Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

Course 4: Income Tax Planning > Module 2: Investment Vehicle Taxation, NII, Additional Medicare Tax and Education Planning > Flashcards

Module 2: Investment Vehicle Taxation, NII, Additional Medicare Tax and Education Planning Flashcards

1
Q

Two tests for Life Insurance (only one must be met)

A

1 - The Cash value accumulation test

2 - The Cash Guideline Premium and Corridor Test

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

When can a life insurance policies cash value be taxable?

A

Surrenders that exceed the insured’s cost basis, otherwise they’re considered a return of principal.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

Taxation of Cash Value Surrender Above Cost Basis

A

Ordinary Income

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

Distribution of Life Insurance Taxation

A

FIFO - gains paid out last

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

Life Insurance in Qualified Plans

A

The purchase of life insurance must be incidental to providing a retirement benefit. The premiums paid are taxable to the employee.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

Transfer for Value for Life Insurance Contract

A

This rule applies when a life insurance contract is transferred for valuable consideration. A calculation is necessary to determine the amount of proceeds excludible from income.
- Typically it’s the DB minus amount paid for DB plus any premiums or other amounts paid by the receiver of the insurance contract

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

Exceptions to the Transfer for Value Rule (5)

A
  • Sale of the policy is to the insured, insured spouse, or insured’s ex-spouse if incidental to a divorce
  • Sale to a business partner of the insured
  • Sale to a partnership in which the insured is a partner
  • Sale to a corporation in which the insured is a shareholder or officer
  • Sale to anyone whose basis is determined by reference to the original transferor’s basis (gift or swap
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

1035 Exchange for Life Insurance

A

No gain or loss shall be recognized on the exchange of one life insurance contract for another life insurance contract, annuity, or endowment contract.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

Single Premium Life INsurance

A

Pre- june 21 1988 - would be able to take tax free loans off the policy, but if the policy lapsed or was terminated before death then taxes would be owed on the total amount that was withdrawn. If held till death, the rest of the policy is passed along tax free

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

Modified Endowment Contract (MEC)

A

A life insurance contract that meets both the state law definition and IRC definition of a life insurance contract, AND fails the seven pay test.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

Seven-Pay Test

A

Assumes a step process over the first seven years of the cash value life insurance contract.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

MEC Taxation

A

If a policyholder wishes to make a withdrawal or loan from an MEC before 59.5 then it will be treated just like a withdrawal from an annuity contract with LIFO treatment at ordinary income

  • There may also be a 10% premature distribution penalty on the taxable portion of the distribution
  • Taking dividends in cash or electing to use whole life dividends to offset an outstanding loan is a taxable event.
  • Electing to use dividends to buy paid-up additions could defer taxation on the MEC dividends, and could even eliminate the tax liability upon the death of the insured.
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

MEC Testing for Material Change

A

Policies can be tested for MEC even after its first seven years, if there is a material change to the benefits provided by the policy. Once a change occurs, a new seven-year testing period is started.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

Life Insurance Material Changes (6)

A
  • The exchange of one policy for another
  • An exchange of insured
  • The increase or addition of certain riders
  • The conversion of a term policy for a whole life contract
  • An increase in future benefits (unless the increase is due to the payment of premiums to fund the lowest death benefit or due to the crediting of interest to those premiums)
  • An increase of more than 150k over the death benefit payable as of Oct. 20 1988
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

Life Insurance non-material changes

A
  • a decrease in future benefits
  • an increase in death benefits because of dividends
  • a COLA to the death benefit
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

Exclusion Ratio for Annuities Definition

A

Annuity Payments or periodic payments from a commercial annuity are partially a return of capital and partially interest income

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

Exclusion Ratio Equation (Fixed Annuities)

A

Investment in Contract / Total Expected Return * annual return each year

Example:

  1. Find expected return: dollars per month * 12 * life expectancy years left
  2. Plug into the equation
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

The amount included in taxation for annuities, how is it taxed?

