CFP Exam 2024 With 100% Correct And Verified Answers, Exams of Advanced Education

Download CFP Exam 2024 With 100% Correct And Verified Answers and more Exams Advanced Education in PDF only on Docsity! CFP Exam 2024 With 100% Correct And Verified Answers CFP Standards of Conduct Sections (6) - Correct Answer-A. Duties owed to clients. B. Fin. Planning and Application of Practice Standards C. Practice Standards for Fin. Planning Process D. Duties owed to firms/subordinates E. Duties owed to CFP Board F. Prohibition on Circumvention Section A of CFP Standards of Conduct - Correct Answer-Duties owed to Client: 1. Fiduciary Duty 2. Integrity 3. Competence 4. Diligence 5. Disclose and Manage Conflicts of Interest 6. Sound and Objective Professional Judgment 7. Professionalism 8. Comply with the Law 9. Confidentiality and Privacy 10. Provide information to client 11. Duties when communicating with a client 12. Duties when representing compensation method 13. Duties when recommending/working with other persons 14. Duties when selecting/using Technology 15. Refrain from borrowing money/ commingling assets Section B of CFP Standards of Conduct - Correct Answer-Definition and standard for compliance when practicing financial planning: Financial Planning is a collaborative process that helps maximize a Client's potential for meeting life goals through Financial Advice that integrates relevant elements of the Client's personal and financial circumstances. Must limit scope of engagement if only giving financial ADVICE, not financial PLANNING. Section C of CFP Standards of Conduct - Correct Answer-Practice standards for the FP process (7): 1. Understand Client's Personal and Financial circumstances 2. Identify and Select Goals 3. Analyse Current Course of Action and Potential Alternatives 4. Develop FP Recommendations 5. Present FP Recommendations 6. Implement FP Recommendations 7. Monitor Progress and Update Section D of CFP Standards of Conduct - Correct Answer-Duties owed to Firm/Subordinates (3): 1. Use Reasonable Care when Supervising 2. Comply with Lawful Objectives of the Firm 3. Provide Notice of Public Discipline to the Firm Section E of CFP Standards of Conduct - Correct Answer-Duties owed to CFP Board: Cannot engage in conduct that reflects adversely on CFP marks or upon the profession. 5 types of conduct that violate CFP standard, 14 reportable events. - Must report to CFP board within 30 days - Provide Board with a narrative statement - Cooperate with Board and comply with Certification and TM license and terms Section F of CFP Standards of Conduct - Correct Answer-Prohibition on Circumvention Cannot act indirectly or through another person to violate CFP Practice Standards Types of conduct that violate CFP practice standards (5) - Correct Answer-1. Felony or relevant misdemeanor 2. Fraud, theft, misrepresentation, other dishonesty 3. Bankruptcy 4. Federal tax lien 5. Other lien or civil judgment that has not been satisfied Chapter 7 Bankruptcy Exemptions (7) - Correct Answer-1. Primary homestead 2. Vehicle (limited) 3. Retirement savings/pension 4. Wages to provide for dependents 5. Limited personal property 6. Life insurance/annuity 7. Disability Chapter 7 Bankruptcy NOT EXEMPTED assets (3) - Correct Answer-1. ESA/529s if contributions are within 2 years of bankruptcy 2. Inherited IRAs 3. IRA assets over $1M Can you use 529s for non-tuition? How about Coverdell ESAs? - Correct Answer-NO - 529 tuition only. YES - Coverdell can be used for almost all school related expenses ERISA - what is it and who enforces it? - Correct Answer-Employee Retirement Income Security Act of 1974 - defines fiduciary conduct for ppl associated with qualified corporate retirement plans - the DoL enforces ERISA 3. The Federal Deposit Insurance Corporation (FDIC) Who regulates mutual funds? - Correct Answer-SEC (Securities and Exchange Commision) Who regulates securities brokers? - Correct Answer-FINRA (Financial INdustry Regulatory Authority) Investment Advisers Act of 1940 - Correct Answer-Legislation governing who must register with the SEC as an investment adviser. Defines "investment advice." Securities Act of 1933 and Securities Exchange Act of 1934 - Correct Answer-1933: Regulates IPOs 1934: Created SEC to enforce laws, regulates secondary market, defines stock "sales" Securities Investors Protection Act of 1970 - Correct Answer-- Established the SIPC to protect investors for losses resulting from brokerage firm failures. - Does not protect investors from incompetence or bad investment decisions Emergency Fund guidelines - Correct Answer-3 or 6 months' expenses 3 months if there are two sources of income (e.g. 2 wages, alimony, trust income, investment income) Monetary Policy Who, Why, and What (3) - Correct Answer-Who: Federal Reserve Board Why: The Fed increases liquidity to create economic growth. It reduces liquidity to prevent inflation. What: 1. Set the discount rate: lower rate = increased liquidity 2. Set reserve (margin) requirements: lower req. = increased liquidity 3. Open market operations: buy bonds (short term US Treasuries) = increased liquidity Living expenses rule of thumb - Correct Answer-PITI or Rent =< 28% of Gross Income Trust Companies - Correct Answer-financial institutions that specialize in managing the money and property of others - They act as "trustee", fiduciary, executor - For someone incapable of doing it themselves (minors, cognitively impaired) Fiscal Policy Who, Why, and What - Correct Answer-Who: Office of Debt Management Why: stabilize the economy What: government spending and taxes Federal Funds Rate (FFR) - Correct Answer-The interest rate that a bank must pay on an overnight loan from another bank. Set by auction. Federal Funds - Correct Answer-Deposits that private banks hold on reserve at the Federal Reserve Bank. Pre-College Funding Years Strategies (4) - Correct Answer-1. UGMA/UTMA 2. EE Educational Bonds 3. Coverdell ESA ($2k/year per child) 4. 529 Savings/ Prepaid tuition ($15k/year per child) During College Funding Strategies (2) - Correct Answer-Pick One: [Rich] - Parent Loan to Undergraduate Student (PLUS) [PooriSh <$60k AGI] - Pell grants, Subsidized Stafford Student Loans, Supplemental Educational Opportunity Grant Pell Grant rules - Correct Answer-A grant (up to $6,345) awarded based on financial need by the U.S. federal government to help students pay for higher education. Does not have to be repaid. Students must carry 12 credit hours and be full- time, or grant will be prorated down. Educational Credits (2) - Correct Answer-American Opportunity Credit, Lifetime Learning Credit American Opportunity Tax Credit - Correct Answer-Up to $2500 per year per student for tuition expenses incurred in the first 4 years of post-secondary education. 100% of the first $2000, and 25% of the next $2000, subject to AGI phaseouts. Expenses cannot be for room, board, or textbooks. The student must be enrolled at least half time in a program that leads to a degree or certificate. Lifetime Learning Credit - Correct Answer-A nonrefundable credit equal to 20% of the first $10,000 of qualified higher education tuition and fees or job training paid during the year on behalf of the taxpayer, his spouse, or his dependents. Undergrad and grad school, can be part time. Educational Funding Coordination: Pick one of (4) - Correct Answer-1. American Opportunity Credit 2. Lifetime Learning Credit 3. Coverdell withdrawal 4. Qualified 529 distribution/UTMA/UGMA Graduate School Funding (6) - Correct Answer-1. Fulbright Scholarship 2. Graduate PLUS Loans 3. Stafford Loans 4. Lifetime Learning Credit 5. 529 withdrawal 6. Coverdell withdrawal (<30 years old) reverse mortgage/home-equity conversion loan - Correct Answer-Allows a homeowner 62 and older to continue living in the home and to borrow against the equity in a home that is fully paid for and to receive the proceeds as a combination of: - a lump sum - monthly payments - a line of credit The repayment is the amount of loan or home value, whichever is lower. Once the loan is repaid, any remaining equity is distributed back to borrower or to their estate. HELOC rules - Correct Answer-Home Equity Line of Credit - deduction limited to interest on first $750k - interest deductible for any loan used to buy, build, or improve your house Chapter 7 Bankruptcy non-dischargeable debt (3) - Correct Answer-1. Student/gov loans 2. Child support + alimony 3. Wage withholding/ tax due "You can't get rid of your ex or the government through bankruptcy" Which student loan forgiveness is taxable income? - Correct Answer-The income based loan forgiveness. Kinds of Student Loan Forgiveness (4) - Correct Answer-1. Income-based 2. PSLF - Public Service Loan Forgiveness 3. Perkins Loan 4. Teacher Loan Income based loan forgiveness - Correct Answer-Balance after 20/25 years forgiven, counted as taxable income. PSLF - Correct Answer-Public Service Loan Forgiveness - work in public service for 10 years/120 payments Perkins Loan forgiveness - Correct Answer-Can be discharged through: Peace Corps, Americorps, Armed Forces, Teaching, Medicine, Social Service, Law Enforcement Teacher Loan Forgiveness - Correct Answer-If you teach full-time in low-income schools, up to $27.5k of Perkins or $17.5k of Direct/Stafford loans can be forgiven. Student Loan Interest Deduction - Correct Answer-Deduct up to $2500 of interest paid on student loans, with AGI phaseout after $70k/$140k Expected Family Contribution (EFC) - Correct Answer-An estimate of the parents' and/or student's ability to contribute to post-secondary expenses. In general, the lower the EFC, the higher the financial aid award from the college may be. 20% of child's AVD - Correct Answer-Alternate Valuation Date - the executor can elect to use FMV up to 6 months after death only if: 1. It would reduce the gross estate 2. It would reduce the federal tax liability 3. It is applied to ALL estate property 4. It isn't depreciating property (like an annuity payout) If distribution is early, use FMV at date of distribution. If sale is early, use FMV at date of sale. Duties of Fiduciary (4) - Correct Answer-1. Loyalty to beneficiaries 2. Must not self-deal 3. Must preserve property and keep it productive 4. Must be impartial to all beneficiaries Breach of fiduciary duty may result in civil/criminal action against the fiduciary. 3 Types of Fiduciaries - Correct Answer-1. Executor/Personal Representative - named in will, appointed by court to manage probate estate 2. Trustee - follows the trust instrument and manages trust assets to benefit beneficiary 3. Guardian/conservator - manages assets/expenditures, makes annual reports to court 3 Types of Transfers to Skip Persons - Correct Answer-Direct Skips, Taxable Terminations, Taxable Distributions Direct Skip (GST) - Correct Answer-Gift directly to a skip person. $15k exclusion, automatically uses exemption unless you opt out. Transferor pays GST tax. Taxable Termination (GST) - Correct Answer-Termination to an interest in trust property where a skip person becomes a trust's only beneficiary. No $15k exclusions, and the trustee must ELECT to use the exemption. The trust pays GST tax. Taxable Distribution to a skip-person - Correct Answer-A payment from a trust to a skip person is a taxable distribution. No $15k exclusion, you must elect the exemption. Even though the distribution is not subject to estate or gift taxes, the GSTT will be imposed at the time of distribution and must be paid by the skip-person. Estate/Gift tax and GSTT ordering - Correct Answer-Estate and gift tax are due first, then GSTT. (The estate/gift tax will reduce the amount of GSTT owed) Grantor Trust (5 examples) - Correct Answer-"Tainted" or "Defective" Trust where the grantor holds too much control and therefore pays taxes on the trust income. 