Taxation for Financial Planners Exam Bank
Course Introduction
This course provides a comprehensive overview of taxation principles and applications relevant to financial planning. Students will learn about income tax fundamentals, tax planning strategies for individuals and small businesses, tax implications of investment decisions, retirement planning, estate and gift taxation, and recent tax law developments. Emphasis is placed on integrating tax considerations into holistic financial plans, optimizing after-tax returns, and identifying tax-saving opportunities for clients. Through practical case studies and real-world scenarios, students gain the skills necessary to advise clients on tax-efficient solutions in the context of personal financial planning.
Recommended Textbook
South Western Federal Taxation 2014 Individual Income Taxes 37th Edition by William Hoffman
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Chapter 1: An Introduction to Taxation and Understanding
the Federal Tax Law
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Q1) Using the choices provided below,show the justification for each provision of the tax law listed.Note: In some cases,more than one answer is appropriate.
a. Economic considerations
b. Social considerations
c. Equity considerations
Answer: A deduction for qualified tuition paid to obtain higher education.
a.Economic considerations or b.Social considerations
Q2) There is no Federal excise tax on hotel occupancy.
A)True
B)False
Answer: True
Q3) The value added tax (VAT)has had wide acceptance in the international community. A)True
B)False
Answer: True
Q4) Under state amnesty programs,all delinquent and unpaid income taxes are forgiven. A)True
B)False
Answer: False
Page 3
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Chapter 2: Working With the Tax Law
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Q1) Technical Advice Memoranda may not be cited as precedents by taxpayers.
A)True
B)False
Answer: True
Q2) The U.S.Tax Court meets most often in Washington, D.C.
A)True
B)False
Answer: False
Q3) The following citation can be a correct citation: Rev.Rul.95-271,I.R.B.No.54,18.
A)True
B)False
Answer: False
Q4) Tax bills are handled by which committee in the U.S.House of Representatives?
A) Taxation Committee.
B) Ways and Means Committee.
C) Finance Committee.
D) Budget Committee.
E) None of the above.
Answer: B
Page 4
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Chapter 3: Tax Formula and Tax Determination; an
Overview of Property Transactions
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Q1) After her divorce,Hope continues to support her ex-husband's sister,Cindy,who does not live with her.Hope can claim Cindy as a dependent.
A)True
B)False
Answer: True
Q2) Katelyn is divorced and maintains a household in which she and her daughter,Crissa,live.Crissa,age 22,earns $11,000 during 2012 as a model.Katelyn does qualify for head of household filing status.
A)True
B)False
Answer: False
Q3) The additional standard deduction for age and blindness is not the same amount for single as for married taxpayers.
A)True
B)False
Answer: True
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Chapter 4: Gross Income: Concepts and Inclusions
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Q1) If the employer provides all employees with group term life insurance equal to twice the employee's annual salary,an employee with a salary of $50,000 has no gross income from the life insurance protection provided by the employer.
A)True
B)False
Q2) Jacob and Emily were co-owners of a personal residence.As part of their divorce agreement,Emily received sole ownership of their personal residence.This property transfer is classified as a property settlement rather than as alimony as the transfer was a result of a divorce.
A)True
B)False
Q3) The annual increase in the cash surrender value of a life insurance policy:
A) Is taxed according to the original issue discount rules.
B) Is not included in gross income because the policy must be surrendered to receive the cash surrender value.
C) Reduces the deduction for life insurance expense.
D) Is exempt because it is life insurance proceeds.
E) None of the above.
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Chapter 5: Gross Income: Exclusions
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Sample Questions
Q1) Ashley received a scholarship to be used as follows: tuition $6,000; room and board $9,000; and books and laboratory supplies $2,000.Ashley is required to include only $9,000 in her gross income.
A)True
B)False
Q2) Julie was suffering from a viral infection that caused her to miss work for 90 days.During the first 30 days of her absence,she received her regular salary of $4,000 from her employer.For the next 60 days,she received $6,000 under an accident and health insurance policy purchased by her employer.The premiums on the health insurance policy were excluded from her gross income.During the last 30 days,Julie received $2,000 on an income replacement policy she had purchased.Of the $12,000 she received,Julie must include in gross income:
A) $0.
B) $4,000.
C) $8,000.
D) $10,000.
E) $12,000.
Q3) What Federal income tax benefits are provided for college students?
