Sources Of Retirement Income And Legal Entities

Question 1

How are surrenders from a cash value life insurance policy taxed?

Answer 1

The amount of the cash surrender value that exceeds the total net premiums paid is subject to taxation as ordinary income.

Question 2

How are insurance policy dividends taxed?

Answer 2

Policy dividends are not taxed as long as the policy is in force, however if the dividends accumulate at interest, the interest is taxable as ordinary income in the year paid.

Question 3

What are the two attributes of a modified endowment contract?

Answer 3

1. Meets federal and state definitions of insurance contract

2. Fails “7-pay test”

Question 4

Describe the “7-pay test”

Answer 4

If CUMULATIVE Premiums paid in the first 7 years at ANY TIME exceed the amounts that would have been paid in at that time (cumulatively) under a level 7-pay paid-up contract.

Question 5

What is the impact of having your insurance policy deemed a Modified Endowment Contract

Answer 5

Withdrawals or loans are treated like withdrawals from an annuity:

1. LIFO
2. Gains or Earnings in the contract are ordinary Income, and are taken first
3. Return of basis (premiums) comes after all gains exhausted
4. Subject to early withdrawal 10% tax penalty is owner is pre-59 1/2.

Question 6

What is the typical amount that can be borrowed against a cash value life insurance policy?

Answer 6

The current surrender value of the contract, less one years calculated interest.

Question 7

Is the interest charged to a policy loan tax-deductible?

Answer 7

NO

Question 8

Are life insurance cash values protected from Creditors?

Answer 8

YES

Question 9

What does OASDI stand for?

Answer 9

Old Age, Survivors, and Disability

Question 10

What is the definition of Full Retirement Age under Social security?

Answer 10

The age at which full retirement benefits are available

Question 11

What is the formula for the benefit reduction for early retirement under social security?

Answer 11

5/9 of 1% per month for each of the first 36 months prior to full retirement, plus 5/12 of 1% for each month in excess of 36 months. The reduced payments continue for life, and do not increase

Question 12

What are the earnings limitations on social security benefits for persons working past full retirement age?

Answer 12

There are none.

Question 13

How are earnings limitations on social security benefits calculated for a person receiving benefits before their full retirement age?

Answer 13

Benefits are reduced by $1 for every $2 earned over the limit for calendar years before the calendar year in which the beneficiary attains his full retirement age (the limit is adjusted annually by cost of living and is set by the SSA). In the calendar year a beneficiary reaches their full retirement age, the benefit is reduced $1 for every $3 earned, for the months prior to their birthday, and then not at all after.

Question 14

What are the three conditions that must be met in order to receive disability benefits under Social Security Disability?

Answer 14

1. The applicant must have satisfied the necessary work credits within a specified period of time.
2. The physical or mental condition has lasted, or is expected to last, at least 12 months or is expected to end in death.
3. The disability must be sever enough to keep the person from doing any substantial work, not just the persons last job.

Question 15

What is the definition of “Provisional Income” in the determination of the taxation of social security benefits?

Answer 15

Modified AGI + 1/2 of Social security benefit

Question 16

What are the base amount tests for provisional income comparisons for social security taxation in a single-filer?

Answer 16

25,000–up to 50% of social security must be included in gross income
34,000–up to 85% of of Social security benefits must be included in gross income

Question 17

What are the base amount tests for provisional income comparisons for social security taxation for Married people filing jointly?

Answer 17

32,000–up to 50% of the social security benefit must be included in gross income
44,000–up to 85% of the benefit must be included in gross income

Question 18

What are the base amount tests for provisional income comparisons for social security taxation for Married people filing separately and living together for some part of the tax year?

Answer 18

$0

Question 19

What are the base amount tests for provisional income comparisons for social security taxation for Married people filing separately and living apart for the whole tax year?

Answer 19

the same as a single filer

Question 20

What unique expenses are tax deductible for C corps?

Answer 20

• -tax exclusions for benefits to employees under self-insured non-discriminatory medical reimbursement plans
• -tax exclusion for employees for amounts received from accident or health plan or paid by the corp to a similar plan for the benefit of employees
• -tax exclusions for the cost of providing employees with group term life (for the first 50k)
• -tax deductions fro meals and lodging furnished for the convenience of the employer.