Wrong Answers Flashcards
Estate vs. Probate
Gross Estate > Probate
Estate = Taxes
Probate = Transfer of Assets via Will or Court
- it’s in probate if there are no beneficiaries named or survivorship listed
- Beneficiaries not named
- Not in JTWROS
- Tenancy in Common
JTWROS
- Included in Probate?
- Included in Estate?
Included in Probate? No - transfers by named survivor, not via will
Included in Estate? Yes
- Spouse: 50%
- Non-Spouse: 100% of JTWROS is in first to die estate unless surviving non-spouse can prove consideration (money put in)
Estate Tax with Spouse
- community property state
- common law state
Passes to spouse through unlimited marital deduction
Spouse receives step-up in basis
- community property state: 100% step up on all of the marital jointly-held property value
- common law state: step up on deceased spouse’s 50% ownership of the jointly held property value
Insurance Authority by Agent
- What if insurance company says not do to something but the agent does it anyway
The insurance company gave the agent an explicit authority not to do something, but if the agent did something and the insurance company accepted it, it’s an apparent authority action by the agent.
Expressed Authority: you work for the benefit of the company, WRITTEN agreement
Implied Authority: you wear the company’s uniform and sign contracts
Apparent Authority: you say something but may not be what the company wants you to do
Annuities
- tax deferred vehicle
- single life deferred annuity: payments until death
- estate: if there are any survivor benefits, the present value of the benefits are included in the gross estate at death
- forced savings: contribution+ tax deferred earnings
Taxed distributions
- Exclusion Ratio: calculate % of contributions vs. expected payout
- the contribution % is what you don’t have to pay taxes on
Change in Net Worth
Change in Assets - Change in Liabilities = Change in Net Worth
E.g.
Assets
+ property
+ property sold above FMV
+ wages
+ investment growth
Liabilities
- expenses
- losses
- solve for x (credit card interest/debt paid off)
Net Worth
*Remember a sale of an asset receives cash/property so it can be a wash
Business Structure Choice: Liability
If there is any potential liability, consider structures with limited liability (limited liability partnership, LLC, S-Corp, C-Corp, PSC)
Retirement Plan: SIMPLE
SIMPLE plans can have BOTH employee deferrals and employer contributions/match
Take Advantage of Passive Losses
- active participation real estate losses (rental): max $25,000 subject to AGI phaseout
- sell position that has embedded passive losses
- find other investments with passive income
- find other active investments that may have other losses or credits (low income housing, etc.)
Casualty Loss Calculation
Federally declared disaster
Lessor of Basis or FMV
- Insurance coverage
- $100 deductible
- 10% of AGI
= amount of deductible casualty loss (itemized only)
Theft loss is calculated the same way
Both Federally declared casualty and theft losses are itemized deductions
Passive Losses: General Partnership vs. Limited Partnerships
General Partnership Loss: pass through to use against other income (general partners are active)
Limited Partnership (as limited partner): a passive loss that can be offset for passive income (not other income). Passive income is stuck in the passive income bucket.
Margin: Muni Bonds
Margin interest can’t be deductible if munis are used as collateral
Exclude muni income in net investment income
Retirement Plan Match Limit
Matches are up to the amount of deferral
100% match up to 3% of salary subject to the deferral limit ($22,500, $15,500 SIMPLE).
Net Gift Tax Paid by Recipient
Gift Tax Paid by Recipient = Normal Gift Tax Paid By Donor / 1.40
Net Gift Amount = FMV of asset - amount of gift tax paid by the recipient
Donor needs to exhaust $12.92 exclusion before allowing a net gift tax payable by the reciy
Calculate Discriminatory Group Plan Benefits
A key employee under a discriminatory group life insurance plan
The amount of benefit income is the difference between the Table 1 rate and the amount the key employee is contributing to the plan.
Benefit = Table 1 - Actual Contribution
In a discriminatory plan, key employees can’t get the $50,000 life insurance taxable exclusion. Non-key employees get the $50,000 exclusion.
In a non-discriminatory plan, both key and non-key employees get the $50,000 exclusion.
Can FSAs pay insurance premiums?
No, FSAs can only pay for co-pays and deductibles
HSAs can pay insurance premiums
Health and Disability FSA caps on qualified expenses.
Health FSA: $3,050, can use until March 15th or keep a small amount to rollover
Dependent Care: $5,000, can’t roll anything over
Can you say CFP Registrant?
