©2014, college for financial planning, all rights reserved. cfpe503 true/false questions certified...

©2014, College for Financial Planning, all rights reserved.

CFPE503True/False Questions

CERTIFIED FINANCIAL PLANNER CERTIFICATION PROFESSIONAL EDUCATION PROGRAMInvestment Planning

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Module 1Income Tax Concepts, Basic Terminology & Tax Calculations

CERTIFIED FINANCIAL PLANNER CERTIFICATION PROFESSIONAL EDUCATION PROGRAMIncome Tax Planning

Module 1 True/False

1. The tax calculation begins with a determination of the taxpayer’s total income.

Your answer

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Module 1 True/False

2. Exclusions are income items received by the taxpayer that are not included in income for tax purposes.

3. There are no deductions allowed in the computation of total income.

4. An unlimited amount of qualified student loan interest is deductible.

5. All of the self-employment tax liability is deductible as an adjustment to income.

6. In the tax calculation process, the taxpayer deducts the lesser of total itemized deductions or the standard deduction from AGI.

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Module 1 True/False

7. Medical expenses for a 70-year-old taxpayer are deductible as an itemized deduction to the extent that the expenses exceed 10% of AGI.

8. The average tax rate is the rate of tax paid on the last dollar of taxable income.

9. There is no phaseout of the credit for qualified adoption expenses.

10. After subtracting credits, other taxes may need to be added to arrive at the total tax due.

11. Avoiding taxes is the equivalent of evading taxes.

12. The receipt of municipal bond income is an example of tax avoidance.

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Module 1 True/False

13. The primary objective of tax deferral is to postpone the time that the taxes will have to be paid on the income.

14. A nondeductible contribution to a traditional IRA is an example of tax deferral.

15. Net long-term capital gains are generally taxed at a maximum rate of 15% or 20%. A 28% or a 25% rate may also apply.

16. The long-term holding period is 18 months.17. AGI is the taxpayer’s total income less exclusions.18. Itemized deductions include business-related

expenses and other deductions allowable in arriving at AGI.

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Module 1 True/False

19. Tier II miscellaneous deductions are deductible only to the extent the total exceeds 2% of AGI.

20. Qualified private activity municipal bond interest is tax exempt but is typically included in the computation of the alternative minimum tax.

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Module 2Tax Accounting & Forms of Business


Module 2 True/False

1. In the cash method of accounting, income generally is recognized when received, rather than when earned.

2. The doctrine of constructive receipt requires that income be recognized when there is an unrestricted right to receive it.

3. Using the accrual method of accounting, income is reported for the year in which the “all events” test is satisfied and the amount can be reasonably estimated.

4. Under the accrual method of accounting, deductions are recognized when the taxpayer becomes liable for them, not when they are actually paid.

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Module 2 True/False

5. In the hybrid method of accounting, purchases and sales are generally accounted for using the accrual method of accounting.

6. Businesses producing items that are normally carried in finished goods inventory or that result from contracts extending over 12 months may use a long-term contract method of accounting.

7. A mathematical error must be corrected via an amended return because it is considered a change in accounting method.

8. If inventories are necessary to show income accurately, the cash method of accounting must be used.

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Module 2 True/False

9. A major advantage of the last-in, first-out method of inventory valuation is that, in periods of rising prices, deferral of income taxes results.

10. One of the additional benefits of a sole proprietorship is the protection from creditors of personal assets not directly used in the business.

11. Nonrecourse financing creates basis for the partners under the partnership form of business.

12. A partnership is required to pay annual income taxes by April 15 of the subsequent year.

13. A potential tax advantage generally associated with a C corporation is that it is a separate taxable entity.

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Module 2 True/False

14. It is an advantage to a C corporation when the IRS claims that a shareholder was paid “unreasonable compensation” for services rendered.

15. One of the advantages of the corporate form of business is the potential application of the personal holding company tax.

16. An involuntary revocation of S corporation status can be a disadvantage because conduit taxation will no longer apply.

17. The S corporation form of business is typically a disadvantage to a new business.

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Module 2 True/False

18. Two requirements that must be met by a business to qualify for S corporation status are that it may have no more than 100 shareholders and only one class of stock.

19. Two nontax differences between an S corporation and a partnership are that a partnership has limited liability and easily transferred interests, while an S corporation does not.

