Exam Review Flashcards
1
Q
IR CODE for: Any transfer of property between spouses during marriage or any transfer of property between spouses (or former spouses if it is incident to a divorce) is tax-free. No gain or loss is recognized, and for income tax purposes, the transferee’s basis and holding period in the property is the adjusted basis and holding period of the transferor.
A
IRC 1041
2
Q
Under IRC ______: No gain or loss is recognized on transfers of property during marriage. This rule covers transfers at any time during marriage, whether or not the spouses are contemplating a divorce for the spouse.
A
1041
3
Q
Under IRC 1041: A transfer of property is incident to a divorce if:
A
a) The transfer occurs within one year after the divorce, or
b) The transfer is pursuant to the divorce decree, and
c) The transfer occurs not more than six years after the divorce [Treas. Reg. § 1.1041-1T, Q7].
4
Q
The two major exceptions to the non-recognition rule:
A
1) It does not apply if one spouse is a nonresident alien; and
2) It does not apply to a transfer of services.
5
Q
Expensing election recapture: The owner may elect to deduct the cost (expense) of certain types of trade or business property in the year the property is purchased, subject to certain limitations based upon the cost of the property and trade or business income [IRC _____].
A
IRC §179: Expensing election recapture
6
Q
What is IRC 6015?
A
Innocent Spouse Rule
7
Q
What is IRC 32?
A
Earned Income Tax Credit
8
Q
What is IRC 71?
A
Alimony Rules Pre-2019: This section of the IRS Code states that alimony and separate maintenance payments are generally taxable to the recipient and deductible from gross income by the payor.
9
Q
This section of the IRS Code allows the alternate payee to receive
money from a qualified plan, pursuant to a QDRO, without having to
pay a 10% tax penalty. The distribution would still be subject to
ordinary income tax and the custodian must withhold 20%
A
IRC 72(t)2(c)
10
Q
This section of the IRS Code states that a spouse is considered abandoned when all of the following conditions are met:
- The abandoned spouse pays more than half the cost of maintaining his/her household for the taxable year.
- The individual files a separate tax return.
- The individual’s household is the principal home of a dependent child for more than six months of the tax year and the individual is entitled to claim the dependency exemption (even if no claim is made).
- The individual lives in a residence separate from his/her spouse for the last six months of the tax year.
A
Abandoned Spouse Rule
11
Q
If you receive a pension from government employment that was not
covered by Social Security, then any Social Security benefits you receive based on your spouse’s Social Security contributions (either as a spouse, widow, or widower) will be reduced by ___(a)____ of your government pension. Thus, the social security benefit is reduced _(b)__ for every ___(c)___ of the government pension.
This is called ____(d)____.
A
a) 2/3
b) $2
c) $3
d) Social Security Offset
12
Q
Determining Present Value at age 65 formula: Using:
PMT: Monthly payments
n: Number of years between 65 to life expectancy x12
i: interest rate / 12
FV: 0 (enter 0 for the parameter you are not solving)
A
FPV = PMT [1- (1 + i)^n / i]
13
Q
Pension Present Value Formula
A
The amount needed to fund the payments = FV
FV = answer from above I = interest rate (do not use inflation adj.) PMT = 0 N= number of years until age 65 PV = the present value
14
Q
1 + discount rate / 1 + inflation rate - 1 x 100 = ____________
A
Inflation Adjusted Interest Rate
15
Q
Recapture: Generally, if the payor spouse wants to deduct spousal support in excess of __(a)___ without being subject to recapture, the payments must last for at least __(b)__ years and they may not decrease by more than __(a)__ over the first __(b)__ post-separation years.
A
a) $15,000
b) 3 years
16
Q
The reason for recapture is to
A
prevent funds that would be part of a property settlement to be disguised as alimony to transfer the income taxation from the payor spouse to the payee.
17
Q
What are the two recapture exceptions:
A
1) Either spouse dies before the end of the third post-separation year or the spouse entitled to receive the payments remarries before the end of the third post separation year [IRC § 71(f)(5)(A)(i & ii)].
2) The payment amount fluctuates for reasons not within the control of the payor spouse. For example, the payments may be a fixed percentage of income from a business or property or from compensation for employment [IRC § 71(f)(5)(C)].
18
Q
Recapture steps: (3)
A
Step 1: Determine the second year recapture amount.
(Calculation: (spousal support paid in second year – spousal support paid in third year) –$15,000 = recapture amount)
Step 2: Adjust second year spousal support for recapture calculation.
(Calculation: Second year actual payment – second year recapture amount = second year adjusted amount)
Step 3: Determine the third year recapture amount.
(Spousal support paid in first year - Average paid in second and third year - $15,000 = Third year recapture amount)
19
Q
Social Security Rate
A
- 2% for employee
- 2% for employer
- 4% for self employed
20
Q
Medicare Tax Rate
A
1.45%
21
Q
SS income cut off
A
2021: $142,800
2022: $147,000
22
Q
A person who helps prepare witnesses, improve arguments and rhetoric, and select juries is considered a ______________.
A
A Trial Consultant
23
Q
What states recognize common law marriage? (11)
```
Hint
T.O.RI
SC.K.I.M
C.U.DC.
NH
~~~
A
T.O.RI Texas, Oklahoma, Rhode Island SC.K.I.M South Carolina, Kansas, Iowa, Montana C.U.DC. Colorado, Utah, DC NH New Hampshire (for inheritance purposes only)
24
Q
In a divorce settlement, what mistake is commonly made by financial professionals without proper training?
A
Considering only an equal division of property
25
Jacob is divorcing his wife, Andrea. Jacob has hired Michelle, a CDFA professional, to work on his divorce case. Who's financial information would it be appropriate for the CDFA to analyze?
Michelle will need to analyze the financial information for both Jacob and Andrea.
26
A ________________ is an individual who has been trained to assist people in coming to an agreement as a neutral 3rd party.
Mediator
27
What impact have the “no-fault” divorce laws had on divorces in the United States?
An increase in the number of divorces
28
From a client’s perspective and without regard to the cost, at which of the following times should an individual hire a CDFA professional?
When considering getting a divorce
29
An individual who is trained to calculate statistically risks, premiums, and life expectancies for insurance and pension plans is referred to as a/an _______________.
Actuary
30
What is the correct sequence of your courtroom appearance as an expert?
Voir dire, direct examination, cross-examination, redirect examination
31
How does an expert witness get qualified?
The lawyers can stipulate that a witness is qualified as an expert.
32
During which segment of the trial will the attorney give an expert witness the chance to elaborate on answers given to opposing counsel?
Redirect examination
33
What is the correct sequence of the four basic steps of direct examination?
Explain assignment, explain procedures and assumptions, summarize work, and admit exhibits.
34
For what is a temporary order used?
To provide support for the family while permanent orders are pending
35
The term defined as a court order requiring a person's appearance in court or at a deposition?
Subpoena
36
During cross-examination, what action should the expert witness take if the client’s attorney objects?
Refrain from answering the question until the judge rules on the objection.
37
Which form of alternative dispute resolution (ADR) utilizes a decision maker to make a binding decision for the parties?
Arbitration
38
On cross-examination, what action should the expert witness take when he or she does not understand the question?
Ask to have the question repeated.
39
What should an expert witness bring to the witness stand?
Only those documents essential to the case
40
When do depositions usually occur?
After the close of discovery
41
What should the expert witness do during cross-examination?
Limit his or her answer to the narrow question asked.
42
Tom is paid every other week and has a gross salary of $1,800. His deductions include a federal tax deduction of $201, state tax deduction of $77, Social Security deduction of $111.60, and Medicare deduction of $26.10. Assuming Tom’s federal and state tax deductions are correct, what is Tom’s net monthly income?
$2,999.32
The net income was calculated as if Tom was paid twice a month with 24 pay periods, but he has 26 pay periods. His deductions for the period total $415.70, leaving a net income of $1,384.30. $1,384.30 multiplied by 26 then divided by 12 equals $2,999.32.
43
Assume that Blake’s annual wages are $144,000 and he contributes $16,500 to his 401(k). Blake paid the following expenses: $5,760 for state and local taxes, $3,600 for real estate taxes, $8,600 for interest paid on his home mortgage, and $1,400 for donations. Assuming Blake files as a single person, how much is his federal income tax?
