Cpf Exam July 2012

Front 1

What is the Financial Planning Process

Back 1

EGADIM - Even God Admits Dat Its Mesmerizing.

1.Establishing and defining the client-planner relationship

2.Gathering information necessary to fulfill the engagement

3. Analyzing and evaluating the client's current financial status

4. Developing and Communicating the recommendations

5. Implementing the recommendations

6. Monitoring the recommendations

Front 2

Statement Of Financial Position - Assets

Back 2

-Cash and cash equivalents (maturities of one year or less)
-Investments
-Personal Use Assets

Front 3

Statement Of Financial Position - Liabilities

Back 3

-Current Liabilities (due within one year)
-Long Term Liabilities (mortgages and notes)

Front 4

Current Ratio

Back 4

=Current assets/current liabilities

-The higher the better, over one is preferred

Front 5

Consumer Debt Ratio

Back 5

=non-housing monthly debt payments/monthly net income

Should not exceed 20%

Front 6

Housing cost ratio

Back 6

=all monthly nondiscretionary housing costs/monthly gross
income

Should be less than or equal to 28%

Front 7

Debt-to-income ratio (total debt ratio)

Back 7

=all monthly debt payments and housing costs/gross monthly income:

Should be less than or equal to 36%

Front 8

American Opportunity Tax Credit

Back 8

-Credit equals 100% of the first $2,000 of qualified
expenses paid in the tax year, plus 25% of the next $2,000

-The maximum credit allowed in a given year is $2,500 per student, if there are
$4,000 of qualifying expenses

-Phaseout MFJ 160,000-180,000
Others 80,000-90,000

Front 9

Lifetime Learning Credit

Back 9

-provides annual per taxpayer reimbursement for
qualified tuition and related expenses per family in the amount of $2,000 per
year

-The Lifetime Learning Credit can be claimed for an unlimited number of years

--Phaseout MFJ 104,000-124,000
Others 52,000-62,000

Front 10

7 Principals of the CFP Code of Ethics

Back 10

ICOCFPD - I can Obtain CFP Designation

1. Integrity
2. Competence
3. Objectivity
4. Confidentiality
5. Fairness
6. Professionalism
7. Diligence

Front 11

Calculate life insurance death benefit needs

Back 11

Should include funds to
-pay off loans
-pay off debts and mortgages
-provide income to survivors
-pay final expenses
-provide a emergency fund
-education funding
-any other special needs

Front 12

Tax treatments of Annuities - Withdrawals before the start of the annuity payments (accumulation period)

Back 12

Annuities Purchased before August 14, 82 use FIFO those purchased after use LIFO

Front 13

Group Term life - Premiums paid by employer tax treatment

Back 13

First 50,000 are tax exempt, considered income after that

Front 14

Nonqualifled stock option Taxation at exercise

Back 14

Bargin element is ordinary income

Front 15

Nonqualifled stock option Taxation at sale

Back 15

Results in either capital gain or loss - long term or short term depending on holding period

Front 16

Incentive stock option Taxation at exercise

Back 16

-no ordinary income,
-There is a alternative minimum tax (AMT) adjustment to the
extent the fair market value (FMV) exceeds the option exercise price

Front 17

Incentive stock option Taxation at sale

Back 17

-If the stock is sold within one year from the date of exercise or two years from
the date of grant, the gain is considered ordinary income but is not subject to
payroll tax
-If sold after one year from the date of exercise and two years from the date of
grant, it is considered a long-term capital gain

Front 18

Social Security definition of disability

Back 18

-a mental or physical impairment that
prevents the worker from engaging in any substantial gainful employment; for
Social Security, the disability must have lasted for 5 months and be expected to
last a total of at least 12 months or result in the death of the worker

Front 19

Disability income replacement percentage

Back 19

should be between 60-70% of gross pay

Front 20

COBRA Qualifying events

Back 20

1.) Death of the covered employee
2.) Termination of employment, including retiring, voluntary resignation, being
laid off, and being flred for anything except gross misconduct
3.) A change in status (e.g., full time to part time)
4.) Divorce or legal separation causing spouse and/or dependent children to lose
coverage
5.) Child reaching an age where the child is no longer eligible to be covered
6.) Employee reaches Medicare age, and spouse and/or dependent child loses coverage
as a result

Front 21

Cobra Term of Coverage

Back 21

1.) 18 months for employees and dependents for reduction in hours
2.) 18 months for employees and dependents for normal termination (except
death)
3.) Up to 29 months if employee (or qualified beneficiary) meets Social Security
definition of being disabled
4.) 36 months for divorce
5.) 36 months (from event) for Medicare
6.) 36 months for death

Front 22

HO-2 Policy

Back 22

HO-2-broad form, residential. This named-perils form insures the dwelling, other
structures, and personal property for specifically named perils (18).

Front 23

HO-3 Policy

Back 23

special form, residential. This special form insures the dwelling and other property against losses on an open-perils basis (all perils except those specifically
excluded).

