Comprehensive Flashcards
What formula is used to find intrinsic value and expected rate of return?
Constant Divided Growth V=D1 ÷ r -g
D1 = Current Dividend × Growth Rate
r = Required Return
g = Growth Rate
To determine if a stock is undervalued or overvalued a planner would use?
Intrinsic Value
Constand Dividend Growth
V = D1 / r-g
Which formula is used to determine if a stock is overvalued or undervalued?
Intrinsic Value
What is the relationship between bond prices and bond features?
The lower the coupon the more volatile the bond The longer maturity the more volatile the bond
Efficient Market Anomalies
- January Effect -Small Firm Effect -Value Line Effect -P/E Effect -AFC/NFC Effect -Presidential Election s *Market Anomalies don’t support EMH
Efficient Market Hypothesis Semi-Strong Form
Historical and public information will not help investors achieve above average market returns. Rejects technical and fundamental analysis
Who sets margin requirements for security transactions?
The Federal Reserve
What is the Intrinsic Value of a Call Option?
Stock Price - Strike Price Intrinsic Value can’t be negative of negative answer is Zero.
What will happen if an investor is long in a futures contract and they let the contract expire?
The commodity will be delivered to the investor.
Whenever there is a cash dividend issued on an underlying stock the price (or premium) for a call option tend to be
Lower
The duration of a bond is it’s
A. Current Price B. Time to Maturity C. Yield to Maturity D. Coupon Rate
The value of the convertible bond as a debt instrument depend on
A. The bond’s coupon B. Current interest rates C. The term of the bond
What is the formula for calculating conversion value of a bond?
CV = (PAR ÷ Cp) x Ps CV = Conversion Price (Par/shares) Ps = Price of the Stock
After Tax Holding Return Formula
After Tax HPR = (SP - PP +/- CF) x (1-TR)/PP
Pre Tax Holding Period Return
Pre Tax HPR = ( Selling Price - Purchase Price +/- Cash Flow) ÷ PP
What is the formula for Holding Period Yield?
HPY = ( Selling Price - Purchase Price) ÷ Purchase Price
If a question asks what the effective date was what do you do?
Use the time value of money to enter the variables and find the FV. Then take the FV and be divide it among the initial investment.
What components are needed when calculating the YTM of a bond?
- The present value of the bond 2. The par value of the bond 3. The length of time to maturity
What is one reason a company may call bond’s that were previously issued?
The bonds are currently selling at a premium.
What is the equation for the Tax Equivalent Yield for a Municipal Bond?
TEY = (Tax Exempt Rate) ÷ (1- investor’s marginal tax rate).
The optimum portfolio is said to occur at the point of tangency of which of the two following measures?
Indifference curve and efficient frontier
Modern Asset Allocation based upon the portfolio theory model developed by Markowitz state that,
The risk, return and covariance of assets are important input variables in creating portfolios..
When is standard deviation the best measure of a portfolios risk?
When a portfolio is not well diversified.
When is Beta a good measure of evaluating risk?
When a portfolio is well diversified
After examining several funds and calculating the correlation coefficient relative to the client’s existing portfolio, when do diversification benefits begin?
Diversification begins anytime correlation is something less than 1.
In the process of adding new investments to a portfolio what makes the best addition?
The lowest correlation coefficient. The closest to negative (-1) is always best.
On the Markowitz Model, at the point of tangency, we have attained
The optimal portfolio
The Efficient Frontier measures,
What portfolios are attainable and unattainable.
The Indifference curve measures what?
What level of risk an investor will accept for given levels of return.
What measures two stock movements relative to one another?
Correlation Coefficient and Covariance measure *Correlation of securities is always the strongest determinate as to what should be added to a portfolio.
What measures a security’s performance relative to expectations of performance?
Standard Deviation *The higher the standard deviation the higher the risk.
Several individual investments each have high standard deviations. What is true about the standard deviation for a portfolio of these same investments?
Can be low if there is a low correlation of returns between the investments. Can be high if there is a high correlation of returns between the investments.
Graphically depicted a correlation of (-1) means what?
That any two investments move exactly opposite from one another.
The optimal portfolio on the efficient frontier represents:
The best combination of risk and return for a given combination of investments.
The Capital Market Line (CML) uses what measure?
Standard Deviation
The security market line (SML) uses what measure?
Uses Beta as risk measurement
What are the probabilities of the Standard Deviation curve?
- (+/-) 1 (68%) STD 2. (+/-) 2 (95%) STD 3. (+/-) 3 (99%) STD
If the risk/return performance of a stock lies above the Security Market Line (SML) the stock is said to have:
Positive Alpha — Below the line negative Alpha
Which securities act covers and regulates activities in the primary markets concerning itself with issuance disclosure and registration of the the initial public be offerings?
Securities Act of 1933
What Securities Act created the SEC and regulation of the secondary market?
The Security Exchange Act of 1934.
Which act permits the SEC to regulate UITs, managed investment companies, and variable life products?
The Investment Company Act of 1940
Which act regulates the action of investment advisors?
The Investment Advisors Act of 1940
Which index uses geometric average to compute it’s daily value?
Value Line
Which indexes uses the value weighted average?
A. Nasdaq B. NYSE Composite C. Wilshire
Which index is a simple price weighted average?
Dow Jones Industrial
What type of allocation is concerned with shifting wealth between asset classes to take advantage of expected price level changes (timing) arising from broad movements in the business cycle?
Tactical asset allocation
Which asset allocation is concerned with allocating the wealth of a client among various asset classes, consistent with the client’s investment objectives, time horizons, and risk preferences?
Strategic Asset Allocation
What is the formula for Net Operating Income?
Net Income + Interest + Depreciation = NOI Or Revenue - Losses - Expenses = NOI
What type of behavior is described when one buys and sells what others are buying and selling?
Herd Mentality
What is the behavior called when one proceeds to invest in every option available?
Naive Diversification
Which behavior describes when people are unlikely to change their views given new information?
Belief Preseverance
What behavior results in buying securities that have fallen in value because it “must” get back up to it’s recent high?
Anchoring
Which behavior leads investors to take action or to refuse to act in hopes of minimizing any regret over their actions or inactions?
Regret Avoidance In investments it leads people to sell winners too soon and to hold on to losers to long.
In mutual funds what type of fees are used for marketing and distribution costs?
12b-1 fees
Which type of funds sell at either a premium or discount to par value?
Closed-End Funds
What are the following factors to consider when investing in a mutual fund?
A. The size of the fund B. The amount.of time until a distribution is made. C. The amount of time the current portfolio manager has managed the fund.
The following are advantages of dividend reinvestment plans,
A. They help raise new capital B. They give investors a systematic way to accumulate capital C. Companies build good will by offering these plans to share holders
Specific companies are researched and chosen as investments based on their outstanding investment possiblities by which type of analyst?
Bottom Up Analysts *Looking for the next big thing. These analysts start with the company, then industry, and finally the economic climate.
What best describes the intrinsic value of a share of common stock?
The discounted value of all future dividends.
When a currency falls in value to the US dollar this would cause what? Vice versa when a currency costs more dollars to buy this would cause what?
A. Devaluation B. Revaluation
The yield curve demonstrates graphically the relationship between?
Long term and short term government debt
What does the term “Riding the Yield Curve” mean?
Refers to the purchase of debt instruments in anticipation of fluctuations in the rates of return on both long and short term instruments.
What is the dividend payout ratio formula?
Dividend per share ÷ earnings per share
What risks can be reduced through diversification?
Business Risk and Financial Risk PRIME cannot be reduced through diversification. Systematic Risks can’t be diversified.
Purchasing what type of option is an alternative to selling short?
A put option
What is considered a leveraged investing technique?
Purchasing stock on Margin
A “Covered Call” does what for an investor?
It’s an income producing strategy where you sell or write call options against shares of stock you already own.
The following investments are subject to interest rate risk,
A. CD’s B. Treasury Bonds C. Collateralized mortgage obligations
Which form can individual taxpayers report their income, deductions, exemptions, and other information required to calculate their federal tax liability?
1040
What is the effective income tax rate?
It’s the average tax an individual pays. The rate is determined by dividing the tax liability by the taxable income.
Taxable Income is the amount
Used to determine tax liability
Need Operating Loss (NOL)
NOL losses currently cannot be carried back but they can be carried forward, (except for select agricultural or insurance filers). However the NOL can only offset 80% of the current year’s income for years after 12/31/17.
