Concepts Flashcards

Question

Netting Capital Gains and Losses

Answer 1

Step 1: * ST capital gains and ST losses are netted * LT capital gains and LT losses are netted Step 2: * If a gain and loss remain, they are again netted Step 3: * If a loss remains after netting capital gains and losses, only $3000 of the net losses can be used to offset ordinary income

Answer 2

**Qualifying:** * Tangible personal property * 1245 Property **Non-Qualifying:** * Real Estate * 1250 Property * Intangible (owning a franchise)

Answer 3

* Historic Rehabilitation programs that are held as passive activity may generate a deduction - equivalent tax credit of up to $25,000. **The benefit of this deduction - equivalent tax credit phases out between $200k- 250k of AGI.** * How does the deduction - equivalent tax credit work? Calculate tax to determine the maximum marginal tax bracket. If it is 25%, for example, then you multiply $25,000 by 25% to get $6,250.

Answer 4

* Low-income housing programs that are held as passive activity may generate a deduction - equivalent tax credit up to $25,000. **There is NO phase out**. * The low income housing credit is allowed annually over a 10 year "credit period." The depreciation is straight-line over 27.5 years. **_How does the credit work?_** For example, multiply 35% by $25,000 to get a credit of $8750. **NOTE**: Because there is no phaseout, it produces a higher credit.

Answer 5

* **Insurance** - Lapse of policy loan, Section 162 life/disability * **Investments** - Zero/Strip Income, TIPS, declared but not paid dividends. * **Tax** - K-1 Income from LP/FLP, recapture * **Retirement** - NUA, 20% withholding plan distributions, secular trust

Answer 6

1. Calculate the maximum deductible - 50% of AGI \*\*Not rure here, but says you must use basis for this\*\* pg 89 Live ITB but Q10 ITP Test. 2. Calculate the eligible amounts given to 50% organizations (public charities) such as all churches, schools, hospitals and organizations such as United Way, Red Cross, Humane Society, etc. 1. 50% for ordinary income property 2. 30% for LTCG property 3. Calculate the eligible amounts given to 30% AGI organizations (private charities) such as private non-operating foundations, war veteran groups, and fraternal orders. 1. 30% for ordinary income propety 2. 20% for LTCG property

Answer 7

* Long-term appreciated property - using FMV deduct up to 30% of AGI * Use-unrelated property, ST capital gain property - using basis deduct up to 50% of AGI

Answer 8

* Medical, dental and LTC (10% AGI) * Casualty and theft losses * Real estate taxes * Investment interest expense * Home mortgage interest * Personal Property tax * State and local income taxes (or sales taxes) * Charitable gifts or contributions * Miscellaneous Deductions * Tier II miscellaneous itemized deductions (exceeding 2% of AGI)

Answer 9

* Fees to investment counselors * Tax advice and preparation fees * Professional and business association dues * Unreimbursed employee business expense * Employee home office expense

Answer 10

All net **UNEARNED** income of a child who has **NOT** attained the age 18 or turns 19-23 if a full-time student and who has at least one parent alive is taxed at the marginal rate of a child's parents regardless of the source of the assets. Children under 18 are entitled (2017) to a standard deduction amount ($1,050) and an additional $1,050 of unearned income will be taxed at the child's rate (10%).

Answer 11

* Net schedule C income * General partnership income (K-1 income) * Board of Directors fees * Part-time earnings (1099) * **NOT** wages or K-1 distributions from an S corp

Answer 12

The taxable wage base will not exceed $127,200 (2017). If you added up the self-employed income, and you exceeded $127,200, you did something wrong. Why? Social Security tax stops at $127,200 (2017). **Shortcut: Multiply self-employment income by 0.1413**

Answer 13

* Realized gain is economic or inherent gain at the time of the transaction. * Recognized gain is the part of the realized gain that is immediately taxable.

Answer 14

1. The basis of property acquired by purchase is equal to cost increased by acquisition (i.e., capitalized) costs, such as legal fees, commissions, sales taxes, freight, etc. 2. The basis of property acquired by inheritance is the fair market value on the date of the decedent’s death or the alternate valuation date if so elected. An asset acquired by inheritance is deemed to be held for the long-term holding period. 3. The basis of property acquired by gift 1. If the FMV on the date of the gift is greater than the donor’s adjusted basis, then use donor’s adjusted basis. 2. If the FMV on the date of the gift is less than the donor’s adjusted basis in the asset, then 1. if sold for less than FMV on date of gift, basis is FMV on the date of the gift 2. if sold for more than the donor’s basis, then basis is the donor’s basis 3. if the sale price of the asset is between the donor’s basis and the FMV on the date of the gift, no gain or loss is recognized—basis is tied to the sale price 4. if donor’s basis is used, the holding period is “tacked”; if FMV is used, there is no tacking of the holding period 4. basis further increased by improvements, but not repairs 1. improvement significantly increases the useful life of, or the value of, the asset involved 2. repair merely maintains the asset in normal working condition

Answer 15

* Cost recovery deductions (CRD) are an allowance for the exhaustion and wear and tear of property used in a trade or business, or held for the production of income. (Can Depreciate) * The modified accelerated cost recovery system (MACRS) applies to all recovery property (not land or intangibles) placed in service after 1986.