Front 24

HO-4 Policy

Back 24

contents broad form, residential and tenant. HO-4 provides protection from
named perils (same as HO-2) for a tenant's personal property.

Front 25

HO-5 Policy

Back 25

-comprehensive form, residential. Same as HO-3 coverage except provides
open-perils coverage for personal property.

Front 26

HO-6 Policy

Back 26

unit-owners form, condominium. HO-6 insures the personal property of the
insured (condominium owner) for named perils (same perils as HO-2).

Front 27

HO-8

Back 27

modifled coverage form, residential. This modified coverage form provides
protection for dwellings with a fair market value (FMV) that is less than their
replacement value (e.g., a home, ACV of $150,000 with a replacement value of
$400,000).

Front 28

Homeowners Section I Coverage

Back 28

Coverage A - Dwelling
Coverage B - Other Structures
Coverage C - Personal Property
Coverage D - Loss of Use
Additional Coverage - debris removal, damage to trees, and credit card loss

Front 29

Homeowners Section I Coverage A

Back 29

Dwelling includes:
1.) structures attached to the dwelling; and
2.) materials and supplies intended for use in construction. This is an important
element of the coverage because a homeowners policy will often be used to
protect a dwelling under construction.
b. Land is specifkally excluded from Coverage A
c. Coverage on the dwelling is on a replacement cost basis provided that the amount
of insurance coverage is 80% of the replacement cost of the building (coinsurance
requirement)

Front 30

Homeowners Section I Coverage B

Back 30

insures the garage and other structures on the premises that are detached
from the dwelling
a. The amount of Coverage B depends on the amount of coverage under Coverage A.
Generally, 10% of the amount of insurance on the dwelling applies as insurance on
detached structures. For example, if the home is insured for $150,000, the detached
structures are insured for $15,000.
b. Three exclusions under Coverage B
1.) Coverage B, like Coverage A, does not extend to land
2.) Coverage B does not apply to any structure used for any business purpose (business
exclusion)
3.) Coverage B does not apply to any structure rented to someone who is not a
tenant of the dwelling, except for a private garage, and then only if the garage is
used for garage purposes (rental exclusion)

Front 31

Homeowners Section I Coverage C

Back 31

a. Personal property, either owned or used by the insured, is covered; this coverage
extends wor ldwide
b. Although the coverage may be increased or decreased, generally, the amount of
insurance on personal property will be 50% of the insurance on the dwelling

Front 32

Homeowners Section I Coverage D

Back 32

provides for living expenses or loss of income in the event of loss of use
a. Generally, Coverage 0 is limited to 20% of the amount of insurance on the dwelling
for HO-2, HO-3, and HO-5 policies (HO-l and HO-8 policies are limited to 10%
of the amount of insurance on the dwelling). The three types of benefits that are
provided under Coverage 0 include additional living expenses, fair rental value, and
prohibited use.
b. Additional living expense coverage pays for increased expenses incurred by the
insured to continue to maintain the insured's standard of living if the house is
deemed uninhabitable because of an insured peril. This benefit is paid only for
the period reasonably required to repair or replace the damage or until the insured
permanently relocates (e.g., lodging costs or additional costs of meals eaten in
restaurants) .
c. If the insured does not incur additional living expenses, the insured will receive a
benefit equal to the fair rental value of the property; fair rental value is also paid
when a portion of the premises is rented to others but is unusable
d.. If use of the property is prohibited because of some event other than damage to the
property, the insured may receive additional living expenses or fair rental value
e. Lease cancellation costs are not covered

Front 33

Homeowners Section I Additional Coverage

Back 33

a. Debris removal extension covers the expense incurred for the removal of debris from
the insured's property that has been damaged by an insured peril
b. Tree, shrubs, plants, and lawn can be covered for perils including lightning, fire,
explosion, aircraft, nonowned vehicle, theft, malicious mischief, riot, and vandalism
(no coverage for wind damage to trees, shrubs, plants, and lawns)
c. Fire department service charges
d. Credit cards, forgery, and counterfeit money coverage includes credit card losses,
unauthorized use of ATM cards, depositors' forgery, counterfeit money coverage, and
defense coverage. The standard limits are $500 on most items; however, increased
limits are available by endorsement up to $10,000.
e. Collapse coverage is for the direct loss to covered property due to collapse caused by
an insured peril; hidden decay or insect damage; weight of contents, equipment, or
people; weight of rain on roof; and defective material
f. Glass or safety glazing material
g. Landlord's furnishing covers appliances and carpet in an apartment on the premises
of the residence that is rented or held for rent

Front 34

Homeowners Section II Coverage E Personal Liability

Back 34

This coverage protects the insured against claims arising out of both bodily injury
and property damage. Personal injury claims are typically not covered. Personal
injury includes damage to the reputation or character of an individual. The insurer
will cover both the damages and the costs of any defense of a covered claim or suit.

