CFP 1: Insurance & Investments Flashcards
(141 cards)
1
Q
How do you calculate the amount of Life Insurance needed? What two things do you have to do in addition to Paul’s calculation?
A
Take annual income, ÷ by rate of return. Add one year of income for the first year.
If you’re given a rate of inflation, subtract it from the rate of return; don’t bother calculating a real rate of return.
2
Q
What is AM Best?
A
The most detailed insurance company evaluator. It’s ratings range from A++ to F.
3
Q
Name HO-2, 3,4,5,6, and 8
A
HO-2 = Broad Peril HO-3 = Mostly Open Peril, broad for personal property HO-4= Renter's HO-5 = All Open Peril, also called H0 3/15 HO-6 = Condo's. Can have coverage against assessments HO-8 = Older homes, Basic Peril only.
4
Q
Name Parts A, B, C, D, E, F, & I of Homeowners Ins.
A
Part A; Dwelling + attached structures (land is not insurable) Part B: Other structures (10% of A) Part C: Personal property (50% of A) Part D: Loss of use (30% of A) Part E: Medical payments Part F: Personal Liability Part I: Deductible
5
Q
Name the Exclusions from Open Peril (Hint: Open WIFI)
A
Ordinance of law Power failure Earth Movement Nuclear accident/Negligence War Intentional Flood I should learn this =)
6
Q
What are the two cost calculations insurance companies use, and which do they usually pay?
A
Replacement Cost and Cash Value Method. They pay the greater of the two.
7
Q
How do you calculate replacement cost of a house for insurance purposes?
A
Replacement cost of house x co-insurance % (usually 80, sometimes 90). This is the amount you should carry.
Divide by 80%
Multiply by amount of loss.
Subtract deductible.
8
Q
How do you calculate the cash value of a home?
A
Multiply replacement cost by factor of depreciation.
Subtract deductible.
9
Q
Is Worker’s Comp taxable? Is Group Disability?
A
Worker’s Comp is not taxable. Group Disability is usually paid by the employer, thus the benefits are taxable.
10
Q
Who is eligible for Medicare? (2)
A
People over 65.
Disabled people who have rec’d SS benefits for 2 years.
11
Q
What does Medicare Part A cover?
A
Hospital stays, skilled nursing home, home health (not home care) or hospice care.
It doesn’t cover outside the US.
It pays after employer health ins. or worker’s comp.
12
Q
What does Medicare Part B cover, and how does it work?
Name three things it includes and three things it excludes.
A
It covers Dr. visits, including for depression, counseling for ETOH, and CBT for cardiovascular disease.
It has a premium, a deductible, and an 80/20 split, with NO STOP LOSS
It excludes dental, visual, hearing, and drugs.
13
Q
What is Medicare Part D?
A
It’s run by private companies approved by the govt.
Companies must provide a 50% discount.
It covers medications.
14
Q
What are Medigap policies? What do they pay for?
A
Private insurance that covers deductibles and co-pays of Parts A and B.
It works like an HMO, so isn’t very flexible.
You must enroll in Medicare parts A and B to purchase.
15
Q
What are the 3 types of disability insurance? Which one does CFP recommend?
A
Own Occupation (the one CFP recommends)
Any Occupation (that your training qualifies you for)
Split, which gives you a period of Own, followed by a period of any.
SS also has a “total disability” which means you can’t work at all, and likely won’t work again.
16
Q
When are disability benefits taxable?
Hint: 3 answers. One for section 162, one for “salary continutation”, and one for S-corps.
A
If the ER pays the premium as a bonus (section 162), the benefit is tax free
If the employer pays the premium as a “salary continuation”, the benefit is taxable.
If an S-corp pays the premium to a partner or a > 2% ownerthe payments are deductible, and the benefits are tax free.
17
Q
Does Medicare pay for LT care?
Does it pay for skilled nursing care? (If so, how?)
Does Alzheimer’s qualify for skilled nursing care under Medicare?
A
Medicare DOES NOT PAY FOR LONG-TERM CARE.
