BIG IDEAS Flashcards
LIFE INSURANCE when someone dies
ALWAYS INCLUDED IN THE GROSS ESTATE
When is it included in probate?
Transferred via a will. Example: Jimmy has a life insurance policy on John’s life and Jimmy dies. The interpolated terminal reserve comes into play. They take the premiums paid in and there is a formula that is used to see how much value will be pulled into the decedent’s estate.
Not transferred via a will:
Jimmy dies and has this policy go to his gross estate.
When is it NOT included in probate?
Jimmy dies and Sandy is the beneficiary. It is included in his gross estate, but does not flow through probate.
- Note that if it was gifted, different rules apply. If it was gifted within 3 years of death and the owner is NOT the insured, then the policy will NOT be brought back into the gross estate. If the policy was gifted within 3 years of death and the owner is the insured, then it will be brought back in. This is why we must be careful when using an existing policy transferred into an ILIT.
Explain a QTIP trust
Not to be confused with an A-B trust (although can be used in conjunction). So the main reason for a QTIP trust, is the wife gets the income for life and may be able to get additional principle distributions, and then when the wife does, the husband would have dictated where the money goes (usually to other children).
Improving your credit score
Even if you pay your card off in full every month, the amount of money that you have as a balance divided by the total credit open is your utilization score. So by paying down a high balance, you can improve your utilization score and in turn, improve your credit.
Mortgage recommendations
A 15-year loan will always be a lower cost option in the long run than a 30-year loan Only go with 30 if the person is tight on cash.
Taxation of traditional IRAs
Joe has a traditional IRA with a total balance of $100,000. His non-deductible contributions (basis) total $20,000, and the remaining $80,000 consists of deductible contributions and earnings.
If Joe takes a $10,000 distribution, 80% of that ($8,000) will be taxable as ordinary income, while 20% ($2,000) will be tax-free, representing the return of his basis.
This prorating method continues until all distributions are completed or the account is depleted.
More than one IRA and taking RMDs?
If you have more than one IRA, you must calculate the RMD for each IRA separately each year. However, you may aggregate your RMD amounts for all your IRAs and withdraw the total from one IRA or a portion from each of your IRAs. You do not have to take a separate RMD from each IRA.
Whether an RMD is taken from each IRA or the individual IRA RMDs are totaled and taken from one IRA results in the same aggregated RMD for the tax year. If a taxpayer has 5 IRAs each with an RMD of $1000, the taxpayer may withdraw $1000 from each IRA, or the taxpayer may withdraw $5000 from one of the IRAs and satisfy the aggregate total RMD for the year. Either way, the aggregate RMD for the year is $5000.
Penalty-free distribution from an IRA if you are helping out someone else to buy a home
First home. Even if you are under age 591/2, you don’t
have to pay the 10% additional tax on up to $10,000 of
distributions you receive to buy, build, or rebuild a first
home. To qualify for treatment as a first-time homebuyer
distribution, the distribution must meet all the following requirements.
1. It must be used to pay qualified acquisition costs (defined next) before the close of the 120th day after the
day you received it.
2. It must be used to pay qualified acquisition costs for
the main home of a first-time homebuyer (defined below) who is any of the following.
a. Yourself.
b. Your spouse.
c. Your or your spouse’s child.
d. Your or your spouse’s grandchild.
e. Your or your spouse’s parent or other ancestor.
3. When added to all your prior qualified first-time homebuyer distributions, if any, total qualifying distributions
can’t be more than $10,000.
If both you and your spouse are first-time homebuyers (defined later), each of you can receive
distributions up to $10,000 for a first home without
having to pay the 10% additional tax.
Are tickets at an event deductible?
If you pay a qualified organization more than FMV for the right to attend a charity ball, banquet, show, sporting event, or other benefit event, you can deduct only the amount that is more than the value of the privileges or other benefits you receive.
Form 706 vs form 1041
IRS Form 1041 is used to report income taxes for both trusts and estates (not to be confused with Form 706, used when filing an estate tax return). Form 1041 tracks the income an estate or trust earns after the estate owner passes away but before any beneficiaries receive their designated assets.
Form 1041 can also be used for trusts if you are still alive and the trust is irrevocable.
REMEMBER TO USE THE TOTAL DEDUCTION ALLOWED!!!
When calculating…
-How much you can deduct from an IRA (ex: someone contributes 6,000 and they are 30% phased out. then we phase out 30% of 7,000 because that is the max allowed deduction.
Real estate rental losses
We are calculating the ceiling by taking the max phaseout range minus the MAGI and then dividing by 2 and that there is the ceiling.
Is room and board covered?
Yes in a 529 savings plan and a Coverdell, but not for savings bonds or education tax credits
Divide to get a deduction!
tax credit/MTB
Primary insurance amount vs provisional income
PIA is the monthly benefit at FRA. Provisional income is what inclusion for taxation is based off of.
Special needs trust vs able account
Both preserve eligibility for government programs (in the able as long as the balance is under 100,000). In the able account, earning are not taxed unless the able account money is not used for qualifying expenses.
