Mod 8
Tenancy in common.
A form of property ownership between two or more individuals who may own unequal percentages. It cannot act as a will substitute as it has no right of survivorship feature.
Discuss the three methods for determining basis in a mutual fund.
First-in, first-out method. This is the method that the IRS will assume if the taxpayer fails to choose another method. This is usually the least advantageous for the taxpayer during a bull market. Specific identification method. The investor communicates to the mutual fund company which shares, based on purchase date, are being sold. This is the most advantageous method for the investor because it allows for "manipulation" of the gain or loss on the sale. Average cost method. The cost of all shares is aggregated and divided by the number of shares held. This is the most common method, and mutual fund companies are now providing average cost basis information on the sale of shares.
Identify at least three ways in which estate planning can help clients meet their objectives
Provide for the financial needs of survivors. The death benefit of life insurance, for example, provides an immediate estate for a surviving spouse and children. In other cases, assets can be transferred into a trust established for their benefit. Ensure that property is distributed according to their wishes. A last will and testament, thoughtful naming of beneficiaries, and titling property in certain ways can direct property to intended recipients. Protect assets from being seized by creditors. A trust where distributions are at the discretion of the trustee, that is irrevocable, and that contains a spendthrift clause can foil the attempts of creditors of both the grantor and the trust beneficiaries to get at trust assets. Avoid the costs and delays associated with probate. Assets transferred through the simple mechanism of a will are reduced through expenses and legal fees associated with probate and can take months to reach beneficiaries. Various estate planning tools can be used to avoid this slow and often costly form of property distribution. Make provision for incapacity. Illness, injury, and old age can rob a client of the ability to manage their own affairs, including decisions on personal care, health care, and the management of finances and property. Several legal instruments can be employed to deal with these possibilities: trusts, disability and long-term care insurance, powers of attorney for health and property, etc. Minimize taxes. Estates with values that exceed the maximum applicable exclusion amount are subject to federal estate tax.State inheritance or estate taxes can kick in at even smaller amounts. Good estate planning can reduce or eliminate these taxes, leaving more for the intended recipients. Ensure orderly succession in the closely held or family business. Estate planning tools can assist in the orderly transfer of ownership for small businesses.
Briefly discuss the rules and requirements for the use of the home sale exclusion.
The taxpayer(s) must have owned and lived in the home for at least two of the previous five years before the sale. A partial exclusion is available if the taxpayer does not meet the two-year use rule due to health, job, or unforeseen circumstances. In general, these exclusions may not be used more than once within a two-year period. There is no age limit as to who may qualify for this exclusion. Gain is recognized (taxed) to the extent that depreciation deductions were allowed in connection with a rental or business use of the residence after May 6, 1997. A qualifying widow or widower (surviving spouse for filing purposes) may exclude up to the full $500,000 if the residence is sold not later than two years after their spouse's death and the other requirements for the $500,000 exclusion are met. The portion of gain attributable to nonqualified use of the residence may not be excluded.
Describe some of the roles that trusts can play in estate planning.
They can provide management of property for the grantor's convenience, or for legally, mentally, or financially incapacitated beneficiaries. They can provide asset protection from the claims of creditors of the grantor and beneficiaries. They can accumulate income for later distribution to a beneficiary. They can enable the grantor to provide one person (such as a surviving spouse) with lifetime benefits, while ensuring that the remainder will go to another person (such as a child from a prior marriage) at the life beneficiary's death. They can provide income, gift, and estate tax savings. They can provide management of assets located in several different states. Since trusts are independent and separate legal entities, they can eliminate the need to have property pass through probate at the death of the grantor. They can provide privacy. Except in the case of so-called pourover trusts, whose assets come (in part) from a publicly disclosed will, the trust, its property, and the beneficiaries are not a matter of public record.
