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
Only real estate is available for a 1031 exchange, nothing else (no machines, collectibles, etc.)
Financial Advice vs Financial Planning
Documents in Writing
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
Life insurance more important than emergency fund if have spouse, kids
Change in Net Worth: UTMAs
If transfer money to UTMA, it is a reduction in your assets because it becomes the minors assets
Emergency Fund: Only covers fixed and variable expenses, not taxes
Use for Qualified Education
IRAs: Yes
Retirement Plans: No
Group Plan Convertibility to Individual Plan
Group Life Insurance: YES, only to a permanent policy
Group Health Insurance: YES, only convert to a similar plan
Group Disability Insurance: NO
Group Health Insurance for Dependents: Can stay on as a dependent until age 26
Business Operating Expenses Policy
Can’t deduct the premium but company gets benefits tax free
Split Dollar Life Insurance: Collateral Assignment
Employee owns policy
Benefits paid to both company and beneficiary
Company gets benefits equivalent to premiums paid
Beneficiaries get the remainder of benefits
An early withdrawal penalty should be considered part of the total tax consequence, not a separate different thing
1244 Stock: Small Business Stock
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
Insurance: Businesses Can’t Deduct Premiums
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
QDRO: no early withdrawal penalty for qualified plans, but penalty for IRAs
COBRA: If company has group health care plan with less than 20 employees, it DOES NOT need to provide COBRA
Employer plans CAN put limits on the amount an employee can defer
Annuity Distributions
After full basis is taken out (exclusion ratio) the rest of the annuity payments are 100% taxable
Buy Sell Agreement
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
Being Trustees on Minor Trusts
May want to reconsider so you don’t taint the trust and have control and tax consequences if you don’t want them.
Reverse mortgage distributions are tax free
Auto Policy: covered drivers
Anyone listed, in your family household and whoever you let drive your car
First to die policy same as joint life policy = pays out at first death
Second to die same as survivorship life policy = only pays out at second death
Insurance Proceeds Prior to Death
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
Insurance Tax over $50k
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
Equivalent Tax Credit
Equivalent Tax Credit = Deduction x Tax Rate
Trust Payments to a Living Spouse is a tainted trust and the grantor needs to pay taxes on the distribution
Qualifying Widower Filing: can file mailed jointly for extra 2 years after death if have dependents
Medical Expenses Deduction
Total Deduction = Total Medical Expense - (7.5% X AGI)
Section 415 Rules: Retirement Plan Total Contributions
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
Retirement Plans: If fail ADP/ACP tests you have up to a year to fix. If not, you have to pay penalties and potential disqualification
Insurance in Retirement Plans
Life and Disability Insurance Available in Retirement Plan?
Qualified Plans: Yes
Non-Qualified IRA Plans: No
RMDS
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
Net Unrealized Appreciation (NUA) of ESOP Stock: Taxes
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.
Non-Qualified Deferred Compensation
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
Self- Employed Retirement Contributions
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.
Sole Ownership = Fee Simple
Estate Tax Credit if person who inherited assets dies within 10 years. It’s a credit of the # of years remaining in the 10 years.
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%
If donate asset with debt still on it, the donor needs to pay cap gains on the amount of debt relieved from the gift.
Gain = debt - basis
Gift Split
If there is a gift split, one spouse can fill out 709 with the signature of the other spouse.
Crummy vs 5 or 5 Provisions
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
Bypass Trust: Portability of Unused Exception
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
Charitable Transfers
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
Private Annuity
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.
Generation Skipping Gift Taxes Payable Amount
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
Income in Receipt of Descendent (IRD)
IRD deduction in amount of the difference between net estate tax with and without IRD included
Disclaim Assets
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
Section 303 Stock: Post Mortem Strategy
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.
Installment Estate Taxes
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
Charitable Gifts: Donating Items Donor Created
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.
QDROs only allowed in qualified plans, not IRAs
Insurance Policy Sale: Life Settlement vs Viatical Settlement
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
Homeowners Insurance: Personal Property Coverage
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.
Long term capital gains are considered income, just as STCG are.
LTCG are part of Gross Income, they are just taxed differently than STCG which is ordinary income.
No 10% early withdrawal penalties for beneficiaries on inherited qualified plans if take out before deceased turns 59 1/2
A person who moves in (boyfriend - considered a roomate even if don’t pay rent) into a house but doesn’t pay rent still needs a renters policy. They won’t be covered under the homeowners policy because it only includes family members of the owners.
Section 121 House Deduction after Divorce: If sell within 2 years after Divorce, get the full $500,000 deduction
Medicare Part B premium amount is tied to AGI 2 years ago (not average of last 2 years)
Medicare Part A: Hospital Stays Deductibles and Co- Insurance
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.
Medicare Part D: Deductibles and Co-Pays
For outpatient drugs, patients pay a deductible and co-pays.
COBRA: Dental and vision are also covered
529 plans: contributions not deductible from federal income but some states allow a state deduction
School scholarships tax free for tuition and fees, not room and board. Scholarships that include room and board are taxable income for the room and board part.
Disabled people that don’t work don’t get their own social security disabled benefits, the parents get the benefit. The disabled didn’t work so they didn’t pay into the social security benefits.
