CERTIFIED FINANCIAL PLANNER CERTIFICATION
PROFESSIONAL EDUCATION PROGRAM
Investment Planning
CFPE503
True/False Questions
©2014, College for Financial Planning, all rights reserved.
Video
Play Video
•
Open-ended &
True/False Questions
•
•
7 minutes
Play video from
Video Layout
1-2
CERTIFIED FINANCIAL PLANNER CERTIFICATION
PROFESSIONAL EDUCATION PROGRAM
Income Tax Planning
Module 1
Income Tax Concepts,
Basic Terminology & Tax
Calculations
©2014, College for Financial Planning, all rights reserved.
Module 1 True/False
1. The tax calculation begins with a determination of
the taxpayer’s total income.
Play Jeopardy
music
Your answer

1-4
Module 1 True/False
2. Exclusions are income items received by the
3.
4.
5.
6.
taxpayer that are not included in income for tax
purposes.
There are no deductions allowed in the computation
of total income.
An unlimited amount of qualified student loan
interest is deductible.
All of the self-employment tax liability is deductible
as an adjustment to income.
In the tax calculation process, the taxpayer deducts
the lesser of total itemized deductions or the
standard deduction from AGI.
5
Module 1 True/False
7. Medical expenses for a 70-year-old taxpayer are
8.
9.
10.
11.
12.
deductible as an itemized deduction to the extent
that the expenses exceed 10% of AGI.
The average tax rate is the rate of tax paid on the
last dollar of taxable income.
There is no phaseout of the credit for qualified
adoption expenses.
After subtracting credits, other taxes may need to
be added to arrive at the total tax due.
Avoiding taxes is the equivalent of evading taxes.
The receipt of municipal bond income is an example
of tax avoidance.
6
Module 1 True/False
13. The primary objective of tax deferral is to postpone
14.
15.
16.
17.
18.
the time that the taxes will have to be paid on the
income.
A nondeductible contribution to a traditional IRA is
an example of tax deferral.
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.
The long-term holding period is 18 months.
AGI is the taxpayer’s total income less exclusions.
Itemized deductions include business-related
expenses and other deductions allowable in arriving
at AGI.
7
Module 1 True/False
19. Tier II miscellaneous deductions are deductible only
20.
to the extent the total exceeds 2% of AGI.
Qualified private activity municipal bond interest is
tax exempt but is typically included in the
computation of the alternative minimum tax.
8
CERTIFIED FINANCIAL PLANNER CERTIFICATION
PROFESSIONAL EDUCATION PROGRAM
Income Tax Planning
Module 2
Tax Accounting & Forms
of Business
©2014, College for Financial Planning, all rights reserved.
Module 2 True/False
1. In the cash method of accounting, income generally is
2.
3.
4.
recognized when received, rather than when earned.
The doctrine of constructive receipt requires that
income be recognized when there is an unrestricted
right to receive it.
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.
Under the accrual method of accounting, deductions
are recognized when the taxpayer becomes liable for
them, not when they are actually paid.
10
Module 2 True/False
5. In the hybrid method of accounting, purchases and
6.
7.
8.
sales are generally accounted for using the accrual
method of accounting.
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.
A mathematical error must be corrected via an
amended return because it is considered a change
in accounting method.
If inventories are necessary to show income
accurately, the cash method of accounting must be
used.
11
Module 2 True/False
9. A major advantage of the last-in, first-out method
10.
11.
12.
13.
of inventory valuation is that, in periods of rising
prices, deferral of income taxes results.
One of the additional benefits of a sole
proprietorship is the protection from creditors of
personal assets not directly used in the business.
Nonrecourse financing creates basis for the partners
under the partnership form of business.
A partnership is required to pay annual income
taxes by April 15 of the subsequent year.
A potential tax advantage generally associated with
a C corporation is that it is a separate taxable entity.
12
Module 2 True/False
14. It is an advantage to a C corporation when the IRS
15.