Answer 16

* 1231 Gains are LTCG which is better rate than Ordinary Income. * 1231 Losses are Ordinary Income and 100% deductible against income. Ordinarily this would be capital loss and only available to deduct $3,000 for the year with an outstanding Loss Carry Forward. * This law makes it so taxpayers and business owners get the best of both worlds. _Additional Explainations:_ * Broadly speaking, if gains on property fitting Section 1231's definition are more than the adjusted basis and amount of depreciation, the income is counted as capital gains, and as result it is taxed at a lower rate than ordinary income. * When losses are recorded on section 1231 property, however, that loss is classified as an ordinary loss and is 100% deductible against their income. * Ordinarily, if income was qualified as capital gains, so would any losses which can only be deductible up to $3,000 for the tax year, and any losses in excess of that figure would be arrived at in the following year. * This law makes it so taxpayers and business owners _get the best of both worlds._

Answer 17

1231 property, defined by section 1231 of the U.S. Internal Revenue Code, is real or depreciable business property held for over a year. Section 1231 property includes buildings, machinery, land, timber and other natural resources, unharvested crops, cattle, livestock and leaseholds that are at least a year old, but does not include poultry, trademarks, or inventory

Answer 18

* Section 1245 Property is any new or used tangible or intangible personal property that has been or could have been subject to depreciation or amortization. It is Personalty Property. * Examples of tangible personal property are machinery, vehicles, equipment, grain storage bins and silos, blast furnaces, and brick kilns. * Examples of intangible personal property are patents, copyrights and trademarks. * Section 1245 property is NOT land or land improvement, nor its buildings or inherently permanent structures, nor its structural components. * Examples of property that is NOT personal property are land, buildings, walls, garages and HVAC.

Answer 19

Any sales price between the cost basis and the adjusted basis results in Section 1245 gain. **Example of 1231 and 1245 (recapture)** It is best not to consider something a 1231 or a 1245 asset, but rather thinking of the character of the gain/loss. * Say you have a $100 widget which is personal property that was subject to depreciation and now has an adjusted tax basis of $25 because you took $75 of depreciation. * If you sell that widget for $125, you have a $100 gain. Of that $100, $75 is 1245 ordinary gain (recapture of the depreciation taken is 1245 gain), $25 is 1231 LTCG gain or capital gain. * If you sell that widget for $10, you have a $15 loss. That loss is a 1231 ordinary loss _Summary:_ * 1231 loss - the loss on personal property used in a trade or business. there are netting and lookback rules, but net 1231 losses are ordinary losses * 1245 gain (never a loss) - recapture of depreciation to the extent there is gain. 1245 gain is an ordinary gain. * 1231 gain - gain above after depreciation has been fully recaptured. subject to capital gain rates.

Answer 20

The gain attributable to straight-line depreciation on realty is treated as long-term capital gain income (Section 1231 income), subject to a maximum 25% long-term capital gain rate. The gain created by actual appreciation of the realty is “regular” long-term capital gain, generally subject to a 15% or 20% maximum rate (also Section 1231). Any sales price between the cost basis and the adjusted basis results in unrecaptured Section 1250 income. Any gain created by actual appreciation of the realty is “regular” LTCG.

Answer 21

An Example of Section 1250 Applicability Consider an investor who purchased real estate with a useful life of 40 years for a total purchase price of $800,000. After five years, the investor claimed $120,000 in accumulated depreciation expenses using the accelerated depreciation method, resulting in a cost basis of $680,000. * Suppose that the investor sells this property after five years for $750,000, for a total taxable gain of $70,000. Because the accumulated straight-line depreciation is $100,000 (initial price of $800,000 divided by 40 years times five years of use), $20,000 of the actual depreciation that exceeds straight-line depreciation must be taxed as ordinary income, while the remaining $50,000 of the total gain is taxed at applicable capital gains tax rates. The recapture of gain as ordinary income under Section 1250 is limited to the extent of actual gain recorded on a sale of real property. * If the real property in the above example was sold for $690,000, producing a gain of $10,000, only $10,000 would be considered ordinary income, not the excess $20,000.

