General Principals Flashcards
Current assets
Cash equivalents, accounts receivable, marketable securities and inventory
Piti-principal interest taxes insurance acceptable
28% of gross income
Acceptable of total debt
36% of gross income
Acceptable of total debt
36% of gross income
What does a balance sheet have on it
Assets, Liabilities, Net worth
No cash flow
Three step calculation-what are we calculating in each step
Step 1-FV of inflated amount needed
Inflation rate
Step 2-PV needed for lump sum
Beg and real rate
Step 3-PV or PMT needed to fund goal. FV giving or from step 2
Interest
MAGI limits for child credits
160-180k
RTFQ
Plus loan for parents making too much money
Kiddie tax
Interest and dividends
$2700
Income $2700
Standard deduction -$1300
Taxable at 10% -$1300 =$130 tax
Parents tax rate (24%) $100=$24.00
Total tax is $154
Qualified tuition program or 529
A gift of current interest, what can it be called through initials
Qtp
Unmarried domestic partner estate plan
Revocable trust and tenant in common titling
Why?
What is a Cobra exception for an employer?
Under 20 employees
20 employed count part time if (50% of business day)
Cobra-voluntary or involuntary termination or change from full time to part time
Terminated employees and dependents can get up to 18 months of coverage
Cobra- employee’s death, divorce, legal separation or eligible for Medicare, loss of dependent status (marriage, reaching dependent age limit
Spouse and dependents up to 36 months
Structured settlement
Stream of tax free (because did not take receipt of the funds) income from a negligent accident to support to meet medical and living expenses.
Could be settled privately or in court
Compensatory damages
Typical tax free but interest is taxed
Damages from age sex or race is taxed unless needed for the emotional distress like psychiatric care (tax free)
Punitive damages
Generally taxed
Intended to punish wrongdoing, not for injuries
Damages to beneficiaries in wrongful death is tax-free
Prizes and awards
Taxed on whole amount unless annuities over 10 years. If over tax years taxed as received
Fiscal policy
The fed controls money supply. Federal taxation and spending to level out business cycle, achieve full employment, price stability, and sustained growth in economy
Monetary policy
The fed reserve influences the money supply to loosen or tighten the flow of credit
Reserve requirement for banks/fed
Example: Reserve requirement is 10% bank can lend 90% of deposits
Easy money-reduce requirements
Tight money-increase requirements
Discount rate when talking about the fed
Rate the fed charges its member banks to borrow to meet the reserve requirement
Not prime rate
Easy money-lower rate
Tight money-higher
Open market
Fed buys and sells securities daily
Repo/buy bonds-easy money/injection
Reverse repo/sell bonds/taking money
Margin rate
Reg T
Decrease margin percentage-easy money
Increase margin percentage-tight money
Fed funds rate
Set by auction
Supply
Supply is the amount of goods a producer is willing to sell
Price
Cost of production
Level of technology
Demand
Is the amount of goods or services that buyers are willing to purchase
Price
Price of other goods
Consumers’ incomes and tastes
Leading economic indicators
Anticipate move or change in the economy
Unemployment claims
New manufacturing orders
New private housing units
Stock prices, 500 common stock
Index of consumer expectations
Coincident indicators
Move in tandem with economy
Industrial production
Personal income less social security, welfare
Non farm payroll
Lagging indicator
Confirming indicator
Average duration of unemployment
Average prime rate charged by banks
Commercial and industrial loans
Credit outstanding to income
Change cpi
CPI
Consumer price index basket of goods in various cities
CPI-U is widely reported
Seven CPI categories
Medical care
Food and beverage
Apparel
Transportation
Housing
Education and communication
Recreation
Producer price index (PPI)
Farm products and industrial commodities
The leading indicator to cpi is ppi
As producer cost rise, they are passed to consumers
Disinflation
The slowing down of price increases
Yield curve
The direction of interest rates move determines what happens to bonds.
The curve shows market rates of different maturities with the same rating
Positive yield curve
Shows that as maturities lengthen, yields increase. Investors demand better yield with added risk
Negative or inverted yield curve
When the fed tightens and raises interest rates, the short-term rates are more attractive then long term rates
Yield curve components
Yield to maturity
Same tax status
Term-to-maturity
Same bond quality
What should an advisor do if a Couple is getting a divorce?
Can represent one, both or neither
Suggest they get separate attorney’s
What would count as alimony for Divorce alimony pre 2019?
Paying the payee’s mortgage
Paying the premium on the payee’s life insurance
Making a payment for the payee ie IRA
Not deducting-Paying of child support
Business cycle peaks
When consumers have enough of everything so business activity ages
Unsecured debt
Consumer borrows on credit worthiness and no collateral is pledged
Signature only debt
Adjustable-Rate Mortgage(ARM)
Interest rates fluctuates with the economy. Limits on the change, how much and how often
Biweekly payments for mortgage
Payments due every two weeks, loan will be paid off faster
Balloon payments
Long term mortgage at given interest rates. Example after 5 years the unpaid balance is due or you have to refinance
Secured overnight financing rate(sofr)
Benchmark rate used by financial institutions for adjustable rate mortgage loans
Federal housing administration (FHA)
Government insurance that reduces risk to the lender for low and middle income individuals to have a down payment or meet the requirements for a conventional loan
Max between $489k and 1.149 mill
Mortgage payment
Due at the end of the month
Positive PV
I
Periods
N
Remember: Solve for payment
1-input
What to consider when determining Leasing vs owning?
Lower years, consider leasing due to cost of owning
Client wants to sell a house at a loss
Consider keeping it until it recovers
Pro forma statements
Future financial statements are expected results for the next year or longer
What segments start to expand during the Through to recovery stages?
