Final Points Flashcards
Explain the process/taxation for an sale using NUA.
- To qualify as NUA it must be a full distribution of the account including employer securities. If that is met, the securities must be rolled into a a separate brokerage account
- OI will always be taxed at the amount put into the account by the employer (the basis)
- For the LTCG treatment, if qualified the FMV at the time of distribution will be placed into a bucket until you sell (deferred tax bc you might get more)
- When you sell from the brokerage, the holding period is based on when you placed the securities into the account/sold them. If LTCG we can add it to our NUA of LTCG. Could be short term, therefore we would have LTCG on the amount rolled over (the bucket of NUA) and STCG based on the difference of the price.
Give the main highlights of a simple IRA
- EE contributions allowed. 13,500/3,000 for catchup
- ER must give either 2% flat NEC contribution (based on 290K) OR 3% match (no cap on comp)
- IF you move your money within the first 2 years of being in the plan you must pay a 25% penalty
- Only can be established by a company with less than 100 EEs (no age requirement/must earn 5K per year)
- Not that a simple 401k can have loans but IRA can’t
Give the main highlights of a SEP
- ER Money ONLY
- Discretionary contribution but must be given to everyone
- Worst plan for part time EEs bc you only need to make $600 per year and work for 1 hour to be eligible
- 100% vested contribution bc IRA. Contribution is limited to lesser of 25% of pay or 58,000 max
- Due date of contribution is 4/15 but can be extended to 10/15
First tell me all the steps of the financial planning process and then tell me when a questionnaire would be used
Risk tolerance would be understanding clients personal and financial circumstances
Name the 7 profit sharing qualified plans
- Profit Share
- 401k
- Stock Bonus
- ESOP
- Thrift
- Age based
- New comparibility
Name the 4 pension plans and tell me which are DC
Non-DC
- DB Plan
- Cash Balance
DC
Target benefit (1 time actuary)
Money Pruchase
What makes a HCE and a KEY
HCE:
- Comp is greater than 130,000
- Greater than 5% owner
KEY
- Comp is greater than 185,000 and is an officer
- Comp is greater than 150,000 and you are greater than 1% owner
- Greater than 5% owner
Top heavy means that 60% of assets are held by key EEs
Deductions for charitable contributions
Learning public for now:
Cash (2021) - 100% deductible
OI Property Lesser of FMV or Basis 50%
STCG Property
All Loss Property
LTCG Property FMV or AB 30% if FMV
Intangible (Stocks) 50% if Basis
Real
Tangible (related)
LTCG
Tangible (Unrelated use) Lesser of FMV or AB 50%
Your clients purchased a home one year ago. They financed $150,000 at 5.5% for 20 years. In four years they will have 15 years remaining on their mortgage. Your clients anticipate that interest rates may fall. If they are able to refinance their home at that time at 5% interest for 15 years, what will their total savings be?
5,976
Step One: calculate the monthly payment
PV = 150,000
N = 240 (20 × 12)
I = .45833 (5.5/12)
FV = 0
Solve for PMT = 1031.83
Step Two: solve for remaining balance in 4 years (15 years will remain)
PMT = 1031.83
N = 180 (15 × 12)
I = .45833 (5.5/12)
FV = 0
PV = 126,282.08 (note: the balance owed on a mortgage is always the present value of all of the remaining cash flows)
Step Three: Solve for the payment assuming the refinance at 5%
PV = 126,282.08 (This is the mortgage balance with 15 years remaining)
N = 180 (15 × 12)
I = .41667 (5/12)
FV = 0
Solve for PMT = 998.63
Step Four: Solve for savings
180 payments will remain on original mortgage (180 × 1031.83 = 185,729.40)
180 payments will remain on refinance (180 × 998.63 = 179,753.40)
Savings from refinance = 185,729.40 – 179,753.40 = 5,976
Explain the calc on a residual benefit for disability.
Example:
Your client has just become disabled for the long term. She works for a major corporation and makes $12,000 per month. Several years ago she purchased an own occupation policy that will pay 60% of monthly wages. The policy has a 90-day elimination period. The policy also has a residual disability benefit that will compensate her, should she return to work at reduced earnings. Your client has paid the premiums for this policy with after-tax dollars. After being totally disabled for 12 months, she is able to return to work. However, she continues to be “residually disabled” and returns to work in a different capacity and at a lower salary. In her present position she earns $5,000 per month
The benefit is the lost income as a % of the pre-loss incomes * the monthly disability
For the example 12K - 5K = 7K lost income, 7k/12k = .583
The monthly benefit is currently 7,200 (60% of $12K). From there we take the % of the residual and apply it to the 7,200 for the reduce payment while the client returns to work = 4,200 per month.
