CFP Deck 2 Flashcards
Three Types of Income
Active, Passive, Portfolio
At risk rules apply…
..before the passive activity rules
At risk rules..
..losses can only be deducted to the extent of property/money at risk.
Passive Activity
No material participation, Rental activities (even w/material participation, Exception: Real Estate dealers.
Material Participation
Greater than 500 hours/year OR Greater than 100 hours and the most of any participant
_____ convention is used in the depreciation of real property.
Mid-Month
Active Income
Wages, salaries, Schedule C income, trade/business income
Wash Sale
purchase and sale of substantially identical securities within 30 days
Individuals who reach the age of ___ during the tax year are not eligible to be qualifying children for the purpose of the child tax credit
17
A replacement property must be identified within ___ days of the sale of the original property.
45
American Opportunity Tax Credit will provide a credit of_____.
$2,500 - 100% of the first $2,000 of expenses and 25% of the next $2,000 of expenses
Deductible Casualty Loss
10% of AGI and $100 per loss
Additional standard deduction if blind AND over 65 is ___.
$1,500 x 2 - single
$1,200 x 2 - married
Additional standard deduction if over 65 is _____.
$1,200
Unreimbursed employee business expenses are miscellaneous itemized deductions subject to____.
2% of AGI floor
Personal Exception =
$3,900
Dependent care credit:
Not phased out and provides a credit of 20% on up to $3,000 per qualifying child with a maximum of $6,000 for two or more children
The penalty for filing a fraudulent income tax return is ____ of the deficiency.
75%
Student Loan interest is ___
an adjustment TO AGI limited to $2,500
For tax purposes, bargain sale transactions cannot generate _____.
Capital Losses
True/False: Losses are not recognized in 1031 exchanges.
True - Losses cannot be recognized in 1031 losses. Logic: Why then would you agree to transfer property in bad deal?
Modern “asset allocation” is based upon the portfolio theory model developed by Markowitz.
The risk, return and covariance of assets are important input variables in creating portfolios.
Which is the only index that uses the geometric average to compute its daily value?
Value Line
Which index/indices use value weighted average?
The NASDAQ, the NYSE Composite, and the Wilshire.
Which index is a simple price weighted average?
The Dow Jones Industrial Average
The negative aspects for investors with regard to callable issues are ____?
The uncertainty about the amount of payments to be made to the bondholders and the reinvestment risk faced by the bond investor.
The form of technical analysis that utilizes Advances and Declines (also known as Breadth of the Market) as an indicator is known as:
Price Indicator
Pension funds are governed by _____
PBGC (also known as the Pension Benefit Guarantee Corporation) and ERISA (also known as the Employees Retirement Income Security Act) rules as to reporting and requirements on the federal level.
Common objectives for life insurance:
Protect income stream for beneficiaries, provide source of funds for education or retirement, provide liquidity, create or sustain wealth
IRC §2035 Requires a decedent’s gross estate to include:
(1) Gift taxes paid on gifts made within 3 years, (2) Value of property gifted within 3 years, (3) Death Proceeds of insured policy if made within 3 years
Qualified Plan Coverage Tests:
(1) General Safe Harbor (2) ratio percentage test (3) average benefits test
Highly compensated employee:
More than 5% owner during plan year or preceding plan year OR compensation exceeding $115,000 (2013) for the prior plan year (NOTE: remember special election of top 20% rule)
Coverage Test: General Safe Harbor Test
% of NHC covered ≥ 70%
Coverage Test: Ratio Percentage Test
% of NHC ÷ % of HC ≥ 70%
Coverage Test: Average Benefits Test
AB% of NHC ÷ AB%of HC ≥ 70%
Coverage Test (Defined Benefit): 50/40 Test
Requires the defined benefit plan to benefit the lessor of 50 nonexcludable (eligible) employees or 40% of all non excludable employees on EACH DAY of the plan year.
Deferred Eligibility requires immediate vesting after ___?
Two years.
Key Employee:
Decision Maker OR > 5% owner with compensation > $150,000 (2013) OR an officer with compensation > $165,000
Top-Heavy Plan:
More than 60% of benefits or contributions belong to Key Employees, plan is top heavy.
If a plan is deemed to be Top-heavy, then ____
it must use (1) Top-Heavy vesting schedules (2-to-6 year graduated OR 3-year cliff) AND (2) provide minimum level of funding to Non-key employees (3%).
Pension Plans (4 types):
DBP: Defined Benefit Pension, Cash Balance Pension; DCP: Money Purchase, Target Benefit
Required Minimum Distribution Rule (RMD)
Account balance at prior YE ÷ distribution period from table (age at current YE), must being RMD at 70 1/2, if not 50% excise tax applies thereafter,
The PGGC does not cover ____
defined contribution plans, defined benefit plans for professional corporations with 25 or fewer employees
Key employee:
(1) greater than 5% owner, (2) Officer with compensation above $165k, (3) Owns at least 1% with compensation above $150k
Highly compensated employee:
1) greater than 5% owner this year or last, (2) Compensation above $115k, (3) In top 20% if election made
Alimony/Child Support - Earned or Unearned?
