WMCP 3 UPDATED QUESTIONS AND CORRECT
ANSWERS
Question:
1. A client purchases stock in a closely-held company for $15,000 and sells the stock 8 months later for
$18,500. Which of the following statements correctly describes this transaction?
a) The gain on the sale of the stock is considered ordinary income and is taxed at long term capital gains
rates.
b) The gain on the sale of stock is considered long term capital gain and will be taxed at capital gains tax
rates.
c) The gain on the sale of the stock is considered ordinary income and will be taxed at ordinary income tax
rates.
d) The gain on the sale of the stock is considered short term capital gain and will be taxed at ordinary
income tax rates.
Answer:
d) The gain on the sale of the stock is considered short term capital gain and will be taxed at ordinary
income tax rates.
Since the stock was held for less than one year, the gain on the sale will be taxed as ordinary income.
Question:
2. Mr. and Mrs. Jones are retired and receiving Social Security retirement benefits. The couple receives
$28,000 a year in Social Security benefits and takes $80,000 a year out of their fully taxable IRA. If this is
all of the Jones' income for the year, the percentage of their Social Security benefits that will be subject to
federal income taxation is
a) 85%.
b) 25%.
c) 0%.
d) 50%.
Answer:
a) 85%.
If provisional income exceeds $44,000 for a married taxpayer, up to 85% of the Social Security benefit
will be includible in taxable income.
Question:
3. An important distinction between the federal gift tax and federal estate tax is:
a) the gift tax rates are progressive, while the estate tax rate is a flat 40%.
b) the annual exclusion applies solely to lifetime gifts, while the federal exemption applies solely to
transfers at death.
c) a charitable gift made during life does not allow the donor to take an income tax deduction, but a
charitable transfer from an estate does.
d) tuition payments made directly to an educational institution on behalf of another individual are not
subject to gift tax but are subject to estate tax.
Answer:
d) tuition payments made directly to an educational institution on behalf of another individual are not
subject to gift tax but are subject to estate tax.
,Question:
4. The alternative minimum tax (AMT) is best described as
a) a separate tax system that does not provide taxpayers with an exemption.
b) a separate tax system parallel to the regular income tax system.
c) an optional tax system where taxpayers can choose the most advantageous calculation.
d) an alternative tax computation used in lieu of the regular tax computation.
Answer:
b) a separate tax system parallel to the regular income tax system.
Taxpayers must compute tax liability under both the regular tax and AMT rules, and pay the higher of the
two.
Question:
5. Which of the following statements is correct about the alternative minimum tax (AMT)?
a) The taxpayer pays the lower of AMT or regular income tax liability.
b) A taxpayer can owe income tax or AMT, but not both.
c) The taxpayer may elect to be taxed under the regular income tax rules or the AMT rules.
d) A taxpayer can owe both regular income tax and AMT.
Answer:
d) A taxpayer can owe both regular income tax and AMT.
Question:
6. An appropriate way to use gifting to reduce the donor's estate tax burden is to
a) make qualified gifts to heirs through will provisions.
b) gift property that has decreased in fair market value.
c) gift property but retain the right to take back the property at any time.
d) reduce an individual's taxable estate by gifting gift appreciating taxable property to family and friends
over time.
Answer:
d) reduce an individual's taxable estate by gifting gift appreciating taxable property to family and friends
over time.
Question:
7. Alice is single and retired. She receives $12,000 of Social Security retirement benefits each year, and
this year will receive $15,000 of fully taxable IRA withdrawals. If this is all of Alice's income for the year,
the percentage of her Social Security benefits that will be subject to federal income taxation is
a) 0%.
b) 100%.
c) 85%.
d) 50%.
Answer:
a) 0%.
If the provisional income is less than $25,000 for a single taxpayer, Social Security benefits are not
taxable. In this situation, Alice has $21,000 of provisional income (half of Social Security [which is
$6,000] + $15,000 IRA distributions). None of her benefits will be subject to taxation.