Medicare pays for skilled nursing care in 3 tiers
- Days 1-20 paid in full
- Days 21-100 require a co-pay of $185/day
- After 100 days, medicare doesn’t pay.
Note: For Medicare to pay, your condition must be expected to improve, so Alzheimer’s doesn’t qualify.
18
Q
What are the only 3 ways you can pay for LT care?
A
LT care insurance
Your own assets
Medicaid
19
Q
What is Whole Life insurance?
A
A cash value life insurance with a fixed death benefit. You can pay in a few installments or over many years. Must pass the 7-pay test, or it’s a MEC.
20
Q
What is Term life insurance? What are Level Term and Decreasing Term?
A
Term is usually the cheapest for younger people, and the best for changing circumstances.
- Level Term keeps the premium constant over the term of the policy by pre-paying some of the later premium.
- Decreasing Term keeps the premium constant by reducing the death benefit as the insured gets older.
21
Q
What are Universal A and B Life Insurance?
What is Variable Universal?
A
Universal A pays face value, and the company retains some of the cash value.
Universal B pays face value + cash value.
Universal life is flexible regarding adjusting the premium, the death benefit, and using the cash value to pay premiums or for additional insurance.
Variable Universal allows the owner to invest the cash value in the stock market.
22
Q
For the CFP Exam, who is Whole Life best suited for? Variable? Universal? FTD Variable Universal? What is the point of STD LI policies?
A
Whole Life is for someone who wants to be forced to save, or who has little risk tolerance.
Variable is for someone who has investment knowledge, or has high risk tolerance.
Universal is for someone who can afford a premium presently, but might need to cut back because they have low job security.
STD LI policies are there to create liquidity at death.
Variable Universal FTD is the policy for cross purchase agreements
23
Q
What is the difference between insurance contract provisions and riders?
A
Contract provisions don’t require additional premiums, riders do.
24
Q
What is a Guaranteed Purchase or Guaranteed Insurability rider?
A
It’s a rider that allows you to purchase additional insurance at regular intervals without providing evidence of insurability.
25
What are Viatical Settlements of LI?
If you're terminally ill, you can sell your policy to a viatical company (or use an accelerated benefits rider if you have one) to access your LI benefit tax free. Any unused benefit becomes part of your estate.
If you're chronically (but not terminally ill) you can use your viatical settlement to pay for LT care.
26
What are Life Settlements of LI? How are they taxed?
| Hint: Part is tax free, part is OI, and part is LTCG.
A Life Settlement is a way to access your LI death benefit even if you're not terminally or chronologically ill. It's taxed as follows:
- Premiums paid are returned tax free.
- Any amount between premium paid and cash surrender value is taxed as OI.
- Any amount between cash surrender value and net proceeds is taxed as LTCG.
27
What is the Uniform Simultaneous Death Act? Why is a Survivorship clause potentially better?
The USDA states that any persons that die with 120 hours of each other are said to pre-decease each other as regards their estates. This prevents double estate taxation when a married couple dies.
A survivorship clause does the same thing in a trust or will and can be up to six months.
28
What makes a MEC? How are they taxed?
Any LI policy that fails the 7-pay test is a MEC. It's then treated as a deferred annuity for tax purposes.
- Distributions are taxed LIFO.
- 10% penalty if withdrawn before 59.5
29
To whom can one transfer LI? (4)
To whom can't one? (2)
LI policies can be transferred to:
- The insured
- The insured's partner in a partnership.
- To a corporation where the insured is a partner or officer.
- To one's ex in a divorce.
LI can't be transferred to:
- A family member of insured.
- A partner of the insured in a corporation.
30
T. or F.: 1940 featured both an investment adviser's act, and an investment company act.
True. Read those questions carefully.
31
Are investment advisers regulated through the SEC or FINRA?
They are regulated by the SEC, but through FINRA.
32
What is the difference between CD's and Money Market accounts?
What is a Money Market Mutual Fund?
CD's and Money Market accounts are the same thing.
Money Market Mutual Funds are a collection of high-quality short-term securities.