The minimum amount of coverage is $100,000 per occurrence
1.) Occurrence is defined as an accident, including continuous or repeated exposure
to substantially the same general harmful conditions
2.) Although an accident may meet the definition of an occurrence, it may not be
covered because certain situations are excluded, such as liability arising from an
auto accident (refer to the following exclusions and also those under the section
"Liability Insurance for the Individual")
c. Liability coverage applies to liability claims resulting from the actions of the
following individuals
1.) The insured
2.) Family members residing in the household
3.) Any person under age 21 who is in the care of one of the above individuals

Front 35

Homeowners Section II Coverage F Medical Payments to Others

Back 35

The homeowners policy includes coverage for the medical payments to others for
injuries that arise even where the insured is not liable for the injury
1.) Medical expenses include reasonable charges for medical procedures, surgical
procedures, hospital stays, ambulances, dental care, x-rays, professional nursing,
prosthetic devices, and funeral services
2.) This coverage does not cover medical expenses of the insured or members of
the insured's household. Medical payment coverage also generally excludes
residence employees. A residence employee can receive medical payments
under Coverage F if the residence employee is off the premises and in the course
and scope of employment when injured, unless the residence employee was or
should have been covered by workers' compensation.
b. Medical payments coverage is not liability coverage and is not based on fault
1.) Covers injuries that occur on the premises whether or not the injured party was
at fault
2.) Generally, Coverage F will pay up to $1,000 for medical payments to others
3.) Because medical payments are not based on fault, the insurer pays regardless
of who is responsible; if the insured was liable, Coverage E would pay for the
liability
c. One of the following conditions must be met for an individual to receive medical
payments coverage from the insured's coverage
1.) The injury occurs while the person has permission to be at the insured location
2.) The injury occurs while the person is away from the insured location and
is caused by a condition at the insured location or on property immediately
adjoining the insured location
3.) The insured injures another person while away from the insured location
4.) The injury occurs as a result of the actions of a residence employee of the
insured away from the insured location while the employee is in the course of
employment
5.) An animal owned by or in the care of the insured injures an individual off the
insured premises

Front 36

Umbrella Policy

Back 36

1. An umbrella liability policy provides protection against catastrophic liability by
providing broader coverage and excess coverage in addition to standard liability
insurance
2. To qualify for an umbrella liability policy, the insurance company usually requires the
insured to purchase certain underlying liability insurance
3. Coverage is inexpensive
4. Coverage is at least as broad as the underlying liability coverage but also covers personal
injury liability

Front 37

Personal Auto Policies

Back 37

Part A - Liability Coverage
Part B - Medical Payments
Part C - Uninsured Motorists
Part D - Damage to your auto
Part E - Duties After an Accident or loss
Part F - General Provisions

Front 38

How do you calculate Adjusted gross income

Back 38

=All (income received-exclusions from gross income)-dedctuons for AGI

Front 39

How do you calculate taxable income?

Back 39

=(AGI- itemized deductions or standard deduction) - personal and dependency exemptions

Front 40

How is alimony payments treated?

Back 40

deductible by the payor and gross income to the payee

Front 41

How do you calculate alimony recapture?

Back 41

Recapture year 3= Payment yr1 + payment yr2 - 2*payment yr3 -37500

Front 42

How is child support payments treated?

Back 42

not taxable income to payee and cannot be deducted by the payor

Front 43

How do you calculate the annuity payment exclusion amount?

Back 43

=(investment basis/expected return) x annuity payment

Front 44

How much social security can be included in gross income?

Back 44

85%

Front 45

How do you calculate the taxable amount of social security payments

Back 45

first establish two base amounts:
1. 32,000 for MFJ, 0 for MFS, 25,000 for all other tax status
2. 44,000 for MFJ, 0 for MFS, 34,000 for all other tax status.

50% of the excess over the first base plus 35% of the excess over the second base is included in AGI

Front 46

How are withdrawals and loans from MECs treated?

Back 46

-basis is recovered LIFO.
-withdrawals and loans to the extent of earnings are taxed

Front 47

How is foreign earned income taxed?

Back 47

Exclude up to $95,000 on foreign earnings or include in taxable income and then claim the tax credit

Front 48

Coverdell Education Savings Account Rules

Back 48

-$2,000 per beneficiary under 18 can be contributed annually
-Phasout: Single 95000-110000 MFJ 190,000-220,000

Front 49

Deductions from gross income to calculate AGI

Above the line

Back 49

1. Ordinary and necessary expenses incurred in a trade or business
2. Deductible portion of self-employment tax paid - 6.2% of Social security
3. Alimony paid to taxpayer's ex-spouse
4.Payments to KEOGH and self-employed SEPs and simple plans
5. Traditional deductible IRA contributions
6. Moving Expenses
7. Forfeited interest penalty for premature withdrawal of time deposits
8. Capital Losses
9. Self-employed health insurance premium
10. Contributions to archer medical savings accounts
11. Contributions to HSAs
12. Interest Paid on Educational Loans

Front 50

Percentage Limitations on itemized deductions

Back 50

-Charitable: Less than or equal to 50% of AGI
-Medical: Greater than 7.5% of AGI
-Casualty: Losses greater than 10% of AGI
-Misc Itemized Deductions greater than 2% of AGI

Front 51

Personal exemption amount for 2012?

