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QB09 Flashcards

1
Q

65 year-old wants to live on fixed income and leave to charity. Needs

  1. CRAT
  2. CRUT
  3. GRAT
  4. GRUT
A

CRAT

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2
Q

Exception to the 21/1 rule

A

2-year/100% vested rule

allows up to a 2-year service requirement if the employee is immediately 100% vested in employer contributions upon becoming a participant

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3
Q

Section 2032A valuation

A
  • Farm valued at current-use valuation in gross estate
  • If S 6166 election made, payment of estate tax can be deferred 5 years
  • Either grantor or recipient must have been material participant in farm for at least 5 of the last 8 years
  • Recapture occurs if recipient sells the farm within the next 10 years
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4
Q

Special use property valuation requirements

A
  • The combined value of the real and personal property of the farm or closely held business must be at least 50% of the gross estate less certain expenses
  • The decedent or a family member must have owned and used the property as a farm or business for at least 5 of the 8 years immediately before the decedent’s death
  • The decedent must have been a U.S. citizen or resident
  • The real property must pass to a qualified heir
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5
Q

Estate Alternate Valuation Date

A
  • Estate tax base must be greater than the exemption $11,580,000 in 2020
  • and may not all pass to surviving spouse
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6
Q

Target Benefit Plan

Who bears investment risk?

A

EE.

Type of DC plan

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7
Q

Do SEPs and 401(k)s require

Qualified Pre-retirement Survivor Annuity?

A

No, because

  1. They don’t pay the participant a life annuity
  2. Participant’s nonforfeitable accrued benefit payable to survivor anyway
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8
Q

Do DB and Target Bens require QPSA?

A

Yes

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9
Q

Which part of Medicare covers outpatient hospital svcs?

A

Medicare Part B

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10
Q

Which Medicare part covers

  • Skilled nursing facility
  • Home health care
  • Hospice care
A

Medicare Part A

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11
Q

Leading questions

A

guide the client to give more detail

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12
Q

Which part of Form ADV must be provided prior to investment advisory contract?

A

2A, at least 48 hours

else client has 5 days to cancel

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13
Q

Cross-tested plan

A
  • DC plan
  • Tests whether contrib formula discriminates by converting contrib made for each participant into equivalent benefit accruals
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14
Q

Schedule I

A
  • Tells SEC whether adviser is still in the business
  • Tells SEC whether any changes in the adviser’s information
  • Affords adviser an opportunity to submit a current balance sheet
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15
Q

2503(b) and 2503(c)

A

Trust income distribution:

  • 2503(b) - must be distributed annually
  • 2503(c) - may be distributed or left in the trust to accumulate. One way to remember this is that 2503(c) trust distributions are made “as the trustee c’s fit.”

Control of trust assets

  • 2503(b) - Donor stipulates under what conditions the trust will end. For example, 2503(b) trusts can delay the termination of the trust past age 21.
  • 2503(c) - beneficiary at age 21
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16
Q

Nonspouse IRA Beneficiary rules

A
  • Designated beneficiaries must distribute fully by 10th anniversary
  • Non-designated beneficiaries by 5th anniv.
  • May roll over to an inherited IRA and name a beneficiary
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17
Q

Representing Comp

A

“Fee only,”

or

“Fee based”

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18
Q

Diligence

A
  • Must provide Professional Services, including responding to reasonable Client inquiries, in a timely and thorough manner
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19
Q

Is Revocation Permanent?

A

You bet

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20
Q

Passive Activity Loss Deductions

Exception for Real Estate

A
  • Deduction of $25,000 ($12,500 for MFS) allowed against a taxpayer’s other non-passive income
  • AGI phaseout $100,000 - $150,000
  • ($50,000 - $75,000 for MFS)
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21
Q

Calculate Net Capital Gains for the year

A

Aggregate LT and ST G/L to a Net CG/L

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22
Q

Home office qualification

A
  • Must be used exclusively and regularly by the taxpayer for administrative or management activities of a trade or business
  • Must also be no other fixed location where these activities are performed to a substantial extent
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23
Q

K Corps: 2% owners eligible for Group Term?