For substantially equal periodic payments to be exempt from the 10% penalty, these payments:
must continue for at least five years or until the participant reaches age 59½, whichever is later and the distribution amount may not be altered during this period
Explain the requirements for a "qualified" distribution from a Roth IRA. A distribution is qualified if:
the distribution is made after the attainment of age 59½, death, or disability, or if it is made to a first-time homebuyer for the purchase of a home (limited to a maximum distribution of $10,000) and a five-year holding period has been met Unless both of these conditions are met, the distribution will be considered "nonqualified" and the earnings will be taxable, and possibly subject to the premature distribution penalty.
A Roth IRA distribution is qualified if:
the distribution is made after the attainment of age 59½, death, or disability, or if it is made to a first-time homebuyer for the purchase of a home (limited to a maximum distribution of $10,000), and a five-year holding period has been met
Ray purchased shares in Maxgrowth Mutual Fund on July 1 of the current year. The ex-dividend date is September 15. On October 15 of the same year, Maxgrowth paid ordinary dividends of $100 and long-term capital gain distributions of $900, but Ray had the distributions reinvested in the fund. Ray sold the shares on December 23 of the current year. How will these distributions be taxable to Ray?(LO 8-1)
$100 qualified dividend income, subject to long-term capital gain rates and $900 long-term capital gain The treatment of the capital gain income is determined by the mutual fund, regardless of how long the investor has held those shares. The dividend income may be taxed at long-term capital gain rates, if the holding period is met. In this situation, the taxpayer held the shares for at least 61 days of the 121-day period that begins 60 days before the ex-dividend date. The $100 dividends and the $900 capital gains distributions were subject to income taxes, so they would increase Ray's basis in the Maxgrowth fund shares. The mutual fund will document the capital gain or loss on an IRS Form 1099-B. While the capital gains distributions are accounted for from the perspective of the fund portfolio, mutual fund sales are accounted for from the investor's perspective. In this case, Ray sold his shares a year or less after his purchase, so his December 23 sale will be short-term.
What will be the amount and character of the capital loss carryover to the subsequent year, if any, if Sally has the following capital transactions during the current year? Long-term capital loss on sale of ABC stock $(6,500) Long-term capital gain on sale of DEF stock $ 2,200 Short-term capital gain on sale of XYZ stock $ 1,000
$300 long-term capital loss carryover Net long-term capital losses ($4,300) reduced by short-term capital gains ($1,000) result in a net long-term capital loss of $3,300. Since only $3,000 of this loss is currently allowed, the excess $300 is carried over as a long-term capital loss. The carryforward loss always retains its character as long- or short-term when moved into the next year.
What is the maximum amount of capital gains from the sale of a primary residence a widower may avoid paying taxes on
$500k if sold within 2 years of the loss
Applicable Credit Amount
A dollar for dollar offset against tax Reduces total tax liability for the year based upon what gift tax was paid
if a taxpayer's modified adjusted gross income (which includes tax-exempt income, most often from municipal bonds) for the tax year plus one-half of Social Security benefits received (what we call provisional income) during the tax year exceeds the "base amount," then the lesser of the following two amounts must be included in gross income:
1. 50% of the Social Security benefits received during the year; or 2. 50% of the amount by which the provisional income exceeds the base amount. The base amount is: $32,000 for married individuals filing jointly $0 for married individuals filing separately $25,000 for all others
Joint tenancy with right of survivorship (JTWROS).
A form of property ownership by any two or more individuals. Interests in the property are considered to be equal, so any income earned on the property is taxed equally to each owner. If an owner dies, his or her interest in the property passes automatically to the surviving joint owner(s), so it avoids probate.
Tenancy by the entirety (TBE).
A form of property ownership between husband and wife recognized by some states. It contains a right of survivorship and thus can act as a will substitute.
Explain the gift tax consequences of transferring property to a spouse.
A person can transfer an unlimited amount of property to a spouse via gift without gift tax consequences if the transfer is eligible for the marital deduction. However, that property then becomes part of the spouse's estate and may have estate tax consequences when they die.