$20,033.10
```
Gross Wages $144,000
-
401(k) $16,500
-
State and Local $5,760
-
Real Estate Taxes $3,600
-
Mortgage Interest $8,600
-
Donations $1,400
=
```
Taxable Income = $108,140
Income Tax = $20,033.10
44
Bob earns $180,000 per year and his limit on Social Security withholding is $132,900. What is his Medicare tax deduction per month?
$217.50
All wages are subject to Medicare tax at a rate of 1.45%. The correct answer is $2,610 divided by 12 or $217.50.
45
Buddy earns $17,660 per month with take-home pay of $14,600 per month. His wife Selena is asking for $6,900 per month in combined child support and spousal support because that is her actual budget for herself and their three small children. If Selena is your client, which of the following actions should you take for her?
Show her the financial impact of the support she is requesting.
A CDFA professional’s role is to take the information provided by his or her clients and their attorneys, analyze the proposals, and then show them the results. In this case, the CDFA professional should show Selena the financial impact of the support that she is requesting.
46
What is the key document that is used to collect financial data pursuant to a divorce?
Financial Affidavit
47
Doug's gross wages are $360,000 per year, and he is paid monthly. If he multiples his withholding from his January 31 paycheck by 12 to calculate the annual deductions, why would these calculations be wrong?
Social Security tax is not calculated on all wages.
48
Assume that Blake’s annual wages are $144,000 and he contributes $16,500 to his 401(k). Blake paid the following expenses: $5,760 for state and local taxes, $3,600 for real estate taxes, $8,600 for interest paid on his home mortgage, and $1,400 for donations. Assuming Blake files as a single person, how much is his federal taxable income?
$108,140
All items are tax deductible.
49
Mary is paid every other week and has a gross salary of $1,800. Her deductions include a federal tax deduction of $201, state tax deduction of $77, Social Security deduction of $111.60, and Medicare deduction of $26.10. Assuming Mary’s federal and state tax deductions are correct, what is Mary’s correct gross income per month?
$3,900
Mary is paid bi-weekly and therefore has 26 pay periods per year. You must multiply $1,800 by 26 pay periods and divide by 12 to get the correct answer.
50
Randy is paid monthly and has a gross pay of $12,500. On Schedule A—Itemized Deductions of his tax return, he lists deductions of $6,397 for state and local taxes, $2,200 for real estate taxes, $5,000 towards the principal on his home mortgage, and $7,800 for interest paid on his home mortgage. In addition, he has contributed $16,500 from his gross income to his 401(k). What are Randy’s total itemized deductions?
$16,397
Randy’s 401(k) contributions and payment on mortgage principal are not itemized deductions. See the calculations below.
51
Marsha is paid monthly and her paystub shows gross pay of $12,000. Her payroll deductions are listed as $2,280 for federal tax, $450 for state tax, $744 for Social Security, $174 for Medicare, $1,375 for her 401(k), and $500 to buy U.S. savings bonds. Assume that Marsha’s federal and state taxes are correct. What should she report as her monthly net take-home pay on her financial affidavit?
$8,358.20
Marsha’s 401(k) contributions and savings bond purchases are not included in her take-home pay. Her income that is subject to Social Security is limited to $132,900. See the calculations below.
52
Assets are traditionally hidden in four ways, what are they?
1) The person denies the existence of an asset
2) Assets are transferred to a third party.
3) The person claims the asset was lost or dissipated.
4) The person creates false debt
53
Where is the first place to look for hidden assets?
Tax Returns
54
How many years of tax returns should you review when looking for hidden assets?
5 years
55
What are the important PRE 2018 Forms to review?
1) Schedule A: Itemized Deductions
2) Schedule B: Interest and Ordinary Dividends
3) Schedule C: Profit or Loss from Business
4) Schedule D: Capital Gains and Losses
5) Schedule E: Supplemental Income and Loss
6) Form 1065: Partnership Income
7) Form 1120: Corporate Income
8) Form 1120S: Corporate income from S corps
56
What are the important POST 2018 Tax forms to review?
1) Schedule 1: Additional Income and Adjustments to Income
2) Schedule 2: Tax (ATM)
3) Schedule 3: Nonrefundable Credits
4) Form 4562: reports deductions for depreciation and amortization
5) Form 4797: reports the sale or exchange of business property and the computation of recapture amounts under sections 179 and 280F(b)(2).
57
Beth saves $100 of her paycheck every month. She puts this money into an account under her name only, and now it is worth $2,600. At her divorce, is this money separate or marital property?
Marital
58
A mnemonic for remembering which states have community property laws is ____________.
TWIN CAN LAW
TWIN: Texas, Washington, Idaho, Nevada
CAN: California, Arizona, New Mexico
LAW: Louisiana, Alaska, and Wisconsin
(Alaska and Wisconsin have special and unique treatment)
59
In _________ property states, the two spouses’ “separate property” is not subject to division of the court.
Community
60
In community property states, generally speaking, separate property is owned before the marriage or obtained by gift or inheritance; everything else is “community property” and will likely be subject to a _________________.
50/50 division
61
Any property acquired in a community property state ____________________________ no matter where the couple moves.
retains its community property status
62
Any property acquired in a community property state ____________________________ no matter where the couple moves.
retains its community property status
63
__________________ states, on the other hand, usually agree that the couple’s property, “marital property,” is divided between the husband and wife equitably, or fairly. This does not necessarily mean 50/50.
Equitable distribution
64
There are _____ types of equitable distribution states, which are differentiated by the way they identify property.
two
65
___________________ determine the value of businesses of different sizes across many industries.
Certified Business Appraisers (CBAs)
66
There are generally three options for dividing a business:
1) One Spouse Keeps the Business (and produces a buyout in a lump sum from other assets, or on a payment plan over time)
2) Both Spouses Keep the Business (they run the business together and share equally in the profits)
3) They Sell the Business (and split the profits)
67
In property division; Equitable =
fair, not equal
in an equitable property division state, it means splitting the property equitably. It does not necessarily mean “equal.” It means “fair.”
68
Generally, a __________ is a starting point when property is divided in an equitable distribution state.
50/50 division
69
Payment by a property settlement note is still considered division of property, so the payor __________ it from taxable income.
The payee ____________ on the principal, _______ on the interest.
a) does not deduct
| b) does not pay taxes, and pays tax
70
It is important to collateralize a property settlement note. If there is no other asset available, it is possible to collateralize this note with a qualified pension by using a __________________.
Qualified Domestic Relations Order (QDRO).
If the payor defaults on the payments of a property settlement note, then the payee can start collecting from the pension pursuant to the terms of the QDRO.
71
Under IRC 1041, transfers or property between spouses during marriage, regardless of whether they are contemplating divorce, ________________________.
No gain or loss is recognized, tax free.
72
Under IRC 1041, A transfer of property to a former spouse, is an incident of divorce if;
1)
2)
3)
1) The transfer occurs within one year after the divorce, or
2) The transfer is pursuant to the divorce decree, and
3) The transfer occurs not more than six years after the divorce [Treas. Reg. §1.1041-1T, Q7].
73
Under IRC 1041; This nonrecognition provision is very broad. It encompasses all types of transfers, whether characterized as sales, gifts, or divisions of marital property, as well as transfers of all types of property, including cash. There are two major exceptions to the nonrecognition rule: it does not apply (1)____, and (2)_____
1) if one spouse is a non-resident alien
| 2) and it does not apply to a transfer service
74
Under IRAC 1041; the value of the property is __________ from the recipient’s income. In addition, the basis of the property is the basis that the transferor spouse had in the property __________________.
excluded
as of the date of transfer
This carryover basis is used to determine either the gain or loss upon a subsequent sale or exchange of the property. Keep in mind that personal losses are not deductible.
75
When U.S. bonds are transferred pursuant to a divorce, the transferor must include __________ on his or her tax return when they are reissued.
the accrued interest
76
When U.S. bonds are transferred pursuant to a divorce, the recipient will report the ________________ on his or her tax return and ________ the interest (on a separate line) that the transferor already reported.
total interest from the 1099
subtract
77
An assignment of an annuity contract is ________ for both the transferor spouse and the transferee spouse under IRC §1041, and the transferee spouse will succeed to the transferor’s “investment in the contract.”
nontaxable
78
Under IRC §1041, Transfer of Annuities, the transferee spouse may ___________________________________________ just as if he or she had purchased the annuity contract.
recover the transferor spouse’s investment in the contract tax-free
79
For Transfer of annuities; if the spouses wish to ensure that the payments are not treated as spousal support, they should _____________________________________.
specifically indicate that they do not want spousal support treatment to apply.