Back 51

$3,800

Front 52

Requirements for qualifying relative

Back 52

1.) The individual is not a qualifying child of the taxpayer or of any other taxpayer
for the tax year, as defined previously
2.) The individual must satisfy one of the following two requirements
a.) Bears a specified relationship to the taxpayer, including parent, in-law,
niece, nephew, aunt, or uncle
b.) Is unrelated to the taxpayer but the individual resided in the taxpayer's
principal home during the tax year
3.) The individual's gross income for the year must be less than the exemption
amount
4.) The taxpayer provides over one-half of the individual's support for the tax year
5.) The individual cannot claim any other individual as a dependent
6.) The individual may not me a joint return for the tax year (unless the only reason
a return was flled was to obtain a refund of tax withheld)
7.) The individual generally must also be a US citizen, US national, or resident of
the United States, Canada, or Mexico

Front 53

Requirements for qualifying child

Back 53

1.) The individual must meet one of the following relationships
a.) Child, stepchild, foster child, or adopted child of the taxpayer
b.) Brother, sister, stepbrother, or stepsister of the taxpayer
c.) Descendants of any of the individuals listed above
2.) The individual must live with the taxpayer for more than half of the taxable
year
3.) The individual must pass an age test (meet one of the following)
a.) Individual is under age 19 at the close of the tax year
b.) Individual is a full-time student and under age 24 at the close of the tax
year
c.) Individual is totally and permanently disabled at any time during the tax
year regardless of age
4.) The individual must not have provided more than half of his own support during
the tax year
5.) The individual cannot claim any other individual as a dependent
6.) The individual may not me a joint return for the tax year (unless the only reason
a return was med was to obtain a refund of tax withheld)
7.) The individual generally must also be a US citizen, US national, or resident of
the United States, Canada, or Mexico
8.) The individual must also be younger than the taxpayer claiming the exemption

Front 54

5 tax filing statuses

Back 54

a. Single
b. Married filing jointly
c. Married filing separately
d. Head of household
e. Qualifying widow(er) with dependent child (also called surviving spouse)

Front 55

Itemized deductions from AGI
Below the line

Back 55

Include charitable contributions, medical expenses, mortgage interest, taxes paid,
casualty losses, and unreimbursed employee business expenses

Front 56

Major Itemized Deductions

Back 56

1. Medical Expenses
2. Taxes
3. Interest
4. Charitable Contributions
E. Casualty Losses

Front 57

What itemized deductions are not subject to the 2% of AGI floor

Back 57

1. Impairment-related work expenses
2.) Gambling losses, but only to the extent of net winnings included in gross
income
3.) Annuity contract basis recovery
4.) Pro rata portion of estate taxes paid with respect to income in respect of
decedent

Front 58

What itemized deductions are subject to the 2% of AGI floor

Back 58

1.) Employee business expenses
2.) Home offke expenses, for employees
3.) Investment expenses
4.) Tax return preparation fees
5.) All other miscellaneous itemized deductions

Front 59

How do you calculate AMTI

Back 59

=Regular Taxable income + positive amt adjustments - negative Amt adjustments + tax preferences

Front 60

How do you calculate AMT

Back 60

1. Minimum tax base =AMTI - AMT exemption
2.Tentative AMT = minimum tax base x AMT rate
3. AMT = Tentative AMT - regulär income tax on taxable income

Front 61

What is a positive AMT adjustment

Back 61

A positive adjustment is made when the deduction or exemption allowed for
regular income tax purposes exceeds the deduction or exemption allowed for
AMT purposes. Income is therefore added to the calculation.

Front 62

What is a negitive AMT adjustment

Back 62

A negative adjustment is made when the deduction allowed for AMT purposes
exceeds that for regular income tax purposes. Income is therefore subtracted
from the calculation.

Front 63

What assets are not considered capital assets

Back 63

ACID:
-Accounts receivable
-Copyrights and creative works
-Inventory
-Depreciable property

Front 64

What kinds of properties are not considered like-kind exchanges (1031)

Back 64

1.) Personal-use assets (personal auto)
2.) Ordinary assets (inventory)
3.) Securities
4.) Personalty exchanged for realty. Depreciable tangible personal property must be
within the same general business asset class or the same product class
(e.g., office furniture, information systems, automobiles, and trucks).
5.) Livestock of different sexes
6.) Foreign real estate for domestic real estate

Front 65

What retirement plans do not integrate with social security

Back 65

-ESOPs
-Simples
-SARSEPs
-Employee deferrals and employer matching to 401(k) plans
-Profit sharing contribution by employer

Front 66

Allowable loans from a qualified plan

Back 66

Loans can be taken on all qualified plans but IRA based plans.
a. When account balances are less than $20,000, loans up to $10,000 are available
b. When account balances are $10,000 or less, the vested account balance is available
for loan

