Exam Review Flashcards
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.
IRC 1041
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.
1041
Under IRC 1041: A transfer of property is incident to a divorce if:
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].
The two major exceptions to the non-recognition rule:
1) It does not apply if one spouse is a nonresident alien; and
2) It does not apply to a transfer of services.
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 _____].
IRC §179: Expensing election recapture
What is IRC 6015?
Innocent Spouse Rule
What is IRC 32?
Earned Income Tax Credit
What is IRC 71?
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.
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%
IRC 72(t)2(c)
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.
Abandoned Spouse Rule
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) 2/3
b) $2
c) $3
d) Social Security Offset
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)
FPV = PMT [1- (1 + i)^n / i]
Pension Present Value Formula
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
1 + discount rate / 1 + inflation rate - 1 x 100 = ____________
Inflation Adjusted Interest Rate
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) $15,000
b) 3 years
The reason for recapture is to
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.
What are the two recapture exceptions:
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)].
Recapture steps: (3)
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)
Social Security Rate
- 2% for employee
- 2% for employer
- 4% for self employed
Medicare Tax Rate
1.45%
SS income cut off
2021: $142,800
2022: $147,000
A person who helps prepare witnesses, improve arguments and rhetoric, and select juries is considered a ______________.
A Trial Consultant
What states recognize common law marriage? (11)
```
Hint
T.O.RI
SC.K.I.M
C.U.DC.
NH
~~~
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)
In a divorce settlement, what mistake is commonly made by financial professionals without proper training?
Considering only an equal division of property
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.
A ________________ is an individual who has been trained to assist people in coming to an agreement as a neutral 3rd party.
Mediator
What impact have the “no-fault” divorce laws had on divorces in the United States?
An increase in the number of divorces
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
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
What is the correct sequence of your courtroom appearance as an expert?
Voir dire, direct examination, cross-examination, redirect examination
How does an expert witness get qualified?
The lawyers can stipulate that a witness is qualified as an expert.
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
What is the correct sequence of the four basic steps of direct examination?
Explain assignment, explain procedures and assumptions, summarize work, and admit exhibits.
For what is a temporary order used?
To provide support for the family while permanent orders are pending
The term defined as a court order requiring a person’s appearance in court or at a deposition?
Subpoena
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.
Which form of alternative dispute resolution (ADR) utilizes a decision maker to make a binding decision for the parties?
Arbitration
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.
What should an expert witness bring to the witness stand?
Only those documents essential to the case
When do depositions usually occur?
After the close of discovery
What should the expert witness do during cross-examination?
Limit his or her answer to the narrow question asked.
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.
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
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.
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.
What is the key document that is used to collect financial data pursuant to a divorce?
Financial Affidavit
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.
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.
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.
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.
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.
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
Where is the first place to look for hidden assets?
Tax Returns
How many years of tax returns should you review when looking for hidden assets?
5 years
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
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).
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
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)
In _________ property states, the two spouses’ “separate property” is not subject to division of the court.
Community
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
Any property acquired in a community property state ____________________________ no matter where the couple moves.
retains its community property status
Any property acquired in a community property state ____________________________ no matter where the couple moves.
retains its community property status
__________________ 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
There are _____ types of equitable distribution states, which are differentiated by the way they identify property.
two
___________________ determine the value of businesses of different sizes across many industries.
Certified Business Appraisers (CBAs)
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)
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.”
Generally, a __________ is a starting point when property is divided in an equitable distribution state.
50/50 division
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
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.
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.
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].
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
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.
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
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
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
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
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.
Often a divorce instrument that provides for the continuation of spousal support payments after the death of the payor spouse.
Life Insurance Policy/Proceeds
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.
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
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.
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.
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
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.
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
_________________ 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
_________________ 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
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
__________________ 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)
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
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
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.
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.
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
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
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
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
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
The IRA rules pursuant to divorce also apply to _____________ and __________ accounts.
health and medical savings accounts.
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.
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.
Pension payout option: payments are made to the retiree for their lifetime and stop upon their death
Single Life Annuity
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
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)
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
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
To find the inflation-adjusted interest rate, use the following formula:
[(1 + discount rate / 1 + inflation rate) – 1] x 100 = inflation-adjusted rate
Determining the current present value formula using FV at age 65:
PV = FV / (1 + i)^n
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
What type of pensions carry a social security offset provision?
Public/government pensions
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
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)
Top-heavy plans or matching contributions typically use _________ vesting schedule.
3-year cliff vesting or 6-year graded vesting
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