A

Ordinary Income

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

Variable Annuity Exclusion Ratio Definition

A

The exclusion amount is determined by dividing the investment in the contract by the number of expected payments.

Example:

  1. Find number of estimated payments: 12 months * expected years of life
  2. Take initial investment / anticipated payments
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
20
Q

Partial Annuitization (non-qualified annuities only)

A

If any portion of an annuity contract is received for 10+ years or over multiple lives, that portion of the annuity will be treated as a separate contract for annuity taxation purposes. Holders can elect to receive a portion of an annuity contract and leave the remained of the contract to accumulate income on a tax-deferred basis.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
21
Q

Tax Treatment of Nonperiodic Distributions

A
  • Before Annuity Date - pre 1982 FIFO, post 1982 LIFO
  • After Annuity Start Date - Generally fully taxable to the extent that the withdrawal exceeds the investment cost remaining in the contract.
  • May also have a premature distribution penalty of 10%
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
22
Q

Computing Taxpayer Holding Period for Securities

A

The day of the acquisition is not counted by the day of disposition is. The holding period computed is based on calendar months, not days.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
23
Q

Taxation of Property Acquired by Gift

A

Tacked - Where the recipient of a gift assumes the donor’s adjusted basis, so their holding period begins on the date that the donor acquired the property.
Non-tacked - if the FMV on the date of the gift is used as the donee’s basis, the holding period starts on the date of the gift.
** It seems that it’s dependent on the FMV at the time of the gift, if it’s less than the basis, we use the nontacked method. It it’s more at the time of the gift, we use the ‘tacked’ method.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
24
Q

Taxation of Property Acquired by a Decedent

A
  • Holding period - deemed to be long-term and the cost basis resets to the DOD.
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
25
Q

Inherited IRA Strategy for Non-Spouse

A

If they have other earned income in the budget, they could contribute money to an IRA in their own name to offset the income from the 10 year period

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
26
Q

Other Inherited IRA Rules

A

If the beneficiary is not 10 years younger than the deceased, they can still do the lifetime RMD’s.
- A minor child who has inherited an IRA is not subject to the 10 year rule until they turn 18.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
27
Q

Capital Asset Excluded Classes (7)

A
  • Inventory or property held primarily for sale to customers in the ordinary course of business
  • Property subject to depreciation and real property used in a trade or business
  • A copyright; literary or artistic composition, a letter, memo, or similar property held by the author or creator, or by the donee of the author or creator
  • A patent, invention, model or design; IP
  • Accounts or notes receivable, acquired in the ordinary course of business, for services rendered or from the sale of inventory
  • United States Goverrnment publications
  • Supplies regularly used or consumed by the taxpayer in the ordinary course of a trade or business
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
28
Q

When is a Capital Loss Deductible

A
  • Generally, a capital loss is only deductible on the sale of an asset held for investment purposes. So the sale of an automobile can result in a gain, but if it was for personal use it cannot result in a loss.
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
29
Q

Capital Gains Calculation

A
  • Wage income - deduction + LTCG = income for capital gains rate. Marginal tax rates apply, not all of the capital gain is taxed at the marginal rate, it’s taxed in it’s specific rate.
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
30
Q

What is considered 1250 Property (Collectibles)?

A
  • Collectibles (if held more than 1 year)

- Gold and Silver ETF’s

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
31
Q

Long-term capital gains rates for 1250 Property

A
  • Maximum of 28% rather than the lower LTCG rates applied to securities
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
32
Q

Mutual Fund Basis

A
  • Specific Identification
  • Average Cost
  • FIFO
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
33
Q

Specific Identification Method

A
  • Requires the seller of the shares to identify shares of the fund that are sold.
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
34
Q

Average Cost Method

A
  • The investor pools all purchased shares into one account and then divides the total cost of all their shares by the number of shares held. This is only available for mutual fund shares
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
35
Q

FIFO Method

A

The default method that is used by the IRS, in the event that the investor does not prove specific identification or chooses the average cost method.

