general, Part A covers: (1) Hospital care (inpatient) (2) Limited home health services (3) Skilled nursing facility care, provided that custodial care isn’t the only care required (4) Hospice care

Question 211

True or False Medicare Part A covers skilled nursing facility services

Answer 211

True Skilled nursing facility (SNF) stays are covered under Medicare Part A after a qualifying hospital inpatient stay for a related illness or injury. To qualify for SNF care, the hospital stay must be a minimum of three days, beginning on the day you are formally admitted as an inpatient. The day you are discharged does not count towards this minimum three-day requirement. Time spent under observation as an outpatient also does not count towards your qualifying stay.

Question 212

True or False Medicare Part A covers home health care services

Answer 212

True Medicare Part A benefits for home health care services are covered when deemed medically necessary and ordered by your doctor Part-time or intermittent skilled nursing care Physical therapy Speech-language pathology services Occupational therapy Medical social services Part-time or intermittent home health aide services Durable medical equipment, when ordered by your doctor* *If your doctor orders durable medical equipment as part of your care and the equipment meets eligibility requirements, this cost is covered separately under Medicare Part B. If you’re eligible for coverage, Medicare typically covers 80% of the Medicare-approved amount for the durable medical equipment. Medicare Part A does not cover 24-hour home care, meals, or homemaker services if they are unrelated to your treatment. It also does not cover personal care services, such as help with bathing and dressing, if this is the only care that you need.

Question 213

True or False Medicare Part B covers hospice care

Answer 213

False

Part A covers hospice care

To qualify for Medicare-covered hospice care, you must meet all of the following conditions:

1. You must be enrolled in Medicare Part A.
2. Your doctor or health provider must certify that you are terminally ill and have six months or less to live.
3. You must agree to give up curative treatments for your terminal illness, although Medicare will still cover palliative (comfort-focused) treatment for your terminal illness, along with related symptoms or conditions.
4. You must receive hospice care from a Medicare-approved hospice facility.

Medicare Part A hospice care is usually received in the patient’s home. It may include, but is not limited to:

1. Doctor services
2. Nursing care
3. Pain relief medications
4. Social services
5. Durable medical equipment
6. Medical supplies
7. Hospice aide services
8. Homemaker services
9. Physical and occupational therapy Dietary counseling Short-term inpatient care (if necessary for managing pain or symptoms) Short-term respite care

Question 214

True of False Medicare Part A covers outpatient hospital services

Answer 214

False Part B covers outpatient hospital services

Part B covers:

1. Medically necessary services: Services or supplies that are needed to diagnose or treat your medical condition and that meet accepted standards of medical practice.
2. Preventive services: Health care to prevent illness (like the flu) or detect it at an early stage, when treatment is most likely to work best.
   
   1. You pay nothing for most preventive services if you get the services from a health care provider who accepts assignment.

Part B Covers Things Like:

1. Clinical research
2. Ambulance services
3. Durable medical equipment (DME)
4. Mental health
5. Inpatient
6. Outpatient
7. Partial hospitalization
8. Getting a second opinion before surgery
9. Limited outpatient prescription drugs

Question 215

Which of the following statements most accurately describes the tax treatment of contributions to and distributions from a Roth IRA? 1. Contributions are made with pretax dollars. 2. A withdrawal from the account will not be subject to tax if the account has been established for at least three years and the funds (up to $10,000) are being used for a first time home purchase. 3. Distributions are not taxable if they are attributable to disability and the account has been established for at least 5 years. 4. If the account has been open for at least 5 years and the account owner is age 59½, distributions are penalty free and income tax free.

Answer 215

3 and 4 Contributions to a Roth IRA are made with after-tax dollars. Distributions from a Roth IRA are income tax and penalty free if the owner has maintained the account for at least 5 years AND the distribution is attributed to one of the following: death disability first-time home purchase ($10,000 lifetime maximum) attainment of age 59½

Question 216

What are the exceptions to the Roth age 59.5 distribution rule?

Answer 216

Nine Exceptions (1) Totally and Permanently Disabled - If you become disabled and can no longer work, the IRS allows you to withdraw money from your Roth IRA, regardless of age, without paying the 10 percent tax penalty. Just be aware that your plan administrator may require you to provide proof of disability before signing off on a penalty-free withdrawal. (2) You’re inheriting a ROTH IRA from someone else - Inheriting a Roth IRA from someone else—be it a spouse or another relative—falls under the qualified distribution umbrella, according to the IRS. If you’re the person who’s leaving a Roth IRA behind for someone else, your estate also wouldn’t have to pay the penalty if the distribution is made before you would have turned 59½. (3) You’re buying a first home - If you need some cash to cover the down payment or closing costs on a first home, you could withdraw some of your earnings from a Roth IRA without a penalty even if you’re under age 59½. The IRS does limit penalty-free distributions to $10,000. To qualify for the first-time buyer exception, the money must be used to pay any associated costs before the close of the 120th day after you receive it. (4) You’re taking a distribution to pay unreimbursed medical expenses - If you have out-of-pocket medical expenses that you need to cover, you may be able to get around paying the additional tax penalty on Roth IRA distributions. To qualify, your unreimbursed medical expenses must exceed 10 percent of your adjusted gross income (7.5 percent if you or your spouse was born before Jan. 2, 1952). (5) You need to pay your health insurance premiums while you’re unemployed - You could also avoid the tax penalty if you’re using some of your Roth IRA savings to maintain your health insurance premiums because you’re unemployed. The IRS will waive the penalty if you lost your job, you received unemployment compensation for at least 12 consecutive weeks, you took the distribution the same year you received unemployment or the next year, and you received the distribution no later than 60 days after going back to work (6) You’re using the money for qualified higher education expenses - A college degree is pricey these days. If you’re footing the bill for education expenses, your Roth IRA may be a valuable source of funding. It’s possible to avoid the 10 percent penalty if you’re using Roth IRA assets to pay for qualified education expenses for yourself, your spouse or your child. Qualified education expenses include tuition, fees, books, supplies and equipment required for enrollment. Room and board is also covered for students who are enrolled at least half-time (there are specifics about how much you can spend) (7) You’re taking substantially equal payments from the plan - In some cases, you may need to make regular withdrawals from a Roth IRA before age 59½, instead of taking a single lump-sum distribution. If you’re taking periodic distributions of the same amount, the 10 percent penalty wouldn’t kick in. The IRS can use one of three methods to determine the amount of the payments you’re entitled to receive and the payments must be spread out over five years. (8) The withdrawal was due to a tax levy- If you have unpaid federal taxes, the IRS can draw on your Roth IRA to pay the bill. The 10 percent penalty won’t apply if the IRS levies the money directly. If, on the other hand, you withdraw the money and use it to pay your tax bill, you’d have to pay the penalty if you don’t meet the qualified distribution guidelines. (9) You’re a qualified reservist- The final exception applies to active duty military members. If you’re called to active duty, you can withdraw money from your Roth IRA without fear of a penalty.

Question 217

Michael is an employee of JJ Enterprises (JJE), where he earns $75,000. JJE sponsors a Section 401(k) plan with a 50% match for contributions up to 6% of salary. Michael always defers the maximum. In addition, JJE sponsors a cash balance plan that provides for a 3% contribution with a guaranteed return equal to 85% of the 5-year Treasury rate. Michael is also a Cajun chef who does catering on the weekends. He typically earns $20,000 from his catering business after his expenses. He is a rather frugal individual and wants to defer as much of his income from catering as possible. However, he does not want to have to worry about administrative issues because of his busy schedule. What retirement plan would you recommend? A)Target benefit plan. B)SIMPLE. C)Cash balance plan. D)SEP plan.

Answer 217

D Focusing on his goals, he wants to save the most money from his catering business without many administrative responsibilities. A SIMPLE or SEP plan would be appropriate. Because he is already contributing maximum elective deferrals for the year into the JJE Section 401(k) plan, he would not be permitted to defer a portion of his salary into a SIMPLE. Therefore, a SEP plan is the best choice. SEP and SIMPLE Similarities (1) Contributions made by an employer for both plans are tax deductible. Contributions by employees to SIMPLE plans are made on pre-tax basis and accumulate tax-deferred. (2) Owners must begin to take minimum distributions by April 1 a year after they reach 70½. (3) Owners can be any age with employment compensation. Differences between SEP and SIMPLE SEP = ALL contributions are funded by the employer SIMPLE = Employer and Employee contributions Maximum Limits SEP = Annual contributions by an employer to an employee’s IRA can’t exceed the lesser of 25% of compensation or $55,000 for 2018. SIMPLE = Employer (i) Employer Option 1 - Matching contribution up to 3% of employee’s compensation. (ii) Employer Option 2 - 2% nonelective contribution for each eligible employee. SIMPLE = Employee (i) $12,500 limit for 2018 ($13,000 for 2019) (ii) $3,000 additional catch-up contribution if over age 50 by Dec. 31

Question 218

Which of the following statements regarding the skilled nursing facility benefit under Medicare Part A is(are) CORRECT? 1. After 100 days of coverage in a benefit period, the patient must pay the entire cost of remaining in the facility. 2. The skilled nursing facility benefit pays the entire cost of the first 30 days while the patient is in the facility. 3. The skilled nursing facility benefit pays for custodial care received in a nursing home.

Answer 218

1 only

Question 219

Charles was an employee of ABC Corporation for 20 years. He received a lump sum distribution from his qualified retirement plan in 2017. The distribution was comprised entirely of ABC stock valued at $100,000 on the date of distribution. The value of the stock contributed to Charles’s individual account in the plan over the years was $70,000. If Charles does not sell the stock this year, what amount is included in his gross income in 2017 as a result of the distribution? A)$30,000. B)$0. C)$70,000. D)$100,000.

Answer 219

C In simplest terms, a qualified retirement plan is one that meets The Employee Retirement Income Security Act (ERISA) guidelines, while a non-qualified plan falls outside of ERISA guidelines. Qualified plans include 401(k), profit sharing plans, 403(b), and Keogh (HR-10) plans. Non-qualified plans include deferred-compensation, split-dollar life insurance, and executive bonus plans. The tax implications for the two plan types are also different. Except for a simplified employee pension (SEP) (NOTE - MJM = what about SIMPLE?), individual retirement accounts (IRAs) plans are not created by an employer and are not qualified plans.

Question 220

Which of the following statements regarding old age insurance under Social Security is NOT correct? A)A worker who is fully insured is eligible to receive reduced monthly retirement benefits as early as age 60. B)Old age insurance benefits are based on a worker’s primary insurance amount (PIA) which is a function of the worker’s average indexed monthly earnings (AIME) on which Social Security taxes have been paid. C)A person is fully insured for purposes of receiving Social Security retirement benefits if the worker has 40 Social Security credits. D)A worker is eligible for retirement benefits under the old age provisions of Social Security if the worker is fully insured under Social Security.

Answer 220

A Social Security’s full-benefit retirement age is increasing gradually because of legislation passed by Congress in 1983. Traditionally, the full benefit age was 65, and early retirement benefits were first available at age 62, with a permanent reduction to 80 percent of the full benefit amount. Currently, the full benefit age is 66 years and 2 months for people born in 1955, and it will gradually rise to 67 for those born in 1960 or later. Early retirement benefits will continue to be available at age 62, but they will be reduced more. When the full-benefit age reaches 67, benefits taken at age 62 will be reduced to 70 percent of the full benefit and benefits first taken at age 65 will be reduced to 86.7 percent of the full benefit.

Question 221

Carol has a retirement need of $30,000 annually in today’s dollars. She will retire in 15 years and projects a retirement period of 20 years. Carol believes she can achieve a 6% after-tax rate of return and is assuming a 4% annual rate of inflation. She has accumulated $175,000 toward her retirement plan. What lump-sum amount should Carol have accumulated over the next 15 years to support her retirement income need? A)$732,144. B)$503,707. C)$907,144. D)$873,553.

Answer 221

C Carol’s first year retirement income need is $54,028. PV = -$30,000 i = 4 n = 15 FV = $54,028 The total capital required to support this need for 20 years is $907,144. In BEGIN mode (the client will make annual withdrawals at the beginning of each year). Find the Present Value of the sum required to sustain 54,028 payments for 20 years. Real Rate of Growth. PMT = $54,028 n = 20 i = 1.9231 [(1.06 ÷ 1.04) - 1] × 100 PVAD = -$907,144

Question 222

Which of the following workers must have Medicare taxes withheld from their earnings? 1. A household worker, unrelated to the employer and age 25, who is paid $10,000 in 2017 2. An agricultural worker who paid in excess of a specified threshold

Answer 222

Both would have medicare taxes withheld

Question 223

Which of the following will cause an increase in the amount of capital needed on hand at the onset of retirement to fund a client’s retirement income objective? 1. All other things being equal, an increase in the assumed rate of return 2. All other things being equal, an increase in the retirement life expectancy 3. All other things being equal, an increase in the assumed inflation rate 4. All other things being equal, a decrease in the wage replacement ratio

Answer 223

2 and 3 A Replacement Ratio is a person’s gross income after retirement, divided by his or her gross income before retirement. For example, assume someone earns $60,000 per year before retirement. Further, assume he or she retires and receives $45,000 of Social Security and other retirement income. This person’s replacement ratio is 75 percent ($45,000/$60,000). Typically, a person needs less gross income after retiring, primarily due to several factors: (1) Income taxes go down after retirement. This is because extra deductions are available for those over age 65, and taxable income usually decreases at retirement. (2) Social Security taxes (FICA deductions from wages) end completely at retirement. (3) Social Security benefits are partially or fully tax free. This reduces taxable income and, therefore, the amount of income needed to pay taxes. (4) Other forms of retirement income, like pensions, are often are exempt from taxation by states (5) Saving for retirement is no longer needed. For all the reasons listed above, conventional wisdom has it that most people will need about a 75% replacement ratio to maintain their standard of living in retirement. Discussion typically focuses on finding ways to maximize sources of replacement ratio income: social security, pensions and retirement savings (401k, IRA, 403b, 457, etc.).

Question 224

The look-back period applicable to asset transfers intended to impoverish a donor to become eligible for Medicaid is A)60 months. B)6 months. C)12 months. D)36 months.

Answer 224

A The Medicaid look-back period is 60 months. If a transfer is made during the look-back period, the donor is not eligible for Medicaid for a period equal to the amount transferred divided by the average monthly cost of nursing care in the donor’s region. The site uses the example that if nursing home care costs $5,000 per month and the individual transferred $10,000, then the person is ineligible for Medicaid for two months. The penalty begins the month of the Medicaid application, not the month the individual transferred the property. If one has gifted assets or transferred them for under fair market value and are able to recuperate the assets, the penalization period will be reconsidered. Therefore, if there has been any violation of the look-back period, it is extremely important to try to recuperate all assets. Please note, in some states, all assets transferred must be recuperated or the penalization period will remain the same. However, other states might allow for partial recuperation of assets and adjust the penalty period accordingly.

Question 225

Which of the following government programs may pay for Harry’s nursing home expenses, assuming his only asset is his home and he requires only custodial care? A)Medicaid. B)Medicare Part A. C)Medicare Part D. D)Medicare Part B.

Answer 225

A Medicaid may pay for custodial nursing home care if the patient is indigent. Medicare Part A pays some nursing home expenses if the patient needs skilled nursing care, but does not pay for custodial care. Medicare Part B does not cover nursing home expenses, and Medicare Part D covers prescription drugs.

Question 226

Does Medicare B cover nursing home expenses?

Answer 226

No Part A Coverage: · Your hospital room and hospital meals · General nursing · Prescription drugs received in the hospital · Skilled nursing facility care · Hospice care · Home health care Part B Coverage: · Doctor visits both to primary care doctor and specialists · Some vaccines, including the flu shot · Mental health services · Annual physical exam · Durable medical equipment including wheelchairs and walkers · Emergency ambulance transportation · Physical, occupational, and speech therapy · Some preventive exams, tests, and screenings

Question 227

What does Medicare part D cover?

Answer 227

Prescription Drugs

Question 228

Maryellen, age 63, is receiving Social Security retirement benefits. She also works part time and her earnings are $10,000 more than the earnings limit. Her Social Security retirement benefits this year will be reduced by A)$10,000. B)$5,000. C)$7,500. D)$0.

Answer 228

B

Question 229

Which of the following types of Medicaid assets generally count when calculating one’s eligibility for Medicaid? 1. Checking and savings account 2. Life insurance with a face amount of under $1,500 3. Certificates of deposit 4. Stocks and bonds

Answer 229

1, 3, and 4 Statement 2 is incorrect. Life insurance with a face amount under $1,500, one motor vehicle, personal property and household belongings, and one’s primary residence with some limitations generally do not count when calculating eligibility for Medicaid.

Question 230

Which of the following statements regarding a payable-on-death (POD) account is(are) CORRECT? 1. A payable on death account is a bank or savings account controlled by the depositor so long as living, but with a provision that the account is payable to another if still open when the depositor dies. 2. Payable-on-death accounts are included in the depositor’s probate estate. 3. Payable-on-death accounts are considered a will substitute. 4. Payable-on-death accounts could create guardian problems if paid to a minor beneficiary.

Answer 230

1, 3, and 4 not included in a probate estate

Question 231

Jackie and Carmen are sisters who own real estate together. Jackie owns an undivided 35% interest in the property and Carmen owns an undivided 65% interest. Jackie and Carmen both have the right to sell their interest in the property or to leave their interest to anyone they choose under their wills. Which of the following describes this form of concurrent ownership? A) Tenancy by the entirety B)Community property C)Tenancy in common D) Joint tenancy with right of survivorship (JTWROS)

Answer 231

C

Question 232

Can tenancy in common be used by non spouse owners?

Answer 232

Yes

Question 233

Can community property be used by non spouse owners?

Answer 233

no

Question 234

Can tenancy by the entirety be used by non spouse owners?

Answer 234

No

Question 235

On January 15 of the current year, Kermit transfers property to an irrevocable trust. The trust is to pay Holly 5% of the trust assets valued annually each year for her life, with the remainder to be paid to a qualified charity. On September 1 of the next year, Kermit dies. Which of the following statements is(are) CORRECT? 1. This is a charitable remainder unitrust (CRUT). 2. Kermit receives a charitable income tax deduction equal to the present value of the remainder interest in the current year. 3. The value of the trust assets will be included in Kermit’s gross estate.

Answer 235

1 and 2

Question 236

Dave and Jessica are both successful professionals. They have been married for 30 years and have 3 grown children and 2 grandchildren. Their simple wills were executed in 1993. Since that time, they have acquired significant assets, including a beachfront cottage in another state which Dave inherited from his brother. In addition, Jessica has inherited a substantial amount of rare antiques from her mother. The couple would like to provide for their grandchildren, as well. They travel together quite often and are becoming concerned about the need to revise their wills. They also want to expedite the transfer of their estate assets. As their financial planner you recommend that they: 1. Make a lifetime transfer of the beachfront real estate. 2. Include a simultaneous death clause in their new wills. 3. Establish testamentary trusts for their grandchildren.

Answer 236

All statements are correct A lifetime transfer of property Dave owns in another state will avoid the expense and delays of ancillary probate. A simultaneous death clause may be useful if both spouses die in a common accident. Determining the order of death is important when settling their estates and allocating the marital deduction. Testamentary trusts allow the couple to accomplish their objective of providing for the grandchildren.

Question 237

Robin inherited 10 acres of land from her father, who died during the current year. A federal estate tax return was filed, and the land was valued at $25,000, its fair market value at the date of her father’s death. Her father had purchased the land several years ago for $5,000. What is Robin’s basis in the land? A)$10,000. B)$15,000. C)$25,000. D)$5,000.

Answer 237

C The basis for inherited property is the fair market value at the date of death or the alternate valuation date if it is elected. The alternate valuation date was not elected, so Robin’s basis in the land is $25,000.

Question 238

Conrad owns a sizeable portfolio of income producing investments. In preparing his estate plan, he plans to leave the portfolio to a testamentary trust. He wants to leave his wife, Edna, an interest in the trust but he wants to ensure that no portion of the trust assets will be included in her gross estate when she dies. Which of the following interests could he leave to Edna and still accomplish his goal? 1. The right to income from the trust for life. 2. The right to income from the trust for life, plus the power to invade the principal for her health, education, maintenance, and support (HEMS). 3. The right to income from the trust for life, plus a general power of appointment over the principal.

Answer 238

1 and 2 Statement 1 is correct. Conrad can give Edna the right to the trust income for life (a life estate) without the trust assets being included in her gross estate. Statement 2 is correct; if Edna’s right to invade the principal is limited to an ascertainable standard such as HEMS (health, education, maintenance, and support) the assets will not be included in her gross estate. Statement 3 is incorrect; if Edna has a general power of appointment over the trust assets, the trust assets will be included in her gross estate when she dies.

Question 239

If one spouse creates a trust and gives general power of appointment to the other spouse will the trust be excluded from the second spouse’s gross estate when they die?

Answer 239

No

Question 240

Which of the following statements regarding sale-leasebacks is(are) CORRECT? 1. In a sale-leaseback, a senior family sells fully depreciated business property to a junior family member and then leases it back. 2. The senior family member can deduct the lease payments made to the junior family member if there is a valid business purpose for the sale and an arm’s-length rental payment.

Answer 240

Both are correct

Question 241

Which of the following statements regarding the gift tax annual exclusion is(are) CORRECT? 1. The gift tax annual exclusion amount for 2017 is $14,000. 2. The annual exclusion applies to as many donees each year as the donor chooses. 3. The annual exclusion applies only to gifts of future interests.

Answer 241

1 and 2

Question 242

Elizabeth executes a qualified disclaimer of property left to her under her uncle’s will. As a result of the disclaimer, the property passes to Elizabeth’s cousin, Roger. Which of the following statements regarding the effects of this disclaimer is(are) CORRECT? 1. Elizabeth is treated as having made a gift to Roger. 2. Elizabeth is treated as never having received the property.

Answer 242

2 only

Question 243

Mike wants to immediately transfer some of his business property to his son James. Mike has made no previous gifts and is in great health. However, during the remainder of his life he will need income on which to live. He has asked his financial planner for advice on which device will achieve his objectives. Which of the following devices should the financial planner recommend as most likely to achieve Mike’s objectives? A)Grantor retained annuity trust (GRAT). B)Buy-sell agreement to take effect at death. C)Qualified person residence trust (QPRT). D)Outright gift.

