Wrong Answers Flashcards

Question

Simple vs Complex Trusts: Distributions

Answer 1

Simple Trust: Income MUST be distributed Complex Trusts: Income and/or assets MAY OR MAY NOT be distributed

Answer 2

They shouldn't be trustees because if they die before the assets are transferred to the minor, the assets will go into the grandparents estate and be taxed.

Answer 3

To qualify for estate tax credit for real estate... Requires closely held business, ranch, farm that is 50% of gross estate and real property of 25% of gross estate.

Answer 4

Charitable Giving Deductibility Loss Property: FMV Short-Term Gain (property bought this year): BASIS Non-Use Property: BASIS Long-Term Appreciation Property (gains at least 1 year from purchase): - FMV 30% AGI max each year with carry over OR - Basis at 50% AGI max

Answer 5

Fiduciary: an engagement Financial Advice: a recommendation Financial Advice = Fiduciary

Answer 6

Needs to be in writing

Answer 7

Not required to be in writing but best practices is that they are

Answer 8

- there is an engagement to do so - the client believes you will - you are already doing it Even if the client doesn't believe you are doing financial planning or don't have an agreement written, but are still doing financial planning, you need to follow the rules of financial planning engagement (written materials, disclosures, etc) The CFP Board will take a weight of the evidence approach called "Integration Factors" - AUM - how much the Financial Advice impacts other parts of the clients personal and financial circumstances - client circumstances - length of time - barriers to implement the financial advice

Answer 9

- Description of services and products - how the client pays for products and services and descriptions of costs the clients may incur - how the CFP and firm is compensated - any public discipline and bankruptcy, public websites with it listed when the CFP was a control person - Full disclosure of material conflicts of interest - privacy policy - other compensation from other professionals - anything else pertinent

Answer 10

Even if don't need to provide financial planning, if you provide financial advice, you are still required to comply with Fiduciary Duty and the duties that apply at all times, including Duties of Integrity, Care/Competence and Diligence.

Answer 11

Child Care: max $3,000/$6,000 expenses x 20% - up to 13 Child Credit: $2,000 - up to 16 yrs old - $500 per adult dependent - subject to AGI - refundable Foreign Tax Paid Retirement Savings Credit: AGI phaseout Adoption Credit: full expenses up to $15,950, no surrogate or spouse's child, MAGI phaseout Elderly and Disabled Credit: 65+ or getting disability income Earned Income Credit: low income families EDUCATION American Opportunity Credit - $2,000 + 25% of next $2,000 (max $2,500), only 4 yrs of college, subject to MAGI - can be a 40% refundable credit, money tax refund back if no income Lifetime Learning Credit - 20% on up to $10,000 ($2,000 max) each year for all qualifying expenses across all students of the tax payer, not per student, unlimited use, subject to MAGI HOUSING Used to get credits, not investment returns. Both up to $25,000 max Low Income Housing Credit: $25,000 x tax bracket - no phaseout - used each year for 10 years - for passive activities Historical Rehabilitation Credit: $25,000 x tax bracket - subject to phaseout $200k max

Answer 12

(Section 199 A) QBI deductions are itemized below the line even if standard deductions are taken. Don't have to Itemize if you take the QBI deduction. Can deduct up to 20% of income from passthrough business that they own. - Personal Services Companies are excluded at higher income levels - can include rental income, publicly traded partnerships (PTPs) and REITs If net QBI is zero or less, can't deduct, but losses can be carried forward Total Taxable Income (not AGI) and business type check: Tier 1: less than $180k any company type, get 20% deduction Tier 2: more than $230k, no deductions for PSCs Tier 3: in-between

Answer 13

C-Corp and PSC -first $250k ($150k for PSC) excluded then 20% tax on remaining retained earnings - pay the tax on all accumulated earnings still not used over time, so can add up

Answer 14

Unfunded ILIT: annual gift pays for insurance premiums in the trust, no tax Funded ILIT: lump sum gift buys investments that generate income to pay for the insurance premiums. - The amount paid for insurance is taxable to the grantor so the benefits are tax free. - If there is extra income generated, the trust if retained or beneficiaries pay the extra tax on the income paid out.

Answer 15

If a grantor has a trust for a beneficiary but retains more than 5% (control) at some point, that trust will be part of the grantor's estate and Income generated and paid to other beneficiaries needs to be paid by the grantor.