33
Are death benefits from a MEC taxable?
No. It's LI after all.
34
Are key employee insurance premiums deductible?
No.
35
What are Split Dollar Plans? What are the two types?
Split Dollar Plans are key employee insurance.
Type 1: Endorsement
- Company owns policy and pays premiums.
- At death, company receives the greater of premiums paid or cash value of policy.
- EE's beneficiary receives remainder of proceeds.
- Advantage ER because they rec. the cash value of the policy above premiums paid.
Type 2: Collateral Assignment
- Employee owns the policy but assigns to the ER the value of the premiums paid from the death benefit. Assigning means giving up the power to change the beneficiary.
- Company loans premium amt. to EE in exchange for assignment.
- Advantage EE because they receive amount of $ value in excess of premium.
- This is common for EE's who are stock holders.
36
What is Business Overhead Insurance? When is or isn't it deductible/taxable?
It covers overhead expenses if owner is disabled.
Doesn't cover owner's salary.
Premiums are deductible and benefits taxable for a sole proprietor.
Premiums not deductible and benefits not taxable for a corporation.
37
How does a Pure Life Annuity work? Is it included in gross estate? What is the risk?
It makes payments only for the lifetime of the beneficiary. No inclusion in gross estate because it's over. It risks a loss of family wealth if you die quickly.
38
What is a Period Certain Annuity? What is a Refund Annuity?
A Period Certain Annuity guarantees a certain amount of payments. If you die early it goes into your estate. Payouts are < Pure life annuity, but the risk to family wealth is reduced.
A refund annuity guarantees a refund of your basis if you didn't live long enough to get it all back in payments.
- Payments are still < Pure Life.
- May provide liquidity for estate tax.
- Risks double taxation.
39
What is a Joint and Survivor Annuity? What is a Joint Life Annuity?
J+S pays until the death of the STD spouse.
- Payments are reduced.
- Nothing left for heirs.
- Spouse is taken care of.
Joint Life Annuity is a Pure Life Annuity for one spouse. It's almost always the wrong answer on the CFP exam.
40
What is a Single Premium Deferred Annuity?
What is a Variable Annuity?
What is a QLAC?
SPDA-- accumulates earnings tax-deferred until payout.
Variable Annuity--invests in mutual funds for accumulation, payout, or both. It's the answer for an investor with a high risk tolerance who wants to "keep up with the market" or "cope with inflation."
A QLAC is a deferred, fixed annuity from an IRA or retirement plan. It can defer income tax by reducing RMD's.
41
How are annuities taxed?
How are annuities owned by entities taxed?
Normal withdrawals are LIFO. 10% earnings penalty if before 59.5.
Normal annuity payments have an exclusion ratio that represents return of basis. Calculate total payments, ÷ by basis, that is the exclusion ratio. The % that is taxed = 1 - exclusion ratio.
Annuities owned by entities are taxed as OI.
42
How are Permanent Group Life premiums taxed?
Term Group Life premiums?
Permanent, non-forfeitable insurance is deductible to ER and taxed to EE.
Term Group Life is only taxed if the death benefit > 50k
- The tax is computed by a table amount per 1k of benefit over 50 per month.
43
7 Other Thoughts about Group Term
- Is it subject to FICA and FUTA?
- How much coverage can EE dependents get w/o it being taxed as income?
- Can it be discriminatory? If not, what consequence?
- Who owns the policy? Who names the beneficiary? Who’s estate does the death benefit go in?
- How does the EE get the db out of their estate?
- Can the EE convert when they quit or retire?
1. Group Term benefit is subject to FICA and FUTA
2. EE Dependents can get 2k coverage for free but beyond that premium is taxed as income.
3. Group Term must be non-discriminatory. If it discriminates, keys must include the full cost of their insurance in their income above the 50k exemption.
4. Usually, the ER owns the policy, but the EE names the beneficiary. The death benefit becomes part of the EE's estate.
5. If the EE gives up all rights to the policy for at least 3 yrs (absolute assignment) the DB is no longer part of their estate.