80
Often a divorce instrument that provides for the continuation of spousal support payments after the death of the payor spouse.
Life Insurance Policy/Proceeds
81
Life insurance proceeds were included in the gross income of the payee spouse until the
Tax Reform Act of 1984 repealed IRC §101(e).
Since then, the transferee spouse of insurance proceeds is eligible for all IRC §101 exclusions.
82
In addition, IRC §1041 provides for the _________________ on the transfer of an insurance policy. Consequently, life insurance proceeds would be __________ from the gross income of a transferee spouse who received the policy during marriage or as a result of a divorce.
nonrecognition of gain or loss
excluded
83
As long as the requirements of spousal support are met and the parties do not otherwise designate, all payments should be deductible and taxable as spousal support for spousal support in divorces prior to _____________.
December 31, 2018
In these cases, the only catch or trap for the unwary is that all spousal support payments must cease upon the death of the payee spouse (which the payee spouse might not consider desirable), and the requirement that an excess amount be included in the payor’s gross income if payments decrease by more than $15,000 during the first three post-separation years.
84
When certain depreciable property is transferred, the transferor is generally required to recapture the depreciation deducted in previous years or the year it is transferred. However, in a divorce the transferee and not the transferor may be subject to recapture.
Depreciation Recapture
Example: Don and Helen
Don transfers his business car that he has depreciated to Helen. Unless Helen used the car in her business more than 50% of the time, she will be subject to recapture for the depreciation that Don claimed.
85
The owner may elect to deduct the cost (expense) of certain types of trade or business property in the year the property is purchased, subject to certain limitations based upon the cost of the property and trade or business income [IRC §179]. This is called what?
Expensing Election Recapture
86
If an election to expense the property was made, then failure ____________________ will trigger recapture. Thus, a spouse who receives property that the other spouse had been using in a trade or business, but who does not continue to use that property in a trade or business, may be subject to recapture even if he or she retains the property.
to continue to use the property predominantly for business
Example : Don and Helen
Last year, Don purchased $18,500 worth of reception area furniture for his office and claimed an IRC §179 expense deduction. This year, when he and Helen divorced, he transferred the furniture to Helen under IRC §1041. Helen uses the property for personal purposes. As a result, Helen will have to include in her gross income the excess of the $18,500 claimed by Don over the regular allowable depreciation on her tax return due to the recapture of the IRC §179 deduction.
87
A _________________ is a qualified plan that provides a separate account for each employee and its benefits are based on contributions and earnings in that employee’s account.
defined contribution plan
88
_________________ have cash value today. The value of the account is fairly easy to determine—the monthly or quarterly statements show the dollar amount available to be divided.
Defined contribution plans
89
_________________ is a qualified plan that obligates the employer to pay a specified annual or monthly pension to each employee upon that employee’s retirement.
A defined benefit retirement plan
90
The employee’s interest in a ______________ is derived not from the value of an account established in his or her name, but from the amount of the pension promised to the employee upon retirement. It has no cash value today.
defined benefit plan
91
__________________ is a nonqualified account set up at a financial institution that allows an individual to save for retirement with tax-free growth or on a tax-deferred basis.
An Individual Retirement Account (IRA)
92
Under IRC §1041, the transfer of a spouse’s interest in a retirement plan as part of the division of the marital property is ____________ event.
not a taxable
93
Under IRC §1041, the transfer of a spouse’s interest in a retirement plan as part of the division of the marital property is not a taxable event. However, if the distribution ________________, the distribution is taxable under IRC §72.
does not qualify as a lump sum
94
Under IRC §1041, the transfer of a spouse’s interest in a retirement plan as part of the division of the marital property is not a taxable event (if it qualifies as a lump-sum distribution).
If the distribution qualifies as a lump-sum distribution, IRC §402 applies:
1)
2)
1) If employer securities are distributed, the tax on all unrealized appreciation on the securities is deferred until sale [IRC §402(e)(4)(B)].
2) A lump-sum distribution from active participation in plans before 1974 is taxable as a long-term capital gain [IRC §402(a)(2)]. The portion from active participation after 1973 is taxable as ordinary income.
95
The Unemployment Compensation Amendment of 1992 (USCA) significantly changed the tax treatment of distributions from tax-qualified retirement plans and 403(b) annuities. The USCA:
a) Requires that participants be provided with a direct rollover option.
b) Imposes a mandatory 20% withholding on any eligible rollover distribution that the participant does not elect to have paid to another retirement plan in a direct rollover.
c) Requires plan administrators to add the new rules to the written notice that must be provided to participants within a reasonable time before the distribution is made.
96
Contributions to this type of account are made with money that may be tax-deductible and any earnings can potentially grow tax-deferred until they are withdrawn in retirement. Many retirees find themselves in a lower tax bracket than they were in pre-retirement, so the tax-deferral means the money may be taxed at a lower rate.
Traditional IRA
97
Contributions to this type of account are made with after-tax money, which can potentially grow tax-free, with tax-free withdrawals in retirement, provided that certain conditions are met.
Roth IRA
98
Contributions to this type of account are "rolled over: from a qualified retirement plan into a traditional IRA. Rollovers involve moving eligible assets from an employer-sponsored plan, such as a 401(k), or 4039b0, into an IRA.
Rollover IRA
99
In a divorce, Individual Retirement Accounts (IRAs) may be transferred in whole or in part from one spouse to the other spouse incident to divorce by ____________________ or ____________ of the IRA assets.
changing the name on the IRA
by making a rollover
100
When transferring an IRA via Trustee to Trustee Transfer or Rollover the transfer of IRA assets—either by the IRA owner or by the recipient spouse—must be completed within ________ of the withdrawal from the IRA owner’s IRA. Otherwise, the IRA owner will pay tax and any penalties on the distribution.
60 days
101
The IRA rules pursuant to divorce also apply to _____________ and __________ accounts.
health and medical savings accounts.
102
Any money that an employee puts into a plan is the employee’s money; he or she is _________. If he or she quits or is fired, ___________________________________.
100% vested
they can take all of this money with them.
103
Three methods used to divide pension benefits:
1) Present value or cash-out method: The non-employee spouse is paid a lump-sum settlement from the pension or receives a marital asset of equal value to the non-employee spouse’s interest in the pension.
2) Deferred division or future share method: No present value is determined. Each spouse is awarded a share of the benefits if and when they are paid.
3) Reserved jurisdiction: The court retains the authority to order distributions from a pension plan at some point in the future. This option should be considered a last resort, as it leaves both spouses in limbo with regard to planning for their future.
104
Pension payout option: payments are made to the retiree for their lifetime and stop upon their death
Single Life Annuity
105
Pension payout option: payments are made to the retiree for a set number of years and will continue to the retirees' estate if he or she predeceases the term
Term Certain
106
Pension payout option: a set amount is paid to the retiree during their lifetime and an amount is continued to be paid to his/her spouse after death. A QJSA can pay 100% of the benefit to the former spouse, 50%, 65%, etc...
Qualified Joint and Survivor Annuity (QJSA)
107
Coverture Fraction =
```
# of years married while working X
__________________________. =. _____ x PMT = Marital Portion
# of years worked until retirement Y
```
[ (X/Y) x PMT ] /2 x PMT= Marital Portion of Pension Payment
108
Calculate marital portion of pension: Lump Sum
Number of years married while working = 15
______________________________________. = % of marital portion
Total number of years worked until retirement = 20
Calculate the marital portion of the present value.
(Years Married While Working/Years working to retirement) x PV = Marital Lump Sum Value
109
To find the inflation-adjusted interest rate, use the following formula:
[(1 + discount rate / 1 + inflation rate) – 1] x 100 = inflation-adjusted rate
109
Determining the current present value formula using FV at age 65:
PV = FV / (1 + i)^n
110
This type of plan typically will not allow any division pursuant to a QDRO, and in some states, the plan assets are not assignable at all to the ex-spouse.
Public Employee Pensions
111
What type of pensions carry a social security offset provision?
Public/government pensions
112
Vesting schedule:
An employee who has at least five years of service must have a non-forfeitable right to 100% of the employee’s accrued benefit [IRC §411(a)(2)(A)].