A

No!

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24
Q

Deadline for electing S corp

A

15th of 3rd month of tax year

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25
Q

Is K-corp income considered self employed?

A

No. W-2

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26
Q

Is Tax-exempt income from a general obligation municipal bond a preference for AMT?

A

No

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27
Q

Is a SEP qualified?

A

No

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28
Q

Are annual Money Purchase contributions mandatory?

A

Yes

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29
Q

Are forfeitures included in annual additions limit?

A

Yes

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30
Q

How are target benefit and defined benefit plans similar?

A

Both better for older EEs

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31
Q

Penalty on excess IRA contributions

A

6%

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32
Q

Does 5-year rule for Roth IRA apply for $10,000 withdrawal for first-time house purchase?

A

Yes!

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33
Q

What causes gifted property to be incl. in GE at DOD value?

A
  • Power to revoke
  • Retain life estate
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34
Q

QPRT

A
  • Grantor must survive the trust term to realize any estate tax savings
  • The grantor makes a taxable gift upon the creation of the QPRT, although the gift is usually small
  • At end of term, property transfers to beneficiaries
  • May be appropriate for vacation homes
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35
Q

Must a special power of appointment held at death be included in the holder’s gross estate?

A

Never

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36
Q

Basis of revocable trust assets when grantor dies

A

Stepped up basis

unless IRD

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37
Q

Are buy-sell premiums on life insurance deductible to the business?

A

Generally not

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38
Q

When is a private annuity best used?

A

When the seller is not expected to outlive his actuarial life expectancy

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39
Q

Medicare pays 100% of the first X days of skilled nursing care

A

20

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40
Q

After X days, Medicare pays everything above a deductible for Y days of skilled nursing care

A

20, 80

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41
Q

Net Cost Method

A
  1. A period is selected (10, 20, or 30 years)
  2. The total premiums are added for the selected period
  3. Dividends for the selected period are deducted
  4. The cash value at the end of the selected period is deducted from the net premiums
  5. The net cost per year is calculated by dividing the insurance cost by the term
  6. The net cost per $1,000 of insurance per year is calculated by dividing the net cost per year by the face of the policy in thousand
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42
Q

Interest-adjusted method:

Surrender cost index

A
  1. Calculate the value of all premiums inflated at a selected fixed interest rate for the selected term
  2. Calculate the value of all dividends inflated at a fixed interest rate (same one) for the selected term, and subtract this amount from the result found in the previous statement
  3. Subtract the cash value at the end of the selected term
  4. Determine the insurance cost
  5. Calculate the annual PMT, with N = selected term and I/YR = interest rate
  6. Calculate the cost per $1,000 per year
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43
Q

IRR on Yield method

A

Calc IRR on cash value of policy if held to term

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44
Q

Child Tax Credit

A
  1. For 2020, a $2,000 credit is given for each qualifying child under age 17
  2. A qualifying child includes child, stepchild, grandchild, or eligible foster child. In any case, the child must be a dependent.
  3. Credit is reduced to $50 for each $1,000 above threshold. Status Married filing jointly Single or head of household Married filing separately MAGI Threshold (MFJ $400,000, S $200,000, MFS $200,000)
  4. The child tax credit is a refundable credit up to $1,400 per child.
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45
Q

Functional Use Test

A

The taxpayer’s use of the replacement property and of the involuntarily converted property must be the same.

For example, an office building used as an office building by the owner is subject to an involuntary conversion. The

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46
Q

Taxpayer-Use Test

A

The owner-investor’s properties must be used in similar endeavors as the previously held properties.

More flexible than the functional use test!

For example, if the owner had held the office building as an investment property, the replacement property could be any realty investment property

47
Q

May AOTC and LLC be used in same year?

A

No

48
Q

May S-corp shareholders establish a Keogh?

