Missed Questions Flashcards
What is the formula for calculating self-employment tax?
Self-employment tax = self-employment income x 0.1413 (0.9235 x 0.1530)
Deductions for investment interest are limited to ___________
Net taxable investment income (interest, dividends, annuities, and royalties) (qualified dividends, capital gains, and tax-exempt interest are NOT included)
Interest paid for business use or the production of income, is deductible (for/from) AGI
For AGI
Interest paid for personal use (investment interest and qualified residence), is deductible (for/from) AGI
From AGI
Who is covered under Section II of the homeowners policies?
- the named insured and spouse
- family members residing in the household
- other persons under the age of 21 in the care of the insured
Immunization is used to reduce _____ and _____ risks in a bond portfolio
Interest and reinvestment rate risks
Chapter 11 Bankruptcy allows a business to:
Negotiate with creditors for most of the debts of the business.
Exceptions to negotiated debts include debts that are provided for in the plan of reorganization and certain nondischargeable debts.
To be on a corporation’s books as a holder-of-record, and thus have a right to the next dividend payment, the investor must purchase stock ____________
Before the ex-dividend date
Conversion Value of Bond =
= (Par / Conversion Price of security) x current market price of security
Conversion Price = current market value of security x # of convertible shares
Open market operations consists of:
Buying or selling Treasury securities depending on the Fed’s desired objective
You (can/cannot) deduct non-business casualty loss expense
Cannot
Counseling Theory - Classical Economics Approach
Clients choose among alternatives based on objectively defined cost-benefit and risk-return tradeoffs
Counseling Theory - Behavioral Approach
Planners attempt to substitute negative beliefs with positive attitudes that should result in better financial results
Counseling Theory - Economic and Resource Approach
Financial planner is considered an agent of change, and the focus is on obtaining and analyzing quantitative data
Formula - Donee’s basis when the donor has paid gift taxes
donor’s adj. basis + (unrealized appreciation / (FMV - donor’s annual exclusion amount used for gift)) x gift tax paid
The receipt of boot will result in
1) the recognition of gain if there is a realized gain
2) no recognition if there is a realized loss
Calculating AMTI:
Regular taxable income
+ positive AMT adjustments
- negative AMT adjustments
+ tax preferences
______________________________
= AMTI
Calculating AMT:
AMTI
- AMT exemption
_______________________
= minimum tax base
x AMT rate
________________________
= tentative AMT
- regular income tax on taxable income
__________________________
= AMT
This Act regulates the actions of investment advisors….
The Investment Advisors Act of 1940
This Act permits the SEC to regulate UITs, managed investment companies, and variable life products…..
The Investment Company Act of 1940
If you participate in a qualified retirement plan, can you deduct Traditional IRA contributions?
Yes, but you must abide by the phaseout limits. If your spouse does not participate in a qualified retirement plan, they can deduct the full $6,500
Probation period of a disability income policy is…..
The time the insured must wait after the issue of the policy before the specified conditions will be covered
What can you do to defer the recognition of any gain on the payout of insurance proceeds? (i.e., basis of building is $125,000, but insurance policy paid $195,000)
Insurance proceeds which exceed the current basis of destroyed property will not be taxable if the taxpayer replaces the property with similar property within a two-year period from the end of the year in which realization resumed if a natural disaster (fire) occurred, or three years from the end of the year in which realization occurred in the event of a government taking (eminent domain).
Coverdell Education Savings Accounts can be transferred to….(person)
- Brother/sister
- Step brother/sister
- Son/daughter
- First cousin
Conversion provision in life insurance policy
The insured may exchange term insurance for permanent insurance without having to show evidence of insurability
Four elements of insurable risk:
1) there must be a sufficiently large and similar sample of individuals or events to make the losses reasonably predictive
2) the loss must be measurable and definite
3) the loss must be accidental
4) the loss cannot be catastrophic
Calculating Duration
Use cash flows - YTM % as i
Add PV of each year, add PV x YR # for each year
Get total for each
Divide PV x Yr # total by PV total to get duration
NAIC model legislation states that
LTC contracts must be guaranteed renewable or noncancellable. They must have a 30-day free look period and an expected loss ratio of 60%. If the policy is a replacement policy, the insurer must waive the time period regarding pre-existing conditions. Contract cannot require a prior hospital stay for benefits. The contract cannot provide skilled nursing care coverage only.
