Random Flashcards
When can you roll a SIMPLE IRA into a Traditional IRA?
A SIMPLE IRA cannot be rolled into a traditional IRA until the participant has been in the SIMPLE IRA for two years.
Framing Bias
The framing bias asserts that people are given a frame of reference, a set of beliefs or values, which they use to interpret facts or conditions as they make decisions.
Who is revocable trust generally taxed to?
Grantor
Non-Capital Assets
Examples: Inventory, business property, accounts receivable, and creative works (like copyrights).
Tax Treatment: Gains on these are taxed as ordinary income, or may involve depreciation recapture if business equipment.
Capital Assets
A capital asset is any property held for personal or investment purposes, including stocks, bonds, real estate, and personal items like jewelry.
Section 1231 losses
treated as ordinary losses
Section 1231 Property
This includes depreciable property and real estate used in a trade or business, like buildings, machinery, and land. To qualify, assets need to be held for more than one year.
Purpose of the Exclusion Ratio
The purpose of the exclusion ratio is to identify how much of each annuity payment can be excluded from income tax.
Since an annuity involves both a return of capital (the initial amount you invested) and a return on that capital (the earnings), the IRS needs to know which part is taxable.
Related-Use Property:
Definition: This is property that the charity will use in a manner that is directly related to its exempt function or mission. In other words, the donated property helps fulfill the organization’s charitable purpose.
Deduction Limit: For related-use property, the donor can generally deduct the Fair Market Value (FMV) of the property, subject to AGI limitations.
Example: Suppose you donate a piece of art to an art museum, and the museum intends to use it as part of its exhibit. Since the art is being used in a way that aligns with the museum’s mission (education and cultural enrichment), it is considered related-use property, and you can deduct the FMV.
Un-Related Use Property
Definition: This is property that the charity will not use in a manner directly related to its exempt purpose. The property might be sold by the charity, rather than used to further its mission.
Deduction Limit: If the property is unrelated-use, the allowable deduction is limited to the donor’s basis (i.e., the original cost of the property), not the FMV. The IRS limits the deduction in this way because the property is not advancing the charity’s main purpose.
Example: If you donate the same piece of art to a local animal shelter, the shelter might sell the art to raise money. Since the art is not related to the shelter’s mission, it is considered unrelated-use property. Therefore, your deduction would be limited to the basis of the property.
Margin Interest Expense Deduction
Margin interest is deductible to the extent that it does not exceed net investment income.
Net investment income generally includes interest, dividends, and short term capital gains. (not long term capital gains)
Gross Profit Percentage
Installment Sale
(RealizedGain)/(TotalContractPrice)
2503(c)
Full Distribution at Age 21: The trust must give the minor the right to access the entire principal (remaining assets) once they reach age 21.
Income Distribution is Discretionary: The trustee can distribute income to the minor before age 21 but is not required to do so.
Asset Distribution if the Minor Dies Before Age 21: If the minor dies before reaching age 21, the trust assets cannot revert back to the grantor. Instead, they must either:
Pass to the minor’s estate, or
Be subject to the minor’s general power of appointment.
Modern Portfolio Theory
“Smart Investors Diversify Efficiently”:
Standard deviation (Risk measure)
Investor behavior is rational and risk-averse
Diversification is essential for risk reduction
Efficient frontier is the goal
FSA Medical
-$3,200 max
-use it or lose by 12/31
-extend it 3/15 OR $640 rolling balance
FSA Dependent Care
-$5000 max
-before school after school
-true use it lose it
-NO EXTENSIONS
PITI
Principal, Interest, Taxes (property only), and Insurance (homeowners only)
DORM
Discount rate
Open market operations
Reserve requirements
Margin rates
Discount Rate
Expansionary: “Lower to Loan”
lowering the discount rate makes it cheaper for banks to borrow and lend out money.
Contractionary: “Raise to Restrain”
Raising the discount rate makes borrowing more expensive, slowing down lending.
Reserve Requirements
Expansionary: “Reduce to Release” Reducing reserve requirements allows banks to lend more
Contractionary: “Increase to Hold”
Increasing reserve requirements forces banks to keep more in reserve, lending less
Open Market Operations
Expansionary: “Repo to Pump”
The Fed buys government securities (repo) to inject money into the system.
Contractionary: “Reverse to Remove”
The Fed sells government securities (reverse repo) to take money out of circulation.
Margin Rates
Expansionary: “Decrease to Drive”
Lowering margin rates allows more borrowing to buy securities.
Contractionary: “Increase to Inhibit”
Raising margin rates restricts borrowing and slows.
Deflation
Drop in Prices and Demand
Insurable Risks
“HADM”:
Homogeneous units
Accidental loss
Definite and measurable
Must not be catastrophic
high loss severity and low loss frequency
use risk transfer (insurance)
high loss severity and high loss frequency
use risk avoidance
low loss severity and high loss frequency
use risk retention and reduction
low loss severity and low loss frequency
use risk retention
Strict Liability
aka product liability
Contributory Negligence
“Contributory = Completely Out” to remember that under contributory negligence, any contribution to the fault by the injured party results in being completely barred from recovery.