5-year cliff vesting
113
Vesting schedule:
An employee who has completed at least three years of service must have a non-forfeitable right to at least the following percentages of his or her accrued benefit: 20% after three years of service, 40% after four years of service, 60% after five years of service, 80% after six years of service, and 100% after seven years of service [IRC §411(a)(2)(B)].
3- to 7-year vesting (7-year graded vesting)
114
Top-heavy plans or matching contributions typically use _________ vesting schedule.
3-year cliff vesting or 6-year graded vesting
115
An employee may be fully vested but may still have to wait until he or she reaches a certain age before being able to receive any benefits. For instance, some companies do not pay out benefits until the employee has reached age 60 or age 65. In some cases, if the employee is not vested in the plan and dies before retirement age, the benefits are lost. These are ________.
Mature Plans
116
As the interest rate (a) , the present value will (b) , and as the interest rate (c) , the value of the pension will (d).
a) increases
b) decline
c) declines
d) increase
117
A common interest rate used in pension valuations is the ________.
20-year average of 20 year Treasuries.
118
In many states, the present value of a pension plan must be calculated by using the _________________________________________.
earliest date of retirement that can be taken without a penalty or reduction of benefits.
119
A QDRO is issued by a state court and signed by a judge, it isn't "qualified" until the ________________________________.
Plan Administrator approves it.
120
An important aspect of this requirement relates to the taxation of the benefits paid to an alternate payee under a QDRO. If the QDRO is for the purpose of child support (generally in arrears), distributions made are taxable to the __________, not the _____________.
Participants, not the Alternate Payee.
121
QDRO distributions made for the purpose of marital property divisions are treated as taxable income to the _____________.
Alternate Payee
122
QDRO distribution for the purpose of alimony owed on cases finalized after December 31, 2019 would not be treated as taxable income to the __________.
Alternate Payee
123
An important aspect of a pension QDRO is the method used to determine the amount that should be paid to the Alternate Payee. There are generally two acceptable methods:
A stated percentage: The language used in the QDRO would specify that the Alternate Payee is to receive a specified percentage(that does not necessarily have to be 50%) that has accrued as of a certain date in time.
A stated dollar amount: The parties can also agree that the Alternate Payee should receive a specified dollar amount as of a certain date as well.
124
The enactment of ___________ established laws relating to the attachment of pension benefits, thereby putting family law courts into a quandary as to how to treat retirement plan assets that state courts clearly determined were marital property.
ERISA in 1974
125
The __________ was enacted in 1982; it recognizes military retirement benefits as marital property and asserts that a state court may divide them pursuant to state law. A state court may order direct payment of benefits to an ex-spouse, not to exceed one-half of the benefit, if during the marriage the military spouse was in the service for at least ten years.
Uniformed Services Former Spouses’ Protection Act (USFSPA)
126
The _____________ provides that all qualified plans subject to ERISA may segregate assets for the benefit of an “alternate payee” through a court order known as a qualified domestic relations order (QDRO). Many non-ERISA plans will also honor these orders.
Retirement Equity Act (REA) of 1984
127
The ___________ added Code Sec. 1041, which allows marital property to be transferred back and forth between spouses without creating any tax on the transfer. The income tax basis of each asset is the basis of the asset in the hands of the transferor.
Tax Reform Act of 1984
128
The QDRO needs to state simplistically whether the spouses are taking the _____________ , which, of course, will reduce their ultimate benefit.
joint and survivor annuity option
129
With a QDRO, an ex-spouse can ______________________________ if the participant spouse dies before they retire.
preserve their right to receive survivor’s benefits
130
An award based on the lifetime of the alternate payee does not generally require a _____________ because it will last for the alternate payee’s lifetime, but an award based on the lifetime of the participant generally does require ______________ because the alternate payee’s pension benefits would cease upon the participant’s death.
post-retirement survivor annuity
131
If a participant is remarried at retirement, the new spouse gets all the survivor benefits unless the QDRO provides for ____________ for the alternate payee (former spouse).
survivor benefits
132
If the participant is single at retirement, the normal form of benefit is generally a __________ for the participant’s lifetime, so it is important to get the QDRO implemented by the plan before the participant retires, as the QDRO can specify that the form of benefit shall provide for a survivor annuity.
single-life annuity
133
Which method of transferring IRAs will never be subject to income tax and penalties?
Transfer the IRA assets to a new IRA in the name of the recipient spouse.
134
Martha, age 57, is to receive half of the $82,000 in John’s 401(k) account in their divorce. She elects the option to keep her account with John’s company as they are getting such a good return. Thirty days later, she hears about the 72(t)(2)(C) provision and withdraws $5,000 to buy new furniture. What is the tax consequence of the distribution?
She will have to pay both the tax and penalty.
135
A Qualified Domestic Relations Order (QDRO) permits:
A 401(k) to be transferred to an alternate payee
136
Joe and Barb, both age 52, are divorcing and have agreed to split Joe’s 401(k) equally. The value of the 401(k) is $200,000. Barb had the plan administrator transfer $80,000 to her IRA and distribute $20,000 directly to Barb. Which of the following will occur as a result of this distribution?
Barb will pay ordinary income tax on $20,000, but will not pay a tax penalty.
137
When dividing an IRA due to a divorce, all of the following are true except:
a) The custodian is not required to withhold 20% of the distribution.
b) The 10% penalty for a distribution before age 59 ½ is not waived.
c) The distribution will be considered taxable income.
d) The custodian is required to withhold 20% of the distribution amount.
d) The custodian is required to withhold 20% of the distribution amount.
138
What is the tax penalty for taking an early distribution from a retirement plan?
10%
139
Tim, age 38, has worked for his company for 16 years. He has decided to divorce Erin after an 18-year marriage. His company says he is eligible for full retirement at age 62 and will receive $2,800 per month based on his current years of service and income. Assuming an interest rate of 4.8%, what is the present value of the marital portion of his plan?
$113,535
140
When a distribution is paid from an IRA, the trustee must withhold what percentage of taxes?
0%
An IRA is not considered a qualified plan and a distribution may take place without withholding 20% for taxes.
141
Martha, age 57, is to receive half of the $82,000 in John’s 401(k) account in their divorce. She elects the option to keep her account with John’s company as they are getting such a good return and to take a direct distribution under 72(t)(2)(C) of $5,000 to purchase furniture. How much money will she receive from the 401(k)?
She will have a 401(k) worth $36,000 and receive $4,000 in cash.
The custodian must withhold 20% of the distribution.
142
Greg and Marsha are getting a divorce. Greg began contributing to his 401(k) plan before he married Marsha. He has been contributing $1,000 per month to his 401(k) and he has $400,000 in it. What kind of property is the 401(k)?
It is marital and separate property because he started contributing before the marriage.
143
Nicole, age 48, has been married to Andy for 12 years and has worked for her current company for 19 years. She has received a statement from her company stating that based upon her current years of service and income, she is eligible to receive $1,900 per month at age 65 from her defined benefit plan. Assuming an interest rate of 5%, what is the present value of the marital portion of her plan?
$70, 575
First figure out the marital % using coverture fraction = 12/19 = 63%
63% of $1900 = $1200
Then solve for N = 198.72
i = .41667 (5/12)
PMT= 1200
FV = 0
PV of monthly payments = $161,759.29
FV= $161,759.29
Solve for N = (Years until retirement) = 17
i = 5
PMT = 0
Press PV = $70,575 as the marital portion
144
If a qualified retirement plan is being transferred to a non-participant spouse pursuant to a QDRO, payment of a tax penalty can be avoided if a distribution is taken by the:
Non-participant spouse as a one-time opportunity.
145
Marty, age 48, is to receive half of Cindy’s 401(k) account in their divorce. He decides to have the plan administrator transfer his share to an IRA in his name. Before the transfer he takes out $10,000 pursuant to the 72(t)(2)(C) provision. What is the tax consequence of the $10,000 distribution?
He will only have to pay tax.
146
When a distribution is paid from a qualified retirement plan, what is the percentage of taxes that the plan administrator must withhold?
20%
The Unemployment Compensation Amendment Act (UCA) of 1992, which took effect in January 1993, states that any monies taken out of a qualified plan or tax-sheltered annuity are subject to 20% withholding.
147
Prior to the Tax Relief Act of 1997, the capital gains tax laws on a house sold prior to 1997 were:
1.
2.
3.