Answer 243

A

Question 244

Ron and Barbara, age 65, have decided that, in order to best pay their $3,000,000 federal estate tax bill, they will purchase a second-to-die life insurance policy. In order to keep the proceeds out of their estate, they were advised to create an irrevocable life insurance trust. Jack and Jill applied for the insurance and the policy was issued to them. An irrevocable trust was drafted. The policy was transferred into the irrevocable trust, and 90 days later both Jack and Jill were killed in a plane crash. The Internal Revenue Service wants to include the insurance in the estate for tax purposes. Which statement(s) is (are) CORRECT? 1. The insurance will be included in the estate because the trust was drafted after the insurance was approved. 2. The insurance will be included in the estate because the premiums were a gift from the insured. 3. The insurance will be included in the estate because the insureds transferred the policy within three years of death. 4. The Internal Revenue Service is has made an error-the insurance will not be included in the estate.

Answer 244

3 only

Question 245

To qualify for the marital deduction, property must pass to the surviving spouse. How can property pass and still qualify for the deduction? 1. By will 2. By survivorship 3. By intestacy 4. By power of appointment

Answer 245

All are correct

Question 246

Which of the following are features of the QTIP trust? 1. The surviving spouse receives the income from the trust for life. 2. Generally, property in the QTIP trust must be included in the surviving spouse’s gross estate to the extent it is not consumed during the surviving spouse’s lifetime.

Answer 246

Both are correct

Question 247

Which of the following statements regarding a living trust is (are) CORRECT? 1. The trust assets do not pass through probate. 2. A living trust is a probate-avoidance method in which property is transferred to a trust during an individual’s lifetime and is distributed according to the terms of the trust.

Answer 247

Both are correct

Question 248

Generally, which of the following property is subject to probate? 1. Property owned outright in one’s own name at the time of death (fee simple). 2. An interest in property held as tenants in common. 3. Life insurance and other death proceeds payable to the decedent’s estate. 4. The decedent’s half of any community property.

Answer 248

All of these statements are correct

Question 249

Which of the following statements regarding probate is(are) CORRECT? 1. Probate may be costly and create delays in the distribution of assets. 2. Probate is open to public scrutiny. 3. Probate protects creditors. 4. Probate provides heirs and/or legatees with clear title to property.

Answer 249

All of these statements are correct

Question 250

the process of determining whether and how an individual can meet life goals through the proper management of financial resources

Answer 250

Financial planning

Question 251

What are the 8 job task domains of CFP’s?

Answer 251

1. Establishing and defining the client - planner relationship 2. Gathering necessary data 3. Analyzing and evaluating clients current financial status 4. Develop recommendations 5. Communicate the recommendations 6. Implement recommendations 7. monitor the recommendations 8. practice within professional and regulatory standards

Question 252

What is the 6 step financial planning process?

Answer 252

1. Establish and define client-planner relationship 2. Gather necessary info/data to fulfill engagement 3. Analyze and evaluate client’s financial status 4. Develop and communicate relationships 5. Implement recommendations 6. Monitor recommendations

Question 253

What are the 3 Life Cycle phases of Financial Planning?

Answer 253

1. Asset Accumulation 2. Conservation/Protection 3. Distribution/Gifting

Question 254

When does the asset accumulation phase take place in a client’s life?

Answer 254

ages 20 - 45 sometimes 25-45

Question 255

Stages of asset accumulation phase

Answer 255

stage 1 low net worth to start usually high % of debt to net worth lack of concern for risks stage 2 increase in cash for investing less debt as a % of net worth higher net worth

Question 256

When does the conservation/protection phase take place in a client’s life?

Answer 256

age 45-60 (or 45 to retirement age) In some cases could last until death

Question 257

Do people become more or less risk averse in the conservation/protection phase?

Answer 257

More, they start to fear losing money that they had built up for so many years

Question 258

This phase begins when a person realizes that he/she can afford to spend money on things he/she may have never believed possible

Answer 258

distribution/gifting phase

Question 259

An investor’s willingness to accept risk

Answer 259

Risk tolerance

Question 260

sometimes described as the tradeoff a client is willing to make between risks and rewards

Answer 260

Risk tolerance

Question 261

A client’s assessment of the magnitude of the risks being traded off

Answer 261

Risk perception

Question 262

the degree to which a client’s financial resources can cushion risks

Answer 262

Risk capacity

Question 263

this theory involves clients valuing gains and losses differently and as a result making decisions based on perceived gains rather than perceived losses

Answer 263

Loss aversion

Question 264

the ability to recognize emotional expressions in oneself and the client, as well as selecting socially appropriate responses to both the circumstances and the client’s emotions

Answer 264

Emotional Intelligence

Question 265

paying full attention to what the client is saying and responding by paraphrasing the client’s comments

Answer 265

Active listening

Question 266

guide the client to give more detail

Answer 266

Leading responses

Question 267

nonverbal messages involving facial expressions, gestures, abd body posture

Answer 267

Body Language

Question 268

a client’s past history or conditions

Answer 268

Context

Question 269

Liabilities due within one year

Answer 269

current liabilities

Question 270

Liabilities due in more than a year

Answer 270

long term liabilities

Question 271

Examples of variable outflows/expenses

Answer 271

food, utilities, medical, clothing

Question 272

Examples of fixed outflows/expenses

Answer 272

Mortgage payments, auto insurance, life/disability insurance

Question 273

Current Ratio

Answer 273

current assets/current liabilities

Question 274

indicates the ability to meet short-term obligations

Answer 274

Current ratio

Question 275

assets that can be converted into cash within one year

Answer 275

currect assets

Question 276

do you want a lower or higher current ratio?

Answer 276

higher

Question 277

a current ratio greater than __________ indicates that the client can pay off existing short term liabilities with available liquid assets

Answer 277

1

Question 278

Consumer debt ratio

Answer 278

non-housing monthly debt payments/monthly net income A key difference between consumer debt and other forms of debt (e.g. corporate secured debt) is that consumer debt is typically used for consumption and not investment or doing business For this calculation do not include your mortgage, rent or home equity payments, or credit card expenditures that you pay in full each month, but do include all other monthly debt payments: car and truck loans, credit card balances, personal loans, school loans, and installment debt.

Question 279

Your consumer debt ratio should not exceed_____%

Answer 279

20% If your consumer debt ratio is 10% or less, you are borrowing wisely. If your consumer debt ratio is between 10% and 20%, you are borderline. If your consumer debt ratio is over 20%, you may have serious debt problems. Only 5% of the population owes such a high percentage of consumer debt. Stop using credit. Stop spending unnecessarily. If your consumer debt ratio is over 25%, GET HELP NOW! You need to make changes immediately. You may want to get debt counseling by professionals.

Question 280

housing cost ratio

Answer 280

all monthly non-discretionary housing costs / monthly gross income

Question 281

Your housing cost ratio should not exceed _______%

Answer 281

28% Borrowers thinking of a potential home loan purchase may want to use the 28% and 36% levels when planning their monthly budgets. Keeping monthly housing expenses at 28% of a borrower’s income can help to create an estimate for how much a borrower can afford to pay monthly on a mortgage. Generally, keeping total debt-to-income far below 36% can also make it easier for a borrower to obtain all types of credit and specifically mortgage credit when applying for a mortgage loan.

Question 282

Debt to income ratio (total debt ratio)

Answer 282

all monthly debt payments and housing costs / gross monthly income

Question 283

Your debt to income ratio should not exceed_____%

Answer 283

36%

Question 284

Savings ratio

Answer 284

savings per year / gross income

Question 285

How much should a client have saved up in an emergency fund?

Answer 285

3 to 6 months worth of non discretionary cash flows 3 months if both spouses work 6 months if single or only one spouse works

Question 286

what are some examples of non discretionary expenses?

Answer 286

mortgage, auto payments, taxes

Question 287

a recurring or nonrecurring expense for an item or service that is nonessential or more expensive than necessary

Answer 287

Discretionary expense

Question 288

What are some examples of fixed discretionary expenses?

Answer 288

club dues premium tv packages video game subscriptions

Question 289

What are some examples of variable discretionary expenses?

Answer 289

Vacation Entertainment Alcohol Gambling

Question 290

a recurring or nonrecurring expense for an item or service that is essential for an individual to maintain his/her life

Answer 290

Nondiscretionary expense

Question 291

What are examples of fixed nondiscretionary expenses?

Answer 291

Housing costs Insurance premiums Loan payments

Question 292

What are examples of variable nondiscretionary expenses?

Answer 292

food clothing taxes

Question 293

If a client has multiple debt obligations, which one should they attempt to pay off first, the higher interest rate or lower interest rate debt?

Answer 293

The higher interest rate debt

Question 294

Mortgages that have a level interest rate for the term of the loan

Answer 294

Fixed mortgages

Question 295

Fixed mortgages have ____ payment amortization schedules

Answer 295

fixed

Question 296

With fixed rate mortgages, the _______ the term, the higher the monthly payment will be given the same interest rate

Answer 296

shorter

Question 297

mortgages where interest rates might change

Answer 297

Variable / adjustable rate mortgages

Question 298

What could happen when an Adjustable Rate Mortgage does not have any caps?

Answer 298

Negative amortization could occur, meaning the mortgage balance may become greater than the home value

Question 299

mortgages guaranteed by the federal government

Answer 299

FHA Loans (Federal Housing Administration)

Question 300

Do FHA loans typically have low or high down payments?

Answer 300

low

Question 301

Can FHA Loans have lower interest rates than other loans?

Answer 301

sometimes since they are guaranteed by the government

Question 302

Is mortgage insurance required with FHA loans?

Answer 302

Yes

Question 303

____ is a policy that protects lenders against losses that result from defaults on home mortgages

Answer 303

Mortgage Insurance

Question 304

FHA requirements include mortgage insurance primarily for borrowers making a down payment of less than ____%

Answer 304

20%

Question 305

Mortgages for veterans of the U.S. military

Answer 305

Veterans Administration Mortgage (VA Mortgage) There are three types of VA loans: purchase loans, interest rate reduction refinance loans (or IRRRL, also referred to as a VA streamline refinance loan), and cash-out refinance loans. There are many benefits to a VA loan, but one of biggest benefits is that no down payment is needed to purchase a home. This can make home ownership a reality for active military or veterans who might otherwise not be able to afford it.

Question 306

True or False? VA Mortgages don’t require a down payment

Answer 306

True The VA loan program offers some of the most attractive and flexible loan benefits available, and they are exclusively for military personnel, veterans and their families. Perhaps the two biggest benefits that make these loan more affordable than a typical loan are that the borrower typically does not need to make a down payment, and there is no private mortgage insurance (PMI) requirement. According to the VA there is “no maximum that an eligible veteran may borrow using a VA-guaranteed loan.” However, there are county limits that must be used to calculate the VA’s maximum guaranty amount for a particular county. In other words, there’s no limit to how much you can spend on your new home with a VA loan, but the VA has limits on how much liability it will assume, which can affect the amount of money your lender will let you borrow. Generally, eligible veterans or military personnel can get loans up to $417,000 with no money down. But that number can be much higher in certain counties that have a higher cost of living. Review the list of county limits for VA loans here.

Question 307

True or False? VA Mortgages don’t require mortgage insurance

Answer 307

True No down payment required (unless required by the lender or the purchase price is more than the VA loan limits) Negotiable and competitive interest rate. Ability to finance the VA funding fee (plus reduced funding fees with a down payment of at least 5 percent and exemption for veterans receiving VA compensation). VA rules limit the amount you can be charged for closing costs. Closing costs are comparable with other financing types (and may be lower). Closing costs may be paid by the seller. No private mortgage insurance premiums are required. An assumable mortgage. Right to prepay your mortgage without penalty. For homes inspected by VA during construction, a warranty from builder and assistance from VA to obtain cooperation of builder. VA assistance to veteran borrowers in default due to temporary financial difficulty.

Question 308

True or False? VA Mortgages have the same federal guarantee as FHA mortgages

Answer 308

True

Question 309

Mortgages where the borrower only pays the interest on a monthly basis

Answer 309

Interest only mortgages

Question 310

When a borrow selects an interest only mortgage what are they hoping happens?

Answer 310

They hope the value of the home increases enough that at the time of sale they can use the proceeds to pay off the principal balance of the mortgage

Question 311

Interest only mortgages are ___ risky

Answer 311

very

Question 312

mortgages where the lender pays the homeowner an income stream secured by equity in the home

Answer 312

Reverse Mortgages The amount of money you’ll receive from a reverse mortgage depends on two major factors. (1) The more equity you have in your home, the more money you can take out. For most borrowers, it’s best if you’ve been paying down your loan over many years and your mortgage is almost completely paid off. The FHA limits HECM mortgages to $726,525 as of 2019 or the appraised value of your home, whichever is less. (2) The age of the youngest borrower on the loan also affects how much you get. Older borrowers can take more. Be very careful, however, if you’re tempted to exclude somebody younger to get a higher payout. A younger spouse would have to move out at the death of the older borrower if the younger person isn’t included on the loan.

Question 313

what are reverse mortgage payments based off of?

Answer 313

value of home and age of homeowner

Question 314

how old must you be to use a reverse mortgage?

Answer 314

62 or older You generally don’t have to repay these loans until you move out of your house or die. You must typically certify to the lender each year that you do indeed still live in the residence. Otherwise, the loan will come due. Several sources for reverse mortgages exist, but one of the better options is the Home Equity Conversion Mortgage (HECM) that’s available through the Federal Housing Administration. An HECM is generally less expensive for borrowers due to government backing, and rules for these loans make them relatively consumer-friendly.

Question 315

Is the initial rate on an adjustable rate mortgage higher or lower when compared to a fixed rate mortgage?

Answer 315

Lower

Question 316

How often does an adjustable rate mortgage reset it’s interest rate?

Answer 316

usually once per year

Question 317

What are the typical caps on adjustable rate mortgages?

Answer 317

2% per year and 6% lifetime

Question 318

Which type of mortgage loan requires less income for qualification purposes, fixed or adjustable rate?

Answer 318

adjustable rate

Question 319

fees paid directly to the lender at closing in exchange for a reduced interest rate

Answer 319

mortgage points When is it worth it to buy points? Deciding whether to pay mortgage points depends largely on two factors: (1) How long you plan to stay in the home. (2) How much money you have to put down at closing. If you are planning to move or refinance in a few years, paying points is probably not a good move. “Buying down your interest rate through discount points is a financial decision that looks better the longer you own the home,” says Greg McBride, CFA, Bankrate’s chief financial analyst. “The upfront payment of points translates into a permanently lower monthly mortgage payment, so the longer you benefit from those lower payments, the better return on investment you get from paying points.”

Question 320

Mortgage payments consist of four components, what are they?

Answer 320

Principal Interest Taxes Insurance

Question 321

Two biggest advantage of owning a home over renting?

Answer 321

Equity Tax deductions

Question 322

True or False? A depositor does not have to be a US citizen or even a resident of the US to be covered by FDIC insurance

Answer 322

True

Question 323

True or False? FDIC insurance protects deposits that are made payable in the US and overseas

Answer 323

False Only US

Question 324

True or False? securities, mutual funds, and similar investments are covered by FDIC Insurance

Answer 324

false

Question 325

What is the maximum amount insured by the FDIC?

Answer 325

$250,000 Currently, the basic FDIC insurance limit is $250,000 per depositor (account holder), per insured bank. However, it’s possible to have more than $250,000 fully insured with a single bank, if your money is strategically divided among the different categories of account ownership. As long as you stay under the limit for each ownership category, you can safely keep much more than $250,000 in one bank.

Question 326

Is accrued interest included when calculating FDIC coverage? Does insurance from the Federal Deposit Insurance Corp. cover the accrued interest on a CD (as well as the principal) if the CD plus interest is less than $100,000?

Answer 326

Yes “FDIC deposit insurance covers the balance of each depositor’s account, dollar-for-dollar, up to the insurance limit, including principal and any accrued interest through the date of the insured bank’s closing.”

Question 327

a state law that allows an adult to make an irrevocable gift to a minor

Answer 327

Uniform Gift to Minor Act

Question 328

True or False? funds received from a Uniform Gift to Minor are included in the receiver’s single ownership accounts for FDIC purposes

Answer 328

True Contributions to UGMA accounts are made with after-tax dollars—the donor doesn’t receive an income tax deduction for making them. However, up to $15,000 per individual ($30,000 for a married couple) can be contributed free of gift tax. For federal tax purposes, the minor or beneficiary is considered the owner of all assets in a UGMA account and the income they generate. But these accounts’ earnings can be taxed either to the child or the parent. Reporting requirements depend on the amount of income the account generates and the beneficiary’s age Under certain circumstances, parents can elect to report their children’s UGMA accounts on their own tax returns, thereby taking advantage of the “kiddie tax” or Tax on a Child’s Investment and Other Unearned Income. This means that if the child’s unearned income, including UGMA earnings, was less than $2,100 in 2019 and he or she was no older than 19 (or 24 if a full-time student) at the end of the corresponding tax year, parents can elect to report their child’s income on their own tax return. In this case, the first $1,050 of the child’s unearned income is tax-free. The next $1,050 is taxed at the child’s tax rate. Anything exceeding $2,100 is taxed at the parents’ tax rate. If such an election is not made or if the child’s unearned income exceeded $2,100 at the end of the tax year, the minor would have to file a tax return subject to “kiddie tax” rules.

Question 329

Are legal entities such as corporations and partnerships eligible for joint account deposit insurance?

Answer 329

No

Question 330

If joint account owners don’t have the same ownership/signature rights, will the account be insured as joint? If a joint account specifies a specific dollar amount for owners to withdraw, will the account be insured as joint?

Answer 330

No Yes

Question 331

What are the four most common categories of ownership?

Answer 331

Single Accounts -All accounts owned by the same one person at the same insured bank are totaled and insured up to $250,000. For example, if you have a savings account with a $200,000 balance and a CD of $80,000, you would be uninsured for the $30,000 that exceeds the $250,000 limit. Joint Accounts -Assuming all owners have equal rights to the money in each account, each account holder’s share of the joint accounts at the same insured bank are totaled and insured up to $250,000. -For example, let’s say you and your spouse hold a joint checking account with a balance of $350,000, and you hold a joint checking account with your daughter that has a balance of $30,000. You would be fully covered because your half of the checking account is $175,000 and your half of the savings account is $15,000, totaling $190,000, which is still below the $250,000 limit. -A person’s share in a joint account is not combined with the amounts owned in single accounts to come up with a total; each account holder is entitled to $250,000 of FDIC coverage in single accounts and $250,000 FDIC coverage in joint accounts. Revocable Trusts Trust accounts are treated differently. Only the interests of the beneficiaries to the trust are insured; owners of a trust account are not insured. Generally speaking, funds are insured up to $250,000 for each beneficiary, per account owner. So, for example, if a couple (mother and father) had $800,000 in a qualified living trust account naming two children as equal beneficiaries, the entire account balance would be fully insured. This is because each beneficiary is covered up to $500,000—$250,000 via the mom and $250,000 via the dad. With a balance of $800,000, the account does not exceed the combined $1,000,000 limit. Self-Directed Retirement Accounts This includes all individual retirement accounts (IRAs), Roth IRAs, Section 457 plan accounts, self-directed defined contribution plan accounts (such as 401(k)s), and self-directed Keogh accounts owned by one person. The total balance in any one or a combination of these accounts at the same institution is insured up to $250,000. This applies only to the portion of your retirement account balance that is in bank deposits, such as CDs and money market accounts. The portion of your retirement account in mutual funds, bonds, and other investments remains uninsured, even if you purchased them through an FDIC-insured bank.

Question 332

What is the maximum value a revocable trust (e.g. living trust, family trust, payable on death, totten trust) is insured for?

Answer 332

Three Criteria First: (1) Formal Rev Trust (Living Trust or Family Trust) and Informal Trust (POD, Totten, As trustee for, In trust for) (2) At the time a bank fails, the beneficiary must be entitled to his or her interest in the revocable trust assets upon the grantor’s death. The FDIC recognizes life estate and remainder beneficiaries, but not contingent beneficiaries (3) The beneficiaries are living individuals and/or an IRS-qualifying charity or nonprofit organization HOW MANY BENEFICIARIES DOES THE TRUST/ACCOUNT OWNER DESIGNATE (4) Five or Fewer - When a revocable trust owner designates five or fewer beneficiaries, the owner’s trust deposits are insured up to $250,000 for each unique beneficiary. When there are five or fewer beneficiaries, maximum deposit insurance coverage for each trust owner is determined by multiplying $250,000 times the number of unique beneficiaries, regardless of the dollar amount or percentage allotted to each unique beneficiary. (5)(a) Five or More - EQUAL INTEREST IN THE TRUST - When all the beneficiaries are assigned equal amounts in the trust, the trust owner receives insurance coverage up to $250,000 for each unique beneficiary. (5)(b) Five or More - UNEQUAL BENEFICIAL INTERESTS - When beneficiaries do not have equal interests, the owner’s revocable trust deposits are insured for the greater of either: (i) The sum of each beneficiary’s actual interests up to $250,000 for each unique beneficiary, OR (ii) A minimum coverage amount of $1,250,000. Note on formal revocable trust accounts: An owner who designates a beneficiary as having a life estate interest in a formal revocable trust is entitled to insurance coverage up to $250,000 for that beneficiary. A life estate beneficiary is a beneficiary who has the right to receive income from the trust or to use trust deposits assets during the beneficiary’s lifetime, where other beneficiaries receive the remaining trust deposits assets after the life estate beneficiary dies. Contingent or secondary beneficiaries, however, are not included in the calculation.

Question 333

In a revocable trust, what is the maximum insurable limit for each beneficiary?

Answer 333

$250,000

Question 334

What happens in regards to insurance when the revocable trust is greater than $1,250,000 and there’s more than 5 beneficiaries?

Answer 334

The FDIC coverage is the greater of $1,250,000 or the aggregate of all beneficiaries proportional interest limited to $250k per bene

Question 335

________ insures credit union member’s accounts

Answer 335

National Credit Union Share Insurance Fund (NCUSIF)

Question 336

_______ are licensed financial institutions that specialize in the selling and buying of securities

Answer 336

brokerage companies

Question 337

________ provides protection for assets and income against various insurable risks through risk sharing and risk transfer

Answer 337

Insurance Companies

Question 338

Mutual Funds are also known as ______

Answer 338

open-end invesment companies

Question 339

What are the 4 goals of state regulations regarding insurance companies

Answer 339

Solvency - Keep insurers solvent Substandard Practices - Safeguard policyholders against substandard insurer practices Availability - Ensure that coverage is available to all individuals Competition - Maintain competition among companies

Question 340

What is the maximum credit allowed under the American Opportunity Tax Credit?