,Question:
8. A taxpayer earns $600,000 per year and is the sole owner of an LLC. Which statement is correct about
the qualified business income (QBI) deduction?
a) The QBI deduction will be higher if the company is a law firm, compared to a manufacturing firm.
b) The QBI deduction will be phased out no matter what type of company the taxpayer owns.
c) The QBI deduction will be higher if the company is a manufacturing firm, compared to a law firm.
d) The taxpayer can increase her QBI deduction by converting to a corporation.
Answer:
c) The QBI deduction will be higher if the company is a manufacturing firm, compared to a law firm.
Question:
9. Which of the following best describes the technique(s) a client uses in investing the after-tax proceeds of
a bonus into a publicly traded security?
a) Shifting only
b) Conversion and deferral
c) Evading only
d) Deferral only
Answer:
b) Conversion and deferral
Conversion occurs when the after-tax proceeds of a bonus (ordinary income) purchase a capital asset
whose realized and recognized returns are preferentially taxed as capital gains. Since any unrealized
capital gains are not taxed, the purchase of a capital asset reflects the technique of deferral.
Question:
10. A deduction under the regular income tax rules that is also not included in the AMTI calculation is
(are)
a) property taxes.
b) capital gains.
c) state taxes.
d) a charitable contribution.
Answer:
d) a charitable contribution.
Question:
11. Sarah claimed her Social Security benefits at age 62, when the earnings test limit was $19,560. She was
entitled to receive $1,000 a month. However, Sarah was still working and had earnings of $25,560. Due to
the earnings test, her benefits will be reduced by
a) $0.
b) $2,000.
c) $3,000.
d) $1,000.
Answer:
c) $3,000.
Sarah is subject to the earnings test. For each $2 she earns over the threshold, she is subject to a $1
reduction in her Social Security benefits. The earnings test threshold for the year was $19,560. Since she is
$6,000 over the threshold, she is subject to a $3,000 reduction in benefits.
, Question:
12. A general rule of thumb for selecting the most appropriate property to gift is:
a) gifting property with associated outstanding loans allows the taxpayer to transfer the obligation to the
donee with no impact to income or tax.
b) property that has significantly appreciated should be distributed through an estate, rather than gifted.
c) outright gifts of cash are appropriate in most cases, with few exceptions.
d) property whose fair market value has fallen below the individual's basis should be gifted.
Answer:
b) property that has significantly appreciated should be distributed through an estate, rather than gifted.
Question:
13. A client had the following transactions during the taxable year: · The client sold capital asset A for a
gain of $13,000 36 months after purchase. · The client sold capital asset B for a loss of $8,000 20 months
after purchase. · The client sold capital asset C for a gain of $7,000 8 months after purchase. What is the
appropriate tax treatment for these transactions?
a) The client will be taxed at capital-gains rates of $13,000 and ordinary income rates at $1,000.
b) None of these transactions will be subject to tax.
c) The client will be taxed at capital-gains rates on $5,000 and ordinary income rates at $7,000.
d) The client will be taxed as capital-gains rates of $12,000.
Answer:
c) The client will be taxed at capital-gains rates on $5,000 and ordinary income rates at $7,000.
The net long-term capital gains are $5,000 (the sale of capital asset A netted against the sale of capital asset
B) since the assets were held for at least one year and are taxed at capital-gains rates. The net short-term
capital gains are $7,000 since the asset was sold within one year, and are taxed at ordinary income rates.
Question:
14. Joe claimed his Social Security benefits at age 62, when the earnings test limit was $19,560. He was
entitled to receive $1,500 a month. However, Joe was still working and had earnings of $29,560 during the
year. Due to the earnings test, what will his annual benefits will be reduced by?
a) $2,000.00
b) $3,000.00
c) $4,000.00
d) $5,000.00
Answer:
d) $5,000.00
Joe will be subject to more than $4,000 in reduced benefits because he earns $10,000 over the earnings
limit threshold. As such, he will have a reduction of $5,000.
Question:
15. The client who is most likely paying the alternative minimum tax (AMT)
a) has income over $200,000 and paid significant state and local tax payments.
b) resides in a high-tax locale like New Jersey, California, Connecticut, or Illinois.
c) has income over $200,000 and made significant charitable contributions.
d) has income over $200,000 and lives in a state without state tax.
Answer:
a) has income over $200,000 and paid significant state and local tax payments.
