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Personal Finance > Estate Planning > Flashcards

Estate Planning Flashcards

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1
Q

Describe

estate planning

A
  • comprises the specific arrangements you make during your lifetime for the administration and distribution of your estate when you die
  • transfer assets in such a way so that they go to your heirs and avoid unnecessary probate costs
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2
Q

Concept

  • comprises the specific arrangements you make during your lifetime for the administration and distribution of your estate when you die
A

estate planning

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3
Q

Concept

includes assets transferred to survivors
* by contract such as by naming a beneficiary for your retirement plan
* by owning assets with another person through joint tenancy with right of ownership

A

nonprobate property

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4
Q

Define

nonprobate property

A

includes assets transferred to survivors
* by contract such as by naming a beneficiary for your retirement plan
* by owning assets with another person through joint tenancy with right of ownership

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5
Q

Fill in the blank

One of the primary benefits of setting up assets as nonprobate property is ____

A

time
* nonprobate property transfers immediately upon your death

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6
Q

Concept

property that transfers immediately upon your death

A

nonprobate property

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7
Q

duration

probate process

A
  • can take 6-12 months if there’s a will
  • can take more than 1 year if there’s no will
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8
Q

Fill in the blank

people sometimes conflate ____ with tax avoidance

A

tax evasion
* tax evasion is illegal
* tax avoidance is legal

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9
Q

list forms of

tax avoidance

A
  • deductions
  • credits
  • adjustments
  • tax sheltering
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10
Q

Describe

401(k)

A
  • income tax is deferred until you retire and start withdrawing the funds
  • no tax is paid on interest, capital gains, and dividends in the meantime
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11
Q

list types of

tax-advantaged accounts

A
  • HSAs
  • FSAs
  • 401(k) plans
  • Roth IRA or traditional IRA
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12
Q

Define

  • HSAs
  • FSAs
A

heath savings accounts and flexible spending accounts for medical costs

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13
Q

Concept

are compulsory financial contributions imposed by a government on its citizens and their property to raise revenue

A

taxes

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14
Q

Define

taxes

A

are compulsory financial contributions imposed by a government on its citizens and their property to raise revenue

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15
Q

Fill in the blank

the federal personal income tax is a ____ tax

A

progressive
* because the tax rate progressively increases as a taxpayer’s taxable income increases

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16
Q

more or less

in a regressive tax scheme, the lower-income households pay proportionately ____ in taxes

A

more
* state sales tax is regressive

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17
Q

Define

marginal tax bracket

A
  • also called marginal tax rate is the rate at which your last dollar of income is taxed.
  • it refers to the highest tax bracket that your taxable income puts you in
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18
Q

Fill in the blank

taxable income brackets are adjusted for inflation to reduce the effects of inflation in a process called ____

A

chained consumer price index

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19
Q

Describe

chained CPI

A
  • used to adjust the tax brackets for inflation
  • accounts for the fact that conumsers make substitutions away from items with higher rising prices toward those that are rising more slowly
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20
Q

Concept

by adjusting for price increase, taxpayers are protected from being forced to pay more taxes as they earn higher incomes purely because of inflation

A

bracket creep

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21
Q

Concept

It is the portion of any extra taxable earnings—from a raise, investment income, or money from a second job—one must pay in income taxes

A

marginal tax rate

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22
Q

Concept

describes a person’s total marginal tax rate on income after adding federal, state, and local incomes taxes

A

effective marginal tax rate

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23
Q

Concept

refers to the average amount of one’s total gross income that is paid in taxes

A

average tax rate

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24
Q

fill in the blank

your average tax rate is always ____ than your marginal tax rate

A

less

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25
Q

number

American millionaires make up ____ of households and received approximately ____ of all the pretax income in the country

A

0.1%; 10%

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26
Q

country with the lowest tax burden among all industrialized nations in the world

A

U.S.

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27
Q

calculation

total income

A
  • add up all sources of income
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28
Q

calculation

gross income

A

total income less any exclusions to income

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29
Q

calculation

adjusted gross income

A

total income
* LESS any exclusions to income
* LESS adjustments

OR
gross income
* LESS adjustments

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30
Q

calculate

taxable income

A

gross income
* LESS adjustments
* LESS IRS’s standard deduction amount for your tax status OR itemized deductions

OR
adjusted gross income
* LESS standard deduction amount
* OR
* LESS itemized deductions

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31
Q

calculate

preliminary tax liability

A

taxable income
* apply tax rate schedule

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32
Q

calculate

final tax liability

A

preliminary tax liability
* apply tax rate schedule
* subtract tax credits

OR
final tax liability
* subtract tax credit

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33
Q

calculate

tax balance owed

A

IF:
* final tax liability LESS amounts withheld is positive –> balance owed
* final tax liability LESS amounts withheld is negative –> refund

34
Q

Concept

For most people, this is derived from active participation in a trade or business, including wages, salary, tips, commissions, and bonuses.