16.
17.
claims that a shareholder was paid “unreasonable
compensation” for services rendered.
One of the advantages of the corporate form of
business is the potential application of the personal
holding company tax.
An involuntary revocation of S corporation status
can be a disadvantage because conduit taxation will
no longer apply.
The S corporation form of business is typically a
disadvantage to a new business.
13
Module 2 True/False
18. Two requirements that must be met by a business
19.
20.
21.
to qualify for S corporation status are that it may
have no more than 100 shareholders and only one
class of stock.
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.
One of the advantages of a general partnership is
that the ownership interests are easily transferred.
To claim a home-office deduction, the home office
generally must be used regularly and exclusively as
a place of business.
14
Module 2 True/False
22. Generally, a home-office expense deduction may
23.
24.
25.
26.
neither create nor add to a loss from the business.
A major disadvantage of the first-in, first-out
method of inventory valuation is that, during an
inflationary period, lower net income is reported.
A major disadvantage of the specific identification
method of inventory valuation is the lack of
flexibility in managing inventory.
One disadvantage of classifying a C corporation as a
personal service corporation is that employee fringe
benefits are disallowed.
Similar to partners in a partnership, S corporation
owners have unlimited liability for the claims of
creditors.
15
CERTIFIED FINANCIAL PLANNER CERTIFICATION
PROFESSIONAL EDUCATION PROGRAM
Income Tax Planning
Module 3
Income Tax Aspects of
Property Acquisitions &
Introduction to Property
Dispositions
©2014, College for Financial Planning, all rights reserved.
Module 3 True/False
1. A leasehold interest in a business automobile is
2.
3.
4.
intangible personalty used in a trade or business.
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.
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.
A cost associated with the acquisition of an asset
used in a business is currently deductible in most
situations.
17
Module 3 True/False
5. The 200% declining balance method typically uses
6.
7.
8.
the half-year convention. This half-year convention
is built into the MACRS table.
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.
A taxpayer who places $230,000 of qualifying
property in service during the 2014 tax year may
take a limited Section 179 expense deduction.
If the sale price of a Section 1245 asset is greater
than the asset’s cost basis, Section 1231 income will
be generated.
18
Module 3 True/False
9. Gain attributable to straight-line depreciation on
10.
11.
realty is treated as ordinary income under Section
1250.
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.
A current-year net Section 1231 gain is always
treated as a long-term capital gain.
19
CERTIFIED FINANCIAL PLANNER CERTIFICATION
PROFESSIONAL EDUCATION PROGRAM
Income Tax Planning
Module 4
Income Tax Aspects of the
Dispositions of Property
©2014, College for Financial Planning, all rights reserved.
Module 4 True/False
1. An exchange of U.S. realty for foreign realty is
2.
3.
4.
5.
considered like-kind.
In a like-kind exchange, gain is recognized
whenever there is gain realized.
A loss cannot be recognized on the sale of a
principal residence.
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.
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.
21
Module 4 True/False
6. The installment sale method is never used to
7.
8.
9.
account for losses.
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.
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.
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.
22
Module 4 True/False
10. The replacement period for condemned rental real
11.
12.
13.
estate ends on the last day of the third taxable year
following the year in which any part of the
condemnation gain is recognized.
The gain recognized (subject to taxation) in a likekind exchange is the lesser of the gain realized or
the boot received.
An exchange of an apartment building for vacant
land that is held for investment purposes may be a
like-kind exchange.
A single taxpayer may exclude up to $500,000 of
gain from the sale of a principal residence.
23
Module 4 True/False
14. Taxpayers wishing to exclude the maximum amount
15.
16.
17.
of gain from the sale of a principal residence must
meet certain age, use, and ownership requirements.
The use of the installment method generally is not
available to dealers.
A taxpayer may deduct a casualty loss from a fire if
the taxpayer intentionally set the fire.
Losses due to embezzlement and extortion are
considered to be theft losses.
24
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.