All payments won’t be taxable since the client paid with after tax $.
Note: Most policies will require a loss of income from 20-25% from prior monthly before paying a residual difference
Tell me what this means:
300/500/300 split liability limits
Bodily injury per person/bodily injury coverage per accident/property damage
So, it’s 300,000 per person, but not more than 500,000 in total for the accident, plus up to 300,000 of property damage
So the example was a multi car pile up but the coverage will pay a max of 500,000 in total bc it’s 1 occurrence.
Detail the befits to a revocable (also called intervivos!) living trust.
A revocable living trust is primarily established so that the trust assets avoid the probate process and provides for management of assets and grantor trust income tax status. The trust assets will transfer per the trust document and will not need to pass through probate. A revocable living trust does not reduce a grantor’s gross estate. The assets of a revocable living trust are included in a grantor’s gross estate at the fair market value at the grantor’s date of death.
No savings on the tax just a method to avoid probate
Explain the at risk vs the passive loss deduction for passive property.
Example question: Jim invests as a limited partner in XYZ partnership (his only activity) and pays $150,000 for a 10% interest. He receives a K-1, which allocates an $80,000 loss to him. How much of his loss is suspended under the passive activity rules?
Dalton sets it up as a 2 step funnel. The first step is looking at how much you have “at risk”. So you invest 150K you can only lose that 150K. For the example, the K1 is based on his actual loss so 80,000 will pass through 1st test.
The next funnel is the passive loss. The 80K will go in but the suspension will depend on the amount of losses you have that year. So if you have nothing to offset the full amount will be suspended. So 80K is suspended under the passive activity rules
Requirements for an individual investor to qualify for passive activity loss
We are talking about the 25K deduction one is allowed to take:
- Participant must actively participate. Meaning taking caring of the grounds/porperty. Different from material as that’s not required. Material focuses on the 500 hour test.
- Must own at least 10% of the value of real estate
- Must have AGI less than 150K or else you have the phase out starting at 100K (130K-100K/2 = deduction example)
Note if you material participate that’s not a passive loss so you will be entitled to deduction of your loss at risk. The remaining amount will be suspended. But note you don’t need to offset just a deduction for your contribution
More to add to this card but tell me about a 2503(c) trust
Crummey powers are found in irrevocable life insurance trusts. The purpose of the 2503(c) trust is to reduce income tax to the grantor by naming a minor beneficiary. Income must be used for the benefit of the minor.
Tell me how to solve this problem:
XYZ company anticipates paying the following dividends, starting next year: Year 1: 2.25 Year 2: 2.75 Year 3: 3.01 After the third year, they anticipate dividends growing at 6%. If Diego’s required rate of return is 12%, how much would he be willing to pay for this stock?
Step #1: Apply the constant growth dividend formula to value the stock as of year 3. V = 3.01(1.06) ÷ (.12 - .06) V = 53.18. Bc it anticipates a growth moving forward.
Next, we need to figure out the value currently. We only have the next 3 years.
Step #2: Use uneven cash flows to determine the NPV of the stock at time period zero (today). CF0 = 0 CF1 = 2.25 CF2 = 2.75 CF3 = 3.01 + 53.18 = 56.19 I = 12 NPV = ? Answer: $44.20
Keeping the dividends rolling. How would you answer this question:
XYZ company paid a dividend of $3.00 this year and anticipates the dividend to grow each year by: Year 1: 5% Year 2: 7% Year 3: 8% After the third year, they anticipate dividends growing at 6%. If Sydney’s required rate of return is 10%, how much would she be willing to pay for this stock?
Step #1: Determine the dividend to be paid each year.
