Investment Vehicle Taxation Flashcards
Generally, what are the tax rules on a non-MEC insurance policy?
Growth and interest not taxed and upon death benefit payout, the recipient is not taxed.
If distributions occur, FIFO rules apply and only proceeds above the premiums paid in, are taxed
Proceeds payable before death (surrender value) may be taxable if they exceed the amount of premiums paid in.
Generally, how is life insurance in qualified plans taxed?
Premiums paid by the employer are taxable to the employee. The employee can annuitze this benefit if he doesn’t pass before retirement, but if he does, it benefits pass tax-free to the beneficiaries.
What is section 1035?
IRC section that governs the exchange of one life insurance product for another. No gain or loss recognized for exchange of life insurance, LTC, annuity, or endowment.
What is a Modified Endowment Contract?
An insurance product that fails the 7-pay test. If it fails, the policy is still treated the same for tax free/deferred growth, but ANY withdraws, including the contract investment, prior to 59 1/2 will utilize the LIFO rules.
What is a material change to a policy and what impact does that have to MEC?
An exchange of policy or insured, increase or additional riders, increase in future benefits, increase of over $150k in death benefits.
This starts the 7 year MEC clock over.
What are the tax rules for annuities?
Return of capital is non-taxable. Interest growth is taxed as ordinary income
What is the FIXED ANNUITY exclusion ratio?
exclusion % = total annuity investment / total expected return
Payout x exclusion % = amount that WILL NOT be taxed. The rest is taxed as ordinary income
What is the VARIABLE ANNUITY exclusion ratio?
Exclusion $ = total annuity investment / # expected payments
$ amount is excluded from taxes.
What is a partial annuitization?
The ability to annuitize a portion of the contract which becomes a separate contract, leaving the rest to continue building interest.
How are commercial annuities taxed?
Prior to Aug 13th, 1982, FIFO
Post Aug 14th, 1982, LIFO
Distributions prior to 59 1/2, 10% penalty on taxable portion of the distribution. Taxable income is taxed as ordinary income
What is the rule for differenciating between short and long term capital gains?
It is 1 year. The day of security acquisition does not count, but the day of disposition does. For simplicity, the day after acquisition, one year later, is the requirement for long term capital gains.
What are the rules with inherited IRAs?
Typically, an inherited IRA must be completely liquidated 10 years from date of death. The clock does not start for minors until they turn 18. Also, a spouse or beneficiary that is not more than 10 years younger than the deceased, can take withdraws over their lifetimes.
What is the difference between a 1231 gain and 1250 gain?
1250 recaptures depreciated property when sold for a gain. The ceiling for such recapture is 25%
1231 is the long term capital gain above and beyond the recaptured gain. This uses LTCG rates.
What is the order of capital gains that capital losses will reduce?
Collectible assets at 28%
1250 recaptured gains at 25%
LTGC at 20/15%
What is a telephone transfer?
When a mutual fund sponsor allows an investor to switch from one type of fund to another without a fee, this is still a taxable event.
When mutual fund earns dividends and those distributions are reinvested to purchase more shares, what is the result?
The numbers of shares and the aggregate basis both increase
What are the general taxation of dividend distributions in cash?
Short term - ordinary income
Long term - LTCG
What are the 3 methods for determining basis when stocks are purchased at different times and different amounts?
Specific ID: most preferred; matches stock sold to stock purchased
Average cost: pools all shares and divides total cost by number of shares
FIFO: least preferred. Maximizes tax liability
How are short sales taxed?
Usually by STCG or losses. Short selling doesn’t typically go for over a year. In the instance it does, then LTCG/L rules apply
According to IRC section 267, when can you NOT deduct losses during sales or exchanges?
Related parties such as members of your own family (blood relatives), certain business organizations, an estate to beneficiary, and certain trusts.
If a bond is bought at discount, an original issued discount (OID), how is it taxed?
The phantom income generated by the difference between face value and purchase price, must be included each year as income. The tax payer should receive a Form 1099-OID that reports the annual OID amount.
What are the tax implications for a bond bought at premium to PAR?
The taxpayer can take a deduction on the interest payments throughout the life of the bond
How can a taxpayer claim a loss from an IRA?
Only in the year of death - the beneficiary of the IRA can claim a loss based on the amount the original owner paid into the IRA and the amount of current worth - assuming the latter is less.
This is an ordinary loss - not a capital gains loss
What is net investment income and how is it usually taxed?
NII is investment interest paid or accrued on a debt that was incurred to purchase property held for investment, such as stocks, bonds, CDs, savings accounts, etc.
Similar to capital gains and losses, the taxpayer can deduct interest paid from interest gained up to the value of the interest gained. Any additional interest payments can be carried over into future years.