Front 67

Rules of the Actual Contribution Percentage (ACP) test

Back 67

1.) The ACP test applies to employer-matching contributions and employee aftertax
contributions
2.) Employer-matching contributions must meet a special test for nondiscrimination
called the ACP test
3.) The plan must meet one of the following two tests in actual operation:
a.) Test I-the ACP for eligible highly compensated employees must not be
more than the ACP of all other eligible employees multiplied by 1.25
b.) Test 2-the ACP for eligible highly compensated employees must not
exceed the ACP for other eligible employees by more than 2%, and the
ACP for eligible highly compensated employees must not be more than
the ACP of all other eligible employees multiplied by 2

Front 68

Rules of the Actual Deferral Percentage (ADP) test

Back 68

1.) Employee elective contributions must meet a special test for nondiscrimination
called the ADP test. The plan must meet one of the following two tests in
actual operation:
a.) Test I-the ADP for eligible highly compensated employees must not be
more than the ADP of all other eligible employees multiplied by 1.25
b.) Test 2-the ADP for eligible highly compensated employees must not
exceed the ADP for other eligible employees by more than 2%, and the
ADP for eligible highly compensated employees must not be more than
the ADP of all other eligible employees multiplied by 2

Front 69

How to correct a failure of the ACP or ADP test

Back 69

a.) A corrective distribution can be made, which will decrease the ADP of
the highly compensated employees
IIIIlI This distribution is made in the following tax year and will be
included in gross income for the taxpayer (highly compensated
employee)
IIIIlI The excess contribution must be conected within 2Yz months after
the end of the year or the employer will be required to pay a 10%
penalty (excise tax) on the amount not corrected
b.) An additional contribution can be made for nonhighly compensated
employees. This additional contribution can take one of two forms, both
of which are required to be 100% vested:
IIIIlI Qualified matching contribution-additional contribution for only
nonhighly compensated employees who deferred for the plan year
IIIIlI Qualified nonelective contribution-additional contribution for all
eligible nonhighly compensated employees (even if they had not been
participating)

Front 70

What is the definition of a dependent?

Back 70

A dependent is someone who is either a qualifying child or qualifying relative.

Front 71

What is required to be a qualifying child?

Back 71

1.) The individual must meet one of the following relationships
a.) Child, stepchild, foster child, or adopted child of the taxpayer
b.) Brother, sister, stepbrother, or stepsister of the taxpayer
c.) Descendants of any of the individuals listed above
2.) The individual must live with the taxpayer for more than half of the taxable
year
3.) The individual must pass an age test (meet one of the following)
a.) Individual is under age 19 at the close of the tax year
b.) Individual is a full-time student and under age 24 at the close of the tax
year
c.) Individual is totally and permanently disabled at any time during the tax
year regardless of age
4.) The individual must not have provided more than half of his own support during
the tax year
5.) The individual cannot claim any other individual as a dependent
6.) The individual may not me a joint return for the tax year (unless the only reason
a return was med was to obtain a refund of tax withheld)
7.) The individual generally must also be a US citizen, US national, or resident of
the United States, Canada, or Mexico
8.) The individual must also be younger than the taxpayer claiming the exemption

Front 72

What is required to be a qualifying relative?

Back 72

1.) The individual is not a qualifying child of the taxpayer or of any other taxpayer
for the tax year, as defined previously
2.) The individual must satisfy one of the following two requirements
a.) Bears a specified relationship to the taxpayer, including parent, in-law,
niece, nephew, aunt, or uncle
b.) Is unrelated to the taxpayer but the individual resided in the taxpayer's
principal home during the tax year
3.) The individual's gross income for the year must be less than the exemption
amount
4.) The taxpayer provides over one-half of the individual's support for the tax year
5.) The individual cannot claim any other individual as a dependent
6.) The individual may not me a joint return for the tax year (unless the only reason
a return was flled was to obtain a refund of tax withheld)
7.) The individual generally must also be a US citizen, US national, or resident of
the United States, Canada, or Mexico

Front 73

How is sec 1245/1250 treated for tax purposes?

Back 73

Section 1245/1250 recapture rules-gain recaptured under either Section 1245
(depreciable personal property used in a trade or business) or gain recaptured as
the excess of accelerated depreciation over straight-line depreciation is taxed as
ordinary income (Section 1250 depreciable real property used in a trade or business)
and is not eligible for installment sale treatment
a.) These amounts are fully recognized (taxable) as ordinary income in the
year of sale
b.) The ordinary income recognized in the year of sale is added to the property's
basis, and this adjusted basis is used in determining gross profit in
the sale
c.) If a portion of the gain on an installment sale are attributable to 25%
gain (straight-line depreciation on real property) and another consists
of 15%/0% gain, the taxpayer must recognize the 25% gain before
the 15%/0% gain when reporting gain received from installment sale
payments
d.) As a planning technique, it may not be advisable to sell some types of
depreciable property used in a trade or business using the installment
method
2.) The gross-proflt percentage is calculated by subtracting the seller's adjusted tax
basis from the total contract price and dividing that flgure by the contract price
3.) Down payment-the down payment received from an installment sale is partially
a capital gain and partially a return of capital. The capital gain portion is
based on the amount of cash received and the gross-profit percentage calculated
previously.
4.) Note payments-the note payments received from the buyer are partially ordinary
income (interest), partially capital gain, and partially a return of capital
a.) If a portion of the gain on an installment sale is attributable to 25%
gain (straight-line depreciation on real property) and another consists
of 15%/0% gain, the taxpayer must recognize the 25% gain before
the 15%/0% gain when reporting gain received from installment sale
payments
4. Other provisions of installment sales
a. Gains recaptured as ordinary income under Sections 1245 and 1250 (depreciable
property) are not eligible for installment-sale treatment. These amounts are fully
recognized as ordinary income in the year of sale and are added to the basis of the
property being sold.
b. If the selling price is more than $3,000 and the contract does not have a reasonable
rate of interest, interest will be imputed
c. If property is sold to a related party and the related party sells the property to a third
party within two years, the deferred gain must be recognized in full by the original
seller
d. If an installment obligation is sold or otherwise disposed of, any unreported gain must
be reported in the year the note was transfened

