Investments, Taxes, & Beyond Flashcards
1
Q
5 Truths about ETFs
- Can you trade them during the day?
- Are they a unit trust or an investment company?
- How does their tax efficiency compare to that of mutual funds?
- Are they considered liquid?
- Can their prices be volatile?
A
- You can purchase at anytime during the trading day.
- May operate as a unit trust or investment company.
- Generally more tax efficient than open-end mutual funds (because of capital gains?)
- Considered non-liquid.
- Subject to price volatility.
2
Q
Advantages of ETF’s over mutual or index funds (3)
A
- Can be bought or sold at any time during the trading day.
- Can be bought or sold on margin.
- Very low management fees.
3
Q
What are Unit Investment Trusts? To whom do they distribute their income? How do they liquidate?
A
A portfolio of frozen assets.
Distributes all its income to “unit holders”
Self liquidating
4
Q
What are mutual funds? If they can’t be bought and sold real time during the trading day, how do they determine their value?
A
Mutual funds are open-end investment companies, meaning they can continually get more buyers.
They determine their value by “Mark to market” each day.
5
Q
What are Open-end, Closed-end, Unit trusts, and variable annuities governed by?
A
The Investment Company Act of 1940.
6
Q
What are guaranteed investment contracts? Who uses them?
A
They’re CD’s with a guaranteed rate of interest.
Their value doesn’t fluctuate with changes in interest rates, the way bonds do, thus they have no interest rate risk.
They’re used by defined benefit pension money.
7
Q
Why is real estate a good investment?
A
It doesn’t move with the stock market, so it’s considered a good form of diversification.
8
Q
How do you compute NOI? How do I compute a property’s value?
A
rental + non-rental income (parking, laundromat) = gross income
minus vacancy + collection loss = effective gross income
minus operating expenses (not including interest and depreciation) = NOI.
Divide NOI by the capitalization rate to get the property’s value.
9
Q
What’s the trap with NOI questions?
A
The NOI of the building doesn’t include mortgage interest and depreciation.
The monthly income of the person includes at least mortgage interest expense.
10
Q
How are REITS characterized as investments? What’s the difference between an Equity REIT and a Mortgage REIT?
A
REITs are seen as illiquid, diversification investments.
Equity REIT = uses a modest amount of financing to preserve cash flow in case of high vacancy.
Mortgage REITs = financing a construction project. You get higher interest rates, but it’s riskier if they units don’t sell. Vulnerable to purchasing power risk.
11
Q
What are the 3 REIT regulations?
A
- 75% of all income must be from real estate to be a REIT. 15% can come from GNMA.
- If a REIT distributes 90% of its income it need only pay tax on the undistributed portion.
- Shareholders may deduct 20% of pass thru income from REITS
- The top effective tax rate for REITS =29.6%
12
Q
What are Warrants? How long do they take to expire? Are the warrant contracts standardized? What intrinsic value are they issued at?
A
Warrants are a specific type of call option that corporations use. They take several years to expire, whereas calls usually expire in 9 months. Warrant terms are not standardized. Warrants are issued at 0 intrinsic value.
13
Q
4 Things about collectibles as investments. Are precious metals taxed as collectibles?
A
- Purchased mostly for enjoyment.
- Pretty darn illiquid.
- Capital gain tax of 28% regardless of holding period.
- They tend to move opposite of the market, so they’re good for diversification.
Precious metals are taxed as collectibles: 28% cap gain rate regardless of holding period.
14
Q
How many non-accredited investors can a private placement have?
What is 1-2-3 accreditation criteria?
A
- 35.
2. 1M in net worth, not counting primary residence, 200k in income if single, 300k in income if married.
15
Q
What are considered liquid investments? Are mutual funds? Are money market mutual funds?
A
ST CD’s, laddered CD’s, cash value life insurance, money market funds also if laddered or ST.
Mutual funds and money money market mutual funds are not considered liquid.
16
Q
What 2 things are unique about Zero Coupon Bonds (and maybe STRIPS, too) ?
A
- No reinvestment rate risk, because they don’t give any payments to reinvest.