1. If the trust income is paid to grantor or spouse. 2. If trust income discharges legal obligation or legal support of grantor 3. If the power to control enjoyment is held by grantor or spouse. 4. If the trust income pays life insurance premiums on grantor or spouse. 5. If a reversionary interest of >5% of the original value is retained by the grantor. GRIT - Correct Answer-Grantor Retained Income Trust - Irrevocable - Grantor retains a right to the income produced - No discount on the taxable gift like a GRAT has (remember, the GRAT is valued minus the present value of the annuity) - GRITs are only useful for non-related parties or for QPRTs. GRUT - Correct Answer-Grantor Retained Unitrust Fixed PERCENTAGE of assets (revalued annually) paid to grantor for a term of years Remainder passes to the named beneficiary Additional Contributions Allowed Use if -Grantor wants inflation protection -Have easy to value assets -Assets are expected to fluctuate/appreciate in value -Grantor wants to share in the appreciation of the trust assets rather than having it go to the remainder beneficiary Grantor Retained Annuity Trust (GRAT) - Correct Answer-A grantor irrevocably transfers assets to a trust and retains a specified annuity income for a stated number of years. The value of the taxable gift is the remainder interest. If the grantor survives the annuity period the assets will be completely removed from his or her estate and no additional taxes will be due. If the grantor dies during the annuity period the trust assets will be included in the grantor's gross estate, but the adjusted taxable gift will be removed from the estate tax calculation -- so there is little downside risk. This is a gift of FUTURE interest, no $15k exclusion. Gift Leasebacks and Sale Leasebacks - Correct Answer-Gifting or sale of business or trade property to a lower-income family member. Following the property transfer, lease payments in proper amounts are made by the former owner to the new owner. The payment is deductible by the former owner as a business expense, and taxable to the new owner as unearned income. The transfer of fully depreciated property is particularly advantageous because the new owner may claim depreciation on the acquired property. The lease payments and selling price must be realistic to avoid challenges by the IRS. To avoid the kiddie tax, gifts should be to people >=23 years old. Qualified Personal Residence Trust (QPRT) - Correct Answer-A special form of a GRIT in which the grantor transfers his home to the QPRT and receives "use" of the personal residence as the annuity. The remainder interest of the trust passes to a non-charitable beneficiary. - Can do primary home, vacation home, or primary + one vacation home - Gift of future interest (no $15k exclusion) - If grantor dies before term is up, the property goes back into estate and the taxable gift (the present value of the remainder interest) is voided. Family Limited Partnership - Correct Answer-Technique to shift income from parents to children. Allows business owners to pass assets to heirs with a minimum of income and estate tax costs while retaining control of assets during their lifetime. - Income must be distributed pro rate by ownership - GPs may be paid for service to partnership - must be CAPITAL-SENSITIVE - not a service business - Can have a 50% valuation discount for gifts due to lack of control/marketability - Basis for gifts remains the same (no step-up) SCIN - Correct Answer-Self-Cancelling Installment Note - installment sale but the balance of payments is cancelled if the seller dies. -An owner can accept an SCIN installment note in a sale of assets when seeking an income stream, income tax deferral, and estate tax deduction -The buyer can depreciate assets based on the purchase price -The buyer can deduct the interest paid on the SCIN installment sale (unlike a private annuity) -The value of the installments canceled at the note holder's death is not included in the gross estate -The buyer pays a premium and the seller pays more income tax while living (increases the installment payment) -Only for family or loved ones when family member is in poor health - Payments cancelled will trigger capital gain on the estate's income tax return (which is a lower rate than the estate tax) Who is a skip person? (2) - Correct Answer-1. A related person 2 generations below the transferor 2. Unrelated person who is >37.5 years younger than the transferor NOTE: If a generation dies, succeeding generations move UP one generation (e.g. a grandson whose parents are both dead is NOT a skip person) What is the GSTT rate? - Correct Answer-A flat 40% Can GSTT paid be added back into the estate? - Correct Answer-No - unlike the gift tax, there is no 3 year rule for GSTT 5 By 5 Power In Trust - Correct Answer-A common clause included in many trusts allowing for beneficiary withdrawals from the trust. Specifically, '5 by 5 Power' or the '5 by 5 clause', gives the beneficiary power to withdraw the greater of: a) $5,000 or b) 5% of the trust's FMV from the trust each year. For income tax purposes, should the beneficiary not exercise the '5 by 5 Powers', the greater of the "5 or 5" would be included in their gross estate (although it remains in the trust). Over time the beneficiary could become the owner of the trust and become liable for taxes on the trust's capital gains, deductions and income. Group Life Insurance - Correct Answer-Provides lower rates for the employer or employee and includes all employees, including new employees, regardless of health or physical condition. Can you continue group life insurance after leaving an employer? - Correct Answer-You can convert to individual life insurance when coverage stops. Must convert to permanent life insurance, not term. Taxation of Group Life Insurance - Correct Answer-If total coverage exceeds $50k, the employee is taxed on the cost of coverage over $50k, minus what they pay in. If it's a discriminatory plan, there's no $50k exclusion for key employees. They must include the actual cost or table cost, whatever is greater. Dependent Life Insurance - Correct Answer-- Not included in $50k exclusion for taxability - Tax free up to $2000 Carve Out Plan types (3) - Correct Answer-Employer can "carve out" highly paid employees from group life insurance and give them their own individual plan (not deductible by the employer). 1. Split dollar plan 2. Section 162 bonus plan 3. DBO (death benefit only) VEBA - Correct Answer-Voluntary Employee Beneficiary Association Contributions are deductible for employee. Could include: - Death benefits - Medical expense benefits - Disability - Childcare - Legal expenses - Unemployment/severance - Education Period Certain Annuity - Correct Answer-An annuity income option that guarantees a definite minimum period of payments, even if the person dies early. Refund Annuity - Correct Answer-A guaranteed-minimum annuity that, on the annuitant's death, pays the beneficiary back the total price of the annuity (purchase price - monthly payments already paid out). Can be refunded in lump sum or installments. Refund is tax-free up to basis. Joint Life vs. Joint-and-Survivor Annuities - Correct Answer-Joint life: Payments stop at 1st death. BAD! Joint-and-survivor: Keeps paying after 1st death. SPIA or SPDA - Correct Answer-Single Premium Immediate (or Deferred) Annuity - Purchased with a single premium up front - In a deferred annuity, earnings accumulate tax-deferred until distributed Variable Annuity Pros and Cons - Correct Answer-Annuity that has a varying rate of return based on the mutual funds in which one has invested. Premiums are invested in separate accounts (fixed and variable) PROS: - Keeps up with inflation/the market CONS: - Payouts vary - Usually expensive Taxation of Annuities (Withdrawals) - Correct Answer-After 1982, taxed LIFO. A withdrawal is taxable interest until you hit your basis investment. Early withdrawals (<59.5) have a 10% penalty tax. Taxation of Annuities (Distributions) - Correct Answer-Annuity payments are broken into 2 parts: 1. Accumulated earnings (taxed as ordinary income) 2. Return of premium (non-taxable) Use the annuity exclusion ratio - percentage of contribution basis to total - to determine taxability. Taxation of Annuities (held by a non-natural person, such as a trust) - Correct Answer- Any income received OR accrued is treated as ordinary income immediately. (or ordinary loss, if a variable annuity goes down in value) PAP (Personal Auto Policy) Rules (4) - Correct Answer-1. Can be written on autos owned/leased by individuals or spouses living in the same household. (or college kids away while at school) 2. Rental cars (Lyft) not eligible - need commercial policy 3. Delivery cars (pizza) not eligible - need commercial policy 4. Car must be a private passenger auto (cars, vans, trucks, SUVs) Auto Policy Framework - Correct Answer-Declarations page - name, address, auto description Part A Liability Part B Med Pay Part C Uninsured and Underinsured Part D Damage to your Auto: Collision, Other than Collision Insureds Duties Following a Loss General Provisions Property Loss Calculation when Underinsured - Correct Answer-First, the required insurance = replacement cost x coinsurance percentage (80% for homes, sometimes 90% for commercial property) Then the amount paid out is the fraction of the loss that was insured minus the deductible. Amt paid = Loss x (Insurance carried/Insurance required) - Deductible Covered Perils: Broad (4) - Correct Answer-Everything in basic plus RAFF: - Ruptured pipes - Artificially generated electricity - Falling objects - Frozen pipes Covered Perils: Open - Correct Answer-"All risk" - the insurer pays for all damage EXCEPT specific exclusions Covered Perils: Basic (10) - Correct Answer-WHLF STARVE: Windstorm Lightning Fire Hail Smoke Theft Aircraft Riot Vehicles Explosion Homeowners Insurance Exclusions (8) - Correct Answer-OPENN WIF Ordinance or law Power failure Earthquake Neglect (NOT carelessness) Professional Liability Insurance: Malpractice vs E&O? - Correct Answer-Malpractice covers bodily injury (doctors, dentist) Errors and Omissions covers property damage (lawyers, brokers) Commercial Property Insurance (BOP) - Correct Answer-Business Owner's Policy: Covers commercial building and property losses resulting from fire, storms, accidents, theft, and vandalism. For small/medium businesses; premiums are deductible. Does NOT cover professional liability! How do you buy out of a company life insurance plan? - Correct Answer-Must convert to permanent insurance. Under the endorsement method, you will have to pay the higher of cash value OR the premiums paid. Endorsement Method - Correct Answer-Requires that the beneficiary change (from employer to another beneficiary) be typed or affixed directly