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CPCU 556 Tax Planning 2 recollection reinforcement
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Donna M. Kesot, CPCUCPCU 556 Personal Financial Planning
May 2, 2012
Taxes & Retirement 2
Principal
Original value of an investment or a debt
Generally, creation of a formal irrevocable trust into which the donor (as grantor of the trust) places property that is subject to the trust
Charitable Remainder Trust
Aka CRT2 types:1. CRUT Charitable Remainder Unitrust(5-50% of each
year’s current value, up to 20 years)2. CRAT Charitable Remainder Annuity Trust (5—50%,
calculated on the initial value of the property)
TRUE or FALSE?TRUE or FALSE?These plans allow individuals to invest pre-tax and provide tax-deferred earningsTraditional IRA401(k) plans, other than Roth403(b) plans, other than Roth457 deferred compensation plans
Total ReturnSum of capital appreciation (or losses) on the principal and
Tax implications: Tax rate applied to gains from capital appreciation is often lower than those applied to gains through investment
The income earned on an investment over a specified period
Match the concept
Capital Gain
Like Kind Exchange
Principal
Rate of Return
Realized Capital Gain
Profit earned when sold
Original value
Selling Prices exceeds Purchase Price
1031
Annual Profit or Surplus
Retirement Income Sources• Individually Provided (IRAs, cash values of Life ins, nonqualified
annuities, savings)• Social Security – guaranteed income floor, available at age 62
Retired Worker’s Benefits - equal to worker’s primary insurance amount (PIA) at age 65-67.
Spouse of Retired Worker (50% of retired worker’s PIA) COLA tied to CPI
• Employer-Provided Retirement Plans Qualified pension plans Profit-sharing plans Savings Plans
A.
B.
C.
D.
E.
Dollar Cost Averaging
A & B
Diversifying the bond and CD portions (fixed income) of an investment portfolio by staggering the maturity dates of instruments.
Systematic investing of the same amount of money in the same stock or group of stocks over a period of time
Investing in the same volume of stock or group of stocks over a period of time, regardless of the changing share prices
Systematic investing of the same amount of money in the same stock or group of stocks over a period of time, regardless of the changing share prices
Right Answer: D Systematic investing of the same amount of money in the same stock or group of stocks over a period of time, regardless of the changing share prices
Method used to estimate needed retirement income based on a percentage of expected final average earned income.
Income Replacement Ratio
60-80% because1. Taxes usually decline2. Certain work related expenses may end or reduce3. Home-ownership expenses may decline if mortgage
debt is eliminated4. Support for dependent children may have ended5. Senior discounts (Go AARP)6. General expenses may decline as the aging individual
become less active/more sedentary
Laddering
Protects against interest rate risk
Diversifying the bond and CD portions (fixed income) of an investment portfolio by staggering the maturity dates of instruments in the portfolio
Asset Allocation
The apportioning of investments among categories of assets
Asset Allocation FundA category of hybrid funds that are
Required to maintain a fixed weighting (assets allocation) of stocks, bonds, and perhaps money market instrumentsMay enable investors to implement an asset allocation strategy through the purchase of one mutual fund, rather than several funds or other assets
AKA Life-Cycle Fund
3 Risk Characteristics of Bonds
Inflation Risk
Default Risk
Interest Rate Risk
Long term bond investors minimize these risks compared to real estate and stock investments
Statutory Definition-Life Insurance
Meets Section 7702 IRC via
1. Cash value accumulation test• A test that limits cash value relative to death benefit.
2. Guideline premium and cash value corridor test• A test that limits premiums paid relative to the death
benefit.
Match the stock concept
Growth Stock
Penny Stock
Defensive Stock
Cyclical stock
Value Stock
Undervalued
Not tied to economic cycles
Faster than general Economy
Trades at <$1
Industrical producers
A 403(B) is a qualified retirement plan that for employees of local, state, or federal governments and agencies.
TRUE or FALSE?FALSE
Real Answer:A 403(b) PLAN IS A TAX FAVORED RETIREMENT PLAN FOR EMPLOYEES OR CERTAIN NONPROFIT ORGANIZATIONS
The development and implementation of strategies designed to reduce, change the timing of, or shift income tax liabilities
Income Tax Planning
The use of legal methods to reduce or eliminate taxes
Tax Avoidance
e.g. Shifting assets to children, Charitable remainder trusts, investing in tax free
munis, using normally taxable distribution from nonqualified deferred annuities to pay charges for long-term
care insurance tax-free, and taking qualified distribution from a Roth IRA
Tax planning strategy that enable taxpayer to delay the recognition of income for tax purposes
Tax Deferral
e.g. 401 (k) plans, IRAs, Deferred annuities
Qualified Dividend• A dividend paid by a U.S. corporation, a
corporation incorporated in a U.S. possession , a foreign corporation located in a country eligible for certain U.S. tax treaty benefits, or a foreign corporation whose stock can be readily traded on an established U.S. tock market and which meets applicable holding period requirements.
TRUE or FALSE?TRUE or FALSE?
Deduction = Amount that reduces an individual’s income subject to tax.
Gain realized on the sale of a capital asset held for one year or less
Short Term Capital Gain
In contrast a long term capital gain is a capital asset held longer than 1 year.
AGI functions in this way
Adjusted Gross Income
Functions as the base amount on which certain limits are calculated (floors for medical expense, mortgage interest, personal casualty/theft losses, and miscellaneous itemized expense deductions
Determines charitable contribution limitations
Gross EstateProperty owned at death
Life Insurance on the Decedent’s life
Joint Tenancies (gross estate of first joint owner to die includes ½ of the value of property jointly held or the full value of a property jointly held with someone other than a spouseGeneral Powers of Appointment –Property held by the decedent with a general POA
Annuities, Revocable Transfers, Transfers taking effect at death, Transfers within 3 years of death
Modified Endowment Contract (MEC):
Meets statuatory definition of life insurance in IRC but
Fails to meet the seven pay test
Does not affect death benefits but living benefits lose preferential tax treatment
Premiums in 1st 7 years exceed sum of net level premiums that would have been paid if the policy provided for paid-up future benefits