ANSWERS
Question:
1. A client purchases stock in a closely-held company for $15,000 and sells the stock 8 months later for
$18,500. Which of the following statements correctly describes this transaction?
a) The gain on the sale of the stock is considered ordinary income and is taxed at long term capital gains
rates.
b) The gain on the sale of stock is considered long term capital gain and will be taxed at capital gains tax
rates.
c) The gain on the sale of the stock is considered ordinary income and will be taxed at ordinary income tax
rates.
d) The gain on the sale of the stock is considered short term capital gain and will be taxed at ordinary
income tax rates.
Answer:
d) The gain on the sale of the stock is considered short term capital gain and will be taxed at ordinary
income tax rates.
Since the stock was held for less than one year, the gain on the sale will be taxed as ordinary income.
Question:
2. Mr. and Mrs. Jones are retired and receiving Social Security retirement benefits. The couple receives
$28,000 a year in Social Security benefits and takes $80,000 a year out of their fully taxable IRA. If this is
all of the Jones' income for the year, the percentage of their Social Security benefits that will be subject to
federal income taxation is
a) 85%.
b) 25%.
c) 0%.
d) 50%.
Answer:
a) 85%.
If provisional income exceeds $44,000 for a married taxpayer, up to 85% of the Social Security benefit
will be includible in taxable income.
Question:
3. An important distinction between the federal gift tax and federal estate tax is:
a) the gift tax rates are progressive, while the estate tax rate is a flat 40%.
b) the annual exclusion applies solely to lifetime gifts, while the federal exemption applies solely to
transfers at death.
c) a charitable gift made during life does not allow the donor to take an income tax deduction, but a
charitable transfer from an estate does.
d) tuition payments made directly to an educational institution on behalf of another individual are not
subject to gift tax but are subject to estate tax.
Answer:
d) tuition payments made directly to an educational institution on behalf of another individual are not
subject to gift tax but are subject to estate tax.
,Question:
4. The alternative minimum tax (AMT) is best described as
a) a separate tax system that does not provide taxpayers with an exemption.
b) a separate tax system parallel to the regular income tax system.
c) an optional tax system where taxpayers can choose the most advantageous calculation.
d) an alternative tax computation used in lieu of the regular tax computation.
Answer:
b) a separate tax system parallel to the regular income tax system.
Taxpayers must compute tax liability under both the regular tax and AMT rules, and pay the higher of the
two.
Question:
5. Which of the following statements is correct about the alternative minimum tax (AMT)?
a) The taxpayer pays the lower of AMT or regular income tax liability.
b) A taxpayer can owe income tax or AMT, but not both.
c) The taxpayer may elect to be taxed under the regular income tax rules or the AMT rules.
d) A taxpayer can owe both regular income tax and AMT.
Answer:
d) A taxpayer can owe both regular income tax and AMT.
Question:
6. An appropriate way to use gifting to reduce the donor's estate tax burden is to
a) make qualified gifts to heirs through will provisions.
b) gift property that has decreased in fair market value.
c) gift property but retain the right to take back the property at any time.
d) reduce an individual's taxable estate by gifting gift appreciating taxable property to family and friends
over time.
Answer:
d) reduce an individual's taxable estate by gifting gift appreciating taxable property to family and friends
over time.
Question:
7. Alice is single and retired. She receives $12,000 of Social Security retirement benefits each year, and
this year will receive $15,000 of fully taxable IRA withdrawals. If this is all of Alice's income for the year,
the percentage of her Social Security benefits that will be subject to federal income taxation is
a) 0%.
b) 100%.
c) 85%.
d) 50%.
Answer:
a) 0%.
If the provisional income is less than $25,000 for a single taxpayer, Social Security benefits are not
taxable. In this situation, Alice has $21,000 of provisional income (half of Social Security [which is
$6,000] + $15,000 IRA distributions). None of her benefits will be subject to taxation.