Year 1: 3.00 × (1.05) = 3.15
Year 2: 3.15 × (1.07) = 3.37
Year 3: 3.37 × (1.08) = 3.64
Step #2: Apply the constant growth dividend formula to value the stock as of year 3. V = 3.64 (1.06) ÷ (.10 - .06) V = 96.46
Step #3: Use uneven cash flows to determine the NPV of the stock at time period zero (today). CF0 = 0 CF1 = 3.15 CF2 = 3.37 CF3 = 3.64 + 96.46 = 100.10 I = 10 NPV = ? Answer: $80.86
Estate Tax Formula
Gross Estate - Allowable Deductions = Adjusted Gross Estate -State Death Tax Deduction -Marital Deduction -Charitable Deduction =Taxable Estate \+pst 1976 adjusted taxable gifts =Tentative Tax Base
Calculate Tax -Gifts Paid on Post 1976 Gifts =Estate Tax Before Credits -Credits =Net Estate Tax Payable
Deductions from the Gross Estate
A B C D E
Admin Expenses (Attorney/account fees + payment of debts + collections of assets appraisal) NOTE can also deduct on 706 or 1040
Burial (Funeral) Expenses (Does not cover travel costs)
Casualty and theft losses during administration
Debts
E.R Last medical expenses (can choose to either deduct on 1040 or estate but can’t do both)
How to calc the taxation of social security benefits
Single: 0-25K = 0% 25-32 = 50% 32-up = 85%
MFJ: 0-32K = 0% 32-44 = 50% 44-up = 85%
Remember this is based on MAGI + 1/2 of the SS payments. The tax won’t just be based on the payments you currently receiving
CRAT
Charitable Remainder Annuity Trust
What is not a capital asset?
A
C
I
D
A - Accounts Payable/Notes Receivable (ordinary)
C - Collectibles/Copyrights (Ordinary)
I - Inventory (Ordinary)
D- Depreciable Assets (1231)
Which plans Can't be integrated with Social Security? 4 4 S T R E S
4 - 401k 4 - 403b/457 S - Sarsep T - Traditional IRA R - Roth IRA E - ESOP S - Simple
Tell me % for SS and Medicare
Total ER and EE
Just EE
- 3% total
- 65% for EE and ER for SS and Medicare.
- 2% for SS - This is capped at $142,800
- 45% - for Medicare
Detail payout for loans
- Only based on vested balance
- 5 year payback unless for a mortgage
0-$20,000 = Lesser of 10K or account balance
$20,000 - $100,000 = 50% account value
100,000 up = $50,000
Qualified Distribution for a ROTH on earnings
-5 year term AND -Death -Disability -59.5 -First time home
10% Penalty Exceptions
ALL Plans
- 59.5
- Death
- Disability
Qualified Plans
- Age 55 and separated from service
- QDRO
- SEPP 72c =Equal payments of 5 years
IRA (5)
- College
- Health Insurance
- Home Purchase
What does ascertainable standard mean
Basically a general power of appointment but is limited to HEMS H - Health E - Education M - Maintenance S - Support
Basis step for:
JTWROS
Community Property
JTWROS = half step in basis.
Note: If married % ownership is always 50/50
If not, you must look at % contributed, that will determine the half when looking at FMV
Example:
Pops 70%
Son 30%
100K put into house(5K gift for the son bc you need 50% ownership)
Pops dies, FMV of home = 200K
Son now has a basis of 170K due to the amount receive from pops while still maintaining his contribution of 30%
Community Property:
Follows the will, so will always go through probate but only 50% of it will.
The step is always 100% so in the last example new basis would be 200K
Another Name for these trusts: A C --------------------------------- B
A - Power of Appointment/ Martial Trust
C - QTIP (use the combo of C and B with another marriage kids) - Marital deduction still preserved
———————————————————–
B - Bypass/Family/Credit Shelter
Judy Meserschmit is a partner in an accounting firm where she specializes in tax audits. Judy is a 1/3 partner and her adjusted basis in the partnership is $25,000. The partnership decided to take out a loan during the year for $45,000 to pay its expenses. For the year, the partnership reported a loss of $180,000. How much loss from the partnership can Judy claim for the past year on her federal income tax return?
40,000
The loan taken out by the partnership during the year increased Judy’s basis by her 1/3 share of the $45,000 loan or $15,000. Judy’s basis, therefore, increased from $25,000 to $40,000. Judy cannot deduct a loss from the partnership in excess of her basis (the amount she has “at risk”), so she can claim only a $40,000 loss.
Note: It would state non-recourse debt if that was the intent of the question.
The basis in a partnership will increase whenever liabilities increases, the increase is treated as a contribution of money to the partnership.
