CRPC Damage Control Test 1 & 2
Questions & Answers35
This year, your 63-year-old client had $17,025 of earned income and $30,000 of investment
income. He was also drawing Social Security benefits. Which one of the following correctly
describes the impact on his Social Security benefits?
He loses $1 of benefits for every $1 above the "allowable limit."
He loses $1 of benefits for every $2 above the "allowable limit."
He loses $1 of benefits for every $3 above the "allowable limit."
There is no reduction to his benefits. - ANSWERS-There is no reduction to his benefits.
The client's earnings (earned income) are below the allowable limit for the current year
($17,640 for 2019). Remember that according to the work penalty rule, only earned income is
counted toward the "allowable limit."
(LO 3-3)
Which one of the following is correct regarding tax-exempt interest and the taxation of Social
Security benefits?
None of the tax-exempt interest is included in the computation of the taxation of Social Security
benefits.
,50% of the tax-exempt interest is included in the computation of the taxation of Social Security
benefits.
85% of the tax-exempt interest is included in the computation of the taxation of Social Security
benefits.
All of the tax-exempt interest is included in the computation of the taxation of Social Security
benefits. - ANSWERS-All of the tax-exempt interest is included in the computation of the
taxation of Social Security benefits.
All tax-exempt interest income is included in computing the portion of Social Security benefits
that are subject to taxation. Tax-free Roth distributions are not counted when determining
provisional income. A maximum of 85% of the Social Security benefits are subject to taxation.
(LO 3-3)
Sam, age 62, begins receiving his Social Security income. His PIA is $1,500 per month. Because
he has filed at age 62, his payment will be reduced by 25% to $1,125. His wife Linda, age 67,
would like to begin spousal benefits. Her monthly income would be - ANSWERS-$750.00.
Because Linda has attained FRA, she would be eligible for 50% of Sam's full PIA, or $750.00.
(LO 3-4)
Over a period of 10 years, Mark Edmunds contributed a total of $20,000 to a nondeductible IRA.
The current value of Mark's IRA is $40,000, and Mark, who is now age 45, has decided to use all
of his IRA assets for the down payment on a second home. Assuming Mark's marginal tax
bracket is 35%, how much does he owe in taxes? - ANSWERS-$9,000
Mark's effective tax rate is 45%; i.e., 35% plus the 10% early withdrawal penalty. 45% × $20,000
tax-deferred earnings = $9,000. The $20,000 basis in the IRA is not subject to income tax or the
early withdrawal penalty.
,Harry, a single professor who is age 36, started his Roth IRA three years ago, contributing
$5,000. He has since made a contribution of $5,500 each year and converted a traditional IRA of
$17,000 to the Roth IRA last year. His total contributions are $16,000 plus the $17,000
conversion, and the account is now worth $36,497. Harry would like to make a complete
withdrawal so that he can buy a new car. He wants to know what his options are and what the
tax consequences would be. Which one of the following statements would be the correct
information for Harry? - ANSWERS-If a withdrawal of converted IRA funds is made from the
Roth account subsequent to the conversion but before five years has elapsed, such a withdrawal
may be subject to the 10% penalty.
Contribution amounts always come out of a Roth IRA account first, and then conversion
amounts, if any. Because taxes have already been paid on these amounts, there are no income
taxes. In this case, Harry can withdraw up to $33,000 income-tax-free. If he withdrew all
$36,497 he would only owe income taxes on $3,497. However, if a withdrawal of converted IRA
funds is made from the Roth account subsequent to the conversion but before five years has
elapsed, such a withdrawal may be subject to the 10% penalty. Thus, he would be subject to the
10% early withdrawal penalty on the $17,000 from last year's conversion. If the Roth IRA
earnings are withdrawn and the distribution is not "qualified," the earnings will be subject to
income taxation and may be subject to the 10% penalty. If he withdrew the entire amount, he
would owe income tax on $3,497 and the 1% early withdrawal penalty on $20,497.
(LO 7-4)
The vested accrued benefit in George's tax-sheltered annuity is $87,500. He has never taken a
loan from the plan but is interested in building an addition to his home. Which of the following
statements correctly describes George's option? - ANSWERS-The amount of the loan would be
limited to $43,750 and the term would be limited to five years.
George wants to remodel, not purchase, his home. The amount of the loan cannot exceed 50%
of the vested amount in George's account, and the term of the loan would be limited to five
years.
(LO 7-1)
, An income-tax-penalty-free distribution cannot be made from a tax-sheltered annuity (TSA) until
the employee does which of the following?
I. separates from service after attaining age 55
II. attains age 55
III. becomes disabled or dies
IV. takes a distribution under most hardship withdrawal rules - ANSWERS-I, and III only
Penalty-free distributions can be made from a TSA or 401(k) when an employee separates from
service after attaining age 55, attains age 59½, becomes disabled or dies, or takes a hardship
distribution for deductible medical expenses only. All other hardship withdrawals are subject to
early withdrawal penalty rules. Attaining age 55 means the worker is 55 on December 31 of the
year of separation—not that the worker was 55 on the day of separation.
A springing durable power of attorney - ANSWERS-gives the attorney-in-fact authority only
when the principal becomes incompetent.
The very purpose of any durable power of attorney is to give the attorney-in-fact authority to
act after the principal becomes incapacitated. However, such authority does not survive the
principal's death. Such authority is created in an independent document (not part of a living
will), and is effective immediately in this type of power of attorney. A springing durable power
of attorney becomes effective when the principal becomes incompetent or incapacitated.
(LO 5-2)
A Medicare Part A patient must pay
all costs for a hospital stay beyond 150 days.