1. Upon the sale of a principal residence, the owner could rollover the gain into a house of equal or greater value without realizing capital gains. The cost basis of the new residence would be the basis of the prior residence plus any cash (“boot”) paid for the new residence or any gain recognized on the sale plus the cost of any improvements to the new residence.
2. Sellers could take a one-time $125,000 exclusion from capital gains if one or both spouses were over age 55.
3. Capital gains were taxed at 28%.
148
According to the Tax Relief Act of 1997 (TRA ’97);
Generally, taxpayers can only exclude from income one sale ___________. Exceptions include a change in the taxpayer’s place of employment, health issues, or unforeseen circumstances.
every two years
149
More recent tax law changes have reduced the capital gains tax to ____% for most taxpayers.
15%
150
According to the Tax Relief Act of 1997 (TRA ’97);
Single taxpayers can exclude from income up to __________ of gain from the sale of the principal residence.
$250,000
151
According to the Tax Relief Act of 1997 (TRA ’97);
Taxpayers who are married and filing joint returns can exclude from income up to _______ of gain from the sale of the principal residence.
$500,000
152
According to the Tax Relief Act of 1997 (TRA ’97);
Taxpayer(s) must own and use their principal residence for ____________________ prior to the sale. The two years do not need to be consecutive [IRC §121].
two of the last five years
153
The ____________________ eliminated the deductibility of maintenance payments for the payor and the inclusion as income to the payee for divorces finalized after December 31, 2018.
Tax Cuts and Jobs Act of 2017
154
For the most part, decrees that were finalized prior to December 31, 2018, provided for maintenance to be deductible to _________ and taxable to __________ unless both parties had agreed otherwise. After 2018, the tax code changed and new orders of support will not be granted this treatment.
the payor
the payee
155
If spousal support is reduced six months either before or after the date when a child reaches the age of 18, 21, or the age of majority in his or her state, the amount of the reduction is considered ______________ and not ________________.
child support and not spousal support.
156
Under the Tax Reform Act of 1984, the amount of “excess spousal support” that has been paid by one spouse must be included in that spouse’s income in the third post-separation year [IRC §71(f)(1)(A)]
157
Determining spousal support recapture: Step 1
To find the second-year recapture amount, subtract the spousal support paid in the third year ($30,000) from the spousal support paid in the second year ($45,000), then subtract $15,000.
Using this formula, the second year recapture amount is $____.
Second-year recapture amount = ($45,000 - $30,000) - $15,000
$0.
158
Determining spousal support recapture: Step 2
Adjust second-year spousal support for recapture calculation.
To find the adjusted second-year amount, subtract the second-year recapture amount ($0) from the actual second-year payments ($45,000).
What is the adjusted second-year recapture calculation?
Adjusted second-year = $45,000 - $0
The adjusted second-year calculation is $45,000.
159
Determining spousal support recapture: Step 3
Determine the average spousal support in years two and three.
To find the average spousal support for years two and three, add the adjusted second-year spousal support ($45,000) and the spousal support paid in year three ($30,000), then divide by two.
The average spousal support for years two and three is $________.
Average spousal support (years two and three) = ($45,000 + $30,000) / 2
The average spousal support for years two and three is $37,500.
160
Determining spousal support recapture: Step 4
Determine the third-year recapture amount.
To determine the third-year recapture amount, subtract the average spousal support paid in the second and third years ($37,500) from the spousal support paid in the first year ($60,000), then subtract $15,000.
Third-year recapture amount = ($60,000 - $37,500) - $15,000
Therefore, the third-year recapture amount is $_______.
Therefore, the third-year recapture amount is $7,500.
161
What are the steps for determining spousal support recapture?
Step 1: Find the second-year recapture amount:
*Spousal support paid in the 2nd year - Spousal Support paid in the 3rd year - $15,000
Step 2: Adjust second-year spousal support for recapture calculation.
*Actual 2nd year payments - 2nd year recapture amount
Step 3: Determine the average spousal support in years two and three.
*Spousal support made in year 2 + Spousal support made in year 3 / 2
Step 4: Determine the third-year recapture amount.
*(Actual spousal support paid in the 1st year - Average spousal support paid in the 2nd and 3rd years) - $15,000
162
Exceptions to Recapture Rule IRC §71(F)(5)
The recapture rules do not apply if:
1.
2.
3.
4.
- Either spouse dies before the end of the third post-separation year or the spouse entitled to receive the payments remarries before the end of the third post-separation year.
- The payment amount fluctuates for reasons not within the control of the payor spouse. For example, the payments may be a fixed percentage of income from a business or property or from compensation for employment.
- The payments are temporary support payments.
- The spousal support payments decline by $15,000 or less over the first three years.
163
Child Support Guideline Model: The ________________ combines the income of both parents and the presumptive child support obligation is prorated between the parents based on their percentage of the combined income.
Income Shares Model
164
Child Support Guideline Model: The _______________ sets support as a percentage of only the noncustodial parent's income; the custodial parent's income is not considered.
Percentage of Income Model
165
Child Support Guideline Model: The __________________ is a variation of the Income Shares Model, which incorporates several public policy judgments designed to ensure that each parent's basic needs are met in addition to the children's.
Melson Formula
166
Child support payments cannot be deducted by the ______ and are not includible in the income of the ____________.
payor
recipient
167
There are only two situations in which payments that would otherwise qualify as spousal support or separate maintenance would be presumed to be reduced at a time clearly associated with the occurrence of a contingency related to the child: The ________________ and the ______________ rule.
(Also the two provisions of the Child Contingency Rule)
the six-month rule and the multiple-reduction rule.
168
The first situation occurs when the payments are to be reduced not more than six months before or after the date on which the child reaches age 18, 21, or the state's age of majority. Even if the emancipation age of 18 or 21 is not specifically stated in the divorce decree, care must be taken that spousal support does not change or end within six months of these two ages.
Six-month Rule
169
This provision of the Child Contingency Rule occurs only if there is more than one child. As in the first situation, the presumption arises when reductions occur within a certain time frame. In this case, if the payments are to be reduced on two or more occasions, which occur not more than one year before or after another child reaches a certain age, then a presumption arises that the amount of the reduction is child support. The date at which the reduction occurs must be when the children are between 18 and 24, inclusive (although it does not have to be a whole number of years), and must be the same for each of the children.
Multiple-Reduction Rule
170
Married couples filing jointly who make under $____________ per year and single individuals, Head of Household, or married couples filing separately who earn less than $___________ per year, will be able to take $2,000 per child as their child tax credit.
$400,000
$200,000
171
The earned income credit is not available to taxpayers that have adjusted gross income or earned income in excess of
$__________ for one qualifying child,
$__________ for families with two qualifying children,
$__________ for families with three or more qualifying children, or if the parent does not work.
$41,094
$46,703
$50,162
172
The ________________ permitted spousal support to be deductible in arriving at adjusted gross income, allowing taxpayers who do not itemize deductions to deduct spousal support.
Tax Reform Act of 1976
173
The custodial parent can transfer the dependency exemption by ________________________
using form 8332.
174
Randy is paid monthly and has a gross pay of $12,500. On Schedule A—Itemized Deductions of his tax return, he lists deductions of $6,397 for state and local taxes, $2,200 for real estate taxes, $5,000 towards the principal on his home mortgage, and $7,800 for interest paid on his home mortgage. In addition, he has contributed $16,500 from his gross income to his 401(k). What are Randy’s total itemized deductions?
$16,397
Randy’s 401(k) contributions and payment on mortgage principal are not itemized deductions.
175
Social Security (FICA) Tax is ________% on the first $_______________ of income.
(Max FICA payment: $____________)
6.2%
$142,800
$8,853.60 (or $737.80/per month)
176
Linda, who is single and 36, sold her home for $500,000. She paid $90,000 for it in 1995 and has lived in it since she bought it. She paid $10,000 in selling expenses. Linda has a mortgage on the home in the amount of $100,000. What is Linda’s taxable capital gain on the sale of her home?
$150,000
500,000 sale price - cost basis 90,00 - seller fees 10,000 = $400,00 in gains - exclusion of $250,000 = taxable gain of $150,000
The mortgage is not calculated when determining capital gains.
177
A taxpayer filing as _________________ is subject to the highest tax rates.
Married Filing Separately
178
A taxpayer qualifies as Head of Household if all of the following apply:
1.
2.
3.