Taxation on rental properties. What are the rules?
According to tax Regulations, no income on the rental of a vacation home for less than 15 days is included in gross income. However, when the home is rented out for 15 or more days and the taxpayer uses it less than 15 days or 10% of the rental (whichever is more), then the home is not considered a residence.
Name the three fiduciary duties required at all times
- Duty of Loyalty (client’s interest ahead of our own at all times)
- Duty of Care (skill, prudence, and diligence)
- Duty to follow client instructions (if reasonable and lawful)
Harold and Sarah Chang are sending their first child to college this Fall and are considering their options for paying the tuition expense of $18,000. They set up an UGMA account for the child that contains $20,000, and the child’s grandparents have funded and are the custodian of a 529 plan that now holds $15,000. Harold and Sarah expect their AGI to be $75,000 this year and next. Harold has an investment account that holds $20,000 invested in stocks, bonds, and mutual funds. How should the Changs pay for the first year of their child’s education?
Not providing choices b/c I want to think about how these accounts are actually used.
When applying for the AOTC credit we must first look at AGI, the phaseout determines if it’s even worth it for some of the actions we can take. Next, look at the accounts being used for college payments. In this case, we have a UGMA and a 529.
To qualify for the credit, the parents will need to pay 4k of the expenses out of pocket. A distribution from a 529/UGMA can not be counted towards the credit. Next, we would cover the rest of the expense with the UGMA b/c we want to increase of chances of the child qualifying for financial aid.
Harry Thomas bought a newly issued six-year zero-coupon, 11% annual bond with a par value of $1,000. He paid $534.64 for the bond. How much income must Harry report for federal income tax purposes during the second year of this bond’s life?
So we are already given the PV of the Bond. From here all we need to do is multiply the PV by the rate of 1.11%. With that we get $593.45
That means we paid $58.81 was paid in the first year. Tp get the second, we do the same step $593.45 * 1.11 = 658.72 = $65.28 phantom tax
Steven Myers, age 47, is married and has two children and is President of Myers Associates, Inc., a graphic arts design company. Steven has consulted a CFP® professional for comprehensive financial planning. The CFP® professional has obtained documents from Steven concerning his employee salary and benefits at his company. The Myers company has a disability income plan which provides long-term disability coverage for its employees. Under the plan, the company pays half of the premium, and the employee pays half. Steven Myers, who has an annual income of $90,000, is insured under the plan for replacement of one-half of his monthly income. If Steven Myers is disabled and receives Social Security disability benefits of $12,000 during the year, how much of this $12,000 will be includible in Steven’s gross income for federal income tax purposes?
Generally, for a taxpayer who files a joint return and whose “combined income” (AGI + foreign income + tax exempt income + ½ of Social Security benefits) is above $32,000, up to 50% of Social Security benefits are included in income. If a MFJ taxpayer’s combined income exceeds $44,000, up to 85% of Social Security benefits may be subject to taxation. In this case, Steven Myers will have to report one-half of the $45,000 he will receive as disability income insurance benefits because his employer paid one-half of the premiums. Since his combined income will be only $22,500 + $6,000 (which is ½ of his Social Security benefit), for a total combined income of $28,500, he will be below the $32,000 minimum and none of the Social Security benefits will be included in his gross income.
Assume for this question that the family maximum for retirement and survivor benefits under OASDI is $1,800 per month and that a worker retired at age 65 with a PIA of $1,300. If the worker later died at age 66, leaving a spouse, age 55; a dependent, unmarried child, age 17; and another dependent, unmarried child, age 15, what will be the spouse’s monthly Social Security survivor benefits?
A surviving spouse under 60 years of age, who is caring for a child under age 16, is entitled to Social Security survivor’s benefit equal to 75% of the deceased worker’s PIA. In this case, 75% of $1,300 is $975. Each dependent, unmarried child under age 18 is also entitled to 75% of the worker’s PIA. Since the deceased is survived by two dependent, unmarried children under 18 years of age, there are three family members who are entitled to a $975 monthly benefit. Their combined monthly benefit would total $2,925, which would exceed the maximum family benefit of $1,800 by $1,125. Therefore, the total excess is divided by 3, to calculate the amount by which each family member’s benefit must be reduced, to stay within the limit, or $1,125/3 = $375. The monthly benefit for the spouse and each dependent child is $975 – $375 = $600, for a total of $1,800 in benefits for the family per month.