6. When an EE quits or retires, they can convert group term to permanent without having to prove insurability.
7. 162 is a carve out for key employees wherein the EE owns the policy and the ER pays the premium. Deductible to the ER, taxable to the EE. Portable to the EE.
44
3 Thoughts on SS Disability Benefits
- How do you qualify?
- When do payments begin?
- When do they impact your disability insurance?
1. To qualify, your disability must be expected to last at least 12 months or result in death.
2. Payments begin with the 6th full calendar month of disability.
3. Payments usually reduce what you're receiving from your disability insurance.
45
What is the Flex Spending Max. salary reduction and grace period?
Max salary reduction is $2,750 for 2021. There's a 2.5-month grace period for the max amount or you can have a rolling balance of $550, but not both.
Flex spending is usually separate accounts for medical and dependent care.
46
5 Details about Dependent Care FSAs
- What is the max deferral?
- Do both spouses have to work to qualify?
- Does it effect dependent care credit eligibility?
- If expenses are for a child, they must be under what age?
5k max for 2021
| Yes, Yes, 13
47
Can 401k's be part of Cafeteria Plans?
Yes.
48
What fringe benefits are tax free to the EE? (9)
Hint: they're for things the govt. wants to encourage + things that are occasional
- Premiums for health ins. for EE or dependents
- Group life premiums up to $50k death benefit
- ER provided day care
- Company car for business only
- Transit or bus pass up to $270/mo
- Parking up to $270/mo
- Occasional overtime meal, cab fare, theater or sports tickets
- Discounts on company products up to profit margin
- Discounts on services up to 20%
49
What are Money Market Deposit Accounts?
Commercial accounts that allow up to 6 withdrawals/month. Same account category as CD's.
50
What are Money Market Mutual Funds? Are they FDIC insured?
MMF's are not FDIC insured! They're short-term debt stuff, t-bills, commercial paper. Typically offered by open-end investment companies.
51
What are Banker's Acceptances?
They're used to guarantee payment to shippers. They are bearer securities, sold at a discount to par.
52
What are Euro Dollars?
Accounts in dollars in a foreign country.
53
What are Yankee bonds?
Bonds issued in the US by foreign companies.
54
What is a bond point worth? What % of interest rate change does it represent?
It's typically 1% of interest rate change. For a $1,000 bond, it's worth $10.
55
What is the yield hierarchy for DISCOUNTED bonds?
| Hint: When you see a discount, Call Mom Currently
Yield to call > Yield to maturity > Current yield
56
What is the yield hierarchy for premium bonds?
Hint: This means interest rates have fallen.
Current yield > Yield to maturity > Yield to call
57
What is "accrued interest"?
When you buy a bond between its bi-annual interest payment, you must pay the seller the portion of the interest they earned before the sale. You will receive a 1099 saying you received the whole of the next interest payment, and you can deduct the accrued interest from that.
58
How do zeroes have phantom income? Are all OID bonds zeroes?
They don't give coupon payments, but you're taxed on the interest as it accrues. Not all OID bonds are zeroes. Some issue partial coupon payments.
59
Describe TIPS (5)
Treasury Inflation Protected Securities
- Sold in 1k denominations
- Bi-annual payments = 1/2 of interest x (basis + 1/2 of principal adjustment)
- Principal is adjusted as inflation occurs.
- Note: interest rate doesn't change--interest payment does.
- Changes to principal are taxable (phantom income!)
60
Describe EE bonds (5)
- Non-marketable, non-transferable.
- Interest accumulates; not taxed until bond is redeemed.
- 20-year term with 10-year extension.
- Interest is deductible if used for education
- Must be 24 to buy.
61
Describe HH bonds
Not available since 2004
62
Describe I bonds (4)
- Interest rate is adjustable due to inflation.
- Interest is a base +/- an inflation adjustment.
- Owner determines if the bond is subject to tax each year or at end of term.
- I-bonds pay interest monthly, compounded every 6 mos.
