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CFP Exam Misc.
Terms in this set (103)
What bond has the highest reinvestment risk?
The one with the higher coupon
What is the 5-yr look back rule?
If one has losses on a 1231 assets in the last 5 years, then the amount of losses is viewed as ordinary income in the year of the next gain
What forms are used to show a qualified rollover?
1099-R and 5498
What are the rental rules for the following time periods:
Fewer than 15 Rental Days
More than 14 days
Fewer than 15 rental days:
-No gross income from rentals and no deductible rental expenses
More than 14 days:
-rental income included in GI
-expenses are deductible
***However if personal days ae more than 14 days, or 10 % of fair rental days, then the expenses are not deductible, but mortgage interest and taxes are deductible
What can an illegal drug business deduct from their income?
Only their COGS
What method of depreciation provides the least amount of depreciation?
When does an accrual based business recognize income?
When they have the right to collect
If personal use property is converted to business use property, what is the basis?
The lower of the taxpayers:
-FMV on date of conversion
Are short or long-term capital losses taken first against ordinary income?
Short Term is taken before long term
Can non-prescribed insulin be taken as a medical deduction?
When can the premiums for long-term care policies be deducted?
The premiums paid are deductible, but are limited based on age
The policy must be guaranteed renewable or non-cancelable for the premiums not to be deductible
What is substitute basis?
The assets FMV reduced by the gain realized, but not recognized
Voluntary Employees Beneficiary Association (VEBA)
A welfare benefit plan into which employers deposit funds that will be used to provide specified employee benefits in the future
Is A Trust or a corporation set up by an employer
Payments made VEBA are deductible by the Employer and the income of the VEBA is tax exempt
What can VEBAs Provide?
What can VEBAs not provide?
-Life insurance before and after retirement
-Fitness and accident benefits
-Unemployment and job training benefits
-Legal service payments for credits
-Accident or homeowners insurance
When must a tax-payer file?
If he has greater or equal to $400 of self employment income
Taxpayer doesn't have to file w-2 income unless greater than standard deduction
An investors itemized investment income deduction is limited to what?
Investment income, plus capital gains
For gain on a personal residence, what amount is prorated if someone lives in the house for less than 2 years?
The exclusion amount ($250,000) is prorated, not the gain on the residence
What income is not subject to S.S. tax?
Rental Income and S-Corporation income
If a question asks to calculate the tax liability, what do you do?
Calculate it before taking the standard deductions
What are some of the requirements for the dependent care credit?
-Tax payer must provide over one half of cost of maintaining the household
-The child must be a dependent
** If married, both parents must work or go to school
What is the primary advantage of a section 179 deduction over other cost recovery methods?
By deducting more currently, total tax liability is reduced and the present value of cash flows is increased
When are advanced rental payments included in income?
In the year that the taxpayer receives it
What deductions are lost under AMT?
State and Local Tax Deductions
Itemized Deduction Subject to 2%
-Intangible Drilling Costs
-Interest on private activity bonds
How are preference items treated in regards to AMT?
They can only be positive, thus reducing the benefits initially received when computing regular tax
What is the dividend received deductions based on the following ownership percentages for corporations?
Less than 20%
80% or more
Less than 20%: 50%
80% or more: 100%
Owned by one person, easy to form
Income is passed through to owner
Income and losses are passed through
Limited Liability Partnerships
Pass through of income
Not liable for business debts, but unlimited liability for own acts of malpractice
income is passed through on schedule k-1
Taxed at entity level (possibly double taxed)
Ease of transfer of ownership
Cannot have more than 100 shareholders
Only allowed one share of outstanding stock
Pass through of income (taxed at personal level)
In regards to MACRS, when would one use mid-month convention?
For nonresidential real property and residential rental property
In regards to MACRS, when would one use mid-quarter convention?
If the mid-month convention does not apply
and if the total depreciable basis of MACRS property you placed in service during the past 3 months of the tax year are more than 40% of the total depreciable bases of all MACRS property you placed in service the entire year
In regards to MACRS, when would one use half-year convention?
If neither the mid-quarter convention nor the mid-month convention applies
What are the possible defined benefit formulas?
Unit Benefit Formula
What are all pension plans subject to?
Minimum funding requriements
How are golden parachute payments taxed?
They are included in w-2 income
They are NOT subject to payroll taxes
What do profit sharing plans allow the company to do?
Allows discretionary contributions
Controls Benefit Costs
May provide legal discrimination in favor of older owner-employers
Can Rabbi Trusts be held offshore?
No they cannot
How do Defined Benefit and Cash Balance Plans differ?
Traditional DB plans define an employees benefit as a series of payments for life to begin at retirement
Cash balance plan defines the benefit in terms of a stated account balance
Who is defined as a key employee?
Greater than 5% owner
Greater than 1% owner and compensation greater than $150,000
Compensation greater than $185,000 and an officer of the company
Can one have voluntary contributions to a profit sharing plan?
At what time is restricted stock included in ones income?
At the time that the stock vests
What does an estate freeze acomplish?
Any property transferred that would be appreciating in value, the future gain would occur in the transferee's ( the person receiving) estate
Which charitable estate strategy is subject ot the probability test?
What does a sprinkling provision allow?
Allows the trustee to make payments of income or corpus to beneficiaries based upon specific needs
What does a discretionary provision allow?
Allows trustees to distribute corpus or income, or not as they determine most prudent
What does a spendthrift provision allow?
Prohibits a trust beneficiary from assigning interest in the trust corps
Also prevents the beneficiaries creditors from having access to the trust
Which charitable trust strategy allows invasion of corpus to pay annual income if there is a shortage?