1. The taxpayer is not married or is legally separated at the end of the year or the taxpayer did not live with his or her spouse for the last six months of the year.
2. The taxpayer pays more than one-half of the costs to maintain the household.
3. The taxpayer’s child qualifies as his or her dependent and lives with the taxpayer more than one-half of the year.
179
Income produced from separate property is generally treated as community property in what four states?
Hint: (WILT)
Wisconsin, Idaho, Louisiana, Texas
180
Income from separate property remains separate property in what 5 community property states?
(CWANN)
| Arizona, California, Nevada, New Mexico, and Washington.
181
All of the following conditions must be met to treat community property income as separate under IRC §66(a):
1.
2.
3.
1. The legally-married spouses live apart at all times during the tax year.
2. The spouses do not file a joint return.
3. No portion of the community income is transferred between the spouses during the tax year.
182
When one spouse in a community property state inadvertently fails to include his or her share of community income on a tax return, the spouse can request relief from the community property laws if all of the following conditions are met:
1.
2.
3.
4.
1. A joint tax return was not filed.
2. The income not included was that earned by the other spouse as an employee, business owner, or business partner.
3. The spouse can prove that he or she had no knowledge of the excluded income.
4. The spouse must show that, considering all the facts and circumstances, it would be inequitable to tax him or her on that item of community income [IRC §66(c)].
183
Exceptions to Community Property Rules:
The IRS also has the authority and/or discretion to deny community property treatment to a spouse who __________________________ and ______________________.
fails to notify the other spouse of the nature and amount of the income
acts as if he or she was solely entitled to the income [IRC §66(b)].
184
In equitable distribution states, earned income is ___________ to the person that earned it and income from property is taxable to the _________________ as determined by state law.
taxable
property’s owner
185
When property is owned jointly, income is taxed _______________________ unless their ownership interest is not equal. In that case, it is in the ________________________________.
50% to each spouse
same proportion as their ownership interest.
186
Taxpayers may allocate estimated tax payments in any manner agreeable to them [Reg §1.6015(b)-1(b)]. In an equitable distribution state, absent an agreement, the estimated payments may be ____________________________________________.
divided in proportion to each spouse’s separate tax liability.
187
Taxpayers may allocate estimated tax payments in any manner agreeable to them [Reg §1.6015(b)-1(b)]. In a community property state, if the payments were from community funds, then the payments are __________________________________.
divided equally between the parties
188
Allocating Tax Carryforwards:
Capital loss carryforwards are allocated based upon each spouse’s separate capital losses [Reg §1.212-1(c)(1)(iv)]. Losses on jointly-owned property or community property are generally divided ______________________. Losses on separately owned property _________________________________________________.
equally between the spouses
belong to the spouse that owned the property that was sold
189
Allocating Tax Carryforwards:
A joint charitable contribution carryforward is allocated between the spouses based upon what the contribution _____________________________ for the year the contribution was made.
would have been had the spouses filed separate returns
190
Allocating Tax Carryforwards:
A joint net operating loss (NOL) carryforward is apportioned between the spouses in the ratio of what their separate NOLs would have been if each spouse had ____________________________.
computed their income separately.
191
Allocating Tax carryforwards:
An alternative minimum tax credit carryforward __________________________ allocated between the spouses.
has no rule regarding how it should be
192
Allocating Tax Carryovers:
If there are suspended passive activity losses, the transfer of property to one spouse is treated __________. This means that the suspended losses are added to ____________.
as a gift
the cost basis
193
There are no rules set forth for investment interest expense carryforwards. Use _________ method to allocate the carryforward.
a reasonable
194
Allocating Tax Carryovers in Divorce:
Losses from an S corporation that exceed the shareholder’s basis ____________________ in divorce.
follow the stock in a divorce.
195
Suspended general business credit carryforwards should follow the ___________ or __________ giving rise to the credit.
property or business
196
In 2021, the maximum amount that an individual may contribute to a traditional IRA or a Roth IRA is $_______. In addition, a catch-up contribution of $______ is allowed for individuals who are at least 50 years old.
$6,000
$1,000
197
Roth Conversions:
Conversions done after _______ do not have the advantage of spreading the tax consequence over a two-year period.
2010
198
A significant benefit of converting to a Roth IRA is the _________________ on the amount converted. In addition, there are no __________________________.
tax-free growth
minimum required distributions at age 70½.
199
A drawback to converting to a Roth IRA is ______________________ with no distributions. If your client needs to access these dollars, the growth would ____________________________________.
the five-year holding period
be subject to ordinary income taxes
200
The retirement savings contribution credit (also known as the saver’s credit) is a ______________________________________ who are saving for retirement.
nonrefundable tax credit for low- to moderate-income taxpayers
201
Retirement Savings Contribution Credit:
The amount of the credit depends on the __________________________ and ________________.
taxpayer’s adjusted gross income
tax filing status
202
Retirement Savings Contribution Credit:
The maximum benefit allows unmarried taxpayers to claim the credit for 50% of _______________ contributed to a retirement account during the year ( $__________ for Married Filing Jointly taxpayers). Therefore, the maximum credit that can be claimed is $_________ ($_________ for Married Filing Jointly taxpayers).
the first $2,000
$4,000
$1,000
$2,000
203
Another strategy that may be helpful is to bunch itemized deductions in one year. Clients may want to bunch deductions in years when they _________________.
expect higher income
204
For tax purposes, a couple that has annulled their marriage is treated as _________________. They can qualify under ________ for tax-free transfers of property. They must also __________________ and ______________.
if they have never married
IRC §1041
amend all tax returns for years that remain open
change their tax status
205
The Internal Revenue Code provides relief from liability for a spouse that signs a joint tax return and has no knowledge of an understatement of tax. This is called the _____________________. (IRC Section _______)
Innocent Spouse Rule (IRC Section 6015)
206
Innocent Spouse Rule:
To qualify for innocent spouse relief, the spouse must establish:
```
1.
2.
3.
4.
5.
```
1. That a joint return was filed.
2. There was an understatement of tax attributable to erroneous items from one spouse filing the joint return.
3. That in signing the return, the innocent spouse did not know, and had no reason to know, that there was an understatement of tax.
4. That taking into account all the facts and circumstances, it would be inequitable to hold the innocent spouse liable for the deficiency in tax.
5. The innocent spouse elects the benefits no later than two years after the date the IRS has begun collection activities with respect to the individual making the election.
207
Innocent Spouse Rule:
Congress changed the law effective ___________ to simplify the qualifications required for innocent spouse relief. Congress eliminated the “substantial understatement” and “grossly erroneous” requirements to make it easier to qualify.
July 22, 1998
208
Innocent Spouse Rule:
Keep in mind that an individual who is potentially liable for a tax deficiency and who does not meet the formal standard for relief (such as on account of missing the two-year deadline) may still be relieved of liability at the discretion of the IRS if _____________________________.
it would be inequitable to hold him or her liable.
209
Filing Status:
If you are unmarried and do not qualify as head of household, file as ___________.
Single
210
Filing Status:
If the taxpayers spouse will not file a joint return, they file as ______________________ (if they do not qualify as head of household). This filing status has the ___________ tax rate, and many credits and deductions are disallowed or substantially limited.
Married filing Separately
Highest
211
Filing Status:
This filing status is for unmarried people who paid over half the cost of keeping a home for a qualifying person, such as a parent or child. Married people who lived apart from their spouse for the last 6 months of the tax year may also qualify for this status. This filing status is usually lower than a single filer or married filing seperate.
Head of Household
212
Exemptions:
There are 5 tests for claiming an exemptions, they are:
```
1.
2.
3.
4.
5.
```
1. Relationship test
2. Income test
3. Support test
4. Qualifying child for child tax credit
5. Children who do not live with you due to separation or divorce
213
Exemptions: Relationship Test
This person must be a ________________ or ________________ all year.
relative or have lived in your home as a family member
214
Exemptions: Income Test
The person's gross income must be less that $_________.
The dependent's gross income can be $_______ or more if they were either __________ at the end of the year or under 24 at the end of 2018 and was a student.
$4,150
$5,950
under the age of 19
215
Exemptions: Support Test
You must have provided _______________ for the year.
There are two exceptions to this test:
one for children of divorced or separated parents
and, one for persons supported by two or more taxpayers.
half the person's total support
216
This section of the IRS Code states that a spouse is considered abandoned when all of the following conditions are met:
The abandoned spouse pays more than half the cost of maintaining his/her household for the taxable year.