Answer 340

$2,500 The American opportunity tax credit (AOTC) is a credit for qualified education expenses paid for an eligible student for the first four years of higher education. You can get a maximum annual credit of $2,500 per eligible student. If the credit brings the amount of tax you owe to zero, you can have 40 percent of any remaining amount of the credit (up to $1,000) refunded to you. The amount of the credit is 100 percent of the first $2,000 of qualified education expenses you paid for each eligible student and 25 percent of the next $2,000 of qualified education expenses you paid for that student. But, if the credit pays your tax down to zero, you can have 40 percent of the remaining amount of the credit (up to $1,000) refunded to you. INCOME LIMITS (1) To claim the full credit, your MAGI,♦ modified adjusted gross income must be $80,000 or less ($160,000 or less for married filing jointly). (2) You receive a reduced amount of the credit if your MAGI is over $80,000 but less than $90,000 (over $160,000 but less than $180,000 for married filing jointly). (3) You cannot claim the credit if your MAGI is over $90,000 ($180,000 for joint filers

Question 341

Under the American Opportunity Tax Credit, _____% of qualified expenses up to $2,000 and _____% of the next $2,000 are available for the credit

Answer 341

100% and 25%

Question 342

What are the Income Phaseouts for the American Opportunity Tax Credit?

Answer 342

AGI MFJ: $160-180k All other tax payers: $80-$90k

Question 343

A student must be enrolled at least ____ ____ to use the American Opportunity Tax Credit

Answer 343

half time To be eligible for AOTC, the student must: Be pursuing a degree or other recognized education credential Be enrolled at least half time for at least one academic period* beginning in the tax year Not have finished the first four years of higher education at the beginning of the tax year Not have claimed the AOTC or the former Hope credit for more than four tax years Not have a felony drug conviction at the end of the tax year

Question 344

Are room and board considered qualified expenses for the american opportunity tax credit?

Answer 344

No For AOTC only, expenses for books, supplies and equipment the student needs for a course of study are included in qualified education expenses even if it is not paid to the school. For example, the cost of a required course book bought from an off-campus bookstore is a qualified education expense. Even if you pay the following expenses to enroll or attend the school, the following are not qualified education expenses: Room and board Insurance Medical expenses (including student health fees) Transportation Similar personal, living or family expenses

Question 345

True or False? If a tax payer owes no taxes they can still use the American Opportunity Tax Credit?

Answer 345

Yes

Question 346

____% of the American Opportunity Tax Credit is eligible for a tax refund

Answer 346

40%

Question 347

provides tax payers reimbursement for qualified tuition and related expenses on a per family basis

Answer 347

Lifetime Learning Credit

Question 348

What is the maximum credit available with the lifetime learning credit?

Answer 348

$2,000

Question 349

To get the maximum credit available with the lifetime learning credit, how much do qualified expenses need to be?

Answer 349

$10,000 20% x 10,000 = 2,000 You can claim the Lifetime Learning credit if you, your spouse, or any of your dependents are enrolled at an eligible educational institution, and if you were responsible for paying those college costs. $10,000 is the collective cap. You can’t claim a credit for each student. The Lifetime Learning credit isn’t restricted to the first four years of undergraduate enrollment, and the student doesn’t necessarily have to attend full time. You might still be eligible if she took only one class. Qualifying expenses include amounts paid for tuition and any required fees such as registration and student body fees. They do not include books, supplies, equipment, room and board, insurance, student health fees, transportation, or living expenses.

Question 350

Is half time enrollment required for the lifetime learning credit?

Answer 350

No

Question 351

True or False? The lifetime learning credit can be claimed for an unlimited number of years?

Answer 351

True

Question 352

During what years can a tax payer use the American Opportunity Tax Credit?

Answer 352

Only the first 4 years of post secondary education

Question 353

What are the income phaseouts for the lifetime learning credit?

Answer 353

AGI - 20K & 10K Differences - Lower Phsaeout MAGI MFJ: $114-$134k MAGI All others: $57-$67k AOTC - 20K & 10K Differences - Higher Phaseout MAGI MFJ: $160K-$180K MAGI All Others: $80K - $90K

Question 354

True or False? Tax payers can claim both the American Opportunity Credit and the Lifetime Learning Credit for the same child

Answer 354

False

Question 355

How much of an employer’s educational assistance program can be excluded from the employee’s income?

Answer 355

$5,250 - If you don’t have an educational assistance plan, or you provide an employee with assistance exceeding $5,250, you must include the value of these benefits as wages, unless the benefits are working condition benefits. (Don’t worry about working conditional benefits right now) Educational assistance means amounts you pay or incur for your employees’ education expenses. These expenses generally include the cost of books, equipment, fees, supplies, and tuition. However, these expenses don’t include the cost of a course or other education involving sports, games, or hobbies, unless the education: (i) Has a reasonable relationship to your business, OR (ii) Is required as part of a degree program. Education expenses don’t include the cost of tools or supplies (other than textbooks) your employee is allowed to keep at the end of the course. Nor do they include the cost of lodging, meals, or transportation. Your employee must be able to provide substantiation to you that the educational assistance provided was used for qualifying education expenses. SEPARATE WRITTEN PLAN - The program qualifies only if all the following tests are met: (1) The program benefits employees who qualify under rules set up by you that don’t favor highly compensated employees. To determine whether your program meets this test, don’t consider employees excluded from your program who are covered by a collective bargaining agreement if there is evidence that educational assistance was a subject of good-faith bargaining. (2) The program doesn’t provide more than 5% of its benefits during the year for shareholders or owners (or their spouses or dependents). A shareholder or owner is someone who owns (on any day of the year) more than 5% of the stock or of the capital or profits interest of your business. (3) The program doesn’t allow employees to choose to receive cash or other benefits that must be included in gross income instead of educational assistance. (4) You give reasonable notice of the program to eligible employees.

Question 356

Can an employee claim a lifetime learning credit or american opportunity tax credit if their employer’s educational assistance program pays for the same expenses? is there an exception?

Answer 356

No Yes, the employee will be able to use a credit for expenses in excess of $5,250

Question 357

What is the maximum amount of student loan interest that is deductible?

Answer 357

$2,500 per year

Question 358

What is are the 2017 income phaseouts for student loan interest deduction?

Answer 358

MAGI MFJ: $135-$165k Single: $65-$80k

Question 359

529 plans that allow contributors to prepay tuition today at a particular school for an individual in the future

Answer 359

Prepaid Tuition Plans

Question 360

Two risks associated with Prepaid Tuition Plans

Answer 360

The beneficiary may choose a different school The beneficiary may not be acepted to the school

Question 361

Type of 529 plan that allows an individual to make contributions today into a savings fund?

Answer 361

College Savings Plan

Question 362

True or False? Contributions of property can be made to 529 plans

Answer 362

False

Question 363

What are some advantages to 529 plans?

Answer 363

Tax deferred growth (Coverdell is as well and has a broader range of investment options) Tax free distributions if used for qualified expenses (Coverdell is the same BUT Taxpayers cannot double dip. Taxpayers cannot use the same expenses to justify both the exclusion from income for distributions from a Coverdell education savings account and another education tax benefit, such as a tax-free distribution from a 529 college savings plan or the American Opportunity Tax Credit.) Contributions aren’t phased out (Coverdell = The maximum contribution is reduced proportionately for taxpayers who file federal income tax returns with AGI between $95,000 and $110,000 (single) and between $190,000 and $220,000 (married filing jointly). Married taxpayers who file separate returns may not contribute to a Coverdell education savings account. There is no income limitation on contributions from corporations, trusts and other organizations. The income phaseouts are not adjusted annually for inflation.) Many states offer state income tax deductions for contributions Owner can change bene at anytime (Coverdell = The beneficiary of a Coverdell education savings account may be changed to a member of the family of the current beneficiary, provided that the new beneficiary has not yet reached 30 years of age. Rollovers to the Coverdell education savings account of a member of the family of the current beneficiary are also permitted once per 12-month period, provided that the new beneficiary has not yet reached 30 years of age.)

Question 364

What are the qualified expenses under 529 plans?

Answer 364

Tuition Books Fees Supplies Some room and board expenses

Question 365

When is the 10% penalty of funds not used for qualified education expenses waived

Answer 365

Death Disabled Beneficiary receives a scholarship and the distributed funds are less than or equal to the value of scholarship

Question 366

True or False? Contributions to a Coverdell Education Savings Account can’t be made after a beneficiary reaches age 18

Answer 366

True You may be able to contribute to a Coverdell ESA to finance the beneficiary’s qualified education expenses. Contributions must be made in cash, and they’re not deductible. Any individual whose modified adjusted gross income is under the limit set for a given tax year can make contributions. Organizations, such as corporations and trusts can also contribute regardless of their adjusted gross income. Contributors must contribute by the due date of their tax return (not including extensions). There’s no limit to the number of accounts that can be established for a particular beneficiary; however, the total contribution to all accounts on behalf of a beneficiary in any year can’t exceed $2,000. In general, the designated beneficiary of a Coverdell ESA can receive tax-free distributions to pay qualified education expenses. The distributions are tax-free to the extent the amount of the distributions doesn’t exceed the beneficiary’s qualified education expenses. If a distribution exceeds the beneficiary’s qualified education expenses, a portion of the earnings is taxable to the beneficiary. Amounts remaining in the account must be distributed when the designated beneficiary reaches age 30, unless the beneficiary is a special needs beneficiary. Certain transfers to members of the beneficiary’s family are permitted.

Question 367

What are the income phaseouts for Coverdell plans?

Answer 367

MAGI Single: $95-$110k MFJ: $190-$220k

Question 368

What is the maximum contribution that can be made to a coverdell plan?

Answer 368

$2,000 per beneficiary combined from all sources

Question 369

When must all funds in a Coverdell be distributed by?

Answer 369

The beneficiary’s age 30 (+30 days)

Question 370

How are Series EE and I bonds taxed in regards to their interest?

Answer 370

Accumulated interest is taxed when bond is cashed in, but the interest may also be non taxable if a family member has qualified higher education expeneses

Question 371

How low and how high can face values of series EE bonds be?

Answer 371

low = $25 high=$10,000

Question 372

Rules for Series EE bonds to have a tax free status

Answer 372

Owned by the parent or parents of the student/child Parent(s) must be 24 years old before the first day of the month the bond was issued Owners must redeem the bonds in the same year that the student’s qualified expenses are paid

Question 373

What is the largest need-based student aid program?

Answer 373

Federal Pell Grants One of the primary products that guidance counselors and college financial aid officers rely on to obtain funding for students in need is the Federal Pell Grant. This is not a loan, does not need to be repaid in any way, and is usually referred to as “the foundation of federal student financial aid” because it is the first step in obtaining additional funds from other sources. For a student or family to receive some other popular grants they must have been awarded a Federal Pell Grant. Colleges will always be able to meet the funding needs of their Pell Grant students because the federal government delivers the entire sum required. Students who receive the Pell Grant do not need to worry about any other funding or aid they will receive impacting the amount of their Pell Grant, the enrollment status of a student however does effect the amount awarded. A student not enrolled for the full academic year, or one who is only a “part-time” student will not be granted the same funding as a full time, full year student. Once the Pell Grant has been awarded any additional financial needs for students in exceptional financial need, can be met through a Federal Supplemental Educational Opportunity Grant, or FSEOG. These are funds awarded by the school, not by a government agency. Each year certain schools receive FSEOG funds, and must use them or face the reduction or even elimination of the grant the following year.

Question 374

a form of student aid in which the government gives outright gifts to a student based on needed and the cost of attending the chosen school

Answer 374

Federal Pell Grants You’re eligible for a Pell Grant if you have financial need. The U.S. Department of Education determines your financial need by taking the information you supply when applying for a Pell Grant (for example, your family income) and plugging it into a standard formula to produce a number called the Expected Family Contribution (EFC). The EFC is then compared to the expected cost of attending your college (tuition and fees, room and board, books, and supplies) to determine the financial aid for which you’re eligible. To be eligible for a Pell Grant, you must also: Be an undergraduate student who has not earned a bachelor’s degree (with some exceptions for students in post baccalaureate teaching programs) Be enrolled or accepted for enrollment as a regular student in an eligible degree or certificate program Have earned a high school diploma or a GED or have completed a high school education in an approved home-school setting Be a U.S. citizen or an eligible noncitizen The maximum Pell Grant for the 2016-17 award year was $5,815. The maximum Pell Grant for the 2017-18 award year is $5,920. The maximum Federal Pell Grant for the 2019–20 award year (July 1, 2019, through June 30, 2020) is $6,195. The amount of the grant depends on your financial need and other factors, including the amount of time you attend college (whether a full academic year or less, and whether you attend full-time or part-time). You cannot receive Pell Grant funds from more than one college at a time. A college may credit Pell Grant funds to your account, pay you directly or use a combination of these two methods. The college must notify you in writing of the amount of the Pell Grant, and of how and when payments are made. Colleges must pay at least once per term, whether that is a semester, trimester, or quarter. Colleges that don’t use formally defined traditional terms must pay the student at least twice per academic year.

Question 375

Who is eligible for Federal Pell Grants?

Answer 375

Only undergraduate students who have not received a bachelors degree previously

Question 376

a student aid grant program managed by colleges for the benefit of undergraduate students with substantial financial need

Answer 376

Federal Supplemental Educational Opportunity Grant (FSEOG) The Federal Supplemental Educational Opportunity Grant (FSEOG) is a grant that is awarded to students in need of financial aid. It is a type of federal grant that is awarded college undergraduate program students and does not need to be repaid. A student awarded with the FSEOG is given anything between $100.00 and $4,000.00 per year depending on the gravity of the person’s financial aid need. A student cannot access FSEOG funds unless they have been awarded a Pell Grant (More on Pell Grant Eligibility Criteria). While full time status is not a requirement for FSEOG funding, receiving additional assistance does reduce the amount available to a student. While these seem like vary basic differences, the amounts awarded can vary dramatically from situation to situation and it is very important that a student, and their family, work quickly to get their Pell Grant amount “set in stone” in order to pursue their FSEOG funds as soon as possible. Because the FSEOG funds available at each school varies, and are issued on a “first come first served” basis, it is critical to apply for them very early.

Question 377

True or False? Students are automatically considered for Federal Supplemental Educational Opportunity Grants (FSEOG) when they complete their FASFA

Answer 377

True

Question 378

a student loan program that is federally funded and administered by the colleges

Answer 378

Federal Perkins Loan Program Important: Under federal law, the authority for schools to make new Perkins Loans ended on Sept. 30, 2017, and final disbursements were permitted through June 30, 2018. As a result, students can no longer receive Perkins Loans. A borrower who received a Perkins Loan can learn more about managing the repayment of the loan by contacting either the school that made the loan or the school’s loan servicer.

Question 379

Loan limits associated with Perkins Loan Program

Answer 379

$5,500 per year for undergrad $8,000 per year for grads $27,500 for undergrad —- cumulative total $60,000 for undergrad + grad —- cumulative total

Question 380

Perkins Loans have ____% fixed interest rates

Answer 380

5%

Question 381

Perkins Loans have a maximum of ____ years to repay the loan

Answer 381

10

Question 382

Perkins Loans have a ____ month grace period upon graduation

Answer 382

9

Question 383

a student aid program where students (graduate, professional, and undergraduate) work 10-15 hours per week at a job that is typically on campus, to earn a portion of their financial aid package

Answer 383

Federal College Work-Study Program The amount you earn can’t exceed your total Federal Work-Study award. When assigning work hours, your employer or your school’s financial aid office will consider your class schedule and your academic progress.

Question 384

Student loans that allow parents of undergraduate student to borrow up to the total cost of education less other financial aid awards

Answer 384

Federal PLUS Loans There are two versions of the Federal PLUS Loan: the Federal Parent PLUS Loan and the Federal Grad PLUS Loan. (1) The Federal Parent PLUS Loan is available to parents of dependent undergraduate students (2) The Federal Grad PLUS loan is available to graduate and professional school students As a general rule, take out student loans in this order: (1) Choose federal subsidized and unsubsidized loans first. As a parent, that means your child will borrow as much as they need in federal loans in their own name, up to the maximum. As a graduate student, that means taking out the maximum in unsubsidized federal loans (2) Look into the interest rates you’d likely receive for private loans. Since these are based on credit history, borrowers with good or excellent credit will get the best rates. Private loans have limited repayment flexibility. But if you think you’ll be able to pay them off quickly or won’t need the option to postpone or lower payments, they may be cheaper. (3) Take out PLUS loans if your credit isn’t strong enough to get a low-interest private loan, or if you plan to qualify for Public Service Loan Forgiveness. Use PLUS loans to fill a gap after subsidized and unsubsidized loans, grants, work-study and scholarships have been applied. Borrow as little as you can manage. PLUS Loan Differs from other types of Federal Loans: (1) PLUS loan interest rates are higher: 7.6% compared with 6.6% for unsubsidized graduate student loans. (2) PLUS loans have an origination fee of 4.264%, which is deducted from the loan money you receive. The fee for subsidized and unsubsidized loans is 1.066%. (3) PLUS loans require a credit check. (4) Parents who take out PLUS loans have very limited repayment options. They don’t have access to most income-driven repayment plans — only income-contingent repayment, which caps monthly payments at 20% of income. (4) There is a limit to the amount of subsidized and unsubsidized loans you can take out, depending on your year in school. You can take out PLUS loans, however, to cover the entire cost of attendance. While this may sound helpful, it could leave you with an overwhelming amount to repay. QUALIFICATIONS Minimum credit score: None, but you won’t qualify if you have “adverse credit history.” That means you have debt payments of more than $2,085 that are 90 or more days late, or that went into collections in the past two years. You also won’t be eligible if you declared bankruptcy or went into foreclosure, among other events, in the past five years. PLUS borrowers must go through an additional step beyond submitting the Free Application for Federal Student Aid, known as the FAFSA. Here’s

Question 385

True or False? Federal PLUS Loans are made on a needs basis

Answer 385

False

Question 386

Federal PLUS Loans require repayment to start within____ days of disbursement

Answer 386

60 days

Question 387

True or False? Subsidized Stafford Loans are not needs based

Answer 387

False They are needs based

Question 388

True or False? The government pays the interest on subsidized stafford loans while the student is enrolled

Answer 388

True Subsidized Stafford Loans are need-based loans. The government pays the interest while the student is in school, in deferment (if applicable), and during the grace period before repayment begins. Students who borrow unsubsidized Stafford Loans are responsible for all interest that accumulates while they are in school, in deferment, and during the grace period. Students can take out both subsidized and unsubsidized loans as long as they don’t exceed yearly Stafford Loan borrowing limits. Students have a six-month grace period after graduating, leaving school, or dropping below half-time status. After this time, payments must be made. During the grace period, interest will not be charged on subsidized loans but will be charged on unsubsidized loans. Payments are due on a monthly basis. Under certain circumstances, e.g. health problems, a student may be eligible for loan deferment

Question 389

How long is repayment of subsidized stafford loans deferred?

Answer 389

Until 6 months after the student graduates, leaves school, or drops below half-time status

Question 390

What is the biggest difference between subsidized and unsubsidized stafford loans?

Answer 390

Government does not pay interest while student is in school

Question 391

True or False? Both subsidized and unsubsidized loans are available to undergrad and grad students

Answer 391

True

Question 392

Can a student have subsidized loans and unsubsidized loans?

Answer 392

Yes

Question 393

True or False? The 10% penalty for withdrawing funds from an IRA or Roth before age 59.5 is waived if used for qualified education expenses

Answer 393

True Other = (1) Rollover Distributions from 401(k) plans and IRAs are exempt from the early withdrawal penalty if rolled over into another eligible retirement plan within 60 days. (2) Distributions Made to Beneficiaries 401(k) and IRA distributions made to beneficiaries of plans inherited after death are generally not subject to the early withdrawal penalty. However, if a spouse beneficiary chooses to treat an IRA as his or her own and is under age 59 ½, distributions will be subject to the 10% penalty. The penalty does not apply if the spouse takes the distribution as the IRA beneficiary, rather than the IRA owner. (3) Disability Disabled persons can take distributions from both 401(k) plans and IRAs without being subject to the early withdrawal penalty. A disabled individual, for this purpose, is one that is “unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or to be of long-continued and indefinite duration.” The IRS requires proof of disability for this penalty exemption. Substantiating documentation from a physician should be obtained. (4) Medical Expenses Distributions from both IRAs and 401(k) plans used to pay for medical expenses not reimbursed by health insurance that exceed 10% of your adjusted gross income are not subject to the early withdrawal penalty. (5) Health Insurance Premiums (IRA Only) Withdrawals from IRAs used to pay health insurance premiums while unemployed are exempt from the 10% penalty if all the below requirements are met. (i) Unemployment compensation is received for at least 12 consecutive weeks. (ii) The withdrawal is made the year unemployment compensation is received or the subsequent year. (iii) The withdrawal must be made prior to 60 days of employment at a new job. (6) Higher Education Expenses (IRA Only) Withdrawals from IRAs for qualified higher education expenses for you, your spouse, child, or grandchild are exempt from the early withdrawal penalty. The distribution can’t exceed the qualified higher education expenses incurred during the tax year. Qualified higher education expenses include tuition at a postsecondary school, room and board (if enrolled at least half-time), fees, books, supplies, and equipment required for enrollment or attendance. (7) First Time Home Purchases You may withdraw up to $10,000 from your IRA during your lifetime to pay qualified acquisition costs for a principal residence without being subject to the 10% penalty if you meet the IRS definition of a “first-time homebuyer”. You are considered a first-time homebuyer if you have not owned a home in the two years preceding the purchase or your principal residence (if married, your spouse must also meet this requirement). This exception applies to costs to purchase your and/or your spouse’s home or a home for your child, grandchild, parent, or grandparent if you or they qualify as a first-time homebuyer. The funds withdrawn from the IRA must be used to pay the acquisition costs by the 120th day after the distribution is received.

Question 394

True or False? A taxpayer will not owe tax on a distribution from an IRA or Roth if under 59.5 and the funds are used for qualified education expeneses

Answer 394

False

Question 395

True or False? If home equity is considered in the financial aid equation, a HELOC could decrease home equity and possibly improve ones eligibility for financial aid

Answer 395

True

Question 396

What are the two main reasons that demand for a good decreases as prices for the good rise?

Answer 396

Substitution effect = The substitution effect is the economic understanding that as prices rise — or income decreases — consumers will replace more expensive items with less costly alternatives. Income effect = The income effect, in microeconomics, is the change in demand for a good or service caused by a change in a consumer’s purchasing power resulting from a change in real income. This change can be the result of a rise in wages etc., or because existing income is freed up (or soaked up) by a decrease (or increase) in the price of a good that money is being spent on.

Question 397

Name some factors that affect demand of a good

Answer 397

Price Income of consumers Substitute goods Population tastes and preferences expectations about future economic conditions (price)

Question 398

What does the supply curve show in regards to relationships?

Answer 398

relationship between the goods market price and the amount of the good producers are willing to produce or sell

Question 399

What is the main force when a producer or seller is determining how much of a good to supply?