- Duration = term.
17
Q
What is unique about Ginnie Mae’s (and maybe other housing bonds) re re-investment rate risk?
A
They have the highest because they pay back principal at the same time as interest.
18
Q
How do you standardize a stock for return per unit of risk?
A
Divide return by Β.
19
Q
What are the 5 systemic investment risks? Hint: PRIME
A
Purchasing Power Re-investment rate Interest rate Market risk Exchange rate risk
20
Q
What taxes are treasuries subject to?
A
Federal ONLY. Not state and local.
21
Q
What is Return on Equity?
What is Yield?
A
ROE = earnings ÷ share price.
Yield = dividend ÷ share price.
See the difference?
22
Q
Which is the price weighted index?
A
The Dow
23
Q
What are examples of financial ratios?
How do you use financial ratios to compare stocks?
A
Price/share, earnings per share, return on equity, yield.
Compute ratios on several companies. Compare those to other companies within the same industry.
24
Q
Do retirement plans and mortgages count in one’s Current Ratio?
Do REITs or brokerage accounts?
A
No and yes.
25
How do you compute the price at which you get a margin call?
(1 - IM ÷ 1 - MM) x initial stock price.
26
How do you solve for geometric mean using a TVM calculation?
1. Add 1 to all returns, multiply the results together. This number = FV.
2. Use -1 for PV.
3. N = the # of returns you have.
4. Solve for I.
27
What is an example of a time-weighted return? A dollar-weighted return? What's the difference? What's the flaw in dollar-weighted return?
TW return = geometric return.
DW return = IRR, or NPV.
The difference is DW returns incorporate $ flows.
The flaw is DW return assumes a constant re-investment rate.
28
What is Current Yield?
The sum of annual payments ÷ by price.
29
What does bond duration move inversely with?
YTM and Coupon rate.
30
What does Duration move in sync with?
Time to maturity, but it's not the same thing.
31
How do high-risk investors bet on bonds?
They buy LT bonds when they think rates will fall; they buy ST ones when they think rates will rise.
32
What type of bond is best for low risk investors?
Low duration bonds!
33
How do you immunize bonds or a bond portfolio?
Match duration to your time horizon.
34
How do you calculate the price of a zero-growth stock (or preferred stock)?
Hint: how would you adapt the dividend growth rate model if growth were zero and dividends are constant?
Price = dividend ÷ required rate of return.
35
How do you calculate the value of a stock with constant dividend growth?
```
V = D1 ÷ (r-g)
D1 = Next yr. dividend.
R = req. rate of return.
G = constant growth rate.
```
36
How do you solve 2-step problems that end with a constant growth rate, using TVM calculation?
1. Do a TVM calculation for each year given. FV = Div, N = yr, I = req. rate of return, solve for PV.
2. Add these numbers together.
3. Do a constant growth rate calculation for the remainder. Add that to previous.
37
What is the short-cut for 2 step stock valuation problems?
1. Use the constant growth model to solve for the long-term value.
2. If the 1st growth rate is lower than the second growth rate, choose the next lowest # from among the answers.
3. If the 1st growth rate is higher than the second growth rate, choose the next highest # from among the answers.
38
What does Information Ratio measure and how do you calculate it?
Information ratio tracks a manager's return against a benchmark.
(Asset return - benchmark return) ÷ Asset SD
39
What is a stock option collar?
You have a stock position that you want to protect against loss, and you want to cover your costs.
- Buy an out-of-the-money put at 10% below current price.
- Sell an out-of-the-money covered call at 10% above current price.
40
What are Bullets and Barbells?
```
Bullets = only intermediate term bonds.
Barbells = only long- and short- term bonds with regular rebalancing.
```
41
What are initial margins, and who set them?
50%, set by the Fed Board under regulation T of the 1934 Securities and Exchange act.
42
Who sets maintenance margins? What are they usually?
Exchanges and FINRA. Usually 25%
43
Can you trade mutual funds or options on margin?
No. Only stocks.
44
How do you calculate the price at which you'll get a margin call?