25
CERTIFIED FINANCIAL PLANNER CERTIFICATION
PROFESSIONAL EDUCATION PROGRAM
Income Tax Planning
Module 5
Passive Activity Losses &
Related Topics
©2014, College for Financial Planning, all rights reserved.
Module 5 True/False
1. Two legal forms that a direct participation program
2.
3.
4.
may use are the C corporation and the S corporation.
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.
Except for master limited partnerships, most direct
participation programs lack liquidity and thus are not
suitable for investors who need liquidity.
Income and losses from the trade or business of a
partnership must be allocated pro rata to all partners
in the partnership.
27
Module 5 True/False
5. Investors in low marginal income tax brackets
6.
7.
8.
generally derive the greatest advantage from direct
participation programs.
The at-risk rules limit the availability of federal
income tax benefits from a direct participation
program by limiting the use of leverage.
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.
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.
28
Module 5 True/False
9. Taxpayers with under $200,000 in adjusted gross
10.
11.
12.
income may use the historic rehabilitation credit to
offset the tax due on up to $25,000 of active or
portfolio income.
To be considered an active participant for purposes
of the passive activity rules, the taxpayer must
exhibit bona fide involvement in management
decisions.
The income from a publicly traded limited
partnership can be offset by passive losses incurred
by the taxpayer from any other source.
For purposes of the vacation home rules, a boat
may qualify as a dwelling unit as long as it has
sleeping space.
29
Module 5 True/False
13. A vacation home rented for fewer than 15 days will
14.
not generate any taxable rental income.
Mortgage interest and property taxes are not
allowed as itemized deductions when a vacation
home is frequently rented but infrequently used for
personal purposes.
30
CERTIFIED FINANCIAL PLANNER CERTIFICATION
PROFESSIONAL EDUCATION PROGRAM
Income Tax Planning
Module 6
Income Tax Aspects of
Securities
©2014, College for Financial Planning, all rights reserved.
Module 6 True/False
1. Inside buildup refers to the tax-deferred
2.
3.
4.
5.
accumulations of cash value within a life insurance
policy.
The tax treatment of life insurance is not different
from the tax treatment of investments.
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.
Distributions from a modified endowment contract
are treated on a last-in, first-out (LIFO) basis.
With a fixed annuity, the annuitant pays now for
future guaranteed payments.
32
Module 6 True/False
6. With a deferred annuity, the annuitant pays now for
7.
8.
9.
10.
future fixed or variable annuity payments.
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.
Nonperiodic distributions from an annuity contract
issued after August 13, 1982, are tax free, up to
basis in the contract.
There are only two tax rates for long-term capital
gains.
Capital gains or losses resulting from various
security transactions are categorized as portfolio
income.
33
Module 6 True/False
11. Excess capital gains, to the extent they exceed
12.
13.
14.
15.
capital losses in any one year, may be deducted
only up to $3,000 of ordinary income.
All shares of a mutual fund have the same cost
basis under the average cost method for
determining basis.
The occurrence of a taxable event in mutual fund
transactions is limited to sales of the shares.
The distribution of interest and dividends from a
mutual fund is treated as a long-term capital gain.
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.
34
Module 6 True/False
16. The wash sale rule does not apply to sales and
17.
18.
investments in mutual funds.
A specialized small business investment company
(SSBIC) may include investment companies that
finance small business concerns owned by
disadvantaged taxpayers.
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).
35
Module 6 True/False
19. Investment interest is interest paid or accrued on a
20.
21.
22.
debt incurred to purchase “property held for
investment.”
A taxpayer is allowed an investment interest
expense deduction to the extent of gross
investment income.
Distributions of corporate earnings and profits are
not taxable as qualified dividends.
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.
36
Module 6 True/False
23. To determine the exclusion ratio for a fixed
24.
25.
commercial annuity, the total expected return for
the life of the contract is divided by the investment
in the annuity.