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Page 7
Chapter 6: Deductions and Losses: in General
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Q1) If a vacation home is classified as primarily personal use,part of the maintenance and utility expenses can be allocated and deducted as a rental expense.
A)True
B)False
Q2) The Code defines what constitutes a trade or business.
A)True
B)False
Q3) A vacation home at the beach which is rented for 170 days and used personally for 16 days is classified in the personal/rental use category.
A)True
B)False
Q4) A football team that pays a star player an annual salary of $20 million can deduct the entire $20 million as salary expense.If the same amount is paid to the CEO of IBM,only $1 million is deductible.
A)True
B)False
Q5) Can a trade or business expense be deductible if it is necessary but not ordinary?
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8
Chapter 7: Deductions and Losses: Certain Business
Expenses and Losses
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Q1) The amount of a farming loss cannot exceed the amount of the taxpayer's NOL for the taxable year.
A)True
B)False
Q2) For the year 2012,Amber Corporation has taxable income of $880,000,alternative minimum taxable income of $600,000,and qualified production activities income (QPAI)of $640,000.The total W-2 wages paid to employees engaged in qualified domestic production activities are $116,000.Amber's DPAD for 2012 is:
A) $54,000.
B) $57,600.
C) $58,000.
D) $79,200.
E) None of the above.
Q3) The amount of a loss on insured business use property is reduced by the insurance coverage if no claim is made against the insurer.
A)True
B)False
Q4) Discuss the calculation of nonbusiness deductions for purposes of determining an individual's NOL.
Page 9
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Chapter 8: Depreciation, cost Recovery, amortization, and Depletion
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Q1) On June 1 of the current year,Tab converted a machine from personal use to rental property.At the time of the conversion,the machine was worth $90,000.Five years ago Tab purchased the machine for $120,000.The machine is still encumbered by a $50,000 mortgage.What is the basis of the machine for cost recovery?
A) $70,000.
B) $90,000.
C) $120,000.
D) $140,000.
E) None of the above.
Q2) Bhaskar purchased a new factory building on September 2,2012,for $2,000,000.He elected the alternative depreciation system (ADS).Determine the cost recovery deduction for 2013.
A) $15,000.
B) $18,000.
C) $22,000.
D) $50,000.
E) None of the above.
Q3) Discuss the reason for the inclusion amount with respect to leased automobiles.
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Chapter 9: Deductions: Employee and
Self-Employed-Related Expenses
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Q1) A statutory employee is not a common law employee but is subject to income tax withholdings.
A)True
B)False
Q2) After she finishes working at her main job, Ann returns home, has dinner, then drives to her second job. Ann may deduct the mileage between her home and second job.
A)True
B)False
Q3) After the automatic mileage rate has been set by the IRS for a year, it can later be changed by the IRS.
A)True
B)False
Q4) Rocky has a full-time job as an electrical engineer for the city utility.In his spare time,Rocky repairs TV sets in the basement of his personal residence.Most of his business comes from friends and referrals from former customers,although occasionally he runs an ad in the local suburbia newspaper.Typically,the sets are dropped off at Rocky's house and later picked up by the owner when notified that the repairs have been made.
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Chapter 10: Deductions and Losses: Certain Itemized
Deductions
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Q1) Jerry pays $5,000 tuition to a parochial school run by his church in order to enable his daughter to attend.This is the amount the school charges all students.Part of the tuition payments can be claimed as a charitable contribution.
A)True
B)False
Q2) Joe,a cash basis taxpayer,took out a 12-month business loan on December 1,2012.He prepaid all $3,600 of the interest on the loan on December 1,2012.Joe can deduct all $3,600 of the prepaid interest in 2012.
A)True
B)False
Q3) Contributions to public charities in excess of 50% of AGI may be carried back 3 years or forward for up to 5 years.
A)True
B)False
Q4) Gambling losses may be deducted to the extent of the taxpayer's gambling winnings.Such losses are subject to the 2% floor for miscellaneous itemized deductions. A)True
B)False
Page 12
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Chapter 11: Investor Losses
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Q1) Last year,Wanda gave her daughter a passive activity (adjusted basis of $80,000; fair market value of $160,000)with suspended losses of $20,000.In the current year,her daughter realizes income of $10,000 from the activity.What are the tax effects to Wanda and her daughter?
Q2) Coyote Corporation has active income of $45,000 and a passive loss of $23,000 in the current year.Coyote cannot deduct the $23,000 loss if it is a personal service corporation.
