Module 8- Achieving Tax And Estate Planning Objectives In Retirement Flashcards
Chapter 1: Taxation of Distributions from Taxable Accounts
Mutual Funds Distributions
Mutual Funds are flow through entities who are not taxed
Three Types of Distributions:
- Qualified Dividends:
- Dividends from common stocks and qualifying foreign corps
- Long-term Capital Gain (meeting holding period) - Long-Term Cap Gains vs Short
- Long= Result of sale, capital gains rate that is usually lower than ordinary income
- Short= Ordinary dividends, ordinary income rate - Ordinary or Nonqualified dividends
- Interest and non-qualified dividends - expenses of fund
- Taxable at ordinary income rate
Each shareholder receives a 1099-Div indicating what was received
Taxable regardless of whether it is reinvested or not
Mutual Fund Sales
Which shares were sold?
Are the shares short or long?
Three Methods Acceptable for determining which shares were sold:
1. FIFO- Default, probably least tax efficient
- Average Cost- Total of purchases/ Shares, Also not tax efficient
- Specific Identification- Extra record keeping but most tax efficient
Financial institutions required to track based on Emergency Economic Stabalization Act of 2008
Gain/Loss is not recognized till a sale occurs, may only recognize $3,000 of loss
Cost basis= Cost to buy asset, and to own the asset (i.e. Commissions
Homes are also increased by expenses for improvements
Capital Assets acquired through inheritance
- Basis is FMV of asset on descendants death
- Can either be stepped up or down
- Generally all assets received are long term
- For property, may use alternative valuation date (6 months after DOD)
Capital Assets acquired as gifts
Lesser of donor’s cost basis or FMV on date of gift
Basis would be increased by any gift tax paid
Should sell the stock and take the loss before gifting
For property, if its gifted at a FMV less than the donor’s adjusted basis, then a gain or loss is measured based on adjusted basis
There is a no gain area when the donor sells an asset that was received under FMV
If taking FMV on gift, then start of holding period is when donor receives
Long term capital gains rate
15% for the 25%, 28%, 33%, and 35% tax brackets
20% for 39.6% bracket
0% if in 10 or 15% bracket
Short term gains are taxed at normal bracket rates
Short term is 12 months or less, determined based on time of sale (not settlement
Real Estate- Top bracket is 25% for straight line depreciation
Collectibles: 28% top bracket, gold and silver etf’s are collectibles
Netting Gains and Losses
Net Shorts vs Shorts and Longs vs Longs
Then net Shorts vs Longs
Max loss is $3,000… the rest is carried forward
Only allowed $1,500 if married filling separately
Exchanges of mutual funds
Tax strategy
Still taxed on gains for exchanges even though you are not receiving the distribution
Almost always makes sense to fill up to 15% tax bracket to take advantage of not paying anything on long-term capital gains
Taxation of Stock Dividend Distributions
Cash Dividends:
- Long term capital gains rate
- Not available for bonds, CDs, mutual funds, REIT, tax exempt entities
- If not held for 61 days of 121 (60 before, 60 after ex-dividend date
- Includes date sold, but not purchase
Dividend Reinvestment Plans:
- Taxed as if cash dividends
- Amount is FMV of security + service charges upon receipt
- Cost basis of new security is FMV on date received, even if bought at discount
Stock Dividends:
- Not a taxable event
- Lowers cost basis based on amount of new shares
Charitable Donations of Appreciated Stocks:
-Charitable donation is the amount of the stock. No Cap Gain recognized
Taxation of Non-Gov Bonds
- Capital Gain/Loss occurs if selling before maturity
- Dividend payments (semi-annual usually) are taxed at ordinary income
- If bought at discount to Face, then pay extra ordinary income at maturity
- If bought at premium, the loss:
1. Taxable Bonds: Loss is amortized and offsets part of dividend income OR becomes part of capital gain/loss at sale or redemption
- Tax Exempt Bonds: Straight line amortization, but no tax benefit
ZERO COUPON BONDS
-Annual accretion of bond value is taxable as interest (ordinary income)
Taxation of US Treasury Securities
T-Bills:
- 1 year or less, zero coupon
- Taxed in year that the T-Bill matures
- Exempt from Local and State Tax
T-Notes and Bonds:
- Same as corporate bonds
- Interest is exempt from state and local tax
- Discount is accrued annually instead of paid in final year
Treasury Inflation Indexed
- Taxed when received
- Inflation adjustment of Face is taxable in year of adjustment
- Exempt from state and local tax
Chapter 1 Review
- Explain Concept of Cost Basis
- Amount you paid for securities - Taxation of Capital Gains and Loss
- 0% for 10 and 15% tax brackets
- 15% for middle tears
- 20% for 39.6%
- 25% on Real Estate using straight line
- 28% Collectibles - Three Methods for determining cost basis for MFs
- FIFO
- Average cost
- Identification
- Taxation of zero-coupon
- Taxed on accretion of value over term
Chapter 2: Distributions from Tax-Deferred Accounts
IRAs
Deductible IRAs:
-Have a $0 basis because contributions are deductible
Nondeductible IRAs:
- Taxes are owed on earnings
- Distributions are on a pro-rata basis for tax
- Can be used as a backdoor IRA as assets can be converted to a Roth regardless of income
Minimum RMD Penalty Tax: 50% Premature Withdraw (before 59.5): 10%
No RMD for Roths
No early distribution penalty for nongovernmental 457 plans
Premature Distributions Exceptions for IRAs
- Death
- Disability
- Medical expenses over 10% of AGI (7.5% if over 65)
- Medical insurance premium while unemployed
- Qualified higher education expenses
- Qualified first time homebuyer up to $10,000 (no principal residence for last 2 years)
- National guard or reservist called to active duty for more than 179 days
- Disaster related
- Substantially equal payments
Also under HIPAA no penalty if:
Separation from Employment must be 12 weeks unemployed before allowing premium pay
Substantially Equal Pay (72t): -Later of 5 years or reaching 59 1/2 -Distribution amount may not be altered 3 Methods of calculating distribution 1. One of the RMD tables, but cannot change between tables after selected
- Fixed Ammortization:
- Amount determined by years and elected interest rate (under 120% of fed mid-term rate of 1.8%)
- Calculate by finding payment based on PV, N, and I/YR - Fixed Annuitization:
- Use annuity factor based on owner’s age and mortality table in Revenue Ruling 2002
- Must be reasonable
- Divide account balance by the annuity factor
Allowed to switch from 2 or 3 to 1 if investment performance is weak
Minimum Distribution Requirements
Must begin by April 1st of the following year in which turning 70 1/2
Full RMD must be taken by that date
IRAs, SEPs, and SIMPLE IRAs must follow this path
Qualified Plans, 403(B) and 457 plans may begin in year after retirement unless 5% owner of company
If no longer employed by Qualified Plan company, then must begin with IRAs
Chapter 2 Review
- Deductible IRA tax Treatment?