Auto sales/manufacturing historically lead the business cycle to expansion
Defensive industries
Like public utilities and pharmaceuticals are defensive and have little impact with business cycles
Commodities Like gold are an inflation hedge. When does inflation usually happen?
Inflation typically happens at the peak of a business cycle
An advisor Not researching in a security and soliciting it would be
Negligence leads to unintentional tort and is a violation of the fiduciary duty
Elderly client looking for fixed income and yield curve is declining
Lock in long term bond in case in interest rates continue to increase
PITI
Mortgage+home insurance+taxes/All gross income (don’t subtract retirement plan contributions)
Emergency fund
-RTFQ
-If someone is having a kid perhaps 6 months is needed depending on their work
-fixed and variable expenses, no taxes
Payment to UTMA
Leaves parents/grandparents ownership and is owned by the child
Reduces net worth
Answers on test
Must relate to the question ie rating when talking about provisions, options, and features
Pure life annuities are
Pure life- payments until death
A fixed annuity can lose most of it’s purchasing power in 30-40 years
Removed from estate
No beneficiary payout
What is a pension max
Take full pension and supplement with life insurance PV of what is needed with a discount rate
Wording like “attempt to cope with inflation” and “keep up with market conditions”
Variable annuity is usually the correct choice in a suitability question
Exclusion ration and inclusion ratio
Investment/expected return=exclusion
1-exclusion=inclusion
An annuity for an entity receives payments
The income is treated as ordinary income the year it is received, no deferral
Corp owns an annuity for an employee
They are charged interest for the year
And can claim an ordinary loss
Sole proprietor and partnership have conduit income and losses that filed on schedule
C
An LLC can be classified as a partnership or a corporation. When is a llc classified as a partnership
When it has no more than two of the following:
Centralization of management
Continuity of life
Limited liability
Free transferability of interests
The LLC governance is controlled by what?
A contract that controls ownership interest, the distribution of funds, capital structure
Dividend received deduction when a US corporation invests in another US corporation
50% of dividend may be excluded from tax if less than 20% of the company is owned by the purchasing corporation
65% exclusion is they own 20-80%
100% exclusion if ownership is greater than 80%
Section 1244 qualified small business stock details
Can turn a capital loss of $100k and turn that into $100k ordinary loss
Still get $3000 of current year capital loss and the rest moves forward as a carry forward capital loss
Personal service corporation (PSC) is a negative. Firms that may be considered HALE Health (doctors, dentist), A accounting acting, architecture, Law, Engineering may face what
Be considered a corporation paying a flat 21%, losing the advantage of a separate tax entity. They do not get the dividend deduction advantage
Subchapter S Corporation breakdown
Elects a special tax treatment
Conduit for income,deductions, and tax credits
Becomes an S corp by UNANIMOUS election of its shareholders
Losses status immediately if it lost it’s eligibility
File taxes on 1120s
S corp eligibility
Limited to 100 shareholders
Can only issue one single class of common shares but can be voting or non-voting shares
Only individuals, estates and certain trusts can be shareholders
Only available for us companies and us citizens or permanent resident aliens
Advantages of S corporations
Limited liability
Conduit-pass through income or losses to owner but limited to basis
Basis = cash plus direct loans made by the shareholder to the corporation
Disadvantage of S corp
Corporate formalities
Sale of stock is limited by eligibility standards
Limited partnership details
Must have a least one general partner
Limited partners are liable only up to their basis
Limited partner is restricted to passive investor
If a limited partner is an active participant then they forfeit limited liability for partnership debt
Business organization chart
A partnership must file
Form 1065 for information purposes only
Each partner must file income or loss on form k1
Partnership losses are deductible up to basis, cash, direct loans from partner and loans to partnership
A corp bank loans an S corp funds but requests a personal guarantee from an owner on the loans
This does not increase basis. Only personal loans to the business increases basis
LLC taxable treatment
If partnership, only an information return is filed. The tax will pass through to the individual members
If the entity is a corporation, the business is a taxable entity and normally files form 1120 or 1120s
What is corporate accumulated earning tax
Unless exempt, a corporation that retains it’s earnings will be penalized with a tax equal to 20% of its accumulated taxable income
A regular corporation can retain up to $250k ($150k personal service corporation) without establishing a business need. A bona fide business need allows corporations to avoid this tax
Purpose is to coerce corporations to pay dividends
Accumulated earnings is from prior year and current year. If over threshold then what?
Taxable at 20%
Conduit entities enjoy what tax benefit over corporations regarding dividend payments?
Double taxation
On what tax form is a S corp distributions normally completed on?
K1 of 1120s
K1 of 1041 is on trust and estate
K1 of the 1065 is for partnerships
1099 is for self employment
Summary of tax forms used by different businesses
When speaking to conduit losses which structure is better LLC, S or C
LLC allows for pass through losses
S corp is limited to the amount contributed as basis
C corp will not allow passthrough losses
Approved CFP nouns
Certificant
Practitioner
Professional
Certification
Mark
Exam
Viatical tax free
Life settlement generally over 65
Treated as long term gain
Regular ordinary income on all other life insurance products
Nuanced with MEC
CFP suspension even if never received marks are
Automatically published
Figuring dollar weighted return use IRR calculation. Important for withdrawals
Capital withdrawals are positive ie going into bank account
Negative NPV means what?
The investment will generate less than the required rate of return. Inversely a positive rate of return will earn more
NPV facilitates investment decisions
When NPV is 0 the interest rate is the same as the required rate of return
