Wrong Answer Cards Flashcards
Liquid Assets
-ETFs, MFs, and Government bond funds are NOT considered liquid.
-CDs and MMFs are!
Beta
- Measures systematic risk (not total risk)
- Beta of 2 is 100% more volatile than average stock
- Expresses volatility (not variability)
Duration
- Inverse relationship with interest rates!
- Interest rates go up, duration goes down
- Smaller the coupon, more volatile price
- Longer the duration, more volatile price
Who’s most likely to buy STRIPS?
Pension plan because they’re tax deferred!
(Zero coupon bonds)
Bond Put Features
Bonds can be redeemed back to issuer at face value even when market value has declined
HPR (Holding Period Return)
YOU DONT HAVE TO SELL THE STOCK TO CALCULATE IT
When must an individual file and income tax return for self-employment?
An individual is required to file if net earnings from self-employment are at least $400
Which form is used to amend a tax return?
1040X
Student loan interest deductibility
Limited to $2,500. Deductible on Schedule 1
Above the line!
When is alimony included in an adjusted gross income?
If divorced before 2019
Who can’t use NOL? (net Operating losses)
S-Corps because they are pass through entities.
Deduction for Federally Declared Disaster
Lessor of FMV or Basis
Minus: Amount reimbursed by insurance
Minus: $100 floor
Minus: 10% of AGI
GPs & LPs - Passive or Active income?
GPs are ACTIVE.
LPs are typically passive.
ISO’s tax deductible?
- yes if the ISO is disqualified
- Exercise Price would be treated as compensation
- holder would need to sell before the two year/one year holding period
Alimony Recapture Rules
- if alimony payments decrease or end during the first three calendar years, you may be subject to recapture rule
-You have to include income in the third year part of the alimony payments you previously deducted
- if payment in 3rd year decreases by more than $15k from 2nd year or if payment in 2nd and 3rd year are significantly lower than 1st
- $37,500 is the constant (for example, $70k (between yr 1 & 2) - constant of $37.5k = $32.5k recapture)
Workers Comp Includes
1) medical care
2) disability income
3) rehab rehabilitation benefits
Received tax-free
Charitable Gifts
- If under $250, dated receipt required
- If over $250, written acknowledgment from charity
- deduction is lessor of FMV or basis for items and shit
Real Return
- Spread between rates and inflation
AMT Paid & Basis (ISO)
If AMT is paid, basis is increased by amount paid.
Dividend Received Deduction (C-Corp)
- if own 20% or less = 50% div deduction
- 20%-80% = 65% div ded
- more than 80% = 100% div ded
QBI
- for pass through entities only
- 20% deduction on earnings
Single: $191k - $241
Married: $382k - $482
- Phaseouts for PSC
Section 1244
- Qualified Small Biz Stock
- for S or C-Corp only!
- if capitalized with less than $1M
- Loss of $100k/yr (JT) or $50k/yr (S) is ordinary loss (not capital)
Tax Filing!
- Self Employed: Schedule C
- Partnership: 1065
- S Corp: 1120S
- Corporation: 1120
179 Deduction (Section 1245 property only!!!! Non-RE)
- Biz can expense up to $1.22M of qualifying property in year of acquisition
- Reduced dollar for dollar by cost of qualifying property
- LOSS CANT BE CREATED
- can be carried into future years though
PTP Rules
- Publicly/nonpublicly traded partnerships
$25k Loss from Real Estate Activity
- May deduct up to $25k/yr of net losses from real estate activity
- Phased out for tax payers between $100k and $150k
Tax Free Rental Income
- If primary home is rented out for less than 15 days a year its tax free!
Renting Vacation Home
- treated as residence if owner uses it more than longer of 14 days or 10% of rental days.
