1 Individual Tax Flashcards
In 20X4, Joan received an acre of land as an inter-vivos gift from her grandfather. At the time of the gift, the land had a fair market value of $50,000. The grandfather’s adjusted basis was $60,000. Joan sold the land in 20X6 to an unrelated third party for $56,000.
Sale of land by Joan $0 - Generally an asset received as a gift has donor’s rollover basis. However, if at the date of gift, the fair market value is lower than the donor’s rollover basis, then the basis for donee would depend on the price at which the donee sells the asset in the future. The FMV at the date of gift is $50,000 which is lower than the donor’s rollover basis i.e.. $60,000.
Further, there is neither a gain nor loss on the sale or disposition of the property if the Donor’s adjusted basis> Sale price > FMV at gift date.
In this case, Donor’s adjusted basis is $60,000, Sale price is $56,000 and FMV at the date of gift is $50,000. Therefore, Joan has neither a gain nor a loss; however the transaction needs to be reported
Stock dividend from Ace Corp
The Moores received a stock dividend in 1994 from Ace Corp. They had the option to receive either cash or Ace stock with a fair market value of $900 as of the date of distribution. The par value of the stock was $500.
$900 - Generally, stock dividends are non-taxable to recipients. However, if taxpayers have an option of receiving either stock or cash dividend, then they must report income equal to the fair market value of the shared on the date of distribution. As the Moore’s had an option to receive cash dividend, their taxable dividend income will be equal to $900, the fair market value on the date of distribution and will be the taxable dividend income.
State tax refund
During 20X6, the Moores received a $2,500 federal tax refund and a $1,250 state tax refund for 20X5 overpayments. In 20X5, the Moores were not subject to the alternative minimum tax and were not entitled to any credit against income tax. The Moores’ 20X5 adjusted gross income was $80,000 and itemized deductions were $1,450 in excess of the standard deduction. The state tax deduction for 20X5 was $2,000.
- $0 - Refunds of federal taxes are never taxable as they are never allowed as deduction from income.
- $1,250 - According to the tax benefit rule, refund of any state taxes are taxable in the current year, to the extent a benefit was received in an earlier year. The Moore’s itemized their deductions in 20X5 that allowed them to take a deduction for state taxes of $2,000. Since the total amount of itemized deduction exceeded the standard deduction for their filing status by $1,450, the full amount of refund of $1,250 is taxable.
Stock option
Tom received 200 stock options from his employer in May of 20X5 at a grant price of $25. Half of these options vested in June of 20X6 (one year from grant) when the market price was $35. Tom did not sell any shares.
$1,000 - Non-qualified Stock Options (NSO) are taxable to shareholders on the date of exercise as ordinary income. The taxable value is equal to (FMV of Stock – Exercise Price) X No. of shares exercised. As 100 stock options were exercised in 20X6, the taxable value would be $1,000 [($35-$25) X 100].
Interest income from Series EE savings bond
Tom received $10,000, consisting of $5,000 each of principal and interest, when he redeemed a Series EE savings bond in 20X6. The bond was issued in his name in 20X0 and the proceeds were used to pay for Laura’s college tuition. Tom had not elected to report the yearly increases in the value of the bond.
Laura had no income of her own and was not Tom’s dependent.
$5,000 - Interest received on redemption of series EE bonds are non-taxable only if they are used for higher education expenses (tuition & fees expenses only) of taxpayer, spouse or dependent. Tom used the money for Laura’s college tuition; however, as Laura is not Tom’s dependent, interest exclusion will not available to Tom and $5,000 will be the taxable interest.
Tom’s 20X6 wages were $53,000. In addition, Tom’s employer provided group-term life insurance on Tom’s life in excess of $50,000. The value of such excess coverage
was $2,000.
$55,000 - Tom’s taxable wages would be equal to wages plus group-term life insurance premium above first $50,000 coverage. Hence, the taxable wages would be $55,000 ($53,000 + $2,000).
Any federal estate tax on income with respect to decedent, to be distributed to Mrs. Vick, may be taken as a miscellaneous itemized deduction not subject to the 2% of adjusted gross income floor.