Answer 22

1. This applies to the sale of personalty that is or has been subject to an allowance for depreciation. 2. Section 1245 also applies to nonresidential real property placed in service after 1980 and before 1987, and depreciated under the ACRS rules. 3. The amount of gain treated as ordinary income on the disposition of Section 1245 property generally is equal to the lesser of: 1. the cost recovery deductions taken, or 2. the gain realized on the sale. 4. If a loss is recognized on the disposition, there is no Section 1245 recapture; the entire loss is treated as a Section 1231 loss. 5. The gain not characterized as Section 1245 recapture is treated as a Section 1231 gain. 6. The gain attributable to the taking of cost recovery deductions is ordinary income; only gain caused by appreciation of the asset is potential long-term capital gain.

Answer 23

1. Losses are never recognized by the taxpayer who qualifies for like-kind exchange treatment. 2. Gain realized is FMV of property received minus A/B of property given up. 3. The gain recognized is always the lesser of the gain realized or the boot received. 4. Basis of the like-kind property received is its fair market value reduced by any gain realized but not recognized. (OR old basis, minus boot received, plus boot paid and gain recognized).

Answer 24

Section 1250 deals with taxing gains at an ordinary tax rate that arises from selling depreciable real property, such as commercial buildings, warehouses, barns, rental properties and their structural components. Personal property, either tangible or intangible, and land do not fall under the scope of this tax regulation. Section 1250 is mainly applicable when a company depreciates its real estate using the accelerated depreciation method, which results in larger deductions in the early life of a real asset, in comparison to the straight-line method. Section 1250 says that if a real property sells for a purchase price that produces a taxable gain, and that property is depreciated using the accelerated depreciation method, the difference between the actual depreciation and the straight-line depreciation is taxed as ordinary income. Because all post-1986 real estate is required to be depreciated using the straight-line method, treatment of gains as ordinary income under Section 1250 is rare. If the property is disposed of as a gift, transferred at death, sold as part of a like-kind exchange, or disposed of through other methods, no possible taxable gain exists.

Answer 25

Section 1250 is a section of the United States Internal Revenue Service Code that states that a gain from selling real property that has been depreciated should be taxed as ordinary income, to the extent that the accumulated depreciation exceeds the depreciation calculated using the *straight-line method.* Section 1250 bases the amount of tax due on the type of property, such as residential or nonresidential property, and on how many months the property was owned.

Answer 26

1. The property to be received must be identified within 45 days after the date on which the old property is transferred. 2. The new property must be received within 180 days after the date on which the old property is transferred, but not later than the due date of the tax return (including extensions) for the year that the old property is transferred. 3. The like-kind provision is mandatory.

Answer 27

Step 1: Figure out the amount of your earnings that is actually taxable for the S/E taxable income Step 2: Calculate the amount you owe for S/E Tax Step 3: Report half of your S/E tas as an adjustment **Ex: S/E of $100K** Step 1: $100,000 x 0.9235 = $92,350 ($92,350 is the S/E Taxable Earnings/Income - we times it by 92.35% because 7.65% is the ER half of FICA tax Step 2: $92,350 x 0.1530 = $14,129.55 (we times it by 15.30% becuase this is the OASDI HI or FICA amount) Step 3: $14,129.55 x 0.50 = $7,064.78 (this is the 1/2 S/E amount you can deduct Above the Line for AGI) **Shortcut is to multiply $100,000 x .1413 = 14,130**

Answer 28

Income from a publicly traded limited partnership may not be offset by any other passive losses.

Answer 29

Ex: Equipment purchase is $620K Net Income is $220K The Section 179 deduction is subject to a taxable (earned) income limitation. However, for this purpose, wages received (even from a completely unrelated source) are considered to be from the active conduct of a trade or business. With only $220,000 of earned income, only $220,000 may be deducted under Section 179.