20. One of the advantages of a general partnership is that the ownership interests are easily transferred.

21. To claim a home-office deduction, the home office generally must be used regularly and exclusively as a place of business.

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Module 2 True/False

22. Generally, a home-office expense deduction may neither create nor add to a loss from the business.

23. A major disadvantage of the first-in, first-out method of inventory valuation is that, during an inflationary period, lower net income is reported.

24. A major disadvantage of the specific identification method of inventory valuation is the lack of flexibility in managing inventory.

25. One disadvantage of classifying a C corporation as a personal service corporation is that employee fringe benefits are disallowed.

26. Similar to partners in a partnership, S corporation owners have unlimited liability for the claims of creditors.

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Module 3Income Tax Aspects of Property Acquisitions & Introduction to Property Dispositions


Module 3 True/False

1. A leasehold interest in a business automobile is intangible personalty used in a trade or business.

2. An individual who purchases unimproved land in anticipation of an increase in value is considered to be holding property used in a trade or business.

3. An improvement is an expenditure that maintains an asset in normal working condition and does not materially increase the life or the value of the asset.

4. A cost associated with the acquisition of an asset used in a business is currently deductible in most situations.

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Module 3 True/False

5. The 200% declining balance method typically uses the half-year convention. This half-year convention is built into the MACRS table.

6. A covenant not to compete that is entered into in connection with the acquisition of a business may be amortized over its actual life since its life will be substantially shorter than 15 years.

7. A taxpayer who places $230,000 of qualifying property in service during the 2014 tax year may take a limited Section 179 expense deduction.

8. If the sale price of a Section 1245 asset is greater than the asset’s cost basis, Section 1231 income will be generated.

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Module 3 True/False

9. Gain attributable to straight-line depreciation on realty is treated as ordinary income under Section 1250.

10. If a taxpayer had an unrecaptured Section 1231 loss of $4,000 during the previous five years, the first $4,000 of net Section 1231 gain in the current year is treated as ordinary income.

11. A current-year net Section 1231 gain is always treated as a long-term capital gain.

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Module 4Income Tax Aspects of the Dispositions of Property


Module 4 True/False

1. An exchange of U.S. realty for foreign realty is considered like-kind.

2. In a like-kind exchange, gain is recognized whenever there is gain realized.

3. A loss cannot be recognized on the sale of a principal residence.

4. If a taxpayer elected the “old” Section 121 exclusion, then he or she may elect the “new” Section 121 exclusion, provided the other requirements are met.

5. Regardless of whether any payment is actually received on an installment sale, the taxpayer must still recognize any cost recovery recapture in the year of disposition.

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Module 4 True/False

6. The installment sale method is never used to account for losses.

7. The amount of a casualty or theft loss is decreased by the amount of insurance reimbursement that would have been received, regardless of whether a claim was actually filed.

8. If a taxpayer receives an insurance reimbursement that is greater than his or her adjusted basis in the damaged or stolen property, he or she will have a casualty or theft gain.

9. In order to postpone gain under the involuntary conversion rules, a taxpayer must purchase replacement property that is similar or related in service or use.

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Module 4 True/False

10. The replacement period for condemned rental real estate ends on the last day of the third taxable year following the year in which any part of the condemnation gain is recognized.

11. The gain recognized (subject to taxation) in a like-kind exchange is the lesser of the gain realized or the boot received.

12. An exchange of an apartment building for vacant land that is held for investment purposes may be a like-kind exchange.

13. A single taxpayer may exclude up to $500,000 of gain from the sale of a principal residence.

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Module 4 True/False

14. Taxpayers wishing to exclude the maximum amount of gain from the sale of a principal residence must meet certain age, use, and ownership requirements.

15. The use of the installment method generally is not available to dealers.

16. A taxpayer may deduct a casualty loss from a fire if the taxpayer intentionally set the fire.

17. Losses due to embezzlement and extortion are considered to be theft losses.

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Module 4 True/False

18. If replacement property in an involuntary conversion costs less than the reimbursement received, gain is included in the taxpayer’s income to the extent that the reimbursement exceeds the cost.

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Module 5Passive Activity Losses & Related Topics


Module 5 True/False1. Two legal forms that a direct participation

program may use are the C corporation and the S corporation.

2. Two disadvantages of the general partnership form for a direct participation program are the high cost of organization and the limited liability of the shareholders.