Answer 16

Trust pays the tax on undistributed Income Beneficiaries pay taxes on distributed income Can have deductions - charity - depreciation - net operating loss carry forwards Deduction for Distributable Net Income (DNI) formally defined in the trust

Answer 17

Can deduct against ALL total sources of net earned income from any or multiple businesses. Can't create a loss on a Section 179 deduction claim, can claim loss up to all income generated Can deduct the full 1245 property expense in 1 year up to $1,160,000 Can carryover extra if over the max that year Easier to keep track of for small business rather than using MACRS tables

Answer 18

Exclusion: $250k/$500k Need to live in 2 out of 5 years Exception due to hardship, get partial exclusion = max exclusion x (# of months lived in /24 months) - figures out how many months % left before the 2 year requirement If spouse dies, get 2 years after death for the full $500k exclusion Can use every 2 years. Buy house, love on 2 yrs sell and take deduction. Can do it again in another 2 years.

Answer 19

If you reduce AGI by gifting more, especially to charities in larger amounts), AGI is reduced, the tax rate is reduced and regular tax is reduced. If the regular tax rate is less than 28% (the AMT tax rate), then the regular tax might be less than the AMT, which means there would be an AMT Payable tax. Once you get to a tax rate close to 37%, it's difficult to trigger AMT because the maximum AMT tax rate is only 28%

Answer 20

Two Types - Ownership in rentals (equipment, real estate) and royalty income - Passive ownership with no material participation in partnerships, S-Corps, LLCs

Answer 21

Can get $25k deductible loss if 10% owner of the real estate and AGI (all income sources, active and passive) under $150k Phaseout $100k-$150k

Answer 22

14 days/yr max rent out without paying rental income tax Lose rental status (business deductions) if live in rental longer of 14 days or 10% of total rental days

Answer 23

Used to get credits, not investment returns. Both up to $25,000 max Low Income Housing Credit: $25,000 x tax bracket - no phaseout - used each year for 10 years - for passive activities Historical Rehabilitation Credit: $25,000 x tax bracket - subject to phaseout $200k max

Answer 24

If carryover Charitable deductions based on max AGI and FMV calculations, excess can be rolled over for only 5 more years after the charitable gift. Carryover years still subject to maximums each year. Any charitable rollovers remaining at death are lost.

Answer 25

Types - inventory - copyright - can't use at charity - art - short term capital gains (bought a property and donated it less than a year)

Answer 26

Can't take both standard deduction and claim charitable deduction (those are itemized)

Answer 27

Spouse/dependents get benefits if insured dies OR is disabled and gets social security benefits Social Security Benefits - 62 Years Old: The insured, spouse of living insured, surviving spouse of deceased/disabled insured, and divorced spouse if married 10 years - any age for surviving spouse with kids under 16 or disabled before 22 - dependents 18 and under in school - disabled adults 18+ Worker Benefits - Retirement: 62 early, FRA: 67 - Disability: under 65, disabled for at least a year, 5 month waiting period Medicare: 65 Spouse Benefits Get Coverage - spouse dies, any age with dependents under 16 - spouse dies, benefits at 60 - divorced, married 10 yrs, not remarried, at 62 Dependents Get Coverage (deceased, disabled or retired insured worker) - under 19 and in school - over 18 with a disability before 22

Answer 28

403b: non-profit 457: government, tax-exempt

Answer 29

A SEP isn't subject to ERISA but uses Keogh rules for self-employed owners Keoghs for sole proprietorship and partnerships Keogh rules for self employed S-Corps

Answer 30

These are powers that the beneficiary has. If the beneficiary has general power, the beneficiary can do what they want with the trust assets. The trust stays in the beneficiary's estate. If the beneficiary has a 5 or 5 power, the beneficiary can take out the greater of $5,000 or 5% of the assets. If they don't take it out for that year and die, the amount not taken out of the $5,000 or 5% is part of their estate, becuase they had control of that distribution right before death. If ascertainable power (HEMS) the trustee has discretion but beneficiary can try to ask for money. The trust isn't in the estate if the beneficiary does.

Answer 31

If over 59 1/2 can take out contributions and conversions at any time (don't need to wait 5 years) For EARNINGS, you need to wait 5 years after contributing to a ROTH IRA even if you're over 59 1/2 to withdrawal, otherwise you'll pay income tax on it.