Questions & Answers35
This year, your 63-year-old client had $17,025 of earned income and $30,000 of investment
income. He was also drawing Social Security benefits. Which one of the following correctly
describes the impact on his Social Security benefits?
He loses $1 of benefits for every $1 above the "allowable limit."
He loses $1 of benefits for every $2 above the "allowable limit."
He loses $1 of benefits for every $3 above the "allowable limit."
There is no reduction to his benefits. - ANSWERS-There is no reduction to his benefits.
The client's earnings (earned income) are below the allowable limit for the current year
($17,640 for 2019). Remember that according to the work penalty rule, only earned income is
counted toward the "allowable limit."
(LO 3-3)
Which one of the following is correct regarding tax-exempt interest and the taxation of Social
Security benefits?
None of the tax-exempt interest is included in the computation of the taxation of Social Security
benefits.
,50% of the tax-exempt interest is included in the computation of the taxation of Social Security
benefits.
85% of the tax-exempt interest is included in the computation of the taxation of Social Security
benefits.
All of the tax-exempt interest is included in the computation of the taxation of Social Security
benefits. - ANSWERS-All of the tax-exempt interest is included in the computation of the
taxation of Social Security benefits.
All tax-exempt interest income is included in computing the portion of Social Security benefits
that are subject to taxation. Tax-free Roth distributions are not counted when determining
provisional income. A maximum of 85% of the Social Security benefits are subject to taxation.
(LO 3-3)
Sam, age 62, begins receiving his Social Security income. His PIA is $1,500 per month. Because
he has filed at age 62, his payment will be reduced by 25% to $1,125. His wife Linda, age 67,
would like to begin spousal benefits. Her monthly income would be - ANSWERS-$750.00.
Because Linda has attained FRA, she would be eligible for 50% of Sam's full PIA, or $750.00.
(LO 3-4)
Over a period of 10 years, Mark Edmunds contributed a total of $20,000 to a nondeductible IRA.
The current value of Mark's IRA is $40,000, and Mark, who is now age 45, has decided to use all
of his IRA assets for the down payment on a second home. Assuming Mark's marginal tax
bracket is 35%, how much does he owe in taxes? - ANSWERS-$9,000
Mark's effective tax rate is 45%; i.e., 35% plus the 10% early withdrawal penalty. 45% × $20,000
tax-deferred earnings = $9,000. The $20,000 basis in the IRA is not subject to income tax or the
early withdrawal penalty.
,Harry, a single professor who is age 36, started his Roth IRA three years ago, contributing
$5,000. He has since made a contribution of $5,500 each year and converted a traditional IRA of
$17,000 to the Roth IRA last year. His total contributions are $16,000 plus the $17,000
conversion, and the account is now worth $36,497. Harry would like to make a complete
withdrawal so that he can buy a new car. He wants to know what his options are and what the
tax consequences would be. Which one of the following statements would be the correct
information for Harry? - ANSWERS-If a withdrawal of converted IRA funds is made from the
Roth account subsequent to the conversion but before five years has elapsed, such a withdrawal
may be subject to the 10% penalty.
Contribution amounts always come out of a Roth IRA account first, and then conversion
amounts, if any. Because taxes have already been paid on these amounts, there are no income
taxes. In this case, Harry can withdraw up to $33,000 income-tax-free. If he withdrew all
$36,497 he would only owe income taxes on $3,497. However, if a withdrawal of converted IRA
funds is made from the Roth account subsequent to the conversion but before five years has
elapsed, such a withdrawal may be subject to the 10% penalty. Thus, he would be subject to the
10% early withdrawal penalty on the $17,000 from last year's conversion. If the Roth IRA
earnings are withdrawn and the distribution is not "qualified," the earnings will be subject to
income taxation and may be subject to the 10% penalty. If he withdrew the entire amount, he
would owe income tax on $3,497 and the 1% early withdrawal penalty on $20,497.
(LO 7-4)
The vested accrued benefit in George's tax-sheltered annuity is $87,500. He has never taken a
loan from the plan but is interested in building an addition to his home. Which of the following
statements correctly describes George's option? - ANSWERS-The amount of the loan would be
limited to $43,750 and the term would be limited to five years.
George wants to remodel, not purchase, his home. The amount of the loan cannot exceed 50%
of the vested amount in George's account, and the term of the loan would be limited to five
years.
(LO 7-1)
, An income-tax-penalty-free distribution cannot be made from a tax-sheltered annuity (TSA) until
the employee does which of the following?
I. separates from service after attaining age 55
II. attains age 55
III. becomes disabled or dies
IV. takes a distribution under most hardship withdrawal rules - ANSWERS-I, and III only
Penalty-free distributions can be made from a TSA or 401(k) when an employee separates from
service after attaining age 55, attains age 59½, becomes disabled or dies, or takes a hardship
distribution for deductible medical expenses only. All other hardship withdrawals are subject to
early withdrawal penalty rules. Attaining age 55 means the worker is 55 on December 31 of the
year of separation—not that the worker was 55 on the day of separation.
A springing durable power of attorney - ANSWERS-gives the attorney-in-fact authority only
when the principal becomes incompetent.
The very purpose of any durable power of attorney is to give the attorney-in-fact authority to
act after the principal becomes incapacitated. However, such authority does not survive the
principal's death. Such authority is created in an independent document (not part of a living
will), and is effective immediately in this type of power of attorney. A springing durable power
of attorney becomes effective when the principal becomes incompetent or incapacitated.
(LO 5-2)
A Medicare Part A patient must pay
all costs for a hospital stay beyond 150 days.