When the probation period is included in disability insurance, what is it?
The time that is needed after the issue of the policy for the specific claims to be covered
On homeowner policy forms where other structures are covered, the coverage is usually what percent of the dwelling?
10%
What is modified no fault coverage
When the insured doesn’t give up the right to sue but refrain from such action until either a dollar threshold or a verbal threshold is reached.
What is an informally funded plan?
A non-qualified plan (rabbi trust) is a irrevocable trust but, unlike a funded deferred compensation plan, the assets are subject to the claims of the employer’s creditors. This avoids constructive receipt by the employee and delays income taxation until distribution.
In an informally funded plan (Rabbi trust), the employee has the segregated assets as security of the agreement, assuming the employer remains solvent and the assets are not taken by the employer’s creditors. This risk of having creditors take the assets inside a “Rabbi trust” is what constitutes a substantial risk of loss or forfeiture and keeps the employee from being considered in “constructive receipt” of the formally funded assets.
Jordan, age 16 and a dependent of James, has a part-time job and earned $4,500 this year. In addition, she had $600 of interest income and $1,000 in qualified dividends.
What is the amount of income that is taxable to Jordan?
Step 1: calculate the standard deduction. The standard deduction for a dependent on another taxpayer’s return is the greater of $1,100 or earned income + $350 (up to a maximum of $12,400, the standard deduction for a single taxpayer in 2021), so her standard deduction is $4,850.
Step 2: deal with the unearned income. The unearned income that is taxable is $1,600. The first $1,100 is tax free because it is covered by the standard deduction under kiddie tax rules. The next $500 is taxed to child at his own rate. (note: 1,100 tax free, next 1,100 at the child rate, anything above is at the parent’s rate SECURE Act 2019)
You have now used $1,100 of the standard deduction, leaving $3,750 to be used against earned income.
Step 3: earned income is $4,500. Subtract the remaining $3,750 of standard deduction and that leaves $750 taxed to the child at her rate (she worked for it, so no kiddie tax).
Step 4: check yourself:
Total standard deduction $4,850
Total taxed at child rate $1,250 ($500 of unearned income + $750 earned income)
Total taxed at parent’s rate $0
Total $6,100 this accounts for all of the taxable income
For a qualified plan tell me the distribution options and the withholding requirement
Distributions:
1. Annuity
2. Lump sum
O- One taxable year
R - Retire
E- Entire Balance
3. Rollover
4. In service withdrawals
Withholdings are subject to 20% for federal income tax purposes (For indirect rollovers only) YOU HAVE 60 DAYS
Lastly, only 1 rollover to an IRA per year no matter the number of accounts you have
What are the prohibited transactions for a retirement plan and what is the penalty for it?
15% of the amount involved within the transaction and 100% if not corrected within the taxable year.
Transactions:
1. Sale/Exchange/Lease of any property between a plan and disqualified person
2. Lending of Money/extension of credit between a plan and a disqualified person
3. Furnishing of goods, services, or facilities between a plan and d person
4. Transfer to or benefit of of the income of the plan to a d person
5. act by a q person who is a fiduciary whereby he deals with the income or assets of a plan in his own interest or for his own account
6 .receipt of any consideration for own personal account by a d person who is a fiduciary from any party dealing with the plan
RMDS Rules during life and inherited
50% penalty on the amount that should have been taken.
Required date is April 1st of year following the turning of age 72 or 701/2 (Pre 12/31/19). If still working and not 5% owner, can wait until year after retirement (only for employer plans not IRA)
Formula is plan balance from end of prior year/life expectancy factor
For inherited:
Same 50% penalty and will be based on eligible bene for special rules:
- Spouse (they are the only ones that can roll this into their IRA, plus they can delay at distribution until the deceased spouse hits the age of 72)
- Child under 18 ( when they hit 18, must be 10 years)
- Disabled or chronically ill
- Someone not more than 10 years younger than deceased owner
Those noted above can generally use their LE in year following death and reduce by 1
EVERYONE ELSE - Limited to 10 years for distribution/No RMD requirement
What is the tests qualifying child and relative
Child
- Support
- Age
- Adobe
- Relationship
Relative
- Relationship
- Gross income
- Support
- Not a qualifying child