Social Security Disability IF
- under 65 and:
1) disabled for 12 mths
2) expected to be for 12 mths
3) expecting to result in death and waited 5 mths
Spouse Eligibility SS
- Over 62
- Under 62 and:
1) child under 16
2) child over 16 w/ disability before 22 - Surviving spouse can take at 60 (if surviving and child under 16, can take at any age)
- Divorced spouse must have been married for 10 yrs and can’t be remarried
Dependent SS
- Surviving dependent of deceased, disabled or retired worker qualifies if:
1) under 19 and Ft student
2) 18+ and disabled before 22
Working after SS
If before FRA, reduce benefits $1 for every $2 above $22,320.
If FRA, reduce benefits by $1 for every $3 above $59,520.
Taxation of SS
- If MAGI + 1/2 of SS above $25k (Single) or $32k (MFJ), tax up to 50% of benefit
- If MAGI + 1/2 of SS above $34k (S) or $44k (MFJ), tax up to 85% of benefit
Money Purchase Pension Plan
- Benefit formula requiring annual employer contribution that is a FLAT percentage of each eligible employee’s comp
- For YOUNG and HIGHLY paid
- only first $345k taken into account
- GUARANTEES %, not return
- Employer can contribute up to 100% of comp, but can only deduct 25%
Target Benefit Pension Plan
- Similar to a DB plan… but it’s a DC (lower cost and simplistic)
- Favors older!
- Actuary determines initial contribution level (but never again)
- Fixed mandatory contribution
- EMPLOYEE assumes investment risk
Profit Sharing
- UP TO 25% in comp
- Flexible contributions
- Discretionary, can be nothing at all
- Substantial and recurring
- YOUNG and Well paid, motivate to work hard
Solo 401(k) / Uni 401(k)
- Not subject to non discrimination and testing
- Allowed for owner, spouse or two partners
Safe Harbor 401k
- Auto satisfies non discrimination testing w/ either:
1) Employer match ($1/$1 for first 3% and then $0.50/$1 on next 2% - up to 4%)
2) Non-elective contribution - 3% to all! - Immediately vested too!
ESOP & Stock Bonus
- Form of Profit Sharing plan
- Stock plan MAY invest in employer stock and an ESOP MUST invest assets primarily in employer stock
- Use to broaden ownership or give sense of ownership
- An ESOP participant with over 10 years and >55 can diversify up to 50% of acct balance (three alternatives offered)
412(i) Plan
- funded by life insurance
- Defined benefit plan
- insurance actuary determines contribution due
- For employers w/ need for LI
- Less growth, larger contributions
Coverage Requirements
1) Ratio Percentage Test: plan must cover % of NHCE that is at least 70% of HCE covered!
If that fails, this must pass…
2) Average Benefits Test: average benefit for all NHCE is at least 70% of those for HCE
Minimum Participation (DB Plans Only)
In addition to coverage requirements…. (70 and 70)
DB plan must benefit AT LEAST the lessor of:
50 employees or
Greater of 40% of all eligible employees or 2 employees
Highly Comped Employees HCE
1) $155k > (in preceding year)
2) Greater than 5% owner
Key Employees
1) Greater than 5% owner
2) Greater than 1% + comp >$155k
3) Officer w/ comp >$220k
Top Heavy Plan
> 60% of aggregate benefit are allocated to KEY employees
Top heavy plans must provide minimum benefits!
DB plans - 2% of comp x number of years which were top heavy
DC plans -no less than 3% of comp
Vesting Schedule
FAST:
- DC Plans & Top-Heavy DB Plans
- 3 yr cliff
- 2 to 6 graded
- 2 yr, 100%
SLOW:
- non top heavy DB
- 5 yr cliff
- 3 to 7 grader
- 100%, 2 yr
ADP/ACP Testing
- Nondiscrimination Testing
- 0 to 2% is “Times 2”
- 2 to 8% is “Plus 2”
Ex: NHCE defers 4%, HCE can only defer 6%.