Front 74

What is the required holding period for inherited property

Back 74

-The holding period of property acquired from a decedent is aiways deemed to be iong
term. This provision applies whether the property is disposed of at a gain or loss.

Front 75

What is the required holding period for gifted property

Back 75

-if the donor's basis carries over to the donee, the donor's holding period is
added (tacked on) to the donee's holding period

Front 76

What is the required holding period for like section 1231 like kind exchange property

Back 76

in a like-kind exchange between a capital asset
or Section 1231 asset, the newly acquired property includes the holding period of the
former property

Front 77

What are ordinary assets

Back 77

ACID
a. Property that, if sold, results in the recognition of ordinary income
b. Examples
1.) Inventory
2.) Accounts and notes receivable
3.) Works of art in the hands of the creator
4.) Copyright for the person who applied for and received it

Front 78

What are Section 1231 Assets

Back 78

3. Section 1231 assets
a. Depreciable personal or real property used in business or for the production of
income
b. By statute; specifically includes the following:
1.) Timber, coal, and iron ore
2.) Livestock
3.) Unharvested crops
4.) Goodwill and intangibles

Front 79

What are Capital Assets

Back 79

Capital assets are personal-use assets and most investment assets. Losses from
personal-use assets are not deductible, but losses from investment assets are
deductible.

Front 80

What is a CRAT

Back 80

charitable remainder annuity trust, or CRAT, the noncharitable beneficiary has the first interest, and the charitable beneficiary has the remainder interest in the trust property. The trust pays out a fixed amount of income to the noncharitable beneficiary every year (an annuity) for the term of the trust, and then the remaining assets pass to the charity.

Front 81

What is a CRUT

Back 81

The charitable remainder unitrust, or CRUT, is similar to the CRAT in that the non-charitable beneficiary has the first interest, and the charitable beneficiary has the remainder interest. However, instead of paying out a fixed amount each year, a CRUT pays the noncharitable beneficiary a fluctuating amount each year, equal to a specified percentage of the total value of the trust assets for that year. At the end of the trust term, the remaining assets pass to charity.

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What is a pooled income fund

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A pooled income fund is similar to a CRAT and CRUT in that the noncharitable beneficiary has the first interest, and the charity has the remainder interest. However, unlike these individual created trusts, a pooled income fund is established and managed by the charity. It consists of donations from several donors and operates similarly to a mutual fund. The charity pays the noncharitable beneficiary a fluctuating amount each year, depending on the total income of the fund for that year. At the end of the trust term, the remaining assets pass to the charity.

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What is a charitable lead trust

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A charitable lead trust is the reverse of the above-named trusts. In a charitable lead trust, the charity has the first or lead interest, and the noncharitable beneficiary has the remainder interest. The trust pays the charity a certain amount every year for the term of the trust (you can specify either the annuity or unitrust method), and then the remaining assets pass to the non-charitable beneficiary.

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What is a qualified personal residence trust

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a specialized form of grantor retained interest trust (GRIT). It is an irrevocable trust into which you transfer an interest in a personal residence, and in which you retain the "income" interest--the right to use or live in the home for a specified term of years. At the end of the term of years or upon your death, whichever is earlier, the home passes to the remainder beneficiaries named in the trust document (typically children) or is held in trust for their benefit. You may continue to live in the home after the term of years ends as long as you pay fair market rent to the remainder beneficiaries.

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What is a grantor retained unitrust (GRUT)

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an irrevocable trust into which a grantor makes a one-time transfer of property, and in which the grantor retains the right to receive a variable amount of principal and interest (based on a fixed percentage) at least annually for a specified term of years. At the end of the retained interest period or upon the death of the grantor, whichever is earlier, the property remaining in the trust passes to the remainder beneficiaries or remains in trust for their benefit.