to the policy - insured must make a written request and mail the request along with the policy to the insurance company. Homeowners Insurance Forms - Correct Answer-HO-1: Basic coverage for all parts HO-2: Broad coverage for all parts HO-3: (Most common) Open coverage except C HO-4: Renters'. Covers C and D HO-5 or HO 3-15: Open coverage for all HO-6: Condo HO-7: Mobile home HO-8: Basic coverage for older homes Coverage for HO-6 Parts - Correct Answer-A: Some coverage for installed carpet/cabinets, plus $5k loss assessment coverage (can buy more if needed) B: none C: Open D: Broad 50% of C Coverage for HO-4 Parts - Correct Answer-A: none B: none C: Broad D: Broad 30% of C HO-3 Policy Outline - Correct Answer-Declaration Page - name, address Section I: A-Dwelling, B-Other structures, C-Personal Property, D-Loss of Use Section II: E-Personal Liability, F-Medical Payments Coverage for HO-3 Part A (5) - Correct Answer-Dwelling: open perils 1. House 2. Attached garage 3. Decks 4. Fences for construction 5. Building materials intended for house Does homeowner's insurance cover land? - Correct Answer-No Coverage for HO-3 Part B (5) - Correct Answer-Other structures: 1. Pools 2. Detached garages 3. Fences 4. Patios 5. Detached ADUs Coverage for HO-3 Part C inclusions/exclusions - Correct Answer-Personal Property: has internal limits of liability - $1k for boats - $1500 for jewelry/furs - $2500 for silverware Excludes: - animals - cars/planes - renter's property - property in the room of the renter (furniture) Coverage for HO-3 Part D - Correct Answer-Loss of Use: pays for additional living expenses arising from house damage, such as temporary housing, eating out, etc. Umbrella policy coverage when the underlying insurance is insufficient - Correct Answer-Insurer will only pay the amount it WOULD HAVE been required to pay if the underlying insurance had been in force. Example of umbrella coverage: You have $1M umbrella that requires $300k underlying, but you only have $100k underlying coverage. If you get sued for $1M, what happens? - Correct Answer-The umbrella insurer treats it as though you had $300k in coverage - only pays $700k out. Underlying will pay $100k. You will have to cover the gap in coverage ($200k) yourself. Endorsement vs Collateral Split Dollar Policy - Correct Answer-EndoRsement: EmployeR owns policy, employee chooses beneficiary. Employee must pay income taxes on premiums since employer is paying them. Collateral: Employee owns the policy and the employer pays the premiums as an "interest-free loan". If the employee dies, they take the loan amount out of the face value, and pay any remaining proceeds to the beneficiary. Buy-Sell Agreement Stock Redemption (Entity Purchase) - Correct Answer-Company (entity) is the owner and beneficiary of life insurance for each shareholder. Can't deduct premiums, so DB is tax-free. When a person dies, the company gets the life insurance money and buys the dead person's stock to reallocate among the other shareholders. Pros: Simpler than cross purchase if there are many shareholders. Cons: Creditors can go after this life insurance. Also, there is no step up in basis this way (dead person's stock retains same basis). Buy-Sell Agreement Cross Purchase - Correct Answer-Each shareholder buys life insurance on each other shareholder. When someone dies, the others get life insurance money to buy back the dead person's stock. Pros: Can't be touched by creditors. You get a step up in basis because you bought the dead person's stock at FMV. Cons: Cumbersome if there are a lot of shareholders Life Insurance Settlement and Taxation of Proceeds (3) - Correct Answer-This is a way to get life insurance money out which is almost always better than just surrendering the policy. The insured is usually healthy and over age 65 (no longer working). 1. The premiums paid get taken out tax-free as basis 2. The cash-value is taken as ordinary income 3. The rest is LTCG - calculated as net proceeds minus cash value OR basis, whichever is higher NOTE: This is the only time life insurance gets taxed at capital gains rates. Viatical Settlement - Correct Answer-The sale of a life insurance policy by a terminally ill insured to another party. - Can do this is there is no accelerated benefit rider on the policy. - Payments are not taxed. Accelerated Benefit Rider - Correct Answer-A living benefit or terminal illness (<2 years to live) rider - if you have terminal illness, you can use the money before you die and it reduces the overall death benefit (by up to 50%). - if you are chronically ill, you can exclude $380/day for LTC services Pension Protection Act of 2006 (rule for nonspouse beneficiaries) - Correct Answer- Federal law that imposes additional funding and disclosure requirements on employers who have employee pension plans. Nonspouse beneficiaries of 401k/403b/457 can transfer to an IRA and withdraw: - over 5 years OR - over their life expectancy NOTE: must be a direct transfer to an INHERITED IRA - not a 60 day rollover indirectly transferred, or it will be all taxable Qualified plan rule: Benefits can't be touched by creditors EXCEPT: (2) - Correct Answer-- QRDO (divorce order) - if the plan doesn't allow for an immediate cash transfer, then the funds will be segregated out into a subtrust until the transfer is possible - to collect federal taxes owed NUA taxation - Correct Answer-Net Unrealized Appreciation - the difference between the stock basis and the FMV when the stock is distributed. Always taxed as LTCG no matter how long it's held. Tax must be paid immediately on the basis amount as ordinary income. The NUA will be taxed as LTCG only upon sale of the stock, and any extra earnings will be taxed just like normal capital gains. Controlled Groups (4) - Correct Answer-A group of corporations owned by the same individual shareholders: - Brother-sister corporations: <=5 people own 80%+ of both companies - Parent-subsidiary corporations: Parent company owns 80%+ of subsidiary company - Affiliated service: rules for professional services (Health, Law, Accounting, Engineering) - Employee Leasing: to avoid letting companies lease employees rather than hire them Controlled group limits to retirement plans - Correct Answer-Company contributions (not deferrals) are limited to 100% compensation or $57k: - in aggregate by related employers, OR - separately by unrelated employers i.e. You can't use multiple companies to contribute extra to your retirement plans. Disparity Limit on Retirement Contributions - Correct Answer-5.7% allowed difference between benefit accruals/contributions from employer for HIGHLY PAID vs LOWER PAID employees (justified as "integration with Social Security" since higher paid workers get less SS as a percent of comp) Which plans can (7) and can't (4) integrate with Social Security? - Correct Answer- Mainly plans where the employer contributes. Can integrate: - Defined benefit - Cash balance - Money purchase - Profit sharing - Target benefit - Stock bonus - SEP Can't integrate: - 401k safe harbor/match only - ESOP - SIMPLE - SIMPLE 401k Qualified plan deduction limits - Correct Answer-Employers can only DEDUCT a max of 25% of all participants' eligible compensation. They can contribute more to one employee as long as total company contributions are <=25%. Qualified plan defined contribution limits - Correct Answer-$57k or 100% of compensation, whichever is less What could happen to the excess if an employer accidentally exceeds retirement plan contributions? (3) - Correct Answer-The excess contributions: - can be reallocated to other employees - can be suspended for later years - can reduce future plan contributions Qualified plan annual compensation limit - Correct Answer-$285k - used to calculate the amount deductible from employer when assessing total payroll (contributions must be <=25% of payroll) Elective deferral limits for multiple plans (more than 1 employer) - Correct Answer- 401k/403b/SEP/SARSEP/SIMPLE: $19.5k + $6.5k catchup Multiple SIMPLE accounts: $13.5k + $3k catchup Keogh plan contribution limits - Correct Answer-lesser of 25% x profit sharing of net earnings after SE tax deduction (.9235 x 0.153/ 2 x gross earnings) or $57,000. NOTE: to calculate 25% rate, use .25/1.25 to get the actual contribution rate Qualified plan loan rules (4) - Correct Answer-- Must be <50% of balance or $50k, but can do up to $10k regardless of balance - Pay back loan <=5years unless buying a house or taking a <1yr leave of absence - Must pay in level installments, at least quarterly. - If you miss a payment, the WHOLE BALANCE DUE is a taxable distribution (plus the 10% penalty for early distribution if you're <59.5) Which retirement plans can do loans? - Correct Answer-All qualified plans. Not: SEPs, SIMPLEs, IRAs. QLAC - Correct Answer-Qualified Longevity Annuity Contract; individual purchases contract. Allows individual to delay withdrawing money from retirement account. Must start by distributions by age 85; Amt of QLAC is not included in amount determined for an RMD QLAC pros (3) and cons (3) - Correct Answer-Pros: - value excluded from RMDs, reducing taxes - lower investment risk - allows early SS benefits which lowers portfolio withdrawals Cons (much like cons for any annuity): - Inflation risk - Loss of control - Acts more like insurance when interest rates are low - bad returns IRA beneficiary options and rules (5) - Correct Answer-1. Spouse: rollover into own IRA or keep in old IRA and keep old RBD (but new life expectancy based on beneficiary) 2. Non-spouse: 5 years to liquidate 3. Minor child: Custodian must oversee money until they reach age of majority. 10 years to liquidate. 