(1 - Initial Margin) ÷ (1 - MM) x stock price.
45
How do you calculate the call amount?
(MM% x current stock price x # of shares) - (current stock price x # of shares - amt. borrowed)
46
What is a straddle and when do you buy one? Who buys a put?
A straddle = buying a call and a put (usually at the same price). It's for the investor who doesn't know where the market's going.
A person who buys a put is a person who seeks to lock in gains.
47
What is tactical asset allocation?
Buying and selling to try to capture the hot sector; it's a market timing strategy.
48
What are the four factors of arbitrage pricing theory? What do they all have in common?
They're all about unexpected changes.
1. . Inflation
2. Industrial production
3. Shifts in risk premium.
4. Changes in the structure of yields.
49
What is risk capacity?
The amount of risk required to reach your financial goals.
50
How does a risk-averse investor buy a house?
| What do most investors do in a panic?
1. In cash.
| 2. The current thinking is they don't make changes.
51
What's the difference b-t the SML and the CML
Both specify the relationship between risk and return. The SML does it for individual stocks, and the CML does it for portfolios.
52
What do the black soles and binomial pricing models attempt to do?
Figure out what stock option prices should be.
53
Are New Comparability Plans expensive to start?
Yes.
54
What is the open enrollment period for Medi-gap when you sign up for Medicare?
Is there a waiting period for pre-existing conditions?
6 months each.
55
When do medical expenses become deductible?
When they exceed 7.5% of AGI.
56
How much marginal interest is deductible?
Marginal interest is deductible to the extent of investment income. Investment income includes interest, dividends, and capital gains.
57
How do you compute self-employment tax?
1/2 of self employment tax?
For SE tax multiply net income x .1413 (pi backwards)
For half of SE tax .07065, or multiply net income by .92935
58
What value are personal casualty losses based on?
The lower of basis or FMV.
59
Do qualified dividends and LTCGs count in computing AGI?
Yes, even though they’re taxed differently.
60
Are Treasury Regulations a source of tax law?
| Are Rev. Rulings and Rev. Procedures?
Treasury Regs are a source of tax law.
| Rev Rulings and Rev Procedures are not, but they may be cited as precedent in tax cases.
61
What are Congressional Committee Reports? May they be cited as precedent?
Cong. Com. Reps. indicate the intent of congress in tax law. They may not be cited as precedent.
62
Who are the 5 people who can represent you in an audit?
CPA, attorney, Enrolled Agent, Enrolled Actuary, any permissible designee.
63
What is a "frivolous return" and what is the tax penalty?
A frivolous return omits information, or is substantially incorrect. The penalty is 5k.
64
What is, and what is the penalty for a negligent tax return?
A negligent return = disregard of rules, but without intent to defraud. The penalty is 20% of underpayment.
65
What is the penalty for a fraudulent return?
75% of underpayment.
66
What estimated tax is required to avoid penalty?
90% of current year liability or 100% of last year's liability.
67
What are the 5 filing statuses? What is required to file HOH or Qualified Widow?
Single, MFJ, MFS, HOH, Qualified Widow.
HOH = You provide > 50% support for a dependent even if they don't live with you.
QW = The year your spouse dies you can still file MFJ. For the next two years you can file QW if you have a qualifying child and don't re-marry.
68
What are included in gross income?
- Punitive damages except for?
- Emotional damages if not?
- Alimony if divorced before?
- Hobby income?
- Scholarships not used for tuition and books?
1. Punitive damages except for wrongful death.
2. Emotional damages if not expensed to therapy.
3. Alimony if divorced before 2019.
4. Unemployment income.
5. Hobby income.
6. Scholarships not used for tuition and books.
69
List 5 exclusions to remember.
```
Gifts and inheritance.
Child support.
Municipal bond interest
Worker's comp
Compensatory damages.
```
70
Excludable Fringe Benefits from your ER (lots)
Health ins. premiums for EE, spouse, dependents
LI prems. up to $50k DB
Company car for business
Commuter vehicle or transit pass or parking up to $270/mo
Up to $5k for dependent care assistance.