Answer 30

No, it is not considered to be SE employment income so we do not have to calculate the SE tax. Yes, S/P net income is considered employment income so you do have to calculate the SE tax and you can take the short cut by multiplying by 0.1413

Answer 31

* Defined Benefit * Cash Balance * Money Purchase * Target Benefit * Profit Sharing * Profit Sharing 401(k) * Stock Bonus * ESOP (**NOT** integrated with Social Security or cross-tested) http://www.pensioncon.com/plantypes.php

Answer 32

* SEP * SIMPLE * SAR-SEP * Thrift or Savings Plans (TSP - Federal EE's and Military) * 403(b) (Public Schools and some Non-Profits)

Answer 33

* Mandatory contributopm of up to 25% employer payroll and can deduct same 25%. * Fixed contributions - need stable cash flow * Maximum annual contribution **lesser** of 100% or salary of $54k (2017) * No acutuarial determination in this plan In money purchase plans, the employer is obligated to contribute even if the company didn't make a profit. The contributions are determined by a specific percentage of each employee's compensation and must be made annually. Although a younger and an older employee with the same level of compensation will receive the same allocation, the long-term accumulation of tax-sheltered funds will **benefit younger employees** more than older employees. A money-purchase pension plan is a pension plan to which employers and employees make contributions based on a percentage of annual earnings, in accordance with the terms of the plan. Upon retirement, the total pool of capital in the member's account can be used to purchase a lifetime annuity. The amount in each money-purchase plan member's account differs from one member to the next, depending on the level of contributions and the investment return earned on such contributions.

Answer 34

* Up to 25% employer deduction * Fixed contributions - need stable cash flow * Maximum annual contribution less of 100% of salary or $54k (2017) * Favors older workers - How? The Target Benefit Plan, which is an age-weighted pension plan. Under this plan, each employee is targeted to receive the same formula of benefit at retirement (age sixty-five), but the benefits are not guaranteed. Because older employees have less time to accumulate the funds for retirement, they receive a larger contribution as a percentage of compensation than the younger employees do. The target plan is a hybrid of defined benefits and defined contribution plans, but it is a defined contribution pension plan with the same limits and requirements as defined contribution plans. One such defined contribution plan is the target plan, which is an age-weighted pension plan. Under this plan, each employee is targeted to receive the same formula of benefit at retirement (age sixty-five), but the benefits are not guaranteed. Because older employees have less time to accumulate the funds for retirement, they receive a larger contribution as a percentage of compensation than the younger employees do. The target plan is a hybrid of defined benefits and defined contribution plans, but it is a defined contribution pension plan with the same limits and requirements as defined contribution plans.

Answer 35

A safe harbor 401(k) plan automatically satisfies the nondiscrimination tests involving highly compensated employees (HCEs) with either an employer matching contribution or a nonelective contribution.

Answer 36

The statutory contribution using a match is $1/$1 on the first 3% employee deferral ***and*** $0.50/$1 on the next 2% employee deferral. If the employer chooses to use the nonelective deferral method, the employer must contribute 3% of all eligible employees' compensation regardless of whether the employee is deferring or not. Employer contributions must be immediately vested.

Answer 37

* Fewer than 100 employees * Employer cannot maintain any other plan * Participants fully vested * Easy to administer and funded by employee salary reductions and an employer match

Answer 38

**_Fast: DB Top-heavy Plans / All DC Plans_** * 3 - year cliff or 2-6 year graded or 100% vested after 2 years **_Slow: Non-top-heavy DB Plans only_** * 5 - year cliff or 3-7 year graded or 100% vested after 2 years

Answer 39

* Death * Disability * Substantially equal periodic payments * Medical expenses in excess of 10% of AGI or health insurance costs while unemployed * First home expense up to $10,000 * Qualified education expense * **Distribution used to pay insurance premium after separation from employment (must have received unemployment compensation for 12 weeks)**

Answer 40

1. Any contributions (not conversions) are withdrawn first 2. Conversions are withdrawn second 3. Earnings are withdrawn last

Answer 41

RMDs for Roth IRAs only required after Death of original owner * Distributed within 5 years of owner's death or * Distributed over the life expectancy of the designated beneficiary with distributions commencing prior to the end of the calendar year following death (stretch) * Where the sole beneficiary is the owner's surviving spouse, the spouse may delay distributions until the Roth owner would have reached 70½, or may treat the Roth as his or her own (roll it to her/her Roth)

Answer 42

* **Key Words** - merger, acquisition or change of ownership * Assets in rabbi trust available for company's creditors * Fear that ownership / management may change before deferred compensation is paid * Irrevocable Trust set aside for the benefit of the EE * Contributions to trust are not currently taxable to EE if the Trust does not contain financial triggers and is not located "offshore". The assets of a rabbi trust must be available to the employer's creditors, and cannot have "insolvency triggers" that would accelerate payment to the participants in the event that the employer's net worth fell below a certain point. In the event that the employer faced bankruptcy or a financial hardship, the trustee must be notified. The trust's assets are then frozen so that the assets will be available to the employer's creditors. Due to Section 409A, an offshore rabbi trust will result in immediate taxation of the benefits, interest at the underpayment rate plus 1%, and a 20% penalty tax.