63
What is the Safe Harbor Elective Match for 401(k) plans? If someone who makes 100k contributes 10% what is their elective safe harbor match?
Match 100% of first 3% and 50% of the next 2%.
4,000.
64
What are the two catch-up provisions for 457 plans? Can you use both in the same year?
$6,500 the standard 50+ catch up, and the final 3-year catch-up of $19,500, if you have unused deferral.
You can’t do both in the same year.
65
What is the most you can borrow from your 401k? Can you have more than one loan?
You can borrow the greater of $10,000, or 50% of your account balance up to $50,000.
You cannot have more than one loan.
66
What are New Comparability Plans, and whom do they benefit most?
New comparability are qualified defined contribution profit sharing plans. They feature different contribution rates for different roles. They are flexible. They bring most to older owners who have senior roles.
67
What is the safe harbor non-elective match for profit sharing plans?
3%
68
What is an example of strict liability?
Owning an alligator; no matter what, if it causes a loss you’re a fault.
69
What is unique about Ginnie Mae’s among mortgage bonds? What additional risk do mortgage and student loan bonds have?
GM’s are the only housing bond that’s backed by the “full faith and credit of the US govt.”
They carry re-investment and interest rate risk.
Reinvestment rate risk is greater than it is with other bonds because principal can be repaid early when interest rates rise.
70
What is the maximum rating of junk bonds?
BB
71
How do you compute conversion value (for convertible bonds)?
```
CV = (PAR ÷ CP)SP
CP = Conversion price, SP = stock price
```
72
What are 10Q and 10K reports?
Reports corporations file quarterly and annually (respectively) with the SEC.
73
What is the most junior form of equity, and why?
Common stock. It’s owners get paid after creditors, bond holders and preferred stock holders in the event of bankruptcy.
74
What is preferred stock? To whom is it attractive?
Preferred stock pays a fixed dividend. It comes in cumulative and non-cumulative varieties (that do and don’t make up missed divident payments). It’s attractive to corporations who get a 50% dividend exclusion, pension funds that need the income, and individuals in low tax brackets.
75
What are qualified dividends? How are they taxed?
Dividends on stock owned for at least 90 days in a 180 day period that begins 90 days before the ex-dividend date. They’re taxed at the CG rate.
76
What are ADR’s (American Depository Receipts)?
- Where are they traded?
- What currency are they traded in/do they pay dividends in?
- What currency are dividends declared in?
- Do they have voting rights?
- Do they qualify for foreign dividend tax rates?
They are shares in foreign based companies, traded in overseas markets, but prices and dividends are paid in dollars. Dividends are declared in foreign currency. They have no voting rights, and they usually qualify for foreign dividend tax rates.
77
What is an SIS (social insurance substitute) benefit?
SIS benefit is a disability insurance rider. If you have it, your disability benefits come in 2 parts: base and SIS. When you’re first disabled you get both in full. Once a social insurance benefit starts (think SS) your SIS benefit is reduced by the amount of your social security benefit.
78
Which is the cheaper disability policy, guaranteed renewable, or non-cancellable?
guaranteed renewable, because the premium can be raised over time.
79
What are presumptive disability and residual disability?
Presumptive—an illness or injury so severe you can presume disability
Residual disability pays the difference between what you were earning before and after disability if you had to take a new job.
80
What is the difference b-t one-year term and extended term?
One year term is a dividend option to increase death benefit.
Extended term is a non-forfeiture option.
81
What are characteristics of Whole Life Insurance?
- Are the premiums level?
- Do they pay dividends?
- Do they allow loans?
- guaranteed level premium
- pays dividends
- allows policy loans
82
If you cash out an LI policy, how is the cash value above premiums taxed?
Ordinary income
83
If your LI policy becomes a MEC, how are dividends taxed?
When aren’t they taxed?
They’re taxed as ordinary income.
They’re not taxed when they’re used to purchase paid up additions, or when they’re left with the company to accumulate.
84
Discribe combined group, parent-subsidiary, and brother-sister ownership
Parent-subsidary = one company owns the other.