For determining taxable income on personal use property what are the requirements?
A person who rents their home for less than 15 days is not required to include the income as it is considered personal property, not rental or mixed. However, no deductions related to the expense of renting out the home are allowed other than taxes and interest associated with the property that would normally be deductible as an itemized deduction.
When is the 4th quarter federal estimated income tax payment due?
The 4th quarter federal income tax estimated payment is due by January 15th of the year following the year the payment is being made for.
What is the marginal income tax rate?
It is the tax rate applied to the last dollar earned.
To figure out required rate of return which formula can be used?
The CAPM formula Rf + b(Rm-Rf)
What is the standard deduction amount for blindness?
$1650
If a spouse dies during the current year and doesn’t remarry by the end of the tax year the spouse may file as?
A. Married filing jointly B. Married filing separately *Spouse does not qualify for filing qualifying widower until after 2 years following the spouse’s death.
What is the standard deduction amount for single tax filing status?
$12,400
If a piece of machinery is purchased, for depreciation purposes, what costs are included to establish the cost basis for the machine?
The purchase price + sales tax + set costs
Increase in Donee’s basis calculation?
Appreciation amount in the property ÷ Market Value of the Gift) x Gift Tax Paid on the gift + the original cost basis.
Section 1245 recapture does not apply to business equipment how’s for 17 months or longer if?
The property is deemed worthless
Depreciable property includes what?
Equipment Patents Copyrights Other Intangibles
Depreciable property or real property used in a trade or business is called?
1231 Asset
A section 1231 gain occurs when?
The sales price exceeds the original purchase price. Section 1231 gain is a capital gain
Assuming ban asset is sold for a gain, when would section 1250 ordinary income occur?
Real property subject to ACRS and accelerated depreciation was used.
Section 1245 recapture applies when?
All or portion of gain on tangible personal business property resulted from depreciation taken.
Section 1245 recapture is applied when?
The sale of depreciated assets
What is the Marginal Income Tax rate?
Is the tax rate applied to the last dollar earned.
What are the CFP Board’s Code of Ethics?
Act with honesty, integrity, competence, and diligence. Act in the client’s best interest Exercise due care Avoid or disclose and manage conflicts of interest Maintain the confidentiality and protect the privacy of client information Act in manner that reflects positively by on the financial planning profession and CFP Certification
The provision that all credit reports are required to contain accurate, relevant, and current information?
The Fair Credit Reporting Act
When does a material conflict of interest exist for CFP professionals?
Duties owed to clients defines material conflicts as ones that could impact advice or cause harm.
If the demand for a product is inelastic it means that?
An increase in the price would lead to an increase in the total amount spent on purchases of the product .
If the demand for a product is elastic it means that.
An increase in price would have no effect on the total amount spent on purchases of the product
What can the Federal Reserve do to reduce the money supply?
Raise the discount rate
What can the Federal Reserve do to increase the money supply?
Purchase Treasury securities and decrease the reserve requirements for banks.
The sale of a life insurance policy to a viatical settlement company is considered a what?
Transfer for Value Therefore the death benefits is taxable to the company at the time of death. Taxable amount = Death Benefit - Purchase Price of the Policy - Premiums Pais
Non-forfeiture rights of policyholders guarantee that there will be:
Cash Value
Split Dollar Life Insurance in a Business Setting
- It can be a fringe benefit to an employee 2. Insurance premiums are usually split between the employer and employee 3. It may be used to fund a buy-sell stock redemption agreement.
Commercial General Liability Conract
Includes Coverage A bodily injury and property damage liability Coverage B personal and advertising liability Coverage C Medical Payments “Other structure s” is not included
Where no fault insurance is involved
Verbal threshold: Lawsuits may be allowed when there is a fatal injury. *There is “no pure fault” existence in any State in the US.
An enforceable insurance contract
The applicant must have an insurable interest to make a contract
Characteristic of a Comprehensive Personal Liability Policy (CPL)
It may be part of a standard ISO homeowners policy or a stand alone policy.
What is an advantage of equity REITs over mortgage REITS?
Equity REITs can participate in the appreciation of the underlying properties.
Which of the following best describes a long hedge position?
A long hedge means that the investor own buys the futures contract to insure a certain price of a commodity that he or she does not own.
As a measure for risk, the Capital Market Line (CML) uses?
Standard Deviation
As a measure of risk the Security Market Line, uses what?
Beta as it’s measure of risk
What is the best source for obtaining a plain language understanding about the current tax law?
Commerce Clearing House Federal Tax Guide
What venue is a jury trial available for tax controversies?
US District Court
A private letter ruling is applicable how?
Case by Case Basis
Treasury regulations classified by their stage of adoption include:
A. Proposed Regulations B. Temporary Regulations C. Final Regulations
Sources of “substantial authority” available for tax research include:
A. Internal Revenue Code B. Congressional Committee Reports C. Treasury Regulations D. Private Letter Rulings.
Deductions – Above the Line for AGI
A. Deductions from losses on sale or exchange of property B. Deductions from rental and royalty property C. One half of self employment tax paid D. Contributions to pension, profit sharing, annuity plans, IRAs, etc. E. Penalty on pre mature withdrawals from time savings accounts or deposits. F. Interest on student loans. G. Health Savings Accounts H. Trade or business expenses. I. Alimony payments - divorced before 12/31/2018
Entertainment Expenses
Are no longer deductible!
Above the Line Deduction Alimony
Above the line Deduction for Alimony paid prior to 12/31/2018 Alimony received is earned income if divorced on it before 12/31/18.
Alimony Recapture
Only first 3 years of alimony Only applies if you have a greater than $15,000 decrease between years 1 and 2 or years 2 and 3. Formula P1 + P2 - 2P3 - $37,500 = Recapture.
Above the Line Deductions Moving
Moving expenses be are no longer deductible except for be armed services relocating to a permanent duty station.
Below the Line Deductions from AGI
Greater of Sum of Itemized Deductions or Standard Deduction. Standard be Deduction given amount for tax year. Itemized Deductions 1. Charitable Contributions 2. Limited Casualty Losses (in excess of $100 + 10% AGI) 3. Medical Expenses (in excess of 7.5% of AGI). 4. Limited misc Itemized Deductions 5. Interest on mortgage and investments, subject to limitations. 6. Taxes (State/Sales & use, local, US property) capped at $10,000. Qualified Business Income Deduction.
Below the Line Deductions Itemized Misc Expense Not subject to 2% threshold
A. Income in Respect of Decedent B. Gambling Losses to extent of Gambling Winnings C. Impairment Related Work Expenses for Handicapped D. Annuity losses for decedent annuitant.
Below the Line Deductions Itemized - Mortgage Interest
Home mortgage in excess of $1 million is not deductible for mortgages dated prior to 12/15/17 ($750,000 for mortgages dated after 12/15/17).
Below the Line Deductions Itemized Interest
No home equity interest is deductible unless used to improve the property.
The equivalent tax free rate for a taxable bond?
Taxable Bond Rate x (1- Marginal Tax Rate) = equivalent tax free rate
Net Earnings from Self Employment
Taxpayer must file if he has greater than or equal to $400 of net earnings.
What is the least amount of adjusted gross income that will require a tax return for a 68 year old?
$14,055
The losses on small business stock section 1244 is recognized how?
Ordinary Loss
Interest on school bonds is treated how in regards to income?
Excluded as income
What is the effective income tax rate?
The average tax an individual pays.
Depreciable property includes
- Equipment 2. Patents 3. Copyrights 4. Other Intangibles
With regard to Sections, 1245 1250, and 1232 will be applied only when:
Any depreciable property is sold at a profit above it’s original cost.
Section 1245 is applied when?
To the sale of depreciated assets.
Five Dependency Tests which must be met to qualify as a dependent?
- Gross Income 2. Support Test 3. Member of Household or Family Member 4. Citizenship Test 5. Joint Filing Test
If a child lives with each parent the same amount of time which parent can claim the child as a dependent?
The parent with the higher AGI can take the claim. Both parents can’t claim the child.
Personal Exemptions
We’re eliminated for years after 12/32/17 by TCJA
High Deductible Health Policy in the current year?
HDHP for family is $2800 and $1400 for a single person.
