Ch 10 Flashcards
Gross income less deductions.
Adjusted gross income
Tax formula
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
Which deductions can you itemize?
Medical expenses
Interest expenses
Charitable contributions
Delay of income taxation until a later date
Tax deferral
The legal strategy of reducing or eliminating income taxation.
Tax avoidance
How is tax avoidance employed?
Shifting assets to children
Charitable contributions
Investing in tax-free bonds
What are the tax advantages of life insurance ?
Death benefit is generally tax free
Mash value generally grows tax-deferred
When is there a taxable gain on life insurance?
When cash value is higher than basis.
What are the two primary objectives of tax planning?
Minimizing and individual’s overall income tax liability
Satisfy the individual’s goals and objectives with minimal tax consequences
Test where the cash value must not be higher than the one-time premium for the same future benefits.
Cash value accumulation test
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.
Guideline premium and cash value corridor test.
A policy that meets the definition of life insurance but fails the 7 pay test.
MEC (Modified endowment contract)
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.
7 pay test.
What sinter tax treatment of a MEC.
Withdrawals or loans are subject to LIFO.
What are the two primary objectives of income tax planning?
Minimizing an individual’s overall tax liability
Satisfying the individual’s goals and obj cruces with minimal tax consequences
What are most of the above-the-line deductions?
Business-related
How do you get taxable income from AGI?
Take standard or itemized deductions
Subtract personal and dependency exemptions
What are the last adjustments done after the tax rate is applied to the taxable income?
Credits are applied (retirement savings contribution credit, foreign tax credit, child and dependent care credit)
What are the three ways to avoid taxes?
Shift assets to children
Charitable contributions
Investing in tax free bonds
What is the penalty on a MEC if the recipient hasn’t attained age 59 1/2?
10% penalty on taxable amounts
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?
Lifo
If someone surrenders an annuity can they reduce the taxable amount by the amount paid in surrender charges?
Yes
Are room and board expenses eligible for purposes of the series EE bond exclusion?
No
What is the phaseout for contributing to a 529?
None
What are qualified education expenses under tax free scholarships?
Tuition, books, fees, equipment, and supplies.
Is the savers credit refundable?
No
How can you calculate how much of a distribution is subject to an early whthdrawal penalty?
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.
When do minimum distributions typically begin?
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.
When does an early withdrawal penalty apply under a traditional IRA?
59 1/2
If the FMV of appreciated property being donated exceeds the donor’s basis in the property how is the recipient’s basis calculated?
The sum of the donor’s basis in the property and a portion of the gift tax paid by the donor.
Can a trust be eligible for a personal exemption?
Yes
What is the double basis rule?
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.
What is a below the line deduction?
A deduction from AGI to determine taxable income.