Alimony = Earned; Child Support = Unearned
Rabbi Trust
Segregated assets as security of employer/employee agreement. Assets at risk from creditors. This risk of having creditors take the assets constitutes a substantial risk of loss or forfeiture and keeps the employee from being considered in “constructive receipt” of the formally funded assets.
Secular Trust
Calls for an irrevocable contribution from the employer to finance promises under a nonqualified plan, and funds held within the trust cannot be reached by the employer’s creditors.
Maximum Contribution to SIMPLE IRA
$12,000 (individual contribution) + Employer Match $/$ up to 3%
Limitation on annual ISO
$100,000 - anything above is treated as NQSO
§125 Cafeteria Plan
Under a cafeteria plan, a family can effectively create its own benefit plan by the rational selecting of options available.
What is a TSA?
TSAs are a tax sheltered annuity or 403(b) retirement plan. TSAs are a form of deferred compensation. Only employees of public education systems and nonprofits can participate. TSAs are funded through employee contributions.
TSA Contributions are subject to ___
Contributions are subject to payroll taxes (Medicare + Social Security) but NOT income taxes.
“Golden parachute” payments made to a “disqualified” person are ____
Included in W-2 income.
Employee Discount: Services cannot be discounted more than ___ of the price that is available to customers.
20% - otherwise the additional discount is included in income.
HSA
Health Savings Account (HSA) - like an IRA but for qualified health care costs, rolls forward, contributions and earnings tax free
Significance of $178,000-$188,000?
MFJ Phase-out range, deductibility of non-covered spouse IRA
83b Election
Recognizing value of Restricted Stock, established basis, after vesting and all sale appreciation is capital gain
Legal requirements for a qualified thrift/savings plan
After-tax employee contributions cannot exceed the lesser of 100% of compensation or $51,000.
True/False: Simple IRAs do not require the 20% withholding because they are not qualified plans.
True - that are not require the 20% withholding
True/False: Simple IRAs require the 20% withholding because they are not qualified plans.
False - they are not require the 20% withholding
qualified retirement plan loan limit
50% of balance or $50,000 - lessor of the two
Early withdrawal penalty for a SIMPLE IRA
25%
What is a tandem plan?
Generally combines a money purchase pension and a profit-sharing plan.
For tax determination purposes, when is the holding period of a nonqualified option is determined to begin?
On the date of exercise.
What is an excess benefit plan?
A supplemental deferred compensation plan that pays retirement benefits on salary, above the Section 415 limits, at the same level as the underlying retirement plan.
A non-qualified deferred compensation plan providing the key employee with a vested beneficial interest in an account is known as:
A funded deferred compensation plan.
A non-qualified plan which is subject to the claims of creditors yet is irrevocable and not accessible by the employer is called:
A Rabbi Trust
Mandatory COBRA coverage - # of employees?
20 or more employees
Which plans must offer a Qualified Joint Survivor Annuity?
All pension plans (defined benefit/contributions) are required to offer a QJSA to participants. Profit-sharing plans (401k) are not.
Characteristics of Secular Trust
Calls for an irrevocable contribution from the employer to finance promises under a nonqualified plan, and funds held within the trust cannot be reached by the employer’s creditors.
A policy which must cover all eligible dependents if the employer pays the entire premium cost best describes:
Dependents’ group life insurance.
Describes a qualified group life insurance plan.
A qualified group life insurance plan, if using a non-discriminatory classification, will have a bottom tier with benefits no less than 10% of the top tier and no more than 250% increase between tiers.
How do cash balance plans differ from traditional defined benefit pension plans?
Traditional defined benefit plans define an employee’s benefit as a series of monthly payments for life to begin at retirement, but the cash balance plan defines the benefit in terms of a stated account balance.
Short-term disability benefits usually start ___
__ the eighth day of an illness (first day for an accident) and generally last no more than six months.
Medicare is a government-sponsored health care plan that has two primary components, namely:
Basic hospital insurance and supplementary medical insurance.
50/40 Rule
A DB plan must cover the lesser of 50 employees or 40%
Inflation Adjusted Rate of Return:
Expected Return (8%) ÷ Inflation (4%) (1.08/1.04) = 1.0385
SIMPLE Distribution early withdrawal penalty:
Increases to 25%
TSAs are also knows as
a 403(b) retirement plan
Which capital needs analysis methods mitigates the risk of outliving retirement funds?
The Capital Preservation Model assumes at life expectancy, as estimated in the annuity method, the client has exactly the same account balance as he/she started with at retirement. So if life expectancy is exceeded there is still capital available.