Student Loan Interest
The amount deducted for student loan interest is $2500 and it’s an above the line Deduction.
Above be the Line Deduction Self Employed Health Insurance
Is an above the line Deduction
The AGI phase out by range for tax payers who are active participants in employer sponsored plans that want to contribute to IRAs?
$104,000 to $124,000 for married filing jointly. Formula:. Reduction = Contribute Limit x AGI - Lower Limit ÷ $20,000
Construction Loan
Typically a short term loan. (One Year or less).
An HMO model under which the subscribers have the greatest flexibility?
An IPA (Individual Practice Association). Allows the greatest flexibility among HMO coverages. B
On Home Owners Policies Forms where other structures are covered the coverage is usually what percent of the dwelling?
10%
Are Insurance premiums to fund buy-sell agreements tax deductible?
No they are not. Entity agreements, where the firm owns the policy, is also not tax deductible.
COBRA Coverage
If an employer terminates a plan but is still in business, COBRA would apply to the formerly covered employees. However, if the business ceases for any reason causing the plan to terminate then COBRA does not apply.
Variable Life Contract
Descriptions 1. Unilateral 2. Aleatory 3. Conditional 4. Personal Contact of Adhesion.
Credit for child care and dependent care expenses
Payments for employment-related care made to a dependent of the taxpayer do not be qualify for child care and dependent care expenses.
American Opportunity Tax Credit.
Will pay 100% of first $2000 and 25% of the next $2000. Applies to post secondary education i.e. college. Phase out for AGI $160,000 to $180,000 MFJ and $80,000 to $90,000 other filing statuses.
Lifetime Learning Credit
Maximum credit per tax payer 20% of qualifying expenses up to $10,000. AGI phase out $118,000 to $138,000 MFJ and $59,000 to $69,000 other filing statuses.
Child Tax Credit
Child Tax Credit is $2000 per child against the tax obligation, up to $1400. Ex 3 children $1,400 x 3 = $4,200. Due to no tax obligation due. Children 17 and over don’t qualify.
Earned Income Credit
Is fully refundable. American Opportunity Credit and Child Tax Credit may be partially be refundable.
The following tax credits reduce tax due on taxable income
- Qualified dependent credit 2. Child Tax Credit 3. Earned Income Credit 4. Credit for estimated tax payments
Qualified Dependent Credit
Applies to to qualified dependents and/or qualifying children 17 and over. Limited to $500 Grandma Should Not Retire Gross Income - less than $4200 Support Not qualifying child Relationship
Dependent care credit
The following conditions must be met 1. The taxpayer must provide over 1/2 cost of maintaining the household, which is also the principal residence of the child. 2. The child must be a dependent 3. If married both parents must go to school or work Dependent Care Credit is not phased out. Provides Credit of 20% on up to $3000.
Carrybacks and carryforwards associated with the general business credit must be used in a specific order
- The business credit carryforwards to the current year. 2. The amount of the current year business credit 3. The business credit carrybacks to the current year
IRS recognizes two categoriess of credit
Refundable and Not Refundable
To receive additional standard deduction must be what age?
Age 65
Amount for additional standard deduction over age 65 and blindness for MFJ?
$1300 for both types
Standard Deduction for Single Filing Status Age 65 and over and blind?
$1650
Real Estate by definition
Is a passive activity
Classifications of Income
- Active 2. Passive 3. Portfolio
Which of the following factors should be considered in determining whether an activity is treated as appropriate economic unit for the grouping of passive activities?
- The similarities and differences in types of business 2. The be extent of common control 3. The be extent of common ownership
Rules for material participation are
- More than 500 hours of participation. 2. Taxpayer is the only one who substantially participates. 3. Taxpayer spends greater than 100 hours in the tax year and no one else more. 4. Taxpayer has materially participated in any 5 of the previous 10 years. 5. The activity is a personal services activity and the individual has materially participated in any 3 prior years. 6. Taxpayer participates 100 or more hours in this activity and total participation in all such activities exceeds 500 hours.
Under the Last In First Out Inventory System
The cost of goods assigned the most current inventory costs
Under the First in First Out Inventory System
The cost of goods sold is based on the costs of the first goods purchased.
Personal Use Property converted to business use
The basis of personal property converted to business use will be the tax payers adjusted basis on that property as of date of conversion or the FMV if lower.
An accrual method of accounting generally must be used to report income earned by
A general partnership with a corporate partner
Tax Accounting Periods
- Fiscal Year – ends on the last day of a month other than December 2. Calendar Year – Ends on the last day of December 3. 52-53 Week Year – Ends on a specifiedvday of the week (such as Friday) that occurs in the last week of the blast month of the tax year.
Major Advantage of the cash method of accounting
- Income may be deferred until cash is received. 2. Deductible Expenses accelerated if paid.
Cash receipts and disbursements method of accounting
Taxpayer who uses the cash method for reporting most items may use a different method for reporting self employment income.
Accrual accounting method, the taxpayer (buyer) recognizes expenses when
When the invoice is received
When is a taxpayer required to use a calendar year?
If the taxpayer does not keep books or accounting records
When can client information be disclosed?
The Client Claimed the Defendant Lied Civil dispute CFP’s employer or partners Defend against wrong doing Legal process *Keep in mind that this does NOT include ban IRS audit.
Forms of Discipline by the CFP Board
The President Publicly Shamed Russia Private Censure Public Letter of Admonition Suspension Revocation
Exceptions to Registration with the SEC as a Registered Investment Advisor
Teachers Accountants Banks or Broker Dealers Lawyers Engineers TABLE
Exemptions to Registration with the SEC as an RIA
Venture capalists - advisors solely to venture capital funds Insurance Companies - advisors whose only clients are insurance companies Private funds - advisors solely to private funds with less than $150 million State - Advisors whose clients live in their home state and don’t provide advice, services, reports etc. about nationally listed securities. Foreign advisors without a place of business in the US. Exchanges - advisors not providing advice about securities traded in a national exchange. VIPs ARE SAFE
What needs to be disclosed in writing when services are considered financial planning
Parties Terms of termination of the agreement Services to be provided as part of the agreement Date of the agreement and it’s duration PTSD
Dividend Options for a Life Insurance Policy
CRAPO Cash (send me a check) Reduce future premiums Accumulate at interest Paid up permanent additions (death benefit increases proportionally). One Year Term Insurance additions (death benefit increases temporarily).
Requisites for an Insurable Risk
CHAD Catastrophe - losses must not pose a catastrophic risk to the insurer Homogeneous - many large similar exposure units Accident - losses must be accidental from the insured’s point of view. Determinable - losses must be measurable and determinsble
Legal Principal of All Insurance Contracts
COALL Consideration Offer Acceptance Lawful purpose Legal competency of all parties
Federal Reserve Monetary Levers
RODE Reserve Rate Open Market Operations Discount Rate Excess Reserves
Income Tax Planning Qualifying Child Tests
SARA Support - provide more than 1/2 support Abode - child must live with taxpayer more than 1/2 the time Relationship Test - tax payers’s child; descendant of the taxpayer’s child, the tax payers brother, sister, step brother, step sister, half brother, half sister, a descendant of the tax payers brother, sister, step brother, step sister, half brother, half sister. Age - must be under the age of 19; must be the age of 24 and a full time student.
Failure to File Penalty
5% of the unpaid balance for each month up to 25% of the unpaid tax balance. However if a tax return is filed more than 60 days the minimum failure to file penalty is the lower of $435 or 100% tax due.
Failure to Pay
0.5% penalty reduces the failure to file penalty.
Preparer Penalty
Preparer penalty for willful or reckless conduct is the greater of $5000 or 50% of the income derived by the preparer for the return.
Penalty for filing a fraudulent Income tax return
75% of the deficiency
Who can represent the taxpayer before the IRS?
- Attorney 2. CPA 3.. Enrolled Agent
When will a tax payer be subject to an accuracy related penalty?
If he makes a substantial understatement of his tax liability, generally more than 10% of the correct tax liability and at least a $5000 tax deficiency.
Un-Reimbursed Employee Expenses
Are not deductible after 1/1/18 per the TCJA. Expenses from Self Employment are deducted above the line and have no AGI floor.
Tangible Personal Property Donated
When this type of property is donated to a charity and not used to carry out it’s tax exempt purpose the Deduction available to the donor is limited to they owner’s cost basis and will be subject to the 50% limitation.