A

earned income

35
Q

Define

earned income

A

is income derived from active participate in a trade or business, including wages, salary, tips, commissions, and bonuses.

36
Q

where is earned income reported

A

Form W-2

37
Q

Concept

is a rise in the value of a capital asset (most any investment) that gives it a higher worth than the purchase price

A

capital gain

38
Q

Describe

capital gain

A
  • is a rise in the value of a capital asset (most any investment) that gives it a higher worth than the purchase price.
  • no tax liability is incurred for any capital gains until the stock, bond, mutual fund, real estate, or other investment is sold
  • capital gains taxes are typically lower than earned income taxes
39
Q

Concept

a sum of money paid regularly (typically quarterly) by a company to its shareholders out of its profits (or reserves)

A

dividends

40
Q

Concept

results when the sale of an asset brings less income than the costs of purchasing and selling the asset

A

capital loss

41
Q

taxation of

dividends

A
  • dividends are normally subject to ordinary income taxes
  • dividends received from a life insurance policy are not taxed because they actually are a refund of your premium
42
Q

Concept

consists of all income (both earned and unearned) received in the form of money, goods, services, and property before exclusions and deductions

A

gross income

43
Q

List

adjustments to gross income

A
  • higher education expenses (up to $4,000)
  • military reservists’ travel expenses (for more than 100 miles)
  • contributions to qualified tax-deferred personal retirement accounts (IRA and 401(k))
  • health savings accounts (up to $3,500 for singles and $7,000 for family coverage)
  • up to $2,700 for FSAs
44
Q

adjustments

HSAs

A
  • up to $3,500 for singles
  • up to $7,000 for family coverage
45
Q

adjustments

education expenses

A

“tuition and fees” up to $4,000

46
Q

alternate names

adjustments

A

above-the-line deductions
* because one subtracts them on the first page of your tax form, just above the last line where you enter your adjusted gross income

47
Q

Concept

is a preset amount of income that all taxpayers can subtract from their adjusted gross income, unless they opt to claim itemized deductions that add up to more than this amount

A

standard deduction

48
Q

Concept

is a preset amount of income that all taxpayers can subtract from their adjusted gross income, unless they opt to claim ____ that add up to more than the standard deduction

A

itemized deductions

49
Q

Concept

is a small business activity carried on in addition to an individual’s full-time employment or principal trade or business

A

sideline business

50
Q

Fill in the blank

Use ____ when filing with IRS Form 1040 to report income or loss from a business you operated or a profession you practiced as a sole proprietor

A

Schedule C

51
Q

deductions

taxes you paid

A
  • real estate taxes
  • personal property taxes
  • state, local, and foreign income taxes
52
Q

deductions

interest you paid

A
  • “Points” treated as a type of prepaid interest on the purchase of a principal residence
  • “Points” paid when refinancing a home mortgage (portion deducted over life of the loan)
  • Private mortgage insurance (PMI) premiums paid
  • interest paid on home-equity loans up to $100,000
  • interest paid on combined total of home loans and home-equity loans up to $750,000 of home acquisition debt incureed to buy, build, or improve your first or second residence
53
Q

deductions

gifts to charity

A

cash donations limited to 60% of AGI
* cash contributions to qualified organizations
* noncash contributions at fair market value
* mileage allowance for travel for charitable work
* charitable contributions made through payroll deduction
* charitable contributions from IRA up to $100,000 for those aged 701/2 or older

54
Q

case study: married couple

A married couple filing jointly
* has gross income of $60,000
* adjustments of $4,700
* itemized deductions of $7,285

A

gross income
* $60,000

AGI
* adjustments: $4,700
* AGI = $55,300

standard deduction for married couple: $24,200
* [($12,200 > $7,285) * 2]

taxable income: $30,900
* $55,300 - 24,400

tax liability: $3,625

55
Q

case study: married couple

A single taxpayer
* has gross income of $76,000
* adjustments of $5,000
* itemized deductions of $8,400

A

gross income
* $76,000

AGI
* adjustments: $5,000
* AGI = $71,000

standard deduction for married couple: $12,200
* [($12,200 > $8,400) * 1]

taxable income: $58,800
* $71,000 - 12,200

tax liability: $6,671

56
Q

Concept

____ may reduce your tax liability to zero, but not below

A

nonrefundable tax credit

57
Q

Concept

____ may reduce your tax liability to below zero

A

refundable tax credit

58
Q

Describe

nonrefundable tax credit

A
  • may reduce your tax liability to zero, but now below
  • if the nonrefundable credit amount exceeds the tax owed, you are not given a refund
59
Q

Describe

refundable tax credit

A
  • can reduce your tax liability to below zero
  • if the credit exceeds the tax owed, you are given a refund
60
Q

Concept

provides through the ACA that individuals and families may take a tax credit to help them afford health insurance coverage

A

HIPTC

61
Q

Concept

provides an up to $2,500 per tax credit to help defray college expenses for the first years of postsecondary education