VEBA
Voluntary Employee Beneficiary Association: Among the types of benefits which a VEBA may provide are accident insurance benefits, childcare costs, employee continuing education, the cost of legal services, life insurance benefits, severance pay, supplemental unemployment benefits, sick leave pay, training benefits, and vacation pay.] A VEBA cannot, however, provide commuter benefits, miscellaneous fringe benefits, or retiree income.
Cash balance plans which vesting schedule?
3-year cliff vesting only
Which stock options give the employer a deduction?
NSQOs. The deduction is equal to the bargain element - (appreciate of stock over exercise price)
Cash Balance Plans - Vesting Schedule?
3-year cliff
Describe the workings of a deferred compensation package that uses life insurance.
A company can defer compensation that would otherwise be due an employee and use the amount to purchase life insurance on the employee in the company’s own name while paying the premiums for the policy.
HIPPA
Health Insurance Portability and Protection Act limits “pre-existing look-back period” to 6 months and does not allow pregnancy to be considered pre-existing. The Act limits the pre-existing conditions exclusion period to 12 months.
A Crummey provision is the explicit right of
a trust beneficiary to withdraw some, or all, or any contribution to a trust for a limited period of time. Essentially converts a future gift into present, qualifying for annual exclusion.
Non-Citizen spouse annual exclusion
$143,000 - Citizen spouses have unlimited
Ascertainable Standard
Health, Education, Maintenance, or Support (HEMS)
Under what circumstances is Power of Appointment overlooked in determining decent’s gross estate?
Ascertainable standard, Requires approval, expiration of 5 and 5 power
5-and-5 Power
Power to appoint the greater of $5,000 of 5% of aggregate value
What is the estate tax form and when must it be filed?
Form 706, filed if decent’s gross estate, plus adjusted taxable gifts, is greater than the applicable estate tax credit equivalency ($5,250,000),
Failure to File Penalty:
5% per month, 25% maximum
Failure to File Fraudulent Penalty:
15% per month, 75% maximum
Failure to Pay Penalty:
0.5% per month, 25% maximum
Inherited property is short or long term?
Long, regardless of decent’s holding period. Basis is FMV as reported on estate tax return
Tenancy by the entirety
Titling between spouses, automatically transfers to surviving spouse at death, avoids probate, 50% of FMV included in gross estate, eligible for unlimited marital deduction
Common Property
Titling between spouses, decedents 50% interest included in probate, both halves stepped up to FMV, no automatic right of survivorship
Fee Simple
full outright ownership by one person, transfers via will or intestacy law, FMV included in gross estate, 100% gross and probate estate
Joint Tenancy with Rights of Survivorship
joint interest, two or more people, equal interest, passes to other owners at death, avoids probate, property included in gross estate to extent of original contribution (actual contribution rule) - if married 50%
Tenancy In Common
joint interest, two or more people, FMV of interest included in gross estate, passes through probate, interest proportional to financial contribution, gift may have occurred if interest > contribution
Private Annuity
asset exchange for unsecured promise to make fixed payments for remainder of life. Term = IRS Mortality table, §7520 rate, annuitant defers capital gain over remaining life, receives income, remove asset/appreciate from gross estate
Each private annuity payment includes:
(1) interest based on §7520 rate at date of sale, (2) capital gain, (3) return of capital (basis)
SCIN
Self-Canceling Installment Note - cancels at death, maximum term is IRC table life expectancy, no gift if PV of note (less SCIN premium) is equal to FMV of asset, classified as installment sale for tax
Which interest paid by is deductible - Private Annuity or SCIN?
SCIN
Buyers basis in: Private Annuity & SCIN
Private Annuity: Basis = Actual Payments; SCIN = Agreed upon Purchase Price
GRAT
Grantor Retained Annuity Trust - pays fixed percentage, dollar amount, of fraction of initial market value to Grantor, at end of term remainder goes to beneficiary (remainderman)
GRUT
Grantor Retained Unitrust - pays fixed percentage of trust assets each year, must be revalued annually, at end of term remainder goes to beneficiary (remainderman)
QPRT
Qualified Personal Residence Trust - special type of GRAT, use of personal residence during term, if grantor dies before end of term FMV included in gross estate
Which two forms of titling have survivorship features?
Joint Tenancy with Right of Survivorship and Tenancy by the Entirety (spousal only)
What is a simple trust?
One that mandates the distribution of all income to beneficiaries.
What is a complex trust?
A trust that is permitted to accumulate income, benefit a charity, or distribute principal.
What is a TPPT?
Tangible Personal Property Trust - very similar to QPRT, except instead of personal residence, funded with personal property. Usually artwork, antiques, or other personal property with appreciation potential.
What is a testamentary Trust?
Any trust created after the death of the grantor. Two common types are credit shelter (bypass) and marital deduction trusts (QTIP, GPOA Trusts, Estate Trusts).