Student loan interest (for/from) AGI and what is the limit?
1) For AGI
2) Limit is $2,500 annually
Assets with expected returns that lie ABOVE the security market line (SML) are:
Undervalued; their expected returns are higher than the required rate of return represented by the SML
What triggers Roth IRA RMDs?
Death of the account owner; the beneficiary will need to take RMDs
How many days before the date of record must an investor purchase a stock in order to receive a dividend?
Two days
Elastic vs. Inelastic demand
Elastic: increase in price would lead to a decrease in the total amount spent on purchases of the product
Inelastic: an increase in price would lead to an increase in the total amount spent on purchases of the product; INelastic = INcrease in revenuue
Perfectly Elastic: increase in price would have no effect on the total amount spent on purchases of the product
When evaluating the return of two investment managers, the performance measurement approach generally used is the:
Time-weighted return; compounded rate of return calculation that allows for a more accurate comparison based on the security’s cash flows
An investor would like to know how a portfolio manager performed relative to how the manager was expected to perform on a risk-adjusted basis would use which indicator?
Jensen index (alpha)
- To compare a portfolio manager’s performance to that of the market using Sharpe or Treynor models, once must calculate the results of both of these models on other portfolios or on a market being used as a benchmark, as well as the portfolio in question
Which risk type can be eliminated using a “buy and hold” strategy with regard to fixed income securities?
Interest rate risk; the price changes when interest rates change, but if you don’t sell the bond then the price change doesn’t really matter. You still get $1,000 par value at maturity.
Branch of government charged with interpreting and enforcing state insurance code rulings that have the force of law?
Executive; Enforcing (E and E)
Judicial; interprets and renders opinions
Which is included in the holding period for determining whether the gain is long-term or short-term? Day of disposition or day of acquisition?
Day of disposition is included
Long-term capital gain = one year or longer or longer than one year?
Longer than one year
MLPs, aka publicly traded partnerships (PTPs), are bought and sold on:
an organized exchange or over the counter as if they were shares of stocks
Favorable tax treatment ISOs
Favorable tax treatment lost if sold within two years from the grant date and one year from the date of exercise - taxed at ordinary income since it’s a disqualifying disposition - taxed at ordinary income is the difference between FMV of the stock at exercise and the exercise price of the option
To receive LT cap gain treatment, ISO must be sold after one year from the date of exercise and two years from the date of grant
ISO Bargain Element
AMT adjustment to the extent the FMV exceeds the option exercise price
Responsible for monitoring the actions of a retirement plan fiduciary ?
Department of Labor
Savings & Loan Associations
-Also known as thrift institutions
- Not permitted to provide demand deposits (checking accounts)
- Regulated by the Office of the Comptroller of the Currency
- Main purpose is to accept savings and provide home loans
Tenancy by the Entirety is only available to ________
Married couples
Life Insurance Needs Methods
1) Capital Retention
2) Human Life Value
3) Financial Needs Analysis
1) How much life insurance is needed to generate an income that is equal to the support needed? Overstates life insurance needs typically
2) Replace an individual’s economic value; considers the income of the individual though remaining work-life expectancy, including raises. What is PV of this total?
3) Factors include family expenses that will remain after the wage earner dies, the number of dependents, and income that can be generated by the surviving spouse
Calculating taxable gifts vs. total gifts
Taxable gifts: use basis to calculate
Total gifts: use FMV
If interest-free loan is less than $________, you do not need to include as a gift
$10,000
To establish a SIMPLE, and employer (can/cannot) maintain another qualified or tax-advantaged plan.