Answer 399

Profit and therefore cost of production Say we have an initial supply curve for a certain kind of car. Now imagine that the price of steel—an important ingredient in manufacturing cars—rises so that producing a car becomes more expensive. SUPPLY CURVE SHIFTS LEFT. FACTORS THAT SHIFT SUPPLY CURVES: (i) favorable or poor natural conditions for the production (ii) Rise or fall in input prices (iii) Improve or decline in technology (iv) Higher or Lower product taxes / more or less costly regulations

Question 400

_________ are goods that can be readily substituted for one another in the production process

Answer 400

related goods

Question 401

True or False? a reduction in tariffs and quotas on foreign goods will open the market to foreign producers and will tend to increase supply

Answer 401

True

Question 402

If a market becomes monopolized, the price at each level of output will _____

Answer 402

Increase

Question 403

What are some factors that affect the supply of a good?

Answer 403

The price technology input prices prices of related goods special influences, such as government tax incentives

Question 404

is the responsiveness of the quantity demanded of a good to changes in the good’s price

Answer 404

Price elasticity

Question 405

Are necessities elastic or inelastic?

Answer 405

inelastic - demand won’t change much if price changes

Question 406

When a good is elastic the quantity demanded responds ____ to price changes

Answer 406

greatly

Question 407

When demand is price inelastic, a price decrease ____ total revenue because quantity stays relatively constant

Answer 407

reduces

Question 408

When demand is price elastic, a price decrease _________ total revenue because quantity will ____ drastically

Answer 408

increases, increase

Question 409

What causes defaltion?

Answer 409

a reduction in money supply Deflation involves a fall in the price level – a negative rate of inflation. From a very basic standpoint, there are two main potential causes of deflation: A fall in aggregate demand (AD) A shift to the right of aggregate supply (AS) – i.e. lower costs of production through improved technology. Deflation usually occurs during a deep recession, when there is a sustained fall in demand and output. This deflation may occur in the aftermath of credit boom and bust or severe tightening of monetary policy/fiscal policy. Monetarists emphasize the role of the money supply – falling money supply and/or falling velocity of circulation causing a fall in the price level. In rare circumstances, rapid growth in technology may enable lower prices, whilst at the same time increasing output. This could be termed ‘benign deflation’ as output increases. Also, a rapid drop in oil prices may cause a negative inflation rate

Question 410

a reduction in the rate at which prices rise

Answer 410

Disinflation

Question 411

What are the two specific areas that inflation affects the real economy?

Answer 411

Total output and economic efficiency

Question 412

The ___ the inflation rate, the greater the changes in relative prices

Answer 412

Greater

Question 413

the total market value of all goods and services produced within the domestic US over the course of a give year

Answer 413

GDP

Question 414

measures the change in the average price of the market basket of goods

Answer 414

GDP deflator The GDP price deflator is an economic metric that accounts for inflation by converting output measured at current prices into constant-dollar GDP. This deflator shows how much a change in the base year’s GDP relies upon changes in the price level. It is important because an economy’s nominal GDP differs from its real GDP in that nominal GDP includes inflation, while real GDP does not. As a result, nominal GDP will often be higher than real GDP. Therefore, the GDP price deflator measures the difference between real GDP and nominal GDP, which can also be used as a measure for price inflation. If, for example, an economy has a nominal GDP of $10 billion and has a real GDP of $8 billion, the economy’s GDP price deflator would be derived as: ($10 billion / $8 billion) x 100, which equals 125. This means that the aggregate level of prices increased by 25 percent from the base year to the current year. This is because an economy’s real GDP is calculated by multiplying its current output by its prices from a base year. So, the GDP deflator will help identify how much prices have inflated over a specific time period.

Question 415

measures the market price of a basket of goods and services such as food, clothing, shelter, fuel

Answer 415

CPI (Consumer Price Index) There are indexes other than GDP that help measure an economy’s inflation. Many of these alternatives are based on a fixed basket of goods. The consumer price index (CPI), for example, measures the level of retail prices of goods and services at a specific point in time. The CPI is considered by some to be one of the most relevant inflation measures in that it reflects any changes to a consumer’s cost of living. However, all calculations based on the CPI are direct, meaning that the index is only calculated on prices already included in the index. The fixed basket used in CPI calculations is static and sometimes misses changes in prices outside of the basket of goods. This makes GDP and the GDP deflator a superior indicator of inflation. Since GDP isn’t based on a fixed basket of goods and services, the GDP deflator has an advantage over the CPI: Changes in consumption patterns or the introduction of new goods and services are automatically reflected in the deflator. This allows the GDP deflator to capture any changes to an economy’s consumption or investment patterns. However, the trends of the GDP deflator will often be similar to trends in the CPI.

Question 416

True or False? The GDP deflator includes prices for capital goods and other goods/services purchased by businesses and governments

Answer 416

True

Question 417

measures the average change over time in selling prices received by domestic producers of goods and services What are the differences between the average change in selling prices vs. the other average change important in the economy?

Answer 417

Producer Price Index Differences between CPI and PPI (1) the composition of the set of goods and services, (2) the types of prices collected for the included goods and services, and (3) coverage of the services sector. (1) Composition of the set of goods and services (A) The target set of goods and services included in the PPI is the entire marketed output of U.S. producers. This includes goods, services, and construction products purchased by other producers as inputs to their operations or as capital investment, goods and services purchased by consumers either directly from the service producer or indirectly from a retailer, and products sold as export and to government. (B) The target set of items included in the CPI is the set of goods and services purchased for consumption purposes by urban U.S. households. (C) The target set of items differs between CPI and PPI in a number of areas: (1) the CPI includes imports, while imports are excluded from PPI; (2) owners’ equivalent rent is included in CPI, but not in PPI; (3) the CPI only includes components of personal consumption that are directly paid for by the consumer, whereas the PPI includes components of personal consumption that are not paid for by the consumer (for example, medical services paid for by government or insurance companies); (4) the PPI includes exports, while the CPI does not; (5) the PPI includes government purchases, while the CPI does not; and (6) the PPI includes sales to businesses as inputs to production, including capital investment, whereas the CPI does not. (D) The price collected for an item included in the PPI is the revenue received by its producer. Sales and excise taxes are not included in the price because they do not represent revenue to the producer. The price collected for an item included in the CPI is the out-of-pocket expenditure by a consumer for the item. Sales and excise taxes are included in the price because they are necessary expenditures by the consumer for the item. In contrast to the CPI, PPI currently does not have complete coverage of services. PPI began expanding coverage beyond mining, manufacturing, agriculture, and utilities in the mid 1980s, introducing its first services price index in 1985, and PPI’s effort to expand coverage into the services sector of the economy is ongoing. PPI currently covers approximately 72 percent of services as measured by 2007 Census revenue. Since PPI does not have complete coverage of its targeted set of in-scope services, a number of consumer services are included in the CPI that are not included in the PPI. Among the most important of these are education services and residential rent. The differences between the PPI and CPI (except for coverage) are consistent with the different uses of the two measures. A primary use of the PPI is to deflate revenue streams in order to measure real growth in output. A primary use of the CPI is to adjust income and expenditure streams for changes in the cost of living.

Question 418

True or False? CPI accurately captures changes in quality of goods

Answer 418

False

Question 419

Expansionary monetary policy _____ money supply and ultimately leads to a ____ in interest rates

Answer 419

Increases, decrease

Question 420

Restrictive monetary policy ______ money supply and leads to a ____ in interest rates

Answer 420

decreases, increase

Question 421

As the reserve requirement increases, there will be ___ money to lend to consumers

Answer 421

less

Question 422

As the reserve requirement increases, money supply becomes ____

Answer 422

restrictive

Question 423

the rate at which member banks can borrow funds from the federal reserve to meet reserve requirements

Answer 423

discount rate The federal funds rate is the interest rate banks charge each other on loans used to meet reserve requirements. The federal funds rate is often confused with the discount rate, which is the interest rate the Federal Reserve charges on loans directly from the Federal Reserve Bank. But they are not the same.

Question 424

when the fed increases the discount rate, money supply becomes___

Answer 424

restricted

Question 425

when the fed decreases the discount rate, the money supply will ____

Answer 425

increase

Question 426

the overnight lending rate between member banks of the federal reserves

Answer 426

Fed Funds Rate

Question 427

True or False? Open market operations is the method most commonly used by the fed to control money supply

Answer 427

True

Question 428

The process of the federal reserve to purchase and sell government securities in the open market

Answer 428

open market operations The short-term objective for open market operations is specified by the Federal Open Market Committee (FOMC). OMOs are conducted by the Trading Desk at the Federal Reserve Bank of New York. OMOs can be divided into two types: permanent and temporary. Permanent OMOs involve outright purchases or sales of securities for the System Open Market Account (SOMA), the Federal Reserve’s portfolio. PERMANENT During and after the financial crisis, permanent OMOs were used to adjust the Federal Reserve’s holdings of securities in order to put downward pressure on longer-term interest rates and to make financial conditions more accommodative. Currently, permanent OMOs are used to implement the FOMC’s policies of reinvesting principal payments from its holdings of agency debt and mortgage-backed securities (MBS) in agency MBS and of rolling over maturing Treasury securities at auction. TEMPORARY Temporary OMOs are typically used to address reserve needs that are deemed to be transitory in nature. These operations are either repurchase agreements (repos) or reverse repurchase agreements (reverse repos or RRPs). Under a repo, the Trading Desk buys a security under an agreement to resell that security in the future. A repo is the economic equivalent to a collateralized loan by the Federal Reserve, in which the difference between the purchase and sale prices reflects interest. Under a reverse repo, the Trading Desk sells a security under an agreement to repurchase that security in the future. A reverse repo is the economic equivalent of collateralized borrowing by the Federal Reserve. Overnight reverse repos are currently used as a tool to help keep the federal funds rate in the target range established by the FOMC.

Question 429

When the Fed buys government securities money supply will ____ and interest rates will ____

Answer 429

increase, decrease

Question 430

When the fed sells government securities money supply will ___ and interest rates will___

Answer 430

decrease, increase

Question 431

the group in charge of open market operations

Answer 431

Federal Open Market Committee The Federal Open Market Committee (FOMC) consists of twelve members–the seven members of the Board of Governors of the Federal Reserve System; the president of the Federal Reserve Bank of New York; and four of the remaining eleven Reserve Bank presidents, who serve one-year terms on a rotating basis. The rotating seats are filled from the following four groups of Banks, one Bank president from each group: Boston, Philadelphia, and Richmond; Cleveland and Chicago; Atlanta, St. Louis, and Dallas; and Minneapolis, Kansas City, and San Francisco. Nonvoting Reserve Bank presidents attend the meetings of the Committee, participate in the discussions, and contribute to the Committee’s assessment of the economy and policy options. The FOMC holds eight regularly scheduled meetings per year. At these meetings, the Committee reviews economic and financial conditions, determines the appropriate stance of monetary policy, and assesses the risks to its long-run goals of price stability and sustainable economic growth.

Question 432

As tax rates increase, the price of equities may ____

Answer 432

decrease

Question 433

occurs when expenditures exceed revenues of the government

Answer 433

deficit spending Governments have strong incentives to spend more than they take in and few reasons to balance the budget. Each year’s deficit is added to the sovereign debt. There is a difference between deficit and debt. An unbalanced budget on the expense side for the fiscal year incurs a deficit. The failure to pay or make up for this imbalance or deficit becomes a debt or loan. Deficit spending is part of the expansionary fiscal policy. Job creation gives more people money to spend, which further boosts growth. Tax cuts are the other tool to expand the economy.

Question 434

Real rate of return = _____

Answer 434

(1+nominal rate / 1+inflation rate) - 1 x 100

Question 435

Why would equity prices drop when tax rates increase?

Answer 435

company gets taxed more cutting into revenues which then may cause smaller dividends to be paid to stock holders

Question 436

During the ____ phase business sales fall, unemployment increases, and GDP growth falls

Answer 436

contraction

Question 437

During the ____ phase business sales rise, unemployment decreases, and GDP grows

Answer 437

expansion

Question 438

During the ____ phase businesses are operating at their lowest capacity and unemployment increases/reaches its peak

Answer 438

Trough

Question 439

During the ___ phase businesses are operating at high capacity and employment reaches its peak

Answer 439

Peak

Question 440

a decline in real GDP for two or more successive quarters

Answer 440

recession

Question 441

___ indicators are used to predict changes in the business cycle because they tend to precede and anitcipate changes

Answer 441

Leading

Question 442

What are some examples of leading indicators?

Answer 442

bond yields, housing starts, investor sentiment, durable good orders

Question 443

___ indicators occur simultaneously during the business cycle in order to confirm the current state of the economical cycle

Answer 443

Coincident

Question 444

What are some examples of coincident indicators?

Answer 444

level of unemployment, consumer income, industrial production

Question 445

____ indicators change after the economy has shifted to another stage of the business cycle

Answer 445

Lagging

Question 446

What are examples of lagging indicators?

Answer 446

average duration of unemployment and prime interest rates

Question 447

Two main differences between GDP and GNP

Answer 447

1. GNP includes income generated by domestic individuals both domestically and internationally 2. GNP does not include income generated domestically by a foreign firm If a Japanese multinational produces cars in the UK, this production will be counted towards UK GDP. However, if the Japanese firm sends £50m in profits back to shareholders in Japan, then this outflow of profit is subtracted from GNP. UK nationals don’t benefit from this profit which is sent back to Japan. A country like Ireland has received significant foreign investment. Therefore for Ireland, there is a net outflow of income from the profits of these multinationals. Therefore, Irish GNP is lower than GDP.

Question 448

What are the two objectives of the Securities Act of 1933

Answer 448

1. Requires investors to receive financial and other important information concerning the securities being offered 2. Prohibit misrepresentation and fraud in the sale of securities The Securities Act of 1933 was the first major legislation regarding the sale of securities. Prior to this legislation, the sales of securities were primarily governed by state laws. The legislation addressed the need for better disclosure by requiring companies to register with the Securities and Exchange Commission. Registration ensures that companies provide the SEC and potential investors with all relevant information by means of a prospectus and registration statement. The act—also known as the “Truth in Securities” law, the 1933 Act, and the Federal Securities Act—requires that investors receive financial information from securities being offered for public sale. This means that prior to going public, companies have to submit information that is readily available to investors. (The required prospectus now has to be available on the SEC website.) The prospectus has to include a description of the company’s properties and business; a description of the security being offered; information about the management running the company; and financial statements that have been certified by independent accountants.

Question 449

What are the 4 types of securites that are exempt from the registration requirements?

Answer 449

1. Intrastate offerings 2. Securities of municipal, state, and federal governments 3. Offerings of limited size 4. Private offerings to a limited number of persons or institutions

Question 450

a law (act) that prohibited commercial banks from acting as investment bankers

Answer 450

Glass-Steagall Act

Question 451

a law (act) that established the Federal Deposit Insurance Corporation

Answer 451

Glass-Steagall Act

Question 452

a law (act) that prohibited commercial banks from paying interest on demand deposits

Answer 452

Glass-Steagall Act

Question 453

Difference between the Securities act of 1933 and the securities act of 1934

Answer 453

1933 focused on new issued securities where the 1934 act focused on securities sold in secondary market

Question 454

the act that brought the OTC market under SEC regualtion

Answer 454

Maloney Act of 1938

Question 455

the act that requires firms or sole practitioners compensated for advising others about securities to register with the SEC

Answer 455

Investment Adviser Act of 1940

Question 456

Generally, only advisers with _____million of AUM or advise a registered investment company must register with the SEC

Answer 456

$100 million

Question 457

the act that clarified insurance was to be regulated at the state level

Answer 457

McCarran Ferguson Act of 1945

Question 458

the act that established the SIPC to insure investors against losses arising from the failure of any brokerage firm

Answer 458

Securities Investor Protection Act of 1970 SIPC was created under the Securities Investor Protection Act as a non-profit membership corporation. SIPC oversees the liquidation of member firms that close when the firm is bankrupt or in financial trouble, and customer assets are missing. In a liquidation under the Securities Investor Protection Act, SIPC and the court-appointed Trustee work to return customers’ securities and cash as quickly as possible. Within limits, SIPC expedites the return of missing customer property by protecting each customer up to $500,000 for securities and cash (including a $250,000 limit for cash only).

Question 459

small advisers are those with less than $____ million AUM

Answer 459

$25 million

Question 460

mid sized advisers are those with AUM between ____million and _____million

Answer 460

$25million and $100 million

Question 461

Large Advisers aare those with AUM greater than ____million

Answer 461

$100 million

Question 462

act that reformed the US regulatory system in a number of areas including consumer protection, trading restrictions, credit ratings, regulation of financial products, corporate governance, disclosure, and transparency

Answer 462

Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010

Question 463

Organization responsible for monitoring registered investment advisors

Answer 463

SEC

Question 464

a person who does any of the following: provides advice or issues reports regarding securities is in the business of providing such services provides such services for compensation

Answer 464

Investment Adviser

Question 465

this documents should clearly spell out the details of the advisory relationship and other business interests of the adviser

Answer 465

ADV Part 2A

Question 466

this documents is used to withdraw ones-self as an investment adviser

Answer 466

ADV-W

Question 467

the act that includes reforms for corporate responsibility, increased financial disclosure, and reduced coporate/accounting fraud

Answer 467

Satbanes-Oxley Act of 2002

Question 468

liability based on ___ states that a financial planner has a duty to exercise the same standard of care that a reasonably prudent and skillful financial planner in the community would exercise under the same or similar circumstances

Answer 468

negligence

Question 469

How long does a credit cardholder have to make a dispute after they receive their bill?

Answer 469

60 days

Question 470

How long does the credit card company/lender have to acknowledge receipt of the dispute?

Answer 470

30 days

Question 471

How long does the credit card lender have to resolve the dispute?

Answer 471

90 days

Question 472

act that requires a person to receive a summary of the information in a credit report if they are declined credit or employment because of the info in a credit report

Answer 472

Fair Credit Reporting Act

Question 473

act that allows a credit cardholder a limited right to withhold payment if there is a dispute concerning goods that were purchased

Answer 473

Fair Credit Billing Act

Question 474

act that requires consumers who report suspected identity theft or fraud to a consumer reporting agency be provided with a summary of their rights at no charge

Answer 474

Fair and Accurate Credit Transactions Act of 2003

Question 475

act that prohibits discrimination based on race, religion, national orgin, color, sex, marital status, age

Answer 475

Equal Opportunity Credit Act

Question 476

allows consumers to receive a free copy of their credit report annually from each nationwide consumer reporting agency

Answer 476

Fair and Accurate Transactions Act of 2003

Question 477

act that makes utilization of bankruptcy protection more difficult for debtors who have the capacity to pay

Answer 477

Bankruptcy Abuse Prevention and Consumer Protection Act of 2005

Question 478

Examples of Debt that cannot be discharged under Chapter 7

Answer 478

Back taxes up to 3 years Alimony and child support debts associated with fraudulent activities debt due to international tort claims student loans consumer debt of more than $650 for luxury goods or services owed to a single creditor within 90 days of the order for relief

Question 479

involves individuals making irrational decisions based on info that should have no influence on the decisions at hand

Answer 479

anchoring

Question 480

the tendency to emphasize the recent past when considering historical info

Answer 480

recency

Question 481

theory that states investors fear losses more than they value gains

Answer 481

prospect theory

Question 482

states that people tend to pay more attention to info that supports their perceived opinions and poorly made decisions, while disregarding accurate info

Answer 482

Confirmation bias

Question 483

asserts that people are given a frame of reference, a set of beliefs or values, which they use to interpret facts or conditions as they make decisions. People generally choose what they perceive is positive versus negative, winning versus losing, or receiving something of high value versus low value

Answer 483

framing efect

Question 484

a financial counseling approach that focuses on obtaining and analyzing quatitative data such as cash flows, assets, and debt

Answer 484

Economic and resource approach

Question 485

states that clients are assumed to be rational and will change to the most favorable behavior if given the appropriate counseling

Answer 485

economic and resource approach

Question 486

a financial counseling approach that believes in increasing financial resources or reducing financial expenditures will result in an improved financial life

Answer 486

classical economics approach

Question 487

a financial counseling approach where a client’s goals and values drive the client-planner relationship

Answer 487

strategic management approach

Question 488

a financial counseling approach where planners try to substitute negative client beliefs with positive attitudes that should lead to better financial results

Answer 488

cognitive behavioral approach

Question 489

What are the 7 ethical principles of a CFP?

Answer 489

Integrity Objectivity Competence Fairness Confidentiality Professionalism Diligence

Question 490

this principle states that the CFP must act honestly and with candor, and must not be subordinated to personal gain or advantage. Act in client’s best interest because the client trusts you

Answer 490

Integrity

Question 491

this principle states that the CFP must act with intellectual honesty and impartiality. Must leave personal prejudices out of the equation

Answer 491

objectivity

Question 492

this principle state that the CFP must have knowledge and skill in the services they are providing to a client and that if skill is lacking in an area of need that the CFP has the skill to refer client to a different professional

Answer 492

competence

Question 493

this principle state that the CFP must be fair and reasonable in all professional relationships and disclose conflicts of interest

Answer 493

fairness

Question 494

this principle states that the CFP must protect the confidentiality of all client info and only share that info with those authorized

Answer 494

confidentiality

Question 495

this principle states that the CFP must act in a manner that demonstrates poise and civility towards clients and other professionals. Must be kind and courteous to clients

Answer 495

professionalism

Question 496

this principle states that the CFP must be thorough in the services they provide and act in a timely manner. Use all client info at hand to make a recommendation

Answer 496

diligence

Question 497

set forth the high standard expected of CFP’s and explains the level of professionalism required of all certificants

Answer 497

Rules of Conduct

Question 498

True or False? If the CFP’s services include financial planning or material elements of the financial planning process there must be a written agreement between the client and the CFP

Answer 498

True

Question 499

What four things should be included in the financial planning agreement between a client and CFP?

Answer 499

1. date agreement started 2. services to be provided 3. how each party can terminate the agreement 4. the parties assocaited with the agreement

Question 500

Which rule of conduct states that a CFP should discuss his compensation and the compensation of any other parties that may be involved throughout the planning process?

Answer 500

Rule 1- defining the client-planner relationship

Question 501

True or False? Prior to a financial planning agreement, The CFP must put into writing the compensation that could be received by other professionals during the planning process (i.e. attorney fees or life insurance commission)

Answer 501

False it is not a requirement but is strongly recommended

Question 502

True or False? While a financial planning agreement is in-force, all compensation must be described in writing for a client to review

Answer 502

True

Question 503

How long does a CFP have to notify the CFP board of a change in contact info?

Answer 503

45 days

Question 504

How long does a CFP have to notify the CFP board of a conviction of a crime?

Answer 504

30 days

Question 505

True or False? A CFP must disclose the cope of the engagement with the client before any services can be provided

Answer 505

True

Question 506

What should a CFP do when they do not have adequate material to move forward with the planning services?