403bs are not qualified plans but they act like one, subject to ERISA if there are employer contributions/matches
Social Security Benefits: once a person reaches FRA, disability benefits are no longer available
Profit Sharing Plans: the employer may contribute AND deduct up to 25% of the entire PAYROLL but individuals can be allocated more than 25%. They may also be age weighted.
Deductible retirement contributions (qualified plans, non-qualified retirement plans, IRAs, etc.) are above the line deductions for AGI.
Remember: Gross Income is before any W2 benefit deductions, FICA/FUTA, etc. taxes are taken out.
An active loss in a passthrough entity is deductible up to the basis and deducted from income. A $3,000 carryover doesn’t apply.
FICA/FUTA Tax:
Still have to pay on qualified/non-qualified retirement plans. Only the Federal income mentax is deferred, not compensation tax.
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
Non-Viatical/Non-Terminal Life Insurance Settlement Sale
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.
Gift Tax: only have to pay tax on gift over $17,000 at the time of gift if you are over the $12.92 exemption
You can donate $12 million and not have to pay the gift tax at the time since you’re still under the lifetime exemption.
Any odd gift taxing strategy to avoid gift taxes would be considered a sham or a step transaction if trying to bypass someone. That sham transaction would be a fraud and a taxable gift.
If change or stop 72(t) subsequent payments in an IRA, it’s a 10% penalty plus interest in the total annual payments prior to turning 59 1/2.
Need to take them for a minimum of 5 years or until 59 1/2, whichever is greater.
Wash Sale
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.
Social Security Benefits Reduced Before FRA
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.
Prepaid Tuition
Pays for tuition and fees only
Part of expected family contributions
Disability Benefits in a salary continuation plan: company pays the premiums and the employee pays the taxes on benefits
Salary Continuation Plan: company gets the disability benefits paid to them (they pay the premium) and the company pays the income to the employee as taxable income.
Unused FSA goes to cover FSA admin costs, not to the company’s general operations
Kiddie tax is only for unearned income. The only reason the kiddie tax calculation is used if there is earned income is if there is also unearned income in a addition to the earned income. That is where the earned income kiddie tax of income plus $400 comes from.
Anyone can contribute to another person’s HSA account as long as they meet the HDHP plan, etc. The account owner gets the tax deduction regardless who contributed to it.
CML is for diversified portfolios even if it uses Standard Deviation.
A 1040X is for amended returns
If you are enrolled in Medicare A or B you can’t contribute to an HSA.
You need to enroll in Medicare, you don’t automatically just get it.
ESOPs, SIMPLEs and 401ks without matching cannot be integrated with social security
No retirement plan early withdrawal penalty if separate from service at age 55
Children can only be beneficiaries of an account if through a custodial account or trust arrangement
Anchoring: can be tied to a particular investment and price or anchored to a guru (warren buffet, etc).
Media bias isn’t a financial bias. Use Anchoring instead
Taxes in Option Writing
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.
Option Exercise and Taxes
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.
Unrelated company retirement plan contributions
Need to keep under the $22,500 employee deferral limit but both companies can contribute to get to the max $66,000 each.
Substantial Recurring Payments Stopping Penalty
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.
Spendthrift Provisions
When an insurance company manages distribution payouts to make sure the beneficiary doesn’t take out all the money right away.
The Value for the Taxable Gift of Insurance Transfer of Value is the interpolated terminal reserve plus the unused premium
The interpolated value is usually greater than the cash value so the IRS wants this value not the cash value for tax purposes
There is a separate Spousal IRA phaseout if not working. A spousal IRA allows a working spouse to contribute to a non-working spouse’s IRA.
The Spousal IRA has a higher phaseout than the married filing jointly phaseout level of both spouses are working.
Divorce Decree: Not a gift tax if transferred to divorced spouse within 3 years of the date of the divorce decree. It is still regarded at a marital gift and not subject to federal gift tax.
Investment Income: EXCLUDE Qualified dividends, they are already tax advantaged
ORDINARY dividend isn’t the same as a QUALIFIED dividend
If grantor trust pays all money to spouse, the grantor still needs to pay the income tax
To reduce AMT exposure, try to reduce the taxable income below the AMT exemptions of $81k/$125k
SEP and Profit Sharing Plans up to 25% contribution of salary up to limits
MEC Taxes on Distribution
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
Medicare premiums can be deducted above the line for self employed or itemized for regular tax payers
Education: Cover Room and Board (only 529s and Coverdells)
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
Actual Cash Value = what it would cost to replace new today minus depreciation (cost decline) of old item
Transfer for value vs Viatical vs life settlement
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
Case: if own s corp with spouse, still need to consider it separate property with the ownership of each spouse subject to probate. There isn’t a beneficiary on business interests
Case: remember to add value of insurance policies if shown separately but not on the balance sheet
If you own the life insurance policy, all death benefits are included in the GROSS estate because the owner had the ability to change beneficiaries. It’s just like a grantor trust.
If you transfer life insurance within 3 years, it’s brought back into GROSS estate.
Remember if spouse is beneficiary of life insurance, the total death benefits is included in the GROSS estate but then since there is an unlimited marital deduction, the life insurance wouldn’t be taxed at the 40% rate.
Life insurance benefits are income tax free but still part of the GROSS estate as an asset.