A

Not based on their S-Corp income, because it’s not considered self-employed

49
Q

Disadvantages of Net Cost Method

A
  • Ignores time value of money!
  • Biases calculations in terms of contingent payments that are treated as certainties (dividends)
  • Yields a cost per $1,000 that is clearly understated
  • Highly sensitive to insurer’s assumptions
50
Q

Interest-adjusted methods

Net payment cost index

A

Measures the relative net payment of a policy for a given term assuming no surrender of the policy during the policy term

Calculate Surrender Cost Index and delete the cash value

51
Q

Central Registration Depository (CRD) System

A

Makes registration with FINRA uniform throughout the states.

52
Q

Pell Grants for Grads?

A

Nope

53
Q

SEP rules and loans

A

IRA rules

Nondiscrimination

Loans NOT permitted

Yearly contributions not required

54
Q

Marital deduction - Terminable Interest Rule

A

Spousal gifts don’t qualify for MD if a terminable interest

55
Q

Terminable interest rule exceptions

A
  1. When only condition is spouse survivor for period <= 6m and spouse actually survives
  2. When spouse receives life estate w/ general POA
  3. When income from CRAT or CRUT to spouse and spouse is only non-charitable beneficiary
  4. Certain marital trusts by statute are also exceptions.
56
Q

Is transfer to GRAT elig. for annual exclusion?

A

No, gift of future interest

57
Q

Who is taxed on trust income used to pay for Life Ins on life of Grantor or Grantor’s spouse?

A

Grantor

58
Q

If a decedent owned policy on own life but ben. was designated, are death proceeds incl. in GE?

A

Yes

2042

59
Q

What kind of corp might not be permitted to have Keoghs?

A

Anything that is not a flow-through

(C corp, S-corp, possibly LLC)

60
Q

MLPs are bought and sold

A

Organized exchanges

and OTC

61
Q

Nonbusiness bad debt losses

Deductible?

A
  • Only as ST Capital Losses
  • Only in year becomes worthless
  • No partial deductions
62
Q

Is student loan interest deductible?

A

Yes, up to $2,500

Don’t have to itemize!

63
Q

Reasons for revocable lifetime trust

A

Avoid probate

Privacy

64
Q

Rev. lifetime trust in GE?

A

Yes! Can’t avoid

65
Q

What two kinds of gifts incl. in GE at DOD value?

A
  1. Incomplete gifts
  2. Life ins. within 3 years of death
66
Q

Are capital gains incl. in DNI?

A

NO

67
Q

CRAT term

A

Fixed period or for life

68
Q

Basis of community prop at DOD

A

Both sides stepped up to FMV

69
Q

Ch. 14 rules on estate freeze

A
70
Q

Ch. 14 rules on buy-sell agreements

A
71
Q

Exceptions to 10% penalty on early Roth IRA distr.

A

Higher ed

Older than 59-1/2

72
Q

SEP plan requirements

A
  1. Must cover all EEs >= 21 and worked 3 of 5 cal years
  2. Part-time employment counts
  3. Contributions for comp < $600 not req.
  4. Can exclude collective bargaining EEs
73
Q

SIMPLE 401(k) and ADP test

A

Not subject to ADP test!

74
Q

SIMPLE 401(k) and vesting of ER match

A

100% immediate

75
Q

SIMPLE 401(k) min. ER match

A

3%

76
Q

May 457 rollover into a 401(k) or 403(b)?

A

Yes, either

77
Q

Taxes on UGMA interest

A

Possibly subject to Kiddie tax

78
Q

Who/what prohibits “Bait and switch” advertising?

A

FTC

79
Q

What is included in Stmt Fin. Position?

A
  • The asset or liability is a fixed and determinable amount
  • The receipt or payment is not contingent on the occurrence of a particular event
  • The receipt or payment does not require future performance of service
80
Q

strategic management financial counseling process

A

Client’s goals and values drive process

SWOT

81
Q

When is a perjury conviction OK?