4. Trust: 10 years to liquidate 5. Beneficiary OR Trust beneficiary who is chronically ill, disabled, or <10 years younger than the deceased: 5 years to liquidate or distributed based on beneficiary life expectancy After death, when do IRA distributions to a beneficiary begin? - Correct Answer-The year AFTER death. The year of death, there is no required distribution. UBTI - Correct Answer-Unrelated business taxable income - income from a limited or general partnership interest (not real estate) Rules for Life insurance in Retirement Plans (2) - Correct Answer-Life insurance must only be incidental. This means: 1. Premiums must be less than: Ordinary/whole life: 50% of DB Term: 25% Universal: 25% This rule is usually used for DC plans. Or: 2. Insured DB must be <=100x monthly benefit. This rule is usually used for DB plans. Social Security Taxation rules - what is MAGI for this? - Correct Answer-MAGI = AGI + 1/2 Social Security + tax exempt interest Social Security Taxation rules for MAGI - Correct Answer-If MAGI > $25k/$32k, 50% tax rate If MAGI > $34k/$44k, 85% tax rate Working After Retirement - Earnings Test - Correct Answer-If you are >= FRA, NO BENEFIT REDUCTION! Benefits reduced by $1 for every $2 earned over $18,240 in 2020 for workers less than FRA. Benefits reduced by $1 for every $3 earned over $48,600 Electing Social Security before NRA - how is benefit reduced? - Correct Answer-N = number of months Benefit reduction is 1/180 x N of your PIA for each of the first 36 months under your NRA. PIA - Correct Answer-Primary Insurance Amount - what you get from Social Security when you turn FRA What happens to Social Security when a spouse dies? - Correct Answer-The survivor can take over the spouse's full benefits. Money Purchase Pension Plan Keys (3) - Correct Answer-- Fixed contributions by employer - Benefits young, highly paid employees. - Retains key employees Contribution Limits for an MPP - Correct Answer-1. Up to 25% payroll is an employer deduction 2. Fixed contributions required stable cash flow 3. Max contribution: Lesser of 100% salary OR $57k 4. Salary cap of $285k to figure out employer contribution Stock Bonus Plan - Correct Answer-A type of profit-sharing plan in which the employer rewards employees with stock instead of cash - MAY be company stock, but doesn't have to be. ESOP Keys (5) - Correct Answer-- Employee stock ownership plan to broaden ownership - MUST invest primarily in company stock - Creates a market for company stock and provides liquidity for shareholders - Used in business continuity planning - Can be used to borrow $ to finance the company Do ESOPs or Stock Bonus Plans have to invest in company stock? - Correct Answer- An ESOP must invest primarily in company stock; a stock bonus plan MAY invest in the company Profit Sharing Plan Keys (6) - Correct Answer-- Appropriate when employees are young and well paid - Used to motivate employees to make company profitable - Flexible contributions (must be substantial and recurring) - 401k provisions (FICA, hardship provisions) - SIMPLE 401k exempt from creditors - Up to 25% employer deduction Target Benefit Pension Plan Keys (4) - Correct Answer-A special type of money purchase pension plan that determines the contribution to the participant's account based on the benefit that will be paid from the plan at the participant's retirement rather than on the value of the contribution to the account. Requires an actuary at inception. 1. Fixed contributions 2. Up to 25% employer deduction 3. Stable cash flow 4. Favors older employees Which retirement plans favor older workers? Which favor younger workers? - Correct Answer-Older: Target Benefit Pension, Defined Benefit Pension Younger: Cash Balance, Money Purchase, Profit Sharing Cliff vs Graded Vesting - Correct Answer-Cliff is 100% vested after 3-5 years of service (usually) Graded is used to retain employees, usually the first year or two are ineligible. 10% Tax Penalty Exceptions for Qualified Plans (9) - Correct Answer-- Age 59.5 - Disability - Death - Divorce (QRDO) - SEPP if you leave work - Age 55+ if you leave work - Medical expenses >7.5% AGI - Beneficiary distributions for inherited plans - Up to $5k for birth/adoption costs 10% Tax Penalty Exceptions for IRAs (including SEPs, SIMPLEs, SARSEPs) (8) - Correct Answer-- Age 59.5 - Death - Disability - SEPP if you leave work - Qualified higher education expenses - First time homebuyers (up to $10k) - Medical expenses >7.5% AGI - Health insurance premiums when unemployed Note: NO age 55+ exception when unemployed QJSA - Correct Answer-qualified joint survivor annuity -post retirement death benefit for the plan participant's spouse. -Qualified pension plans are required to provide a QJSA. -Currently, survivorship annuity must not be less than 50% or more than 100% of the annuity payable during the joint lives of the participant & spouse QPSA - Correct Answer-qualified pre-retirement survivor annuity -preretirement death benefit for the plan participant's spouse upon the death of the participant who dies before the starting date of the QJSA. -Survivorship annuity cant be less than what would be payable under the plans QJSA. Hardship Distributions - Correct Answer-A distribution from a 401(k) plan because the employee has an immediate and heavy financial need and the withdrawal is necessary to satisfy the need. The distribution is taxable and subject to penalties to the extent the participant has other resources to have satisfied the financial need. When can defined benefits plans begin? - Correct Answer-Age 62 - this counts as retirement income even if not retired from work When must you take an RMD for IRA-type plans or Qualified plans? - Correct Answer- For IRAs/SEPs/SIMPLEs/SARSEPs Required beginning RMD is April 1st on the year after you turn 72, then Dec. 31st in following years. RMD is based on the amount in the plan on Dec 31st of the prior year. For Qualified plans, you can postpone taking an RMD until April 1st of the year after you RETIRE. (No solo 401k workarounds - if you are >5% owner, you must take RMDs at 72 regardless) What is the excise tax on a RMD not taken? - Correct Answer-50% Vesting schedules: when must they be fast or slow? - Correct Answer-Faster: Top- heavy, defined contribution plans Slower: Non-top-heavy, defined benefit What are fast vs slow vesting schedules? - Correct Answer-Fast: 3 year cliff or 2-6 year graded Slow: 5 year cliff or 3-7 year graded Rollover rules (5) - Correct Answer-- 60 day deadline for IRA rollovers; can do once per 12 month period 1. Noncancellable - flat premium until age 65, can't be canceled by company 2. Guaranteed Renewable - must have the option to renew, but premium may go up- you're "guaranteed to pay more when you renew" 3. Conditionally renewable - usually a 2-year benefit. Can continue past age 65 if you are still employed. Can you modify a disability insurance policy? - Correct Answer-No. Presumptive Disability Provision - in what cases is it assumed you're disabled? (4) - Correct Answer-Provision found in most disability income policies that specifies the conditions that will automatically qualify for full disability benefits: 1. Loss of sight 2. Loss of hearing 3. Loss of speech 4. Loss of both hands, both feet, or one hand and one foot. "It has to cost an arm and a leg." Disability Provisions/Riders (3) - Correct Answer-1. Partial disability benefits - starts after total disability runs out, lasts 6 months, usually half of regular payout 2. Residual disability (proportional) - only for an OWN OCCUPATION policy. Pays out based on loss of earnings, proportionally. 3. Social insurance substitute benefit (SIS) - for total disability. Pays out full value minus any Social Security disability payments received ACA income limitations (2) - Correct Answer-100%-400% of poverty level gets ACA subsidies under 100% of poverty level gets Medicaid (unless state opted out) What is the ACA "employer mandate"? - Correct Answer-To force big companies to give employees healthcare, companies with 50+ employees must offer healthcare or they must pay a penalty for any employee getting a subsidy. When is ACA open enrollment? - Correct Answer-11/1 to 1/31: All of November, December, and January. Taxation of Disability Insurance Premiums and Benefits (3) - Correct Answer-If employee owns plan & pays premiums = premiums are not deductible, but benefits are tax free If employee owns the plan, but the employer pays the premiums (employer uses bonus money Section 162 to pay premiums) = premiums are deductible to employer, and benefits are tax free If employer owns plan, & pays the premiums ("salary continuation") premiums are deductible to employer and tax-free to employee, but benefits are taxable to the employee When is someone chronically ill? - Correct Answer-When they are unable to perform 2+ ADLs for 90 days What are ADLs? (6) - Correct Answer-Activities of daily living: - eating - bathing - dressing - getting from bed to chair - using the toilet - being continent What are the steps to elect COBRA? (4) - Correct Answer-1. Qualifying event happens 2. Notice of event to beneficiary by plan administrator 3. Electing coverage (within 90 days) 4. Paying the premium (within 45 days of election) What is the cost of COBRA? - Correct Answer-Can't exceed 102% of the normal cost of the plan. What is Medicare Part B? - Correct Answer-Voluntary Insurance Program When do you sign up for Medicare Part B? - Correct Answer-When you retire (must have job health coverage) or age 65, whichever is later. Within 8 months of retiring or penalty Within 3 months of age 65 or penalty What is the penalty for signing up late for Medicare Part B? - Correct Answer-10% increase in the premium every year you delay signing up When can you enroll in Medicare? - Correct Answer-Within +/-3 months of your 65th birthday, or 1/1 to 3/31: All of January, February, and March. Overlaps January with ACA open enrollment, "because seniors are slower". When does Medicare coverage begin? - Correct Answer-July. We celebrate with fireworks. When is Medigap open enrollment? - Correct Answer-For 6 months after you sign up for Medicare Part B or turn 65, whatever is later. Medigap - Correct Answer-a private insurance policy that pays the difference between the medical charge and the amount that Medicare pays. You must be in both Medicare A and B Medicare Part A - Correct Answer-The part of the Medicare program that pays for: - hospitalization - 100 days in a skilled nursing facility - unlimited home health care - hospice care. What are the Medicare Part A hospital stay deductibles? (3) - Correct Answer-Three different deductibles: First 60 days, then 30 days, then 60 days. Medicare Part C - Correct Answer-Medicare Advantage Plans - private insurance providers that cover Part D stuff, also vision and dental Medicare Part D - Correct Answer-D for drugs - pays for 50% of prescription drugs. Must have both Medicare Part A and B Can you have both an HSA and an FSA? - Correct Answer-Yes, but the FSA must be a limited purpose FSA (vision/dental only) What are indemnity and managed care dental plans? - Correct Answer-Indemnity - fee for service (like PPO) Managed care - monthly fee prepaid (like HMO) How are group dental insurance premiums and benefits taxed? - Correct Answer- Premiums are deductible by employer, and the benefits are tax-free to the employee. Cafeteria Plan examples of benefits (5) - Correct Answer-Permits employees to pick and choose from benefits like: - health care - disability - term life insurance - 401k - CASH (must be offered as an option) Health FSA limit? Grace period? Rollover allowed? - Correct Answer-Limit is $2750/year Grace period can be up to 3 months OR Rollover up to $500 but not both Which FSAs have rollovers allowed? - Correct Answer-Health FSAs possibly. Dependent care FSAs cannot have rollovers. Kinds of FSAs (2) - Correct Answer-- Dependent care FSAs - Qualified medical expenses FSAs (vision/dental) 3. A gift where splitting election is taken (only one 709 needs to be filed if it's only $30k, both spouses must file 709s if they give >$30k. NO 709 must be filed if it's a gift of only $30k from a joint account) Taxablity of gifts and donor's estate rules (4) - Correct Answer-1. Gifts are taxable to the extent they exceed the annual exclusion 2. Adjusted taxable gifts added to taxable estate 3. Any gift taxes paid are saved to use against the tentative tax. 4. Can't get out of paying estate taxes by overpaying gift taxes on your deathbed - any gift tax paid within 3 years of death is added back to your gross estate Powers of Attorney Exclusions - You can't give away the power to: (2) - Correct Answer- 1. Execute or revoke a will. 2. Execute a living will. 5 or 5 right (5 by 5 clause/power) - Correct Answer-Trust provision: Can take $5000 or 5% of the trust's FMV each year. Crummey Powers - Correct Answer-Powers that give trust beneficiaries the right to withdraw each year the