Brother-Sister = both share a common owner
Combined group = No common direct owner, but part of the same ownership tree.
85
What are the match increases allowed under social security integration?
SS Integration can double the match up to an increase of 5.7%
86
How does NUA taxation work?
You have to take it all in one distribution. At distribution, the basis (ie, the deduction the ER claimed) is taxed as OI (not wages). The difference between basis and FMV at distribution (the NUA) is taxed as LTCG
87
Are entity purchase or cross-purchase premiums deductible? Are the benefits taxable?
Neither is deductible. Because premiums are paid with after-tax dollars, disability and death benefits are tax free.
88
When a corporation owns a non-qualified, tax-deferred annuity for an EE, is the interest it earns taxable?
Yes. It’s taxed as ordinary income. Annuities don’t declare capital gains.
89
Can you outlive an installment refund annuity?
No. Installment refund is a rider on a life annuity to guarantee that you get your principal back.
90
How long is the waiting period for SS disability benefits?
5 months. Payments begin on the first of the sixth month
91
Out of life, health, and disability, which ER policies are convertible?
Only life and LT disability, health policies don’t convert.
92
How much must a key employee include as income in a discriminatory ER LI policy?
The entire premium.
93
What are the options for health care FSA money not used at the end of the year?
You can roll over $500 for health care only, or your employer may allow a 2.5 month grace period.
94
What is the dependent care limit for FSA’s? What is the child age limit?
$5,000, and under 13.
95
Can FSAs provide funds for non-qualified deferred compensation?
No. Note the “non-qualified” modifier.
96
I
97
3 important points about FSA’s:
- What are the basic FSA facts?
- Is FSA money subject to FICA or FUTA?
- Can FSA money be used to pay for OTC items?
- Separate accounts for health and dependent care, with different account limits, $2,750 for health, $5,000 for dependent care.
- The health account can be used for OTC, and can be granted an extension for 2.5 months before forfeiture.
- Neither account is subject to FICA, FUTA, or federal withholding
98
What is split dollar life insurance?
Employer and employee split the costs and benefits of a cash value policy on the EE’s life.
99
What are the 2 types of split dollar life insurance? How do they differ?
Colateral Assignment (Loan Regime)
- EE owns policy
- ER loans money for premiums
- EE taxed on interest free part of loan.
Endorsement (Economic Benefit Regime)
- ER owns policy, but EE assigns beneficiary
100
When you quit your job, how much COBRA do your dependents get?
18 months; they only get 36 when you become inelligible.
101
What is “other than collision” auto insurance? Does it cover a bird hitting your windshield? Your engine getting dammaged in a flood?
“Other than collision” = comprehensive. It covers animal collision and flood damage.
102
When is your kid’s car no longer covered under your PAP?
When they’re no longer a dependent (think out of college).
103
Does your PAP cover you when you’re delivering pizza?
No! That’s a business activity.
104
What is an 80% coverage requirement based on? What do you have to subtract?
Replacement cost of home. Subtract the value of the land.
105
What is the greatest benefit of a cross purchase agreement as opposed to an entity purchase one? Should you consider this if one of the partners is ‘rated’?
The stepped-up basis the partners get. Yes.
106
When an LI policy is sold by an ER to an EE, what is the price?
The > of premiums paid or cash value.
107
The Whole Life death benefit = the death benefit + potentially what? What isn’t included?
Death benefit = DB + pd. Up additions. Does not include $ value.
108
Does an EE have an incident of ownership in group term? How does he get rid of it? How long does that take?
Being able to choose the beneficiary is an incident of ownership. You can give absolute assignment of the policy to someone (thus surrendering your right to change beneficiaries) and wait 3 years and it’s out of your estate.
109
What is BI/PD insurance in my PAP?
Bodily injury + property damage.
110
What are the two types of split dollar life insurance, and who owns each?
Endorsement, ER = owner.
Collateral assignment, EE = owner.
111
Can you convert group health to an individual plan? Group disability? ER LI?