Answer 506

Restrict the scope of the engagement to the relevant info you have or terminate the engagement

Question 507

Practice Standards 100 series involves what?

Answer 507

Establishing and defining the relationsip with the client

Question 508

Practice Standard 200 series involves what?

Answer 508

Gathering Data

Question 509

Practice Standard 300 Series Involves what?

Answer 509

Anaylze and Evaluate Data

Question 510

Practice Standard 400 Series involves what?

Answer 510

Develop and present recommendations

Question 511

Practice Standard 500 series involves what?

Answer 511

Implement recommendations

Question 512

Practice Standard 600 series involves what?

Answer 512

Monitor plan

Question 513

What are the 4 forms of discipline for CFP Respondents?

Answer 513

1. Private Censure 2. Public Letter of Admonition 3. Suspension 4. Permanenet revocation of the right to use the CFP marks

Question 514

A disciplinary form that is an unpublished written reproach mailed by the disciplinary and ethics commission to a censured respondent

Answer 514

Private Censure

Question 515

A disciplinary form that is a publishable written reproach of the behavior - usually published by press release

Answer 515

Public Letter of Admonition

Question 516

True or False? If a CFP (respondent) gets suspended it can last longer than 5 years

Answer 516

False

Question 517

Are suspensions of a respondent made public?

Answer 517

Yes

Question 518

True or false? The CFP board has a legal responsibility to notify a professional’s employer in the case of complaint

Answer 518

False

Question 519

used to ensure an individuals conduct does not reflect adversely on their fitness as a candidate for the CFP certification or upon the profession

Answer 519

Candidate Fitness Standards

Question 520

How to figure your deduction when limits apply (charitable)

Answer 520

USE THE FOLLOWING STEPS: 1. Cash contributions subject to the limit based on 60% of adjusted gross income (AGI). Deduct the contributions that don’t exceed 60% of your adjusted gross income. 2. Noncash contributions (other than qualified conservation contributions) subject to the limit based on 50% of AGI. Deduct the contributions that don’t exceed 50% of your AGI MINUS your cash contributions to a 50% limit organization. 3. Cash and noncash contributions (other than capital gain property) subject to the limit based on 30% of AGI. Deduct the contributions that don’t exceed the smaller of: a. 30% of your AGI, or b. 50% of your AGI minus your contributions to a 50% limit organization (other than contributions subject to a limit based on 100% of AGI or qualified conservation contributions), including capital gain property subject to the limit based on 30% of AGI. 4. Contributions of capital gain property subject to the limit based on 30% of AGI. Deduct the contributions that don’t exceed the smaller of: a. 30% of your AGI, or b. 50% of your AGI minus your contributions subject to the limits based on 60% or 50% of AGI (other than qualified conservation contributions). 5. Contributions of capital gain property subject to the limit based on 20% of AGI. Deduct the contributions that don’t exceed the smaller of: a. 20% of your AGI, b. 30% of your AGI minus your contributions of capital gain property subject to the limit based on 30% of AGI, c. 30% of your AGI minus your other contributions subject to the limit based on 30% of AGI, or d. 50% of your AGI minus the subject of your contribution to the limits based on 60%, 50%, and 30% of AGI (other than qualified conservation contributions).

Question 521

Taking a Loan Against Your Retirement Plan

Answer 521

The IRS allows you to take loans of up to 50% of the vested balance of your retirement plan, up to a maximum of $50,000. Naturally, the higher your 401(k) vesting is, the larger the loan amount you can take. As an example, let’s assume you have $50,000 in your 401(k) plan, which is comprised of $30,000 in employee contributions, and $20,000 in employer matching contributions. Your company plan uses graded vesting, and you’ve been working with the company for four years. In this case, 60% of the employer match is vested, giving you a total vested balance of $42,000 ($30,000 + $20,000 X 60%). Since the IRS allows you to borrow up to 50% of your vested plan balance, you can take a loan for as much as $21,000. But if you are with the employer for at least six years, you would be fully vested in the plan. That would enable you to borrow up to $25,000, which is equal to 50% of the total value of your 401(k) plan.

Question 522

What is a Qualified Plan

Answer 522

A qualified plan is an employer-sponsored retirement plan that qualifies for special tax treatment under Section 401(a) of the Internal Revenue Code TWO CATEGORIES There are many different types of qualified plans, but they all fall into two categories. A defined benefit plan (e.g., a traditional pension plan) is generally funded solely by employer contributions and provides you with a specified level of retirement benefits. A defined contribution plan (e.g., a profit-sharing or 401(k) plan) is funded by employer and/or employee contributions. The benefits you receive from the plan depend on investment performance. Most Qualified Plans Share Certain Key Features (1) Pre-Tax Contributions - Employer contributions to a qualified plan are generally able to be made on a pretax basis. That is, YOU don’t pay income tax on amounts contributed by your employer until you withdraw money from the plan. Your contributions to a 401(k) plan may also be made on a pretax basis. (2) Tax-Deferred Growth - Investment earnings (e.g., dividends and interest) on all contributions are tax-deferred. Again, you don’t pay income tax on those earnings until you withdraw money from the plan (3) Vesting - If the plan provides for employer contributions, those amounts (and related investment earnings) must vest before you’re entitled to them. Check with your employer to find out when this happens (4) Creditor protection - In most cases, your creditors cannot reach your qualified retirement plan funds to satisfy your debts (5) Roth contributions - Your employer may also allow you to make after-tax Roth contributions to the 401(k) plan. While there’s no up-front tax benefit, qualified distributions are totally free from federal income taxes

Question 523

Medicare Part A - Part D

Answer 523

Part A provides inpatient/hospital coverage. Part B provides outpatient/medical coverage. Part C offers an alternate way to receive your Medicare benefits (see below for more information). Part D provides prescription drug coverage.

Question 524

Contribution Limits for a 401K and an IRA

Answer 524

Type and 2019 Contribution Limit (special rules for 50 or older). Traditional IRA - 6,000 (7,000) Roth IRA - 6,000 (7,000) Traditional 401K - 19,000 (additional 6K) Roth 401K - 19,000 (additional 6K) If you contribute to your 401(k) account, you may still contribute to a Roth IRAand/or a traditional IRA, as long as you meet the IRA’s eligibility requirements. However, if you wish to contribute to a traditional IRA and take a tax deduction for that contribution, depending on your income, your contribution to your employer’s 401(k) plan may hinder your ability to do so. But It will not affect the amount you are able to contribute (up to an annual $5,500/$6,500 if you’re age 50 or older, for 2018; up to $6,000/$7,000 for 2019). If you do have a retirement plan at work, such as a 401(k), 403(b), pension plan, etc., your ability to take the IRA deduction is income-restricted. Investors who have 401(k)s don’t automatically get an upfront tax deduction the way traditional IRA investors do, but you can qualify for a full deduction if your MAGI is less than $64,000 as of 2019. You must be single or file as head of household. For example, In 2019, single taxpayers covered by plans cannot take an IRA deduction if their MAGI is $74,000 or more. Those making more than $64,000 but less than $74,000 can take a partial deduction. Those making $63,000 or less can take a full deduction – regardless of their 401(k) participation. Deductions begin to phase out at $103,000 and are capped at $123,000 for married couples who file joint tax returns if the spouse who is making the contribution is covered by a 401(k) or related plan at work. This increases to $193,000 to $203,000 if the contributing spouse is married to someone who’s covered by a workplace plan. Modified AGI over $203,000 allows no deduction. ​The phase-out range for a married individual filing a separate return is $0 to $10,000.

Question 525

Eligibility for 401K and IRA and RMDs?

Answer 525

Traditional IRA - Anyone can participate, but you must have earned income. Contributions can only be made until age 70 ½. RMD = 70.5 Roth IRA - Contributions can be made at any age, and you must have earned income. RMD = None during your lifetime. Traditional 401K - You must work for an employer that provides a 401k. RMD = if you are retired, must begin taking RMDs by age 70.5 Roth 401K - You must work for an employer that provides a Roth 401k. There are no income limits like a Roth IRA has. RMD = If you are retired, must begin taking by 70.5

Question 526

Example: T, age 65, transfers a capital asset with an adjusted basis of $20,000 and a fair market value of $60,000 to her son, S, in exchange for S’s promise to make annual annuity payments of $7,043 at the end of the period for the remainder of T’s life. The fair market value of the property transferred ($60,000) exactly equals the present value of the annuity promise as determined under IRS Pub. 1457, Actuarial Valuations Version 3A (5-2009), assuming an 8.0% applicable federal rate for determining the present value of an annuity in the month of the transfer.706 T’s life expectancy as determined under Reg. §1.72-9 is 20 years. Therefore, T’s expected return under the annuity agreement is $140,860 ($7,043 × 20). What is the exclusion ratio? What is the capital gain ratio? What is the ordinary income ratio? At what point does everything become ordinary income?

Answer 526

(1) The exclusion ratio for §72 purposes is 14.2% ($20,000 investment in the contract divided by $140,860 expected return), so that $1,000 of each annual payment (14.2% of $7,043) is excluded from income until T has lived to her life expectancy as of the date the contract was executed (20 years). Thereafter, it is taxed as ordinary income. (2) A capital gain of $40,000 is realized ($60,000 present value of the annuity promise minus $20,000 adjusted basis for the property). This capital gain is reported ratably over T’s life expectancy, so the annual capital gain is $2,000 ($40,000 divided by 20). (3) The remaining $4,043 of each payment is taxed as ordinary annuity income for the remainder of the transferor’s life. (4) The capital gain portion ($2,000) is taxed as ordinary income after the capital gain portions equal the difference between T’s adjusted basis for the property and the fair market value of the annuity promise (that is, after the breakeven point, 20 years from the annuity agreement).

Question 527

Private Annuity Exclusion Ratio

Answer 527

Exclusion = (Investment in the Contract ÷ Expected Return709) × Annuity Payment Taxpayer’s investment in the contract for unsecured private annuities is simply the transferor’s adjusted basis in the property transferred.

Question 528

Capital Gain Ratio

Answer 528

Capital Gain = (Present Value of the Annuity – Cost Basis) ÷ Life Expectancy defines consideration paid as the transferor’s cost basis in the property transferred.

Question 529

Ordinary income Ratio

Answer 529

Ordinary Income = Annuity Payment – (Exclusion + Capital Gain)

Question 530

Requirements for a Private Annuity

Answer 530

(1) needs to be a bona fide transfer and can’t be a will substitute (2) The Annuitant can’t retain a prohibited interest. The buyer should not make the payments by transferring back to the seller the very assets that were purchased. Ideally the assets purchased should produce sufficient income to enable the buyer to make the annuity payment, or if not, the buyer should be able to make up the difference out of his own assets.

Question 531

What is an ESOP?

Answer 531

An ESOP is a tax-qualified deferred compensation plan formed as a trust. It originates and remains affiliated with a specific, sponsoring corporation – primarily through the ESOP’s whole or partial ownership of that corporation. It provides several tax-beneficial qualities and involves participation of corporate employees, and for these reasons, both the IRS and the Department of Labor share jurisdiction over many of its features, as is the case with, for example, the more familiar Section 401(k) plan. Employees are essentially beneficiaries of the trust, and assets such as cash are contributed to it and allowed to “build up” tax-free for the benefit of the participating employees. The primary purpose of an ESOP, as its name implies, is for the trust to hold stock of the sponsoring company on behalf of the employees. Indirectly, they own shares of the company stock. The ESOP can hold all or part of the company’s outstanding stock, and can incur debt to acquire that stock. Some of the holdings of the ESOP are allocated to participant employee “accounts” within the ESOP, while other holdings are held in a general account of the ESOP, to eventually be allocated to participant accounts, pay down debt used to acquire shares, buy shares from retiring or terminated employees, or simply be held for investment. While the ESOP is expected to primarily hold stock of the sponsoring corporation, it also can hold cash or other investments. Some diversification requirements exist that allow participants aged 55 or older who have provided at least 10 years of service to direct the investments of 25% to 50% of their account balances into assets other than company stock.

Question 532

Tax Impact on Employees

Answer 532

The ESOP is a retirement vehicle for employees. Contribution of money and other assets to an employee’s account in the ESOP does not result in current taxable income for the employee. Likewise, increases in the account value occur tax-free. The holdings become taxable to the employee when later withdrawn from the ESOP (upon retirement or departure from the company), unless transferred to another retirement account. An employee does not have free access to his or her ESOP account; the trust agreement will restrict that, again much like a 401(k) plan. An employee who leaves the company or retires nearly always will find that the company stock will be exchanged for cash within the trust, pursuant to the trust agreement, prior to being paid to the departing employee. (This common provision prevents stock from being held too widely, or held by someone no longer affiliated with the company, or worse – in the case of an S corporation – at risk of being transferred to a disqualified shareholder that may cause the company to lose its S election.) Once reduced to cash, the employee can choose to have the holdings paid to the employee or “rolled over” into another qualified plan or IRA of the employee’s choosing. If not directed to another IRA or qualified plan, the receipt of funds will result in taxable income at that time. If the employee has not reached retirement age (59 ½ years), an additional federal penalty tax of 10% can be expected too. In certain circumstances, ESOP participants may receive dividends from an ESOP or directly from the sponsoring corporation. Such dividends will result in current taxable income to the participant. Unlike “conventional” dividends that may qualify for favorable long-term capital gain tax rates, these dividends are taxed as ordinary income because they are treated as distributions from a qualified plan. However, they do not result in imposition of the early distribution 10% penalty tax.

Question 533

Lumina Foundation’s Rule 10 Formula

Answer 533

Though originally intended as a benchmark for colleges seeking to expand access to higher education, the formula can certainly be utilized by families. This approach recommends that families pay for college using the benchmarks: Families save 10 percent of their discretionary income; Families save over a period of 10 years; and Students work 10 hours per week while attending college. Discretionary income is typically defined as total after-tax income, minus all minimal survival expenses such as food, medicine, housing, utilities, insurance, transportation, etc. The Lumina Foundation states that for the purposes of these benchmarks, any income above 200 percent of the federal poverty level is “discretionary.” For a family of 4 in 2017, that would be any income over $49,200. Following this formula, a family making an average of $100,000 annually might save 10 percent of the remaining $50,800, or $423 a month. Over 10 years, that’s nearly $51,000 saved for college. With a student working 10 hours a week for 50 weeks per year at the current $7.25 minimum wage, that’s an additional $3,625, for a total contribution of $14,500 over 4 years. Of course, if your income increases or decreases, your contributions can be adjusted accordingly. And you can always make this methodology go farther by using a tax-advantaged savings tool to grow your money over time. For example, if a family with an 8-year-old child began saving $423 month in a 529 savings plan, that amount could grow to $75,300 in 10 years. It would be enough to cover the ⅓ of costs that experts recommend for a public-out-of-state school, or about ½ the cost of an in-state university.s

Question 534

Differences Between NPV and IRR

Answer 534

(1) Outcome. The NPV method results in a dollar value that a project will produce, while IRR generates the percentage return that the project is expected to create. (2) Purpose. The NPV method focuses on project surpluses, while IRR is focused on the breakeven cash flow level of a project. (3) Decision support. The NPV method presents an outcome that forms the foundation for an investment decision, since it presents a dollar return. The IRR method does not help in making this decision, since its percentage return does not tell the investor how much money will be made. (4) Reinvestment rate. The presumed rate of return for the reinvestment of intermediate cash flows is the firm’s cost of capital when NPV is used, while it is the internal rate of return under the IRR method. (5) Discount rate issues. The NPV method requires the use of a discount rate, which can be difficult to derive, since management might want to adjust it based on perceived risk levels. The IRR method does not have this difficulty, since the rate of return is simply derived from the underlying cash flows. Generally, NPV is the more heavily-used method. IRR tends to be calculated as part of the capital budgeting process and supplied as additional information.

Question 535

ROI vs. IRR Example Year 1 = -$100 purchase and -$5 brokerage fee Year 2 = $5 dividend Year 3 = $5 dividend Year 4= -$5 brokerage fee; $5 dividend; $165 Final Sale; -$13 taxes on gains (20%) Net Cash Flow: Yr 1 = -$105 Yr 2 = $5 Yr 3 = $5 Yr 4 = $152

Answer 535

IRR CF (0) = -$105 CF (1) = $5 CF (2) = $5 CF (3) = $152 IRR% = 16.2

Question 536

7-Pay Test

Answer 536

The 7-pay test determines whether the total amount of premiums paid into a life insurance policy, within the first seven years, is more than what was required to have the policy considered paid up in seven years. Policies become an MEC when the premiums paid to the policy are more than what was needed to be paid within that 7-year time frame. A “modified endowment” policy is a life insurance policy that has failed a “7-pay test.” The result is that all loans and cash withdrawals are taxed using the last-in first-out, or LIFO, accounting method. The 7-pay test must be passed every year. Once the test is failed, modified endowment treatment applies for the remaining life of the contract. Reformation of the policy is not possible. For example, Imagine you own a $50,000 flexible premium policy. Let’s assume the MEC limit for that policy is $1,000 each year for the first seven years of the contract. That means you can pay up to $1,000 in premium each year without triggering MEC status. But, if in the fourth policy year you submit a $2,000 payment, that causes the total cumulative premium payments ($5,000) to exceed the cumulative MEC premium limit of $4,000, and your policy would then be classified as a MEC.

Question 537

Calendar Spread

Answer 537

A calendar spread, also known as a horizontal spread or a time spread, is created by the simultaneous purchase and sale of two options of the same class (i.e., call or put) and strike price, but with different expiration dates. Calendar spreads can be either bullish or bearish, and can be established either for a credit or a debit. The month closest to the time at which the spread was initiated is called the “front month,” or “near term” option; the other month is the “back month” or “deferred” option. If a trader is long on the deferred option, the calendar spread is considered “long.” If the trader is short on the deferred option, the trader is said to be “short.” The price of a calendar spread reacts to changes in underlying stock price, time until expiration, changes in implied volatility levels in both months, interest rate, and dividend structures.

Question 538

Calendar Spread Maximum Return

Answer 538

In an S&P Options Report, this is the potential percentage return for the position if the short term option is In The Money at expiration and the longer-term option retains its time value.

Question 539

Calendar Spread Minimum Return

Answer 539

In an S&P Options Report, this is the percent return for the position if the stock expires above the short call, assuming both options are exercised at expiration.

Question 540

Call Defeased

Answer 540

Termination of certain of the rights and interests of the bondholders and of their lien on the pledged revenues or other security in accordance with the terms of the bond contract for an issue of securities. This is sometimes referred to as a “legal defeasance.” Defeasance usually occurs in connection with the refunding of an outstanding issue after provision has been made for future payment of all obligations related to the outstanding bonds, sometimes from funds provided by the issuance of a new series of bonds. In some cases, particularly where the bond contract does not provide a procedure for termination of these rights, interests and lien other than through payment of all outstanding debt in full, funds deposited for future payment of the debt may make the pledged revenues available for other purposes without effecting a legal defeasance. This is sometimes referred to as an “economic defeasance” or “financial defeasance.” If for some reason the funds deposited in an economic or financial defeasance prove insufficient to make future payment of the outstanding debt, the issuer would continue to be legally obligated to make payment on such debt from the pledged revenues.

Question 541

Call Premium

Answer 541

The difference between the price at which the issuer may redeem a bond when called and the face value of the bond. For example, if the issuer calls a bond with a face value of $1,000, but pays $1,200 for the bond, the call premium would be $200.

Question 542

Cash Covered Put

Answer 542

A short put position in a cash account that is secured by setting aside cash equal to 100% of the exercisable value of the put contract(s). Rules: None. Example: Short 1 Put XYZ 50 Cash set aside: $5,000 = 1 (qty) x 100 (multiplier) x 50 (Strike Price)

Question 543

Collar

Answer 543

The collar spread, also called a “fence,” is the simultaneous purchase of an out-of-the-money put and sale of an out-of-the-money covered call. Under normal circumstances, the protective put and covered call comprising the collar share the same expiration dates, but have different strike prices. A covered call is sold on a share-for-share basis against the underlying stock. For example, for stock XYZ currently trading at $50, buying 100 shares of XYZ, selling an XYZ 55 call, and buying an XYZ 45 put creates a collar. The trader is protected if the stock drops below the strike price of the put, and forfeits any profits should the stock rise above the strike price of the call. Traders who are moderately bullish on an underlying stock, but lacking strong conviction, often employ collar spreads. The strike price of the call determines the degree of bullishness of the strategy. The further the call moves out-of-the-money, the more bullish the strategy becomes. Rules: The strike price of the put must be less than the strike price of the call option with the same expiration date. Example: Long 1000 XYZ at 120 Short 10 Call XYZ 125 Long 10 Put XYZ 115

Question 544

REIT

Answer 544

A REIT is required to invest at least 75% of total assets in real estate and distribute 90% of their taxable income to investors. Illiquidity is an inherent risk associated with investing in real estate and REITs. There is no guarantee the issuer of a REIT will maintain the secondary market for its shares and redemptions may be at a price which is more or less than the original price paid. Changes in real estate values or economic downturns can have a significant negative effect on issuers in the real estate industry.

Question 545

Condor

Answer 545

Also known as a “flat butterfly” or an “elongated butterfly,” a four-leg spread. In a long call condor spread, there is a long call of a lower strike price, one short call of a second strike price, one short call of a third strike price, and a long call of a fourth strike price. Each call has the same expiration date, and the strike prices are an equal distance apart.

Question 546

Conversion

Answer 546

An options trading arbitrage strategy in which a customer takes a long position in an underlying stock and offsets that holding with the simultaneous purchase of an at-the-money put and sale of an at-the-money call with the same expiration. The two options create a synthetic short stock, and the customer holds parallel long and short positions. The strategy is meant to take advantage of overpriced options, and the profit is made in the premium difference between the call and the put. Rules: The strike prices of the put and the call options must be equal. Example: Long 1000 XYZ at 120 Short 10 Call XYZ 120 Long 10 Put XYZ 120

Question 547

Convexity Convexity to Worst

Answer 547

A measure of the curvature of the relationship between bond prices and yields. It is typically used in conjunction with duration, to approximate the rate of change in a bond’s price given a change in interest rates. Convexity can be used to improve the estimate of the percentage price change obtained using duration, particularly for a large change in interest rates. Mathematically, it is the first derivative of modified duration and the second derivative of price with respect to yield. Convexity to Worst is the convexity of a bond computed using the bond’s nearest call date or maturity, whichever comes first. This measure ignores future cash flow fluctuations due to embedded optionality.