Answer 32

Can take money out for things (house, college only education, etc.) but have to pay the early withdrawal penalty and income tax. IRAs can take out for first house, education, etc. without early withdrawal penalty but may have to pay income for tax. Profit Sharing/401k/Stock Bonus Plans Hardship Withdrawals (Safe Harbor Distribution) - any age - financial needs test (immediate and heavy burden) - resources test (enough to satisfy need and no additional needed) - still subject to income tax and early withdrawal penalty (59 1/2) - can take out deferrals, vested matching and earnings on deferrals. Can't take out unvested matches or earnings on unvested amounts

Answer 33

QJSA: qualified drained benefit plans require it. No other qualified plans require it.

Answer 34

Can take an In-Service Withdrawal while still working at 70 1/2 without hardships or penalties When you leave the company, you can take a distribution at 55 without penalty

Answer 35

Qualified Charitable Distribution (QCD): - Can donate up to $100,000 to charity after 70 1/2 each year - satisfies RMD without the distribution being taxed, but no charitable deduction

Answer 36

Can withdrawal from qualified plans at 55 after separation from work (retire)

Answer 37

General Partnerships operating income is distributed and subject to self employment tax for active general partners.

Answer 38

NPV discounts uneven cash flows at a required rate of return less the initial cost of investment Just because NPV is positive doesn't necessarily mean you should invest in it, it just means the calculation results in the IRR > required rate of return.

Answer 39

The value of the common stock for gift tax purposes will be based on dividends paid on the preferred stock. The common stock value would then be the difference between the FMV of the corporation and the aggregate value of the preferred shares.

Answer 40

Surviving spouse receives the greater of 100% of deceased spouse's benefits or the surviving spouse's own benefits.

Answer 41

Asset Consideration - Parent's Assets: Custodial accounts: 529s, coverdells, EE Bonds, regardless who donated. No retirement assets. - Kid's Assets: UTMA/UGMA. Free Application for Federal Student Aid (FAFSA) - same for applying for government loans, direct aid from the school, Parent Loans for Undergraduate Students (PLUS) - submit parents and students tax returns for last 2 years Expected Family Contribution - calculated based on income and included assets - reduced the more family members are in college Parents: 5.64% of non-protected assets Student: 20% of non-protected assets Included in Calculation: liquid, non-retirement assets, 529s, Coverdell, UGMA/UTMA, etc. (even if funded by others) Excluded in Calculation (protected assets): retirement plans, IRAs, life insurance cash values, small business (less than 100 full time workers), anything not liquid

Answer 42

Yes, you can get Social Security retirement benefits at 62, Medicare at 65. Social security retirement benefits may just be reduced (50%, 33%) prior to full retirement age or taxed at a higher 50%, 85% rate.

Answer 43

Financial Advice: only privacy policy in writing, everything else is optional Financial Planning: everything but Material Conflicts of Interest need to be in writing Conflicts of Interest are never required to be in writing but best practices for financial planning are that they are in writing

Answer 44

If transfer money to UTMA, it is a reduction in your assets because it becomes the minors assets

Answer 45

Group Life Insurance: YES, only to a permanent policy Group Health Insurance: YES, only convert to a similar plan Group Disability Insurance: NO

Answer 46

Can't deduct the premium but company gets benefits tax free

Answer 47

Employee owns policy Benefits paid to both company and beneficiary Company gets benefits equivalent to premiums paid Beneficiaries get the remainder of benefits

Answer 48

Can take up to a $50,000 (single)/$100,000 (married) loss on ordinary income for small business 1244 stock Any excess loss above $50,000/$100,000 is treated as a capital loss with $3,000 maximum per year with carryovers

Answer 49

Businesses can't deduct premiums on - key person life insurance - split dollar life insurance - unfunded deferred compensation with policy owned by company - equity redemption buy sell agreement Group Life insurance can be deductible if part of employee salary or section 165 bonus plan

Answer 50

After full basis is taken out (exclusion ratio) the rest of the annuity payments are 100% taxable

Answer 51

If only 2 or 3 owners and want access to the cash value in insurance policy of a buy sell agreement, better to use a cross-purchase with cash value based insurance policies

Answer 52

May want to reconsider so you don't taint the trust and have control and tax consequences if you don't want them.