3. Except for master limited partnerships, most direct participation programs lack liquidity and thus are not suitable for investors who need liquidity.

4. Income and losses from the trade or business of a partnership must be allocated pro rata to all partners in the partnership.

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Module 5 True/False

5. Investors in low marginal income tax brackets generally derive the greatest advantage from direct participation programs.

6. The at-risk rules limit the availability of federal income tax benefits from a direct participation program by limiting the use of leverage.

7. The alternative minimum tax limits a taxpayer’s ability to use losses or credits from a direct participation program to reduce the tax due on active or portfolio income.

8. The active participant in a real estate investment who has less than $100,000 in adjusted gross income may use up to $25,000 in losses annually to offset active or portfolio income.

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Module 5 True/False

9. Taxpayers with under $200,000 in adjusted gross income may use the historic rehabilitation credit to offset the tax due on up to $25,000 of active or portfolio income.

10. To be considered an active participant for purposes of the passive activity rules, the taxpayer must exhibit bona fide involvement in management decisions.

11. The income from a publicly traded limited partnership can be offset by passive losses incurred by the taxpayer from any other source.

12. For purposes of the vacation home rules, a boat may qualify as a dwelling unit as long as it has sleeping space.

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Module 5 True/False

13. A vacation home rented for fewer than 15 days will not generate any taxable rental income.

14. Mortgage interest and property taxes are not allowed as itemized deductions when a vacation home is frequently rented but infrequently used for personal purposes.

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Module 6Income Tax Aspects of Securities


Module 6 True/False1. Inside buildup refers to the tax-deferred

accumulations of cash value within a life insurance policy.

2. The tax treatment of life insurance is not different from the tax treatment of investments.

3. An insurance policy will be classified as a modified endowment contract (MEC) if it fails to meet the seven-pay test, receiving greater than the equivalent of seven net level premiums within the first seven years.

4. Distributions from a modified endowment contract are treated on a last-in, first-out (LIFO) basis.

5. With a fixed annuity, the annuitant pays now for future guaranteed payments.

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Module 6 True/False

6. With a deferred annuity, the annuitant pays now for future fixed or variable annuity payments.

7. The taxable portion of a nonperiodic distribution from an annuity contract may be subject to a 10% premature distribution penalty if the annuitant has not reached age 59½ at the time of the payment.

8. Nonperiodic distributions from an annuity contract issued after August 13, 1982, are tax free, up to basis in the contract.

9. There are only two tax rates for long-term capital gains.

10. Capital gains or losses resulting from various security transactions are categorized as portfolio income.

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Module 6 True/False

11. Excess capital gains, to the extent they exceed capital losses in any one year, may be deducted only up to $3,000 of ordinary income.

12. All shares of a mutual fund have the same cost basis under the average cost method for determining basis.

13. The occurrence of a taxable event in mutual fund transactions is limited to sales of the shares.

14. The distribution of interest and dividends from a mutual fund is treated as a long-term capital gain.

15. For purposes of the wash sale rule, a stock or security is substantially identical if it is not different in any material or essential way.

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Module 6 True/False

16. The wash sale rule does not apply to sales and investments in mutual funds.

17. A specialized small business investment company (SSBIC) may include investment companies that finance small business concerns owned by disadvantaged taxpayers.

18. Individuals, but not C corporations, may elect to defer recognition of capital gain income on the sale of publicly traded securities if, within 60 days of the sale, the taxpayer uses the proceeds to purchase common stock or a partnership interest in a specialized small business investment company (SSBIC).

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Module 6 True/False

19. Investment interest is interest paid or accrued on a debt incurred to purchase “property held for investment.”

20. A taxpayer is allowed an investment interest expense deduction to the extent of gross investment income.

21. Distributions of corporate earnings and profits are not taxable as qualified dividends.

22. A lump-sum payment of the proceeds of a life insurance policy that is made to the beneficiary upon the insured’s death is exempt from income taxation.

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Module 6 True/False

23. To determine the exclusion ratio for a fixed commercial annuity, the total expected return for the life of the contract is divided by the investment in the annuity.

24. The exclusion amount for a variable annuity is determined by dividing the investment in the contract by the number of expected payments.

