Ch 10

Question 1

Gross income less deductions.

Answer 1

Adjusted gross income

Question 2

Tax formula

Answer 2

Gross income - “above the line deductions” = AGI

AGI- standard or itemized deductions (whichever is higher) - personal and dependency exemptions = taxable income

Multiply taxable income by the tax rate from the table

Subtract credits (retirement savings contribution credit, foreign tax credit, child and dependent care credit) = how much to pay

Question 3

Which deductions can you itemize?

Answer 3

Medical expenses
Interest expenses
Charitable contributions

Question 4

Delay of income taxation until a later date

Answer 4

Tax deferral

Question 5

The legal strategy of reducing or eliminating income taxation.

Answer 5

Tax avoidance

Question 6

How is tax avoidance employed?

Answer 6

Shifting assets to children
Charitable contributions
Investing in tax-free bonds

Question 7

What are the tax advantages of life insurance ?

Answer 7

Death benefit is generally tax free

Mash value generally grows tax-deferred

Question 8

When is there a taxable gain on life insurance?

Answer 8

When cash value is higher than basis.

Question 9

What are the two primary objectives of tax planning?

Answer 9

Minimizing and individual’s overall income tax liability

Satisfy the individual’s goals and objectives with minimal tax consequences

Question 10

Test where the cash value must not be higher than the one-time premium for the same future benefits.

Answer 10

Cash value accumulation test

Question 11

Aggregate premiums paid must not exceed certain amounts and the death benefit must be at least equal to a specified percentage of the cash value.

Answer 11

Guideline premium and cash value corridor test.

Question 12

A policy that meets the definition of life insurance but fails the 7 pay test.

Answer 12

MEC (Modified endowment contract)

Question 13

Test to see if a life insurance contract is a MEC where the aggregate premiums paid in the first 7 years must not exceed the sum of the net level premiums that would have been paid under a policy that would be paid up after 7 years.

This tells you if a life insurance policy is a MEC.

Answer 13

7 pay test.

Question 14

What sinter tax treatment of a MEC.

Answer 14

Withdrawals or loans are subject to LIFO.

Question 15

What are the two primary objectives of income tax planning?

Answer 15

Minimizing an individual’s overall tax liability

Satisfying the individual’s goals and obj cruces with minimal tax consequences

Question 16

What are most of the above-the-line deductions?

Answer 16

Business-related

Question 17

How do you get taxable income from AGI?

Answer 17

Take standard or itemized deductions

Subtract personal and dependency exemptions

Question 18

What are the last adjustments done after the tax rate is applied to the taxable income?

Answer 18

Credits are applied (retirement savings contribution credit, foreign tax credit, child and dependent care credit)

Question 19

What are the three ways to avoid taxes?

Answer 19

Shift assets to children

Charitable contributions

Investing in tax free bonds

Question 20

What is the penalty on a MEC if the recipient hasn’t attained age 59 1/2?

Answer 20

10% penalty on taxable amounts

Question 21

If someone takes money out of a life insurance policy before death, the withdrawal reduces the death benefit, and is taken within the first 15 years what is the tax basis of the withdrawal?

Answer 21

Lifo

Question 22

If someone surrenders an annuity can they reduce the taxable amount by the amount paid in surrender charges?

Answer 22

Yes

Question 23

Are room and board expenses eligible for purposes of the series EE bond exclusion?

Answer 23

No

Question 24

What is the phaseout for contributing to a 529?

Answer 24

None

Question 25

What are qualified education expenses under tax free scholarships?

Answer 25

Tuition, books, fees, equipment, and supplies.

Question 26

Is the savers credit refundable?

Answer 26

No

Question 27

How can you calculate how much of a distribution is subject to an early whthdrawal penalty?

Answer 27

Basis distributed = (total basis / total account value) * distribution taken

The early withdrawal penalty only applies to the part of the distribution that is included in gross income.

Question 28

When do minimum distributions typically begin?

Answer 28

April 1 following hitting 70 1/2 EXCEPT in a qualified plan where the beginning date is deferred to the April 1 after retirement. This rule only applies if the person owns 5% or less of the sponsoring company.

Question 29

When does an early withdrawal penalty apply under a traditional IRA?

Answer 29

59 1/2

Question 30

If the FMV of appreciated property being donated exceeds the donor’s basis in the property how is the recipient’s basis calculated?

Answer 30

The sum of the donor’s basis in the property and a portion of the gift tax paid by the donor.

Question 31

Can a trust be eligible for a personal exemption?

Answer 31

Yes

Question 32

What is the double basis rule?

Answer 32

It applies to gifts of property.

You take the donor’s basis in the property and if it is sold after being gifted at a higher price subtract the higher price from the donor’s basis. Gift tax doesn’t matter since it only matters if the property has appreciated.

Question 33

What is a below the line deduction?

Answer 33

A deduction from AGI to determine taxable income.