Chapter 8 &9 Flashcards
According to the IRS Premiums paid on life insurance are
not tax deductible
Proceeds paid od Life Insurance are
Paid Income tax free to beneficiary
The interest paid on the cash value as it increase or accumulates
is tax deferred unless the cash value exceeds the single premium that required to fund future contract benefits.
If the cash surrender value exceeds the cost basis (gains) (Total Premiums paid less the dividends)
Considered Ordinary income and taxable
Dividends paid on Whole life policy
are taxed exempt
Dividends left the insurer to accumulate at interest
the interest earned will be taxed as ordinary income
Dividends will be taxable unless
they are used to purchase paid up additional insurance
If the total dividends received under a life insurance policy exceed the total premiums paid
it is taxable as ordinary income
The beneficiary receives the lump sum settlement
Income tax free
Whenever another settlement option is selected where the face amount is retained by the insurer
interest must be paid to the beneficiary
If a policy is transferred to another party for valuable consideration
It will loose its tax free status
When an individual dies all his or her assets are compiled and a monetary value are placed on them
Estate
Federal and State taxes may be levied on the estate value
Death taxes or Estate Taxes
Examples of property generally included in the estate
Real property, personal property, life insurance death benefits, annuities, gifts to others any interest or rights in other property
If used to pay for business purposes or to provide charitable contributions
Premiums may be tax deductible
The equity that builds with in a whole life policy is referred to as
cash value
If a contract owner borrows against the cash value in a contract
there are no tax consequences (in most cases)
If policy is a MEC distributions of subject to the interest first rule
They are taxable as income if the cash value of the contract immediately prior to payments exceeds the cost basis in the contract.
Barrowing against the cash value is sometimes referred to as
Partial surrender ( not taxable but lower owners equity)
What a owner paid into a contract
cost basis
When a contract owner barrows against the cash value of a whole life policy
The interest paid to the insurer is not tax deductible
When a beneficiary receives a lump sum settlement it is receive tax free but
the interest paid is taxable as ordinary income
Home or rental property
Real Property
Gifts or other property transfers are included in the estate if the descendants dies with in
60 months
Based upon the value of the estate at the time of the property owners death
Death Taxes
Premiums paid for it are not in proportion to the death benefit provided
Modified Endowment Contract (MEC)
A MEC
Is not a life insurance policy
If the accumulated premiums paid at any time during the initial seven years of the contract exceed the sum of net level premiums that should have been paid during this time frame
Is A (MEC) Modified Endowment Contract
designed to reduce or prevent the purchase of whole life insurance for the purpose of short term investment gains
The Rule of Seven Pay Test
Modified Endowment Contracts receive favorable tax treatment on interest credited policy cash value (tax deferral)
As long as no distributions are made
Cash distributions from MEC are subject to taxation on income in the year received
if the cash value on the contract prior to pay exceeds the investments (premiums)
The contract owner will be penalized 10% premature distribution and penalty tax is assessed on any MEC distributions from a MEC that is included in the recipients taxable income
When withdrawn prior to 59
No penalty tax will be applied on a MEC if
received because of disability, received after age 59 or paid like a life annuity
Once a policy is classified as a MEC
it can never revert back to an ordinary whole life policy with regard to tax treatment.
Qualified and none qualified annuity receives tax deferral during the
accumulation phase
Contributions to qualified individual (employee- sponsored annuity
tax deductible
Cost basis of an annuity are generally
The amounts paid
penalties are assessed on annuities
for premature distribution
Generally taxed on a last in first out basis, accumulation or interest earned is considered with drawn first win distributions are made
Prematurely withdrawn amount (10 percent federal age base tax penalty )
Total investment of a contract divided by the expected return
Exclusion ration
If a owner dies during the accumulation phase and prior to the annuity phase
Beneficiary will receive the greater of the accumulated value of the annuity or the amount of contribution premium
If the owner dies prior to the annuity phase the entire interest in the contract must be distributed with in fiver years following the owner death or contract surrender
In less the beneficiary chooses to annuitize the contract proceeds with in one year of the owners death.
No matter the amount of premiums paid
The beneficiary will receive the face amount on a policy
A corporation may purchase a annuity. However it must identify a natural person as a annuitant. If a firm fails to do this which of the following will occur.
Interest earned during the year will be taxable to the firm
Which of the following is not true in regard to the 1035 exchange
Once begun the exchange must be completed with in 30 days
The continue increase of cash value in a whole life policy
may be subject to taxation if withdrawn if the policy fails the seven pay test.
Plans approved by the IRS to receive favorable tax treatment.
