Important for Exam Flashcards
Like-kind Exchanges (Boot)
- boot received = recognized (cash)
- boot paid = 0 recognized, add to basis
- basis carries over from last property
(Boot is not like-kind property)
AMT Payable
- AMT tax - regular tax = AMT payable
- if regular tax exceeds AMT payable amount of AMT due is 0
Phantom Income: Insurance
- any type of lapse with a loan
- section 162 life and disability
Phantom Income: Investments
- zeros/strip income
- TIPS
- declared but not paid dividends and capital gains
- EE bonds (if elected)
Phantom Income: Tax
- k-1 income from LP/FLP
- recaptures
Phantom Income: Retirement
- ESOP distribution (basis’ only)
- secular trust
Ordinary Income Property (charitable donations)
- basis only, up to 50% AGI
- inventory
- work of art created by taxpayer
- use-unrelated property (watch out for artwork and collectibles)
- short term capital gains property
- copy rights
*real estate and stocks are always LTCG property
Charitable Bargain Sale Calculation
- (sale / fair market value) * basis = adjusted basis
- sale - adjusted basis = taxable gain
PIA Calculation
PIA - [(# of months before FRA / 180) * PIA]
Taxation Management of Distributions Techniques
- substantially equal payments
- spread out distributions to take advantage of lower tax brackets
- use after-tax investments for retirement needs
DB/DC Limits
- DB/DC salary cap = $330,000
- SIMPLE IRA cap = $516,667
- DC max contribution = $66,000 (73,500 if 50+)
- DB max contribution = stuff it like a pig
- tandem plan is a wrong answer
When to adopt a Profit Sharing Plan
- profits vary year to year
- wants a qualified plan to motivate employees to help make profits
- employees are young, well paid and have lots of time
Steps for Solving IRA Problems
- look for plan (if none mentioned, assume both can deduct)
- look at ages (highlight and make note if catch-up or not)
- look at salary and AGI, if no salary or earned income mentioned cannot contribute to IRA. Be careful AGI is NOT earned income
Special Purposes for Roth IRA’s
- 59.5+
- death
- disability
- first home expense up to $10,000
- medical expenses
- medical insurance premiums while unemployed
- substantially equal payments
- higher education cost
- federal declared disasters
Nonqualifed Plans Characteristics
- may discriminate
- exempt from most ERISA requirements
- no tax deduction for contributions until employee is taxed
- fund earnings are sometimes taxable to employer
- distributions are taxable at ordinary tax rates
Qualified Plan Characteristics
- may not discriminate
- must satisfy ERISA requirements
- immediate tax deduction for contribution
- earnings accrue tax deferred until distributed
- same as nonqualifed
High Loss Severity, Low Loss Frequency
Transfer (Insurance)
High Loss Severity, High Loss Frequency
Avoidance
Low Loss Severity, High Loss Frequency
Retention and Reduction
Low Loss Severity, Low Loss Frequency
Retention
Owner of S-Corp
- tax free benefits
Homeowners Coverage C
- boats and trailers up to $1,000
- exclusions: property of roomers, boarders, and other tenants; property contained in an apartment regularly rented or held for rental
Term Insurance (When to Recommend)
- young with low cash flow
- no cash value needed
- temporary need
Whole Life (When to Recommend)
- forced savings
- guaranteed amount
- conservative
- when don’t specify
Universal Life (When to Recommend)
- wants cash value in addition to death benefits
- conservative
- has cash value need
- flexible
Variable Life (When to Recommend)
- worried about failure
- various
- risk tolerant
Variable Universal (When to Recommend)
- various and flexible
- worried about failure
- young, aggressive, good cash flow, separate funds
Flexible Spending Accounts
- no fica, futa, or income taxes
- no LTC
- not an HSA
- use it or lose it 12/31 (dependent care only)
Dep - Dec
Med - Mar
QBI Deduction Limit
- 20% up to $464,200 can be deducted For conduit entities
- cannot be service related
When to Recommend: Defined Benefit
When an older controlling employee wants to maximize tax-deferred retirement savings for their benefit and when company has very stable cash flows with excess profits
When to Recommend: Cash Balance
When company can no longer afford guaranteed benefits under a DB or small company with high earners
When to Recommend: MPP
- stable work force
- simple to administer and explain
- stable cash flows and fixed contributions to make annual fixed contributions
When to Recommend: PSP
- profits vary
- want to adopt a qualified plan
Deferral
$22,500 or $15,500 (SIMPLE)
Employee Contribution
$22,500 or $15,500 (SIMPLE) + catch up
Employer Contribution
$66,000
Can hardship withdrawals come from Profit Sharing Plan
No, has to have 401k provisions
Solo 401k vs SEP
- over 50 = Solo 401k because of catch up
- under 50 = SEP
Keogh (Partnership’s and Sole Proprietors)
- 25% = 18.59%
- 15% = 12.12%
** used for sole proprietor SEPs as well
SIMPLE first 2 year penalty
25% of distribution + income tax
Integration with Social Security
- DB, DC, MPP, TB, PSP, SB, SEP
- NO ESOP, SIMPLE AND SIMPLE 401k
21 and 2 rule
- not allowed for 401k
When to Recommend: SEP
- alternative to qualified Profit Sharing Plan
- contributions year to year; simple and less expensive to install
Correlation of Investments SHORTCUT
- if 0 choose number closest to 0
- if less than 1; take average of standard deviation and pick next lowest number
- perfectly positive think honda and toyota
- perfectly negative think one up and down
Dividend Discount SHORTCUT
- calculate based on second number
- choose number higher or lower based on first number (i.e., first number higher choose higher)
Benchmarks
Dow Jones - Price Weighted
S&P - Float Weighted
Russell 2000 - popular capitalization weighted
Value Line - equally weighted
Wilshire 5000 - broadest; value weighted
NASDAQ - capitalization weighted
EAFE - international
EPS Formula
ROE x Book Value or Net Worth
Time Horizon
Should equal duration