-gift tax is imposed only on the remainder interest

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What is a grantor retained annuity trust (GRAT)

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an irrevocable trust into which a grantor makes a one-time transfer of property, and in which the grantor retains the right to receive a fixed amount of principal and interest at least annually for a specified term of years. At the end of the retained interest period or upon the death of the grantor, whichever is earlier, the property remaining in the trust passes to the remainder beneficiaries or remains in trust for their benefit.

-gift tax is imposed only on the remainder interest

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What is a Credit Shelter Trust? B Trust

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Typically, with marital deduction and bypass planning, both spouses will set up a credit shelter trust (also called a bypass trust). Assets transferred to a credit shelter trust are includable in the estate of the first spouse to die. However, the credit shelter trust is generally drafted so that just enough assets are transferred to the trust to fully utilize the deceased spouse's applicable exclusion amount. Thus, no estate taxes are actually imposed on the credit shelter amount.

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What is a QTIP? C Trust

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A commonly used type of marital trust is a qualified terminable interest property trust. Assets of the first spouse to die that do not fund the credit shelter trust will be transferred to a QTIP trust. The assets in the QTIP trust qualify for the unlimited marital deduction and thus will not be subject to estate taxes in the estate of the first spouse to die.

The main benefit to establishing a QTIP trust is that the first spouse to die can designate in the trust document who should receive the assets in the trust upon the death of the surviving spouse. Many married couples use a QTIP trust if there are children from the current or previous marriage that they would like to inherit the assets.

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What is a power of appointment Trust? A Trust

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Another commonly used type of marital trust that qualifies for the unlimited marital deduction is called a power of appointment trust. Like a QTIP trust, the surviving spouse must receive all the income, at least annually, from the trust for as long as he or she is alive. The surviving spouse must also be given a general power of appointment over the assets in the trust.
A general power of appointment gives the surviving spouse the right to use the property in the trust for his or her own needs, or to transfer the property to someone else including his or her estate, his or her creditors, or the creditors of his or her estate.

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Exceptions to the terminable interest rule

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1. An interest will not be considered a terminable interest if your spouse's interest will terminate if he or she dies within six months of your death, or as a result of a common disaster that also results in your death
2. The estate trust is a special type of marital trust that does not create a terminable interest.
3. An interest will not be considered a terminable interest if your spouse will receive all the income from the property for life, and will have a general power of appointment over the property. A general power of appointment is the right to say who gets the property.
4. QTIP is defined as property in which your spouse has a qualifying income interest for life and for which the QTIP election has been made by your personal representative
5.An interest will not be considered a terminable interest if your spouse is the only noncharitable beneficiary of a charitable remainder annuity trust or a charitable remainder unitrust.

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What is net unrealized appreciation?

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A distribution of employer stock consists of two parts: (1) the cost basis (that is, the value of the stock when it was contributed to, or purchased by, your plan) and (2) any increase in value over the cost basis until the date the stock is distributed to you. This increase in value over basis, fixed at the time the stock is distributed in-kind to you, is the NUA.

For example, assume you retire and receive a distribution of employer stock worth $500,000 from your 401(k) plan, and that the cost basis in the stock is $50,000. The $450,000 gain is NUA.

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Who is considered a highly compensated employee?

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a. Was a 5% owner of the employer at any time during the current year or preceding
year
b. For the preceding year, had compensation greater than $115,000 (for 2012) from the
employer
1.) If the employer makes an election, only persons in the top 20% of compensation
and having income greater than $115,000 (for 2012) are included as highly
compensated. This exception is often for large employers and helps the plan
pass the coverage or actual deferral percentage (ADP) test for Section 401 (k)
plans.

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Who is considered a key employee?

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1.) An offker with compensation in excess of $165,000 (2012)
2.) A greater than 5% owner
3.) A greater than 1 % owner with compensation >$150,000 (not indexed)
4.) The number of offkers who may be considered key employees is limited to the
lesser of:
a.) 50 employees; or
h) the greater of 3 employees or 10% of all employees

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What is a top-heavy plan?

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1. A top-heavy plan is one that provides more than 60% of its aggregate accrued benefits
or account balances to key employees (see definition in Section G (5)). Top-heavy plans
must meet certain additional qualification rules.
a. A defined benefit plan is top heavy if the present value of accrued benefits for
key employees is greater than 60% of the present value of accrued benefits for all
employees
b. A defined contribution plan is top heavy if the aggregate of account balances of key
employees exceeds 60% of the aggregate account balances of all employees

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Characteristics of EE Bonds

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-Paper EE bonds were sold at a discount equal to one-half of the face value of the bond. In other words, a bond with a face value of $100 would cost you $50.

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Characteristics of I Bonds

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-Series I bonds are sold at face value, and all interest is paid at redemption along with the face value.

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What is excluded from Gross Income?

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-Child support payments
-Loan proceeds
- gifts and inheritances
- Qualified scholarships
-Life insurance proceeds

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Mixed Use Home Tax Treatment

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A second home is a personal residence that you rent to others for fewer than 15 days per year. The tax treatment is as follows:
-Deductions: You'll be allowed to deduct any qualified residence interest and property taxes you paid on the home during the year (subject to the normal limitations on mortgage interest deductions for primary and second homes). You can also deduct casualty losses.
-Rental income: Rental income you receive is not subject to taxation.
-Expenses: Expenses related to the rental of the property are not deductible.