How long is the carry over period for individuals to use any excess current charitable deduction?
5 years
When is Margin Interest deductible?
It can be deducted up to net investment income without making a special election. Net Investment Income includes Interest Ordinary Dividends Short Term Capital Gains If Long Term Gains and Qualified Dividends are elected ordinary income then the full amount full amount could be deducted.
A donation of short term capital assets recognized as a charitable expense receives what tax deduction?
Lower of the fair market value or basis
A donation of appreciated long term assets are recognized as a charitable expense receive what tax deduction?
FMV unless basis is chosen
Deductible Itemized Deductions Sales and State Taxes
State Income or sales tax (whichever is higher) are deductible as itemized deductions for years after 12/31/17 they are capped at $10,000.
Occupational license fees
Are deductible as a direct business cost in which they are deducted for AGI not as itemized deductions.
Federal Income Taxes Paid
Are deductible from the tax liability but not an itemized deductions.
Example, If a painting’s value has appreciated and is donated to museum for use the what is the donor’s deduction?
30% of his AGI and the remaining can be carried over for the next 5 years.
Investment Interest Deduction
Taxpayer’s investment Interest Deduction is limited to the investment income. *Capital Gains could be added to reach maximization.
Fine Arts and Antiques Home owners policy
Insured on a HO policy with endorsement known as “personal articles floater” which is a form of Inland Marine Insurance. Coverage is provided on an appraised value.
The split definition of disability includes
Own Occupation to Modified Any Occupation
Joint Last to Die Insurance Policy
The Last to Die will pay on the second death and if held in trust it will not add to the insured estate tax due because it will not increase the taxable estate.
HO4 Policy
For Renters Insurance
If interest on an investment account were to be compounded semi annually the effective rate of interest will be?
Higher than the nominal rate
Calculation for computing mortgage home interest
Per TCJA home mortgages are limited to qualified residential interest and maximum indebtedness of $750,000 financed after 12/15/17. Debt prior to 12/15/17 $2 million limit applies. (Qualified Mortgage ÷ Total Mortgage x Interest Paid = Amount that is deductible)
Personal Casualty Losses
Are not deductible unless the.loss was as a result of a federally declared disaster. For business losses reimbursements are not included in AGI but rather reduce the loss.
Medical Expenses can include
Prescription Drug Costs, Doctor’s Bill, Expense Cost to see a specialist, Health premiums. Deduction is limited to expenses that exceed 7.5% of AGI. To calculate, AGI x 7.5% - medical expenses = deductible amount
Medical Expenses Deductibles
$0.17 cents per mile may be deducted and $50 per person for lodging. Mileage Calculation = mileage x amount each way x number of trips x .17 Lodging Calculation = number of trips x $50 (however many people).
Deduction for Unreimbursed Employee Business Expenses
Not deductible after 12/31/17
Hobby Activities
Income generated from a hobby activity is included in gross income above the line. Any expenses can’t be deducted. If an activity earns a profit in 3 out of 5 years the IRS has the burden of proof of showing that there is no profit motive. If there has not been a profit in 3 out of the last 5 years the taxpayer has the burden of proof.
Non prescription medication
Is generally not deductible but an exemption is non prescription insulin.
Artistic Charitable Gift
Only materials and expenses are deductible. Not artistic contribution or time. No deduction allowed for use of property
Donation of short term property
Taxpayer is required to use the lesser of fair market value or adjusted basis for the determination not the charitable income tax deduction.
Premiums on an LTC Policy
Are deductible, the policy must be guaranteed renewable or non cancelable Premiums paid are deductible but limited based upon age.
Standard Deduction
Make sure itemized expenses don’t total more than standard deduction.
Trade or business expenses
QNEC, qualified non elective contributions, to a 401k plan to maintain qualification is an ordinary/necessary business expenses. Fines are not business expenses
Trade or Business Deductions
Expenses incurred in connection with issuing and selling stock are not deductible. Other expenditures is the rule of the lesser of $5000 or cost of expenditures.
When must replacement property be identified?
45 days
Tangible Personal Property
Section 1031 like kind exchanges - Tangible Property is not eligible Only property that used in a trade or business.
Boot
Anything not in like kind in the exchange is called “boot.”
Losses in Like Kind Exchanges
Are not recognized
Bargain Sale Transactions
For tax purposes, bargain sale transactions cannot generate capital losses.
Changes to the value of land
Are not taxable events.
The maximum capital loss that a taxpayer can apply
Is up to the extent of any capital gains for that year plus an additional $3,000 against income from other sources.
Individual Income Tax
Generates the largest percentage of gross collections for the Internal Revenue Service.
Statute of Limitations for the collection of a deficiency by the IRS.
10 years
Statute of Limitations for Fraud
There is no statute
Statute of limitations under section 6501?
3 years
Statute of limitations for a substantial understatement of income greater than 25%?
6 years
Constructive receipt doctrine
Applies to secular trust used for deferred compensation
5 - year MACRS depreciation life
CAT CORN Computers, Autos, and Trucks are 5 year.
7 Years MACRS depreciation life
Office Furniture
Residential real property (rental houses) MACRS depreciation life
27.5 years
Nonresidential real property (commercial buildings) MACRS depreciation life
39 years
Cost recovery of an intangible asset is allowed through?
Amortization
Basis for depreciation
Is the lower of FMV or adjusted basis for depreciation.
Cost Recovery
Is a periodic expensing of tangible property, including real and personal property used in business.
Amortization
Is a periodic expensing of the cost of intangible assets.
Depletion
Is the expensing of natural resources as they are being used up. This expense will fluctuate with the actual taking of the resource from the land.
Amortization of a bond premium
Is a capital recovery
Depreciation of real property
Uses mid month
Inclusion amount
Is designed to help smooth the lease expense vs the depreciation expense. The lease is front load.
Depreciation is allowed for
- Tangible personalty 2. Improvements to land
Will provide the least depreciation expense for a given period
Straight Line Depreciation
ACRS application
Was discontinued in 1987
Publication 17
Advance rent is any amount you receive before the period that it covers. Include advance rent in rental income in the year it is received regardless of the period covered or the method of accounting used.
S Corporations
Hold no retained earnings since all profits or losses are passed through to it’s owners.
“Pass through” entities
S Corporations, LLC and Partnership are considered “pass through” entities. “Pass through” means that the entity is not taxes separately from it’s owners, but passes it’s profits and losses through to the owners in their pro rata share of ownership.
“Pass through” entities
S Corporations, LLC and Partnership are considered “pass through” entities. “Pass through” means that the entity is not taxes separately from it’s owners, but passes it’s profits and losses through to the owners in their pro rata share of ownership.
Prohibited from having one class of stock
S Corporations
Characteristics of a C Corporation
- The number of shareholders is unlimited 2. The bankruptcy of a major shareholder has NO effect on the business form. 3. Shareholder liability is limited.
Would dissolve in the event of a 50% turnover in ownership
- Limited Partnership 2. A General Partnership
Will not expose shareholders to their share of undistributed Corporate income
C Corporation
How much of a penalty tax can be imposed on the undistributed personal holding company income?
20% if the business is deemed to be PHC by the IRS.
A minority non-employee shareholder in an S Corporation,
- Receives income when the Corporation declares and pats a dividend. 2. Votes for the Board of Directors at the annual shareholders’ meeting. 3. Receives a K1 annually in order to prepare a personal income tax return. 4. Reports on a personal income tax return a pro rata share of the corporate profit or loss.
State Income Tax and AMT
State income taxes deducted as an itemized deduction will be added back into regular income to calculate Alternative Minimum Taxable Income.
Installment Sales
Executed after March 1, 1986 but not before, are add back items.
Section 179 Deduction
Section 170 deduction is $1,040,000 for 2020. However the amount is reduced dollar for dollar for acquisition amounts above $2,590,000 placed into service during 2020.
Claiming Section 179 Expense
Immediately reduces the basis of the property by whatever the amount claimed (not to exceed original cost). The amount of deduction is limited in total and further subject to Income limitation before the deduction is taken.
When do the recapture rules for Section 179 apply?
- When the asset is sold before it would have been fully depreciated. 2. When the business use drops below 50%
Section 179 Deduction over other cost recovery methods
Section 179 is an upfront business deduction, now at $1,040,000 (2020) that can be used by businesses to reduce tax liabilities. It’s possible to reduce Section 179 deduction to zero, depending how much is placed into service, Section 179 would not have any advantages over other methods of depreciation.
