Series 7 Chapter 3

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Income received for providing goods or services. (i.e. Salaries, commissions, and wages earned through employment).

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Earned or Ordinary Income

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Ordinary Income is taxed at...

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Marginal Rate of Tax (or at a customers tax bracket)

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Income received from a business venture in which the investor does not have an active role.

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Passive Income

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Passive Income is taxed at...

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the same rate as Earned or Investment income, however passive losses may only be used to offset other passive income or gains. (It does not offset gains from Earned or Investment Income).

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Income that is derived from owning various types of investments.

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Investment Income.

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Income derived from being a shareholder of an equity that has distributed gains.

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Dividend Income.

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The two types of dividends are...

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1. Cash dividends

2. Stock dividends

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When are Cash Dividends taxed?

Back 8

In the year at which they are received.

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When are Stock Dividends taxed?

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They are taxed when the stock is sold, and adjust the cost basis per share of the owners position in the stock.

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Progressive Tax Structure

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A form of graduated tax structure, increase relative to someones earnings

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Regressive Tax Structure

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A flat tax structure.

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Types of Investment Income that is taxed as ordinary income:

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1. Passive Income

2. Deferred Income

3. Investment (portfolio) Income

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Dividend Income is taxed at...

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A maximum 20% if the stock that produced the income has been held by the owner for more than 60 days from the Ex-Dividend Date.

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Alternative Minimum Tax

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is a method of calculating tax liability for wealthy taxpayers. Requires the taxpayer to adjust their taxable income based on their investment in tax-preference items. The taxpayer must calculate their income twice, once using the ordinary method and then using this method, and then pay the higher of the two.

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Capital Gains

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Generated when an investment is sold for more than its cost basis.

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Capital Loss

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Generated when an investment is sold for less than its cost basis.

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Long Term Capital Gain or Capital Loss

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Triggared when

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Capital Gains are taxed at...

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Short Term (less than a year): as ordinary Income.

Long Term (1+ year): maximum rate of 20%

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Capital Losses are taxed at...

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Capital losses are not taxed, instead they are netted against Capital Gains. First Short Term Gains vs Losses, than Long Term Gains vs Loses, than the net of Short vs Long. The net amount is what is taxed.

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Net Capital Losses effect taxes by...

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Offsetting your Ordinary income on a dollar for Dollar basis, up to $3000. If the loss exceeds this amount that it may be carried over to the next year to be netted against future capital gains.

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Goal of investors who want to have money available for use, generally up to three months living expenses, in the event of an urgent need.

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Cash Reserve

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Goal in which investors are concerned with potential loss of their initial investment. Generally produces a low return, but is a safer investment.

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Preservation of Capital

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Goal in which investors need to access their funds within a short period of time.

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Liquidity

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Goal for investors whose primary investment goal is producing a steady, reliable stream of cash.

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Current Income

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Goal of investors who their capital to appreciate.

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Growth

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Products suitable for an objective of Capital Reserves

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1. Money Market Funds

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Products suitable for an objective of Preservation of Capital

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1. US Government Securities

2. Insured Certificates of Deposit

3. Money Market Funds.

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Products suitable for an objective ofLiquidity

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1. Money Market Funds

2. T-Bills

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Products suitable for an objective of Current Income.

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1. Bonds

2. Preferred Stocks

3. Fixed Annuities

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Products suitable for an objective ofGrowth

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Common Stocks and Mutual Funds

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Products suitable for an objective of College Funding

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1. Uniform Gift/Uniform Transfers to Minors Acts accounts (UGMA/UTMA)

2. Coverdell Education Savings accounts

3. Qualified Tuition Plans (529 Plans)

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Products suitable for an objective of Speculation

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1. Day trading in margin accounts

2. Derivatives

3. Hedge Funds

4. Small Cap stock

5. Micro Cap Stock

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Product suitable for an objective of Tax Relief

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1. Municipal Bonds

2. Tax deffered accounts

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Suitability questions for retail customers:

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1. Age

2. Other Investments

3. Financial Situation and Needs

4. Tax Status

5. Investment Objective

6. Investment Experience

7. Investment Horizon

8. Liquidity Needs

9. Risk Tolerance

10. Any other information obtained from the client.

Front 35

Requires a member firm and its RRs believe that the product is suitable for at least some of its Investors

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reasonable basis obligation

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Requires that a member believes that a recommendation is suitable for a particular individual

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Customer Specific Obligation

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Requires that a member firm believes that a series of recommended transaction are not excessive when considering a customers investment profile, even if the transaction would be suitable.

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Quantitative Obligation