Of the 3 types of insurance you can get thru your job, only group health can’t be converted to an invdividual plan. Note: with disability, you can only convert LT.
112
What is the 1244 Small Business Stock Deduction?
Investors in S or C corps that start with less than $1m can take current year losses on ordinary income up to 100k MFJ or 50k single. This is well in excess of the $3,000 capital loss + carry forward that they would otherwise have to do.
113
What are the S-Corp requirements and characteristics (5)?
- Limited to 100 investors
- Can only issue 1 type of stock (and it can't be preferred)
- Investors must be US residents
- Pass-thru entities for income
- Liability protection
114
Differentiate b-t Limited Partnerships and Limited Liability Partnerships
```
LP = 1 general partner and several limited partners who are essentially passive investors.
LLP = Several professionals who want to have an office together but limit their liability for their partner's malpractice.
```
115
Which entity types allow 3rd party loans as basis? How does this make LLC's unique?
Partnerships, Sole-proprietorships, and LLC's do.
S and C corps don’t.
LLC's are the only org that offers liability protection and loans as basis.
116
What is the Corporate Accumulated Earnings Tax?
A tax of 20% on accumulated earnings over 250k that don't go to an established business need. The point of this law is to encourage corporations to pay dividends.
117
What are 1031 or "like-kind" exchanges? What are two rules about them? What can cause a 1031 to collapse?
1031s are exchanges of income property, the rules about what you can trade for what are pretty loose.
You get 45 days to identify the new property and 180 to transfer title.
1031 collapses if sold to related party and related party sells within 2 years.
118
How do you do 1031 calculations?
There are only 3 numbers that matter:
- FMV of property rec'd
- Basis of property given up
- Boot rec'd or paid.
There are only 3 questions you can be asked:
- What is the realized gain?
- What is the recognized gain?
- What is the new basis?
Here are the 3 answers:
- Realized gain = Total value received - adj. basis of property given up.
- Recognized gain = lesser of realized gain or boot rec'd. If boot = 0 or less, no recognized gain.
- New basis = FMV rec'd - (realized gain - recognized gain)
119
How do you net LT and ST cap gains?
| What is the max loss you can take in a single year?
- Write it out! Net ST w ST and LT w LT.
- If both gains and losses remain, net them again (ie if they're not the same sign)
- $3,000 is the max loss you can take in a single year.
120
What are the 4 rules for section 121: Capital Gain Exclusion on Sale of a Personal Residence? Can you take both 121 and 1031?
1. If you've lived there 2 out of the last 5 years you can exclude $250k of cap gain. Exclude 500K if MFJ.
2. If you're forced to move for a job change or divorce, you can claim a partial credit based on what fraction of 2 years you lived in the house.
3. If your spouse lived there for a fraction of 2 years she can also claim the same partial credit.
4. If you own a house, then rent it, then sell it for another rental you can get both 121 and 1031.
121
Depreciation Recapture for 1245 property (business equipment), 6 steps.
- Subtract depreciation taken from original purchase price--this is your adjusted basis.
- Subtract basis from sale price. This is your capital gain or loss.
- If depreciation < capital gain, cost recovery is taxed as OI, and the difference between cap gain and cost recovery is 1231 gain.
- If cap gain < depreciation, the gain is taxed as OI and there is no cap gain.
- When the amt. realized is < adjusted basis you have an 0I loss.
122
Who is the AMT for? What's the top rate? What is the exemption? Does it phase out? Who does the AMT apply to mostly, and how do you get to pay less of it?
The AMT applies to individuals, not corporations. Its top rate is 28%.
Exemptions are $73.6k single and 114.6k MFJ, phased out around 1m of income.
After the TCJA, the AMT applies to fewer people, mostly high income who have a high level of municipal bond income or something.
You can usually pay less AMT by earning more or doing anything else that would increase your 1040 liability.
123
How do you calculate AMT? How do you calculate AMT due?
| Hint: Ugh
Start with 1040 income if itemizing, or AGI if using the standard deduction.
Add back: private activity municipal bond interest, oil and gas depletion if not straight line.