Answer 53

Anyone listed, in your family household and whoever you let drive your car

Answer 54

If terminally ill: Sell to viatical company tax free If not terminally ill: Take a life settlement transaction - pay ordinary income on cash value above basis - pay cap gains on higher of cash value or net settlement proceeds

Answer 55

Table cost x (full benefit - $50,000) - Employee cost x full benefit = annual income benefit Non-discriminatory: everyone gets $50k exemption Discriminatory: key employees don't get the $50k exemption, have to pay tax on 100% of it

Answer 56

Equivalent Tax Credit = Deduction x Tax Rate

Answer 57

Total Deduction = Total Medical Expense - (7.5% X AGI)

Answer 58

Covers ERISA plans, SIMPLE, SEP, 403b, etc. Lessor of 100% compensation or $66,000 max total contributions $330,000 salary max for calculations DEFINED BENEFIT PLANS - maximum annual retirement benefit highest average 3 consecutive years of compensation up to $265,000 max - subject to max $330,000/yr maximum compensation for unit benefit/fixed average method calculations

Answer 59

Life and Disability Insurance Available in Retirement Plan? Qualified Plans: Yes Non-Qualified IRA Plans: No

Answer 60

In IRAs and IRA Plans (SIMPLE,.SEP): need to take at 73 Qualified Plans - take at 73 - can hold off if still working at 73, take when retired - if 5% owner and still working, still need to take RMD at 73

Answer 61

At distribution from ESOP account: - grant price (basis) at ordinary income tax - LTCG on distributed amount (deferred) and at sale aren't taxed until the stock is sold At Sale of Stock - LTCG Tax on Distribution Price - Grant Price - STCG or LTCG based on holding period after distribution from ESOP account ***If distributed before 59 1/2, the basis AND the distributed amount have the 10% early withdrawal penalty at the time or early distribution. The growth at sale is not subject to the 10% withdrawal penalty. ***Beneficiaries can claim NUA if they take a lump sum distribution. Can't get NUA if roll into IRA.

Answer 62

Salary Reduction (pure deferred comp): partially paid by employee Salary Continuation: paid by employer Corporations: employee taxed when employee gets constructive receipt, then company can deduct compensation expense Pass-Through Business: can't deduct at business level, need to pay tax at individual 1040 level

Answer 63

On questions, if they say the person is self employed, don't forget to use the Keogh rules for sole proprietorship, partnership and SEP plans.

Answer 64

Example If inherit assets and die within 3 years, the estate of the person who inherited the assets gets a credit of 70% on their estate. 7 yrs remaining / 10 years = 70%

Answer 65

If there is a gift split, one spouse can fill out 709 with the signature of the other spouse.

Answer 66

Crummy - Only when contributions to the trust are made, can take out the LESSOR of $17,000 (annual exclusion) or the amount contributed that year. - if no contribution, can't take anything out 5 or 5 - can take out GREATOR of 5% or $5,000 each year, even if no contributions

Answer 67

If the $12.92 million isn't used up when the first spouse dies, the remaining exception can be added to the surviving spouse's exemption in a Bypass Trust. Total Married Spouse Exemption = $12.92 million x 2 = $25.84 million

Answer 68

The tax deduction of charitable transfers is based on the present value of future interest, not the FMV when put into a trust (CRAT/CLUT, pooled income fund, etc.) Charitable Transfers are not the same as charitable gifts based on FMV and basis calculations because the tax deductions in transfers involve ongoing income payments to the donor/charity and there are retained interests. The tax deduction occurs at death or when the set time period ends, not at the time of the transfer. For Charitable Lead Trusts, can get the up front tax deduction of PV of income stream to charity

Answer 69

A private annuity is an exchange of an asset for income as a life annuity. It's a sale and out of the estate. It's a sale of a property at a discount for income until death, usually with a family member. Taxed to seller when private annuity is set up.

Answer 70

Gift Taxes Taxable Amount - Taxes Paid (1st gen) = GSTT Taxable Amount x 40% = GSTT Taxes Paid GSTT Skip Age: 37 1/2 if not related

Answer 71

IRD deduction in amount of the difference between net estate tax with and without IRD included

Answer 72

Needs to be within 9 months of notice or 21 yrs old Can put in a disclaimer trust (irrevocable)to keep out of beneficiary's estate but beneficiary can still get income

Answer 73

Able to sell stock instead of get dividend payouts. Get stepped up basis at death so save on taxes using capital gains (basis at FMV at death) vs income tax rates on dividends. Stock needs to be closely held business and 35% of ADJUSTED gross estate. Max amount needs to equal estate taxes and admin expenses. Trying to cover costs of estate vs big sale of stock in illiquid time with forced sale pricing.