The individual files a separate tax return.
The individual’s household is the principal home of a dependent child for more than six months of the tax year and the individual is entitled to claim the dependency exemption (even if no claim is made).
The individual lives in a residence separate from his /her spouse for the last six months of the tax year.
Section 7703(b)
217
Schedules for 2021:
Schedule 1: Additional Income and Adjustments to Income
The amended Schedule 1 includes new lines for alimony recipients and payors to include __________________________ and _____________________.
the date of the original divorce or separation agreement
218
Schedules for 2021:
Schedule 2: Tax
The amended Schedule 2 includes several line items from the _____________________ , which is obsolete for the 2019 tax year.
2018 Schedule 4
219
Schedules for 2021:
Schedule 3: Nonrefundable Credits
The amended Schedule 3 includes additional credits and payments and combines ______________________________________________.
nonrefundable credits and refundable credits from the 2018 Schedules 3 and 5
220
Schedules for 2021:
Form 4562
This form reports ______________________ and _________ as well as provides information on the business/investment use of automobiles and other listed property.
deductions for depreciation and amortization
221
Schedules 2021:
Form 4797
This form reports the ______________________ and the computation of recapture amounts under sections 179 and 280F(b)(2).
sale or exchange of business property
222
Which of the tax carryforwards affects the basis of an asset upon transfer in a divorce?
Passive activity loss
Any passive activity loss carryforward is added to the basis of the asset transferred in a divorce. It would reduce the taxable gain when the asset is sold.
223
How is marital status determined in the year the divorce takes place?
Marital status is based on the last day of the tax year.
December 31 is the measuring date for the year.
224
Which tax credit is refundable?
Earned income credit
225
Which Internal Revenue Code section permits spouses or former spouses to transfer property tax-free?
IRC 1041
226
Which of the tax carryforwards does not have a rule for allocation between spouses?
Alternative minimum tax credit
227
If you receive a pension from government employment that was not covered by Social Security, then any Social Security benefits you receive based on your spouse’s Social Security contributions (either as a spouse, widow, or widower) will be reduced by __________ of your government pension. Thus, the Social Security benefit is reduced $2 for every $3 of the government pension.
two-thirds
228
Social Security benefits paid to a parent are ___________ in a parent’s gross income for the purposes of calculating child support.
includible
229
The Consolidated Omnibus Budget Reconciliation Act (COBRA) law was passed in _______ to help individuals who are divorcing.
1986
230
COBRA allows them to continue to receive health insurance from their ex-spouse's company, if it has at least ___ employees, for _____ years after the divorce.
20
three (36 months)
231
If the company is not notified within ________________ of divorce, the company does not have to provide COBRA benefits.
sixty days
232
__________________ includes the mortgage on the house or other real estate and loans on cars, trucks, and other vehicles. It should be made very clear in the separation agreement which party will pay each debt. If one spouse fails to make a payment on a debt that is secured by an asset, the creditor can pursue payment from the other spouse or repossess or foreclose on the secured asset.
Secured debt
233
_______________ includes credit cards, personal bank loans, lines of credit, and loans from parents and friends. These debts may be divided equitably. The court also considers who is better able to pay the debt in the context of the full financial settlement.
Unsecured debt
234
For ___________ after the divorce, the IRS can perform a random audit of joint tax returns. In addition, the IRS can audit a joint return—if it has good cause to do so—for ____________. It can also audit a return whenever it feels fraud is involved.
three years
seven years
235
Bankruptcy:
_____________ allows you to liquidate all of your assets and use the proceeds to pay off your debts, erasing the debts that cannot be paid in full. All unsecured debts are forgiven, and all assets over statutory minimum protected amounts are forfeited. Creditors have the right to repossess their fair share of the assets. The net proceeds from the sale of the assets are divided pro-rata among the unsecured creditors.
Chapter 7
236
Bankruptcy:
__________ allows you to develop a pay-off plan over a three-year period. The assets may be preserved and the debtor is allowed to pay off all of the secured debt, as well as a portion of the unsecured debt, and discharge the rest of the unsecured debt. The debtor needs to make payments under a plan.
Chapter 13
237
If life insurance insuring the life of the first spouse is transferred to the other spouse pursuant to the divorce, what happens to the proceeds upon the death of the insured?
The death proceeds are non-taxable income to the recipient.
238
To equalize their divorce settlement, Joe signed a property settlement note for 16,000. Maura is concerned that Joe will attempt to discharge this debt and wants to make sure that she is protected should he file for bankruptcy. What should Maura’s CDFA professional suggest?
The property settlement note can be collateralized with a QDRO to protect it from bankruptcy filing.
239
When a distribution is paid from a qualified retirement plan, what is the percentage of taxes that the plan administrator must withhold?
There is a 20% withholding requirement on any distribution taken from a qualified retirement account.
240
Keith was ordered to pay Cindy spousal support for five years when they divorced in 2017. They have two children. Which of the following scenarios would have triggered the recapture rules?
Payments dropped by $15,000 in year two and by $15,000 in year three
241
Susie, age 35, gave up her career to stay home with the children for 10 years. Which of the following questions would be inappropriate for a CDFA professional to ask her?
How much spousal support do you need so that you do not have to work?
242
Jim, aged 54, has been married for 28 years. He has also worked for his current company for 28 years. He received a statement from his company stating that he is eligible to receive $2,600 per month at age 62 from his defined benefit plan based on his current years of service and income. His plan is protected from inflation. Assuming an interest rate of 6% and an inflation rate of 3%, what is the present value of the marital portion of his plan?
$257,463.79
243
How many days is the typical residency requirements for filing for divorce?
90 Days
244
Which filing status would NOT permit a taxpayer to take the childcare credit?
Married Filing Separately
245
A common mistake is thinking that retirement assets have the same value as ____________________________________________.
Calculations should be performed to determine the future value of the retirement asset (based on interest, payments, present value, etc.) to determine how to divide the asset.
an equal dollar amount of non-retirement assets
246
Which of the following is NOT something that attorneys use to determine how the law is likely to be applied in a case?
a) Case law
b) State legislation
c) Local custom
d) Local mediation reports
d) Local mediation reports
247
A CDFA professional's work product is never protected by attorney-client privilege when working in which role?
Pro se Divorce
248
Childcare expenses for a child without disabilities can qualify for the tax credit for child and dependent care expenses as long as the child is no older than:
12
If the child is disabled, it is 13.
249
Andrea is receiving spousal support from Mike and is refusing to provide her Social Security number to him. What is the fine she will have to pay for withholding her Social Security number?
$50
250
When a distribution is paid from an IRA, the trustee must withhold what percentage of taxes?
$0
There is no withholding requirement for IRAs; the 20% withholding is for distributions from qualified plans.
251
When did the QDRO come into existence?
In 1984, the Tax Reform Act was enacted.
252
What is the personal exemption amount?
0
253
Which filing status has the highest standard deduction amount?
Survivng Spouse and Married Filing Jointly
254
Rachel is paid every other week. Her pay stub shows her gross salary is $1,800, her federal tax deduction is $325, her state tax deduction is $77, her Social Security deduction is $111.60 and her Medicare deduction is $26.10. What is Rachel's correct deduction for Social Security per month? Click on the tax table exhibit for the tax rates.
$241.60
To calculate her monthly social security you would take her monthly gross ($3900) and multiply by the Social Security Rate of 6.2%
255
Bob, age 56, had been married for 30 years. He has worked for his current company for 30 years. He has received a statement from his company stating that based on his current years of service and income, he is eligible to receive $2,850 per month at age 62 from his defined benefit plan. His plan is protected from inflation. Assuming an interest rate of 6.2% and an inflation rate of 3.5%, what is the approximate present value of the marital portion of his plan?
$324,180.14
256
Rick, age 48, has been married to Christy for 25 years. He has worked for his current company for 20 years. He has received a statement from his company stating that based on his current years of service and income, he is eligible to receive $3,350 per month at age 65 from his defined benefit plan. His plan is protected from inflation. Assuming an interest rate of 6% and an inflation rate of 3.5%, what is the approximate present value of the marital portion of his plan?
$161,172.24
This requires an interest adjustment prior to the calculation. The Interest Adjustment is(1.035/1.06)-1 x 100 = 2.36.
