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Flashcards in Tax Deck (14):

Economic income equation:

Economic income = PV (future premiums) - PV(future losses)


What is the discount rate to be used in tax calculated

For each AY, the discount rate is the 60mnth moving average of the "federal mid-term rates", ending Dec 1 of the prior AY


Reason that tax calculations use Schedule P Part 1, instead of Part 3:

-Part 3 contains only DCC, not AAO. Part 1 contains all LAE.
-Part 1 is audited, whereas Part 3 is not.
-Some actuarial methods rely on judgment to select paid LDFs. The IRS method does not involve judgment.


Portion of Tax exempt income that is taxed due to proration provision:



Due to the DRD, what portion of dividends are tax exempt:

-if the taxpayer owns less than 20% of the firm, 70%
-if the taxpayer owns between 20 & 80%, 80%
-if the taxpayer owns more than 80%, 100%


Equations to derive RTI from incurred losses according to direct & indirect

Direct: Paid loss + change in discounted reserves
Indirect: Statutory incurred loss - change in reserve discount.


Equations to derive RTI from bond income according to direct & indirect methods.

Direct: 15% municipal bond income
Indirect: Statutory income - 85% x municipal bond income


Equations to derive RTI from dividends according to direct & indirect methods.

Direct: 40.5% of unaffiliated common stock dividends
Indirect: Statutory income - 59.5% of dividends


Equations to derive RTI from revenue oset according to direct & indirect methods.

Direct: WP - 80% Change in UEPR
Indirect: Statutory EP + 20% x Change in UEPR


AMTI equation:

AMTI = RTI + 0.75 x Income that escapes taxation


ARIT equation:

ARIT = RIT - prior year's minimum tax credit


Factors that management need to consider when deciding portions of stocks versus bonds to hold:

-relative tax rates
-asset liability management
-Management dislike of erratic income


Reasons municipal bonds often provide a higher after tax yield than corporate bonds of similar risk levels:

-Callability: most municipal bonds are callable
-Liquidity: Municipal bonds are less liquid.
-Tax legislation: The proration provision reduced the tax advantage of municipal bonds


Relationship between RTI & AMTI that would produce the optimal tax strategy:

AMTI = RTI x 175%