Answer 43

* Younger employees, * short-service employees, * employees in lower-pay brackets, * employees who quit after medium lengths of service are those who will benefit most from profit-sharing plans.

Answer 44

* qualified defined benefit plan that provides specified employer contributions and a guaranteed return into a hypothetical account. * **Favors Younger Employees. Uses Career Average Pay ONLY.** * The cash-balance plan credits your account with a set percentage of your salary each year. * Another key difference: If you leave the company before retirement age, you may take the contents of your cash-balance plan as a lump sum and roll it into an IRA. A traditional pension isn’t portable.

Answer 45

* guaranteed benefit * quasi money purchase plan with guaranteed return * Defined benefit plan can be AMENDED into a cash balance plan to simplify and reduce costs. (When this is done, the company can keep the same vesting schedule and amounts in the new plan. In other words, all participants in the defined benefit plan would not be automatically 100% vested because of the defined benefit pension plan termination.)

Answer 46

Similar to a pension plan and a 401(k) combined. You have ER guaranteed returns (5% + 3%) in a hypothetical account for each EE. Account builds and at retirement can take an annuity on the account balance. The account is Portable. * Cash balance pension plans are defined benefit plans that appear similar to defined contribution plans. * Instead of guaranteeing Retirement Benefit * Cash balance plans are defined benefit (DB) plans * Maximum annual benefit is limited to the amount that will fund a benefit of $215,000 a year in retirement in 2017, or if compensation is less, 100% of compensation. * Only up to $270,000 in compensation can be used when calculating this benefit. * Actuarial services are required annually. * The employer guarantees the specified investment result. Usually fixed percentage (5%) + interest credit (3%). * The cash balance plan does NOT provide an amount of benefit that will be available for the employee at retirement. Rather.... * Instead, the cash balance plan sets up a "**hypothetical individual account"** for each employee, and credits each participant annually with a plan contribution (usually a percentage of compensation). * The employer also guarantees a minimum interest credit on the account balance. For example, an employer might contribute 10 percent of an employee’s salary to the employee’s plan each year and guarantee a minimum rate of return of 4 percent on the fund. In a typical cash balance plan, a participant's account is credited each year with a "pay credit" (such as 5 percent of compensation from his or her employer) and an "interest credit" (either a fixed rate or a variable rate that is linked to an index such as the one-year treasury bill rate). Increases and decreases in the value of the plan's investments do not directly affect the benefit amounts promised to participants. Thus, the investment risks are borne solely by the employer. When a participant becomes entitled to receive benefits under a cash balance plan, the benefits that are received are defined in terms of an account balance. For example, assume that a participant has an account balance of $100,000 when he or she reaches age 65. If the participant decides to retire at that time, he or she would have the right to an annuity based on that account balance. Such an annuity might be approximately $8500 per year for life. In many cash balance plans, however, the participant could instead choose (with consent from his or her spouse) to take a lump sum benefit equal to the $100,000 account balance. If a participant receives a lump sum distribution, that distribution generally can be rolled over into an IRA or to another employer's plan if that plan accepts rollovers. The benefits in most cash balance plans, as in most traditional defined benefit plans, are protected, within certain limitations, by federal insurance provided through the Pension Benefit Guaranty Corporation.

Answer 47

* Employer contributions are limited to up to 25% of covered payroll up to $54,000 per participant. * Forfeitures may be reallocated to remaining participants’ accounts or applied to reduce employer contributions. * Subject to minimum funding standards * \*\*Allocation of employer (ER) contributions is based on **age-weighted formula.** * \*\*Actuary is used for the first year of the plan only.

Answer 48

* An age-weighted profit sharing plan provides the same potential benefit as the target benefit plan; however, the age-weighted profit sharing plan is not subject to mandatory funding.

Answer 49

* 401(k) provision allows for pre-tax EE deferrals. * Prior to the enactment of 401(k) provisions in 1981, employees could only make after-tax contributions—this was called a **Thrift Plan**. * The IRS issued proposed regulations on 401(k) plans that sanctioned the use of employee salary reductions as a source of retirement plan contributions. Many employers replaced older, after-tax thrift plans with 401(k)s and added 401(k) options to profit-sharing and stock bonus plans.