Kiddie Tax
For dependent children unearned income over $2,200 is subject to tax at the parents tax rates. NOT earned income
Cash Basis Tax Payer
Does not recognize the income not received.
FICA taxes paid
The first $137,700 for 2020 will be taxed at the full employee FICA rate of 7.65%. Amounts earned over $137,700 will be taxed at the Medicare rate of 1.45%.
Underpayment penalty for IRAs
To avoid an underpayment penalty, substantially equal periodic payments must continue for the greater of 5 years or until the individual attains 59 1/2.
Tax Forms used for obtaining information on IRA rollovers..
Form 1099 R and Form 5498
Which entity would be required to adopt a calendar year for federal income tax purposes?
A Trust
Which of the following income is not taxes under Social Security self employment tax?
- Rental Real Estate income 2. Shareholder’s share of A Corporation income in excess of salary.
When figuring the basis of an asset such as purchase of a tractor
Personal property tax is not included.
If a credit card was stolen what is the maximum amount that a credit card company will pay?
$50 per card
Non-Qualified stock Options
Are taxed at the bargain element (difference between the market price and the strike price) as ordinary income when exercised. (Market Price - Stock Price) x Number of Shares x Tax Rate = Tax
NQS Options
The option is not taxed at the grant if the exercise price is equal to or greater than the fair market value of the stock.
NQS Options Employment
If an individual is not an employee of the company then the stock options they receive are non qualified.
NQS Options
The security holding period in the case of non qualified options begins on on the date the option is exercised.
When both ISOs and NQSOs are issued in the same year
When both ISOs and NWSOs are available in the same year the individual can exercise and sell the unfavored NQSOs to generate enough cash to purchase and hold the favored ISOs.
Qualified ISOs
- No taxable income will be recognized by the employee when the qualified option is granted or exercised. 2. For favorable tax treatment the option must be held two years and the stock for one year after exercise.
415c limit
$57,000 for 2020
Defined Benefit Plan Retirement Benefit
Current retirement benefit in a defined benefit plan is most affected by the current number of years at employment because minimum funding is based upon current accrued benefits not projected retirement benefits.
Negative Election Clause
Can assist a 401(k) plan in meeting the ADP test because it automatically deems that an employee defers a specific amount unless he elects out of the automatic deferral amount.
Top Heavy Plan
Profit Sharing Plan the contribution is limited to the lesser of $57,000 (2020) or covered compensation. Top Heavy must provide a benefit to all non key employees of at least 3%.
Life Insurance in a qualified retirement plan
Only life insurance may be included in a qualified retirement plan. To qualify under the incidental benefit rules the entire premium for universal life cannot exceed 25% of the employer’s aggregate contributions and 50% for whole life.
ADP
Actual Deferral Percentage Test
Pension Plans
Mandatory funding are a characteristic of pension plans.
Total limit for an employee under age 50 into a 401k acct.
$57,000 is the total limit for an employee under 50 from all sources including employee deferral, employer match, forfeitures and profit sharing contributions by the employer.
Money Purchase Plans
Must contain 1. A definite and non discretionary employer contribution formula. 2. Forfeitures can be reallocated to the remaining participates accounts in a non discrimatory manner or used to reduce employer contributions. 3. An individual account must be maintained for each employee of employer contributions.
Defined Contribution Plan
The maximum deductible contribution is 25% of the total covered compensation. The limit to an employee’s salary is $285,000.
Defined Benefit Plan
The maximum defined benefit is the lesser of $230,000 or compensation.
Constitute incidence to an insurance policy
- The right to name beneficiary 2. The right to surrender policy 3. The right to assign policy 4. The right to borrow from policy
Unlimited tax marital deduction?
The unlimited marital deduction applies to property included in the decedent’s gross estate.
In calculating the estate tax liability
Adjustable taxable gifts are added back to the taxable estate to determine the tentative tax base The tentative tax is reduced by the unified credit.
Casualty and Theft losses
TCJA repealed personal Casualty and Theft losses for Dec 31, 2017 - Jan 1 2026. If a loss happens during the administration of the estate, the estate can either deduct on the 706 or 1041.
Regarding Estates Unpaid medical expenses
Unpaid medical expenses can be deducted on the 1040 or the 706 but not the 1041.
$15,000 annual exclusion
$15,000 annual exclusion is not available for bequests.
Periodic annuity settlement benefits
are not fully subject to income tax because the recipient has a tax basis equal to the proceeds. Proceeds are includible in estate for tax purposes only if grantor retained an incident of ownership. Life insurance premiums are not deductible when personally owned, and the 3-year rule applies to a life insurance policy regardless of irrevocability.
Totten trusts
used to avoid probate, not to lower the value of the gross estate
The 3-year rule
applies to life insurance and gift taxes paid on gifts made within three years, so the insurance is not included but the gift tax paid is included.
“Key person” life premiums
life premiums are not deductible as a business expense. Any death benefit pad will be nontaxable to PDC.
Remainder trusts
distribute the remainder of the property to the charity while generally distributing income to a non-charitable beneficiary
CRATs and CRUTS
Both CRATs and CRUTS serve to minimize income and estate taxes while providing life income to the beneficiary.
Charitable Remainder Annuity Trust CRAT
The CRAT is a better option than the CRUT because the payout from the CRAT would be a fixed dollar amount, rather than a fixed percentage
A grantor retained annuity trust GRAT
a GRAT and therefore no charitable tax deduction
Political organizations
are not qualifying charitable organizations.
CRAT
requires invasion of corpus to pay annual income if there is a shortage
CRUT
Income Control over assets income can increase
A charitable pooled income fund.
This estate planning tool is created and managed by a qualified charity to provide a variable income stream (based on portfolio performance) to non-charitable beneficiaries.
The following accurately describe a charitable lead trust
The remainder interest can go to any non-charitable beneficiary chosen by grantor. A corporation cannot be the grantor. The charity has the lead interest, not a remainder interest and the grantor will only get a charitable income tax deduction if the grantor elects trust status.
An estate planning tool which permits (but does not require) invasion of principal (corpus) to meet income payout requirements is known as
A charitable remainder unitrust
SIMPLE IRA
100% of salary up to $13,500 (2020). Employer to match dollar for dollar up to a 3% match.
Safe Harbor Plans & 401(k) Plans
Safe harbor plans require 100% vesting, while 401(k) plans with QACAs require two year 100% vesting. The matching contributions are different for the plans. Employees are not required to participate in either plan. Both plans eliminate the need for ADP testing, which means that they eliminate the need for qualified matching contributions and corrective distributions.
Short-term disability plan
Premiums under an employer-paid plan are deductible to the employer when paid to the insurance company. The employee must claim the benefits from the employer-paid policy as taxable income. If employees pay for the premium on an after-tax basis, benefits are tax exempt. Premiums paid by the employee are deductible only though a Section 125 cafeteria plan, then benefits are taxable. Definitions of disability are much more liberal under short-term disability than under long-term disability.
403b Plan
A 403(b) plan is a tax-advantaged plan (tax qualified), not a qualified retirement plan. All of the others are qualified plans subject to ERISA rules.
Qualified Plans Employer Deductibility
Generally, only contributions up to 25% of covered compensation can be deducted for a year.
Qualified Plans
All qualified plan assets are held in a tax exempt trust and all earnings within the trust are deferred from taxation until distributed from the plan.
Traditional IRA Tax Deduction Formula
Total Contribution Amount x (gross salary - minimum phase out#) / (difference of salary and phase out) = the amount that’s not included in the deduction.
Hardship Withdrawal
May not be another source of funds. Unless the employer has actual knowledge to the contrary, the employer may rely on the written representation of the employee to satisfy the need of heavy financial need.
Qualified automatic contribution arrangement QACA
The 401(k) plan avoids ADP testing ADP and NHCE is irrelevant.
Defined Contribution Benefit Plans
Account value based benefits. Fixed employer contributions based upon terms of plan.
Top Heavy Plan
top heavy, the plan must provide a benefit to all non-key employees of at least 3%.
50/40 rule Defined Benefit Plans
The 50/40 rule requires that defined benefit plans cover the lesser of 50 employees or 40% of all eligible employees. 40% of the nonexcludable employees was included in the calculation.
