Post q Bank Flashcards
Is the $2k limit for Coverdell per contributor or per beneficiary?
Per beneficiary
What is bounded rationality?
rationality is limited when individuals make decisions
They will select a decision that is satisfactory rather than optimal
What is availability bias/heuristic?
a mental shortcut that relies on immediate examples that come to a given person’s mind when evaluating a specific topic, concept, method, or decision
What is the disposition effect?
the investor does not mark their stocks to market prices, and instead create mental accounts when they purchase stocks and continue to mark their value to purchase prices after market prices have changed
Aka regret avoidance or faulty framing
What are the property classes for depreciation?
CATORN
CAT 5year property
O 7 year property
R 27.5 year property
N 39 year property
Computer, auto, trucks
Office furniture
Residential
Non-residential
What is the SS Taxation hurdle for MFS?
$0
Do repairs and improvements increase cost basis?
No, only capital improvements that extend the life of the asset
Does analysis take place in the first step of the financial planning process, understanding?
Yes
“Analyze information to assess the client’s personal and financial circumstances”
This is different from the third step, “analyzing client’s current course of action”
What is anchoring?
judgements or decisions are influenced by a reference point or “anchor” which can be completely irrelevant.
“When judging stimuli along a continuum, it was noticed that the first and last stimuli were used to compare the other stimuli”
What is cognitive dissonance?
The tendency to misinterpret information that is contrary to an existing opinion or only pay attention to information that supports an existing opinion
What is familiarity bias?
Investors tend to overestimate/underestimate the risk of investments with which they are familiar/unfamiliar
What is representativeness?
Thinking that a good company is a good investment without regard to an analysis of the investment
What is naive diversification?
Investing in every option available (also called 1/n diversification)
Does a prospectus contain top holdings or trading commissions?
Top holdings that get updated periodically. Trading commissions are not contained.
Is fundamental analysis considered top-down or bottom-up analysis?
Bottom-up.
Bottom-up analysis starts with specific variables (such as companies) rather than broad variables (such as trends)
What is the difference between dollar-weighted return and time-weighted return?
Dollar-weighted return takes into account additional share purchases and is looking for investor returns
Time-weighted return is concerned with the growth of a single purchase, without regard to the investor’s cash flows
Do mutual funds report on a time- or dollar-weighted return?
Time-weighted
What is the tax breakdown of an NUA distribution?
OI on basis
Cap gains on NUA
Basis = contribution
NUA = distribution - contribution
What is a VEBA and how is it taxed?
A benefit plan into which employers deposit funds that will be used to provide employee benefits in the future.
Payments made to the VEBA are deductible by the employer and the income is tax exempt
What can VEBAs provide?
To both employees and retirees:
Life insurance
Fitness and accident benefits
Severance benefits
Unemployment and job training
Disaster benefits
Legal service payments
What can’t VEBAs provide?
Savings, retirement, and deferred compensation
Commuting expenses
Auto or HOI
Does a QDRO trigger a 20% withholding requirement for indirect rollovers?
Yes
Who can seize the assets of a Rabbi trust?
General creditors, not the employer
Therefore, treated as unfunded due to the presence of a substantial risk of forfeiture
Does the secular trust allow for the deferral of taxation?
No, because it is not subject to substantial risk of forfeiture
How many employees must an employer have to be covered by COBRA?
20 employees for at least 50% of the year
What is the excess method permitted disparity calculation?
Base rate applies on income up to the integration level
Excess rate applies on income above the integration level, up to the maximum covered compensation limit of $330k
Thee excess rate is limited to the lesser of twice the base rate or a difference of 5.7%
“Lesser of 2x or 5.7%”
What is the maximum percentage for the excess and offset method?
26.25%
Which plans don’t allow for SS integration (permitted disparity)
ESOP and 401k
Can catch up contributions exceed the defined contribution limit?
Yes, they are not subject to the DC limit
What happens if an employer exceeds the contribution limits for DC plans?
They must correct them or receive an excise tax penalty
What correction options does an employer have for excess contributions?
-Allocate the excess to other plan participants
-Hold the excess in a separate account and allocate in future years
-make corrective distributions
What is the self-employed contribution rate formula?
Contribution rate / (1 + contribution rate)
How do you calculate the self-employed individual’s contribution?
(Net self-employment income - 1/2 self-employment tax) x self-employed contribution rate
Self-employed contribution rate Reminder: contribution rate / (1+contribution rate)
What plans does the PBGC not cover?
DC plans and employers with 25 or fewer participants
How much does the PBGC cover in the event of a plan terminating?