A

AOTC

62
Q

Concept

  • a partially refundable credit may be claimed every year for tuition and related expenses paid for all years of postsecondary education
  • credit to a maximum of $2,000 for all eligible students in a famliy
A

LLC

63
Q

Concept

Maximum credit is $529 with no qualifying children, $3,526 with one child, $5,828 with two children, and $6,557 with three or more children

A

EITC

64
Q

Concept

up to $13,810 to available for the qualifying costs of an adoption

A

adoption credit

65
Q

Concept

  • support for lower income individuals who are age 65 or older or who are permanently and totally disabled
A

elderly or disabled tax credit

66
Q

Concept

was designed to take back some of the tax breaks allowed for regular tax purposes for very high income taxpayers who previously were escaping paying income taxes through legitimate means

A

alternative minimum tax

67
Q

strategies

reduce income taxes

A
  • practice legal tax avoidance, not tax evasion
  • reduce taxable income via your employer
  • prune taxable investments
  • make tax-sheltered investments
  • defer income
  • accelerate deductions
  • take all of your legal tax deductions
  • shift income to a child and the Kiddie Tax
68
Q

describe

Roth IRA accounts

A
  • contributions of after-tax dollars (up to $6,000 annually) accumulate tax-free and withdrawals are tax-free
  • excellent investment vehicle for people with long-term horizon
  • the real benefit is that any growth in the account is earned tax-free
69
Q

describe

traditional IRA

A
  • tax-deductible amount contributed (up to $6,000 annually) is considered an adjustment to income
  • growth inside the account is tax-sheltered
  • withdrawals are taxed as ordinary income
70
Q

alternate name

qualified tuition programs

A

are known as 529 plans

71
Q

strategy

put your child to work

A
  • a child can contribute up to $19,000 in the company tax-deferred Roth or 401(k)
  • an additional $6,000 in a Roth IRA effectively shelters up to $25,000 per year
72
Q

strategy

government savings bonds

A
  • Series EE and Series I bonds are promissory notes issued by the federal government
  • the income is exempt from state and local taxes
  • you may defer income tax up until maturity
73
Q

strategy

capital gains on housing

A
  • married couples can avoid capital gains of up to $500,000 on the disposition of property; $250,000 if single
  • the home must have been the primary residence for 2 out of 5 years immediately prior to the sale
74
Q

Oliver wants to be sure that his assets are distributed in such a way that they go to his desired heirs. He wants to avoid unnecessary probate court costs and procedures for his heirs.

What does Oliver need to have in place to ensure his wishes are implemented?

Estate plan

Probate plan

Codicil plan

Survivorship plan

A

Estate plan

75
Q

Fatima has named her daughter her beneficiary for her retirement and life insurance accounts.

What are Fatima’s retirement and life insurance accounts considered to be in this situation?

Codicil property

Probate property

Contingent property

Nonprobate property

A

Nonprobate property

76
Q

Sara wants to be sure that her life insurance policy gets paid out to her husband upon her death without going through probate.

What does Sara need to name her husband to ensure this happens?

Contingency

Beneficiary

Probate

Testator

A

Beneficiary

77
Q

Hannah lists her husband as her beneficiary on her retirement account at work. She lists her daughter as the contingent beneficiary.

What does it mean to be a contingent beneficiary?

As a contingent beneficiary, Hannah’s daughter will receive 25% of the retirement account disbursement, and Hannah’s husband will receive 75%.

As a contingent beneficiary, Hannah’s daughter will receive the retirement benefits in the event that Hannah’s husband has preceded her in death.

A contingent beneficiary receives 75% of the retirement account, while Hannah’s husband will receive the remaining 25%.

A contingent beneficiary is a co-beneficiary, so Hannah’s daughter will split the retirement benefits equally.

A

As a contingent beneficiary, Hannah’s daughter will receive the retirement benefits in the event that Hannah’s husband has preceded her in death.

78
Q

Ahmed and Anika share a bank account. They own their home together.

Which transfer by contract would allow one spouse to assume full ownership of the assets upon the death of the other spouse without going through probate?

Joint tenancy with right of survivorship

A will

Payable-on-death designation

Beneficiary

A

joint tenancy with right of survivorship

79
Q

What is the term used for the court-supervised process that allows creditors to present claims against an estate and ensures the transfer of assets to the rightful recipient upon one’s death?

Will

Codicil

Intestate

Probate

A

Probate

80
Q

Talia is the sole owner of her home. In her will, Talia lists that she will leave her house to her daughter.

Which type of property is Talia’s house?

Nonprobate

Joint tenancy

Probate

Payable-on-death

A

Probate

81
Q

Li has a bank account that he wants to leave to his nephew upon his death. Li does not want his nephew to be able to access the funds now. He wants him to be able to access the funds only after his death.

Which type of transfer by contract should Li get to ensure this happens without the account going through probate?

Gift

Joint tenancy

Payable-on-death

Will

A

Payable-on-death

Personal Finance (10 decks)

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