Answer 50

* Relatively simple to explain and install * Annual contributions generally in favor of **older**, **highly paid participants.**

Answer 51

* Mandatory annual contributions * Limits employer’s tax deduction

Answer 52

* 25% employer deduction limit * Employer contributions usually are discretionary, but must be “substantial and recurring” * Forfeitures usually are reallocated to remaining participants’ accounts

Answer 53

DB Plans Provide **specified** retirement benefit Defined Benefit Pension Plan Cash Balance Pension Plan

Answer 54

DC Plans Provide an **uncertain** retirement benefit PSP (PSP) Money Purchase (PP) Target Benefit (PP)

Answer 55

They are subject to Minimum Funding Standards DBPP CBPP MPPP TBPP

Answer 56

A money purchase plan or money purchase pension is a type of defined contribution retirement plan offered by some employers. **Money purchase plans are like other defined contribution plans**, such as 401(k) and 403(b) plans, in that **both the employer and employee make contributions to the plan**. **EE** **makes** **after-tax contributions** into plan. What makes money purchase plans different is that they **require fixed employer contributions**. That means that employers must contribute a fixed percentage of each eligible employee's salary annually to their separate retirement accounts. Money purchase plans are similar to profit-sharing plans, but with a profit-sharing plan, the employer can determine each year how much will be distributed to employees. Instead of a fixed percentage of salary, a profit-sharing employer could decide to share a fixed amount of profit, and distribute it to employees each year as a percentage of salary. For employers, money purchase plans make budgeting and planning for contributions easier, while profit-sharing plans offer more flexibility in less profitable years. A money purchase pension plan is a type of qualified defined contribution plan in which you, the ER, make annual required contributions to the accounts of participating EE's. The amount of your employer contributions is generally determined based on a preset formula that cannot be changed without amending the plan, even if your business profits are low or nonexistent. A money purchase pension plan is very similar to a profit-sharing plan. In fact, the two plans are so similar that each type of plan is specifically required to identify itself as either a "money purchase pension plan" or a "profit-sharing plan" in the plan document. The most significant distinction between the two types of plans is the MPPP mandatory fixed contribution formula (in contrast, contributions to a profit-sharing plan are generally discretionary). According to the Internal Revenue Service, a money purchase retirement plan is a defined contribution plan into which the employer is required to contribute money. The plan prescribes the contribution percentage that the employer is required to make and the employer makes the contribution, typically annually, to a separate account for each eligible employee based on the employee's pay. Like a defined benefit pension plan, a money purchase plan is subject to the minimum funding requirements and the qualified joint and survivor annuity requirements. Like a defined contribution plan, a money purchase plan is subject to the annual limit on contributions to the plan and the annual valuation of plan assets. This duality of requirements significantly affects the design of money purchase plans. Although a younger and an older employee with the same level of compensation will receive the same allocation, the long-term accumulation of tax-sheltered funds will benefit younger employees more than older employees.

Answer 57

* A Keogh plan is a tax-deferred pension plan available to self-employed individuals or unincorporated businesses for retirement purposes. It can be set up by small businesses that are structured as LLCs, sole proprietorships or partnerships. * A Keogh plan can be set up as either a _defined-benefit_ or _defined-contribution_ plan, although most plans are defined as contributions. * A Keogh is similar to a 401(k) for very small businesses, but the annual contribution limits are higher than 401(k) limits. $54K for 2017.

Answer 58

Integrated with Social Security aka 'premitted disparity' * A company retirement plan may take into consideration Social Security when allocating an employer contribution to eligible employees. * Because Social Security is only paid on compensation up to a certain dollar amount, any employee with compensation over the Social Security Taxable Wage Base (TWB) will receive a large allocation of the employer contribution allocated in the company retirement plan to account for this. * The TWB for 2017 is $127,200.

Answer 59

In addition to that broad discretion, IRS rules also allow a variety of methods to determine what portion of the total contribution goes to each plan participant. Each of these allocation methods can be combined with 401(k) features, matching contributions, etc. to achieve an overall design customized for each company’s needs. 1. Salary Proportional Method aka Pro-Rata 2. Permitted Disparity Method aka Social Security Integration 3. New Comparability Method aka Cross-Tested 4. Age Weighted Method (TBPP) 5. Service Based Method

Answer 60

The _Permitted Disparity Method_, aka as _Social Security Integration_, recognizes that Social Security benefits are only provided on an individual's compensation up to the Social Security Wage Base ($127,200 for 2017) and allows additional plan contributions on pay exceeding that level (referred to as Excess Compensation). The contribution is calculated in two steps: Step 1. A uniform percentage of total base pay is allocated to all eligible participants. This is referred to as the base percentage. Step 2. A uniform percentage of Excess Compensation is allocated to all eligible participants who have such pay. The excess percentage cannot exceed the lesser of the base percentage or 5.7%. It is possible to integrate the allocation at a level below the Social Security Wage Base; however, doing so often results in a reduction of the maximum excess contribution percentage.