Joint Tenancy
A person owns an undivided equal interest in the property with one or more persons The deceased joint tenant's name drops off the ownership and the surviving tenants then own equal interests in the property Valid form of will substitute
Describe the kinds of activity that must be avoided by a counselor who is not also an attorney to prevent the unauthorized practice of law.
A person who is not a licensed attorney in the state in which they are giving advice can avoid the unauthorized practice of law by not drafting or interpreting legal documents and by not explaining or applying state law.
Describe the difference between a person's probate estate and gross estate.
A person's probate estate is comprised of all assets that will be transferred at the person's death either by will or by state laws of intestate succession. A person's gross estate includes all assets that are subject to the federal estate tax at the person's death.
Common law state
A state that does not allow husbands and wives to own property as community property.
Federal gift tax.
A tax levied upon the donor of a lifetime transfer of property for which the donor receives less than full value, and over which the donor gives up control. Taxable gifts of up to $11.4 million (2019) may be given before the donor actually has to pay any taxes.
Applicable credit amount
Actual dollar amount of tax liability that can be avoided by use of such credit
Backdoor Roth IRA
Allows participants that are not able to deduct their Traditional contributions and unable to contribute to a Roth IRA due to exceeding income limits, to contribute to a Trad IRA and then convert the funds immediately to a Roth IRA Works best for those who do not already have a Traditional IRA
List the exceptions to the 10% early withdrawal penalty associated with distributions from an IRA.
Although IRC Section 72(t) specifies that distributions from IRAs taken before age 59½ generally will be subject to the 10% early withdrawal penalty, an exception is made when distributions from an IRA are made for one of the following reasons: death of the IRA owner (inherited IRA assets) disability of the IRA owner (must be permanently disabled) medical expenses in excess of 10% of AGI (for 2019) medical insurance premiums while unemployed qualified higher education expenses (tuition, fees, books, supplies, and equipment, must be postsecondary, includes graduate level) qualified first-time homebuyer (neither taxpayer nor spouse can have had ownership in a principal residence for a two-year period prior to the date of purchase or commencement of construction) up to $10,000 qualified reservist distribution made to an individual who is a reservist or national guardsman called to active duty for a period of 180 days (or more) or for an indefinite period disaster-related distributions (such as a tornado) a series of substantially equal periodic payments Note that the premature distribution rules also apply to qualified retirement plans and Section 403(b) plans, but not 457 plans; another set of exceptions to the 10% early withdrawal penalty are allowed for qualified plan and TSA distributions.
Discuss the taxation of zero-coupon bonds.
Although there is no annual income received from "zeros," their annual increase in value is taxed to the investor each year. This taxation of phantom income is not much different than the taxation of dividends reinvested in a mutual fund—the investor has a current tax liability without the cash in hand to pay it.
Annual Exclusion
Amount an individual can give up to a certain amount per year to as amany individuals as they wish without incurring a gift tax Max amount for 2019 is $15,000
Gift Splitting
An election made by the spouses to treat a gift made by one spouse as made one half by each All gifts in that year made by both spouses must be treated as split gifts
Define the following basic terms relating to estate planning. a. estate
An estate is all the rights, titles, and interests that a person (living or deceased) has in any property. An estate can include both tangible and intangible personal property and real property.
Explain the tax rules involving use of the annual exclusion, and two types of transfers that allow tax-free gifts.
An individual can gift a maximum amount of present interest gifts (up to $15,000 per year or $30,000 for a married couple through gift splitting in 2019) to as many individuals as they wish without incurring a gift tax. To qualify for the annual exclusion, a gift must be a gift of a present interest (i.e., the donee must be able to immediately use, possess, or enjoy the gifted asset). The annual exclusion is indexed annually for inflation, but increases only when cumulative inflation has increased the base amount ($10,000) by a multiple of $1,000. A gift of any amount may be excluded from gift tax if it meets both of the following conditions: it was a gift to pay for educational tuition or medical treatment; and the payment was made directly and exclusively to the educational or medical services provider, and not to the person benefited by the payment.
Describe the difference between an inter vivos and testamentary trust.
