Overall Review Flashcards
PV Calculation
0 CFj
1x CFj
% I/YR
NPV
IRR Calculation (Real Rate of Return)
-x CFj
1x CFj
+(2x+y) CFj
IRR/YR
Calculate NPV
-x CFj
1x CFj
+(2x+y)
% I/YR
NPV
(+) is good
(-) is bad
Structured Settlement
No lump sum
Tax free payments
Voluntary agreement for injury
Compensatory Charges
Tax free payments (interest is taxable)
Discrimination is taxable (except for medical)
Punitive Damages
Taxable
wrongful death is tax free
Leading Indicators
Unemployment
Manufacturing orders
Private Housing Units
Stock Prices
Consumer expectations
Coincident Indicators
Personal Income
Industrial Production
Lagging Indicators
Unemployment Duration
Prime Rate
Loans Outstanding
Change in CPI
Business Cycle VS Indicators
(Recovery, Expansion, Peak)
Recovery: leading (up), coincident (down), lagging (down)
Expansion: leading (up), coincident (up), lagging (down)
Peak: leading (up), coincident (up), lagging (up)
Investment Advisor Registration with SEC
ADV
$150 fee
ADV part 1 & Schedule 1
Medicare Part A
65 and Older, or 2 years disabled
Hospital Coverage: 1-60 days (deductible 1), 61-90 (deductible 2), 91-120 days (deductible z)
Post hospital stay: 100 days skilled nursing home
Home care services
Hospice
Medicare Part B
Voluntary: financed through premiums
Deductible, Medicare pays 80%, no stop loss
Includes: doctor visits, preventative care, tests, radiology, mental, blood, therapy, non-administered drugs
Medicare Part D
50% Discounts on drugs
Must have A+ B
Taxation of LTC
(premiums & benefits)
Premiums paid for qualified LTC: deductible as itemized medical expenses
Deductibility Limits:
days 51-60 $1,690
61-70 $4,510
Subjects to 7.5% AGT Floor (not for SE)
Benefits are NOT taxable
Medicaid
New worth under $2,000
- 5 year look back rule
- Home equity up to $636,000
Offers: hospital, nursing facilities, physician, lab, x-ray, home health
Group Life Insurance Income Tax
(Implications/Calculations)
(Table 1 Rate) x (Coverage over $50k)= Y
(EE Contribution) x (all coverage) = X
Y - X = EE included annual income
Discriminatory Group Life Plans
(Key Employee Income Inclusion)
Key Employee includes greater of :
1. actual cost of insurance
2 cost by formula:
(Table 1 cost) x (overall coverage / 1000) x 12 months =
income to employee
FSA
No FICA or FUTA tax
NO LTC
Not HSA
Use it or loose it by 12/31
Bond Conversion Price (CP)
PAR / # of shares
Bond Conversion Value (CV)
(PAR / CP) x stock price
Unit Investment Trusts (UITs)
Unmanaged security portfolio / Passive
Self Liquidating: dividends distributed to unit holders
Units redeemed at NAV
SD Calculation
E+
E+
gold Sx,Sy
Mean Return Calculation
E+
E+
gold x,y
Geometric Return
Time Weighted Return
N= # of returns
I= ?
PV= -1
PMT = 0
FV= (1+x) x (1+y) X (1.etc..)
Current Yield
Annual coupon / bonds current price
Dividend Discount Model Shortcuts
(2 growth rates)
- if 1st rate < 2nd growth rate
- use lower growth rate in model
- choose next LOWEST answer - if 1st growth rate > 2nd growth rate
- use 2nd growth rate
- choose next HIGHEST answer
ROE
EPS / Common Equity
Current Market Price
Earnings x P/E ratio
Dividend Payout Ratio
Common Dividend Paid / EPS
Stock’s Yield
Dividend / stocks closing price
Capital Market Line (CML)
MACRO
PORTFOLIO risk/return
STANDARD DEVIATION
tangent to efficient frontier
DIVERSIFIED portfolios expected return
Security Market Line (SML)
MICRO
Individual Security risk/return
Above SML: undervalued
Below SML: overvalued
BETA
Wash Sale Rule
30 days pre, 30 days post
$ loss added to cost basis of final purchase
No loss deduction
Dividend Timing
Purchase Date
Ex-Dividend Date
Date of Record
*buy before ex div date to receive div
Margin Required
= ((1 - initial margin) / (1 - maintenance margin)) x stock price
initial margin: 50%
maintenance margin: 25%
Maintenance Call
shares x new stock price = $
$ x maintenance margin = Equity Required
$ - loan = Actual Equity
Equity Required - Actual Required = Maintenance Call
Arbitrage Pricing Theory (APT)
Unexplained changes / Unanticipated Shifts
Not explained by risk/return
Inflation, industrial production, risk premium, structure of yield
Black - Scholes
Valuation of Calls/Puts
Variables: prices, exercise $, time, rate volatility
increase exercise price : decreased value
all others increase : increase value
Binominal Option Pricing
Valuation Model
Assume stock price has 2 values at expiration