$6750 per month or $81k per year max
Is the employer or employee exempt from payroll taxes on contributions to a qualified plan?
Both are exempt from payroll taxes on EMPLOYER contributions
What is the waiting period for qualified plan entrance dates?
Not more than 6 months after date of becoming eligible. Generally there are two entrance dates per year to meet this requirement.
What are the eligibility requirements for qualified plans?
21 and 1
Part time allowed if 3 years and 500 hours
A waiting period of two years is allowed for everything but 401k, but IMMEDIATE vesting must be allowed.
Who can be excluded from coverage testing?
Employees who do not meet eligibility rules, and employees who are part of a collective bargaining agreement
When is an employee considered covered by a qualified plan for purposes of coverage testing?
When they receive a contribution, accrued benefit, or simply the right to participate
How do you do the calc for the general safe harbor test, ratio test, AB test? (% of NHC >/= 70%)
Total NHC / Covered NHC
Which vesting schedules do the following use:
DC
DB
Cash Balance
Top heavy
2-6, 3
3-7, 5
3
2-6, 3
When is a plan considered top heavy?
When the benefits going to key employees is greater than 60%
What must a plan do when determined to be top heavy?
It must use top heavy vesting schedules and provide a minimum level of funding to non-key employees
When determined to be top heavy and paying out to non-key employees, what are the amounts?
DC must provide a contribution equal to at least 3% of the employee’s compensation
DB must provide a benefit equal to 2% x years of service x average compensation
What test is also required for CODA/401k plans?
ACP/ADP
What is the 415c limit?
$66k, consisting of:
Employee contributions
Employer contributions
Any forfeitures added to the plan
If the employer maintains multiple DC plans, the limit is based on the aggregate of all contributions
In regards to the 415c limit, what is included in employer contributions to the plan?
Mandatory, discretionary, and matching contributions
In regards to the 415c limit, what is included in employee contributions to the plan?
Mandatory, elective deferral, and after-tax contributions.
Catch up contributions DO NOT count towards the limit, effectively raising it to $73.5k
What fringe benefits are no longer deductible due to TCJA?
Entertainment
Membership dues
Transportation
For which fringe benefits do non-discrimination rules apply?
educational assistance
Dependent care assistance
No additional cost services
Employee discounts
Adoption assistance
Tuition reduction
What is max amount for a COBRA payment?
102%
What benefits are allowed in a cafeteria plan?
Accident and health benefits (but NOT MSA or LTC)
Adoption assistance
Dependent care assistance
Group term life insurance
How is discrimination in regards to cafeteria plans handled?
If providing more than 25% of the benefits to key employees, will result in the value of the benefits chosen by those KE to be included in their income
What is split dollar life insurance and what are the two means of policy ownership?
An arrangement where an employee and employer share premiums costs and cash value or death benefit of a life insurance policy covering the life of the employee.
Endorsement method - employer owns the policy
Collateral assignment - employee owns the policy
What is the difference between accounting methods?
Accrual-basis recognize income when it is earned
Cash-basis recognize income when it is received
How is a related party sale treated?
Only matters when there is a loss
Transferor’s loss is gone forever and not deductible
Transferee uses double basis rule
How do bargain sales to charities work?
The basis must be determined for sale purposes by using this formula:
Amount realized / FMV x basis of property
How do you calculate depreciation?
[1 / number of years for property class] x value
What are the general rules for section 179?
Can expense up to $1.16m of business tangible property placed in service during the year
Cannot expense realty or production of income property
What is the deduction for section 179?
The lesser of
Property placed in service
Taxable income
$1.16m (phased out for PPS >$2.89m)
What are the rules for trade or business expense deductions?
Must be ordinary, necessary, reasonable, incurred in conduct of business, not capital in nature
Are key person life premiums deductible as a business expense?
No
How are business casualty losses treated vs. personal?
Business casualty loss is deductible to the business FOR AGI
Personal casualty loss is only deductible if a national disaster is declared
Personal and business losses cannot be netted against one another
How is a gain from a business casualty loss treated?
Gain can be ordinary or capital for business, calculated as the insurance proceeds less basis
Reminder: cannot be netted against personal losses
What are specifically excluded from casualty losses?
Misplaced items, negligence (such as insect damage, disease
Must be identifiable and damaging to property, as well as sudden, unexpected, and unusual in nature
What is section 1244?
It recategorizes capital losses on small business stock into ordinary losses
50/100 (s/mfj) deduction
What are the requirements for section 1244?
-domestic corporation incorporated after 1978
-<$1m in capital contributions
-stock owner must be original owner
-must not have been earned in return for services
-must have earned more than 50% of profits from sources other than NII
What are the most basic requirements of 1231 assets?