36
Q

Telephone Transfer

A
  • Transfers between funds is still ta taxable event, even if the transfer is only from one growth or one income fund to another.
37
Q

Mutual Fund Distributions

A
  • Dividends are passed along and the distribution is taxed and potentially subject to preferential rates
  • The distribution of LT Capital Gains is treated as LT Cap Gains to the shareholder
  • The distribution of ST Capital gains from the fund is treated as ordinary income to the shareholder
    • When buying a mutual fund, the investor generally should NOT buy into the fund immediately prior to a distribution because they are in effect buying a tax liability.
38
Q

Wash Sale Rule

A
  • disallows a loss on the sale or disposition of stock or other securities if the taxpayer purchases substantially identical stock or securities within either 30 days before or 30 days after the date of the sale of disposition.
39
Q

Change in Basis of New Security with Wash Sale Rule

A
  • the basis of the security is increased by the amount of loss that was disallowed on the wash sale.
40
Q

Short Sale Taxability

A

Generally considered a short term capital gain or loss (unless the investor closes the short sale with securities held for the long-term holding period)

41
Q

IRC Section 267 - Related Party Sales of Loss Property

A

No loss deduction is allowed from a sale or exchange between certain related taxpayers:

  • Member of the seller’s family (in-laws not included)
  • Controlled corporations
  • Certain Business Organizations, if one person owns more than 50% of each
  • An estate and beneficiary
  • Certain Trustees, grantors, and beneficiaries
42
Q

Phantom Income

A
  • a taxpayer must pay taxes on a discount of an OID bond each year, and the annual accrual increases the cost basis of the bond each year
43
Q

Market Discount Bond Taxability

A
  • The holder of a bond purchased int he market at a discount may elect to treat the difference between the purchase price and the face value being taxed as current income annually over the remaining term of the bond, or taken in total as ordinary income upon the maturity of the bond.
44
Q

Market Premium Bond Taxability

A

The interest return on the bond is reduced because the IRC allows the taxpayer to amortize the bond premiium on taxable bonds as a deduction over the life of the bond. This reduced the basis of the bond. Premium amortization is not deductible in a “tax free” bond situation

45
Q

T-Bills Taxability

A

The difference between the holder’s tax basis and the FV is taxed as ordinary income

46
Q

Treasury Notes and Bonds Taxability

A
  • same as corporate bonds
47
Q

TIPS Taxability

A
  • The interest payments are taxed when received
  • The inflation adjustments to the principal are taxable in the year in which such adjustments occur
  • The interest is exempt from state and local income tax
48
Q

Nondeductible IRA contributions

A
  • Can have deductible losses if the IRAs are liquidated, but deductible IRA contributions will not allow a loss.
49
Q

What is Investment Interest

A

Interest paid or accrued on a debt that was incurred to purchase property held for investment (can be any “property” that produces portfolio-type income: stocks, bonds, annuities, CDs or Savings Accounts

50
Q

What isn’t investment interest

A
  • rental properties

- interest incurred from tax-exempt securities

51
Q

Investment Interest Expense Deduction

A
  • allowed to the extent of the taxpayer’s net investment income. It’s an itemized deduction and is reported on Schedule A.
52
Q

Calculating Investment Income

A
  • Sum of the gross income from property held for investment, includes interest income, STCG, and nonqualified dividends. LTCG and Qualified dividends may be included, but only if the investor elects to forgo the preferential treatment of that income.
53
Q

What is deductible for Investment Interest Income?