Qualified plans
Contributions are generally tax deductible
Qualified Plan
Contributions made by employers to qualified plans are
Tax deductible
Contributions made to qualified plans are
not counted as income
Funds accumulate in the plan are taxed deferred, contributions and earnings are exempt from current income taxation
Qualified Plan
Any distributions from qualified plans prior to 59 are taxed
on pro rata- recovery basis
10% Penalty is also imposed on
premature distribution (except of death, disability divorce financial hardship, loans or qualified roll over)
Age related distributions made after age 59
qualified retirement distributions
Transfer of one qualified plan to another
Rollover
Any distribution that represents an employee cost basis is
Tax free
Any amount received as employer compensation or appreciation will be
taxed as ordinary income
If a employee or individual withdraws such funds in order to deposit them in another plan
20% percent withholding tax may apply
A rollover must be effected with in how many days
60
an investment vehicle available to all individuals who posses earned income
(IRA ) Individual Retirement Account
Characterized by heavy withdraw penalties in the early years after they are purchased even if funds are withdrawn to be roll over
IRA
Annual Contributions to an IRA may be equal to 100% income earned not to exceed
5,500 per year (above 50 6,500
IRAs may be rolled over to another high yield account with out
tax penalty (long as its with in 60 days)
IRA are allowed to be withdrawn up to 10,000 in order to
to buy his or her first home
Excess contributions to a IRA
subject to a 6% penalty
A tax deduction is available to individuals who contribute to an IRA and is not covered by an IRS qualified pension plan or an employer sponsored retirement program no matter what their annual taxable income
True
allows investors age 50 and older to add additional 1,000
catch up provision
Coverdell education savings account were a investor can make nondeductible contributions up to 2,000 per child up to the age eighteen
Education IRA
allows one to make nondeductible contributions which are tax free when withdrawn
Roth IRA
Beneficial for individuals with large savings that may leave them in the same or even higher tax bracket after that retire.
Roth IRA
Advantageous for those who continue to work after the age of 70 who prefer to daily IRA distribution
Roth IRA
Penalty free withdraws may be made prior to age 59 for qualified education expenses for the taxpayer, spouse, or any child or grandchild
Roth IRA
Roth IRA Federal income tax and penalty free distributions may be made in the following situations
Roth must have existed for five years; after age 59; death or disability; first time home buyers expenses
Contribution retirement vehicles for small business, self employed individuals and their eligible employees.
Simplified Employee Pension (SEP)
employer Sponsored IRA
SEP Simplified Employee Pension
The amount of employer SEP contributions permitted each year is the lesser of 25% of earned income not exceed
54,000
Offer the ease of administration with minimal reporting requirements
(SEP) Simplified Employee Pension
Contributions for employees are allowed up
18,000
Records the amount of contributions on the appropriate area on his or her tax form
( SEP) Simplified Employee Pension
Non corporate retirement savings vehicle
KEOCH Plans or 11R-10 plan
designed for self employed or sole proprietor
KEOCH Plan
Characterized by strict reporting, great deal of documentation must be provided to the IRS for as contributions and deductibles
KEOCH Plan
allows contributions by employees to be invested into various vehicles
401K
Contributions made to this qualified plan are excluded from the individuals gross income up to a maximum limit The limit is adjusted annually for inflation.
401K
employee conurbation may be match my the employer which reduces the employees tax ability as well
Salary Reduction (401K)
Contribution in which employer profits are shared with employees, no definite benefits and if no profits are made no contributions will be made.
Profit Sharing Plan
Plans are employer sponsored and maintained utilized by firms with larger number of employees
Pension Plans
Identifies the amount of installment benefit to be paid to the retired employee upon retirement.
define benefit
Characterized by an individual account for each employee
a defined contribution plan
allows any state or local government entity to provide a deferred compensation program for its employees
Section 457 (Deferred Compensation)
The employer agrees with the employee to reduce his or her pay by a specified amount and invest the deferrals in one or more investment outlets that may include insurance outlets.
Section 457 (fixed variable accounts)
The difference between 457 and 403b is
Investments in the 457 plan are not owned by the employer
Retirement plan is set for qualified or tax exempt organizations
403b (Tax Sheltered Annuities) TSA
403b plan is available to
Teachers, social workers, collage professors, and non profit organizations
funds may be contributed to a qualified annuity with pre tax contributions which are referred to
before tax dollars
TSA is characterized as a salary reduction rather
tax deduction
Savings incentive match plan for employees who work for small employers 100 or less and received a least 5000 in compensation.
Simple Plan