They must have a long term holding period (more than 1 year)
They must be used in a trade or business
What is the difference between sections 1231, 1244, 1245, and 1250?
1231 is depreciable property
1245 and 1250 determine how 1231 property is taxed at sale
1244 is unrelated to the others and is small business stock loss
How does section 1245 work?
If sold for an amount equal to adjusted basis, no tax consequences.
If sold for an amount less than adjusted basis, ordinary loss.
If sold for an amount greater than adjusted basis but does not exceed depreciation taken, ordinary gain to the extent of the gain.
If sold for an amount greater than adjusted basis and exceeds depreciation taken, ordinary gain to the extent of the gain, capital gain on the remainder.
How does section 1250 work?
Any straight line depreciation recapture is taxed at 25%
For like kind exchanges, how is taxation treated for the two parties?
Party receiving boot recognizes gain to the extent of boot received (if it exceeds gain, still only recognize amount of boot)
No tax consequence for party trading up until it is sold, but they add boot to their basis
How does rental property taxation work?
If treated as nonvacation rental property, income considered business and included in gross income. Losses are deductible as a business expense up to $25k FOR AGI (phased out between 100-150k)
Otherwise
If there are more than 14 rental days, and the personal use days are NOT more than 14 days or 10% of rental days, then still get business tax treatment
If less than 15 rental days, treated as personal use and no business treatment allowed
What is the difference between ademption vs. abatement?
Ademption: assets are already disposed of
Abatement: assets are reduced
What is the ABC trust arrangement?
A power of Appointment trust
B bypass trust
C QTIP
Decedent places full estate exemption into B trust
Gives the A trust to spouse for access to principal
C trust provides income to spouse and remainder beneficiary
For a transfer to be considered qualified, does the medical expense have to be deductible? (I.e. would a cosmetic expense be qualified?)
No
Who pays the taxes on interest and dividends in a GRAT?
The grantor
What is included in the three year look back?
ANY gift tax paid on gifts made within three years
The value of any property gifted within three years in which the decedent retained an interest
Death benefit of any life insurance that was gifted
What is the difference between short and long term disability?
Short is 2 years or less, long is until retirement
What is stop loss in insurance?
When MOOP and deductible have been paid and insurance covers 100% of the rest
What are the conditions for grandchildren to qualify as children on their grandparent’s SS?
If they are dependents and their parents are deceased or disabled
What is adhesion?
Take it or leave it. Non-negotiable
What is aleatory?
Money exchanged may be unequal (premium for DB)
What is warranty?
A promise made by the insured to the insurer
What is waiver and what is estoppel?
Waiver occurs when a party relinquishes a right
Estoppel takes place when one party is denied a right to which they are otherwise entitled
What is rescission vs. reformation?
Rescission deems a contract void from inception
Reformation revises the contract to express original intent
How is coinsurance/copayment treated for health insurance?
Pay Deductible first, then coinsurance ratio above the deductible to MOOP
How are rating agencies’ best ratings broken down?
AMBEST: A++ to A/A-
MOODYS: Aaa to Aa1/Aa2
SP: AAA to BBB
What are the four underwriting ratings for insureds, in order?
Preferred, standard, rated, declined
In HOI policy, is water damage covered from the sky down or from the ground up?
From the sky down
How much are detached structures covered in HOI?
10% of the dwelling
What is the breakdown of the x/y/z number in auto insurance?
Bodily injury per person, per accident, and property damage
What is strict and absolute liability?
Occur as a result of legislation in which one party is held legally liable regardless of who is at fault
Ex. Workers comp
What is vicarious liability?
When an individual is held responsible for negligent acts performed by someone else
What is comparative vs. contributory negligence?
Contributory: negligent actions contributed to loss, cannot recover
Comparative: negligent actions contributed to loss, can recover portion of loss from other negligent party
Are cross-purchase agreements and entity purchase agreements premiums deductible?
No, but the death benefit proceeds aren’t taxable either
What is the income based repayment plan?
IBR
15% of discretionary income with remaining debt forgiveness at 25 years
Most federal loans eligible (except parent plus)
What is the pay as you earn plan?
Pay as you earn:
10% of discretionary income with remaining debt forgiveness at 20 years
only direct federal loans and graduate plus eligible
What is the income contingent plan?
ICR:
20% of discretionary income with remaining debt forgiveness at 25 years
Only direct federal loans and graduate plus are eligible
What is the maximum term and minimum rate of a CRAT, and how often must it be paid?
20 years of term, 5% annually
How much is the deduction for a charitable contribution to a CRT?
The contribution less the present value of the income stream
