Unit 21

Question 1

Tax Considerations

Alimony and Child Support

Answer 1

Alimony counts towards income for receiving spouse and deductions for paying spouse.

Child Support does not count towards income or as a deduction

Question 2

Portfolio income

Answer 2

Taxed in the year it’s earned

Question 3

Dividends

Answer 3

For test purposes, assume the dividend is qualified.

If the dividend qualifies, the tax rate is generally a maximum of 15% (this is a reduced rate)

If not qualified, it’s taxed at ordinary income rate.

Income from bond funds are not qualified and taxed at ordinary income (except muni bond funds)

Question 4

Marginal Tax Rate

Answer 4

Highest paid rate on income for the last dollar received. (Tax brackets are like thresholds that make an earner pay more at each one)

Question 5

Some factors for determining federal income tax:

Answer 5

Age
Citizenship
State of residence

Question 6

Income on debt securities taxed how? (Except munis) of

Answer 6

Always at ordinary income rates (except munis)

U.S. Treasuries are exempt from state tax, not federal

Question 7

Municipal bonds taxation

Answer 7

Munis can be exempt from state and federal tax.

Cap gains are always taxed though (sold for price higher than bought)

Question 8

TIPS Taxation

Answer 8

Exempt from state and local tax (bc treasury securities), but annual interest is taxed federally as ordinary income and annual increase to the principal is taxed as well

Question 9

Foreign security and ADR dividend and interest tax

Answer 9

Withholding tax of 15%. Can get tax credits. Taxed at all levels (state and federal)

Question 10

Form 1099

Answer 10

Shows income and realized gains from investments for taxes.

Question 11

Interest on interest plan

Answer 11

Like a savings account in a bank that compounds quarterly. Interest on interest.

Question 12

DRIPS

Answer 12

Dividend reinvest plan

Taxed in year realized

Cost basis adjusted by dividend increase, so income is not taxed again. (KNOW THIS FOR COMPUTATIONS)

Regardless of fluctuations in the market, investors participating in the DRIP program will always have more shares in their account at the end of the year than at the beginning

Question 13

Margin interest

Answer 13

Tax deductible

Not tax deductible on munis bc they’re already tax free

Question 14

Effective tax rate

Answer 14

Overall tax rate you pay

Question 15

Long term capital gains rate

Answer 15

15%

Question 16

Capital losses

Answer 16

Capital losses that exceed capital gains can offset earned income up to $3000/year. Capital losses can be carried forward

Question 17

Tax-Swapping

Answer 17

Although wash sales are not allowed for stocks, an investor can sell a 2035 bond at a loss and purchase a 2036 bond

Question 18

Sale of primary residence tax benefits

Answer 18

As long as it had been lived in for 2 years…

$250k excluded from capital gains for a single person;
$500k excluded for married

Question 19

AMT

Answer 19

To determine if you owe AMT, compute your regular taxes, the compute the AMT. You pay the higher amount.

Items that must be added back in for the purpose of AMT are called tax preference items

Question 20

Life insurance taxation

Answer 20

Beneficiary proceeds are not taxed

Premiums are typically non-deductible. Generally exempts the beneficiary from taxation.

Whoever holds “incidents of ownership” is the one who owns the policy, or has those powers. Best to have someone else own the policy so proceeds aren’t taxed. Some people use ILITs for this.

Question 21

Policy surrender of life insurance

Answer 21

Any gains are taxed at ordinary income

Question 22

Life Insurance withdrawals

Answer 22

FIFO is used (unlike an annuity that uses LIFO) so no tax consequences until excess above cost basis is received.

Question 23

Taxation of social security. OASDI (official name of SS)

Answer 23

Taxed bracket of SS income is based on base income (provisional income)

Question 24

Carryover basis

Answer 24

How gift tax keeps cost basis and holding period

Question 25

Step up provision

Answer 25

Inherited securities step up the basis.

Does not apply to annuities

Question 26

Trust tax rates

Answer 26

Can get expensive if not handled properly

Taxation is based on what is earned and what is retained

If the trust estate has income it must be reported on IRS form 1041

Question 27

Trust taxation Other

DNIt

Answer 27

DNI - distributable net income.

Taxable income to the trust or estate.

Commissions and fees subtracted from DNI. Cap gains are reinvested.

Question 28

Portability of unused estate tax

Answer 28

Each living spouse has a tax exemption of $11.4MM.

Because of the unlimited marital deduction, if a spouse were to leave their estate to another spouse, they would not have to use any of their limit of $11.4MM. And the surviving spouse could pass on $22.8MM worth of her estate tax free.

Lifetime gifts eat into the $11.4MM lifetime limit.

Question 29

Generation skipping trusts (GST)

Answer 29

Skips one generation (and therefore one more level) of taxation

Question 30

Gross Estate
Adjustable Gross Estate (AGE)
Taxable Estate

Answer 30

Federal tax is calculated using formula of Gross estate.

Certain expenses are added to come to the Adjusted Gross Estate. (Ex. Funeral expenses, charitable contributions, debt of deceased)

Once deductions are made, unlimited marital and charitable deductions are made to come to Taxable Estate.

Question 31

Alternative valuation date

Answer 31

IRS may use a value of 6 months after the death if they choose. Typically do this if the inheritance was sold at a big loss.

Question 32

Computation of estate tax is done on IRS form 706. From the gross assets certain expenses such as the cost of administration of the estate funeral expenses payments of outstanding debts and charitable bequest are deducted into taxes levied on the remaining taxable estate ***

Answer 32

Also, estate taxes are due 9 months after death

Question 33

Form # for computation of estate tax?

Form # for computation of estate income tax?

Answer 33

Estate tax form: 706

Estate income tax form: 1041

Question 34

Gift tax

Answer 34

$15k/year to any individuals. Married =$30k.

***Any amount over $15k requires a gift tax return (filed on form709) and eats into 11.4mm lifetime exclusion. DUE AT THE SAME TINE AS REGULAR TAX RETURN - April 15.

Value of gift is based on current market value.

**work out all problems the long way and do all math

Question 35

**Tax Documents and Due Dates

Answer 35

Sold Proprietorship , Single member LLC- Schedule C - April 15

Multiple member LLC, partnership, S Corp - March 15.
LLC and Partnership on 1065
SCorp on 1120s

C-Corp - April 15, or 15th day of the 4th month after end of fiscal year. Form 1120