Answer 74

Must be closely held sole proprietorship, partnership or corporation Must be worth 35% of ADJUSTED gross estate Pay over 4-10th year Have to pay interest of 2%, not deductible

Answer 75

Charitable gifts of items created by the donor (e.g. an artist donating a painting) can only deduct BASIS (the cost of creating it), not the FMV if it was sold.

Answer 76

Life Settlement - still alive, not terminally ill and want to sell policy, don't need the life insurance anymore - treated as Ordinary Income and Capital Gains - Basis = Premiums Paid - Cost of Insurance - Income Tax = Sale Price - Basis (sales price is usually close to the death benefit amount) - Cap Gains Tax = Cash Value - Premiums Paid Viatical Settlement - terminally ill - get proceeds tax free

Answer 77

There is no coverage of personal property outside of the home unless there is theft. The theft coverage outside of the home is usually for a specific dollar amount for theft listed in the policy. Personal Property in the home usually covered by specific dollar amounts.

Answer 78

Patients have to pay deductibles and co-pays on hospital stays For first 60 days, patient only pays the deductible, then deductible and copays for all days afterwards.

Answer 79

For outpatient drugs, patients pay a deductible and co-pays.

Answer 80

Section 125 plans benefits (FSAs) ARE NOT subject to FICA/FUTA. 401k, SIMPLE, 403b plans employee deferrals - ARE NOT subject to Federal Income Tax - ARE subject to FICA/FUTA because it's still compensation and compensation tax still needs to be paid. Only the Federal tax is deferred and no FICA/FUTA when distributed at retirement

Answer 81

If a life insurance policy is sold to someone other than the insured, partner, corporation, then the death benefits are taxable to the buyer. The death benefits will be taxable up to the basis (purchase price of the insurance). The benefits are Subject to INCOME tax for the buyer when the seller insured dies. There is no 3-year rule when you sell the insurance policy. The insurance policy is sold and the owner pays capital gains. If in a cross purchase buy sell agreement , if you buy the policy from the other where the other is the insured (instead of yourself) there will be taxable consequences at the time of sale (sale price minus basis) and the death benefits are taxable as income to the beneficiary.

Answer 82

If holding a loss position, can't buy then sell in 30 days. E.g. Buy March 1 at $15, Buy June 1 at $10, Sell June 30 at $10. The June 30 sale still triggers a wash Sale because of the purchase on June 1.

Answer 83

Benefit amount reduced if working at when claim SS: 50% before FRA, 33% year of FRA, 0% at FRA The amount reduced decline as you get closer to FRA.

Answer 84

Pays for tuition and fees only Part of expected family contributions

Answer 85

When writing an option that is exercised, the amount of the option premium received is added to the stock exercise price (locked in the price) and the gain is on the locked in exercise price and the basis. The tax is based on the underlying stock holding period.

Answer 86

Don't pay taxes on an option you exercise. The tax is on the holding period of the stock you buy at option exercise date, then sell it.

Answer 87

Need to keep under the $22,500 employee deferral limit but both companies can contribute to get to the max $66,000 each.

Answer 88

If stop or change amount before 5 years, even after age 59 1/2, need to pay 10% early withdrawal penalty plus interest on all payments. If stop before 5 yrs and are over 59 1/2, the penalty and interest is on all payments up to 59 1/2.

Answer 89

When an insurance company manages distribution payouts to make sure the beneficiary doesn't take out all the money right away.

Answer 90

It's LIFO - if single premium paid years ago and there has been growth since then, if take money out, the earnings are taxes as ordinary income first, then any remaining from the premiums paid are tax free - premiums can be taken out tax free and with no penalty - since it's LIFO, the gains are taken out first, subject to ordinary income tax and an early withdrawal penalty https://www.nerdwallet.com/article/insurance/modified-endowment-contract

Answer 91

Educational Bonds - only tuition and required course fees - no books, equipment, room or board - EE Bonds, I bonds Tax Credits - tuition, fees, books, supplies and required equipment - no room and board - American opportunities Credit, lifetime learning credit Education Accounts - tuition, fees, books, room and board - These cover room and board and a variety of other things - 529, Coverdells

Answer 92

If transfer (buy) life insurance on yourself, by a partner, a corporation or part of a divorce, generally only pay the cash value If Viatical and going to die, get the large death benefits tax free If life Settlement and not going to die, pay income tax on the large proceeds