money that is contributed to the trust OR the annual exclusion, whichever is lesser. Usually used to gift money to children into a trust for them and bypass the gift tax by only gifting $15k each year. Estate Tax Filing Requirements - Correct Answer-Must file form 706 if you have more than the exemption in your gross estate (+ taxable gifts). Or if you want to elect marital portability. Probate (4) vs Nonprobate (4) Assets - Correct Answer-Probate: 1. Singly owned assets 2. Community property 3. Tenancy in common 4. Estate as beneficiary Nonprobate: 1. JTWROS/ entirety 2. General powers 3. Life insurance 4. Last 3 years of gift taxes Steps to go from Gross Estate to Net Estate Tax (6) - Correct Answer-1. Gross estate -> minus funeral expenses, debts, taxes, casualty losses: 2. Adjusted gross estate -> minus marital, charitable deductions: 3. Taxable estate -> plus taxable gifts: 4. Tax base -> minus $11.58 exclusions, then 40% of remainder: 5. Tentative tax -> minus gift taxes already paid: 6. Net estate tax Are survivorship annuities included in an estate? (2) - Correct Answer-Usually fully included if survivor opts to take the lump sum. If survivor opts for periodic payments, the present value of the annuity is included. When is life insurance included in an estate? (3) - Correct Answer-1. If you had insurance on yourself (or gifted it to your spouse and named yourself beneficiary) (or the value if you own a policy on your spouse) 2. If proceeds were paid to your executor 3. If you gift your policy away within 3 years of death. What is excluded from an estate? (3) - Correct Answer-1. Life insurance owned by others 2. Completed gifts 3. A non-retained life estate (for your own life only to use and enjoy) - usually a home What are the best ways to/why should you gift these types of property? 1. Highly appreciated property 2. Property likely to appreciate 3. Income-producing property 4. Loss property 5. Out of state property 6. Property subject to depreciation 7. Life insurance - Correct Answer-1. Charity or donee in low tax bracket 2. Gift to remove future value 3. Gift to low-income donee 4. Don't gift: sell, take the loss, give cash 5. Gift to avoid ancillary probate 6. Don't gift: keep and take the depreciation 7. Almost always good to gift Transfers with a retained life estate + one exception - Correct Answer-Property transferred is included in the estate if you retain the right to use/enjoy the property or the right to designate who can use/enjoy it. Exception: you can give a 529 plan without it being in your gross estate. Three Year Rule and exceptions (2) - Correct Answer-Transfers made within 3 years of death are still included in the estate. Exceptions: real estate, cash Gift tax on gifts of present vs future interest - Correct Answer-Present interest (may be enjoyed immediately): $15k exclusion Future interest (possession delayed): does not qualify for exclusion, taxed in whole (except 529s, some trusts) Net Gift Technique - Correct Answer-Gift is made, on the condition the donee pays the gift tax. Discounted gift that benefits the donor and donee. Limitations: -$5,490,000 exemption must first be exhausted before there is any gift tax payable by the donee -The decedents gross estate includes the amount of gift tax paid by the donees on net gifts made by the decedent in the past 3 years -The amount paid by the donee in tax can be used as a credit to the donor's estate -Used when the donor has a liquidity problem and cannot afford the gift tax. Ex. Amount gifted x 40% = N N / 1.4 = amount of gift tax donee pays Gift of life insurance - how do you calculate the value included in the estate? - Correct Answer-First figure out the prorated cash balance between premium payments (interpolate). Then add any unearned portions of the last premium payment. Community Property rule of ownership - Correct Answer-Each spouse holds a 1/2 interest in the property. NOTE: There is a full step up in basis on all community property when spouse dies, including the survivor's share. What is considered community property and what is excluded? (4) - Correct Answer-All property acquired during marriage. Exceptions: - Gifts to a single person - Assets and income from before the marriage - Inheritances to a single person - Interest on any single-owned assets Is life insurance payout taxable? (for term, whole life, etc) - Correct Answer-Only the pure death benefit is tax-free. The cash balance counts as ordinary income. Roth distributions ordering and taxation (3) - Correct Answer-1. All contributions (never taxable) 2. All conversion amounts (tax free after seasoning for 5 years, or if there's a special purpose) 3. Earnings (tax free after seasoning for 5 years, before 5 years special purpose is still taxed but no penalty, before 5 years is taxed and 10% penalty) Incentive Stock Options - Correct Answer-A stock option that gives an employee the opportunity to buy the employer corporation's stock at a fixed price for a certain period of time, and that offers favorable tax treatment (cap gains rates when sold) to the first $100k/year if certain conditions are met. Corporations don't get a deduction. When do you use single life insurance and when do you use survivorship/second to die? (2, 2) - Correct Answer-Single life: - for the primary income provider - needing to pay off debt/education Survivorship: - For a couple (double earners), it's lower cost - For estate liquidity What are two important term life provisions? - Correct Answer-1. Renewability - guarantees right to renew (for higher premiums) for a limited number of years 2. Convertability - you can exchange for permanent insurance (whole life, etc). Must convert within a certain time frame and can do it without evidence of insurability. Whole Life Insurance Policy/ "Ordinary Life" - Correct Answer-A permanent life insurance policy that guarantees that the policy will remain in force as long as the premium is paid, for the WHOLE LIFE of the insured. Level premium based on life expectancy. The life insurance policy has a cash account that grows (interest) tax deferred. Cons of Whole Life Insurance (2) - Correct Answer-- Expensive - Inflexible [They make you pay dearly, and then you can't get out without paying even more dearly.] Universal Life Insurance - Correct Answer-permanent cash-value insurance that combines term insurance (death benefits) with a whole life insurance: cash value (tax- sheltered savings/investment account that pays interest, usually at competitive money market rates). Like whole life but more flexible - you can change the premium/cash value/ DB. The interest to cash value is at current interest rates, while for whole life it's a fixed interest rate. Universal Insurance types ("type 1" and "type 2") - Correct Answer-Option A: Level death benefit - constant DB, cash value increases. Once cash value hits a certain benchmark, the DB must increase (required by 1984 Tax Act) Option B: Increasing death benefit - as the cash value increases, the DB increases proportionally Variable Life Insurance - Correct Answer-whole life insurance that invests the cash value of the policy in a separate account, and the stocks or other high-yielding securities in the general account. The separate account won't be frozen if the company fails. How is variable life insurance classified? Who regulates it and variable life insurance agents? - Correct Answer-Classified as securities. Regulated by the SEC and anyone selling it must be FINRA licensed (Series 6) and also life insurance licensed (by state). Incontestable Clause and exceptions (3) - Correct Answer-The insurer cannot contest the policy after it has been in force two years during the insured's lifetime. Exceptions are for fraud by the insured: - No initial insurable interest. - Intent to murder - Impersonating someone for the medical examination Grace Period Provision - Correct Answer-Coverage remains in effect for 31 days past premium due date; benefits paid during grace period would be deducted from sum. Reinstatement clause for life insurance - what will you need to reinstate the policy? (2) - Correct Answer-You can reinstate the policy with - proof of insurability - paying all the lapsed premiums plus interest Suicide clause - Correct Answer-A provision stating that if the insured dies by suicide during the first two years the policy is in force, the death benefit will equal the amount of the premium paid. After two years, you can commit suicide without penalty. Disability Waiver of Premium Rider - Correct Answer-Included in most guaranteed renewable policies, this rider to a DI policy waives all future premium obligations to an insurer if the insured becomes permanently and totally disabled. All future premiums required to maintain the DI policy are waived while the insured is receiving DI benefits; however, this requires the insured to be totally and permanently disabled for at least 3 - 6 months before such waiver becomes effective, at such point it retroactively waives all premium payments from the insured. Disability provision - how does it apply to whole life? - Correct Answer-All future premiums are waived and the cash balance is credited as normal, as though you were paying the premium. Disability provision - how does it apply to universal/variable life? (2) - Correct Answer- Options from worst to best: 1. Company only waives charges for mortality/admin expenses. Doesn't increase cash balance since premium isn't being paid. 2. Company waives full premium. Guaranteed Purchase (Insurability) Option - Correct Answer-At 3 year intervals up to a max age, you can buy additional insurance guaranteed, regardless of insurability. Accidental Death Benefit Rider (Double Indemnity) - Correct Answer-doubles the face amount of life insurance if death occurs as a result of an accident What is the cost basis of life insurance? - Correct Answer-Premiums paid minus dividends received. Grandfathered Life Insurance Rules - Correct Answer-if the death benefit increases by more than 150k then the contract becomes subject to material change rules and may lose its grandfathered status (become a MEC) Tax deduction of stock donation is limited to what % of AGI? What if you use basis for the donation value? - Correct Answer-30% AGI unless you use basis, then 50% AGI If you donate STCG stock, how is the tax deduction limited? - Correct Answer-Must use basis for the donation value (can do up to 50% AGI) Donating stock with a loss - what donation value does it have? - Correct Answer-FMV [You can't donate a beanie baby you bought for $2k that's now worth a dollar and have "donated $2k"]. But don't donate loss stock, sell it and take the loss, then donate cash instead. Max limit on personal use with a rental (2) - Correct Answer-1. 14 days or 2. 