A

If it happened more than 5 years ago

82
Q

Imputed interest on below-market loan

A

Difference between interest charged and interest using Federal rate

Using Federal rate: compounted semi-annually, adjusted monthly

83
Q

Types of below-market loans using imputed interest

A
  1. Gift loans
    1. Lender has imputed income, borrower interest expense
    2. Imputed interest is a gift
    3. May occur only between individuals
  2. Comp loans
    1. ER has interest income and comp expense; EE has imp. expense (may or may not be deduct) and comp. income
  3. Corp-shareholder loans
    1. Co has interest income and div expense; SH has imp. expense (may or may not be deduct) and div income
  4. Tax avoidance loans
84
Q

Exceptions to imputed interest rules

A
  1. No imp. interest on gift loans of $10,000 or less between individuals, unless the proceeds are used to purchase income-producing property.
  2. No imp. interest on gift loans of $10,000 or less between Co-SH, unless the proceeds are used to purchase income-producing property.
  3. On loans between individuals greater than $10,000 and less than or equal to $100,000, imp interest <= borrower’s investment income (from all sources) for the year
  4. If the borrower’s investment income for the year does not exceed $1,000, no interest is imputed on loans of $100,000 or less.
  5. If the principal purpose of the loan is tax avoidance, none of the exceptions apply.
85
Q

Material participant criteria

A
  1. >500 hours particip
  2. Accounted for essentially all the particip
  3. >100 hours & >= others’
  4. >100 hours & signif. activity >500
  5. MP in 5 of last 10 years
  6. Is personal service activity, and has MP any 3 yrs?
  7. Regular, continuous basis (>100hrs)
86
Q

Minimize AltMin

A

Accelerate income

87
Q

Standard deduction for a dependent

A

Max($1,000, earned income + $350)

88
Q

Statute of limitations

A
  1. 3 years from later of (filing, due) date
  2. 6 years if 25% gross income unreported
  3. None for fraud or failure to file
89
Q

Calc failure to file penalty + failure to pay

A

Netted against each other!

5% /mo file

90
Q

When is a passive loss allowed?

A
  1. Netted against passive gains, and
  2. When prop is disposed
91
Q

50/40 rule

A
  1. DB must benefit min(50 EE, 40% all nonexcludable EEs)
    1. 40% test does not have to consider noneligible EEs
    2. Noneligible incl.
      1. Do not meet age /svc (21/1)
      2. Excluded EEs, such as union employees, certain airline pilots, and nonresident aliens
      • If five or fewer EEs, two EEs must be covered. In the case of a single employee, that person is required to be covered. Below is an example of the 50/40 test “lesser of” rule.
      • DB plan with 1,000 nonexcludable EEs must benefit at least 50 EEs
      • DB plan with 100 nonexcludable EEs must benefit at least 40 EEs
      • In addition, DB plans also must meet one of the safe harbor, ratio percentage, or average benefits percentage tests
92
Q