Answer 61

Under the Age-Weighted method, the employer’s profit sharing contribution is allocated in a manner that considers both the participant’s age and compensation. Using one of the mandated mortality tables and interest rates, points are allocated to each participant based on age. The ratio of a participant’s points to the total points of all participants determines the participant’s percent of the overall profit sharing contribution.

Answer 62

A profit sharing contribution must demonstrate non-discrimination in either the form of allocations or benefits. Giving all participants the same percentage of pay as an allocation is clearly non-discriminatory. However, giving each participant the same theoretical retirement benefit is also non-discriminatory and the present-day allocations required to generate these benefits may not be equal. This is because older participants have less time to retirement, and thus require larger allocations to reach the same benefit level. Certain design-based safe harbor allocation methods like the _Salary Ratio and Social Security Integration (permitted disparity) methods_ are deemed to be non-discriminatory. Non-safe harbor allocation methods like the _Age-Weighted and New Comparability (Cross Tested) methods_ must demonstrate non-discrimination by passing the General Test on either an allocations basis or on a benefits basis. When an allocation method passes the General Test on a benefits basis, this is known as Cross-Testing.

Answer 63

Hardship W/D for QP and NQP How to set up the Problem for how much of an IRA we can deduct when we are investing in a QP?

Answer 64

Yes, you are taxed at your income tax rate and there is a 10% penatly but you can only access your deferrals.

Answer 65

The participant must exhaust other "reasonably available" resources. Examples of the required "immediate and heavy financial need" include: * college tuition expenses * medical expenses * purchase of a primary residence * prevention of eviction from a primary residence Hardship withdrawals may consist of the participant's elective deferrals only, not earnings associated with these deferrals. * If the participant is under age 59 1/2, the withdrawal is subject to the 10% early withdrawal penalty.

Answer 66

Qualified employee discounts and health and accident insurance are the only listed employee benefits that are nontaxable to the employee.

Answer 67

Yes, Withdrawals can be taken from an IRA penalty free if used for qualified education expenses but you will have to pay regular taxes on the distribution.

Answer 68

Yes, Withdrawals can be taken from a Roth IRA penalty free if used for qualified education expenses and the distribution is tax free as long as you take less than the amount contributed.

Answer 69

Yes, but it would have to be in the form of a loan. You can not take a distribution or you will be taxed.

Answer 70

Integration with Social Security and permitted disparity. The purpose of integration is to equalize the employer’s contributions (to a qualified plan and Social Security) regarding retirement benefits for higher- and lower-paid employees. Without integration, the disparity is that the employer contributes a higher percentage of compensation for lower-paid employees. The net result is to lower the cost for rank-and-file employees while maintaining the same level of contribution (cost) for more highly paid employees (typically owners). Permitted disparity is the lesser of the base contribution percentage or 5.7%.

Answer 71

The NHCE benefiting from the plan must be at least 70% of the HCE's. Ex. 1,000 EE's 100 HCE 900 NHCE If 90% of the highly compensated employees benefit from the plan (90/100 = 90%). Therefore, at least 63% of nonhighly compensated employees must benefit from the plan (90% × 70% = 63%). With 900 eligible nonhighly compensated employees, 567 must participate (900 × 63% = 567).

Answer 72

_HCE:_ * A greater than 5% owner * OR * An employee earning in excess of $120,000 during the preceding year (2016) _Key Employee:_ An individual is a key employee if at any time during the current year he/she has been one of the following * A greater than 5% owner or * An officer and compensation \> $170,000 (2017) or * Greater than 1% ownership and compensation \> $150,000 (2017)

Answer 73

* Property subject to a general power will be included in a donee decedent's estate (or considered a taxable gift" only to the extent that the property exceeds the greater of: 1. $5,000 or 2. 5% of the total value of the fund subject to the power as measured at the time of lapse

Answer 74

* Simple trusts (2503(b), Marital, QTIP) are considered merely a "conduit" for forwarding income to the beneficiaries (pass-through) * Complex trusts (2503(c)), are separate tax entities and taxed as such if it meets two requirements: 1. It is irrevocable, and the grantor has not retained any control 2. Income is accumulated

Answer 75

* Property transferred to the trust at the time of the decedent's death * Can be structured to provide a stream of income to surviving spouse or other individuals * **Decedent has postmortem control**

Answer 76

* Provides surviving spouse with a stream of income for life, but decedent has postmortem control of trust property * Property qualifies for marital deduction * Mainly used for second marriages * Key word for QTIP - LAME * **_L_**ifetime income for the spouse * **_A_**nnual payments to spouse * **_M_**andatory payments to spouse * **_E_**xclusively for spouse

Answer 77

* **No unlimited marital deduction** * However, no estate tax due * Jointly held property between spouses is not considered one-half owned * Limited gift between spouses of only 100K (indexed) per year