The step one calculation is PMT= 3350, FV =0, i= .20(2.36/12 - round to two decimals), n = 150.72 (12.56 x 12) solve for PV = 161172.24.
Step two uses PV from step one as FV, i =6, n =17, PMT = 0 solve for PV $ 161,172.24
257
Joseph is paid monthly. His pay stub shows gross pay of $10,000. His payroll deductions are listed as $2,010.00 for federal tax, $428.50 for state tax, $640.00 for Social Security, $145.00 for Medicare, $1,375 for his 401(k), and $200 to buy US Savings Bonds. Joseph also has the following expenses: he paid $5,142 for state income tax, he paid $3,150 for real estate taxes, and $14,650 for interest on his home mortgage, $3,850 towards the principal on his home mortgage and $3,200 for charitable contributions. What are his total itemized deductions?
$26,142
His itemized deductions would include his state taxes, his real estate taxes, his mortgage interest and his donations.
Not inclusive of payroll deductions
258
Bob earns $150,000 per year and his limit on Social Security withholding is $142,800. What is his Medicare deduction per month?
$181.25
259
Distributions of non-deductible IRA contributions after age 60 are subject to what taxation?
Applicable state and local income taxes
non-deductible contributions made after age 60 - distributions would be exempt from federal taxes
260
Which filing status has the highest standard deduction amount?
Survivng Spouse and Married Filing Jointly
261
Distributions of after-tax contributions from 401(k) plans after age 60 are subject to what taxation?
Applicable state and local income taxes
These distributions would be federal tax free
262
Which of the following describes the relationship between child support and spousal support?
As spousal support increases, child support decreases.
As spousal support increases the need of child support usually reduces and the two tend to have an inverse relationship.
263
Assume that at age 57 Mindy gets remarried. At FRA(Full retirement age), she decides to apply for Social Security benefits.
Mindy can apply to receive half of her new husband's Social Security if it is more than hers.
Mindy can elect to receive the higher of her own or one half of her current husband's benefit. She is no longer eligible to receive one half of Philip's benefit as she is remarried. Should she divorce she would then be eligible for one half of which ever ex-spuse has the hgiher benefit.
264
Refer to Case 1: Phil and Mindy During negotiations, Phil agrees to pay spousal support in the amount of $3,000 per month for ten years, rather than what he offered her originally. Mindy, on the recommendation of her CDFA® professional, asks for the spousal support to be protected with life insurance on Phil's life. Assuming a discount rate of 3.6%and rounded to the nearest 1,000, how much life insurance will be needed?
$303,000
```
This would be a time value of money calculation. Using the following inputs
FV=0,
I =.3(3.6/12)
n = 120(10*12)
PMT 3.000
solve for PV = 302853.42
```
265
Refer to Case 1: Phil and Mindy Mindy decides to sell the house when their son reaches age 18. How much capital gain will be realized on the sale of the house, assuming that it is still valued at $420,000 and selling costs are 6%?
$309,800
The gain is the sale price of $420,000 minus the basis of 85,000 plus the sales cost of 25,200. Note: this question is not asking for the taxable gain so the exclusion amount is not a factor.
266
What is TRUE about the treatment of a pension in a divorce?
The pension is a future stream of income and should be included as a marital asset.
The pension is a future stream of income and the present value of that income stream is included in the marital assets. The coverture fraction is used to reduce the marital portion of the pension because they have only been married 20 years and he has been
267
You are hired as a CDFA® professional by Mindy. Her main concern is to make sure that she is able to pay her basic bills in the short term without giving up on her long term goals. Which of the following would you recommend for her to do first?
Ask Phil for more spousal support for a shorter period of time.
The best alternative to help meet her immediate concerns is to receive more alimony for a shorter period of time until she is able to open the bakery and become self sufficient.
268
What kind of debt is debt that has been incurred by one spouse on a joint credit card, after filing for divorce?
Marital debt and both spouses are legally liable.
Debt incurred on a joint card prior to the divorce being finalized would be considered marital debt and both parties would be liable.
269
What are the two major exceptions to the nonrecognition rule: transfers as a tax-free transfer of property?
There are two major exceptions to the nonrecognition rule: it does not apply if one spouse is a nonresident alien, and it does not apply to a transfer of services.
270
What happens when an annuity contract is assigned pursuant to a divorce decree?
The recipient spouse gets the transferor's investment in the contract
Pursuant to Section 1041, the cost basis and holding period are assumed by the transferee
271
Sam's 401(k) is worth $3,200. His employer matches $.25 for every $1 that Sam contributes within the confines of the plan. Sam is 40% vested. What is the amount that Sam should include on his financial affidavit?
$2,816
The first step is to determine which is employee contribution and which is employer. The employer contribution is the only portion subject to vesting. The employee contribution is $2,560 and the employer contribution is $640. Apply the vesting percentage to the employer contribution (640*.40) and you add the product(256) to the employee contributions.
272
How are assets divided in a community property state?
Everything that was acquired during the marriage, other than acquisitions by inheritance or gift, is divided 50/50 between the spouses.
Everything that was acquired during the marriage, other than acquisitions by inheritance or gift, is divided 50/50 between the spouses.
273
How is property divided in an equitable distribution state?
Marital property is divided In an equitable manner.
274
Connie's divorce was final on December 18. What will be her filing status?
She can file as either single or head of household, depending on her circumstances.
275
Assume that Tom violates the Six-Month Rule by stopping spousal support payments to Eva the year that Grayson reaches emancipation age. When will re-characterization of the spousal support payments take effect?
Retroactive to the beginning of the spousal support payments.
276
Distributions of non-deductible IRA contributions after age 60 are subject to what taxation?
Applicable state and local income taxes
277
Distributions of after-tax contributions from 401(k) plans after age 60 are subject to what taxation?
Applicable state and local income taxes
278
During negotiations, Phil agrees to pay spousal support in the amount of $3,000 per month for ten years, rather than what he offered her originally. Mindy, on the recommendation of her CDFA® professional, asks for the spousal support to be protected with life insurance on Phil's life. Assuming a discount rate of 3.6%and rounded to the nearest 1,000, how much life insurance will be needed?
$303,000
```
This would be a time value of money calculation. Using the following inputs:
FV=0, I =.3(3.6/12)
n = 120(10*12)
PMT 3.000
solve for PV = 302853.42
```
279
Assume that Tom violates the Six-Month Rule by stopping spousal support payments to Eva the year that Grayson reaches emancipation age. When will re-characterization of the spousal support payments take effect?
Retroactive to the beginning of the spousal support payments.
280
Distributions of pre- tax contributions from 401(k) plans after age 60 are subject to what taxation?
Applicable state , local and federal taxes
281
The pension is a future stream of income and ______________________ as a martial asset.
should be included
282
What is NOT required to be in a Qualified Domestic Relations Order (QDRO)?
The amount that the alternate payee is taking as an immediate distribution.
283
If the parents' income exceeds specified income limits, then the guidelines do not apply.
This statement is _________________________.
True or Not True regarding child support guidelines?
is NOT true regarding child support guidelines
284
Adam and Mary used and owned their residence during their eight-year marriage. If Mary has the right to possession of the residence until it is sold in six years, Adam qualifies for the capital gain exclusion for the sale of the residence under which of the following conditions?
As long as he retains title to the residence, Adam is treated as using the residence during the period that Mary uses it.
285
Which act required certain spousal support payments to be included in the recipient spouse’s income and was changed by the JTCA of 2017?
Revenue Act of 1942
The Tax Reform Act of 1984 simplified the definition of spousal support and eliminated many issues regarding the transfer of marital property between spouses.
286
Which of the tax carryforwards does not have a rule for allocation between spouses?
Alternative minimum tax credit
There is no rule for allocating alternative minimum tax credit. The other options all have a rule for allocation.
287
Which of the following is NOT something that attorneys use to determine how the law is likely to be applied in a case?
Case Law
State Legislation
Local Custom
Local mediation reports
Local mediation reports
288
A divorce statute may list factors that the judge must consider when dividing property in a divorce. What is an appropriate action for the couple to take when negotiating a property settlement?
Obtain approval from the judge for their negotiated property settlement.
The divorce statute may list factors that the judge considers when dividing property in a divorce. The statute does not say that the same factors must be considered and weighted the same way when spouses divide the property themselves.
289
Which filing status would NOT permit a taxpayer to take the childcare credit?
Married filing separate