A)True
B)False
Q3) Which of the following factors should be considered in determining whether an activity is treated as an appropriate economic unit?
A) The similarities and differences in types of business.
B) The extent of common control.
C) The extent of common ownership.
D) The geographic location.
E) All of the above.
Q4) Describe the types of activities and taxpayers that are subject to the at-risk rules.
Q5) What special passive loss treatment is available to real estate activities?
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Chapter 12: Alternative Minimum Tax
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Q1) Which of the following statements is correct?
A) A C corporation classified as a small corporation is eligible to have the AMT calculated using the AMT provisions for individuals.
B) A C corporation classified as a small corporation is not subject to the AMT.
C) A C corporation classified as a small corporation is subject to the AMT only on its adjusted current earnings.
D) A C corporation classified as a small corporation is eligible to use the 15%/0% tax rate on net capital gain and qualified dividends rather than the regular tax rates applicable to other C corporations.
E) a., b., and c. are correct.
Q2) What is the relationship between taxable income and AMTI?
Q3) Nell has a personal casualty loss deduction of $14,500 for regular income tax purposes.The deduction would have been $26,600,but it had to be reduced by $100 and by $12,000 (10% ´ $120,000 AGI).For AMT purposes,the casualty loss deduction is $26,600. A)True B)False
Q4) How can the positive AMT adjustment for research and experimental expenditures be avoided?
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Chapter 13: Tax Credits and Payment Procedures
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Q1) Both education tax credits are available for qualified tuition expenses,and in certain instances,also may be available for room and board.
A)True
B)False
Q2) Bradley has two college-age children,Clint,a freshman at State University,and Abigail,a junior at Northwest University.Both Clint and Abigail are full-time students.Clint's expenses during the 2012 fall semester are as follows: $2,400 tuition,$250 books and course materials,and $1,600 room and board.Abigail's expenses for the 2012 calendar year are as follows: $10,200 tuition,$1,200 books and course materials,and $3,600 room and board.Tuition and the applicable room and board costs are paid at the beginning of each semester.Bradley is married,files a joint tax return,claims both children as dependents,and has a combined AGI with his wife of $114,000 for 2012.Determine Bradley's available education tax credit for 2012.
Q3) The work opportunity tax credit is available only for wages paid to qualifying individuals during their first year of employment.
A)True B)False
Q4) Discuss the treatment of unused general business credits.
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Page 15
Chapter 14: Property Transactions: Determination of Gain or
Loss and Basis Considerations
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Q1) Kevin purchased 5,000 shares of Purple Corporation stock at $10 per share.Two years later,he receives a 5% common stock dividend.At that time,the common stock of Purple Corporation had a fair market value of $12.50 per share.What is the basis of the Purple Corporation stock,the per share basis,and gain recognized upon receipt of the common stock dividend?
A) $50,000 basis in stock, $10 basis per share for the original stock and $0 basis per share for the dividend shares, $0 recognized gain.
B) $50,000 basis in stock, $9.52 basis per share, $0 recognized gain.
C) $53,125 basis in stock, $10 basis per share for the original stock and $12.50 basis per share for the dividend shares, $3,125 recognized gain.
D) $53,125 basis in stock, $10.12 basis per share, $3,125 recognized gain.
E) None of the above.
Q2) Identify two tax planning techniques that can be used to avoid the wash sale disallowance of loss.
Q3) Explain how the sale of investment property at a loss to a brother is treated differently from a sale to a nephew.
Q4) What effect does a deductible casualty loss have on the adjusted basis of property?
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Chapter 15: Property Transactions: Nontaxable Exchanges
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Q1) Define an involuntary conversion.
Q2) Section 1033 (nonrecognition of gain from an involuntary conversion)applies to both gains and losses.
A)True
B)False
Q3) Abby exchanges 3,000 shares of Osprey,Inc.,stock for 1,500 shares of Blue Heron,Inc.,stock.Abby's adjusted basis for the Osprey stock is $270,000 and the fair market value of the Blue Heron stock is $300,000.Abby's recognized gain is $0 and her adjusted basis for the Blue Heron stock is $270,000.
A)True
B)False
Q4) A building located in Virginia (used in business)exchanged for a building located in France (used in business)cannot qualify for like-kind exchange treatment.
A)True
B)False
Q5) Define qualified small business stock under § 1045.
Q6) What effect do the assumption of liabilities have on a § 1031 like-kind exchange?
Q7) Discuss the treatment of losses from involuntary conversions.
