Competency 16 Section 2

Question 1

1. The vast majority of people will relocate shortly after they retire.

Answer 1

False. Up to 90 percent of people will, at least initially, stay where they are after retirement. (LO 16-2-1)

Question 2

2. Some states exclude retirement income from state taxation

Answer 2

True. (LO 16-2-1)

Question 3

3. Some states may not tax U.S. military retiree benefits.

Answer 3

True. (LO 16-2-1)

Question 4

4. If state A (e.g., California) allows a deduction for 401(k) contributions while the client is working, it can tax 401(k) distributions when the client moves to state B (e.g., Pennsylvania) in retirement.

Answer 4

False. A state may not tax retirement benefits paid to residents of another state on the grounds that those retirees were residents of the state when the benefits were earned. (LO 16-2-1)

Question 5

5. Many states exempt food and prescription drugs from sales taxes

Answer 5

True. (LO 16-2-1)

Question 6

6. Clients with multiple residences should consider planning to create domicile in the most estate tax friendly state

Answer 6

True. (LO 16-2-1)

Question 7

7. A client can travel and live in most foreign countries without affecting their Social Security benefits.

Answer 7

True. (LO 16-2-1)

Question 8

8. One of the pros of aging in place is that the client is surrounded by memories and familiarity.

Answer 8

True. (LO 16-2-2)

Question 9

9. One of the cons of aging in place is that changes in the client’s functionality may go unnoticed.

Answer 9

True. (LO 16-2-2)

Question 10

10.Only one spouse has to meet the use test of Code Section 121 in order for the applicable gain from the sale of their home to be excluded from taxation.

Answer 10

False. Both spouses have to meet the use test and only one spouse needs to meet the ownership tests. (LO 16-2-3)

Question 11

11.Both the ownership and use test concerning the Tax Code Section 121 exclusion on the gain from the sale of the home require 2 years of ownership and use anytime during the 5-year period preceding the date of the sale.

Answer 11

True. (LO 16-2-3)

Question 12

12.The client can use the Tax Code Section 121 exclusion on the gain from the sale of the home when he or she sells their vacation home

Answer 12

False. The exclusion only applies to their principle residence. (LO 16-2-3)

Question 13

13.If your client is incapable of physically or mentally providing self-care, then the 2-year use test under Tax Code Section 121 (exclusion on the gain from the sale of the home) becomes essentially a 1-year test because time in a nursing home counts as time in the home.

Answer 13

True. (LO 16-2-3)

Question 14

14.A surviving spouse can continue to use the $500,000 exclusion amount on the sale of the principal residence for the two years following the deceased spouse’s death

Answer 14

True. (LO 16-2-3)

Question 15

15.The Tax Code Section 121 exclusion on the gain from the sale of the home is $200,000 if the client is single

Answer 15

False. The amount for a single person is $250,000. The amount for a couple who is married and filing jointly is $500,000. (LO 16-2-3)

Question 16

16.Tax relief under the Code Section 121 exclusion on the gain from the sale of the home applies to only 1 sale or exchange every 2 years. However, a reduced maximum exclusion is available for taxpayers who have a change of place of employment, health issues, or unforeseen circumstances.

Answer 16

True. (LO 16-2-3)

Question 17

30. Which of the following statements about the taxation of gain on the sale of a client’s principal residence is correct? (LO 16-2-3)
    A. A client who lives in a home for 1 year can never exclude the gain on the sale of his/her home.
    B. A client who retires can exclude the entire amount of gain on his house as long as he/she meets the ownership and use tests and has not sold a house in the past two years.
    C. A surviving spouse can continue to use the $500,000 exclusion amount on the sale of the principal residence for the two years following the deceased spouse’s death.
    D. A widow and widower who both own separate homes can marry, move into an apartment and both exclude $500,000 worth of gain on their home as long as they are filing jointly.

Answer 17

30. The answer is C. Statement A is incorrect for two reasons. First, if the client is incapable of physically or mentally providing self-care, then the 2-year “use test” under Tax Code Section 121 (exclusion on the gain from the sale of the home) becomes essentially a 1-year test because time in a nursing home counts as time in the home. Second, partial exclusions apply if, for example, the client needs to move in with a daughter based on his health. Statement B is incorrect because the exclusion is limited to $250,000 if single or $500,000 if married filing jointly. Statement D is incorrect if the widow and widower sell their lifetime homes either before or shortly after their marriage in order to move into an apartment, each gets to exclude only $250,000 of gain. This is the case even if they are married filing jointly when they sell their homes.

Question 18

57. Which of the following statements about the taxation of a relocated and retired client’s 401(k) is (are) correct? (LO 16-2-1)
    I. If state A (e.g., California) allows a deduction for 401(k) contributions while the client is working, it can tax 401(k) distributions when the client moves to state B (e.g., Pennsylvania) in retirement.
    II. All 50 states impose a state tax on 401(k) distributions in retirement.
    A. I only
    B. II only
    C. Both I and II
    D. Neither I nor II

Answer 18

57. The answer is D. Statement I is incorrect because a state may not tax retirement benefits paid to residents of another state on the grounds that those retirees were
    residents of the state when the benefits were earned. Statement II is incorrect because some states exempt retirement income from state taxation.

Question 19

83. All of the following statements concerning relocation after retirement are correct EXCEPT (LO 16-2-1)
    A. The vast majority of people will continue to remain in their home in the initial period after retirement.
    B. A client cannot receive U.S. Social Security if they relocate to and are living in a foreign country.
    C. Some states exclude military retirement benefits from state taxation.
    D. Many states exempt food and prescription drugs from sales tax.

Answer 19

83. The answer is B. A client can travel and live in most foreign countries without affecting their Social Security benefits