Cannot
The employer can, however, also have a non-qualified plan such as a 457 plan.
Under the RMD rules for IRAs, a penalty tax of ___% is assessed on the amount of distribution not taken before the RMD date
25%
Can be reduced to 10% if the shortfall is withdrawn proptly
Income replacement ratio
Amount of one’s paycheck that is replaced by Social Security. Ratio is lower for higher earning individuals, and higher for lower earning individuals.
403(b) - 15 years of service rule
An employee with more than 15 years of service may contribute an extra $3k to their retirement plan. Counts toward the $66k annual additions limit
The objective of ERISA is to
To require plan sponsors to provide full and accurate information about qualified retirement plan activity and funding to plan participants and appropriate regulatory agencies (e.g., IRS)
Age-weighted profit sharing plans are capped by ______________
the annual additions limit
What retirement plans permit loans?
Qualified plans and 403(b) plans
Retirement plan loan limitations:
- Must be repaid within 5 years (except if used to acquire principal residence)
- Bear reasonable rate of interest
- Provision must be provided to all employees
- Loan amounts limited to 1/2 of account balance and cannot exceed $50k
- If account is less than $10k, 100% of vested balance is available for loan
- If account balance is less than $20k, $10k is available for loan
- Must be repaid at separation of service
- Loan is nondeductible
Calculating retirement contribution for self-employed persons
1) Calculate net self-employment income (must subtract 1/2 self-employment taxes from gross self-employment income)
2) Must use a net contribution rate in determining allowable contribution (25% contribution rate / 1.25 = 20% max contribution)
The penalty for an early withdrawal from a SIMPLE Plan is
25% if withdrawal is made within two years of initial participation; 10% otherwise
Key Employees vs. Highly Compensated Employees
HCE:
- GREATER than 5% owner of employer in current year or preceding year
- $150k compensation in 2023, or $135k in 2022
- If employer makes election, only persons ranked in top 20% of compensation and having income greater than $150k are included in HCE
Key Employee:
- Greater than 5% owner
- $150k/yr and 1% owner
- $215k/yr and officer of company
If working for two employers, what is the total amount of additional employer contributions for the year?
$132k; each employer has a limit of $66k additional contributions, however the employee still can only contribute $22,500 between the two company plans
A cash-basis taxpayer can deduct bad business debt up to ______
$0; if a customer declares bankruptcy, cash-basis taxpayers cannot deduct the loss
This retirement plan type can use forfeitures to reallocate to participants to increase account balances
Money purchase plans; defined benefit plans can only use forfeitures to decrease costs
Material participants are considered such if:
- Participated more than 500 hours in the current year
- If the taxpayer participated 100 hours, and is at least equal to or more than any other participantt
- They are considered material participants 5 of last 10 years
An activity is NOT considered a rental activity if:
- Average customer use is 7 days or less
- Avg. customer use is more than 7 days, but not over 30 days, and the owner provides no significant personal services
- Owner also provides extraordinary services
- Property is customarily made available during business hours for nonexclusive use by customers
Investments in a 403(b) plan is limited to ________
Annuity contracts and mutual funds
Pension plans can invest up to ____% in employer stock. Profit sharing plans can invest up to ___%.
10%; 100%
Dividends are taxable to the recipient as dividend income, but only to the extent:
of the corporation’s current and accumulated earnings and profits
Received Stock at a Loss: Gifted Stock vs. Inherited Stock
Gifted: Double-basis applies
Inherited: Use FMV
Payroll taxes on deferred compensation plans are due
at the time compensation is earned and deferred, not when the funds are distributed
Unrelated Business Taxable Income (UBTI) exemption
Income from rental in not included; any type of leveraging or borrowing within a plan is subject to UBTI
Integration formulas are allowed for which plan: ESOP or stock bonus plan?