Answer 78

**Remember: PIGS need income** * **_P_**rivate annuity * **_I_**nstallment Sale * **_G_**rantor Annuity Trusts (GRAT/GRUT) * **_S_**elf canceling installment note (SCIN)

Answer 79

* Partnership / S-corp * Family Limited Partnership (FLP) * Gift Leaseback * Qualified Personal Residence Trust (QPRT)

Answer 80

**_Stock Redemption (Section 303)_**: 1. Business must be incorporated (closely held) 2. Value of business must exceed 35% of the decedent's adjusted gross estate 3. Redemption cannot exceed the sum of the estate taxes plus administrative expenses **_Installment payment of estate taxes (Section 6166)_**: 1. Value of business must exceed 35% of decedent's adjusted gross estate 2. During the first 4 years (of 14 years) can pay interest only on taxes due

Answer 81

**_Special Use Valuation (Section 2032A)_**: 1. 25% of the gross estate consists of real property 2. Must be in qualified use: 5-out-of-8 year rule before death and 10 years after death.

Answer 82

_Transfer sections:_ 1. a. Property gifted by decedent is included in the gross estate if the decedent retained rights with respect to the property, including: 1. (1) the right to use or receive income from the property (§2036) 2. (2) the right to designate the persons who shall possess or enjoy the property or the income therefrom (§2036) 3. (3) the right to vote stock in a controlled corporation (§2036) 4. (4) a right of reversion in the property (§2037) 5. (5) the right to alter, amend, terminate, or revoke disposition of the property (§2038) 6. (6) the right to affect the time or manner of enjoyment of the property or its income by others (§2038)

Answer 83

1. _1. Three-year inclusionary rule (§2035)_ 1. a. There are only three situations in which property must be included in the gross estate of a decedent because of an action taken within three years of death: 1. (1) paid gift taxes out of pocket on gifts made within three years of death (the “gross up” rule) 2. (2) transferred incidents of ownership on a life insurance policy on his or her own life 3. (3) released a retained right mentioned in the transfer sections of the Code (§§2036–2038)

Answer 84

Used for large block of publicly traded stock that cannot be marketed without adversely affecting the price

Answer 85

Inability of closely held business interest to control business decisions

Answer 86

Real estate that has impaired marketability because estate cannot sell its partial interest or purchase co-owner’s partial interest

Answer 87

Loss of person who is vital to business operations

Answer 88

Restrictions on marketability and costs of taking public a closely held business

Answer 89

1. Tax on transfer of wealth (during life or at death) to persons who are deemed to be two or more generations younger than the transferor 2. GSTT _in addition to_ any gift or estate tax due on the transfer 3. Taxed at top regular estate tax rate for year of transfer

Answer 90

* _Lineal Relatives_ - The Transferee is two or more generations younger than the Transferor. Grandchild or great grandchild. * _Non Lineal Relatives_ - Someone who is 37.5 years younger than the Transferor.

Answer 91

* Transferee who is deemed to be less than two generations younger than the transferor or the transferor's spouse. Like a child or nephew of the Transferor. * Transferor's spouse or former spouse is always considered a non-skip person regardess of age difference with the transferor.

Answer 92

* Spouses * Ex-Spouses * Charities * Transfers that qualify for the annual exclusion * Direct Payments to Medical and Educaitonal providers

Answer 93

Let’s say son dies and the grandfather transfers assets to the grandson, then the grandson would move into the son’s slot and there would be no GSTT due to the deceased ancenstor rule.

Answer 94

* GSTT is in addition to any estate of gift tax due. * Annual exclusion available for present interest gifts. * GSTT exemption is $5,490,000 in 2017. * Gift Splitting allowed for spouses. * Direct payment to educational and medical providers are exempt. * Flat tax rate of 40% at Gift and Estate Level and a 40% at the GSTT level.

Answer 95

* Provides surviving spouse with a stream of income for life, but decedent has postmortem control of trust property * Property qualifies for marital deduction * Mainly used for second marriages * Key word for QTIP - LAME * **_L_**ifetime income for the spouse * **_A_**nnual payments to spouse * **_M_**andatory payments to spouse * **_E_**xclusively for spouse

Answer 96

(1) Substantial risk of forfeiture is necessary to prevent constructive receipt in certain plans. (2) Substantial risk of forfeiture generally requires the employee's actual performance of services. (3) Substantial risk of forfeiture is _not necessary in an unfunded_ plan that is executed prior to the performance of services. (4) Substantial risk of forfeiture provisions _are generally necessary only in funded plans_ to prevent constructive receipt.