Stretch IRAs

A
  1. Traditionally, a stretch IRA extends the period of tax-deferred earnings of assets within an IRA beyond the lifetime of the person who established the IRA, sometimes over multiple generations. However, the SECURE Act of 2019 has reduced the amount of the stretch to 10 years for most, but not all, situations. The SECURE Act did this by establishing three types of beneficiaries:
    1. Eligible designated beneficiary (EDB): Mostly unchanged from the former rules. These people are still allowed to factor in their life expectancies when determining the RMD rules. There are five types of EDBs: surviving spouses, disabled people, chronically ill people, people no more than 10 years younger than the decedent owner (i.e., a sister who is two years older or a friend eight years younger), and a minor child of the decedent. A surviving spouse who is an EDB always has the option to move the decedent’s money into an IRA in the spouse’s own name and be subject to the IRA rules based on his own age. An EDB who is a minor child is only allowed to use his life expectancy until reaching the state set age of majority. At that time, the RMD requirements revert to the 10-year rule. The SECURE Act also established a new test. The test for being an EDB is taken on the date of death. However, the identity of a designated beneficiary is still determined on September 30 of the year follow-ing the year of death. For example, Mary died on June 27, 2020. Her daughter Sally was 35 at the time and healthy. Six months later, Sally was in a car wreck and became disabled. Since Sally was healthy on the day Mary died, Sally cannot be an EDB. On September 30 of the year following the year Mary died, Sally officially became the designated beneficiary. However, she is not an EDB. Thus, becoming an EDB is a two-step process. First, you must be in one of the five categories of EDBs on the date of death. Second, you must be a designated beneficiary on September 30 of the year following the year of death
      1. Designated beneficiary: A designated beneficiary is a person or certain types of trusts for whom the IRS can calculate a life expectancy. The identity of any designated beneficiary and the second step in being an EDB is determined on September 30 of the year following the year of death. Being a designated beneficiary (only and not an EDB) means the person who inherits the employer retirement account or IRA is always under the 10-year rule regardless of when the decedent passed away relative to his required beginning date (RBD). The 10-year rule means the account must be completely emptied by December 31 of the year containing the 10th anniversary of the decedent owner’s death. Notice that this is 11 tax years. Thus, a decedent’s healthy adult child will always be under the 10-year rule whether the decedent passed away at 45 or 105. The SECURE Act greatly limited the options for someone who is only a designated beneficiary and not an EDB
        1. Beneficiary: Being listed as a beneficiary allows the entity to receive the retirement assets, but only being a beneficiary (and not an EDB or even just a designated beneficiary) means the ability to stretch the retirement asset is the most limited. The most common beneficiaries in this category are estates and charities. Charities often want the money as soon as possible, so their options for stretching the account are less important. The estate is the most impor-tant type of beneficiary. The rules were not changed for this category by the SECURE Act. Often, when a family has young children they will list the spouse as the primary beneficiary and “my estate” as the contingent beneficiary. As a minimum, the secondary beneficiary should be updated to the children’s names as they reach the age of majority
  2. After the IRA owner’s death, beneficiaries are allowed to take distributions under the rules for whichever type of beneficiary they are and (usually) when the original owner died relative to the required beginning date (RBD). (See XV(H): Required Minimum Distributions)
  3. By spreading out, or stretching, distributions over as long as allowed by law, the account has the best opportunity to grow, and taxes are deferred. IRS data shows that around 20% of people take withdrawals from inherited IRAs and employer retirement accounts according to the RMD rules. The other 80% withdraw the money faster than the RMD rules.
    4.
93
Q

One-time only IRA to HSA rollovers

A
  1. In general, not included in gross income
  2. Not allowed as a deduction and counts against the individual’s maximum annual HSA contribution for the tax year of the distribution
  3. Requirements and rules
    1. Only certain IRAs
      1. Traditional or a Roth IRA but not from an ongoing SIMPLE IRA or SEP IRA
    2. Maximum <= account owner’s maximum annual HSA contribution.
    3. Generally, only one allowed during the lifetime of an individual
    4. A qualified HSA funding distribution relates to the tax year in which the distribution is actually made
    5. An individual must be eligible at the time of the qualified HSA funding distribution. The distribution must be a direct transfer from an IRA or Roth IRA to an HSA, but a check from the IRA payable to the HSA trustee is acceptable
    6. Testing period rules
      1. If a qualified HSA funding distribution is made from the individual’s IRA or Roth IRA to his HSA and he remains an eligible individual during the entire testing period, the amount of the qualified HSA funding distribution is excluded from his gross income and the 10% additional tax does not apply
      2. The testing period begins with the month in which the qualified HSA funding distribution is contributed to the HSA and ends on the last day of the 12th month following that month
    7. HSA distributions not used for qualified medical expenses
      1. An HSA distribution not used for qualified medical expenses is included in gross income and subject to a 20% additional tax (with certain exceptions), regardless of whether the amount contributed to the HSA under the qualified HSA funding distribution is included in the account beneficiary’s income and subject to the additional tax.
94
Q

Stretch IRA Eligible Designated Beneficiary (EDB)

A
  1. surviving spouses
  2. disabled people
  3. chronically ill people
  4. people no more than 10 years younger than the decedent owner (i.e., a sister who is two years older or a friend eight years younger)
  5. a minor child of the decedent
95
Q

