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CFP Self-Study > General Principles > Flashcards

General Principles Flashcards

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1
Q

Formula for Capitalized Income for a Business

A

Capitalized Value = Annual Income/Capitalization Rate
(note - capitalization rate would be given)

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2
Q

Pro Forma Statement

A

Projected Cash Flow statement for a business. Usually the next fiscal year, but could be longer.

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3
Q

Emergency Fund

A
  1. Checking Account balance in excess of 1 month’s expenses (or $0)
  2. Government Money Market Accounts
  3. CDs maturing in 90 days or less
  4. Savings accounts
  5. Laddered CDs maturing in 180 days or less
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4
Q

National Credit Union Share Insurance Fund

A

Credit Union version of FDIC Insurance. This is a Federal Agency.

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5
Q

FDIC Insurance Amount

A

$250,000 per person, per ownership, per bank. Different accounts (i.e. checking account and money market account) in the same ownership count as an aggregate figure. Joint accounts with different people are aggregated together for the person who is in common.

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6
Q

Insider Trading and Securities Fraud Act of 1988

A

Person with access to private and key information who makes trades on the underlying security is prohibited.

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7
Q

Principal Goals of State Insurance Regulation

A
  1. Maintaining solvency of insurers
  2. Protecting policyholders against mistreatment by insurers
  3. Maintaining fair competition
  4. Helping assure coverage is available to all who want and need it
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8
Q

Operation areas monitored by State Insurance Regulators

A
  1. Licensing companies and agents
  2. Policy forms
  3. Rebating
  4. Company insolvencies or liquidations
  5. Competency of agents
  6. Reserves
  7. Twisting (unnecessarily replacing an insurance policy with a new one)
  8. Access to insurance
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9
Q

Who regulates Mutual Fund companies?

A

The SEC

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10
Q

Securities Act of 1933

A

The first act, regulates NEW issues and requires a prospectus with full and fair disclosure of risks to be provided to an investor before a transaction takes place.

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11
Q

Securities Act of 1934

A

The second act, regulates the trading of previously issued securities on the secondary market. Created the Securities Exchange Commission (SEC) to create and enforce securities law.

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12
Q

Investment Advisors Act of 1940 (IAA)

A

Defines the roles and responsibilities of an investment advisor. Authorizes the SEC to monitor those who advise others (individuals, pension funds or other institutions) on investing. Stipulates what constitutes and investment advice and who must register with state and federal regulators to dispense it.

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13
Q

Securities Investors Protection Act of 1970

A

Established the SIPC to supervise firms that fall into financial difficulty. Insures investors against loss arising from firm failure (insolvency) but NOT loss from poor investment strategy.

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14
Q

Trust Company

A

An organization (usually associated with a commercial bank) that engages as a trustee/fiduciary for an individual or organization. They act in this capacity for the purposes of investment management and estate planning.

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15
Q

College Funding Strategies during pre-planning years

A
  1. UGMA/UTMA (subject to Kiddie Tax under age 24
  2. EE Education Bonds (parents own bonds)
  3. Coverdell Education Savings Plan (ESA) ($2,000/yr)
  4. Section 529 Plan (QTP) (College Savings or Pre-paid Tuition)
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16
Q

College Funding Strategies during college attendance (Grants and Loans)

A

Wealthy (over $60K):
1. Parent Loan Undergraduate Students (PLUS)

Poorish (under $60K):
1. Pell Grants
2. Supplemental Educational Opportunity Grant
3. Subsidized Stafford Student Loans

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17
Q

College Funding Strategies during college attendance (Tax Credits)

A
  1. American Opportunity Credit (AOC):
    a. $2,000 plus 25% of next $2,000 ($2,500 max)
    b. MAGI phase outs on tax sheet
    c. First 4 years of college only
  2. Lifetime Learning Credit:
    a. $2,000 maximum (20% of expenses up to $10K)
    b. Any higher learning institution (undergrad/grad/CE)
    c. MAGI phase outs on tax table
    d. Deductions also available, subject to MAGI (not on table)
    NOTE: as with ESA and 529, cannot be combined for the same child/expense dollar. Coordinate with Coverdell (ESA) and 529 (QTP).
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18
Q

College Funding Strategies during college attendance (Distributions and Withdrawals)

A
  1. Coverdell (ESA) withdrawal:
    a. Must be used before 30 (can transfer to new bene)
    b. MAGI phase out on tax sheet
  2. 529 (Qualified Tuition Plan or QTP) distribution:
    a. No MAGI phase out
    NOTE: as with AOC and LLC, cannot be combined for the same child/expense dollar. Coordinate with AOC and LLC.
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19
Q