Riskless portfolio / perfect hedge
Hobby
Hobby income is reportable
Business if: generates profit 3/5 years
Houses: 2/7 years
Schedule B, C, D, E
Schedule B: ordinary dividends, taxable interest
Schedule C: business income / losses
Schedule D: capital gains / losses
Schedule E: Real Estate
Gross Income to Tax Due
GROSS INCOME
- for AGE deductions
AGI
- from AGI deduction
TAXABLE INCOME
x tax rate
TAX CALCULATION
- tax credits
TAX LIABILITY
- withholding penalties
TAX DUE
Adjustments FOR AGI
(SIEAH K/S SE)
Student loan interest ($2,500 per year)
IRA contributions
Education expense ($4,000)
Alimony
HSA
Keogh / SEP
SE Tax (0.07065) and medical premiums 100%
Adjustments FROM AGI
Itemized Deductions
(MMCCTI)
Medical expenses over 7.5% AGI
Mortgage Interest
Causality Losses
Charitable Deductions
Taxes ($10,000)
Investment Interest
Medicare Taxes
under $200k wage: 1.45%
over $200k wage: 2.35%
plus 3.8% on investment income from LTCGs and non-qualified dividends
Dependent Care Tax Credit
Under 13 years old
$3,000 for 1 child
$6,000 for 2+
times 20% for credit
EX:
- $6,000 x 20% = $1,200
- $3,000 x 20% = $600
Child Tax Credit
$2,000 for each child under 17
- reduced $50 for each$1,000 over $400k
- up to $1,400
$500 Family Credit: dependent adults
Adoption Credit
$14,890 pre child
Installment Sales
Deferred gain for seller
Profit / Sale price = profit %
instilment payment x profit % = Gain
Sole Proprietorship
Advantages:
- Keogh, SEP
- 100% medical plan deduction
- no legal formalities
- conduit of income and loss
- schedule C
Disadvantages:
- unlimited liability
- business dies with owner
- capital structure depends on owners assets
Partnership
Advantages:
-Keogh, SEP
- 100% medical plan deduction
- conduit of income and loss
- agreement can be oral
Disadvantages:
- unlimited personal liability
- Dissolves upon death/bankruptcy
- capital structure is owners resource
LLC
Partnership or Corporation
Can operate like a general partnership
20% income deduction if they have QBI with pass through entity
C Corp
Separate tax entity
Double taxation:
1. distribution to owners
2. owners taxed income
Advantages:
- Unlimited investors
- dividend reduction (50%)
- limited liability
- continuity of life
Disadvantages:
- corporate formalities
- after tax dividends
- double taxation
Dividend Received Deduction
US Corp invested in US Corp
0-20% ownership: 50% dividend deduction
20-80% ownership: 65% dividend deduction
80-100% ownership: 100% dividend deduction
Section 1244 Qualified Small Stock
C or S Corp < $1mm market cap
Loss of $100k (joint): ordinary loss
Loss of $50k (single): ordinary loss
Personal Service Corporation (PSC)
HALE:
- Health
- Accounting, Architects, Actors
- Law
- Engineers
Taxes at flat 21% rate
S Corp
CONDUIT:
- 100 or less share holders (individuals, estate, trusts)
- single class of stock
- domestic Corp
Advantage:
- limited liability
- conduit
- basis is cash and direct loans (no bank)
Disadvantage:
- corporate formality
-sale of stock: limited eligibility
Business Selection
PROFITABLE:
- C Corp
- PSC
LOSSES:
Riskless:
-Sole Proprietorship
- Partnership
Risky:
- S Corp
- LLC
- LP
MARCS / Straight-Line
Depreciation %
MARCS:
- 5yr: 20%, 32%
- 7yr: 14.29%, 24.49%
Straight-Line:
- 5yr: 10%, 20%
- 7yr: 7.14%, 14.29%
Realized Gain
(FMV acquired + boot) - Basis of property
Recognized Gain
lessor of realized or boot received
Substitute Basis
FMV acquired - (realized - recognized)
Charitable Bargain Sales
(Sales price / FMV) x basis = adjusted basis
Sales price - adjusted basis = taxable gain
FMV - Price Paid = Gift
Passive Activites
Does not materially participate
Passive losses only offset other passive income (schedule E)
Passive Activities:
1. Rentals
2. Business: non-material
- limited partnership
- partnership/S-Corp
Public Traded Partnership (PTP)
(loss/income)
PTP Loss: NO NETTING
PTP income: portfolio income
Non-Public Trade Partnership (PAL/PIG)
(loss/income)
PALs loss taken up to income from PIGs
Rental vs Residence
Treated as residence if used: the greater of
1. 14 days
2. 10% of rental days
Alimony Recapture
P1 + P2 - $37,500 =
or
P1 + P2 - 2P3 - $37,500 =
SS Fully Insured
40 Qs of coverage
survivor and retirement benefits
Taxation of SS benefits
Income plus 1/2 SS benefits
- income includes muni interest
50%, 85% SS taxed
Single: $25k, $34k
MFJ: $32k, $44k