Question 548

Correlation

Answer 548

Correlation is a statistical measure of how movement in one market reflects movement in another. The measure ranges from a -1 to +1 (or from -100% to +100%), with a measure of +1 indicating that the two markets move together 100% of the time. A high correlation between two markets means that they will move in a similar fashion; however, the magnitude of their moves may not be identical. A measure of +0.5 reflects two markets moving together approximately 75% of the time, a reading of 0.0 reflects the two markets moving together only 50% of the time, while readings of -0.5 and -1.0 reflect two markets that move together 25% and 0% of the time respectively. By contrast, a correlation coefficient measure uses positive numbers to show the degree of positive relationship between two markets and negative numbers to show the degree of negative relationship between two markets. A zero indicates that there is no relationship between the two markets being compared. Correlation studies sometimes reveal superior trading characteristics in comparison with more traditional hedges.

Question 549

Credit Spread

Answer 549

An options strategy consisting of the buying and selling of options on the same underlying stock, in which the credit from the sale is greater than the cost of the purchase, resulting in a credit at the time of entry into the strategy. In a credit spread, the credit received from entering the position is the maximum profit achievable through the strategy. Rules: A credit spread consists of either all calls or all puts on the same underlying with the same expiration date. Examples: Calls – Short call strike is lower than the long call strike Puts – Long put strike is lower than the short put strike

Question 550

Cumulative Return

Answer 550

Cumulative Return shows how much your investments grew or declined — in total – over a multi–year period. For example, if a $100 investment returned 10% the first year and 10% the second year, its cumulative return over the entire time period would actually be 21%, taking compound interest into account as illustrated below: Starting value of the investment: $100 Return after the first year: 10% ($110) Return after the second year: 10% ($121) Ending value of the investment: $121 Compounded Cumulative Return on the investment: 21%

Question 551

Current Yield

Answer 551

The ratio of the annual dollar amount of interest paid on a security to the purchase price or market price of the security, stated as a percentage. For example, a $1,000 bond purchased at par with a 5 percent coupon pays $50 per year, or a current yield of 5 percent. The same bond, if purchased at a discount price of $800, would have a current yield of 6.25 percent. A $1,000 bond purchased at a premium price of $1,200 would have a current yield of 4.1 percent.

Question 552

Cyclicals

Answer 552

Stocks of companies whose business prospects are tied to economic cycles. For example, steel companies often do poorly in a recession, when consumers are buying fewer large items such as cars and refrigerators.

Question 553

TAMRA What is the 7-pay test? What are the two concerns with the 7-pay test?

Answer 553

Technical and Miscellaneous Revenue Act of 1988 (TAMRA) Congress decided that it should discourage the use of life insurance for tax avoidance. As a result, under IRC section 7702 Congress passed legislation that created limits on the amount of money that can be put into a life insurance policy in a set period of time. If you exceed those limits then the policy becomes a Modified Endowment Contract. A policy will fail the 7-pay test if the premiums paid by the policyholder will exceed the amount of premiums required to cause the policy to be paid up within 7 years. Get it? 7 years. What you pay. The 7-pay test. TWO CONCERNS The first instance would be to test the total premium payments in the first seven years of the policy to make sure it meets the 7-pay test. The second instance is when a policy incurs a material change, such as a reduction to the death benefit, which may or may not cause the policy to MEC

Question 554

Above the Line Deductions

Answer 554

Taking an above-the-line deduction lowers adjusted gross income, says Gina Chironis, a certified public accountant and personal financial specialist in Irvine, California. You want that AGI to be as low as possible because a reduced number can slash your tax liability and qualify you for certain tax credits, she says. IRA deduction - For 2019 contributions, that amount has increased to $6,000. Those who are age 50 or older can contribute an additional $1,000 catch-up amount. Health savings account deduction.For 2018 income, you can deduct contributions up to $3,450 as a singleton and $6,900 if you have family insurance coverage. For 2019 income, those amounts increase to $3,500 for singles and $7,000 for families.Fultz notes that if you have an HSA, your employer may allow you to fund it directly from payroll deductions. Those would be pretax deductions that – as a cherry on top – wouldn’t be counted when calculating certain payroll taxes such as Social Security and Medicare tax. What you would report on your Schedule 1 tax form would be any outside-of-payroll contributions to your HSA, which will reduce your adjusted gross income but won’t save you from paying those additional payroll taxes on the amount. Student loan interest deduction - This above-the-line deduction takes some pain out of your pesky student loan bill. If you repaid eligible higher education loans in 2018, you can deduct up to $2,500 in interest as an above-the-line deduction. Filers who earned above certain phaseout amounts won’t receive this benefit. Those thresholds are between a modified AGI of $65,000 to $80,000 for single filers and $135,000 to $165,000 if you’re married filing jointly. Educator expense deduction. Qualified teachers can deduct up to $250 (or $500 if married filing jointly and you’re both teachers) as an above-the-line deduction. No itemizing is necessary. Typical expenses are those for books, supplies and computer equipment. Teachers who want to claim this deduction “should keep receipts of the amount of unreimbursed supplies” Fultz says. Self-employment deductions. Self-employed taxpayers may deduct the employer share of their payroll taxes, contributions to eligible self-employed retirement plans and certain contributions to health insurance. The rules are complex for setting up and claiming these plans appropriately on your taxes, so consult a professional with questions. Alimony deduction.While the Tax Cuts and Jobs Act nixed the alimony deduction for future divorces, if you have a divorce in effect from before 2018, you will still be able to deduct alimony payments from your taxes. Moving expenses for armed forces deduction.

Question 555

Qualifications for IRA contributions and phaseouts?

Answer 555

An important caveat about IRAs: To qualify for this beneficial tax treatment, you must meet certain eligibility requirements. First, you or your spouse must have earned income, like that from a job or side hustle. Second, if a taxpayer or his spouse are actively contributing to certain employer-sponsored retirement plans, they lose the ability to deduct their contributions if their income is above certain thresholds, which are called “phaseouts.” If both spouses participate in an employer-sponsored plan, those phaseouts are between $64,000 and $74,000 for 2019 modified adjusted gross income, or MAGI, for single filers and $103,000 and $123,000 for those married filing jointly. If only one spouse is participating, the phaseouts are between $103,000 and $123,000 for the active participant spouse and $193,000 and $203,000 for the nonactive participant spouse.

Question 556

What are the estate tax savings if an estate used an alternate valuation date that reduced the value of the estate from $11.19 to $11.18 million.

Answer 556

This can mean savings of $4,000—40 percent of the $10,000 difference between $11.18 million and $11.19 million. This is money that might otherwise go to the beneficiaries. Using the alternate valuation date can also affect the step-up in cost basis enjoyed by beneficiaries who later sell inherited assets. The stepped-up tax basis in an asset is its value as of the date of valuation for estate tax purposes. Capital gains taxes come due on the difference between this value and the eventual sales price. When the alternate valuation date decreases the tax basis, the beneficiary might be liable for increased capital gains—he could realize more of a profit when and if he sells.

Question 557

Disadvantages of Using the Alternate Valuation Date

Answer 557

This is an across-the-board election. All assets must be revalued if alternate valuation date values are used, not just those that might have gone down in value. This can ultimately affect the overall reduction in the value of the estate and result in fewer tax savings. Each $10,000 in reduced value of one asset might be offset by a $10,000 gain in value of another piece of property. You must elect to use the alternate valuation date within one year of the due date of the federal estate tax return, IRS Form 706, including extensions. There’s no way to request an extension for making the election, and it’s irrevocable after it’s made.

Question 558

Let’s say you earned $50,000 from employment and $30,000 net income from self-employment in 2016. The total of $80,000 from your wages and your self-employment is less than the Social Security maximum of (2019 = $132,900), so your Social Security tax is due on all of your income.

Answer 558

Let’s say $3,100 in FICA taxes has been withheld from your wages. You also owe about $3720 as self-employment tax on your $30,000 of self-employment income. (The calculation gets a little tricky here; this may not be exact, depending on your specific situation.)

Question 559

Nancy and Oscar marry in 2001 and move into an apartment. The couple each separately owned and used a home for at least two years before marrying. Nancy and Oscar sell their separate homes in 2002. Nancy realizes a gain of $225,000 on the sale of her home and Oscar realizes a gain of $275,000 on his sale. Although Nancy and Oscar do not meet the requirements to exclude up to $500,000 of gain on their joint return, each spouse may exclude up to $250,000.

Answer 559

Therefore, Nancy and Oscar will exclude $225,000 from the sale of Nancy’s home and $250,000 from the sale of Oscar’s home. Because Oscar cannot use any of Nancy’s unused exclusion, the couple must include $25,000 of the gain on his home in income. The result would be the same if Nancy and Oscar each had sold their homes before marrying. A husband and wife who file a joint return may exclude up to $500,000 of the gain if (1) Either spouse meets the two-year ownership requirement. (2) Both spouses meet the two-year use requirement. (3) Neither spouse excluded gain from a prior sale or exchange of a principal residence within the last two years.

Question 560

Basis Adjustments for Selling your home:

Answer 560

Fees and Closing Costs: (1) Settlement Fees and closing costs: Abstract fees (abstract of title fees), Charges for installing utility services, Legal fees (including fees for the title search and preparing the sales contract and deed), Recording fees, Survey fees, Transfer or stamp taxes, and Owner’s title insurance.

Question 561

Basis Adjustments NOT allowed for selling your home:

Answer 561

(1) Some settlement fees and closing costs you can’t include in your basis are: Fire insurance premiums, Rent for occupancy of the house before closing, Charges for utilities or other services related to occupancy of the house before closing, Any fee or cost that you deducted as a moving expense (allowed for certain fees and costs before 1994), Charges connected with getting a mortgage loan, such as: Mortgage insurance premiums (including funding fees connected with loans guaranteed by the Department of Veterans Affairs), Loan assumption fees, Cost of a credit report, Fee for an appraisal required by a lender, and Fees for refinancing a mortgage.

Question 562

For example, Ike, who runs a HR Consulting business, calculates his total net income for the year to be $100,000 after business expenses have been deducted. What are the Self-Employment Taxes?

Answer 562

Let’s say your self-employment earnings were $100,000 for 2018. According to the IRS, most, but not all of your total earnings would be subject to the SE tax. To find out what’s taxable, multiply your earnings ($100,000) by .9235. In this case, it comes out to $92,350. Why is 92.35 percent of your earnings taxable? Because that 7.65 percent deduction takes into account the employer-half of the FICA tax, which the business would be able to deduct if you were paid as an employee. Next, simply multiply your self-employment taxable income ($92,350 in this case) by 15.3 percent, which equals $14,129.55. here’s one more bonus step: You can report half of your total SE tax as an adjustment to your gross income, which means you pay less income tax overall. The IRS considers this step to be the employer-equivalent portion of your self-employment tax. So, back to our example: Divide your entire SE tax of $14,129.55 in half, which gives us $7064.78. Report this number on your 1040 Form as an adjustment to your income.

Question 563

General Eligibility for Medicare Part A

Answer 563

You are age 65 or older and a U.S. citizen or permanent legal resident of at least five years in a row. You are already receiving retirement benefits. You are disabled and receiving disability benefits. You have end-stage renal disease (ESRD). You have amyotrophic lateral sclerosis (Lou Gehrig’s disease or ALS).

Question 564

Do beneficiaries pay a premium for Medicare Part A?

Answer 564

Most beneficiaries do not pay a premium for Medicare Part A if they have worked at least 10 years (or 40 quarters) and paid Medicare taxes during that time. Individuals who aren’t eligible for premium-free Medicare Part A can still enroll in Part A and pay a premium. Beneficiaries who delay enrollment after they first become eligible for Medicare Part A may be subject to a late enrollment penalty once they sign up. If you turn 65 and are already receiving Social Security retirement benefits or benefits from the Railroad Retirement Board (RRB), enrollment in Medicare Part A is usually automatic. Medicare Part A benefits begin the first day of the month you turn 65. If your birthday is on the first day of the month, your benefits will begin the month before you turn 65. If you enrolled in Medicare Part B when you applied for retirement, your Part B coverage will begin at the same time. Your red, white, and blue Medicare card will arrive about three months before your 65th birthday.

Question 565

Calculate the Consumer Debt Ratio: Car/vehicle payment = $300 Credit card payments = $100 Student loan payments = $200 Other loan payments = $0 Mortgage = $750 Monthly Take Home Pay

Answer 565

$600 / $2,500 = 24%

Question 566

If you inherit a Traditional, Rollover, SEP, or SIMPLE IRA from a SPOUSE, you have several options, depending on whether your spouse was UNDER or over age 70½ . Most commonly, those who inherit an IRA from a spouse transfer the funds to their own IRA. If your spouse (the account holder) was UNDER 70½ , these are your choices:

Answer 566

Option #1: Spousal transfer (treat as your own) -You transfer the assets into your own existing or new IRA -Money is available = at any time, but a penalty will apply to withdrawals made before you reach age 59.5 -Only available if the you are the sole beneficiary. -IRA assets can continue growing tax-deferred. -If you are under 59½ you’ll be subject to the same distribution rules as if the IRA had been yours originally, so you cannot take distributions without paying the 10% early withdrawal penalty—unless you meet one of the IRS penalty exceptions. -You may designate your own IRA beneficiary. Option #2: Open an Inherited IRA: Life Expectancy Method -You transfer the assets into an Inherited IRA held in your name -Money is available = distributions must begin no later than 12/31 of the year the account holder would have reached 70½. -Your annual distributions are spread over your single life expectancy, which is determined by your age in the calendar year following the year of death and reevaluated each year. -If multiple beneficiaries, separate accounts must be established by 12/31 of the year following the year of death; otherwise, distributions will be based on the oldest beneficiary. -Required Minimum Distributions (RMDs) are mandatory and you are taxed on each distribution. You will not incur the 10% early withdrawal penalty. -Undistributed assets can continue growing tax-deferred. -You may designate your own IRA beneficiary. Option #3: Open an Inherited IRA: 5 Year Method -You transfer the assets into an Inherited IRA held in your name. -Money is available = at any time up until 12/31 of the fifth year after the year in which the account holder died, at which point all assets need to be fully distributed. -You are taxed on each distribution. -You will not incur the 10% early withdrawal penalty. -Undistributed assets can continue growing tax-deferred for up to five years. -You may designate your own IRA beneficiary. Option #4: Lump Sum Distribution -None. All assets in the IRA are distributed to you. -Money is available at once - You will pay income taxes on the distribution all at once. - You will not incur the 10% early withdrawal penalty. - You may move to a higher tax bracket depending on the amount of the distribution and your current income level.

Question 567

If you inherit a Traditional, Rollover, SEP, or SIMPLE IRA from a SPOUSE, you have several options, depending on whether your spouse was under or OVER age 70½ . Most commonly, those who inherit an IRA from a spouse transfer the funds to their own IRA. If your spouse (the account holder) was over 70½ , these are your choices:

Answer 567

Option #1: Spousal transfer (treat as your own) -You transfer the assets into your own existing or new IRA. -Money available = At any time, but a penalty will apply to withdrawals made before you reach age 59½ . -Only available if the you are the sole beneficiary. -IRA assets can continue growing tax-deferred. -You must take an RMD for the year of death (if the account holder did not already take it). -If you are under 59½ you’ll be subject to the same distribution rules as if the IRA had been yours originally, so you cannot take distributions other than RMD for the year of the death without paying the 10% early withdrawal penalty. -You may designate your own IRA beneficiary. Option #2: Open an Inherited IRA: Life Expectancy Method -You transfer the assets into an Inherited IRA held in your name. -You must begin taking an annual RMD over your life expectancy beginning no later than 12/31 of the year following the original account holder’s death. - Note: If the original account holder did not take an RMD in the year of death, an RMD must be taken from the account by 12/31 of the year the original account holder died. -Your annual distributions are spread over your single life expectancy (determined by your age in the calendar year following the year of death and reevaluated each year) or the deceased account holder’s remaining life expectancy, whichever is longer. -If there are multiple beneficiaries, separate accounts must be established by 12/31 of the year following the year of death; otherwise, distributions will be based on the oldest beneficiary. -Required Minimum Distributions (RMDs) are mandatory and you are taxed on each distribution. -You will not incur the 10% early withdrawal penalty. -Undistributed assets can continue growing tax-deferred. -You may designate your own IRA beneficiary. Option #3: Lump Sum Distribution -None. All assets in the IRA are distributed to you. -Money is available = all at once -You will pay income taxes on the distribution all at once. -You will not incur the 10% early withdrawal penalty. -You may move to a higher tax bracket depending on the amount of the distribution and your current income level.

Question 568

If you inherit a Traditional, Rollover, SEP, or SIMPLE IRA from a friend or family member, you have several options, depending on whether the account holder was under or over age 70½ . If the account holder was under 70½, these are your choices:

Answer 568

Option #1: Open an Inherited IRA: Life Expectancy Method -You transfer the assets into an Inherited IRA held in your name. -Distributions must begin no later than 12/31 of the year after the account holder died. -Your annual distributions are spread over the beneficiary’s single life expectancy determined by your age in the calendar year following the year of death and reevaluated each year. -If multiple beneficiaries, separate accounts must be established by 12/31 of the year following the year of death; otherwise, distributions will be based on the oldest beneficiary. -Required Minimum Distributions (RMDs) are mandatory and you are taxed on each distribution. -You will not incur the 10% early withdrawal penalty. -Undistributed assets can continue growing tax-deferred. -You may designate your own IRA beneficiary. Option #2: Open an Inherited IRA: 5 Year Method -You transfer the assets into an Inherited IRA held in your name. -At any time up until 12/31 of the fifth year after the year in which the account holder died, at which point all assets need to be fully distributed. -You are taxed on each distribution. -You will not incur the 10% early withdrawal penalty. -Undistributed assets can continue growing tax-deferred for up to five years. -You may designate your own IRA beneficiary. Option #3: Lump Sum Distribution -None. All assets in the IRA are distributed to you. -All at once. -You will pay income taxes on the distribution all at once. -You will not incur the 10% early withdrawal penalty. -You may move to a higher tax bracket depending on the amount of the distribution and your current income level.

Question 569

If you inherit a Traditional, Rollover, SEP, or SIMPLE IRA from a friend or family member, you have several options, depending on whether the account holder was under or over age 70½ . If the account holder was over 70½, these are your choices.

Answer 569

Option #1: Open an Inherited IRA: Life Expectancy Method Option #2: Lump Sum Distribution

Question 570

If you are inheriting a Roth IRA as a SPOUSE, you have several options— including opening an Inherited IRA.

Answer 570

Option #1: Spousal transfer (treat as your own) -You transfer the assets into your own existing or new Roth IRA. -Money Available = At any time, but earnings generally will be taxable until you reach age 59½ and the five year holding period has been met. -Only available if the spouse is the sole beneficiary. -You’ll be regulated by the same distribution rules as if the IRA had been yours originally; normally early withdrawal penalties may still apply. -You may designate your own IRA beneficiary. Option #2: Open an Inherited IRA: Life Expectancy Method -You transfer the assets into an Inherited IRA held in your name. -Required Minimum Distributions (RMDs) are mandatory and you have the option to postpone distributions until the later of: -When the decedent would have attained age 70½, or -December 31 of the year following the year of death. - Distributions are spread over the beneficiary’s single life expectancy. -If multiple beneficiaries, separate accounts must be established by 12/31 of the year following the year of death in order to use your own single life expectancy; otherwise, distributions will be based on the life expectancy of the oldest beneficiary. -Distributions may be taken without being taxed (provided that the five-year holding period has been met), otherwise only earnings are taxable. -You will not incur the 10% early withdrawal penalty. -Undistributed assets can continue growing tax-free. -You may designate your own beneficiary. Option #3: Open an Inherited IRA: 5 Year Method -The assets are transferred into an Inherited IRA held in your name. -At any time up until 12/31 of the fifth year after the year in which the account holder died, at which point all assets need to be fully distributed. -Your distributions can be spread over time, but all assets must be withdrawn by 12/31 of the fifth year after the year in which the account holder died. -Distributions may be taken during that period without being taxed (provided that the five-year holding period has been met), otherwise only earnings are taxable. -You will not incur the 10% early withdrawal penalty. -Undistributed assets can continue growing tax-free for up to five years. -You may designate your own beneficiary. Option #4: Lump Sum Distribution -None. All assets in the Roth IRA are distributed to you -Money is available = All at once. -If the account is less than five years old at the time of the account holder’s death, earnings are taxable.

Question 571

If you are inheriting a Roth IRA from a friend or family member, you have several options— including opening an Inherited IRA.

Answer 571

Option #1: Open an Inherited IRA: Life Expectancy Method -You transfer the assets into an Inherited IRA held in your name. -Required Minimum Distributions (RMDs) are mandatory and distributions must begin no later than 12/31 of the year following the year of death. -Distributions are spread over the beneficiary’s single life expectancy. -If multiple beneficiaries, separate accounts must be established by 12/31 of the year following the year of death in order to use your own single life expectancy; otherwise, distributions will be based on the life expectancy of the oldest beneficiary. -Distributions may be taken without being taxed (provided that the five-year holding period has been met), otherwise only earnings are taxable. -You will not incur the 10% early withdrawal penalty. -Undistributed assets can continue growing tax-free. -You may designate your own beneficiary. Option #2: Open an Inherited IRA: 5 Year Method -You transfer the assets into an Inherited IRA held in your name. - Money is available = At any time up until 12/31 of the fifth year after the year in which the account holder died, at which point all assets need to be fully distributed. -Your distributions can be spread over time, but all assets must be withdrawn by 12/31 of the fifth year after the year in which the account holder died. -Distributions may be taken during that period without being taxed (provided that the five-year holding period has been met), otherwise only earnings are taxable. -You will not incur the 10% early withdrawal penalty. -Undistributed assets can continue growing tax-free for up to five years. -You may designate your own beneficiary. Option #3: Lump Sum Distribution -None. All assets in the Roth IRA are distributed to you -Money available = all at once -If the account is less than five years old at the time of the account holder’s death, earnings are taxable.

Question 572

What are the four coverages in Section I: Property Coverages?

Answer 572

(1) Coverage A – Dwelling provides protection for your home and the structures attached to your home. (2) Coverage B – Other Structures covers the structures other than your home located on your property such as a detached garage or shed. (3) Coverage C – Personal Property covers the contents of your home such as furniture, appliances, clothing, and toys. (4) Coverage D – Loss of Use provides coverage for additional living expenses when you “lose” the use of your home due to a covered loss. It’s important to note that not all causes of loss are covered on the standard homeowners policy. For example, flood damage is not covered by typical homeowners policies. Homeowners policies are designed to provide coverage for exposures that most homeowners will incur. This helps keep the cost of insurance affordable.

Question 573

What are the two coverages in Section II: Liability Coverage?

Answer 573

There are two coverages in Section II: (1) Personal Liability Coverage provides coverage when you are LIABLE for bodily injury or property damage to others. It also covers injury or damages to others caused by any relatives living with you. (2) Medical Payments covers medical bills incurred by people invited to your home who are injured on your property or as a result of your personal activities. Just as every home is different, so is every insurance policy. To ask questions and learn more about what coverages you need to protect your home, contact your local independent insurance agent today!