10% of rental use, whichever is bigger How are margin interest expenses deductible? - Correct Answer-Deductible against ordinary income. What investment income is taxed as ordinary income? (5) - Correct Answer-- Interest income - STCG - Ordinary dividends - LTCG if you opt out of reduced rates - dividends if you opt out of reduced rates What are the tax consequences if divorced in 2018 or before? - Correct Answer-Alimony before 2018 was deductible/taxable. After 2018, it's not. Is child support taxable (by payee) and deductible (by payor)? - Correct Answer-No Is alimony taxable (by payee) and deductible (by payor)? - Correct Answer-Only for divorces before 2018, after 2018 they are nondeductible and nontaxable. What happens to the basis of transferred property as alimony? - Correct Answer-It retains the original basis. How to calculate self employment tax - Correct Answer-Net earnings x .9235 x .153 (subtract out half of the self employment tax first. Low income housing tax credit - how much? Spread over how many years? - Correct Answer-A tax credit allowed for investors as an incentive for the development and Which is stricter, material participation or active participation? - Correct Answer-Material participation has stricter rules. AMT Calculation - what are the steps? (3) - Correct Answer-1. Start with regular AGI post deductions 2. Add back non-AMT deductible items 3. Add back preference items What are non-AMT deductible items you add back in? (3) - Correct Answer-- SALT (state and local tax) - ISOs - Property tax What are the AMT preference items you add back in last? (3) - Correct Answer-- Private munis - %age of depletion (not cost depletion!) of oil/gas interests, intangible drilling rights - Depreciation (ACRS/MACRS, not straight line depreciation) How do you avoid AMT? (3) - Correct Answer-1. Make more money so regular tax >AMT. By: - increasing income - exercising NSO 2. Decrease income to get below threshhold 3. Reduce preference and addback items - reducing itemized deductions - buying public, not private munis 1031 Exchange - Correct Answer-Under Internal Revenue Code section 1031, a tax- deferred exchange of "like kind" properties. How long do you have to select and close on a 1031 property? - Correct Answer-- 45 days from selling to select a specific property - 180 days from selling to closing What kind of property can be exchanged in a 1031? Can residential real estate be exchanged? - Correct Answer-Real estate only, not personal property. Can only exchange for residential property if it will be used as a rental. What are the realized and recognized gain in a 1031? - Correct Answer-Realized gain: the inherent economic gain of the swap Recognized gain: what gets taxed. It's the lesser of the realized gain or the boot received (if no boot, then pay zero taxes). Substitute basis - Correct Answer-The basis in a property acquired in a qualified Section 1031 Exchange is reduced by deferred gain and becomes the substitute basis. For example, if the market value of property given up is $200,000, and the basis in that property was $75,000, then realized gain equals $125,000. Assume the market value of property acquired through a tax-deferred exchange is $350,000, then subtracting the unrecognized gain of $125,000 equals the substitute basis of $225,000. The effect of this adjustment to basis is to build in the deferred $125,000 gain into the property acquired. If the new property were sold the next day for $350,000, a $125,000 gain would be reported. Child tax credit age and amount, phaseout? - Correct Answer-<17 years old, $2k per child, $200k/$400k phaseout What is the credit for someone older than 17 who is still a dependent? - Correct Answer-$500 dependent credit if they make less than $4300 Child Tax Credit - how much, how much is refundable, phaseout? - Correct Answer-- $2k tax credit per child <17 years old (bio kid, stepchild, foster) - $1400 of that is refundable - MAGI phaseout $200k/$400k Childcare Credit - how much, limit? - Correct Answer-- 20% of expenses - Limit $3k expenses for one dependent, $6k for 2+ So max credit per family would be $600 or $1200 FICA - Correct Answer-Federal Insurance Contributions Act - the Social Security/Medicare Act How much is the FICA tax? - Correct Answer-Social Security (6.2% up to $137,700) + Medicare (1.45% unlimited) = 7.65% [Double that for self-employed people] Can you create a loss with a home office deduction? - Correct Answer-No. Earned income deduction for a child is the greater of: - Correct Answer-$1,100 unearned income OR $350 + earned income (the deduction caps at the normal amount of $12,400) Casualty Losses Calculation (4 steps) - Correct Answer-1. Use lesser of basis or FMV 2. Subtract insurance coverage 3. Subtract $100 (floor) 4. Subtract 10% of AGI When can you take casualty losses? - Correct Answer-Must be a presidentially declared disaster. Section 1244 Stock - Correct Answer-The first $1 million of stock issued by a corporation for cash or property. $50k/$100k of the loss on the disposition of Section 1244 stock is ordinary to individual investors. The gain is still capital gain. What are the differences in taking losses between S Corp and LLC/LLP? - Correct Answer-S Corp: Limited losses up to basis (only direct loans by shareholder, cash contributed) LLC/LLP: Losses up to basis (which includes ALL loans as well as cash contributed). Can also deduct unlimited loan interest. Misc Expenses that are not deductible past 2018? (5) - Correct Answer-- Entertainment expenses (except company picnics, 50% of employee travel meals) - Investment management fee - Tax prep fee - Safety deposit box - Job educational costs 179 deduction - Correct Answer-Election to expense up to $1.04 M of qualifying property in the year of acquisition. 179 deduction: what kind of property? - Correct Answer-1245 property used in a business, or *improvements* to 1250 property 179 deduction: can you create a loss or carry over the deduction? - Correct Answer- Can't create a loss, limited to income. Can depreciate the rest of the deduction using MACRS. Regular C Corp taxation - what is the tax rate? - Correct Answer-21% flat rate since TCJA For C Corps, how are distributed earnings taxed? - Correct Answer-Twice - once as corporate earnings and again at the owner level. For C Corps, how are dividends taxed? - Correct Answer-Dividend deductions that are excluded: - 50% of dividends excluded if the receiving company owns <= 20% of the distributing company - 65% of dividends if 20% to 80% - 100% of dividends if >=80% Installment Sale - how is the gain taxed? What are exceptions? (4) - Correct Answer- Gain on sale is recognized as spread out over the life of the note (gain is prorated). Exceptions: - If all payments are received in one year. - If it is a loss, not a gain to cover the taxes). The benefits won't be taxable because you already paid the taxes on the premiums. In a salary continuation disability plan, will the benefits be taxable? - Correct Answer- Yes, because you don't pay taxes on the premiums up front - the company simply buys a policy for you. SEP IRA company plan - can employees contribute? - Correct Answer-Only if there's a 401k program or a SARSEP program. Otherwise, SEP plans are funded by company money. Can a company skip contributions to a profit sharing plan? Can they skip contributions to a SEP IRA? - Correct Answer-Not really - contributions must be "recurring and substantial". For a SEP, yes - there is no requirement for the company to make contributions. What is the difference in employee eligibility between a profit sharing plan and a SEP IRA? Do they have to be full time? - Correct Answer-For a profit sharing plan, employees must work 1,000 hours/year (full time). For a SEP, they only have to make $600 for 3 of the last 5 years. (part timers will be eligible) What is the difference in contribution limits between a profit sharing plan and a SEP IRA? - Correct Answer-For a profit sharing plan, company can put 100% of compensation up to $57k. If a business doesn't make a ton, this may be a better option to max the account. For a SEP, you can only put in 25% of compensation up to $57k. If an employer wants to put in a retirement plan for the previous year, what may be the best bet? - Correct Answer-A SEP IRA since you can create it/fund before the tax filing deadline. What retirement plans does the 55 year old age rule apply to? (can take money out without penalty if you leave after age 55) - Correct Answer-All qualified plans, but not IRAs. Can passive losses offset ordinary income gains or capital gains? - Correct Answer- Nope, passive losses can only offset only passive gains. What happens if a grantor survives the annuity period of their GRAT? What if they die before the annuity term is up? - Correct Answer-If the grantor survives the annuity period the assets will be completely removed from his or her estate and no additional taxes will be due. If the grantor dies during the annuity period the trust assets will be included in the grantor's gross estate, but the adjusted taxable gift will be removed from the estate tax calculation -- so there is little downside risk. Does a GRAT get the $15k exclusion? - Correct Answer-No, because it is a gift of future interest. Why does the private annuity intra-family technique not work anymore? - Correct Answer-The private annuity creates phantom income because all the gain is taxed in the first year. Which estate planning techniques are "freezing" techniques? (4) - Correct Answer- GRAT or QPRT - assets are frozen when transferred into the trust as a taxable gift. Annuity sale or SCIN - the assets are transferred in exchange for a stream of income. What is the conduit theory for trusts? - Correct Answer-Income distributed from the trust is just passed on to the beneficiary, while retaining the same character as was in the trust. When do gifts to grandchildren avoid having to pay GSTT? - Correct Answer-When the parents are dead - the grandchildren "step up" a generation for GSTT purposes. Does a trustee receive powers and/or instructions from the probate court? - Correct Answer-No, from the trust instrument itself. Mrs. Jackson died and left $150,000 to her grandson (a skip person). She had already used $11,580,000 of her GST tax exemption. How much GST tax will be due at her death in 2020 if her maximum estate tax rate is 40%? HINT: The estate tax offsets the GST tax like in the practice questions. - Correct Answer-36,000: $150,000 x 60% = $90k left after gift tax is paid, $90k x 40% = $36k When is income from a trust taxable to the grantor? - Correct Answer-When the trust is tainted. When can heirs not use the 6-month alternate valuation for assets? What value is used for basis? - Correct Answer-When there is no estate tax due. Assets step up in basis to FMV on date of death. When can you use special use valuation? - Correct Answer-Only for real property (including real estate). Not just a business. A widow inherits stock with a date of death FMV of $70,000. She and her husband held the stock jointly before his death (basis $20,000). She sells it nine months later for $80,000. What is the amount of capital gain and is it STCG or LTCG? - Correct Answer- $35,000 LTCG. His half of basis is stepped up. When you inherit assets, they will always be considered long term, no matter how long you hold them for. If your spouse dies, can you disclaim their half of assets held in tenancy by the entirety? - Correct Answer-No, because tenancy by the entirety must be held by a married couple. You can't disclaim it to someone other than your spouse. Bob and Mary are living together (not married). They have a common-law marriage. Bob dies intestate. Who will get Bob's assets? - Correct Answer-The court will decide. What kind of property does NOT get a step up in basis on death? Examples? (2) - Correct