An inter vivos trust operates during the life of the grantor. A revocable living trust is an example. A testamentary trust is one created in the grantor's will and becomes operative only upon the grantor's death.
Unlimited charitable deduction.
Any person may transfer unlimited amounts of qualifying property to a qualified charity free of gift or estate tax because of this deduction.
Unlimited marital deduction.
Any person may transfer unlimited amounts of qualifying property to his or her spouse free of federal gift or estate tax because of this deduction. There are limitations for non-U.S. citizen spouses.
How are withdrawals from a nondeductible IRA normally treated for tax purposes?
As it is under a number of retirement plans, a person who makes a withdrawal from an IRA must ask, "What is my basis in the account?" If only after-tax dollars were used (a nondeductible IRA), then the total of the contributions represents the owner's basis. Distributions are partially a return of capital and partially interest income. The portion of the withdrawals representing basis is tax-free.
How are withdrawals from deductible IRAs normally treated for tax purposes?
As it is under a number of retirement plans, a person who makes a withdrawal from an IRA must ask, "What is my basis in the account?" If only pretax dollars were contributed (the contributions were fully deductible), the owner has no basis in the account and all withdrawals will be fully taxable.
Federal Estate Tax
Based on the size of the decedent's estate Determined by reducing the gross estate by allowable deductions and then adding all lifetime taxable gifts made by the decedent. Last, subtract out allowable credits
Community property.
Community property is recognized only in Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, Wisconsin, and Alaska (by affirmative election only). It includes all property acquired by either spouse during marriage except when acquired by gift, devise, bequest, or inheritance. Each spouse has a vested one-half interest in the property regardless of how the property is titled. Community property may or may not have a right of survivorship feature. Traditional community property does not.
Explain the concept of cost basis.
Cost basis is the price paid for an asset, adjusted by costs incurred in buying, selling, or owning it. For example, a client's cost basis in a stock is the purchase price of the stock adjusted upward by commission expenses and any transfer taxes.
Qualified dividends
Dividends from common stock of domestic corporations and qualifying foreign corporations Normally taxed at long-term capital gain rates (subject to certain holding period restrictions)
How are non-qualified annuity payments taxed
Each monthly payment is considered partially a return of principal and partially a receipt of gain, so each payment is taxable to some extent. The amount of each payment that is subject to tax is proportional to the extent it represents gain versus a return of principal.
Gift tax annual exclusion.
Enables an individual to gift up to $15,000 (2019) per year of present interest gifts to as many recipients as he or she chooses without incurring a federal gift tax.
Define the following basic terms relating to estate planning. b. estate planning
Estate planning is an activity that arranges for the conservation and transfer of property from one person to other persons or entities so as to achieve, as much as possible, the first person's objectives and minimize taxes and transfer costs.
Disadvantages of Probate
Everything is public Delay in transfer Legal and administrative costs
Date of valuation - Estates
Executor can choose to use either the date of the decedent's death or six months after the decedent's death If six months is chosen it must apply to all eligible property in the estate
Tenancy by the entirety
Exists only between spouses in certain states Does not allow either tenant to sell or gift their interest without the consent of the other tenant Acts as a will substitute because of the survivorship feature
For married couples with large combined estates (i.e., over the estate tax applicable exclusion amount), what is the drawback of simply transferring the estate of the first spouse to die to the surviving spouse?
For couples with larger combined gross estates, the drawback to transferring the first to die's gross estate to the surviving spouse is that doing so eliminates the opportunity to use the estate tax applicable credit amount of the first spouse to die if portability of credit amounts between spouses is not continued to the date of the second spouse's death. Also, the surviving spouse will probably die with a gross estate that exceeds the applicable exclusion amount, and thus will not be able to negate all of the estate tax by application of the applicable credit amount. One solution to this problem would be to transfer part or all of the first estate to other beneficiaries (perhaps by use of a bypass trust), thus making use of that spouse's estate tax applicable credit amount, and reducing the gross estate of the surviving spouse below the estate tax applicable exclusion amount without portability of the unused credit amount from the first spouse to die.