College Funding Strategies during Graduate attendance

A
  1. Fulbright Scholarship
  2. Stafford Loan (unsubsidized)
  3. 529 (QTP) distribution or Coverdell (ESA) withdrawal (same coordination rules apply regarding child/expense dollar)
  4. Lifetime Learning Credit is available within MAGI limits
20
Q

Other College Funding Strategies during all phases of education planning

A
  1. Gifts
  2. Earnings
  3. UGMA/UTMA
  4. 2503(c) trust (minor child trust)
21
Q

Coverdell (ESA) Qualified Expenses

A
  1. Tuition
  2. Fees
  3. Academic tutoring
  4. Special needs services
  5. Books/supplies/equipment related to attendance
  6. Room and board
  7. Uniforms
  8. Transportation
  9. Supplementary items
  10. Services such as extended day programs (after care)
22
Q

Kiddie Tax Rule WITH EARNED income

A

If the child has earned income (from a job) greater than the $1,150 standard deduction for unearned income, the amount of the earned income plus $400 becomes the new standard deduction. The next $1,150 is still taxed at the child’s rate (likely 10%) and then the remainder is taxed at the parent’s rate (given).

Ex. - Evan earns $5,000 annually at his job, and has $3,000 of unearned interest income. The first $5,400 is exempt from tax ($5,000 earned, plus $400 unearned). The next $1,150 is taxed at 10% (based on tax table), and the remaining $1,450 is taxed at his parent’s rate.

NOTE - BE CAREFUL WITH THE TYPE OF UNEARNED INCOME. Capital Gains rates may be used instead of ordinary income. Capital gains rates for low income earners can be 0%

23
Q

Series EE and I Bonds education expense tax rules

A
  1. Must be redeemed in the year college expenses are paid to qualify
  2. Only tuition and fees qualify for beneficial tax treatment
  3. Owner (parent) must have MAGI less than certain thresholds (provided on the tax table)

NOTE: Bonds CAN be held in an UTMA account, but will not qualify for beneficial tax treatment.

24
Q

American Opportunity Credit Rules

A
  1. $2,000 plus 25% of next $2,000 of expenses for the tax credit ($2,500)
    a. Phaseouts are on the tax table
  2. A deduction alternative is available (phaseouts not on table)
    a. $4,000 deduction for MAGI $65K Single/$130K Joint
    b. $2,000 deduction for MAGI $80K Single/$160K Joint
  3. Undergrad only
  4. Part-time student eligible (1/2 normal full-time class load)
  5. Felony drug conviction NOT OK
  6. Tuition, books, supplies and equipment only (no room/board)
25
Q

Lifetime Learning Credit

A
  1. $2,000 max (20% of expenses up to $10K)
  2. Phaseouts are on the table
  3. Part-time student eligible (no required class load)
  4. Graduate or Undergraduate qualify
  5. Degree pursuit not required
  6. Can be used for one or more courses or to acquire/improve job skills
  7. Felony drug conviction OK
  8. Tuition, books, supplies and equipment only (no room/board)
26
Q

Student Loan Interest Deductibility

A
  1. Above the line deduction on 1040 (NOT ITEMIZED)
  2. Equal to the amount of interest paid up to $2,500 maximum
  3. Phaseouts are on the table
27
Q

Pell Grants

A
  1. Approximately $6,000 max per year
  2. Undergraduate only
  3. Part-time student eligible (6 credit hours)
  4. EFC must be below certain amount to qualify (US Dept of Ed determines EFC)
28
Q

Supplemental Education Opportunity Grants

A

Available to Pell Grant recipients, up to $4,000 per year

29
Q

Student Loan Forgiveness Programs

A
  1. Income driven repayment plans
    a. Cap loan payments as a % of income (usually 15%)
    b. Forgiveness after 20 to 25 years
    c. Pay As You Earn may cap payments at 10% of income
  2. Public Service Loan Forgiveness
    a. Loans can be forgiven after making 10 years of eligible payments
    b. Firefighting, Nursing, Teaching, Military, Government
30
Q

Teacher Loan Forgiveness Program

A
  1. For teachers (elementary/secondary/service agency) serving low-income families.
  2. 5 full and consecutive years of service
  3. $5,000-$17,000 in loans can be forgiven
  4. Direct sub or unsub loans only, NOT PLUS
31
Q

PLUS Forgiveness

A
  1. Death of parent
  2. Disability of parent (not the student)
  3. May be forgiven if student the loan was for dies
32
Q

College Financial Aid (FAFSA)

A
  1. FAFSA is required to apply for state and federal loans, PLUS as well as financial aid from private colleges and universities
    a. Application opens Oct 1 the year prior to academic year
    b. Aid is usually first come, first served
    c. Used to determine EFC
33
Q