- Fully taxable - Nondeductible IRA?
- Taxed on earnings - Backdoor Roth IRA?
Nondeductible IRA being rolled into a Roth, though must pay taxes on rollover amount and any before - RMD rules apply to IRAs?
- Must begin in year following turning 70 1/2 by April 1st
Chapter 3: Distributions from Tax Exempt Accounts
Roth IRA
- May take out contributions at any time tax free and penalty free
- If qualified, then no tax on earnings, and no 10% penalty
Qualified if:
- After hitting 59 1/2, death, or disable, or first time home buy up to 10k
- Five year holding period is met
Non qualified is both taxed income and earnings
Exceptions applying on IRAs also apply to Roth’s for earnings
-First time home buy on earnings up to 10k is tax free if meeting 5 yr hold period (dont need to be 59 1/2)
Five Year Rule for Roth distributions
Starts January 1st in year of contribution
Any subsequent contributions also are on initial clock or any new Roths
5 year period holds even after death so beneficiaries must wait on earnings
Ordering Rules
- Contributions first, earnings second
- Does not apply to nondeductible IRAs
3 Possible IRA Distributions in this order:
- Return of contributions (no tax)
- Return of conversion amount (have own 5 year period, so 10% may apply)
- Return of earnings
- Not taxed if qualified
- Income and 10% early withdraw if non qualified
Chapter 3 Review
- Requirements for a qualified distribution form a Roth IRA
- 59 1/2 and 5 years (exceptions may apply) - Explain 5 year clock
- Starts January 1 of year first contribution is made and continues.
- Conversions start their own clock - Ordering rules for distributions from Roth?
- Unlike non-deductible IRAs, distributions are ordered: Contributions (non taxed), Conversions (possibly 10% penalty depending on hold period), Earnings
Chapter 4: Taxation of Annuities
- Deposits into a Roth annuity or nonqualified annuity are not tax deductible
- Into an IRA are deductible or pretax
- Withdrawls come from gains first and if in an IRA would all be taxed. If in a Roth, not taxed
- If withdrawing before 59 1/2, it is taxed
Annuity Payments
Nonqualified Annuity Payments
- If annuitized, each monthly payment is partially gain, partially return of principal
- No 10% penalty if annuitizd
Tax-Favored Plans
- Non-deductible IRA partially taxed
- Deductible IRA fully taxed
- Roth not at all taxed
Chapter 4 Review
- Taxation of lump sum or periodic distributions from a nonqualified annuity
- Taxed on gains first and then tax free on contribution repay - Taxation of annuity payments from a nonqualified annuity?
- Partial tax on earnings and partial non tax
Chapter 5 Taxation of Home Sales, Social Security, Life Insurance and Tax Diversification
Section 121
- Created after Taxpayer Relier Act of 1997
1. Capital gains up to $500,000 for joint and $250,000 for single taxpayers are excluded if it is your primary residence - Property that is used most is considered principal
2. Business/Rental property does not apply, and is taxed on gain (higher due to depreciation reductions)
3. Must have owned and lived in the home for 2 out of 5 years. Vacations are counted as use.
4. Exclusion may not be used twice in a 2 year span - Pro-rata reduction if move is due to a new job, health, or unforeseen circumstances (6 months = 25%)
5. No age limitation
6. Taxed on gains over 500k for joint or 250k singles
7. Qualifying widow or widower (surviving spouse for taxes) may exclude full $500k if sold in two years following spouse’s death. - Both spouses must have used the property for two years, while only one must have owned it for the full time
- If only one spouse is eligible for the exclusion, then may deduct 250k
Determination of Primary Residence
Several Factors Considered Including:
- Where taxpayer works
- Principal place of family members
- Address on tax returns, drivers license, voter registration
- Where car is registered
- Location of taxpayers bank
- Location of clubs and church affiliated