Answer-Ordinary income property (CDs, Annuity) What step up in basis does real property get under tenancy by the entirety? - Correct Answer-It gets a half step up in basis, since it's LTCG property. What kind of assets stay out of probate? - Correct Answer-Tenancy by the entirety Revocable trusts Direct beneficiaries (IRAs, 401ks) General powers General Power of Appointment - Correct Answer-A donee can appoint to herself, her creditors, or her estate as if donee owns the property himself. This precludes a special power like HEMS for a trust. What does a Marital Trust consist of? - Correct Answer-Assets (income & corpus) intended for the sole use, enjoyment, or benefit of the surviving spouse. What kind of investments should go in an UTMA for a 10 year old? - Correct Answer- Growth stocks - not bonds (since they produce income) or other income-producing assets Do STRIPS produce taxable income? - Correct Answer-Yes (unless held in a tax- deferred account) Even though there is no coupon payment, taxes are due on the interest earned each year. ("phantom interest") What is the best intra-family technique for someone to share the income from their business without losing control? - Correct Answer-FLP How much can you gift tax-free to the President of the United States? - Correct Answer- As much as you want. What kind of educational trust should you set up for your kid if you think they might not go to college? - Correct Answer-Crummey Trust Support Trust - Correct Answer-A trust that instructs the trustee to spend only as much income and principal (the assets held in the trust) as needed for the beneficiary's support. HO-6 unit owners HO-7 modified Is an art painting sold for a gain ordinary income or capital gain? What tax rate? - Correct Answer-Capital gain, but taxed at 28% like all collectibles How is real estate depreciation taxed? - Correct Answer-When you sell a real estate investment, you get depreciation recapture at 25%. What kinds of property can be transferred into an FLP? (5) - Correct Answer-- real estate - bonds - securities (<=80% of the FLP property as a whole) - life insurance on the GP - stock of the closely held company (but not voting shares) What kind of property can NOT be transferred into an FLP? (4) - Correct Answer-- voting shares of stock of a closely held company - S corp shares - family residence - qualified retirement assets Pros and cons of using an FLP for intra family transfer of a business - Correct Answer- Pros: GP keeps control, able to discount property inside FLP, protection from creditors, keeps company 99% out of the estate, Cons: GP responsible for all debts, cost of setting up and running an FLP American Opportunity Credit - how much, how much refundable, what qualifies - Correct Answer-Max of $2,500 per student - 100% of first $1k, 25% of next $1k. 40% or $1k max is refundable credit. First 4 years of a secondary education tuition, fees, course equipment. Cannot be used for room + board Do you need to file form 709 for a split gift to megafund a 529? - Correct Answer-Yes, both spouses must file a 709 form. Is an UTMA exempt from FAFSA? Retirement assets? - Correct Answer-No UTMAs are not exempt, Yes, all retirement assets are exempt. What is reported as gift exclusions in the first year if you megafund a 529 for $60,000? - Correct Answer-It is ratable over the 5 years, so you would be reported as having gifted $12k each year. When does a CFP act as a fiduciary? - Correct Answer-Whenever providing financial advice (not just financial planning) How do you solve for the total cost of a car purchase or lease? - Correct Answer-Find present value using payments and THEN add the down payment in. In what step in the financial planning process do you give the Form ADV to a client? - Correct Answer-Before or at the time you enter into an advising agreement. When establishing the client relationship/scope of relationship. What can the Fed do to directly increase the money supply? - Correct Answer-Buy government securities. Lowering the discount rate or reserve requirements does not DIRECTLY increase the money supply. If a mutual life insurance company has increased investment profits, what could increase or decrease? (Cash value, dividends, premiums, death benefit?) - Correct Answer-Dividends of a whole life policy could increase, since a mutual life insurance company is owned by shareholders. The premiums could also be reduced. What is a benefit of group insurance over individual insurance policies for a company? Are part time employees eligible? - Correct Answer-Lower premiums. No, part timers are usually ineligible. At what age should you apply for LTC insurance? - Correct Answer-Over age 50 and before 65 when the premiums increase. If you hit age 65 and are still working, what are your options for enrolling in Medicare? (3) - Correct Answer-1. Postpone Medicare enrollment as long as you are actively working for a company that gives you health insurance. 2. Decline employer coverage and enroll in Medicare. 3. Enroll in Medicare as a secondary coverage after your employer's coverage. Split Dollar Plan - how does it work, for whom? - Correct Answer-Funding mechanism whereby employer & employee share cost of premium. Upon death, benefit is shared between employer & beneficiary. Common with key employees but not rank and file. If a skilled nursing facility costs $500/day and the Medicare co-pay is $100, how much will you have to pay for a 130 day stay? How much will Medicare pay? - Correct Answer-The first 20 days are completely covered by Medicare ($10k), the next 80 you will have to pay the co-pay ($100x80=$8k) and Medicare will pay the rest ($400x80 = $32k). The 30 days after you will have to pay full price ($500x30 = $15k). In total, you will pay $23k, Medicare will pay $42k. Can a creditor come after payments from a medical settlement? - Correct Answer-Yes, since the person has unfettered access to the funds. If you get awarded damages in a medical settlement, is that included in your gross estate? - Correct Answer-Yes If you get awarded damages in a medical settlement, are the payments taxable in lump sum? As monthly payments? - Correct Answer-Never taxable. Portfolio Immunization - Correct Answer-Protects bond portfolio from interest rate risk and reinvestment rate risk. Balances price risk and reinvestment risk. The duration of a portfolio should match the investor's time horizon Rebalance every 6 months to one year, matching time horizon and duration When do you need to use the mid-quarter convention for MACRS? - Correct Answer-If more than 40% of the property is placed in service during the last quarter of the tax year. NOT for residential or real property, or property bought and sold within the same year. When do you use the half year convention for MACRS? What is the half year convention? - Correct Answer-All property unless mid-quarter applies. (Not residential or real property). It treats all property bought or sold in a year as being bought or sold on the midpoint of that year. Is half-year or mid-quarter convention used for MACRS depreciation of residential rental property? - Correct Answer-Trick question, neither! - residential real estate or real property uses the mid-month convention. If you use Section 179 to write off the cost of equipment, do you pay depreciation recapture when you sell it? - Correct Answer-Yes, the basis reduction is recaptured as depreciation recapture (ordinary income, usually 25% rate). If you borrow money to buy investments, can you deduct the interest on your taxes? - Correct Answer-If you itemize, you can deduct investment interest expenses up to the amount of investment income. What is considered investment income? (6) - Correct Answer-- Royalties - Kid's investment income if included on your tax return - Ordinary dividends - Qualified dividends if elected to be taxed as ordinary income - STCG - LTCG if elected to be taxed as ordinary income What is the main disadvantage to gifting S-corp to children (over doing an FLP)? - Correct Answer-There is only one class of stock, so it would be hard to keep control if you wanted to gift most of a company. What is the limit for charitable donation deductions of cash? Noncash contributions? Unrelated use contributions? Capital gain property? - Correct Answer-60% of AGI for cash 50% for non-cash contributions - can use FMV for related use, basis for unrelated use. 30% for capital gain property using FMV, or 50% if you use basis option that forgives multiple types of loans. PSLF takes 10 years. Peace Corps will only discharge a Perkins loan. Tenancy in common - Correct Answer-Fractional ownership. You get all income from your share. You can transfer your share to anyone. No survivorship rights - your share goes through probate. Do you have to file a 709 if you and your spouse gift $30k as a split gift? - Correct Answer-If it's from a joint/community property account, no 709 needed for $30k or less. If it's from a single account between $15k and $30k, they file the 709 and the other spouse signs it. If it's more than $30k, then they both will have to file 709s to show who is using up the taxable gift. If you get a gift of stock and sell it, will it always be LTCG? - Correct Answer-Only if you hold it for more than a year. Inherited stock is always LTCG, not gifted stock. If a simple trust gets $10k in capital gains and $5k in dividends, how much must it pay out? - Correct Answer-$5k - all of the income. The capital gain is not income and gets added to the corpus. Totten Trust - Correct Answer-A revocable trust in the form of a bank account with a beneficiary clause - Payable upon death Pay-on-Death Bank Account (POD) - Correct Answer-A bank account utilizing a beneficiary designation to keep assets out of court. (TOD Transfer on Death) 1244 stock gain or loss - how is it taxed? - Correct Answer-1244 is small business stock. If it's a gain, just as regular capital gain. If it's a loss, the first $50/100k is counted as ordinary income loss. zero-cost collar - Correct Answer-A zero cost collar is a form of options collar strategy to protect a trader's losses by purchasing call and put options that cancel each other out. Good for a concentrated position that is highly appreciated in order to diversify. Why would you use a 2503b vs a 2503c vs a Crummey trust? Which allow the $15k exclusion? Which gets the money out of the donor's estate? - Correct Answer-- A 2503b is used if you want to control the assets past age 21, but it doesn't allow the $15k exclusion (gift of future interest). - A 2503c is more flexible (allows beneficiary to access principal) and allows the $15k exclusion (gift of future interest). - The Crummey trust is like the 2503b in that it can be extended past age 21, and like the 2503c in that it allows the $15k exclusion (is a gift of present interest). However, unlike the 2503b and 2503c, a Crummey trust can accumulate income without having to distribute it. And it can have multiple beneficiaries. The main disadvantage is that it counts as a kid asset for financial aid, as well as the costs and complications of setup and notification requirements. All three will get the $$ out of the donor's estate, as long as the donor/donor's spouse is not the trustee. You can convert a 2503c to a Crummey at age 21 if desired. Why would you