For tax determination purposes, the holding period of a nonqualified option is determined to begin
On the date of exercise.
Taxation of ISOs and NQSO
ISO is not subject to payroll tax NQSO are subjec to payroll taxes
Sale of ISO stock
Will have a negative impact on AMT Tax not a positive one therefore AMT will not be applied.
Non-qualified stock options are taxed
Non-qualified stock options are taxed on the “bargain element” (difference between the market price and the strike price) as ordinary income when exercised. (Market Price – strike price) × Number of Shares × Tax Rate = Tax
ISOs
there is no regular tax for ISOs From the grant date to the exercise date there is an adjustment for AMT (LTCG). From the exercise date to the sell date (LTCG).
NQS Options
In the case of NQS Options, the option is not taxed at the grant if the exercise price is equal to or greater than the fair market value of the stock.
Qualified incentive stock options
No taxable income will be recognized by the employee when the qualified option is granted or exercised For favorable tax treatment the option must be held two years and the stock for one year after exercise.
When both ISOs and NQSOs are available in the same year
the individual can exercise and sell the unfavored NQSOs to generate enough cash to purchase and hold the favored ISOs. It would also be valuable to have both if they issued over $100,000 in options exercisable in the same year because there is a $100,000 limit on ISOs.
Illustrates the difference between the treatment of ‘qualified’ versus ‘nonqualified’ stock options
The tax implications are immediate and the income is recognized as soon as the option is exercised rather than when the stock is subsequently sold.
When would you advise a person not to wait to exercise a nonqualified stock option?
If all gain has been apparently made in a security, rather than lose the profit, and since there are no special advantages to holding non-qualifieds, it may be the time to exercise and to follow with an immediate sale. The rest of the options are actually reasons for holding the option without exercising it.
Employer Tax Consequence in a Non Qualified Plan
Employer is unable to deduct any contributions to a non-qualified plan until the employee actually takes constructive receipt. Death benefits from a split-dollar arrangement, both the employer and the employee’s beneficiary’s share, are generally tax free.
Qualified and non-qualified retirement plans
The timing of employee taxation on properly executed non-qualified and qualified plans are the same. Non-qualified plans can be split dollar plans, executive bonus plans, etc.
Non Qualified Plans - Taxation to an executive
Under IRS regulations an amount becomes currently taxable to an executive even before it is actually received if it has been “constructively received.”
An excess benefit plan
An excess benefit plan extends the same benefits to employees whose contributions to the plan are limited by Section 415 (e.g., employee earns $285,000 yet receives $57,000 contribution instead of $70,000 contribution due to Section 415 limitation on a 25% money purchase plan). An excess benefit plan would put additional $13,000 into non-qualified retirement plan. Do not confuse with a SERP which provides benefits in excess of the Section 415 limits AND ignores the covered compensation limits (i.e., $285,000 in 2020) applied to qualified plans.
A Supplemental Executive Retirement Plan (SERP)
SERP supplements the pension plan without regard to limits imposed upon salary levels (i.e., maximum salary of $285,000 in 2020) or the maximum funding levels of Section 415. Do not confuse with an excess benefit plan which extends the benefits of a company’s qualified plan above the Section 415 limits but still adheres to maximum salary limitations.
A non-qualified deferred compensation plan that provides the targeted key employees with only a promise to pay benefits at a future time is known as
An unfunded deferred compensation plan
Characteristics of a non-qualified deferred compensation agreement for an individual
It may provide for benefits in excess of qualified plan limits It must be entered into prior to the rendering of services to achieve deferral of compensation. The contribution underlying the agreement may be paid from the current compensation of the employee
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
Basic characteristics of non-qualified deferred compensation
Under both the funded plan and an informally funded plan, the IRS may likely rule that the employee is in constructive receipt of income unless there is a substantial risk of loss or forfeiture.
Payments under a “golden parachute”
Are considered ordinary income. Additionally, any amounts under the Social Security cap will be subject to the OASDI tax. All amounts will be subject to Medicare tax. “Golden parachute” payments are also subject to an additional 20% excise tax. Because these are non-qualified plans, no lump sum treatment or IRA rollover options apply.
Cash Balance and Money Purchase Pension Plans
favor younger entrants
In determining the allowable annual additions per participant to a defined contribution pension plan account for the current year, the maximum contribution
Contribution up to $57,000
The total limit for an employee under 50 from all sources includingemployee deferral, employer match, forfeitures, and profit sharingcontributions by the employer.
$57,000
Defined contribution pension plans
Must have a definite allocation formula based upon salary and/or age or any other qualifying factor.
it is a pension plan, are fixed by the funding formula and must be made annually.
Defined Benefit and Target Benefit Pension Plans
favor older age entrants with less time to accumulate, and therefore, require higher funding levels.
Defined Benefit Pension Plan
The maximum defined benefit is the lesser of $230,000 (2020) or his compensation
Safe Harbor Plans & and 401(k) Plans with Qualified Automatic Contribution Arrangment (QACA)
Safe harbor plans require 100% vesting, while 401(k) plans with QACAs require two year 100% vesting. The matching contributions are different for the plans. Employees are not required to participate in either plan. Both plans eliminate the need for ADP testing, which means that they eliminate the need for qualified matching contributions and corrective distributions.
Advantages of profit sharing plans to businesses and business owners
An advantage of profit sharing plans is that they PERMIT withdrawal flexibility
Unit benefit (a.k.a. percentage-of-earnings-per-year-of-service) formula
The unit credit formula rewards many years of service
Flat percentage formula
If there are at least 10 years of service put in.
The maximum benefits under IRC 415(b) are reduced for participation less than 10 years
A new comparability plan
is a profit sharing plan
“A plan which requires annual employer contributions equal to a formula determined by each participant’s salary”
Money purchase plan
Self Employed individual’s contribution
Contribution Rate / (1 + Contribution Rate) = Self-employed contribution rate
Benefit formulas used by defined benefit plans
Base the benefit on the years of service and salary level of employees, while taking into consideration some of the benefits of Social Security
Base the benefit retirees receive on a fixed percentage of every employee’s salary, limited to the annual compensation limit
Define the benefit for retirees as a fixed dollar amount, regardless of income level
Profit sharing plans can be integrated with
Social Security
In order to be qualified, money purchase plans must contain
A definite and non-discretionary employer contribution formula
Forfeitures can be reallocated to the remaining participants’ accounts in a non-discriminatory manner or used to reduce employer contributions
An individual account must be maintained for each employee of employer contributions
Integration formulas
Are not allowed under an ESOP plan but are allowed under a stock bonus plan
Defined Contribution Plans
Require individual accounts
Definite Contribution Allocation Formula
IRC Section 415(c) applies an “annual addition” limited to certain qualified plans
The limit only applies to defined contribution plans
Salary deferrals are included as part of the annual additions limit
403(b) and 457
Can both receive 19,500 (qualified and deferred comp plans
Maximum disparity
Using the excess method is the lesser of the formula amount your given (40 years × 1.5%) or 26.25% (35 years × .75%)
Which of the following characteristics apply to paired plans (also known as “tandem plans”)
Generally combines a money purchase pension and a profit-sharing plan
ADP test
Applies in a non-safe harbor plan
Factors which would affect a participant’s retirement benefits in a target benefit plan include
The actuarial assumptions used to determine plan contributions.
The total return on plan assets.
The age of the participant.
The includible compensation for the plan year for the participant
Owner of corporate stock who sells to an ESOP to qualify for the nonrecognition of gain treatment
The ESOP must own at least 30% of the corporation’s stock immediately after the sale
The owner must reinvest the proceeds from the sale into qualified replacement securities within 12 months after the sale
The ESOP may not sell the stock within three years of the transaction unless the corporation is sold
The owner must not receive any allocation of the stock through the ESOP
Cash balance plans
Are defined benefit plans due to the guaranteed investment returns and benefit formula, not simply a contribution amount. While cash balance plans provide guaranteed rates of return, they are not 100% guaranteed by the PBGC (PBGC has coverage limits). Cash balance plans use 3-year cliff vesting only.
Legal requirements apply to Employee Stock Ownership Plans (ESOPs)
Deductions for interest payments are not limited for ESOP plans
ESOPs must permit participants, who are aged 55 or older and who have at least 10 years of service, the opportunity to diversify their accounts
The mandatory 20% income tax withholding requirement does not apply to distributions of employer stock from an ESOP
How do cash balance plans differ from traditional defined benefit pension plans
Cash Benefit Plans are required to offer payment of an employee’sbenefit in the form of a series of payments for life.