Question 574

Let’s say you get a 30-year fixed-rate mortgage for $200,000 at 5.5 percent interest with no points. The monthly principal and interest payment would be?

Answer 574

The monthly principal and interest payment would be $1,136. NOTE – You do not need to amortize this! P/YR = 12 N = 360 I / YR = 5.5 PV = 200,000 PMT = -1,135.58

Question 575

Let’s say you get a 30-year fixed-rate mortgage for $200,000 at 5.5 percent interest but you pay TWO points to reduce the loan to 5.0%. The monthly principal and interest payment would be?

Answer 575

If you pay 2 discount points at closing, or $4,000, and your rate is reduced to 5 percent, your monthly payment would be $1,074, a reduction of $62 per month. It would take almost five and a half years to get back the $4,000 you paid upfront on discount points (4,000 / 62 = 64.5 months). Note - this doesn’t take into account the opportunity cost of earning a return over 5.5 years on the $4,000 that you would have otherwise had

Question 576

What is a mortgage point and how is it calculated

Answer 576

A point is a fee equal to 1 percent of the mortgage amount. DISCOUNT POINTS Discount points are actually prepaid interest on the mortgage loan. The more points you pay, the lower the interest rate on the loan. Paying points is often referred to as “buying down the rate.” A loan with no points will have a higher interest rate than a loan with 1 point. ORIGINATION POINTS Origination points cover the lender’s cost of processing the loan. They’re a way to pay closing costs – and, they’re negotiable. The number of origination points lenders charge varies, so be sure to ask about them when you are shopping for a mortgage lender.

Question 577

Financing Points - If you don’t pay cash for points at closing, you might be able to finance them and roll them into your loan. Let’s say you get a 30-year, fixed-rate mortgage for $150,000 at 6 percent. You can pay 2 points ($3,000) to get a rate of 5.5 percent, or you can opt for zero points and pay the 6 percent.

Answer 577

Monthly principal and interest payments on 5.5 percent would be $852; monthly payments on 6 percent would be $899. You cut the monthly payment by $47 if you buy the points, but you increase your loan amount to $153,000 by financing them. Nevertheless, buying those points would save you $17,151 in interest over the life of the loan if you stay in the house.

Question 578

Are discount points tax deductible?

Answer 578

Generally, the Internal Revenue Service (IRS) allows you to deduct the full amount of your points in the year you pay them. If the amount you borrow to buy your home exceeds $1 million ($750,000 for new mortgages beginning in 2018), you are generally limited on the amount of points that you can deduct. The IRS also imposes the following requirements to deduct mortgage points: (1) The mortgage must be used to buy or build your primary residence (2) The points must be a percentage of your mortgage amount (3) The use of points must be a normal business practice in your area (4) The amount of points paid must not be excessive for your area (5) You must use cash accounting on your taxes (6) The points must not be used for items that are typically stand-alone fees, such as property taxes (7) You cannot have borrowed the funds to pay for the points from the mortgage lender or broker (8) The amount you pay must be clearly itemized as points on your statement If you aren’t able to deduct your points in the year you pay them, you may still qualify to deduct them over the life of the loan. As far as filing taxes goes, claiming a tax deduction for mortgage points is a fairly straightforward process. Mortgage points are considered an itemized deduction and are claimed on Schedule A of Form 1040. Here are the specifics: - Usually, your lender will send you Form 1098, showing how much you paid in mortgage points and mortgage interest - Transfer this amount to line 10 of Form 1040 Schedule A - If any of your points were not included on Form 1098, enter the additional amount you paid on line 12 of Form 1040 Schedule A For many taxpayers, the process really is this simple. In some cases, though, calculating and deducting mortgage points can be tricky. With TurboTax, just answer a few simple questions and we can help you get the proper deduction for your mortgage points.

Question 579

John has three informal trust/POD accounts at the same insured bank. For each of these accounts, John has designated the same two unique beneficiaries, Jack and Janet.

Answer 579

Multiple POD (payable upon death) accounts for one owner where there are five or fewer unique beneficiaries. Two beneficiaries Maximum insurance coverage for these accounts = $250,000 X 2 beneficiaries = $500,000 Example (1)

Question 580

Lisa is the single owner of one informal trust/POD account with a balance of $450,000. She also co-owns a formal living trust account with her husband, Paul, with a balance of $700,000. three unique beneficiaries between the two trust accounts.

Answer 580

Paul’s share: $350,000 (50% of Account 1) Lisa’s share: $800,000 (50% of Account 1 and 100% of Account 2) Maximum insurance coverage of Lisa’s interests = $250,000 x 3 beneficiaries = $750,000 $50,000 is left uninsured. Paul owns 50% of the living trust, totaling $350,000. He has two unique beneficiaries designated in the trust. Maximum insurance coverage of Paul’s interests = $250,000 x 2 beneficiaries = $500,000 Paul’s interests are fully insured.

Question 581

if a father names a child the sole beneficiary in a living trust account worth $230,000 and also names him as sole beneficiary of a POD account with a $40,000 balance, what would be insured?

Answer 581

The $20,000 exceeding the $250,000 limit would be uninsured.

Question 582

Benefits of ESOP

Answer 582

• provide employees with a stock-based benefit plan; • provide tax-favored corporate financing; • provide a means for business perpetuation (e.g., when there is no buyer for a departing owner); • provide a market for thinly traded stock; • provide special tax advantages for shareholders selling stock in a closely held C corporation; • make an S corporation non taxable; • provide liquidity for estates of business owners; • provide an anti-takeover device by keeping company stock in “friendly” hands; and • make dividends deductible at the corporate level.

Question 583

Tax Benefits of ESOP

Answer 583

First, an ESOP is a “tax-qualified retirement plan.” This means that all the provisions of the Internal Revenue Code, IRS regulations, and other government pronouncements that apply to tax-qualified retirement plans (such as “profit sharing” plans) apply to ESOPs. Therefore, an ESOP must satisfy the following requirements: • the plan must be written; • plan assets must be held in trust for the benefit of the plan participants; • the plan may not discriminate in favor of “highly compensated” employees; • the plan must cover a reasonably broad cross section of the company’s employees; • employees must become vested in their plan benefits according to minimum standards; and • the employer and the trustee have a fiduciary responsibility to guard the interests of plan participants. The second key element of the definition is, the ESOP must be designed to “invest primarily in qualifying employer securities.”

Question 584

Preferred Stock Ratio

Answer 584

For example, say a company issues convertible preferred shares to an investor that have a par value (value at time shares were issued) of $100 each, pay a 5 percent dividend annually, and have a conversion ration of 6. The worst that investors in this issue can do is get the 5 percent dividend – which which comes out to $5 per year for every share they own. A conversion ratio of 5 means they get 5 shares of common stock for every of convertible preferred, a conversion ratio of 6 means they get 6 shares, and so on. For the investor to make money on this exchange, the common shares have to be trading at a price greater than the purchase price of a share of the preferred common stock divided by the conversion ratio. In this example, the common stock would have to be trading higher than $100/6, which equals $16.67 per share, in order for the conversion to be profitable Holders of convertible preferred stock have the right, but not the obligation, to convert their shares into common stock shares. Venture capitalists who hold this type of stock will typically convert on two occasions – after the company makes an initial public offering (IPO), or after the company is acquired by another company.

Question 585

Grace Period for Stafford Loans PLUS Loans

Answer 585

STAFFORD LOANS = (1) You have six months to begin repayment on Stafford loans after graduation, or after you leave school or drop below half-time enrollment. Older Stafford Loans may have a longer grace period. (2) Interest will not accrue while you are in school, and during the grace period for subsidized Stafford loans. The government pays the interest on these loans. This is not the case for unsubsidized loans. If you have unsubsidized loans, you may either pay the interest during the in-school deferment and grace periods, or the interest will be capitalized when repayment begins. Be advised that this grace period “interest subsidy” was eliminated for Direct subsidized loans made on or after July 1, 2012 and before July 1, 2014. (3) For loans made for periods of enrollment beginning on or after July 1, 2012, graduate and professional students are not longer eligible to receive subsidized loans. Loans made prior to this date are not affected by this change. PLUS LOANS = (1) There is no grace period for PLUS loans. Repayment on PLUS Loans generally must begin within sixty days after the final loan disbursement for the period of enrollment for which the loan was borrowed. However, deferments are available for PLUS loans disbursed on or after July 1, 2008. These graduate and professional student PLUS borrowers may defer repayment during the six months after they leave school. The additional six months will automatically be applied when the graduate PLUS borrower requests an in-school deferment. However, interest continues to accrue during these deferment periods. (2) A parent borrower with loans disbursed on or after July 1, 2008 may defer repayment while the student on whose behalf the loan was taken out is in school. Parent PLUS borrowers may also defer repayment for six months after the student on whose behalf the loan was borrowed is no longer in school or if the parent is also a student, six months after the day that the parent is no longer in school. Parent PLUS borrowers must apply for this deferment. (3) Because PLUS loans are unsubsidized, interest will accrue during the deferment period.

Question 586

Interest Capitalization

Answer 586

Capitalized interest is a second reason your loan may end up costing more than the amount you originally borrowed. Interest can start to accrue (grow) from the day your loan is disbursed (sent to you or your school). At certain points in time—when your separation or grace period ends, or at the end of forbearance or deferment—your Unpaid Interest may capitalize. That means it is added to your loan’s Current Principal. From that point, your interest will now be calculated on this new amount. That’s capitalized interest. If you choose to request a student loan deferment, you won’t have to make principal and interest payments during your deferment period. Your interest will continue to accrue (grow) while your loans are deferred, and at the end of the deferment, any Unpaid Interest will capitalize (be added to your loan’s Current Principal). This can increase your Total Loan Cost. If you can pay your accrued interest before it capitalizes, that can help keep your Total Loan Cost down.

Question 587

What Causes Aggregate Demand to Fall

Answer 587

(1) Fiscal austerity. If the government cut spending and cut the wages of public sector workers – there will be a fall in spending and AD will fall. This occurred in southern Europe in the Eurozone crisis of 2012-16. (2) Credit crunch/stock market fall. In the aftermath of the Wall Street Crash 1929, many banks went bust. This caused a fall in the money supply and a fall in bank lending. With contraction in money supply and fall in spending, prices fell. Firms were trying to cut prices to attract customers to buy surplus stock. (3) The paradox of thrift. In a serious recession, people become pessimistic about the future. Therefore, they are likely to increase their personal savings and cut back on spending. This causes lower demand and again firms may need to try and cut prices to encourage sales. In Japan in the 2000s, there were periods of deflation because customers were unwilling to spend. (4) Debt deleveraging. After a credit bubble, people may be seeking to pay off debts and have to reduce their spending. (5) Overvalued exchange rate and high-interest rates to maintain the value of the currency. (6) Tight monetary policy – higher interest rates. (7) Lower Costs: This is deflation caused by lower costs of production. This could be due to lower oil prices or improved technology, e.g. development of computer chips which enables price of manufactured goods to fall. This is considered a ‘benign period of deflation because we get lower prices – but output is also rising. We get the best of both worlds.

Question 588

Deflation Spiral

Answer 588

Deflation can become a self-reinforcing loop. Falling prices create circumstances for prices to continue falling. (i) With falling prices – firms want to cut wages – lower wages lead to less spending (AD) and lower costs. (ii) Falling prices lead to a decline in confidence, and therefore lower spending and lower investment. (iii) Deflation leads to expectations of falling prices – people won’t spend unless prices fall and they can delay spending until they do.

Question 589

Historical Deflations

Answer 589

1920s (i) In the 1920s, the UK experienced several periods of deflation. This was due to several factors. One important factor was that the government tried to maintain the value of Pound Sterling against the dollar at close to $4.85 (this was the pre-war gold standard. The UK returned to this level in 1925). The high pound, made imports cheaper (helping keep prices low). But, the overvalued exchange rate also made UK exporters uncompetitive. Many firms were forced to try and cut costs to retain their export markets. This created a strong downward pressure on prices. (ii) In addition, the economy faced: (a) Relatively tight fiscal policy (trying to reduce budget deficit through higher taxes, lower spending) After the end of the war, the government cut spending quickly. (b) Relatively tight monetary policy. Interest rates were kept high to keep the value of the Pound high. Real interest rates were often over 5% (compare that to negative real interest rates we see today) 1930’s The UK experienced more deflation during the 1930s because of the extent of the recession/great depression. The US also experienced a period of deflation. One major cause of the US deflation was a fall in the money supply following the failure of many banks in the aftermath of the Wall St crash and the Great Depression. 2009 Great Recession The UK experienced a period of temporary deflation during 2009 (if we use the RPI method, which includes interest payments). However, CPI inflation which excludes mortgage interest payments stayed positive. The inflation picture in the UK was complicated: (i) There was a sharp fall in output causing spare capacity and higher unemployment. But, there was significant wage and price rigidity. (ii) The UK also experienced a sharp devaluation in the exchange rate which tends to contribute to inflation (e.g. imports more expensive) (iii) There was also substantial cost-push factors, such as rising oil prices. (iv) Monetary policy was very loose. Interest rates cut to 0.5% and from March 2009 a programme of Quantitative easing trying to increase the money supply. (v) Therefore, overall the recession did not cause actual deflation. In Contrast to UK, Greece and Spain (periphery of Eurozone) have experienced Deflation: (i) They cannot devalue in the Euro, so they are seeking to regain competitiveness through internal devaluation. (cutting prices and costs) (ii) Fiscal austerity – cutting spending, including cutting public sector wages (iii) Due to the credit crunch, bank lending has fallen significantly; this contributed to a fall in the money supply

Question 590

Types of Retirement Plans

Answer 590

Individual Retirement Arrangements (IRAs) Roth IRAs 401(k) Plans 403(b) Plans SIMPLE IRA Plans (Savings Incentive Match Plans for Employees) SEP Plans (Simplified Employee Pension) SARSEP Plans (Salary Reduction Simplified Employee Pension) Payroll Deduction IRAs Profit-Sharing Plans Defined Benefit Plans Money Purchase Plans Employee Stock Ownership Plans (ESOPs) Governmental Plans 457 Plans

Question 591

What is the benefit of paying interest on reserves and what is the weakness? How was the weakness cirucmvented? What does the Fed do to respond to the still remaining weakness?

Answer 591

PAYING INTEREST ON RESERVES Paying interest on reserve balances enables the Fed to break the strong link between the quantity of reserves and the level of the federal funds rate and, in turn, allows the Federal Reserve to control short-term interest rates when reserves are plentiful. EXAMPLE - In particular, once economic conditions warrant a higher level for market interest rates, the Federal Reserve could raise the interest rate paid on excess reserves–the IOER rate. A higher IOER rate encourages banks to raise the interest rates they charge, putting upward pressure on market interest rates regardless of the level of reserves in the banking sector LIMITATION - While adjusting IOER Rate is effective when reserves are plentiful, fed funds rates have generally traded below this rate. This relative softness of the federal funds rate reflects, in part, the fact that only depository institutions can earn the IOER rate. EFFECTIVE FLOOR - Expand beyond depository institutions: To put a more effective floor under short-term interest rates, the Federal Reserve created supplementary tools to be used as needed. For instance, the overnight reverse repurchase agreement (ON RRP) facility is available to a variety of counterparties, including eligible money market funds, government-sponsored enterprises, broker-dealers, and depository institutions. Through it, eligible counterparties may invest funds overnight with the Federal Reserve at a rate determined by the FOMC. REMAINING WEAKNESS Similar to the payment of IOER, the ON RRP facility discourages participating institutions from lending at a rate substantially below that offered by the Fed.

Question 592

Janet Yellen’s Expanded Toolkit

Answer 592

(1) Reserve Interest Payments (2) Overnight Reverse Repurchase Agreements (3) Large Scale Asset Purchases (4) Explicit Forward Guidance Two of the Fed’s most important new tools–our authority to pay interest on excess reserves and our asset purchases–interacted importantly. Without IOER authority, the Federal Reserve would have been reluctant to buy as many assets as it did because of the longer-run implications for controlling the stance of monetary policy. While we were buying assets aggressively to help bring the U.S. economy out of a severe recession, we also had to keep in mind whether and how we would be able to remove monetary policy accommodation when appropriate. That issue was particularly relevant because we fund our asset purchases through the creation of reserves, and those additional reserves would have made it ever more difficult for the pre-crisis toolkit to raise short-term interest rates when needed.

Question 593

Contractionary Policy

Answer 593

The opposite is contractionary fiscal policy. That is when the government spends less than it receives in revenue to achieve a balanced budget. Contractionary policy also includes tax increases.

Question 594

US Deficit Spending

Answer 594

Most people blame deficit spending on entitlements. To some extent, that’s true. Social Security, Medicare, and Medicaid cost $2 trillion a year. Those payments consume more than two-thirds of the revenue received each year. But payroll taxes cover 100% of the costs of Social Security and 50% of Medicare’s costs. This mandatory spending must be paid to legally fulfill the acts of Congress that created them. Congress must pass another Act to amend or reduce them. This is rarely done since millions of current beneficiaries will have their incomes reduced. Recessions cause deficit spending in order to end them. For example, Congress passed the $787 billion economic stimulus package in March 2009 to end the 2008 financial crisis. It paid for extended unemployment benefits and public works projects. Most people don’t realize that wars create more deficit spending than recessions. For example, President Franklin D. Roosevelt only increased the deficit by $3 billion a year to fight the Great Depression. He spent around $50 billion a year to fight World War II. If FDR had spent as much on the New Deal, he would have ended the Depression. If the global economy had improved sooner, then perhaps World War II could have been avoided. The attacks on 9/11 increased deficit spending more than the Great Recession. The War on Terror drove military spending to new heights. The War in Afghanistan cost $28.7 billion in 2001. The War in Iraq drove overseas military costs up to $72.5 billion by 2003. By 2008, total costs grew to $186.6 billion. That is in addition to annual budgets for the Departments of Defense, State, and Homeland Security. As projected in the FY 2019 budget, Trump plans to add $4.775 trillion to the debt by the end of his first term. That’s a 29% increase from the $20.245 trillion debt at the end of Obama’s last budget for FY 2017. Until 2016, the United States could afford deficit spending because the interest on the debt was so low. One reason was that China, Japan, and other countries demanded U.S. Treasurys. But that began to change in late 2016 as the economy improved. They were still the largest foreign owners of the U.S. debt, but their appetite has slackened.

Question 595

Bond Yield - Yield Curve

Answer 595

Leading Indicator Bond yields are thought to be a good leading indicator of the stock market because bond traders anticipate and speculate about trends in the economy. (They aren’t always correct.) Whereas most earlier analysis has focused on documenting historical relationships,the use ofthe yield curve as a forecasting device in real time raises a number of practical issues that have not been clearly settled in the scholarly literature. FIRST - First,the lack ofa single accepted explanation for the relationship between the yield curve and recessions has led some observers to question whether the yield curve can function practically as a leading indicator.If economists cannot agree on why the relationship exists,confidence in this indicator may be weakened SECOND - the literature lacks a standard approach to constructing forecasts based on movements in the yield curve.How should the slope of the yield curve be defined? What measure of economic activity should be used to assess the yield curve’s predictive power? The current variety of approaches to producing and interpreting yield curve forecasts may lead to misreadings ofthe signal in real time.

Question 596

New Private Housing Starts

Answer 596

Leading Indicator If housing starts rise, it means builders are optimistic about the demand in the near future for newly constructed homes. If housing starts fall, builders are getting cautious. That’s a sign that home sales are slowing, or at least that builders fear they soon will. The New Residential Construction Report, commonly referred to as “housing starts,” is considered to be a critical indicator of economic strength. Housing start statistics are released on or around the 17th of each month by the U.S. Commerce Department. The report includes building permits, housing starts, and housing completions data. Surveys of homebuilders nationwide are used to compile the data. Investors and analysts watch the housing starts figures each month, comparing them with previous months’ data and year-over-year periods. Because housing starts can be significantly affected by weather, the numbers are also presented as seasonally adjusted and smoothed using statistical formulas. The housing starts data are often revised to reflect the most current evaluations. Housing is a key part of the U.S. economy, which has an effect on related industries, such as banking, the mortgage sector, raw materials, employment, construction, manufacturing, and real estate. In a strong economy, people are more likely to purchase new homes; conversely, in a weak economy, people are less likely to buy new homes. For example, if housing starts show a decline in new single-family units in favor of multifamily housing starts, it could indicate that a supply shortage is looming for single-family housing. That may lead to price increases for that segment, making those units more of a premium. It could also indicate that the general public is shying away from more expensive homes in favor of seeking more affordable multifamily units. Furthermore, housing starts indicators include reports on apartment construction, which can also reveal details on inventory for that segment, and whether or not prior buildup was more than what the market needed. Speculative builders might have launched construction on multilevel apartment buildings in urban areas, for example, anticipating a certain amount of demand for apartment space in a given city. If there is a drop in demand for such housing, construction companies naturally might pull back on plans to further build up and develop in in cities.

Question 597

Average weekly hours of production workers

Answer 597

Leading Indicator If the economy is just beginning to grow out of a recession, businesses will tend to hold off on hiring new workers until they are more confident that economic growth is improving, and will instead ask their existing workers to work more hours. As the economy continues to improve, eventually businesses will be forced to add more workers, and this increase in employment will reinforce the positive trend in economic growth. In contrast, if the economy is just beginning to slow down, employers wishing to maintain employee loyalty will try to keep their workers by reducing hours worked, rather than immediately laying-off workers. If the slowdown deepens into a recession, then eventually businesses are forced to lay off workers, which reinforces the negative trend in economic growth. Thus hours worked is thought to be a leading indicator of future change in the economy.

Question 598

Initial claims for unemployment insurance

Answer 598

Leading Indicator The initial claims report gets released at 8:30 a.m. EST each Thursday by the U.S. Department of Labor. The report’s official title is “Unemployment Insurance Weekly Claims Report.” Initial Claims is a report that measures the number of jobless claims filed by individuals seeking to receive jobless benefits. The report, published since 1967, also shows how many unemployed individuals qualify for and are receiving benefits under unemployment insurance. The initial claims number is watched closely by financial analysts because it provides insight into the health of the economy. Policy makers use the initial claims figure in conjunction with other employment data to determine the strength of the labor market. Higher initial claims correlate with a weakening economy. Initial claims typically rise before the economy enters a recession and decline before the economy starts to recover. To learn more about unemployment and the economy For bonds, however, a higher-than-expected reading is considered positive/bullish, while a negative reading is deemed to be negative/bearish; this is because bond markets may factor in a higher probability of falling interest rates.