set up a Crummey trust intentionally as a grantor trust? And how? - Correct Answer-Make the donor/donor's spouse the trustee to taint the trust. This will make the donor responsible for paying the taxes of the trust (which essentially is an extra gift to the beneficiary). Without this, the trust income is taxed to the kid (possible kiddie tax). Federal Funds Rate vs. Prime Rate vs. Discount Rate - Correct Answer-Federal Funds Rate - rate that banks charge each other for overnight loans (set by auction) Prime Rate - rate that banks charge their corporate clients (related to FFR, set by banks) Discount Rate - rate that the Fed charges banks for overnight loans (set by Fed as part of monetary policy) Would you ever intentionally taint a trust for estate tax purposes? - Correct Answer-No, you might taint it for income tax purposes (so that the income is taxed at a lower personal rate than a trust rate). But tainting a trust will always bring it back INTO the estate. Can you manage the assets in a 529? - Correct Answer-No, if you want active management an UTMA/UGMA would be better. Can you megafund a 529A with $75k? - Correct Answer-No, an ABLE plan can only be funded $15k/year Does a 529 ABLE account disqualify you from Medicaid or other services? - Correct Answer-No, it's excluded. Can you set a CRAT or CRUT to last for 30 years and then terminate? - Correct Answer-No, you can define the number of years up to 20. After that, it has to be for life. How much do CRATs and CRUTs pay out? - Correct Answer-5%. A CRAT is 5% fixed payment of the initial value. A CRUT 5% is revalued annually depending on corpus. When would you use a Pooled Income Fund or a CGA rather than a CRAT/CRUT? What is the difference between them? Do they still pay out 5% like a CRAT/CRUT? - Correct Answer-You would use these if you have one specific charity in mind. For Pooled Income, the payments are variable (like a CRUT). For a CGA, payments are fixed for life (like a CRAT). For both, there is no 5% minimum (no guaranteed payout). Wealth Replacement Trust (WRT) - Correct Answer-An irrevocable trust that owns and holds life insurance on its grantor's life. A WRT is also known as an Irrevocable Life Insurance Trust (ILIT) How could you use a CRAT and an ILIT together to donate more than the $1M you have? - Correct Answer-You donate $1M to a CRAT and get a tax deduction and income stream. You then use that money to fund an ILIT for another $1M. When do you fund a CLAT/CLUT? How big of an estate makes sense? - Correct Answer-At death, since they are grantor trusts, to save on estate taxes. Otherwise, you would have to pay income tax on the money distributed each year. This is for huge estates to save millions on estate tax. When would you set up a private foundation? How much do you have to distribute to charity? - Correct Answer-For scholarships, for travel, study, prizes, etc. Very broad - doesn't have to be charity. You can run your own foundation and pay yourself to do it. You must distribute at least 5% to charity annually to avoid the penalty. If you have depreciated assets, should you do an installment sale or a SCIN? Why? - Correct Answer-Not an installment sale - you will have to recapture all of the depreciation in the first year of sale. Will the assets in a GRAT/GRUT come back into the donor's estate at death? What kind of assets would you want to put into a GRAT/GRUT? - Correct Answer-Only if they die before the term of the trust is up. You want to put in high growth assets since the taxable gift is only [amount of assets - annuity PV] and the remainder and growth will be out of your estate. If I want to give my CFP business to my daughter, should I do an S corp stock transfer? An FLP? - Correct Answer-No S corp - this is a service business, so the IRS will deem it income transfer and I'll still get all the income assigned to me. I could do an FLP. If I have a farm business and I want to gift assets to my kids to reduce my estate, how could I do that? - Correct Answer-FLP would be good - you can discount the valuation allowing for more estate reduction. Also you can retain control. Could also do a gift leaseback, where I gift fully depreciated tractors to them and lease them back to push income to them (this would only work if kids are >=24 years old). When should you ever fire a client? - Correct Answer-When they do stuff that's illegal or if they lie to you. What is the IRD deduction? If there's no estate tax, does IRD still apply? - Correct Answer-You get an income tax deduction for the estate taxes already paid. Say you inherit a $2M IRA, you pay ordinary income on it. If that IRA already got taxed for $500k of estate taxes, you only have to pay income taxes on $1.5M instead. Difference between things that are liquid and things that are marketable? - Correct Answer-Both can be sold quickly, liquid assets also have stable price. How is the correlation coefficient of two stocks related to standard deviation? - Correct Answer-If the correlation coefficient (rho) = 1, the std dev (sigma) is the weighted average of each std dev/"risk". If the correlation coefficient =-1, the std. dev is ZERO. A stock returns 8%, 12%, 0%. What is the mean and std dev? - Correct Answer-Use the sum button to input values. 6.67% mean, 6.61 rho What is the coefficient of variation? - Correct Answer-the ratio of the standard deviation to the mean expressed as a percentage. Risk per unit of return. Standard deviation vs Beta - Correct Answer-Std Dev measures variability of returns in a nondiversified portfolio (total risk) Beta measures volatility of a diversified portfolio (systematic risk) What does a beta of 1 mean? <1? >1? Negative? - Correct Answer-Market beta is always 1. A single stock's beta = 1 means the stock moves exactly the same as the market. <1 means it fluctuates less. >1 means it fluctuates more. There is no such thing as negative beta. How do you calculate risk adjusted return? - Correct Answer-Return divided by beta. What is CML and SML? - Correct Answer-Two components of CAPM: CML uses std dev (total risk) and SML uses beta (systematic risk) Capital Market Line - specifies the relationship between risk and *portfolio* return Security Market Line - values any asset, whether individual stocks or portfolios as a whole. market risk premium - Correct Answer-the slope of the SML - the difference between the expected return on a market portfolio and the risk-free rate Stock risk premium - Correct Answer-(Market Return-Risk free Return)*beta When do you use Jensen (alpha), Treynor, or Sharpe? - Correct Answer-Jensen (alpha)/Treynor is measured in terms of beta (systematic risk). Look for a diversified portfolio or a high correlation coefficient R^2 = 60+. We want a high alpha, or a high Treynor. Sharpe is measured in terms of std dev (variability, total risk). Look for a non-diversified portfolio or low R^2 <60. We want a high Sharpe number. Maintenance Margin Requirement - if the MMR is 30% and the stock value is $10k, what does that mean? - Correct Answer-The margin requirement on any day other than the first day of a transaction. That means you have to have $3k of your own cash deposited in the account. You have $20,000 worth of securities bought using 50% initial margin. When the margin requirement is 30% and the value of the securities drops to $12,000, what happens? How much would you have to deposit or sell? - Correct Answer-Margin call! Your maintenance margin requirement is 30% of $12k = $3600. You borrowed $10k and now the value of your stock is $12k - this means you only have $2k of equity. You must deposit another $1600 into the account or sell off some of the stock so that your cash equity is >30% of the value. OR: You can sell stocks from your margin, increasing the percentage of equity. X = the amount of stocks you should sell to cover the call. 30% of [($10,000 - X) + $2,000] = $2,000 X = $5,333.3 How do you calculate deductible casualty losses? - Correct Answer-1. Start with the *lesser* of basis or FMV. 2. Subtract insurance coverage 3. Subtract $100 4. Subtract 10% AGI 5. YOU MUST ITEMIZE TO USE THIS DEDUCTION Dependent Care Credit - Correct Answer-a credit based on the taxpayer's cost of caring for dependents either under age 13 or physically or mentally incapable of caring for themselves. 20% of expenses up to $3000 for one kid or $6000 for more. The max credit is therefore $1200 S Corp - Correct Answer-A legal entity that offers limited liability with single taxation. Must be <=100 shareholders, only one kind of stock but it can be voting or nonvoting. Nonresident aliens can't hold stock. Can only take losses up to basis (bank loans don't count as part of basis, only direct loans - unlike a partnership) What's the major disadvantages of an S Corp? A partnership? A sole prop? A C corp? An LLC/LLP? - Correct Answer-S corp limits losses to basis, only has one kind of stock Partnership - unlimited personal liability, no continuity Sole Prop - unlimited personal liability, no continuity C Corp - double taxation, extra tax return LLC/LLP - one general partner, limited partners cannot actively participate Who gets the Section 199A QBI deduction? (5) Who is phased out? - Correct Answer-- sole props - Schedule E rental income - LLCs - S corps - Trusts/REITs/MLPs (publicly traded LPs) Service trade or businesses are phased out completely - stuff like doctors, attorneys, artists, financial pros, skilled trades. Phaseout is $326k-$426k. For non-service based business, phaseout is the same, but you are limited to the lesser of: 20% of QBI or 50% of W2 wages CFP exam - what clues help you eliminate business entities as answers? sole prop, LLC/LLP, partnership, limited partnership, S corp, C corp - Correct Answer-Sole prop - profits or continuity LLC/LLP - big profits Partnership - if business is risky Limited partnership - bad answer, active S Corp - profits, risk: usually LLC/LLP is a better answer C corp - losses How do you calculate adjusted basis? What is excluded? (3) - Correct Answer- Investment plus fees and improvements, minus deductions. Excluded: repairs, taxes, normal expenses. Section 197 - Correct Answer-intangible assets like goodwill, franchises. Can be depreciated. How long do you have to live in a house to qualify for the $250/$500k exclusion? What are the exceptions? (3) - Correct Answer-2 of the last 5 years. Exceptions: - moving for a job >50 miles away - health reasons - unforeseen circumstances like marriage If a couple lives in a house for 6 months before selling it to move for a new job >50 miles away, how much exclusion do they get? - Correct Answer-25% of the normal exclusion, since they lived there 6 months out of the required 2 years. $125k exclusion. What tax schedule does partnership income/losses get recorded on? Can you use $3k of the loss to offset income? - Correct Answer-Schedule E. No, can't take $3k loss unless it's from Schedule D. What could be a passive activity? 1. 40% ownership of an S corp 2. 25% ownership of limited partnership 3. 5% ownership in a RELP 4. 100% ownership of a rental - Correct Answer-All could be passive. Any active or material participation would make them not passive. Deduction for ordinary income property donations - what counts? (5) When do you use FMV or basis? - Correct Answer-Always use basis. Includes: - inventory