A
  • Investment interest expense is deductible up to the amount of Investment Income, and the excess can be carried forward the the following year.
54
Q

Qualified Dividends Tax Treatment

A

Non-deductible to corporation but receive LTCG rates to the recipient of the dividend

55
Q

What does NOT qualify for the Dividend Preferred Rate

A
  • Credit Unions
  • Mutual Insurance Companies
  • real estate investment trusts
  • farmers’ cooperatives
  • tax-exempt entities
  • deductible dividends from employer securities owned by an employee stock ownership plan (ESOP)
  • dividends on stock owned for less than 61 days in the 121 day period surrounding the ex-dividend date
  • “substitute payments” from short sale of stock
56
Q

Return of Capital

A
  • the distribution is not considered a dividend, but if the distribution ends up exceeding the shareholder’s basis, the excess is treated generally as capital gain.
57
Q

Property Dividend

A

Generally, the tax consequences of a property dividend are the same as for a cash dividend. Calculated by the FMV of the property at the time of the distribution plus any cash received, then decreased by any liabilities on the property that the shareholder assumes.

58
Q

Property Dividend Shareholder Basis

A
  • the basis is the equibalent of the FMV of the property received at the time of distribution, and it is not adjusted for any liabilities that the shareholder assumes.
59
Q

Corporation who distributes a property dividend

A
  • a distribution of appreciated property is treated as if the corporation had sold the property to th shareholder for the property’s FMV and the corp can recognize a gain, but not a loss, on the distribution of property to a shareholder.
60
Q

Stock Dividends and Rights Taxability

A
  • Stock dividends or rights are not taxable as long as the dividend, or rights, are issued pro rata stock-to-stock
61
Q

Stock Dividend Exemptions (“deemed distributions”)

A
  • when the shareholder has an option between stock dividends and cash dividends
  • when the stock is distributed in a disproportionate manner, that does not reflect the ownership percentages of the shareholders interest
  • when a distribution gives common stock to some and preferred stock to others
  • any situation of preferred stock distribution
  • distribution of convertible stock
    • Holding period is considered the period in which you held the “old” stock, and the basis is split up between the old stock and the new stock
62
Q

Life Insurance Dividends Taxability

A
  • general rule is that life insurance dividends are nontaxable as a refund of unused premium or excess premium paid unless they exceed the investment int he life insurance contract or are an distribution from an MEC that isn’t used to pay premiums or purchase additional paid up insurance.
63
Q

Additional Medicare Tax

A

If the individuals wages, other compensation, or self-emplyement income exceeds a certain threshold, an additional medicare tax of .9% is imposed. Only the employee pays this.

64
Q

SE Tax liability deduction for Additional Medicare Tax

A
  • The additional medicare tax of .9% is not included in this deductible aount.
65
Q

Steps when computing the SE tax

A
  • reduce the SE income by 7.65% and then apply the SE Tax of 15.3% on that number. If it’s over the 142k wage base, include a 2.9% medicare rate on that amount.
66
Q

Net Investment Income Tax (NIIT)

A

3.8% tax imposed on taxpayers with unearned income or portfolio income.

NIIT is the lesser of:

  • net investment income or
  • excess of modified AGI over a specified threshold amount
67
Q

NIIT Deductions

A
  • penalty on early withdrawal of savings
  • Amortizable bond premium on a taxable bond
  • a portion of SALT or foreign income taxes.
68
Q

What counts towards NIIT?

A
  • interest income
  • dividends
  • annuities
  • net royalties
  • and net rental income
  • Net gain attributable to disposition of property
69
Q

What isn’t counted towards NIIT?

A
  • Income from most active trades or business, along with taxable gains that come from an active trade or business. It does not take into account any item used in determining self-employment income.
  • does not include distributions from qualified plans
  • tax exempt income
  • life insurance proceeds received by reason of the death of an insured
  • any gain from the sale of a primary residence
70
Q

American Opportunity Tax Credit (AOTC)

A
  • $2,500 per student for qualified tuition and related expenses incurred by the taxpayer, the taxpayer’s spouse or a dependent of the taxpayer.
  • First four years of college
  • student required to attend at least half-time for at least one academic period during the year =
  • 100% on the first $2,000 and 25% on the next $2,000
  • does not include room and board, student health fees, or nonacademic activities
  • An eligible student may not be a convict of any federal or state or felony drug offense for possession or distribution
  • phaseout, if the student is a dependent of the parent, then the parent gets the tax credit because they are the ones who are “technically” paying for it
71
Q