Comparative Negligence
“Comparative = Shared Fault, Reduced Pay” to remember that comparative negligence shares the fault and reduces the payout based on the injured party’s contribution to the accident.
Capital Utilization
“Utilization = Use Up”: The capital is used along with the interest.
Capital Retention
“Retention = Retain Principal”: Only interest is used, preserving the capital.
Business Owner’s Policy (BOP)
Think of “BOP = Basic Business Bundle” to remember that a BOP bundles essential coverages like property and liability but excludes professional liability.
Medigap
Think of “Medigap = Medicare’s Missing Pieces” to remember that Medigap fills in the gaps of Medicare by covering out-of-pocket costs like deductibles, coinsurance, and some additional benefits.
Level Death Benefit
Option A; Option 1; Type 1
“Level = Fixed Face Value” to remember that the death benefit remains fixed and does not increase with cash value.
Increasing Death Benefit
Option B; Option 2; Type 2
“Increasing = Added Cash Value” to remember that the death benefit increases as the cash value grows.
Life Insurance Dividend Options
Think of “CRAP-O” to remember the options:
Cash
Reduction of Premium
Accumulate with Interest
Paid-Up Additions (PUAs)
One-Year Term Insurance
Non-forfeiture Options
Think of “CRE – Cash, Reduced, Extended”:
Cash: Get immediate cash value, policy ends.
Reduced: Keep a smaller, permanent death benefit.
Extended: Maintain the full death benefit temporarily.
Settlement Options
Think of “CIFIL”:
Cash
Interest
Fixed Period
Installments of Fixed Amount
Life Income
Life settlements (not for the terminally ill)
“Three-Tier for Insured”:
Basis (tax-free)
Surrender Value - Basis (ordinary income)
Above Surrender Value (capital gains).
“Company Pays on Death Benefit”: The viatical company pays ordinary income tax on the death benefit minus their basis.
Collateral Assignment Method
Think “Collateral = Control for Shareholders” to remember that the employee owns the policy and has rights to excess cash value, with the company being repaid first for any premium loans.
Endorsement Method
Think “Employer’s Policy, Pays First” to remember that the company owns the policy and is the primary beneficiary, up to the amount of premiums paid.
Annuity payout exclusion ratio
Premium paid / expected return
Annuity payout expected return
monthly payment x years of life expectancy
Market Capitalization
Market Cap = Shares × Price
Coefficient of Variation (CV)
Risk (standard deviation) / Average Return (mean)
Calculating Geometric return
(1 +/- return) x (1 +/- return) x …
Take result and enter as FV
PV= -1
N= number of years
Solve for i
Dollar Weighted Return
“DWR = Dollar Influence Return” to remember that DWR/IRR reflects the investor’s cash flow impact.
Time-Weighted Return
“TWR = True Manager Return” to remember that TWR isolates manager performance from cash flows.
Return on Equity
ROE = Earnings per share ÷ Book Value
Dividend Payout Ratio
Common dividends paid / EPS
Dollar Cost Averaging (DCA)
-use columns
-compute how many shares you buy
-divide total cost buy total number of shares to get average share price
CML
Capital Asset Pricing Model
-concerned with the MACRO aspect. Uses standard deviation (all risk) to measure risk
SML
Security Market Line
-concerned with MICRO aspect. Uses Beta (only systematic) to measure risk.
AGI Exclusions
“G.I.C.M.W.C.” - “Gifts In Cash Mean We’re Clear” to help you remember they’re tax-free!)
Gifts
Inheritances
Child Support
Municipal Bond Interest
Workers’ Compensation Payments
Compensatory Damages
AGI Adjustments
“IRA, SELF, SMART, EDUCATION
IRA: IRA contributions
SELF: Self-employment health insurance, self-employment tax deduction
S: SEP or Keogh plans
M: Moving expenses for military
A: Alimony paid (pre 2019)
R: Retirement contributions (Keogh/SEP)
T: Tuition deduction ($4,000)
E: Early withdrawal penalty
D: Deductible Student Loan Interest
H: Health Savings Account (HSA)
Self Employment Income
“CG Board Part-Time”
C: C Schedule (Net Schedule C income)
G: General Partnership (K-1 income)
BOARD: Board of Director’s fees
PART-TIME: Part-time earnings (1099)
Gross profit percentage
Profit / total contact price
Qualified Business Income (QBI) Deduction
can deduct 20% of TAXABLE income (not AGI)
IDGT’s or Tainted Trusts
IDGTs: Think “Income Defective, Estate Effective” to remember the dual benefits for income and estate taxes.
ILIT
ILITs: Think “Unfunded is only insurance; Funded has finances” to distinguish between ILIT types.
Home Improvements
“Improvements Increase” (they increase basis and value, no immediate deduction).
Home Repairs
“Repairs Reduce Taxes” (you can deduct repair expenses immediately, reducing taxable income).