The exclusion amount for a variable annuity is
determined by dividing the investment in the
contract by the number of expected payments.
A stock dividend is not taxable because it is not
considered a distribution of earnings and profits.
37
CERTIFIED FINANCIAL PLANNER CERTIFICATION
PROFESSIONAL EDUCATION PROGRAM
Income Tax Planning
Module 7
Tax Planning for the
Family
©2014, College for Financial Planning, all rights reserved.
Module 7 True/False
1. Gifting property to a child under age 19 operates to
2.
3.
produce tax savings because all future income from
the gifted property is taxed at the child’s tax rate.
Family partnerships and S corporations operate to
produce tax savings by passing through income and
losses directly to partners or corporate
shareholders.
The personal exemption allocation allowed in
support of family members can operate to produce
tax savings when allocated to a higher-bracket
taxpayer.
39
Module 7 True/False
4. When a grantor retains a reversionary interest over
5.
6.
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.
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.
A gift of a remainder interest in a personal
residence or farm does not qualify for the charitable
income tax deduction.
40
Module 7 True/False
7. A gift of a partial interest transferred through a
8.
9.
10.
qualifying form of trust can be treated as a
charitable contribution deduction.
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.
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.
A premarital agreement may have as a primary
purpose the procurement of a divorce.
41
Module 7 True/False
11. Child support payments are deductible by the payor
12.
13.
14.
and taxable to the recipient.
If there is no written agreement to the contrary, the
custodial parent may claim the dependency
exemptions for his or her children.
A dependent of another taxpayer may use a limited
personal exemption against earned income.
The IRS challenges to gift-leaseback arrangements
typically center on the economic reality of the
transaction.
42
Module 7 True/False
15. When a grantor directly or indirectly retains certain
16.
17.
18.
administrative powers that may be exercised for his
or her benefit, income from the trust is taxed to the
trust.
If the grantor retains only administrative and
clerical power over the assets of the trust, the trust
income is taxed to the grantor.
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.
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.
43
Module 7 True/False
19. A premarital agreement need not be in writing to be
20.
21.
held enforceable by a court of law.
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.
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.
44
CERTIFIED FINANCIAL PLANNER CERTIFICATION
PROFESSIONAL EDUCATION PROGRAM
Income Tax Planning
Module 8
Tax Law Research &
Special Income Tax
Considerations
©2014, College for Financial Planning, all rights reserved.
Module 8 True/False
1. A vast majority of the IRS audit process is random.
2. The process of obtaining and analyzing information
3.
4.
5.
to answer specific tax questions is referred to as tax
law research.
The tax treatment of a particular transaction
generally is based solely on statutory law.
The body of U.S. tax law consists of legislative
provisions, court decisions, and administrative
pronouncements.
Secondary sources of tax law interpretation include
only statutory laws and their official interpretations.
46
Module 8 True/False
6. Secondary sources of tax law interpretation are
7.
8.
9.
unofficial and should not be used as the supporting
authority.
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.
The alternative minimum tax is based on tax
referral and tax addition items.
Corporations are not subject to the alternative
minimum tax.
47
Module 8 True/False
10. Because self-employed individuals are not subject to
11.
12.
13.
employer withholding, they are also not required to
pay their own Social Security and Medicare taxes.
Self-employed individuals with less than $400 of net
earnings are not required to pay self-employment
taxes.
A financial transaction need not have economic
substance if the transaction does not violate any
federal tax laws.
Negligence is defined as a taxpayer’s bad-faith
conduct with intent to evade paying income tax.
48
Module 8 True/False
14. The self-employment tax consists of a Social
15.
Security component and a Medicare component.
The wage base for calculating self-employment
taxes is not adjusted annually for cost-of-living
increases.
49
CERTIFIED FINANCIAL PLANNER CERTIFICATION
PROFESSIONAL EDUCATION PROGRAM
Investment Planning
CFP 3
True/False Questions
End of slides
©2014, College for Financial Planning, all rights reserved.