Stock bonus plan; integration is not allowed under ESOP
% withheld from SIMPLE plans when requesting an entire account distribution
0%; SIMPLE plans are not qualified accounts, and therefore do not require a 20% withholding
Employees an contribute what amount to Savings/Thrift Plans?
$66k in after-tax contributions
Maximum participation exclusion for a SEP
21 years old and 3 years of service
If qualified plan eligibility is greater than two years, vesting must be
Full and immediate
Can you have both a profit-sharing plan and a 401(k) plan in the same company if you are the owner?
Yes
Section 415 Limit
$66,000
Citizenship Test for Qualifying Dependent
Dependent can be a citizen of the U.S., Canada, or Mexico
The three nonforfeiture options available when surrendering or discontinuing premium payments on a whole life insurance policy:
1) Surrender a whole life insurance policy and receive the net cash value (cash value less any applicable surrender charges and/or outstanding policy loans)
2) Policyowner leaves the cash value with the company and receives a smaller amount of fully paid-up insurance
3) Policyholder leaves the cash value with the insurance company in exchange for retaining the full amount of the original of the original policy’s death benefit, but as a term insurance policy for a guaranteed period
Which property interest types avoid probate?
- Tenancy by entirety (between spouses)
- Joint tenancy with rights of survivorship
- Community property is included in probate 50%, and tenants in common is included in probate up to % of ownership
JTWROS property may be partially protected from what?
May be partially protected against claims of creditors of an individual joint tenant
Most fixed-income securities are subject to these risks
Default risk
Reinvestment rate risk
Liquidity Risk
Purchasing power risk
Not subject to interest rate risk if held to maturity
Commercial Package Policy (CPP) (Insurance)
- Property
- General liability
- Crime
- Boiler and machinery
- Inland marine
- Commercial Auto
- Farm
Split-dollar life insurance
- Employer corporation may pay part of the annual premium that equals the current year’s increase in the cash surrender value of the policy
- When insured employee dies, the corporation recovers its premium outlay with the balance of the policy proceeds paid to the beneficiary chosen by the employee
Qualified Terminable Interest Property Trust (QTIP)
Allows a terminable interest to be passed to a surviving spouse and the property to still qualify as the marital deduction
- Income paid annually to spouse at least annually
- Value of the trust assets must be included in the gross estate of the surviving spouse when she dies, valued at DOD of second spouse
- First spouse typically identifies the remainderman in the trust documents
Only need to use this if the total assets are above the marital deduction
Bypass Trust vs. QTIP
- Bypass Trust Property does not qualify for the marital deduction in the estate of the first spouse to die
- QTIP qualifies for marital deduction
Which gifts must be included in gross estate is made within 3 years of death?
- Transfers of retained life estates
- Transfers taking effect at death
- Transfers of life insurance policies by the insured
- Gift taxes paid on gifts made within three years of death
- Transfers in which the decedent reserves the right to alter, amend, revoke, or terminate the transfer or power to affect the beneficial interest in the transferred property
If receiving IRA assets from a divorce settlement, what are your options with the proceeds?
You must roll them over into your own IRA or retirement plan within 60 days. If you don’t, and for example, roll them into a CD, you will owe ordinary taxes. You will not owe a 10% penalty however, because divorces are an exception.
What are nonrefundable tax credits?
They are deducted from the client’s tax liability. It CANNOT create a refund, however, it can reduce the amount of tax owed to $0. Then, if any tax was paid during the year, that can create a tax refund.
Nonrefundable tax credits CAN, however, be carried forward for FIVE years.
Testamentary Trust
- Becomes effective at death
- Not subject to gift tax because the transfer occurs at death
- Because assets are transferred to the trust through a will, they are subject to probate when the testator dies
- Assets included in testator’s gross estate for estate tax purposes upon death
What retirement plans can be adopted by an S Corp?
