Charitable Gifts, Estate, Kiddie tax, AMT

Question 1

What are grantor trust rules?

Answer 1

Requires that the trust’s income be taxed to the grantor if the grantor retains more than 5% control of revision over the trust. Revisions include purchases, exchanges, borrowing against, or dealing with assets for the benefit of the grantor and without consent of others

Question 2

What is a 2503(c), or complex trust?

Answer 2

A trust that can accumulate income. The principle can be distributed and the trust requires an employer identification number and files a tax return.

This type of trust can often have minors who become trust grantors after their 21st birthday and they allow the trust to continue. In that case, the new grantor is taxed on the trust income.

Question 3

What is a 2503(b), or “simple” trust?

Answer 3

A trust that pays out all of its income each year. One cannot donate charity into the trust and the trust cannot distribute principle.

A simple trust does not have an employer identification number, and does not file a tax return.

Question 4

When can trust income be taxed?

Answer 4

If income is accumulated in the trust
If income is distributed to a beneficiary from the trust
If it is a grantor trust

Question 5

What is a trust?

Answer 5

A legal arrangement whereby an individual transfers legal ownership of property to a trustee

Question 6

What is an estate?

Answer 6

An estate comes into existence upon the death of an individual and remains in effect until all assets are passed onto heirs.

The estate holds and protects assets, collects income from those assets, and satisfies obligations of the estate until all of the assets are distributed.

Question 7

What is a grantor or revocable trust?

Answer 7

A trust where the grantor retains the power to change the trust (hence revocable)
A trust where the grantor pays all trust taxes
The trust is ignored for income tax purposes

Question 8

What are the major differences between trust taxable income and individual taxable income?

Answer 8

A trust is entitled to deductions for any distributions made to its beneficiaries
A trust is not entitled to a standard deductions
A trust is entitled to a personal deduction of $300 for a simple trust and $100 for a complex trust.

Question 9

What are other tax deductions that can be made with a trust?

Answer 9

Administrative fees, as long as it isn’t claimed on the beneficiary tax return
Medical expenses - 1 year rule - dependents final tax return vs estate
Distributions to the beneficiaries: the lesser of distributable net income (DNI) or the amount actually distributed

Question 10

What are the unearned and combo (unearned/earned) income for dependents rules?

Answer 10

For just unearned income, it is $1500 deduction and then taxed at the dependents rate

For combo, the deduction is the greater of either $1500 or earned income + $400 not to exceed the full deduction amount of $12,950.

Question 11

What are the kiddie tax rules?

Answer 11

Against unearned income, the first $1500 is a standard deduction. The next $1500 is taxed at the child’s marginal tax rate. Any net unearned income above $2300 is taxed to the parents at their marginal tax rate.

Question 12

When does the kiddie tax stop applying?

Answer 12

In the year that the child turns 19 or 24 if a full-time student
When the child is married and files their own joint tax return
When the child’s earned income exceeds half his support

Question 13

What is the relationship between kiddie tax and LTCG?

Answer 13

Capital gains are still preferential with kiddie tax, but so are short term (as ordinary income).

Question 14

How is earned income taxed under kiddie rules?

Answer 14

From earned income, subtract deduction which is earned income + $400, not to exceed $12,950. Remaining + unearned income = taxable income.

Subtract from unearned income $2300 deduction. Remaining unearned income will be taxed at parents tax. The remaining taxable income will be taxed at the child’s tax rate.

Question 15

What qualify as charitable contributions?

Answer 15

Direct cash or gift directly to the charitable organization

Indirect gift that includes the provision of food or services to the charity to make possible the achievement of the charitable purpose

Question 16

What is generally considered the date of transfer by the IRS for a gift or charitable donation?

Answer 16

Usually, date received by the charitable organization

Question 17

What are the dollar amount thresholds that require additional measures of value proof by the IRS?

Answer 17

<$500 or more: IRS requires detailed info about the acquisition, value, and amount claimed as deduction

<$5000 property / <$10000 stock: IRS requires qualified appraisal. The appraisal is not deductible.

Question 18

What is use-related property?

Answer 18

Property the charity has a use for. The donor-taxpayer can choose to take FMV deduction
deduct the basis in the property, whichever is higher.

Question 19

What is use-unrelated property?

Answer 19

Property that the charity does not have a related use for. The donor taxpayer is generally limited to the lesser of FMV of the property or the donor’s tax basis in the property - likely basis.

Question 20

What is the rule for donating property that would normally result in ordinary income, such as a work of art created by the taxpayer, or STCG property?

Answer 20

The donor taxpayer must take the lesser of FMV or basis in the property - likely the basis.

Question 21

What is the maximum deduction when donating to public charities (50% organizations)?

Answer 21

60% AGI when donating cash.
50% AGI when If donating ordinary income property.
30% AGI when donating FMV or LTCG property

Question 22

What is a donor advised fund (DAF)?

Answer 22

A charitable savings account in which the donor can make contributions over many years, take the deductions in the years contributed, and then direct grants to the selected charities out of the DAF.

Question 23

What is the maximum deduction when donating to private charities (30% organizations)?

Answer 23

30% AGI when donating ordinary income property including cash. 20% AGI when donating FMV or LTCG property

Question 24

What is the carry-toward period for contributions which exceed the limits for deduction?

Answer 24

Up to 5 years or death

Question 25

What is a bargain sale and what is its formula?

Answer 25

Occurs when a donor transfers property to a charity in an exchange that is less than FMV of the property.

Determine allocated basis: basis x [sale price / FMV]
Determine taxable gain: sale price - allocated basis
Determine new FMV: Original FMV - sale price
Determine new basis: original basis - allocated basis

Question 26

What are the three questions needed to be asked which will determine the rules for charitable contributions and their corresponding deductions?

Answer 26

Type of charity - public or private?
Type of contribution - cash or property?
How does the charity use the contribution?

Question 27

Inputed interest rules were put in place to prevent tax evasion through “sham loans” which had no repayment schedule or interest rates.

For the purpose of imputed interest, what are the significant dollar amounts which trigger (or don’t) imputed interest?

Answer 27

> $10,000 - the IRS does not care

Btwn $10,000 - $100,000: limited to the amount of the borrowers investment income for the year

<$100,000 - the IRS cares and will input interest to the lender or borrower

Question 28

What is the purpose of the alternative minimum tax?

Answer 28

Created to parallel the regular tax system and impose a minimum tax on those who would side-step all other regular taxes to ensure they paid a minimum tax

Question 29

Because the standard deduction is not allowed with AMT, what deductions are allowed?

Answer 29

Medical expenses in excess of 7.5% MAGI
Gambling losses to the extent of winnings
Qualified housing interest
Investment expense
Charitable contributions
Estate taxes paid on a decedents home

Question 30

What is a positive and negative adjustment to itemized deductions for AMT vs regular tax?

Answer 30

A positive adjustment is when the deduction allowed for regular tax exceeds the deduction allowed for AMT

A negative adjustment is when the deduction allowed for AMT exceeds the deduction for regular tax.

Question 31

What is the formula to determine the Alternative Minimum Taxable Income (AMTI)?

Answer 31

Regular taxable income
\+postive AMT adjustments
-negative AMT adjustments
\+AMT tax preference items
------------------------------------------
=AMTI

Question 32

What are important examples of positive adjustments for AMTI?

Answer 32

Bargain element of ISO: not taxed on reg tax, but is taxed under AMT
Standaradized deduction: ^
Itemized deduction: ^