Tax

Question 1

Economic income equation:

Answer 1

Economic income = PV (future premiums) - PV(future losses)

Question 2

What is the discount rate to be used in tax calculated

Answer 2

For each AY, the discount rate is the 60mnth moving average of the “federal mid-term rates”, ending Dec 1 of the prior AY

Question 3

Reason that tax calculations use Schedule P Part 1, instead of Part 3:

Answer 3

• Part 3 contains only DCC, not AAO. Part 1 contains all LAE.
• Part 1 is audited, whereas Part 3 is not.
• Some actuarial methods rely on judgment to select paid LDFs. The IRS method does not involve judgment.

Question 4

Portion of Tax exempt income that is taxed due to proration provision:

Answer 4

15%

Question 5

Due to the DRD, what portion of dividends are tax exempt:

Answer 5

• if the taxpayer owns less than 20% of the firm, 70%
• if the taxpayer owns between 20 & 80%, 80%
• if the taxpayer owns more than 80%, 100%

Question 6

Equations to derive RTI from incurred losses according to direct & indirect
methods

Answer 6

Direct: Paid loss + change in discounted reserves
Indirect: Statutory incurred loss - change in reserve discount.

Question 7

Equations to derive RTI from bond income according to direct & indirect methods.

Answer 7

Direct: 15% municipal bond income
Indirect: Statutory income - 85% x municipal bond income

Question 8

Equations to derive RTI from dividends according to direct & indirect methods.

Answer 8

Direct: 40.5% of unaffiliated common stock dividends
Indirect: Statutory income - 59.5% of dividends

Question 9

Equations to derive RTI from revenue oset according to direct & indirect methods.

Answer 9

Direct: WP - 80% Change in UEPR
Indirect: Statutory EP + 20% x Change in UEPR

Question 10

AMTI equation:

Answer 10

AMTI = RTI + 0.75 x Income that escapes taxation

Question 11

ARIT equation:

Answer 11

ARIT = RIT - prior year’s minimum tax credit

Question 12

Factors that management need to consider when deciding portions of stocks versus bonds to hold:

Answer 12

• relative tax rates
• yield
• diversification
• asset liability management
• SAO
• Management dislike of erratic income

Question 13

Reasons municipal bonds often provide a higher after tax yield than corporate bonds of similar risk levels:

Answer 13

• Callability: most municipal bonds are callable
• Liquidity: Municipal bonds are less liquid.
• Tax legislation: The proration provision reduced the tax advantage of municipal bonds

Question 14

Relationship between RTI & AMTI that would produce the optimal tax strategy:

Answer 14

AMTI = RTI x 175%