Federal Tax Considerations Flashcards
When would life insurance policy proceeds be included in the insureds taxable estate?
When there is an incident of ownership at the time of death
Upon surrender of the life ins policy, what portion of the cash value will be taxed?
Only the portion in excess of the premium paid
Main purpose of the 7-pay test?
To determine if a life insurance policy is a Modified Endowment Contract
Why are dividends in life ins policies not taxable?
Dividends are not considered income for tax purposes, they are a return of unused premium
Is the death benefit of a life ins policy taxed to the beneficiary if it’s received as a lump sum?
No, lump sum benefits are received tax free
What portion of a nonqualified annuity payment would be taxed?
Interest earned on principal
What is the name of a overfunded life ins policy?
A modified endowment contract, MEC
What is the general taxation rule for death benefits payable to the beneficiary of a life insurance policy?
Death benefits are generally not subject to income taxes
According to the taxation rules of life ins policies, how are cash value increases taxed?
Cash value growth is tax deferred
In a direct rollover, how is the money transferred from one retirement plan to a new one?
From trustee to trustee
Dividends received by the owner of stock in a stock company are taxable as
Ordinary income. Dividends are never taxed as capital gains
A cash surrender where the amount received is more than the amount paid in premiums
Could cause a taxable event
Tax deferred 1035 exchange
Surrendering a LI policy for cash and using the proceeds to buy a new policy from a diff insurer
Are premiums paid for individual life insurance tax deductible?
No, nor are the benefits taxed
If you gift your LI policy to a charity when can you claim a deduction?
In the year of the gift
Modified endowment contracts lose their favored tax treatment
The loans and withdrawals would be taxable unlike life insurance
If a spouse is the beneficiary of an Ira owner who died before distributions started what can they do
Treat the Ira as their own or roll it over to a new one
Can you fund an Ira with an annuity?
Yes with immediate and deferred but not with whole life insurance
Children cannot buy an Ira unless
They have earned income
IRS levies 10% on withdrawals made before 59.5 on cash surrenders on annuities, IRAs, Tsas, and Keough
Unless the individual has died or become disabled
Are premature distribution penalties waived for bankruptcy?
No
A Roth is diff than traditional because
Contributions are not tax deductible but distributions are tax free
Contributions to an Ira are always tax deductible if
An individual and or spouse isn’t covered by a retirement plan at work
What happens to taxes when exchanging one LI policy for another
Taxes are deferred