Proper – Federal estate tax expenses related to the income of decedent is allowed as deduction on the return of a beneficiary. As Mrs. Vick is a beneficiary, she can claim deduction for estate taxes paid as miscellaneous itemized deduction not subject to the 2% of adjusted gross income threshold (Mnemonic: Miles Takes Interest in Charity & Casual Jolly Meets)
The Vick’s income tax liability will be reduced by the credit for elderly or disabled.
Mrs. Vick, a 40-year-old cash basis taxpayer, earned $45,000 as a teacher and $5,000 as a part-time real estate agent in 20X5. Mr. Vick, who died on July 1, 20X5, had been permanently disabled on his job and collected state disability benefits until his death.
Improper – Only Mr. Vick would be eligible to receive the elderly and disabled credit as he was permanently disabled. Mrs.Vick is less than 65 years old. However, the Vick’s income tax liability will not be reduced by the credit for elderly or disabled because one half of excess AGI over threshold will eliminate the credit. The elderly and disabled credit is 15% of the ‘eligible income’. The eligible income is calculated in the following manner:
$5,000 (Maximum Base) - Social Security Income - 1/2 of excess AGI over $7,500
The Vick’s one half of AGI, $25,975 ($51,950/2) exceeds the threshold of $7,500 making them ineligible for the elderly and disabled credit.
The Vicks paid alternative minimum income tax in 20X4. The amount of alternative minimum tax that is attributable to “deferral adjustments and preferences” can be used to offset the alternative minimum tax in the following years.
Improper – The amount of alternative minimum tax that is attributable to “deferral adjustments and preferences” can be used to reduce/ offset the regular tax liability in the future years, and does not the affect the future alternative minimum tax.
The funeral expense paid by Mr. Vick’s estate is a 20X5 itemized deduction.
Improper – An individual taxpayer can claim a deduction for funeral expenses only if it is paid out of the estate’s funds and will be deductible only on estate tax return. Funeral expenses cannot be claimed as itemized deduction on Form 1040.
For 20X6, the Moores were subject to the phase-out of half their personal exemptions for regular tax because their adjusted gross income was $$100,000
Improper - For high-income taxpayers, the personal exemption is subject to a phase-out, depending on the income level and filing status. The phase-out limitation for 20X6 is for married filing joint tax payers begins at $311,300 and ends at $433,800. As Moore’s adjusted gross income for 20X6 of $100,000 is much below the phase out level, they are not subject to phase-out for exemptions.
The Moores’ unreimbursed medical expenses for AMT had to exceed 10% of adjusted gross income.
Proper - Qualified medical and dental expenses are deductible in calculating Alternate Minimum Tax Income (AMTI) to the extent they exceed 10% of adjusted gross income. Therefore, Moore’s unreimbursed medical expenses have to exceed 10% of adjusted gross income to be allowed as deduction for determining AMT.
The Moores’ personal exemption amount for regular tax was not permitted for determining 20X6 AMT
Proper - Adjustment of personal and dependent exemptions is not allowed for determining Alternative Minimum Tax.
The Moores paid $1,200 in additional 20X6 taxes when they filed their return on Friday, April 14, 20X6. Their 20X6 federal tax withholdings equaled 100% of 20X5 tax
liability. Therefore, they were not subject to the underpayment of tax penalty
Proper - Penalty for underpayment of taxes is not applicable if:
Balance due (Total tax liability less Tax withheld less Estimated tax payments) as on April 15 (tax return due date) is < $1,000;
Tax paid is 90% of the current year tax liability or 100% of the prior year tax liability, whichever is smaller.
As Moore’s 20X6 federal tax withholdings equaled 100% of 20X5 tax liability, they will not be subject to the underpayment of tax penalty.
The Moores were allowed an earned income credit against their 20X6 tax liability equal to a percentage of their wages.
Proper - Earned income credit is calculated based on the percentage of earnings up to a maximum credit. Both credit rate and maximum credit vary by family size with more credit available to families with more qualifying children. Moores will be allowed an earned income credit according to the percentage of their wages.