- Profit sharing plan
- Stock bonus plan
- Money purchase pension plan
- Employee stock ownership plan (ESOP)
- SIMPLEs
- 401(k)
- Target benefit pension
- Defined benefit pension plans
Rollovers from 457 plans are (allowed/disallowed) into 401(k) or 403(b) plans?
Allowed
For ERISA nondiscrimination purposes, a qualified plan is required to:
1) meet minimum participation and coverage requirements
2) Contain provisions for top-heavy plan modifications
3) provide for contributions or benefits that are not discriminatory and that do not exceed certain limits
Does a 2503b trust give trustee discretionary authority over trust income?
No
At what age does a beneficiary gain access to assets in a 2503c trust?
2503c trust must end or at least offer the beneficiary ownership of the trust assets at age 21
Cash balance and Money purchase pension plans favors (older/younger) employees?
Younger
A non-related person is a skip person in relation to GSTT, if the skip person is ____ years younger than the transferor
37 1/2 years younger
In a CRAT, the present value of the remainder interest passing to the charity must be at least ___% of the initial fair market value of the property transferred to the trust
10%
A qualified plan is considered top heavy if it provides more than ____% of its aggregate accrued benefits or account balances to key employees
60%
What is a unit benefit formula (unit credit formula)?
- Based on the employee’s service with the employer. The formula may provide 1.5% of earnings for each of the employee’s years of service
- Most common type of benefit calculation in a defined benefit plan
If a plan is top heavy, and all employees of the company receive 1% contributions, how much in additional contributions to non-key employees receive?
None - because all employees received the same benefit, no additional contributions are needed
For the below, which are included in gross income, and which are excluded?
- Worker’s compensation
Compensatory damages - Punitive damages
- Reimbursements from an employee medical plan
- Punitive: included
- Worker’s comp: excluded
- Compensatory: excluded
- Reimbursements: excluded
To be fully insured by Social Security, how many credits do you need?
10
When you gift stock, the value of the gift is the:
Average of the high and low price on the day of gift
A CRAT or CRUT is (revocable/irrevocable)
Irrevocable
When is tax deduction for CRAT/CRUT received?
Immediately, based on the PV of the remainder interest to charity
SEP employee contribution and coverage requirements
- SEP must cover all employees who are age 21 and have worked for the employer 3 of the previous 5 years (part-time work counts)
- Contributions must be made to all employees who had a minimum of $750 in compensation
- Employer contributions are immediately 100% vested
Leading indicators in change of economgy
- Stock market
- Housing starts
- Durable goods orders
- New claims unemployment
- Changes in investor sentiment
Who is responsible for paying GSTT?
Donor
Intangible assets can be amortized over what time period?
15 years
Static risk
Natural disasters
If you are covered by a pension plan, can you make deductible IRA contributions?
Yes
If you have a qualified plan you cannot have a _______
SIMPLE plan
Funded vs. Unfunded ILIT
Funded has assets other than life insurance, therefore the grantor must gift more property in the year the trust is created.
Income of a funded ILIT that may be used to pay insurance premiums is taxable income to GRANTOR.
DB Pension Plans - The maximum benefit permitted by law is reduced proportionately for each year of participation less than ____ years
10 years
Employer contributions to a SEP (are/are not) subject to payroll taxes
Are not
1244 Stock Tax Treatment
Loss on the sale of Section 1244 stock is deductible as an ORDINARY LOSS up to $100k per year on a jointly filed return, or $50k on any other return. Any Section 1244 loss in excess of the annual limits is treated as a CAPITAL LOSS; long or short term depends on holding period
ISO Tax Treatment on Sale
Qualified Disposition: sale occurs 2 years from GRANT and 1 year from EXERCISE. No tax implications on exercise. LONG-TERM CAPITAL GAINS on the SALE PRICE minus EXERCISE PRICE. You also receive a negative AMT adjustment on sale. Positive AMT adjustment occurs at exercise on the bargain element (exercise price - grant price).