Control Groups
- Related Employers… can’t max out separate plans! Boooo (limited to $69k or lessor earned comp)
- $69k allowed per account if SEPARATE employers…
1) Parent Subsidiary- owns 80% of company
2) Brother sister- five or fewer owners of two or more entities own 80% or more.
3) Affiliated groups- service orgs HALE
SS Taxable Wage
$168,600
Not taxed for SS above that.. but Medicare, yes!
Medicare is 2.9% combined.
15.3% for both!
Contribution = Employer
Deferral = Employee
Keogh Plan
- Qualified plan for sole prop or partnerships
- Can be DB or DC
***Self Employed Contribution:
- If 15%, then 12.12%!!
- If 25%, then 18.59%!!!
Multiply by net income and that’s your max contribution hehe
Hardship Withdrawals
ONLY 401k
ABLE Accounts
- $18k/yr, (annual gift) disabled before 26
- Tax advantaged
- Exempt from $2k limit on personal assets for Medicaid
SEP
- Lessor of 25% of comp ($345k) or $69k
- Like profit sharing that is easy and cheap
- Same percentage as owners
- DOES NOT have to be substantial and recurring
- Age 21, 3/5 years and makes $750
Salary Reduction Vs Salary Continuation
- Both NQDC
- SR uses employees current comp to fund benefit..
- continuation is employer funded
Secular Trust
- Irrev trust established exclusively for benefit of employee
- beyond reach of creditors
- security!
- no forfeiture risk but taxed now
Rabbi trust is similar but creditors can tap into it!
Unfunded Plans (NQDC)
- To maintain deferral, must be unfunded
- Unfunded:
1) Naked Promise (mere promise)
2) Informally Funded (life insurance, annuities, mutual funds or other investments) - subject to creditors - No tax deductions for company until benefits received!
- Employees taxed when constructive receipt or benefit has been received
ESPP
- Employer can discount stock up to 15%
- Taxes paid at sale of stock
- Similar to ISO (tax)
Principle of Indemnity
- Insurer seeks to reimburse insured for amount lost!
- No more, no less
These support indemnity:
1) Insurable interest
2) Actual cash value
3) Other insurance
4) Subrogation
Parts of Insurance Contract
DDICE
Disability Insurance Payout
Approx 50% - 60% of earnings!
Can add group disability to improve.
Rating Companies
- Only AM Best provides detailed historical data on insurance carriers (others provide ratings)
• AM Best = A++ to F
• Standard & Poor = AAA to CCC
• Moody’s = Aaa to C
• Weiss = A+ to F
Auto Insurance
A - Liability: bodily injury and property damage (BI/PD)
B - Medical Payments: reasonable and necessary med payments of insured (only within 3 years)
C - Uninsured Motorist Coverage: pays if other doesn’t have insurance
D - Damage to auto: collision & other than collision (break glass, missiles, falling objects, fire, theft, flood, earthquake, windstorm, vandalism, animal bird, explosion)
Medicare Part A
- Hospital Insurance
- Disabled and receiving benefits for 2 years is eligible
- Hospital stay deductible for first 60 days, again for 30 days and again for next 60 days (150 limit)
- Post hospital skilled care of 100 days (first 20, then part of next 80)
- unlimited post hospital home health services
- Hospice care for terminally ill
- Patient pays for first three pints of blood
- Services can’t be outside US
Medicare Part B
- Medical
- Voluntary
- Monthly premiums
- Deductible paid first! Then, Medicare pays 80% of balance of approved charges
- No stop loss so significant exposure to expenses
- Doctors service, diagnostic tests, radiology, transfusion, mental illness, Pt, outpatient services, preventative care
- NO DENTAL, HEARING, VISION, IMMUNIZATION (except flu), DRUGS
Medicare Part D
- Drug manufacturers provide 50% discount
- MUST have A & B
- Donut hole is real
- Based on IRMAA
Medigap
- Must have A&B!
- Pay deductibles and coinsurance for A&B..
