Chapter 9 Part 2 Flashcards Preview

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Flashcards in Chapter 9 Part 2 Deck (20)
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Under AMT rules, these taxpayers must compute their income taxes

twice. An individual subject to the AMT must first calculate his taxes using the standard method, and then he must recalculate his tax liability using the AMT method. The taxes due will be the greater of the two calculations


Individuals may transferassets or give a gift of up to

"$14,000 per year to any
number of persons (related or unrelated) without incurring gift taxes. A married couple may
combine their individual gifts for a total of $28,000 per recipient. Amounts above the current limits will be subject to gift tax. In addition, the person receiving the gift will not need to pay income taxes on the gift"


There is an exception to the marital deduction. When one spouse is not a U.S. citizen, all gifts or inheritances will be

fully taxable. In this situation, the couple might consider establishing a Qualified Domestic Trust or have the spouse become a U.S. citizen, in order to qualify for the marital deduction


Capital gains arc generated when an investment is sold for a greater value than its cost basis. If an investment has been held for

one year or less at the time of the sale, the gain is considered short-term and will be taxed at ordinary income rates. However, if the asset is held for more than one year, the gain is considered long-term and is taxed at a maximum rate of 20%


Capital losses are generated when an investment is sold for less value than its cost basis. As with capital gains, if an investment has been held for

one year or less at the time of the sale, the loss is considered short-term. If the asset is held for more than one year, the loss is considered long-term


Capital losses are

not taxed. Instead, the IRS requires capital gains and capital losses to be netted


Neiling capital gains and losses will permit an investor to

nel (offset) capital losses against capital gains with no maximum dollar limitation. The result will be a net capital gain or a net capital loss


Net short-ter, capital gains or net long-tenn capital gains are taxed at the rates previously specified. however, if an investor has both net long-term gains and net short-term losses, these two figures must be

netted before the 20% rate applies


Net capital losses may be used to offset ordinary income on a

dollar-for-dollar basis in any tax year, up to a maximum of $3,000. Excess capital losses in a particular year may be carried forward until the excess net losses have been offset by net gains


Net Worth

Total Assets - Total Liabilities


Liquid net worth

"excludes assets that arc not readily converted into cash such as real estate, limited
partnerships, and stock in small companies. When analyzing a client's financial profile, advisers must consider his liquid net worth (e.g., stocks, bonds, mutual funds, and savings accounts) to accurately evaluate his financial position"


Risk is defined as

the chance taken when an investment's actual return will be different from its expected return


suitability is dependent on whether

the investment was appropriate for the client, given all the circumstances, not on simply whether the client could afford the losses


As a general rule, most people should have a cash reserve equal to

"at least three
at least 3 months' living expenses. In certain circumstances, such as when a client's income is unpredictable, it may be wise to maintain a larger cash reserve. Capital reserves should he kept in a safe, liquid investment such as a money-market fund"


Funds invested in Uniform Gifts/Uniform Transfers to MinorsAct accounts (UGMA/UTMA accounts) can be used for purposes of

funding education expenses. Other options in saving for college include Coverdell Education Savings Accounts and Qualified Tuition Programs such as 529 Plans


Investors whose primary investment goal is current income want investments that

produce a steady, reliable stream of cash. Some examples of income investments include most bonds, preferred stocks, and fixed annuities. The downside to income inveslmenls is that they usually produce little, if any, growth in principal (the original amount invested)


Clients whose main objective is growth want their capital to

appreciate. They usually expect that the capital will grow at a higher rate than other investments, outpacing the rate of inflation. Growth investments are used often to increase assets in the long term for some future use, such as retirement or college expenses. However, often these investments involve a greater risk to principal than income-oriented investments. Common stocks are an example of growth investments


Some investors need access to their funds within a short period. Investments that offer

liquidity provide this access to investors. Money-market mutual funds and 't'-bills may pay a lower return than other investments, but the principal is relatively safe and investors will have ready access to their capital


Investors who are concerned with the potential loss of capital will invest in securities that provide safety. Although they want a return on their investment, they are also concerned with

preservation of capital. In other words, they do not want to put their principal at risk. Clients with this objective often invest in U.S. government securities, insured ceitificates of deposit, or money-market funds


This is a generalization, but most people will need an income equivalent to

70% of their current pretax income when they retire

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