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Personal Use Home Tax Treatment

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-You or any other person having an ownership interest in the property
-A member of your family or a family member of any other person having an ownership interest in the property (unless the family member uses the home as his/her primary residence and pays a fair rental value for the use of the home)
-Anyone who, in return for use of your vacation home, allows you to use another home or dwelling unit
-Anyone who pays less than fair market rent for the use of the home

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Rental Use Home Tax Treatment

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A vacation home may be defined as a second residence with a combination of personal and rental use, where the home is rented 15 days or more per year and your personal use exceeds the greater of 14 days per year or 10 percent of the days rented.

Deductions--You'll be allowed to deduct any casualty losses and property taxes you paid, as well as qualified residence interest (but only on one vacation home). Mortgage interest will only qualify as "qualified residence interest" if it is incurred with respect to your principal residence and one other residence. Thus, you will not be able to deduct the mortgage interest on more than one secondary residence or vacation home. There are also limits on the amount of indebtedness that may be taken into account in determining the amount of qualified residence interest that is deductible each year. For more information, see Home Mortgage Interest Deduction.
Rental income--All rental income is reportable.
Expenses--Expenses must be allocated or prorated between personal use and rental use of the property. Essentially, deductions (other than qualified residence interest, property taxes, and casualty losses) are limited to the amount of income generated by the property. These expenses include insurance, repairs, utilities, and depreciation (in that order); you are required to subtract these expenses from the rental income in a specified order.

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Rental losses deductibility rules

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If you sell a vacation home at a loss, no capital loss is allowed on the personal use portion. You are allowed an ordinary loss on the rental portion of the home,

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Distributions from qualified plans before the beginning date. Spouse Beneficiary

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1.) The surviving spouse can receive distributions over the surviving spouse's
remaining single-life expectancy, recalculated each year
a.) Distributions must begin in the year in which the owner would have
attained age 70Yz
2.) The surviving spouse can roll the plan balance over and defer distributions until
the surviving spouse attains age 70Yz
a.) This election may be made only if the surviving spouse is the sole
beneficiary
3.) The surviving spouse can elect to distribute the entire account balance within
flve years after the year of the owner's death (five-year rule)
a.) This election can be made only if the plan provisions allow the five-year
rule

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Distributions from qualified plans before the beginning date. Non- Spouse Beneficiary

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1.) The distribution period is the remaining life expectancy of the designated
benefkiary
2.) Life expectancy is calculated using the age of the designated benefkiary in the
year following the year of the employee's death, reduced by one for each subsequent
year
3.) The beneficiary can elect to distribute the entire account balance as a single
lump sum or in installments but fully distributed before the end of the £lfth year
following the year of the participant-owner's death (five-year rule)
a.) This installment election can be made only if the plan provisions allow
the five-year rule

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Distributions from qualified plans after the beginning date. Spouse Beneficiary

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1.) The surviving spouse can receive distributions over his remaining single-life
expectancy, recalculated each year
a.) Distributions must begin in the year following the year of death
2.) The surviving spouse can roll over the plan balance and defer distributions until
he attains age 70Yz
a.) This election may be made only if the surviving spouse is the sole beneficiary

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Distributions from qualified plans after the beginning date. Non- Spouse Beneficiary

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1.) The distribution must be distributed at least as rapidly as the remaining life
expectancy of the designated benefkiary
2.) Life expectancy is calculated using the age of the designated beneficiary in the
year following the year of the employee's death, reduced by one for each subsequent
year
3.) The benefkiary may still elect a single lump-sum distribution

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What are the exceptions to the premature distribution rule

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-death
-qualifying disability
-72t series of substantially equal periodic payments
-after separating form service at 55 or older (not for ira)
-medical expenses up to 7.5% of ago
-QDRO
-higher education costs limit of 10,000
-first time homebuuyer

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Roth IRA Phase out

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MFJ: 173,000-183,000
S: 110,000-125,000
MFS: 0-$10,000

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IRA phase out when active participant in another qualified plan and when one spouse is active

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$58,000-$68,000 for single and $92,000-$112,000 for married
fHing jointly in 2012
-When only one spouse is an active participant, the nonparticipant spouse will have
his deduction phased out at AGI levels between $173,000-$183,000 (2012)

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Calculate the basis of new property received from like kind exchange (sec 1031)

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When no boot is given up or received in a like-kind exchange, the basis of the property received is the same as the basis of the property transferred. The expenses incurred in the exchange may also be added to the basis. If cash or other nonqualifying property is exchanged in addition to the qualifying property, the basis of the property acquired is the basis of the property transferred plus the fair market value of the nonqualifying property transferred. When an exchangor transfers property subject to a mortgage for mortgage-free property, the amount of the outstanding mortgage is treated as boot received by the exchangor. The basis of the property received in the exchange is increased by the amount of any mortgage assumed in the exchange.