Lifetime learners credit

A
  • Nonrefundable credit of up to $2,000, equal to 20% of up to $10,000 of qualified tuition expenses
  • Available Annually for an unlimited number of years, but can only be used once per taxpayer
  • It is available for expenses relating to improving job skills, along with graduate and undergraduate or professional expenses
72
Q

Withdrawals fro IRAs to Support Higher Education Expenses

A

Exempt from 10% penalty if withdrawn from a Roth and Traditional IRAs, this does not apply to qualified plans like 401k’s and IRA’s

73
Q

Student Loan Cancellation Taxation

A
  • Generally, if a taxpayer is responsible for making student loan payments, and the loan is canceled or repaid by someone else, the borrower must include the amount that was cnceled or paid on their behalf in gross income for tax purposes.
  • However, after December 31st, 2017 the borrower may be able to exclude amounts from gross income if the cancellation is due to death or permanent and total disability
74
Q

Education Assistance from Employer

A

An employee is allowed to exclude 5250 from their income if it’s considered education assistance.

75
Q

Self-Employment Education Deduction

A

If you’re SE, you can deduct your expenses for qualifying work-related education directly from your SE income. Which reduces the amount of your income subject to both income tax and SE Tax.

76
Q

Scholarships Taxability

A
  • Scholarship or fellowship grant is tax free only if you are a candidate for a degree at an eligible education institution. It is tax free to the extent that:
  • doesn’t exceed your qualified education expenses
  • isn’t designated or earmarked for other purposes (room and board)
  • doesn’t prohibit it’s use for qualified education expenses; and
  • doesn’t represent payment for teaching, research, or other services required as a condition for receiving the scholarship
77
Q

Student Loan Interest Deduction

A

Maximum allowable deduction is $2500, and the taxpayer may not be claimed as a dependent of another. There’s a phaseout

78
Q

US Savings Bonds Redeemed for Education Expenses

A

Series EE and I

In order to qualify:
- Purchased by someone 24 and older
- must be held in the persons name or jointly with spouse
- must be redeemed for the qualifying higher education expenses of the taxpayer, spouse or dependent.
- Must not be held in an UGMA or UTMA account
-

79
Q

What is a Qualified Higher Education Expense?

A
  • Tuition and Fees net of any scholarships, fellowships, or other tuition reduction amounts, paid to an institution of higher education.
80
Q

Coverdell Education Savings Accounts (ESAs)

A
  • $2,000 per year per beneficiary under the age of 18.

- There is a phaseout

81
Q

Employer Contribution to Coverdell ESA

A
  • not considered a gift but it counts as taxable income to the employee
82
Q

ESA distributions

A
  • are considered to be tax free if they don’t go over the amount of qualified costs
83
Q

ESA Qualified Costs

A
  • Full-time students: Tuition, Room and Board, Class fees, supplies
  • Room and board is not a qualified expense if the student is only going half time
  • Must be distributed by the time the student turns 30 years old - can be rolled over or transfered to another coverdell account with a different beneficiary
84
Q

529 Account Control

A
  • the contributor or beneficiary may not control the investment of contributions or earnings.
  • can only change the investment option twice per calendar year
  • rollover to a different states qualified plan only once every 12 months
85
Q

529 Qualified Distributions

A
  • excluded from income
  • tuition, books, fees, and equipment for enrollment at an eligible education institution; expenses for special needs services for a special needs student; and room and board costs for students who are at least half time.
86
Q

529 Non Qualified distributions

A
  • treated as a return of principal and investment income
  • 10% penalty on the account earnings
  • Does not apply if the account is terminated due to the death or disability of the beneficiary
  • does not apply if the withdrawal occured because the beneficiary has received a scholarship or fellowship grant, veterans educational assistance, or employer-provided educational assistance so other funds are not needed for college.

Course 4: Income Tax Planning (8 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2024 Bold Learning Solutions. Terms and Conditions