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.
Statement(s) is/are true for a target benefit plan in 2020
It favors older participants
It requires actuarial assumptions
The maximum individual annual additions is the lesser of 100% of pay or $57,000
Legal requirements for a qualified thrift/savings plan
Employees make after-tax contributions to a thrift; employers don’t make contributions
After-tax employee contributions cannot exceed the lesser of 100% of compensation or $57,000
Actuary establishes the required funding for a defined benefit pension plan by determining
The amount of annual contributions needed to fund single life annuities for the participants at retirement
Tax treatment of life insurance policy proceeds
Payments under a settlement option of a life annuity are partially subject to income tax
When is Life Insurance included in a gross estate?
Proceeds are includible in estate for tax purposes only if grantor retained an incident of ownership.
Bequests made in Estates
The $15,000 annual exclusion is not available for bequests
Wasting Assets
“wasting assets” are any assets that naturally will decline in value as time passes. Copyrights become less valuable as they come closer to their expiration. Annuitized annuities will decline due to payouts. These “wasting assets” cannot use the AVD, the must use Date of Death value. Any assets sold between DOD and AVD will use the sale price.
- Annuities
- Copyrights
Fred, the founder and CEO of WonderCo, recently passed away. At his death, Fred owned 80% of the stock of WonderCo and the WonderCo stock was his only asset. WonderCo is a publicly traded company. Which of the following discounts would be applicable to Fred’s WonderCo stock?
A Blockage Discount
Federal estate and gift taxes are determined by the fair market value of the property transferred.
Asset values are based upon the fair market value on the date of death or six months after the date of death for the gross estate.
Taxes are progressively higher as more assets are transferred during life
Value is determined on the date of the transfer of the assets for lifetime transfers
The marital deduction may be applied to
Terminable interest property
The ownership interest of a life insurance policy
Is not a terminable interest
CRAT in Gross Estate
The value of the CRAT is included in the gross estate and then deducted from the adjusted gross estate as a charitable deduction. Only gift taxes paid on gifts made within three years are included under the gross up rule.
Joint and survivorship life insurance
The premiums are generally less than if purchasing two individual policies on the same insureds. Proceeds may or may not be includible in one of the insured’s gross estates. Survivorship life insurance can be used in an irrevocable life insurance trust (ILIT).
Calculation to figure Adjusted Gross Mortgage
16,000,000 - Gross Estate
16,000 Funeral
15,000 Debts-C
50,000 Debts-M
15,919,000 AGE
34,000 UL
260,000 UM
15,625,000
Deducted from a decedent’s gross estate
Debts and obligations of the decedent are deductible from the gross estate. Only 1/2 the mortgage on community property is deductible.
“Key person” life premiums
Are not deductible as a business expense. Any death benefit paid will be nontaxable.
All Bequests
All bequests are included in the gross estate
Owner of Life Insurance Policy whose paying premiums up until their death, how is it included in the Gross Estate?
The value of the interpolated terminal reserves plus any unexpired premium
Circumstances would cause the value of gifted property to be included in the donor’s gross estate
Donor retains a life estate in the gift property
Donor retains the power to revoke or amend the gift
Completed gift are not pulled back into the estate. Additional information for reference on the estate pullback rules: ILIT that have insurance policies transferred into them will be added to the gross estate, if the ILIT was created and insurance purchased, it will be excluded from the gross estate.
Included in the gross estate
Incidence of ownership of life insurance policies assigned within three years of death are includible in the decedent’s estate, as are CRATs and CRUTs. Any amount subject to the gross up rule is includible in the taxable estate but must be for gifts made within three years of death.
Marital deduction
The marital deduction has the effect of treating the husband and wife as one economic unit for gift and estate taxes.
Qualifying all of the decedent’s property for the marital deduction may result in excess estate tax being paid.
What is the appropriate estate planning strategy for married couples to minimize taxes over the death of both spouses?
Bequeath the applicable exemption equivalent amount to a bypass trust and the balance to the surviving spouse in a qualifying way.
Totten Trust
Totten trusts are used to avoid probate, not to lower the value of the gross estate.
Following techniques can be used to lower the value of an individual’s gross estate
Qualified Personal Residence Trust
Family Limited Partnership
Irrevocable Life Insurance Trust
Testamentary trust
Created at death
The following is a way to transfer assets out of the gross estate during a client’s lifetime
The creation of a joint tenancy with right of survivorship with the creator’s spouse
3 Year Rule
The 3-year rule applies to life insurance and gift taxes paid on gifts made within three years, so the insurance is not included but the gift tax paid is included
Following right will not cause an insurance policy to be included in the gross estate of the owner/insured if retained within the three years prior to the death of the owner/insured assuming the policy was in an ILIT.
The right to change the name of a charitable beneficiary to another charitable beneficiary.
Survivorship life insurance
It is generally not includible in any insured’s gross estate, if owned in an ILIT
It can provide liquidity to pay estate taxes at the death of the second insured
Premiums are usually less expensive than for individual policies on each of the two insureds for the same face amount
Under IRC section 2035, the proceeds of a life insurance policy transferred within three years of death.
Are included in the gross estate of the transferor.
Unpaid Medical Expenses
Unpaid medical expenses can be deducted on the 1040 or the 706 but not the 1041.
Marital Deduction
The marital deduction is not a credit, but is a deduction against the adjusted gross estate in calculating the taxable estate.
If the death benefit of a life insurance policy is included in a decedent’s gross estate
The value of the death benefit will be eligible for the unlimited marital deduction
Which of the following planning techniques can be used to reduce total estate taxes for both spouses?
A Charitable Bequest
The unlimited tax marital deduction
The unlimited marital deduction applies to property included in the decedent’s gross estate.
Reversionary interests
A reversionary interest is one that reverts back to the donor after some time or event
Not a benefit of the unlimited marital deduction
The use of the unlimited marital deduction can shelter future appreciation of an asset from estate taxes at the death of the second-to-die spouse.
B trust and QTIP
Precludes invasion of corpus.
JTWROS
50% of the fair market value must be included in Rick’s estate because of the deemed contribution rule because his joint tenant Amber is his spouse. If he titled JTWROS with anyone but a spouse we would use the “actual contribution rule” in which case he would have $400,000 included in his gross estate. Note that is he had titled the property tenants in common, he would have had $400,000 inclusion.
Qualified gift property determination by the IRS
IRS qualified property determination is not required as part of gift giving.
The amount of tuition paid directly to the institution is a qualified transfer
Not subject to the gift tax regime
The following is necessary for a completed gift to have occurred
The donor relinquished all control over the asset
There was delivery to the donee
There was acceptance by the donee
Federal gift tax in 2020
The federal gift tax applies to all gratuitous transfers.
Following may result in a gift for federal gift tax purposes
The simple conversion of an individual to a joint tenancy investment account with your child.
Gift tax returns
An extension of time to file the income tax return (1040 etc.) automatically extends the time for filing gift tax returns. No separate form is required.
2503c trust for minors
Would qualify for the annual exclusion because any gift to such a trust is deemed to be a gift of a present interest.
For a deed to effectively act as a “will substitute”
Competent grantor’s signature
There must be delivery of deed during the grantor’s lifetime with an intent to gift
The grantor must be competent and the deed must be delivered. Recording of deed does not affect gifting, but may affect future rights in the property. A gift can be made subject to a mortgage.
A gift to a 529 plan
A 529 plan permits the donor to be the owner of the account, and thereby reserves the right to the donor, to take back the gift.
Gift and estate taxes
Gift and estate taxes have the same exemptions
The two forms differ. The estate tax return is the 706. The gift tax return is the 709. There are different deductions and exclusions.
This device permits addition of assets after the inception of the device
Only a charitable unitrust among the choices allows additional contributions. Adding assets to the trust, however, increases current income to the charity, which would only occur in a charitable lead trust where the charity is the current income beneficiary. A CRUT can also have additional contributions, but was not an available choice.
In the case of charitable lead trusts
The remainder interest may revert to the grantor as the income for the term passes to a 501 (c)(3) charity.