Non-Qualified Disposition: If taxpayer sells stock before 1 year after exercise, the gain is considered COMPENSATION INCOME and reported on W-2 by the employer and tax at ORDINARY RATES. Not subject to FUTA or FICA
*Income is NEVER recognized when the options are granted. Positive AMT adjustment at exercise, negative AMT adjustment at sale.
NQSO Taxation
Individual RECOGNIZES INCOME when NQSO is granted. Recognized income equals number of shares times the share price at grant.
An individual is taxed on the bargain element when the options are exercised (the difference between the FMV of the stock on the date of exercise and the option price)
Bargain element is compensation income and tax at ORDINARY RATES. Subject to FUTA and FICA.
Any appreciation that occurs after the exercise date is CAPITAL GAIN. Basis is the FMV at the date of exercise. Holding period beings at date of exercise.
Community property state
Earnings of both spouses during marriage are deemed to be community property.
Community property DOES NOT have a right of survivorship feature, and spouses may also own property in other forms that do not have a right of survivorship feature.
Subject to probate. One half value of the value of all community property is included in the probate estate and gross estate of the first spouse to die.
BOTH HALVES OF THE COMMUNITY PROPERTY RECEIVE A STEP-UP IN BASIS TO FMV ON DATE OF DEATH OF THE FIRST SPOUSE TO DIE.
Medicare Part B Eligibility
You must be at least 65 and eligible for Part A coverage.
As long as you are a U.S. citizen, you can purchase Part A and Part B, even if you worked abroad your entire life.
Convertible Bond Conversion Value Calculation
= (Par/Conversion Stock price) x Current Market price of stock
Hardship Withdrawals
Hardship withdrawals are limited to worker contributions; earnings and employer contributions not eligible.
They are both TAXED and 10% PENALIZED
Requirements for Using Alternative Valuation Date
1) the value of the decedent’s gross estate must be reduced
2) the transfer taxed owed by the estate must be reduced
*Any assets that have naturally declined in value due to the mere passage of time must be valued without consideration of such decline in value, which means that such assets are valued at their date-of-death value
Concept of Substantial Risk of Forfeiture
Generally necessary only in funded plans to prevent constructive receipt.
Generally requires the employee’s actual performance of services.
Compensation will be deemed to be subject to a substantial risk of forfeiture if the right to receive compensation is conditioned on performance of substantial future services and the possibility of forfeiture is substantial in nature.
Spendthrift Provision
Bars transfer of beneficiary’s interest to a third party and stipulates that the interest is NOT SUBJECT to claim’s of beneficiary’s creditors. Not usually effective in a will.
PPO Features
Often have deductible for prescriptions and other supplies as well as co-pay for office visits
Pay more of the total bill when participating providers are used
Social Security Spousal Reduction if spouse takes benefits before reaching their own retirement age
Spousal reduction is 25/36 of 1% for the first 36 months and 5/12 of 1% for any months exceeding 36 months
Taxation of Preferred Dividends for Corporations
50% of the preferred dividends received by a corporation are exempt from federal income taxes
Mutual funds, nonprofits, and governments pay no income taxes so there is no benefit to investing in preferred stock
Section 125 Cafeteria Plan
25% of the total benefits can accrue to key employees
There must be at least one cash benefit
Mid-year changes in reductions are allowed only for qualified changes in status
Deferral of income is not allowed except through a 403(b)
This type of insurance policy provides for unbundled premiums and allows the client to select investments.
Variable Universal Life
What type of shareholder must be paid first, in the event that dividends are not paid in a given cycle.
Preferred Shareholders always get paid before common shareholders
This governing body regulates the ADV
SEC
Which of the property titles automatically passes to the surviving owner? Which property titles DO NOT automatically pass to the surviving owner?
Automatically passes to surviving owner:
Joint Tenancy w/ Rights of Survivorship
Tenants by the Entirety (can only be used by spouses)
NOT Automatically passed to surviving owner:
Tenants in Common (goes to named beneficiary)
Community Property (goes to probate)
