Just finished a tutoring session and noticed that the client had some trouble recognizing when a different question was asking the same thing as a previous question he had already nailed. Most people get this first question wrong, but today’s tutoring client nailed it in about 10 seconds:An investor purchased shares of a growth & income fund in early February this year.  In late December this year, she receives a capital gains distribution from the fund.  Therefore

a.this represents a tax-free return of capital
b.the capital gain is tax-exempt to the investor
c.the capital gain is treated as a short-term capital gain
d.the capital gain is taxable at long-term capital gains rates
So, since he nailed that one, I assumed he’d also get this one right:Which of the following represents an accurate statement concerning the tax implications of mutual fund investing?
a.municipal bond mutual funds distribute tax-free long-term capital gains
b.capital gains distributions are determined by the fund’s holding period, even if the investor has held the shares for less than one year
c.because the mutual fund provides a 1099 form, the investor is relieved of the responsibility to report dividend income to the IRS
d. all dividends distributed are currently taxed at a maximum of 15%Notice how answer choice b is explaining exactly why the client got the first question correct? In the first question, the cap gains distribution was long-term because it was based on the fund’s holding period–not the investor’s. Why then didn’t answer choice b scream out to the candidate?
Not sure. He knew answer a was wrong. He knew C was BS. But, still, he couldn’t choose answer b here.
Maybe he was tired. But, at the testing center I’m hoping he will keep struggling with a question until he sees it in its proper light. For a lot of you, that isn’t happening yet because you’re only spending 15 seconds on a question. You want to know the answer without figuring out the question. That doesn’t work, people. Be willing to figure out the questions, and you will end up getting licensed. Need help on the series 65?

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