25. A stock dividend is not taxable because it is not considered a distribution of earnings and profits.

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Module 7Tax Planning for the Family


Module 7 True/False

1. Gifting property to a child under age 19 operates to produce tax savings because all future income from the gifted property is taxed at the child’s tax rate.

2. Family partnerships and S corporations operate to produce tax savings by passing through income and losses directly to partners or corporate shareholders.

3. The personal exemption allocation allowed in support of family members can operate to produce tax savings when allocated to a higher-bracket taxpayer.

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Module 7 True/False

4. When a grantor retains a reversionary interest over a trust’s corpus in excess of 5% of the value of the property placed in trust, the resulting income is taxed to the beneficiary.

5. When a grantor can exercise a power of disposition over either a trust’s income or corpus without the consent of an adverse party, income from the trust is taxed to the grantor.

6. A gift of a remainder interest in a personal residence or farm does not qualify for the charitable income tax deduction.

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Module 7 True/False

7. A gift of a partial interest transferred through a qualifying form of trust can be treated as a charitable contribution deduction.

8. A gift of a remainder interest in real property made to a public charity for conservation purposes does not qualify for the charitable income tax deduction.

9. Two requirements that must be met for the payor to take a tax deduction for alimony are that payments must be in cash and they must be received by or for the benefit of the payee spouse.

10. A premarital agreement may have as a primary purpose the procurement of a divorce.

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Module 7 True/False

11. Child support payments are deductible by the payor and taxable to the recipient.

12. If there is no written agreement to the contrary, the custodial parent may claim the dependency exemptions for his or her children.

13. A dependent of another taxpayer may use a limited personal exemption against earned income.

14. The IRS challenges to gift-leaseback arrangements typically center on the economic reality of the transaction.

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Module 7 True/False

15. When a grantor directly or indirectly retains certain administrative powers that may be exercised for his or her benefit, income from the trust is taxed to the trust.

16. If the grantor retains only administrative and clerical power over the assets of the trust, the trust income is taxed to the grantor.

17. Any transfer of property between spouses incident to a divorce is tax free, and the transferor spouse’s basis is carried over to the recipient spouse.

18. One of the requirements of qualifying alimony is that the terms of a divorce decree must state that alimony payments will be made only until the death or remarriage of the recipient.

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Module 7 True/False

19. A premarital agreement need not be in writing to be held enforceable by a court of law.

20. When the transfer of property from one spouse to another is in exchange for a release of all marital claims, the transaction will be taxable to the recipient and will be deductible by the transferor.

21. Alimony paid in the first and second years must be recaptured by the payor in the third year if, during the three years, alimony payments decreased by more than $10,000.

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Module 8Tax Law Research & Special Income Tax Considerations


Module 8 True/False

1. A vast majority of the IRS audit process is random.

2. The process of obtaining and analyzing information to answer specific tax questions is referred to as tax law research.

3. The tax treatment of a particular transaction generally is based solely on statutory law.

4. The body of U.S. tax law consists of legislative provisions, court decisions, and administrative pronouncements.

5. Secondary sources of tax law interpretation include only statutory laws and their official interpretations.

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Module 8 True/False

6. Secondary sources of tax law interpretation are unofficial and should not be used as the supporting authority.

7. The purpose of the alternative minimum tax is to ensure that taxpayers who are able to reduce their federal income tax liability below a certain level will still be required to pay at least a minimum amount of income tax.

8. The alternative minimum tax is based on tax referral and tax addition items.

9. Corporations are not subject to the alternative minimum tax.

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Module 8 True/False

10. Because self-employed individuals are not subject to employer withholding, they are also not required to pay their own Social Security and Medicare taxes.

11. Self-employed individuals with less than $400 of net earnings are not required to pay self-employment taxes.

12. A financial transaction need not have economic substance if the transaction does not violate any federal tax laws.

13. Negligence is defined as a taxpayer’s bad-faith conduct with intent to evade paying income tax.

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Module 8 True/False

14. The self-employment tax consists of a Social Security component and a Medicare component.

15. The wage base for calculating self-employment taxes is not adjusted annually for cost-of-living increases.

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CFP 3True/False QuestionsEnd of slides

CERTIFIED FINANCIAL PLANNER CERTIFICATION PROFESSIONAL EDUCATION PROGRAMInvestment Planning

©2014, college for financial planning, all rights reserved. cfpe503 true/false questions certified...

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