Explain how a married couple with a combined gross estate of less than the estate tax applicable exclusion amount can use the marital deduction to avoid estate tax altogether when transferring property to their children or others.
For married couples with combined gross estates of less than the applicable exclusion amount, avoiding estate tax is very simple. They simply arrange for the estate of the first to die to be passed to the surviving spouse. The estate of the first spouse to die will owe no estate tax, because the estate tax marital deduction will keep anything in the gross estate from being taxable. When the surviving spouse dies, their estate will still be under the applicable exclusion amount (assuming inflation in the value of estate assets does not increase their total value in excess of the applicable exclusion amount) and, thus, this estate will be able to cover any estate tax due by application of the decedent's applicable credit amount.
The cost basis for gain or loss
For most investment products acquired through a broker-dealer, or for a personal residence, the cost basis is the price paid for the asset, adjusted by costs incurred in buying, selling, and owning the asset
Community Property
Form of property ownership available only to a legally married couple Property acquired during marriage belongs one half to each spouse Not a will substitute, distributed through probate court.
Generation Skipping transfer tax
Highest estate tax rate in effect at 40%
When does a qualified plan require you to take an RMD while still working
If you are more than a 5% owner of the company
Annual exclusion
In federal gift tax, the first $15,000 (for 2019, indexed annually) given to any donee in any calendar year is excluded from the donor's total gifts as "free" from tax. However, the exclusion is not available if the gift is of a future interest.
Gifts to spouses
Individuals may transfer an unlimited amount of property to a spouse who is a US citizen without incurring gift or estate tax if they meet certain requirements
Explain the strategy of using a "back door" Roth IRA.
Individuals who are prevented from making deductible contributions to a traditional IRA or after-tax contributions to a Roth IRA due to their AGI have the option of making a nondeductible IRA contribution. Because there is no AGI limit on a taxpayer's eligibility to convert funds held by a traditional IRA into a Roth IRA, an individual can convert nondeductible IRA assets into a Roth IRA. Of course, the individual must pay any applicable income taxes on gains in the account in the year of conversion. Also, the existence of a deductible IRA complicates the issue, as a portion of the deductible IRA will be treated as converted also.
insurance proceeds paid to named beneficiaries
Insurance proceeds are transferred by contract to a named beneficiary (other than the insured's estate) without having to pass through probate. This form of transfer is generally much quicker than transfer by will.
Interest income or nonqualified dividends
Investment income earned by the fund from interest and nonqualified dividends minus expenses Taxable at ordinary income tax rates
How are non-qualified annuity distributions taxed
LIFO
proceeds of annuities, IRAs, and qualified retirement plans paid to named beneficiaries
Like life insurance contracts, IRAs, Keogh plans, and other individual and qualified retirement plans name beneficiaries to receive benefits after the plan participant's death. Upon the death of the plan owner or participant, proceeds are paid directly to the beneficiaries, making this a quick and efficient means of transferring property outside of probate (if the beneficiary is not the owner's estate).
In determining the value of property for transfer tax purposes, what are the valuation dates for gifts
The valuation date for gifts is the date on which the transfer is completed.
Describe the taxation of capital gains and losses.
Long-term capital gains (LTCGs) and long-term capital losses (LTCLs) are netted, as are short-term capital gains (STCGs) and short-term capital losses (STCLs). If a gain and a loss remain, these are again netted. For married couples filing jointly in 2019, the 0% long-term capital gain rate ends at $78,750 of taxable income. For long-term capital gains falling between the $78,750 breakpoint and $488,850 of taxable income, the rate is 15%. For long-term capital gains falling into the taxable income above $488,850 (MFJ), the rate is 20%. A net STCG is treated as ordinary income, which is taxed at the taxpayer's marginal income tax rate. A net capital loss is deductible only up to $3,000 per year against ordinary income, with a carryforward of the remaining losses into the following year(s).