A CRUT does not
What can Irrevocable life insurance be used to acomplish?
-Create a vehicle to avoid generation skipping tax
-Make proceeds available to a surviving spouse
-Ensure that proceeds will be excluded from probate of both spouses
-Shelters cash contributions for premiums from taxation, up to the annual exclusion amount
What happens if a bypass trust has the power to invade for an ascertainable standard for all beneficiaries?
Then it will become a non-marital trust
When are QTIP trusts included in the estate of the spouse?
QTIP Trusts are always included in the gross estate of the spouse
What is the rule of thumb for consumer debt of an individual?
It is best if consumer debt does not exceed 20% of net income
What is reformation?
Working together to rectify the situation
What is rescission?
Occurs when no agreement can be reached and is usually carried out by a court of law
Where can the Fed purchase Treasury Bonds?
From bank investment departments
What is not required when giving financial advice?
Setting the scope of the engagement
What are the steps to compute the NOI?
Add all sources of income and the subtract the vacancy rate, then subtract all expenses, add back interest expense and depreciation
What is a municipal bond issued with a restrictive revenue base?
Limited General Obligation Bonds
What type of analysis is performed when specific companies are researched and chosen as investments based on their outstanding investment possibilities?
When evaluating the return of two investment managers, what is the best performance measure approach?
How much does a dependent parent (age 62) receive if from a fully insured persons S.S. Benefit?
How much does a spouse greater than age 65 receive of a fully insured S.S. benefits of a decedent?
How much of a fully insured retired S.S. beneficiary's spouse over age 65, or spouse with a child under 16, or child under 18 receive?
Beta is the slope of the best fit line for the points with coordinates representing what?
The market rate of return and the security's rate of return
Asset selection can be achieved through what four means?
-Discounted cash-flow techniques
-Relative Valuation with multipliers
If the market risk premium were to increase, what would happen to the value of the stock?
It would decrease in-order to compensate the investor for increased risk
When are physical assets suitable for an investor?
If the investor is looking for long-term capital gains
Developing cash flow projections and valuations for real estate can be difficult due to what?
Changes in demographic and economic variables
What do Indexes and ETFs trade at?
Index: Always at net asset value
ETF: Can trade at a discount
When can index funds be purchased?
At the end of the day and and they require the full purchase price and cannot be shorted
Think of index fund like mutual funds!
What is the conversion formula?
(Par / Conversion Price) x Stock Price
What is the adjustable basis formula?
Acquisition Cost - Deprectiation
What is the tax penalty if a return is filed more than 60 days late?
The lesser of:
$100% of tax due
What are the limitations of the following insurance policies in a qualified plan?
Term & Universal: 25%
Whole Life 50%
How can forfeitures be allocated? Who do they benefit the most?
Can be allocated exactly the same way as the employer contributions
Over time, the allocation of forfeitures in a company plan would tend to discriminate in favor of highly-paid employees
Is a resident alien required to file an estate tax return?
Not unless the decedent's gross estate exceeds 11.7 million
When are social security survivor benefits available for a spouse?
To a surviving spouse at age 60, whether or not they are divorced, but has to have been married for 10 years
What is Policy Persistency?
Measures how long customers stay with their poicy
What effect can increasing inflation rate have on the value of common stocks and bonds?
Can have a negative effect due to an increase in the investor's required rate of return
What is the formula to determine how many shares of stock a bond may be converted to?
Par / Conversion Price
What does the Capital market line use to measure risk?
What does the Security Market line use to measure risk?
CML uses Standard Deviation
SML uses Beta
Why is a yield curve normally upward sloping?
Because long-term bonds, by their nature are more risky than short term bonds
What % of meals are deductible?
For 2021, 100% of meals are deductible as a business expense
What must adopt a calendar year for federal income tax purposes?
What is a Thrift Savings plan?
After tax employee contributions cannot exceed the lesser of:
-100% of compensation, or
**Employers don't make contributions
In a grantor trust, one person can have what roles?
What are the following forms used for?
1040: Decedent's federal tax filing
1041: Estate tax return
What does a will substitute do?
Allows property to pass outside of probate
What is a spend thrift provision?
Provides beneficiaries with only as much trust principal or income as the trueee decides is appropriate and provides creditor protection
Are CRAT's and CRUT's included in the decedent's gross estate?
They are included, but then receives a deduction for the charitable gift
Are bequests included in the gross estate?
YES, all bequests are included in the gross estate
How does one determine the amount of life insurance needed?
Divide income needs by investment return
What are the permissible deductions for a business and personal use trip?
All domestic airfare is deductible
Pro Rata foreign airfare, unless it is less than 7 days or the personal use was less than 25% of the time
Transportation to and from the airport is fully deductible
What type of plan is a 403B plan?
How does one determine the conversion price?
Par / # of shares
For medical expenses deductions, what is the deduction per mile? How much can be deducted for lodging?
$0.16 per mile
$50 per person for lodging
What is the parol evidence rule?
Once the contract is placed in written form, all previous and prior understanding of a verbal contract will not be allowed to contradict the written statement
What is the collateral source rule?
The person who commits the torn will not benefit or be relieved of obligation and responsibility just because the victim has insurance
What provision of a disability coverage, covers partial disability in the event one had to reduce workload?
Residual Disability Benefits
What does the nonforfeiture rights of a policy holder guarantee?
That there will be a cash value
What is a Medicare Advantage Plan?
They work like an HMO, it will cover vision, dental, and hearing
Can long-term care insurance be included in a cafeteria plan?
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