Question 599

Manufacturer’s new orders for consumer goods / materials

Answer 599

Leading Indicator This component is considered a leading indicator because increases in new orders for consumer goods and materials usually mean positive changes in actual production. The new orders decrease inventory and contribute to unfilled orders, a precursor to future revenue

Question 600

Percentage of companies reporting slower deliveries Vendor Performance (Slower deliveries diffusion index)

Answer 600

Leading Indicator This component measures the time it takes to deliver orders to industrial companies. Vendor performance leads the business cycle because an increase in delivery time can indicate rising demand for manufacturing supplies. Vendor performance is measured by a monthly survey from the National Association of Purchasing Managers (NAPM). This diffusion index measures one-half of the respondents reporting no change and all respondents reporting slower deliveries.

Question 601

New orders of non-defense capital goods

Answer 601

Leading Indicator As stated above, new orders lead the business cycle because increases in orders usually mean positive changes in actual production and perhaps rising demand. This measure is the producer’s counterpart of new orders for consumer goods/materials component (#3).

Question 602

Money Supply (M2) growth rate

Answer 602

Leading Indicator The M2 figure is looked at more than the rest —cash equivalents in this designation are deemed to be collectively liquid enough to be spent without any real delays or penalty costs. While growth in the money supply does not directly indicate future spending growth as it once did, it does indicate that inflation could be around the corner. This is where knowing both money supply growth and GDP growth becomes very handy—if money supply growth is rapidly outpacing economic growth, there will soon be more money chasing after the same amount of goods. This supports the famous quote from economist Milton Friedman: “Inflation is always and everywhere a monetary phenomenon.” Stregnths A timely and consistent indicator, released weekly and with a long operating history It is often misunderstood by investors, creating opportunities for those who know how to use it There is a lot of existing research on the relationship between money supply and GDP growth as well as inflation Weakness Rarely a mover of the markets in the short term Limited breakdowns available in the weekly release; the quarterly Flow of Funds report provides a broader view Lack of economic consensus on how to best compare money supply levels to inflationary outlook and future spending patterns Why No Inflation from QE? It is true the monetary base spiked during these initial rounds of QE, but the second reason QE didn’t lead to hyperinflation is we live under a fractional reserve baking system whereby the money supply is more than just the amount of physical coins, paper money and bank deposits in the system. The monetary base, or M0, is what most people think about when it comes to the amount of money in circulation, but banks are in the business of making loans with the deposits on hand. The money from those loans are then deposited back into the banking system and re-loaned, over and over again. This is the so-called money multiplier effect. If the multiplier is 10x, for every $100 deposited into a bank up to $1,000 of new credit money is created through this mechanism. The M2 measure of the money supply, which includes the effects of fractional reserve banking and credit, was actually quite stable during this period. Below are graphs of the M0 and M2 money supply measures. So where did all the M0 money go if it wasn’t multiplied through the credit system? The answer is that banks and financial institutions hoarded the money in order to shore up their own balance sheets and regain profitability. Banks still had bad loans and toxic assets on their balance sheets as a result of the housing bubble burst and its aftershocks. The extra cash on hand made their financial picture look a whole lot better. As the economy has recovered and the fed has begun tapering its interventions, the money being held by banks is being returned to the Fed slowly in the form of interest payments on the debts purchased during QE. Meanwhile, the U.S. economy, on the whole, has remained productive and growing.

Question 603

Index of Consumer Expectation

Answer 603

Leading Indicator This is the only component of the leading indicators that is based solely on expectations. This component leads the business cycle because consumer expectations can indicate future consumer spending or tightening. The data for this component comes from the University of Michigan’s Survey Research Center, and is released once a month.

Question 604

Building Permits

Answer 604

Leading Indicator Building permits mean future construction, and construction moves ahead of other types of production, making this a leading indicator.

Question 605

Standard & Poor’s 500 Stock Index

Answer 605

Leading Indicator The S&P 500 is considered a leading indicator because changes in stock prices reflect investor’s expectations for the future of the economy and interest rates. The S&P 500 is a good measure of stock price as it incorporates the 500 largest companies in the United States.

Question 606

M2

Answer 606

M2 includes M1, plus assets in money market accounts and small time deposits.

Question 607

M1

Answer 607

includes currency and checking deposits.

Question 608

Employees on non-agricultural payrolls

Answer 608

Coincident Indicator Non-farm payroll employees is one of the most followed economic indicators and has a big impact on financial markets because it provides data on the health of the job market (non-agricultural), which affects everything in the economy. Related to this is the unemployment rate. A declining unemployment rate shows demand for employees, and indicates the economy is in good shape. Rising unemployment means people are losing jobs and it will be harder to find work; as you may suspect, this is not good for the economy.

Question 609

Personal income less transfer payments

Answer 609

Coincident Indicator In the United States, transfer payments usually refer to payments made to individuals by the federal government through various social benefit programs, such as Social Security. This component is designed to include the value of all sources of income, adjusted for inflation, for the purpose of measuring the real salaries and other earnings of all people. Social Security payments are excluded. This measure of income adjusts wage accruals less disbursements (WALD) to smooth seasonal bonuses that can distort the wages on which earners base their purchase decisions. The personal-income component measures both the general health of the economy and aggregate spending.

Question 610

Industrial production

Answer 610

Coincident Indicator Output of gas and electric utilities, mining and manufacturing production are measured on a value-added basis. The data is collected from many industrial sources contributing values of shipments, employment levels and product counts. Historically, this value-added measure has captured most of the movements in total industrial output.

Question 611

Manufacturing and trade sales

Answer 611

coincident indicators This attempts to measure real total spending. The data comes from the National Income and Product Account calculations, which are prepared by the Department of Commerce’s Bureau of Economic Analysis.

Question 612

Average duration of unemployment

Answer 612

Lagging Indicator Once people start to lose their jobs, the economy has already begun declining. The last thing employers want to do is let people go. Unemployment will also continue to rise even after the economy has started to improve. Companies wait until they believe the economy has recovered before they start hiring again. The number of weeks in which the unemployed, those counted as such by the Bureau of Labor Statistics, have been looking for a job. During a recession, the number of long-term unemployed increases. Weight = 0.0361

Question 613

Ratio of trade inventories to sales

Answer 613

Lagging Indicator The Bureau of Economic Analysis calculates this for manufacturing, wholesale, and retail companies. An increasing Inventory to Sales ratio is generally a bad sign for the economy, it could be the result of a decrease in sales (Less revenue for the companies) or an increase in the companies’ inventory (Higher costs to maintain the extra inventory), and it may indicate that there are supply/demand imbalances in the economy. An inventory to sales ratio value equal to one means that the current inventory levels correspond to one month of current demand. During the last recession, inventory to sales ratio increased from a value that ranges between 1.25 and 1.31 to a value of 1.48. Weight = 0.1211

Question 614

Change in index of labor cost per unit of output

Answer 614

Lagging Indicator This number increases when factories produce far less per employee, due to slower orders. The only way to reduce this number is to lay off workers or produce more. Weight = 0.0587

Question 615

Average prime rate

Answer 615

Lagging Indicator When times are good, banks resist lowering rates and consequently, their profits, even if business starts to slow. When times are bad, they resist raising rates until they are sure the demand supports it. Weight = 0.2815.

Question 616

Commercial and industrial loans outstanding

Answer 616

Lagging Indicator This is a lagging indicator because banks still have a lot of loans in the pipeline even after a recession starts. Similarly, businesses that are losing revenue in the beginning stages of a recession will take out loans to cover costs. Once the economy begins to improve, it takes a while before banks have enough liquidity to start lending again. Weight = 0.0970

Question 617

Ratio of consumer installment credit outstanding to personal income

Answer 617

Lagging Indicator Consumer debt statistics are compiled by the Federal Reserve. Personal income is reported by the Bureau of Economic Analysis. After a recession, consumers cautiously hold off accumulating debt even though their income starts to rise. Conversely, they will borrow more during a recession to pay bills when they get laid off. Weight = 0.2101.

Question 618

Change in consumer price index (CPI)

Answer 618

Lagging Indicator This is a part of the Consumer Price Index. Service providers may raise prices at the beginning of a recession to maintain profit margins as demand falters. Once the recession hits, they are forced to cut costs and lower prices. They may keep cutting prices, even when the recovery has begun. Those that remain after a recession are likely to continue lowering prices. They keep trying to gain more business because it worked. They don’t recognize when the recession is over. Weight = 0.1955.

Question 619

Limit Order

Answer 619

A limit order is an order to buy or sell a stock at a specific price or better. Example - A buy limit order can only be executed at the limit price or lower, and a sell limit order can only be executed at the limit price or higher.

Question 620

Stop Order

Answer 620

A stop order, also referred to as a stop-loss order, is an order to buy or sell a stock once the price of the stock reaches a specified price, known as the stop price. When the stop price is reached, a stop order becomes a market order. A buy stop order is entered at a stop price above the current market price. A stop sell order is entered at a stop price below the current market price.

Question 621

Stop Limit Order

Answer 621

Examples: Sell Stop-Limit: Let’s say a security is currently trading at $30.00. You’d like to sell the security if it reaches or goes below $29.00, but only if the security can be sold for $28.00 or more. You can place a Stop-Limit order by setting the Stop Price to $29.00 and the Limit Price to $28.00.

Question 622

Multistage Growth Model Formula When dividends are not expected to grow at a constant rate, the investor must evaluate each year’s dividends separately, incorporating each year’s expected dividend growth rate. However, the multistage growth model does assume that dividend growth eventually becomes constant. See the example below. Let’s assume that during the next few years XYZ Company’s dividends will increase rapidly and then grow at a stable rate. Next year’s dividend is still expected to be $1 per share, but dividends will increase annually by 7%, then 10%, then 12%, and then steadily increase by 5% after that.

Answer 622

Here are the inputs: D1 = $1.00 k = 10% g1 (dividend growth rate, year 1) = 7% g2 (dividend growth rate, year 2) = 10% g3 (dividend growth rate, year 3) = 12% gn (dividend growth rate thereafter) = 5% Since we have estimated the dividend growth rate, we can calculate the actual dividends for those years: D1 = $1.00 D2 = $1.00 * 1.07 = $1.07 D3 = $1.07 * 1.10 = $1.18 D4 = $1.18 * 1.12 = $1.32 We then calculate the present value of each dividend during the unusual growth period: $1.00 / (1.10) = $0.91 $1.07 / (1.10)2 = $0.88 $1.18 / (1.10)3 = $0.89 $1.32 / (1.10)4 = $0.90 Then, we value the dividends occurring in the stable growth period, starting by calculating the fifth year’s dividend: D5 = $1.32*(1.05) = $1.39 We then apply the stable-growth Gordon Growth Model formula to these dividends to determine their value in the fifth year: $1.39 / (0.10-0.05) = $27.80 The present value of these stable growth period dividends are then calculated: $27.80 / (1.10)5 = $17.26 Finally, we can add the present values of Company XYZ’s future dividends to arrive at the current intrinsic value of Company XYZ stock: $0.91+$0.88+$0.89+$0.90+$17.26 = $20.84

Question 623

Age Requirements for IRA and 401K?

Answer 623

401K = Anyone who works for an employer that offers a plan IRA = Anyone under age of 70.5 with earned income can open a traditional IRA Roth IRA = have no age limit

Question 624

Best order to contribute to 401K and IRA

Answer 624

If you’re eligible to invest in a 401(k) and an IRA, here’s an efficient way to do it: (1) Enroll in your company’s 401(k) and contribute at least the amount that your employer will match. (2) Contribute the maximum allowed to your IRA. (3) Go back to your 401(k) plan and contribute beyond the match to the annual maximum allowed, if possible. We recommend following these steps because an IRA offers more flexibility and choice, giving you a greater chance to diversify your assets and reduce your investment risk.

Question 625

Consider a 30-year-old earning $55,000 per year (22% federal marginal tax bracket). Her first priority should be saving at least enough in her workplace retirement plan to earn the full employer match, which in her case is 50% of the first 6% saved (a typical match scenario).

Answer 625

In this case, she’s saving nearly $5,000 in tax-deferred funds in her 401k ($3,300 + $1,650 match). However, perhaps she’s anticipating earning far more in the near future and wants to sock away some after-tax money while she’s still in a relatively low tax bracket. She could save an additional $6,000 in a Roth IRA. That brings her total annual contributions to $10,500, all of it growing in tax-advantaged accounts.

Question 626

Next, consider a married 55-year-old woman earning $300,000 per year. Say she’s maxing out her workplace 401k at her $19,000 yearly contribution limit. Because she’s over 50, she also gets to make a catch-up contribution of $6,000 to her 401k. Luckily, her work matches contributions one-for-one up to 6% of her salary – which means another $18,000 in her 401k, for a total of $43,000 that is pre-tax and will grow tax-deferred.

Answer 626

While she can also contribute $6,500 to a traditional IRA, her contributions will be nondeductible given her modified AGI level. The savings will still grow tax-deferred, so she decides it’s still a worthwhile retirement savings vehicle to pursue, despite the fact that it’s tied up for the next 4.5 years.*

Question 627

What three ways are CPI used?

Answer 627

As an economic indicator As a deflator of other economic series As a means of adjusting dollar values As an economic indicator. The CPI is the most widely used measure of inflation and is sometimes viewed as an indicator of the effectiveness of government economic policy. It provides information about price changes in the Nation’s economy to government, business, labor, and private citizens and is used by them as a guide to making economic decisions. In addition, the President, Congress, and the Federal Reserve Board use trends in the CPI to aid in formulating fiscal and monetary policies. As a deflator of other economic series. The CPI and its components are used to adjust other economic series for price changes and to translate these series into inflation-free dollars. Examples of series adjusted by the CPI include retail sales, hourly and weekly earnings, and components of the National Income and Product Accounts. The CPI is also used as a deflator of the value of the consumer’s dollar to find its purchasing power. The purchasing power of the consumer’s dollar measures the change in the value to the consumer of goods and services that a dollar will buy at different dates. In other words, as prices increase, the purchasing power of the consumer’s dollar declines. As a means of adjusting dollar values. The CPI is often used to adjust consumers’ income payments (for example, Social Security), to adjust income eligibility levels for government assistance, and to automatically provide cost-of-living wage adjustments to millions of American workers. As a result of statutory action, the CPI affects the income of millions of Americans. Over 50 million Social Security beneficiaries, and military and Federal Civil Service retirees, have cost-of-living adjustments tied to the CPI. Another example of how dollar values may be adjusted is the use of the CPI to adjust the Federal income tax structure. These adjustments prevent inflation-induced increases in tax rates. In addition, eligibility criteria for millions of food stamp recipients, and children who eat lunch at school, are affected by changes in the CPI. Many collective bargaining agreements also tie wage increases to the CPI.

Question 628

What goods and services does the CPI cover?

Answer 628

The CPI represents all goods and services purchased for consumption by the reference population (U or W). BLS has classified all expenditure items into more than 200 categories, arranged into eight major groups (food and beverages, housing, apparel, transportation, medical care, recreation, education and communication, and other goods and services). Included within these major groups are various government-charged user fees, such as water and sewerage charges, auto registration fees, and vehicle tolls. In addition, the CPI includes taxes (such as sales and excise taxes) that are directly associated with the prices of specific goods and services. However, the CPI excludes taxes (such as income and Social Security taxes) not directly associated with the purchase of consumer goods and services. The CPI also does not include investment items, such as stocks, bonds, real estate, and life insurance because these items relate to savings, and not to day-to-day consumption expenses. For each of the item categories, using scientific statistical procedures, the Bureau has chosen samples of several hundred specific items within selected business establishments frequented by consumers to represent the thousands of varieties available in the marketplace. For example, in a given supermarket, the Bureau may choose a plastic bag of golden delicious apples, U.S. extra fancy grade, weighing 4.4 pounds, to represent the apples category.

Question 629

Is the CPI the best measure of inflation?

Answer 629

Various indexes have been devised to measure different aspects of inflation. Inflation has been defined as a process of continuously rising prices or, equivalently, of a continuously falling value of money. The CPI measures inflation as experienced by consumers in their day-to-day living expenses; the Producer Price Index (PPI) measures inflation at earlier stages of the production process; the International Price Program (IPP) measures inflation for imports and exports; the Employment Cost Index (ECI) measures inflation in the labor market; and the Gross Domestic Product (GDP) Deflator measures inflation experienced by both consumers themselves as well as governments and other institutions providing goods and services to consumers. There are also specialized measures, such as measures of interest rates. The “best” measure of inflation depends on the intended use of the data. The CPI is generally the best measure for adjusting payments to consumers when the intent is to allow consumers to purchase at today’s prices, a market basket of goods and services equivalent to one that they could purchase in an earlier period.

Question 630

Which index is the “official CPI” reported in the media?

Answer 630

The broadest and most comprehensive CPI is called the All Items Consumer Price Index for All Urban Consumers (CPI-U) for the U.S. City Average, 1982-84=100. CPI data are reported on a not seasonally adjusted basis as well as a seasonally adjusted basis. Sometimes the index level itself will be reported, but it is also common to see 1-monthor 12-month percent changes reported. In addition to the all items index, BLS publishes thousands of other consumer price indexes, such as all items less food and energy. Some users of CPI data use this index because food and energy prices are relatively volatile, and they want to focus on what they perceive to be the “core” or “underlying” rate of inflation.

Question 631

How do I read or interpret an index?

Answer 631

An index is a tool that simplifies the measurement of movements in a numerical series. Most CPI index series have a 1982-84=100 reference base. That is, BLS sets the average index level (representing the average price level) for the 36-month period covering the years 1982, 1983, and 1984 equal to 100; then measures changes in relation to that figure. An index of 110, for example, means there has been a 10-percent increase in price since the reference period; similarly, an index of 90 means there has been a10-percent decrease. Movements of the index from one date to another can be expressed as changes in index points (simply, the difference between index levels), but it is more useful to express the movements as percent changes. This is because index points are affected by the level of the index in relation to its reference period, while percent changes are not. In the table that follows, Item A increased by half as many index points as Item B between Year I and Year II. Yet, because of different starting indexes, both items had the same percent change; that is, prices advanced at the same rate. By contrast, Items B and C show the same change in index points, but the percent change is greater for Item C because of its lower starting index value.

Question 632

Real Rate of Return

Answer 632

Real Rate of Return: [(1 + Nominal Rate) / (1 + Inflation Rate)] - 1 The real rate of return formula is the sum of one plus the nominal rate divided by the sum of one plus the inflation rate which then is subtracted by one. The formula for the real rate of return can be used to determine the effective return on an investment after adjusting for inflation. The nominal rate is the stated rate or normal return that is not adjusted for inflation. The rate of inflation is calculated based on the changes in price indices which are the price on a group of goods. One of the most commonly used price indices is the consumer price index(CPI). Although the consumer price index is widely used, a company or investor may want to consider using another price index or even their own group of goods that relates more to their business when calculating the real rate of return.

Question 634

Name all of the Retirement Plans:

Answer 634

• 401K Plan
  
  1. Defined Contribution Plan
  2. An employee can make contributions, either before or after-tax depending on the options offered in the plan
  3. Employer can make contributions such as matching up to a certain percentage. (Generally Employer contributions not required)
  4. Maximum Contribution =
     
     1. Employee elective deferrals limited to $19,000 in 2019
     2. Total Employee and Employer Contributions limited to the lesser of:
        
        1. 100% of an employee’s compensation or
        2. $56,000 for 2019 ($55,000 for 2018 not including “catch-up” elective deferrals of $6,000 in 2015 - 2019 for employees age 50 or older)
• 403(b) Tax-Sheltered Annuity (TSA) Plan
  
  1. Defined Contribution Plan
  2. offered by public schools and certain tax-exempt organizations
  3. funded by elective deferrals made under:
     
     1. salary reduction agreements and
     2. nonelective employer contributions (i.e. contributions come directly from the employer and are not deducted from employees’ salaries)
  4. Maximum Contribution =
• Cash Balance Plan
  
  1. Defined Benefit Plan
  2. benefit amount is computed based on formula using:
     
     1. contribution and
     2. earning credits
  3. Each participant has a hypothetical account
  4. More likely than defined benefit plans to make lump sum distributions
• Defined Benefit Plan
  
  1. Traditional Defined Benefit Plan
  2. Benefits based on factors such as:
     
     1. salary
     2. age
     3. number of years of service
• Defined Contribution Plan
  
  1. Defined Contribution Plan
  2. employee and/or the employer contribute to the employee’s individual account under the plan
  3. value of the account will change based on contributions and the value and performance of the investments
  4. Examples
     
     1. 401(k) plans
     2. 403(b) plans
     3. Employee stock ownership plans
     4. Profit-Sharing Plans
• Simplified Employee Pension (SEP)
  
  1. Defined Contribution Plan
  2. ONLY Employer contributions are permitted.
  3. Easy to set up and operate
  4. Low administrative costs
  5. Flexible annual contributions – good plan if cash flow is an issue
  6. Employer must contribute equally for all eligible employees
• SARSEP
  
  1. Defined Contribution Plan
  2. you can’t choose one now because a law change prohibited new SARSEPs from being established after 1996
  3. Funded by:
     
     1. Employee elective deferrals (also referred to as salary reduction contributions) and
     2. Nonelective employer contributions - employer contributions made to each eligible employee’s SEP-IRA - regardless of how much the employee deferred.
• SIMPLE IRA
  
  1. Defined Contribution Plan
  2. SIMPLE IRA contributions include:
     
     1. employee may choose salary reduction contributions and
     2. employer contributions: a. matching contributions or b. nonelective contributions.
• SIMPLE 401K
  
  1. Defined Contribution Plan
  2. SIMPLE IRA contributions include:
     
     1. employee salary reduction contributions and
     2. employer contributions: a. matching contributions or b. nonelective contributions
• Profit Sharing Plans
  
  1. Defined Contribution Plan
  2. An employee can make contributions, either before or after-tax depending on the options offered in the plan
  3. Employer can make contributions such as matching up to a certain percentage
     *

Question 635

Example 1 -

• Mary, age 49, whose annual compensation is $360,000 ($30,000 per month), elects to defer $1,500 per calendar month, up to $18,500 for the 2018 year

Example 2 -

• Your plan requires a match of 50% on salary deferrals that do not exceed 5% of compensation. Mary earned $360,000.

Answer 635

Answer 1

• Mary may contribute to the plan until she reaches her annual deferral limit of $18,500 even though her compensation will exceed the annual limit of $275,000 in October.

Answer 2

• Although Mary earned $360,000, your plan can only use up to $275,000 of her compensation when applying the matching formula for 2018.
• Mary’s matching contribution would be $6,875 (50% x (5% x $275,000)). Although Mary makes salary deferrals of $18,500, only $13,750 (5% of $275,000) will be matched. She must receive a matching contribution of $6,875 (50% x $13,750) under the terms of the plan.