Federal Gift Tax
Meant to account for property transfers that would otherwise reduce the estate and tax liability at death
Net Capital Losses
NCL's can be deducted up to $3k a year and the remainder can be carried over to the next year
Long-term capital gains
Net gains from the sale of shares held by the fund for more than one year Subject to the capital gains rates, usually lower than ordinary income tax rates
Short-term capital gains
Net gains from the sale of shares held by the fund for one year or less May be treated as ordinary income, thus taxable at ordinary income tax rates
State the ordering rules associated with distributions from a Roth IRA.
Nonqualified distributions from a Roth IRA are taxable and are subject to ordering rules, which treat all amounts distributed as contributions first and then as earnings. Therefore, no portion of such a distribution is treated as ordinary income (and thus taxable income) until the total of all prior distributions exceeds the total of all prior contributions. There are three possible categories of Roth IRA distributions, and they are considered to be distributed in this order: Return of contributions. Principal is returned first, and there is no income tax or 10% penalty assessed on this portion. Return of conversion amount. This will not be subject to income tax since it was taxed when converted; however, if the individual is under age 59½ it may be subject to the 10% early withdrawal penalty tax if the converted funds have not been in the Roth IRA for at least five years from the date of conversion. Return of earnings. Earnings come out last, and will not be taxed if it is a qualified distribution (attaining age 59½ and the five-year holding period requirement has been met). If it is not a qualified distribution, then it will be subject to income tax and the 10% early withdrawal penalty if the individual is under age 59½ (unless one of the exceptions is met).
Explain the taxation of annuity payments from a nonqualified annuity.
Once annuitized, each monthly payment is considered partially a return of principal and partially distribution of gain, so each payment is taxable to some extent. The amount of each payment that is subject to tax is proportional to the extent it represents gain versus a return of principal.
Fee Simple
One absolute owner who designates who will receive the property at death Must have a valid will provision covering the property
Inter vivos trust
One that the donor establishes and funds during their lifetime Constitutes a will substitute
Gifts of a present interest
Only gift type eligible for the annual exclusion Recipient must be able to immediately use or enjoy the gift
Explain the disadvantages of distributing property through laws of intestate succession.
Only specified blood relatives can receive property. The amount that will go to these heirs is fixed and cannot be varied. Nothing will go to friends or charities (possible exception for registered domestic partners). The income or use of property cannot be separated from its legal ownership, as would be possible in a trust established in a person's will. Transfer tax planning is impossible since the intestacy statute will control where the property goes and in what amounts.
Tenancy in Common
Property owned with one or more persons Each has right to sell their interest without other's consent If either tenant dies the decedent's share goes to the deceased's estate Not a valid will substitute
Under Section 121, what amounts can a single person or married couple (filing jointly) exclude from capital gains tax on the sale of a primary residence (if all conditions are met)?
Section 121 allows a qualified single taxpayer to exclude up to $250,000 in capital gains from taxation on the sale of their primary residence. The exclusion is $500,000 for a married couple filing jointly.
IRS Form 709
Tax form used to report taxable gifts and the election to split gifts Must be filed by April 15th the following year unless the donor's estate tax return must be filed sooner
Explain the relationship between tax-exempt income and the taxation of Social Security benefits
Taxpayers who receive Social Security benefits and other income find that a portion of their Social Security benefits are includible in taxable income if a calculation puts their income over certain thresholds. Ironically, tax-exempt income is one of the factors in that calculation. The more muni bond income retirees have, the more likely it is that they will have to pay taxes on otherwise untaxed Social Security benefits. Social Security benefits may be fully nontaxable, or may be subject to taxation on up to between 50% and 85% of the benefits received.
Describe the concept used by the U.S. Treasury in determining the value of property for transfer tax purposes
The U.S. Treasury uses the fair market value at the time of transfer when determining the value of transferred property for gift or estate taxes. The definition of fair market value is "the price at which a property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell, and both having reasonable knowledge of relevant facts."