Up to $5,250 for education.
$10k for adoption assistance
Discounts on products up to profit margin
20% discount on services
Occasional overtime meal, cab fare or theater or sports tickets.
71
What extra deductions can SE persons take? Can they deduct disability premiums? What is the limit on these deductions?
SE persons can health, dental, and LT care insurance as long as it's < business income.
SE persons cannot deduct disability ins.
72
List deductions to Gross Income (or for AGI)
| Hint: Lots
```
IRA + HSA contributions
Student loan interest
Keogh or SEP contributions
Alimony paid if divorced before 2019
SE health insurance
Moving expenses for military only
Penalty for early withdrawal of savings
$4k of educational expenses (AGI limits apply--alternative to AOC).
```
73
3 standard deductions
- What is the individual SD?
- How much extra for over 65 and/or blind?
- How much for a child’s unearned income?
$12,550 for individual
Extra $1,350 for 65+ and for blind.
$1,100 for child unearned income
74
List ‘Itemized’ or ‘Below-the-line deductions’ (lots)
- Among the harder to think of, is there a deduction for investment interest expennse? What is that?
- what if there’s a federal disaster? What if there’s not?
- Medical, dental expenses over 7.5% AGI
- SALT up to $10,000
- Property tax up to $10,000
- Mortgage Insurance if AGI < 100k
- Interest on up to $750 of home mortgage
- Charitable gifts up to a % of AGI
- Investment interest expense up to extent of investment income (the rest carries forward)
- Casualty losses if federal disaster declared
75
How do you calculate the deduction for casualty losses of personal property?
- Use the lesser of basis or FMV
- Subtract ins. coverage
- Subtract $100 floor
- Subtract 10% of AGI
- This is your deduction.
76
How do you calculate your Home Office Expense Deduction?
| Can it create a loss?
- It cannot be > business income from that activity
- Deduct other business expenses first, then deduct your home depreciation due to home office from that, but the result can't be less than zero.
77
What meals and entertainment expenses are deductible?
100% of meals at restaurants
Social and recreational expenses other than for HC (think holiday party)
Tickets to sporting events are never a deductible expense.
78
What are Medicare Taxes?
1. 45% on wages normally.
| 2. 35% on wages above 200k or 250k MFJ.
79
What is section 179 election? What are its limits, and what type of property is eligible for it?
Section 179 allows you to opt to expense the entire amount of business equipment in a single year. Vehicles, office furniture, and computers are eligible. You can only take $1.04m of this in a year and if you put $2m in new business property into use in a year your deduction is reduced $1 for $1 over 2m.
80
What is the max. Amt. Of capital loss you can have in a year? How long can the rest carry forward?
$3,000. The rest carries forward indefinitely.
81
How much gain does one have to recognize in a 1031 exchange?
The lesser of boot received or realized gain. The answer is usually the amt of boot rec’d, but may not always be.
82
What is the maximum deduction you can take on 1244 stock (small business stock you sell at a loss)?
$100,000
83
Name 3 AMT add-backs
- Private purpose municipal bond interest
- Property tax itemized deduction
- Excess of % depletion over adjusted basis
84
Why is increasing your income likely to reduce your AMT liability?
The top income tax bracket is 37%. The top AMT bracket is 28%
85
What is a child's standard deduction? How does it get complicated if they have wages and investment income?
$1,100 for unearned income.
If they work they can claim a standard deduction of $350 + wages up to $12,550, but they can only use $1,100 of that against unearned income.
86
How is the first $1,100 of unearned income for a child taxed?
What about unearned income above that?
10%, income beyond that is taxed at the parent's rate.
87
What types of income are subject to SE tax?
- Net schedule C income
- General partnership K-1 income
- BOD fees
- part-time earnings
88
How do you calculate SE tax due?
What's the shortcut?
1. Start with net SE income.
2. Multiply by .9235
3. Multiply by .153
4. Deduct 1/2 this amount above the line.
For a shortcut, multiply by .1413 (reverse of pi!), deduct 1/2 this amount above the line.
89
How does the credit for child and dependent care credit work?