,Question:
8. A taxpayer earns $600,000 per year and is the sole owner of an LLC. Which statement is correct about
the qualified business income (QBI) deduction?
a) The QBI deduction will be higher if the company is a law firm, compared to a manufacturing firm.
b) The QBI deduction will be phased out no matter what type of company the taxpayer owns.
c) The QBI deduction will be higher if the company is a manufacturing firm, compared to a law firm.
d) The taxpayer can increase her QBI deduction by converting to a corporation.
Answer:
c) The QBI deduction will be higher if the company is a manufacturing firm, compared to a law firm.
Question:
9. Which of the following best describes the technique(s) a client uses in investing the after-tax proceeds of
a bonus into a publicly traded security?
a) Shifting only
b) Conversion and deferral
c) Evading only
d) Deferral only
Answer:
b) Conversion and deferral
Conversion occurs when the after-tax proceeds of a bonus (ordinary income) purchase a capital asset
whose realized and recognized returns are preferentially taxed as capital gains. Since any unrealized
capital gains are not taxed, the purchase of a capital asset reflects the technique of deferral.
Question:
10. A deduction under the regular income tax rules that is also not included in the AMTI calculation is
(are)
a) property taxes.
b) capital gains.
c) state taxes.
d) a charitable contribution.
Answer:
d) a charitable contribution.
Question:
11. Sarah claimed her Social Security benefits at age 62, when the earnings test limit was $19,560. She was
entitled to receive $1,000 a month. However, Sarah was still working and had earnings of $25,560. Due to
the earnings test, her benefits will be reduced by
a) $0.
b) $2,000.
c) $3,000.
d) $1,000.
Answer:
c) $3,000.
Sarah is subject to the earnings test. For each $2 she earns over the threshold, she is subject to a $1
reduction in her Social Security benefits. The earnings test threshold for the year was $19,560. Since she is
$6,000 over the threshold, she is subject to a $3,000 reduction in benefits.
, Question:
12. A general rule of thumb for selecting the most appropriate property to gift is:
a) gifting property with associated outstanding loans allows the taxpayer to transfer the obligation to the
donee with no impact to income or tax.
b) property that has significantly appreciated should be distributed through an estate, rather than gifted.
c) outright gifts of cash are appropriate in most cases, with few exceptions.
d) property whose fair market value has fallen below the individual's basis should be gifted.
Answer:
b) property that has significantly appreciated should be distributed through an estate, rather than gifted.
Question:
13. A client had the following transactions during the taxable year: · The client sold capital asset A for a
gain of $13,000 36 months after purchase. · The client sold capital asset B for a loss of $8,000 20 months
after purchase. · The client sold capital asset C for a gain of $7,000 8 months after purchase. What is the
appropriate tax treatment for these transactions?
a) The client will be taxed at capital-gains rates of $13,000 and ordinary income rates at $1,000.
b) None of these transactions will be subject to tax.
c) The client will be taxed at capital-gains rates on $5,000 and ordinary income rates at $7,000.
d) The client will be taxed as capital-gains rates of $12,000.
Answer:
c) The client will be taxed at capital-gains rates on $5,000 and ordinary income rates at $7,000.
The net long-term capital gains are $5,000 (the sale of capital asset A netted against the sale of capital asset
B) since the assets were held for at least one year and are taxed at capital-gains rates. The net short-term
capital gains are $7,000 since the asset was sold within one year, and are taxed at ordinary income rates.
Question:
14. Joe claimed his Social Security benefits at age 62, when the earnings test limit was $19,560. He was
entitled to receive $1,500 a month. However, Joe was still working and had earnings of $29,560 during the
year. Due to the earnings test, what will his annual benefits will be reduced by?
a) $2,000.00
b) $3,000.00
c) $4,000.00
d) $5,000.00
Answer:
d) $5,000.00
Joe will be subject to more than $4,000 in reduced benefits because he earns $10,000 over the earnings
limit threshold. As such, he will have a reduction of $5,000.
Question:
15. The client who is most likely paying the alternative minimum tax (AMT)
a) has income over $200,000 and paid significant state and local tax payments.
b) resides in a high-tax locale like New Jersey, California, Connecticut, or Illinois.
c) has income over $200,000 and made significant charitable contributions.
d) has income over $200,000 and lives in a state without state tax.
Answer:
a) has income over $200,000 and paid significant state and local tax payments.