Describe each of the following concepts relating to the federal unified transfer tax: Applicable credit amount
The applicable credit amount is a dollar-for-dollar offset against any tentative federal gift or estate tax liability. The estate and gift tax applicable credit amount is $4,505,800. It pays tax on the first $11.4 million of taxable transfers—lifetime or at death.
Date of valuation - Gifts
The date on which the transfer is considered to be completed
Explain how the five-year clock for Roth IRA contributions works.
The five-year "clock" starts on January 1st of the year for which the contribution is made. For example, your client establishes a Roth IRA and makes a deposit on April 15, 20X2, for the 20X1 tax year. The contribution is being made for the 20X1 tax year, so the clock would start on January 1, 20X1. So even though the contribution itself is being made in 20X2, since it is for 20X1 the five-year clock starts at the beginning of 20X1. Any subsequent contributions into Roth IRA accounts would be on this initial clock—there is not a new "clock" for each contribution.
An inter vivos gift occurs when two things happen
The giver receives less than the full value of the property in return for property transferred The donor gives up control over the property
Which one of the following describes the taxability of tax-exempt market discount bonds?(LO 8-1)
The market discount is taxed as ordinary income upon the sale or redemption of the bond. Any market discount is taxed as ordinary income upon the sale or redemption of the bond.
In determining the value of property for transfer tax purposes, what are the valuation dates for estates
The valuation date for property in a decedent's gross estate is either the decedent's death or six months after that death (the alternate valuation date).
executrix/executor
These are alternative names (female/male) given to a personal representative of a decedent who died with a valid will by some states.
Income beneficiaries
These are the people who will benefit from the trust during the existence of the trust.
Remainder beneficiaries.
These persons take title to the trust assets when the trust ends.
Inter vivos transfers.
Transfers that take place during a transferor's lifetime.
trusts
Trusts are will substitutes when they are funded with property during the grantor's lifetime. Such property avoids probate since the grantor no longer has legal title at the time of death.
Explain how required minimum distribution rules apply to IRAs.
With IRAs, SEPs, and SIMPLE IRAs, distributions must begin by April 1 of the year following the year in which the individual reaches age 70½, whether they are still working or not.
Explain the taxation of lump sum or periodic distributions from a nonqualified annuity.
Withdrawals from a nonqualified annuity come first from earnings/gains (LIFO treatment). Distributions are fully taxable as ordinary income until all of the gains have been withdrawn. The principal amount—the original contribution(s)—is then withdrawn and is not subject to tax, as it is attributable to after-tax money. In addition, withdrawals from an annuity prior to age 59½ are generally subject to a 10% penalty on the taxable portion of the distribution.
P.O.D. accounts
accounts in which an individual deposits funds with a financial institution for the benefit of another and the funds are payable on the death of the depositor to the designated beneficiary Provides a means of transferring cash equivalent assets to spouses, children and charities outside probate, while still allowing the depositor complete control over funds during life
Nonqualified use
any use after 2008 during which the property is not used as the principal residence of the taxpayer, spouse, or former spouse. Primarily, this relates to use of a residence as a vacation home or as a rental property.
Which one of the following is the most common method for investors to use in determining the cost basis of mutual fund shares?(LO 8-1)
average cost The average cost method is the most widely used as fund companies provide this information, thus making it simple for fund shareholders. The first-in, first-out method requires the taxpayer to reconstruct his or her purchases in determining gain or loss, and results in greater gains during a rising market. Thus, it is not as widely used as the average cost method. The specific identification method results in the lowest tax liability, although it requires meticulous record keeping that most taxpayers will not adhere to. Also, the shares sold would have to be specifically identified to the mutual fund when the sale is made. This is practically impossible.
probate
court-supervised process for administering and distributing property subject to a will or state laws of intestacy at a person's death.
The order of saving
for those who are eligible for a company match in their 401(k) or other employer-sponsored plan, receiving this full match should always be the first priority. You will also want to be sure your clients have saved in an emergency fund. Next, in most instances it makes sense to fund a Roth IRA, especially for younger clients. Then comes tax-deductible accounts and finally after-tax savings.