Page 17
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Chapter 16: Property Transactions: Capital Gains and Losses
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Q1) Mauve Company signs a 13-year franchise agreement with Mauve Too.Mauve Too retained significant powers,rights,and a continuing interest.Mauve Company (the franchisee)makes noncontingent payments of $16,000 per year for the first five years of the franchise.Mauve Company also pays a contingent fee of 1% of gross sales every month.Which of the following statements is correct?
A) Mauve Company may deduct the $16,000 per year noncontingent payments in full as they are made.
B) Mauve Company may deduct the monthly contingent fee as it is paid.
C) Mauve Company may deduct both the noncontingent annual fee and the contingent monthly fees as they are paid.
D) Mauve Company may not deduct either the noncontingent annual fee or the contingent monthly fees as they are paid.
E) None of the above.
Q2) On January 10,2012,Wally sold an option for $2,000 on vacant land he held as an investment.He had purchased the land in 2008 for $76,000.The option allowed the option holder to purchase the property for $122,000 plus the cost of the option.On March 1,2012,the option holder exercised the option.What is the amount and nature of Wally's gain or loss from disposition of the land?
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Chapter 17: Property Transactions: Section 1231 and Recapture Provisions
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Q1) Vertical,Inc.,has a 2012 net § 1231 gain of $67,000 and had a $22,000 net § 1231 loss in 2011.For 2012,Vertical's net § 1231 gain is treated as:
A) $45,000 long-term capital gain and $22,000 ordinary loss.
B) $67,000 ordinary gain.
C) $45,000 long-term capital gain and $22,000 ordinary gain.
D) $67,000 capital gain.
E) None of the above.
Q2) If there is a net § 1231 loss,it is treated as a long-term capital loss.
A)True
B)False
Q3) Section 1250 depreciation recapture will apply when accelerated depreciation was used on property used outside the United States and the property is sold at a gain.
A)True
B)False
Q4) Section 1231 property generally does not include musical compositions.
A)True
B)False
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Chapter 18: Accounting Periods and Methods
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Q1) For purposes of determining the partnership's tax year,there may be more than one principal partner.
A)True B)False
Q2) Taylor sold a capital asset on the installment basis and did not charge interest on the deferred payment due in three years.
A) Interest will be imputed, thus increasing the total gross income from the transactions.
B) Interest will be imputed, thus decreasing the capital gain.
C) Interest will not be imputed because the contract is for less than five years.
D) Interest will be imputed, thus increasing the buyer's basis in the asset.
E) None of the above.
Q3) Red Corporation and Green Corporation are equal partners in the R & G Partnership.Red Corporation's tax year ends September 30th,and Green Corporation is a calendar year taxpayer.R & G Partnership must use September 30th as its tax year,unless it has a business purpose for using a different tax year.
A)True B)False
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Chapter 19: Deferred Compensation
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Q1) Yvonne exercises incentive stock options (ISOs)for 100 shares of Apple Corporation stock at the option price of $100 per share on May 21,2012,when the fair market value is $120 per share.She holds the stock for only seven months and sells the shares for $140 per share.Determine the recognized gain on the sale and classify it as capital or ordinary.
A) $2,000 ordinary income and $2,000 STCG.
B) $2,000 ordinary income and $2,000 LTCG.
C) $4,000 ordinary income.
D) $4,000 LTCG.
E) None of the above.
Q2) If an individual is ineligible to make a deductible contribution to a traditional IRA,nondeductible contributions of any amount can be made to a traditional IRA.
A)True
B)False
Q3) In a profit sharing plan,a separate account is maintained for each participant.
A)True
B)False
Q4) What is a highly compensated employee?
Q5) What is a profit sharing plan?
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Chapter 20: Corporations and Partnerships
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Q1) On March 9,2012,all of the shareholders of Kingfisher Corporation (a calendar year entity)voluntarily revoke the S election (effective as soon as possible).For all of 2012,Kingfisher Corporation will be a C corporation.
A)True
B)False
Q2) Pursuant to a complete liquidation,a corporation sells its assets to third parties and distributes the cash proceeds to its individual shareholders.As a result of the sales,the corporation must recognize both realized gains and losses.
A)True
B)False
Q3) Guaranteed payments are deductible by the partnership and are taxable to the partner receiving the payments.
A)True
B)False
Q4) Guaranteed payments have no effect on the basis of a partner's interest in the partnership.
A)True
B)False
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