Add back: the property, state, city, tax deduction (if taken) up to $10k
Add the bargain element of any ISO's.
Subtract the exemption.
AMT due is the difference b-t your AMT tax and your 1040 tax.
124
What are the 3 types of income?
Earned, investment, and passive.
125
What are the two types of passive income?
1. Rentals
| 2. Businesses in which the taxpayer doesn't materially participate.
126
What are the two business categories from which you can have income without participating?
How are they taxed differently? Hint: Publicly traded partnerships and non-publicly traded partnerships.
Publicly traded partnerships and non-publicly traded partnerships.
For publicly traded, losses can only be offset by losses from that partnership (these can be called "master limited partnerships). They work like investment income.
By contrast, income from non-publicly traded partnerships can be offset by losses from other non-publicly traded partnerships, like Goodegg.
In both cases, losses in excess of income are carried forward.
127
What are the 2 types of participant status you can have with your rental real estate? How are they defined?
1. Active participant. Must be 10% owner and decision maker (me).
2 Materal participant. Must be full time landlord.
128
What is the maximum deduction for Active Participant real estate? What's the phase out?
$25k in losses (if you have them) can be taken against 0I.
| Phases out at AGI between 100 and 150k of AGI.
129
If you rent your home for up to 15 days/year, how are income and deductions handled?
You do not include income, you do not take deductions.
130
What are the two tax outcomes if you rent for longer than 14 days?
1. If you use it for > 10% of rental days, it's still a home. You don't include income, you don't deduct costs.
2. Otherwise it's a business and you can include income and deduct costs.
131
What are the age and income qualifications for dependent children? What's the possible trick question?
Dependent children must be under 19 or under 24 and a full-time student. You must provide > 1/2 their support.
Trick: It doesn't matter how much they earn! If you provide > 1/2 their support, they're dependents.
132
Are treasuries taxed at the federal level?
| At the SALT level?
Federal yes, SALT no.
133
What kind of bonds are STRIPS? What is their phantom income?
| What is the phantom income of TIPS?
STRIPS are treasury zeroes. Income is taxed as it accrues to basis, but not received until bond matures.
TIPS have basis adjusted for inflation. This is taxed as incurred but not rec'd until bond matures.
134
When is EE bond interest received? When is it taxed?
Can you sell your EE bond if you want?
Can an UGMA deduct EE bond interest if used for education? Can a parent?
Is there a phaseout for the ed. deduction?
EE bond interest is rec'd at maturity. The owner can choose to tax it at maturity or as phantom income.
EE's are not marketable.
For the ed. deduction, EE bond's must be owned by the parent; an UGMA won't do.
There is a phaseout. The only ed savings vehicle without a phaseout is 529.
135
How are I-bonds protected from inflation?
How is their interest taxed?
Are they transferrable?
Can interest be deductible for education?
I-bonds have two interest rates, one of which can adjust for inflation.
They are taxed like EE's--Owner's choice.
They are non-transferrable and eligible for the ed. deduction.
136
What kind of bond is the Z tranche in a CMO? How do its duration and risk compare to the other tranches?
Z's are essentially OID bonds, highest duration and risk.
137
Corporate and Municipal bonds have DRIP risk. What does that mean?
Treasuries have RIP risk, except for which ones, which only have IP risk?
Default, reinvestment rate, interest rate, and purchasing power.
Treasuries have no default risk, and STRIPS have no R risk because there's nothing to reinvest.
138
What is the maturity of preferred stock? What does this mean about its potential price fluctuation?
Preferred stock has infinite maturity. Its price has maximum fluctuation potential.
139
What is a put bond? What is a callable bond?
A put bond allows the holder to sell it back to the company on a certain date.
You know what callable bonds are.
140
What kind of investment are ETF's (mostly)?
| What kind of investment companies are mutual funds? Why?
ETF's are open end index funds.
| Mutual funds are open end investment companies. Their shares are redeemable, but not marketable.
141
What is the Time Value of an option?
The premium minus the amount by which it's in the money.