- Must be for a child under 13, or a dependent unable to care for themselves.
- Max credit is 3k for the first child, 6k for two or more.
- You get a % of the max credit based on how much you earn; the more you earn, the lower the %
- The most common rate is 20%
90
How do the Child Tax Credit and Family Tax Credit work?
How old can a child be to qualify for the Child Tax Credit?
Does the Child Tax Credit have a phase-out?
The Child Tax Credit must be for a qualifying child under 17.
The credit is 2k, reduced by $50 for every 1k of MAGI above $400k.
Up to $1,400 is refundable.
The "family" version of this credit is for those who provide > 50% support to a retired family member, or a disabled child 17 or older. This person need not live with you for you to claim this credit. The credit is $500, non-refundable, and you can’t claim it for yourself or your spouse.
91
How does the Foreign Tax Credit work?
If you pay income tax in another country with which the US has friendly relations you may deduct foreign tax paid dollar for dollar from your US income, or claim a dollar for dollar credit.
92
How does the Adoption Credit work?
You can get up to $14,440 to cover expenses in adopting a child. You must claim in the year the adoption was finalized for foreign adoptions. Special needs child can claim full credit regardless of expenses.
93
Credit for the Elderly or Disabled
Available to those over 65 or permanently disabled, with income under certain limits. Typically b-t $3,750 - $7,250
94
What is the Earned Income Tax Credit?
A credit for those with lower levels of earned income.
95
What's better a tax credit or a deduction? How do you tell?
It depends on your tax bracket. To see the value of a deduction, multiply the amount by the tax bracket.
To see the value of a credit, divide the credit by the tax bracket.
96
How does the $ basis accounting method work? Who uses it?
Count income when received, count expenses when paid. Almost every individual uses it. Businesses with revenues > 25m cannot use it.
97
What is the Accrual Method of accounting?
- Count income when earning process is complete.
| - Count expenses when the firm incurs liability.
98
3 quirks about accounting method choice (cash basis vs accrual):
- Can you change the method you use?
- Can you use a hybrid method?
- What method do contracts longer than 1 year use? Hint: It’s neither of the above, nor a hybrid.
- You generally can't change the method you use.
- You can use a hybrid method.
- Contracts longer than 1 year use a % completion method.
99
How are capital gains paid in installment sales?
When can't you use installment sales?
What's the catch with related party installment sales?
You pay gains pro rata on the installments you receive.
You can't use this for publicly traded securities or on loss sales.
You must pay the full gain if the sale is to a related party and they resell within 2 years.
100
Name the 3 inventory methods. Which one can show the highest profit or loss?
Hint: consider the options for selling shares
LIFO, FIFO, and specific ID.
| Specific ID can show the greatest profit or loss.
101
Net Operating Losses:
- What entity types can’t use them?
- What % of NOI can they be used against?
- How much carry forward?
- How much carry back?
- What % NOI can you offset with grandfathered pre 2018 NOLs?
- Not available to S-corps or partnerships.
- Can only be used against 80% of NOI
- Unlimited carry forward
- No carry back
- Pre 2018 losses are grandfathered and can offset up to 100% of NOI.
102
What entity types can claim QBI?
How much is the deduction?
Does it phase out? How high?
Does it apply more to service businesses or physical ones?
QBI is for pass-thru businesses only.
Gives a deduction of up to 20% on QBI income.
Phases out if your income is > 214,900
Generally applies less to service businesses.
103
Several facts on C-corps:
- How are they taxed?
- Do they offer liability protection?
- How many shareholders can they have?
- Do they offer continuity of life?
- Can profits be double-taxed?
They're taxed as separate entities. They offer limited liability, and can have an unlimited # of sh. holders. They offer continuity of life. Profits are double-taxed if distributed to owners.
104
What is the flat rate tax on corporate profits?
| How are dividends received by corporations taxed?
The flat rate for corporate profits is 21%.
Corporate dividends always get a 50% exclusion. If the corp owns > 65% of the company the exclusion is 80%, and if the corp owns more than 80% of the company dividends are excluded entirely.