Stretch IRA Designated Beneficiary

A
  1. a person or certain types of trusts for whom the IRS can calculate a life expectancy
  2. Being a designated beneficiary (only and not an EDB) means the person who inherits the employer retirement account or IRA is always under the 10-year rule regardless of when the decedent passed away relative to his required beginning date (RBD). The 10-year rule means the account must be completely emptied by December 31 of the year containing the 10th anniversary of the decedent owner’s death. Notice that this is 11 tax years. Thus, a decedent’s healthy adult child will always be under the 10-year rule whether the decedent passed away at 45 or 105
  3. The SECURE Act greatly limited the options for someone who is only a designated beneficiary and not an EDB.
96
Q

Negligence income tax penalty

A

20%

97
Q

Sect 179 property

A

Tangible personal property used in a trade or business and placed in service during the current year

office equipment, business computers, and so forth

98
Q

Irrev. Trusts’ FDIC insurance

A

Greater of $1,250,000 and aggregate, ltd. to $250,000/benefiary

99
Q

Sect 179 annual limit

A

Any amount above $2,529,000, limited to taxable income

Carryforward available

100
Q

Viatical settlement for chronically ill

A

Tax-free if used for LT Care

otherwise gains taxable

101
Q

Tax treatment of annuity earnings/losses if owner not a natural person

A

Taxable income/losses

102
Q

Sect. 121 Ownership Test and Use test

A
  1. A home must have been owned and used as a principal residence for at least two of the five years before the sale (do not have to be consecutive years).
  2. Either spouse can meet the ownership requirement, but both must meet the use requirement, with neither inelig. due to #3
  3. Exclusion can be used every two years
  4. If change due to employment or health, partial exclusion available shorter of either Use or Ownership
103
Q

Transfer for Value Rule

A
  1. If an existing policy is transferred for valuable consideration, the insurance proceeds are includable in the gross income of the transferee to the extent the proceeds exceed basis (amount paid for policy plus any subsequent premiums paid).
  2. Five instances in which the transfer-for-value will not result in inclusion in gross income include the following:
    1. transfers to the insured
    2. transfers to a partner of the insured
    3. transfers to a partnership in which the insured is a partner
    4. transfers to a corporation in which the insured is an officer or shareholder; and
    5. transfers to a transferee (such as a child), whose basis in the policy is deter-mined by reference to the transferor’s basis (tax-free exchange or gift).
104
Q

Affiliated Service Group rules

A

May not use 5500 EZ

105
Q

Controlled Group rules

A

May not use 5500 EZ

106
Q

Leased employee rules

A

May not use 5500 EZ

107
Q

Donee’s basis in appreciated prop

A

Donor’s basis + gain / FMV * gift tax

108
Q

How much of interest expense is NOT deductible?

A

Interest expense * (1 - tax exempt income / Investment income)

109
Q

Fed. declared disaster casualty deduction

A

Loss - ins. - 10%AGI - $100

110
Q

Allowable max. deduction from RE losses

A

$25,000 reduced by 50% (AGI > $100K)

111
Q

DC plans’ SS integration level

A

May only use Excess method

Disparity <= min(Base %, 5.7%)

112
Q

Are ER contrib to SEP mandatory?

A

No! Discretionary

113
Q

5 and 5 power

POA trust

A

If the right to exercise is limited to the greater of $5,000 or 5% of the aggregate value of the property each year, the POA is generally not included in the decedent’s gross estate.

  • This right to withdraw is referred to as a 5-and-5 power.
  • The 5-and-5 power must be noncumulative. If the withdrawal is not made dur-ing the year, that year’s right to withdraw is lost
  • The value of the amount available but not exercised at the DOD under the 5-and-5 power is includable in the decedent’s gross estate in the year of death. An amount is “available” if the decedent’s power to withdraw had not lapsed before the DOD. Generally, the value of the 5-and-5 power will be 5% of the trust value at death because this amount is typically greater
  • The lapse of a power that exceeds the 5-and-5 power will be included in the decedent’s gross estate for three years (as the lapse of a general POA).
114
Q

ISOs

Event 1040 AMT Grant Exercise Sale HPR met HPR not

A

ISOs

Event 1040 AMT Grant No tax No tax Exercise No tax Bargain element: AMTI Sale HPR met HPR not Negative adjustment LTCG BE = W2 (no FICA) CG

CGT (6 decks)

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