No
Mortgage Calcs, Debt payments, are END Mode
Yield Ladder Discount/Premium Bonds
YMCA: Discount Bonds (top of the chart)
- yield to call highest yield with a discount bond because yield plus price appreciation to par at maturity
Premium Bonds (bottom of the chart)
- yield to call lowest yield because the price will fall to par at maturity
Qualified plans hardship withdrawals
Hardship Withdrawals: in service withdrawals, subject to penalties and income tax
Only deferrals and vested profit sharing contributions.
Can’t take out earnings.
SEP vs SIMPLE
SEP
- 25% salary employer contributions
- No employee deferrals
- Special Eligibility: paid at least $750 (2023) and worked 3 of the 5 prior years
- Good for part time workers with high turnover (don’t work 3 out of 5 years)
- not required to contribute
- same % to everyone
SIMPLE
- $15,500 max contribution
- deferrals and contributions
- match: 2% everyone or 3% match (up to $15,500)
Estate Powers
Can create a trust for yourself, giving powers to others (trustees) to withdraw money on your behalf.
Can create a trust for others with rules, but give beneficiaries some powers to make decisions
E.g. parents create a trust, give powers to daughter to invade corpus to pay HEMS or special power. Not a gift and out of estate tax for parents. It’s not a general power for the daughter so not a gift or anything.
5 or 5 Rights to Corpus
5 or 5 Rights are beneficiary rights to corpus, not just taking out income take GREATOR of $5,000 or 5% out
IRS wants you to take money out so it’s taxable
Simple vs Complex Trusts: Distributions
Simple Trust: Income MUST be distributed
Complex Trusts: Income and/or assets MAY OR MAY NOT be distributed
Grandparents as trustees of UTMA/UGMAs, 2503(c) Trusts
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.
Section 2032A
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.
Charitable Property Deductibility
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
CFP Standards
Fiduciary: an engagement
Financial Advice: a recommendation
Financial Advice = Fiduciary
Certified Financial Planning Agreement
Needs to be in writing
Conflicts of Interest
Not required to be in writing but best practices is that they are
Do You Need to Provide Financial Planning
- 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
Written Engagement Requirements
- 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
Financial Planning vs. Financial Advice
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.
Casualty Losses are an Itemized Deduction
Tax Credits
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
Qualified Business Income (QBI):
Deductions
(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
Accumulated Earnings Tax
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
ILIT: Irrevocable Life Insurance Trust
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.
Reversionary Interest
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.
Complex Trusts: Taxes
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
Section 179: Faster Business Depreciation Expense
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
Section 121: Personal Residence
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.
Reduce AMT
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%
Passive Investment Income Activities
Two Types
- Ownership in rentals (equipment, real estate) and royalty income
- Passive ownership with no material participation in partnerships, S-Corps, LLCs
Real Estate Rental Active Participation Deduction
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
Home Rental Limits
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
Housing Credits:
Low Income Housing
Historic Rehabilitation
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
Charity Deduction Rollovers
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.
Charity Donations: Non-Appreciating (ordinary income; use basis)
Types
- inventory
- copyright
- can’t use at charity
- art
- short term capital gains (bought a property and donated it less than a year)
Charitable Deductions vs Standard Deduction
Can’t take both standard deduction and claim charitable deduction (those are itemized)
Social Security / Medicare Ages
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
457 vs 403b
403b: non-profit
457: government, tax-exempt
Keogh Plans are Subject to ERISA
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
Trust Provisions
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.
Roth IRA Distributions
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.
Qualified Plans: In-Service Hardship Withdrawals
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
Qualified Joint and Survivor Annuity (QJSA)
Qualified Preretirement Survivor Annuity (QPSA)
QJSA: qualified drained benefit plans require it. No other qualified plans require it.
Qualified Plans: In-Service Withdrawal While Still Working at 70 1/2
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
IRAs: Donate to Charity
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
Qualified Plans: Early Retirement Withdrawal
Can withdrawal from qualified plans at 55 after separation from work (retire)
General Partnerships Income Tax
General Partnerships operating income is distributed and subject to self employment tax for active general partners.
S-Corps can’t use net operating losses (NOLs) because they already pass through losses to shareholders
Net Present Value
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.
Stock Recapitalization: Taxes
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.
Social Security Benefits: Spouse Dies
Surviving spouse receives the greater of 100% of deceased spouse’s benefits or the surviving spouse’s own benefits.
Asking Client Questions
Always ask them for open ended questions for answers, not simple yes or no questions
Financial Aid: Who Pays What?
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
IRA Distributions For First-Time House and Qualified Education? Yes
Social Security Benefits When Working?
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.
Child Support was Never Taxable or Deductible, Only Alimony Was