Expected Family Contribution (EFC) for the FAFSA

A
  1. Tax Forms from 2 years prior to FAFSA application are used
    a. Ex. 2019 1040 is used for FAFSA application for the 2022 year
  2. Having additional dependent family members attending college simultaneously reduces EFC
  3. 5.64% of unprotected assets used toward EFC
  4. Small businesses (more than 50% owned, less than 100 fully-time employees) are EXCLUDED from assets counted toward EFC
  5. Retirement accounts and Cash Value of Life Insurance are EXCLUDED
  6. 20% of assets owned by dependent student are INCLUDED
34
Q

Planning Considerations for Divorce

A
  1. Home should be sold before divorce is finalized to take advantage of higher Section 121 exclusion
  2. Closely held business interests should be scrutinized
  3. Property Settlements are tax-free exchanges (basis is carried over)
  4. Divorces finalized before 2019 alimony is deductible to the payor and taxable to the payee. Requirements:
    a. Cannot file jointly or live together at time of payment
    b. Payment must be made in cash
    c. Must be received for the benefit of the payee spouse
    d. Payments must cease at death by decree or state law
  5. Divorces finalized after 2019 is not deductible by the payor, and is not includible as income for the payee
  6. Child Support Payments are non-deductible for the payor and non-taxable for the payee
  7. Custodial parent maintains tax privileges for dependent children (tax credits, deductions)
35
Q

Planning Considerations (options) for Disability

A
  1. Disability Income Insurance (individual or group)
  2. Social Security (SSDI)
  3. Worker’s Compensation (tax-free)
  4. Medicare or Medicaid benefits
36
Q

Planning Considerations for Terminal Illness

A
  1. Life Insurance, Disability Income, LTC insurance are planning options
  2. Disability Income, LTC, Medicare and Medicaid may provide benefits once a diagnosis is made
  3. Documents that should be prepared or reviewed:
    a. Living Will
    b. Durable POA for Healthcare (for health decisions)
    c. Living Trust
    d. Durable POA (for financial decisions)
37
Q

Planning Considerations for non-traditional families (single parent, unmarried domestic partners)

A
  1. Single Parent
    a. Budget for additional childcare/time off work
    b. Social Security benefits available
    c. Income replacement using life insurance and trusts
    d. Guardianship
  2. Unmarried domestic partners
    a. Titling of assets (Tenants in Common best answer)
    b. Beneficiaries
    c. No intestacy rights (revocable trust best answer)
38
Q

Planning Considerations for job change or job loss

A
  1. Revising budget
  2. Refinancing mortgage
  3. Using retirement funds for current needs
  4. Health Insurance considerations (COBRA)
39
Q

Monetary Windfalls (damages, settlements, awards and prizes)

A
  1. Compensatory Damages
    a. Damages that compensate for injury or sickness are generally tax
    free, but if the award is annuitized, earnings are taxable
    b. Damages that compensate for non-physical injury (discrimination)
    are taxable (medical care expenses are tax-free)
    1. Structured Settlements
      a. Voluntary agreement (could be a court order)
      b. Stream of tax-free income
  2. Punitive Damages
    a. Meant to punish wrongdoing
    b. Fully taxable except in the case of wrongful death
  3. Prizes or Awards (lottery or other contest)
    a. Generally the full value of the prize or award is taxable when
    claimed. This includes future value of annuity payments
    b. Annuity payments taken over 10 years are taxed in the year
    received
40
Q

Leading Economic Indicators

A
  1. Average weekly hours for production workers in manufacturing
  2. Initial unemployment claims (tested)
  3. New manufacturing orders (tested)
  4. Vendor performance (% of companies reporting slow delivery)
  5. Contracts for plans and equipment
  6. Private housing starts (tested)
  7. Interest rate spread
  8. Stock prices, 500 common stocks (tested)
  9. Money supply
  10. Index of consumer expectations (tested)
41
Q

Coincidental Economic Indicators

A
  1. Number of employees on non-agricultural payrolls
  2. Personal Income (excluding transfer payments like SS and welfare)
  3. Industrial Production (tested)
42
Q

Lagging Economic Indicators (also called confirming indicators)

A
  1. Average duration of unemployment
  2. Average prime rate charged by banks
  3. Commercial and industrial loans outstanding
  4. Ratio of consumer installment debt outstanding to personal income
  5. Change in the CPI for services
43
Q

Gross Domestic Product (GDP)

A

Total production of goods and services in a nation’s boundaries. Does NOT factor in inflation or other yearly price fluctuations

44
Q

Consumer Price Index (CPI)

A
  1. Food and Beverages
  2. Apparel
  3. Education and communication
  4. Housing
  5. Transportation
  6. Other goods and services
  7. Recreation
  8. Medical Care
    Note: Includes products and services
45
Q

Producer Price Index (PPI)

A

Index of the prices of farm/industrial products and commodities. Excludes services.

CFP Self-Study (6 decks)

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