This estate planning tool is a sale to charity at a price below fair value
A charitable bargain sale
Which is not an issue when considering whether to deduct the adjusted basis or the fair market value of property contributed to a charitable organization?
The capital gains rate in effect at the time of the transfer.
Political organizations
Are not qualifying charitable organizations
A charitable remainder unitrust
The CRUT accomplishes all of these objectives. Income for parents eliminates “lead trust” and “pooled income.” Control over assets eliminates CRATs. CRAT cannot provide for inflation. CRUT income can increase.
Which of the following is not a characteristic of a CRUT
The CRAT requires invasion of corpus to pay annual income if there is a shortage. The CRUT does not.
A charitable lead trust (CLT)
Provide immediate income to the trust
The corpus of this trust reverts to the transferor or designated non-charitable beneficiary
A charitable lead trust
A charitable trust that provides the grantor with income tax advantages and with a life income is known as
Both CRATs and CRUTS serve to minimize income and estate taxes while providing life income to the beneficiary.
This estate planning tool is created and managed by a qualified charity to provide a variable income stream (based on portfolio performance) to non-charitable beneficiaries.
A charitable pooled income fund
Charitable Remainder Annuity Trust
Would be the best option because the charity is the remainder beneficiary and David would be the income beneficiary. The CRAT is a better option than the CRUT because the payout from the CRAT would be a fixed dollar amount, rather than a fixed percentage. David wants a stable payout each year which would lead us to a fixed dollar amount, and thus the CRAT.
Charitable lead trust
If a unitrust, additions to corpus may be placed in the trust
GRAT
There is no charitable beneficiary in a GRAT and therefore no charitable tax deduction.
Which of the following statements concerning CRATS and CRUTS is/are accurate
The remainder interest at the inception must be at least 10% of the net fair market value of assets contributed.
Even if 7520 interest rates decline over time, a CRAT created several years ago will maintain its qualified status.
The following are parties to a power of attorney
The principal and the principal’s agent
The following accurately describes special and general powers
The surviving spouse can be given the power to invade the entire corpus of a marital trust for an ascertainable standard
Exercise, lapse or release of a general power of appointment are considered a transfer of the property by the power holder for gift, estate, and generation skipping tax purposes.
The existence of a general power of appointment will cause the power holder to be considered the owner of all or part of the trust for federal estate tax purposes in the event the power holder dies.
The existence, lapse, exercise, or release of a special power will not cause inclusion in the power holder’s gross estate.
Qualified disclaimer
The disclaimant cannot select the ultimate beneficiary. Otherwise, he or she is still deemed to retain ownership, rendering disclaimer invalid.
Qualified disclaimer
Must be written, irrevocable and received by the executor of the estate within 9 months. It must not direct the asset and can be for any interest partial or full.
The following arrangements may be used to deal with unexpected incapacity
Fee simple ownership is not an arrangement that helps to deal with unexpected incapacity. All of the other arrangements are methods of dealing with unexpected incapacity.
Under which of the following circumstances would a decedent be considered to have died intestate
Under which of the following circumstances would a decedent be considered to have died intestate
This estate planning tool will cause underlying assets to be included in the non-grantor holder’s gross estate
A general power of appointment that is unexercised
Which of the following best describes a “mutual will”?
A mutual will is also referred to as a sweetheart will where both spouses leave all assets to each other.
Codicil
Is a document used to alter a will.
Devisee
Is a gift of real property through a will
Legatee
Is a person who inherits property under the will.
Abatement
Is the reduction in an estate when there is insufficient assets to satisfy all legatee provision.
In terrorem
Is a “no-contest” clause
Holographic will
One that is handwritten, signed and dated
Nuncupative
Which is not valid in all states, is an oral will
Primary responsibilities of the personal representative
Inventory the estate
Probate the will
The unrestricted ability to ultimately name beneficiaries of income and corpus of a trust is known as
A general power of appointment
The presumption under USDA
Applies only when the order of death is not known
The following statements is correct about a charitable remainder unitrust (CRUT) with husband and wife as joint and survivor annuitants
The full value of the assets in the CRUT are included in the gross estate of the grantor (assuming he dies first).
Testamentary life interest
The testamentary interest will not qualify for the marital deduction.
Crummey withdrawal powers
Allow a beneficiary to withdraw an amount contributed to the trust in a given year in order to create a gift of a present interest, thereby permitting use of the annual exclusion and/or applicable credit.
A spouse wants to make sure that she makes full use of the applicable estate tax credit upon her death, but also wants to make sure that her husband, has access to her property. Which of the following would you recommend
Bypass Trust
Characteristics of a private annuity
Title to the property is conveyed to the individual responsible for making annuity payments at the time of the transaction
Each payment received by the annuitant is divided into gain, interest income, and a non-taxable recovery of basis.
Grantor Retained Unitrust (GRUT)
The corpus value may be included in the grantor’s gross estate if grantor dies before the end of the term of the GRUT. GRUTs are irrevocable and income needs to be paid out annually with the amount recalculated annually. Due to grantor status, the GRUT will be part of the gross estate if the grantor dies before the end of the trust term.
CRUT
The CRAT but not the CRUT is subject to the probability test
The following is considered a complex trust
A 2503(c) trust
A trust which allows the trustee discretion to distribute or accumulate current income
A trust which allows a beneficiary a limited noncumulative right to demand
Section 2503(b
is a simple trust
Installment sale has which of the following characteristics
Allows pro-rata recognition of profits in the year payments are received.
Has a fixed selling price contractually agreed to by both parties
2503(c) trust
Does not require annual distribution of income
2503(b)
Requires mandatory distribution of income on an annual basis
A testamentary trust
Is created under a Will. The assets in the trust will come from the will and therefore are generally included in the probate estate.
SCINs
A SCIN can give the seller a collateral interest in the property sold.
The following accurately describes the income tax implications of a sale-leaseback using an installment payment method
The transferor may not be able to deduct lease payments made to a family member as ordinary and necessary business expenses.
A fully depreciated property that is transferred by sale-leaseback to a family member can nonetheless be depreciated by the new owner
The transferor of a sale-leaseback may be subject to depreciation recapture in the year of sale
By-pass Trusts
By-pass Trust allows for this income splitting or sharing.
QTIP trust
The spouse must have limited control over the QTIP.
Devon Wright asked if you could help him structure an irrevocable trust. His ultimate goal is to remove the trust corpus from his gross estate while still reporting the income taxes on any income generated by the trust during his life. His best choice of trust to accomplish this is?
A Defective Grantor Trust
QPRT
QPRTs can hold only one residence. You may own 2 QPRTs. The donor retains all tax advantages.
Section 6166
The amount required to use the Section 6166 is that the ownership asset must make up at a minimum of 35% of the estate.
Sec 303 redemptions
Redemption amounts are determined by the payment of death taxes and estate administration taxes and costs.
Fee simple ownership
Is included in probate and is not presumed in community property states.
The following accurately describes Community Property
Is available only to legal and lawful spouses.
Property acquired during marriage by either spouse’s industry is community property.
Community property cannot be transferred without the consent of all community property owners (except at death in some states).
Property acquired by gift or inheritance during marriage is generally not community property.
The Generation Skipping Transfer Tax (GSTT)
A skip beneficiary is generally a person who is two or more generations younger than grantor.
Skip Persons
A natural person assigned to a generation that is two or more generations below the settlor’s generation, or
A trust that meets either of the following conditions:
All interests in the trust are held by skip persons; or
No person holds an interest in the trust, and at no time after the transfer to the trust may a distribution be made to a non-skip person.
Interest
A person holds an interest in the trust if, at the time the determination is made, the person:
Has a current right to receive income or corpus from the trust;
Is a permissible current recipient of income or corpus from the trust (other than charitable entities); or
Is a charitable or other entity described in section 2055(a) and the trust is a charitable remainder annuity trust, a charitable remainder unitrust, or a pooled income fund.
A Qualified Terminable Interest Property (QTIP)
Trust does qualify for the marital deduction. However, the surviving spouse cannot be given a general power of appointment with a QTIP trust
Estate tax return is not required for a U.S. resident alien
An estate tax return is not required for a U.S. resident alien, unless the decedent’s gross estate, plus adjusted taxable gifts, exceeds the applicable exclusion amount ($11,580,000 for 2020)
If a QTIP trust is established
If a QTIP trust is established, the donor will need to file a gift tax return to make a QTIP election.