COBRA
- If disabled, can extend to 29 months
- Cost can’t exceed 102%
Disability - Taxation of Premiums & Benefits
Qualified LTC Premiums & Expenses
- If unreimbursed, qual LTC expenses and premiums are deductible as itemized deduction (below line)
- Limited to:
1) $1,760 if age 51-60
2) $4,710 if age 61-70
Subject to 7.5% of AGI floor
- HSA can be used to pay/reimburse, but FSA cant
Medicaid
- Less than $2k in countable assets (both income and assets)
- 5 yr look back period
CFP(r) Nouns
- Certificant
- Practitioner
- Professional
- Certification
- Mark
- Exam
Dividend Options
1) Cash
2) Reduce premium
3) Accumulate with interest (taxable)
4) Paid up additions
5) One year term insurance (5th dividend)
Nonforfeiture Options
1) Note - 6mth delay clause to distribute cash value
2) Paid up term insurance - uses cash value to pay for policy, when done, lapses
3) Cash option - surrendered for cash value
4) Reduced benefit - no addition benefit, smaller premium
Viatical
- Must be terminally ill (reasonably expected to die within 24 months of date of certification)
Life Settlement
- Not terminally ill! (Or chronically ill)
- Generally over age 65
- Tax free basis!! (Premium paid)
- Ordinary income from basis to policy’s cash surrender value
- Long term capital gains from higher of cash surrender to net settlement amount
MEC
If DB increases by more than $150k, contract becomes subject to material change and can lose grandfathered status.
If has to prove insurability, MEC.
Group Life
Premium Amount >$50k is taxable to employee
Subtract amount paid by employee on ALL (including $50k)
Premium deductible by employer.
IRC Section 162 Bonus Plan (Life)
Employer deducts premiums.
Employee receives as taxable income.
Disability Benefits
- Typically, employer pays and deducts premiums
- Benefits received as taxable income
- if employee pays for any, it’s tax free
Section 125 Cafeteria Plan
- Employee choose benefits they want!
- must offer cash option
- FSA (no FICA or FUTA)
- Health FSA ($3,200 max) - maintain $640 year over year or grace period of 2.5 but not both
VEBA (Voluntary Employees Bene Association)
- DB
- Medical Expenses
- Disability bene
- Legal expense
- Unemployment
- Child care
- Severance
- Education
NO DEFERRED COMP
NO RETIREMENT
Systematic Risk
1) P - purchasing power: inflation fucks you
2) R - reinvestment: proceeds reinvested at lower interest rates
3) I - interest rate risk: market value falls due to increased rates
4) M - market risk: overall market
5) E - exchange rate risk
Bond Risks
DRIP: default, reinvestment, interest, purchasing power
Of government bond, only RIP
Private Placement
- 35 non accredited investors (must be sophisticated)
- Unlimited accredited investors
1) NW of $1M
2) Single w/ $200k income
3) Joint w/ $300k income
Beta vs SD
Markowitz
- portfolio selection along the Efficient frontier :)
- ER and Risk (standard deviation)
Capital Market Line (CML)
- Relationship between risk (SD) and return on PORTFOLIO
- is a straight line tangent to markowitz frontier
- Portfolio of risk free assets and risky assets
Security Market Line (SML)
- relationship between risk and return for one asset (micro)
- CAPM formula or r = Rf + (Erm - Rf)b
- Market risk premium: Erm - Rf
- Stock risk premium: (Erm - Rf)b
EMH
- Passive, can’t outperform market consistently
- random walk means that price changes are unpredictable and patterns are accidental
1) Strong: all info (public and private) accounted for. NO fundamental or technical. NO insider.
2) Semi: insider information can give you an edge. NO technical or fundamental
3) Weak: FUNDAMENTAL analysis may provide better results
Ed dividend dates
- To be listed as investor, must purchase stock BEFORE ex dividend date.
- Date of record is day after…
- watch for weekends/holidays
- T+1
- Buy Day before ex dividend, own by ex dividend, date of record get paid