Ratio % Test
NHCEs / # HCEs = or > 70%
Average Benefits Test
AB% NHCEs / AB % HCEs = or > 70%
Minimum Participation
(50/40)
Lessor of:
50 employees
40% employees
Top Heavy Plans
aggregate benefits allocated to KEY employees > 60%
ADP / ACP Testing
(Employer Matching)
NHCE 0-2%, HCE times 2
NHCE 2-8%, HCE plus 2%
Inherited IRA (Roth) Distributions
No bene: 5 yrs from owners death
Bene: 10 yrs from owners death
Spouse:
1. until deceased would have turned 72
2. Roll over to spousal IRA
RMD Calculation & Penalty
Prior year balance/ this year age uniform table = RMD
50% penalty for amount under withdrawn
Totten Trust
Recoverable trust in bank account
Depositor retains rights of withdrawal until death
Balance passes to beneficiary
Gross Estate to Net Estate Tax
GROSS ESTATE
- expenses, admin, debts, taxes, causality
ADJUSTED GROSS ESTATE
- marital and charitable deduction
TAXABLE ESTATE
+ taxable gifts
TAX BASE
- tax deduction ($12,060,000)
X remainder at 40%
TENTATIVE TAX
- gift taxes paid
NET ESTATE TAX
3 Year Rule
(added back to GE)
Made within 3 years of death
- transfers of Life Insurance
- Gift Tax Paid (not GSTT)
Survivorship Annuties
Included in Gross Estate
Right to lumpsum: annuity full value
Periodic Payments: PV of future payments
Powers vs Gift & Estate Tax
Special/Ascertainable (HEMS): No Gift or Estate Tax
General Power no 5/5: Gift and Estate Tax
General Power with5/5: Estate Tax only
Gift of Future Interest
Future Interest does not count for the $16k annual exclusion (taxable gain in full)
Exceptions:
- to trust for minor
- 2503 (c)
- Crummy Trust
-529 Plans
Gifts to Noncitizen Spouse
$164,000 exclusion
No marital gift exclusion
Gift Tax Paid by Donor
For appreciated gift, tax increases basis
Gifts with Debt
FMV - Debt = Gift
Debt - Basis = Capital Gain
Basis + Gain = Donee Basis
Medicaid Planning
Income and Assets ($2,000) under limits
Prohibited if given way money within 5 years of incurring nursing home expenses
$ given away / cost of nursing home monthly = # of months Medicaid will NOT cover
A Trusts
2nd to die controls property
Marital Trusts
Power of Appointment
Spousal Trust
B Trusts
1st spouse to die controls property
Fully Fill
Non-marital trust
Credit Shelter Trust
Unified Credit Trust
Family trust
Bypass Trust
Dynasty Trust
C Trusts
1st to die controls property
QTIP
Current Interest Trust
Gifts to Minors
(Future vs Present Interest)
FUTURE: 2503(b)
PRESENT:
-2503(c)
- 529
Subject to Kiddie tax:
- UGMA
-UTMA
2053(b) vs 2053 (c)
2053(b)
- Investment: income producing
- Transferred: mandatory income distribution, corpus no mandatory
- Gift Tax: future interest, income is present interest
- Taxation: subject to kiddie tax if under 24
2053(c)
- Investment: any
- Transferred: principal at 21 or sooner
- Gift Tax: present interest
- Taxation: trust tax rules
Sprinkling Provision
trustee has power with DISCRETION to distribute income to bene
Discretionary Provision
only as much income or principal to bene as trustee SEES FIT
Support Trust
deems necessary for support or education of bene
Charitable Transfer
(income to donor)
Trusts: 5%, any charity
- CRAT: fixed payment, no additions
- CRUT: variable payments, additions allowed
Specific Charity:
- Pooled Income: charity controlled, variable payments, additions allowed
- Charitable Gift Annuity: fixed payments, no additions
Charitable Transfer
(income to charity)
Trusts: 0%, income/estate tax deduction
- CLAT/CLUT
Private Foundation: 5%
Donee Pays Gift Tax Formula
exhaust $12,060,000
- amount over $16k x 40% = Y
- Y / 1.40 = $ gift tax paid by donee
- amount over $16k - $ gift tax paid by donee = Adjusted Gift
Intra-Family & Business Transfers
Owner needs income (PIGs)
- Private Annuity
- Installment Sale
- GRAT/GRUT
- Self Cancelling Installment Note
-GRIT: no family members
Income to Family:
- Partnership / S Corp
- FLP
- Gift Leaseback
- QPRT
Direct Skip
Transferor pays gift tax
Taxable Terminations
termination of nonskip person interest, result in skip person receiving income/principal
- Gift of future interest (no $16k)
- Trustee pays GSTT
Taxable Distributions
distribution out of a trust to skip person
- Future interest (no $16k)
- Transferee pays GSTT
Post Mortem Elections
ESTATE LIQUIDITY:
- Section 303 Stock Redemption
- Installment Payment of Estate Taxes (6166)
ESTATE TAX REDUCTION
- Special Use Valuation (2032 A)