Describe each of the following concepts relating to the federal unified transfer tax: Unified
indicates that the once-separate systems for federal gift taxes and estate taxes now share a single tax rate schedule.
will
legally enforceable declaration of how an individual's probate property is to be distributed when they die. It is revocable until the time of death.
What is meant by income in respect of a decedent, and how is it taxed?
money to which a decedent was entitled as gross income at death but, due to the cash method of accounting or terms of payment, is not includible in taxable income. An example would be a royalty payment earned but not received at the time of death. The IRD must be included in the gross estate for estate tax purposes. If the IRD is received by the decedent's estate, it must be reported as income on the estate's fiduciary income tax return (Form 1041). If a beneficiary receives the income, that person will have to include it in their income in the year it is received. However, whether the estate or an estate beneficiary reports the IRD as income, the taxpayer will be entitled to an income tax deduction for the estate tax paid out of pocket attributable to the IRD.
Zero-Coupon Bonds
non-interest-paying debt securities sold at a discount to face value
intestate
refers to dying without a will. Thus, a person who died without having first created a will is said to have died intestate.
applicable credit amount
represents the amount of gift and estate tax liability that a person can incur without having to actually pay gift or estate tax. It is applied directly against a tax owed.
T-bills
short-term versions of zero-coupon bonds, i.e., they make no interest payments per se but are sold at a discount to face value. They are available in terms ranging from four weeks to 52 weeks The interest income from the T-bill is exempt from state and local income taxes.
Requirements for a married couple to exclude the full $500k of capital gains from the sale of a home
spouses must file a joint return one of the spouses must have owned the home for at least two of the previous five years before the sale both spouses must have used the home as a principal residence for at least two of the previous five years before the sale
unrecaptured Section 1250 income
subject to a maximum rate of 25%
Describe each of the following concepts relating to the federal unified transfer tax: Applicable exclusion amount
the amount of taxable property that can be transferred without having to actually pay any federal gift or estate tax because the tax on that amount is offset by the applicable credit amount. The estate tax applicable exclusion amount in 2019 is $11.4 million. The gift tax applicable exclusion amount is $11.4 million in 2019.
stepped-up basis
the basis for an asset acquired from a decedent is the fair market value of the asset on the date of the deceased's death.
Capital assets acquired as gifts. (carry over basis)
the basis generally would be the lesser of the basis or the fair market value of the stock on the date of the gift.
Which one of the following represents the basis of stock acquired by gift, if the fair market value on the date of gift is less than the donor's basis?(LO 8-1)
the basis is not known until the stock is sold Normally, the basis of an asset acquired by a gift will be the donor's adjusted basis. However, if the fair market value on the date of the gift is less than the donor's basis, it is not possible to know the donor's basis until the asset is sold. If the asset is sold for less than the value on the date of the gift, the loss is determined from the value on the date of the gift and the holding period is determined from the date of the gift. If the asset is sold for a value above the donor's basis, the gain is determined from the donor's basis and the holding period began when the donor purchased the asset. If the asset is sold for a price between the donor's basis and the fair market value on the date of the gift, there is no taxable gain or loss, so the holding period is irrelevant.
Applicable exclusion amount
the dollar size of a taxable gift or a taxable estate that can avoid paying gift or estate tax liability out of pocket
ex-dividend date
the first date following the declaration of a dividend on which the purchaser of a stock is not entitled to receive the next dividend payment. When counting the number of days the stock is held, include the day the stock was disposed of, but not the day it was acquired.
personal representative
the generic term given to a person appointed by a court to administer a decedent's estate.
Fair market value at the time of the transfer
the price agreed upon by a willing seller and a willing buyer. Used for federal taxes
The availability of IRA contribution tax deduction is based on two things:
their status as an "active participant" in an employer-sponsored retirement plan and their modified adjusted gross income.
IRS Form 8606
used to record nondeductible contributions.
phantom interest
zero-coupon bonds generate tax obligations without generating the cash to pay them
