Fiduciary Tax

Question 1

Lyon, a cash basis taxpayer, died on January 15, 2015. In 2015, the estate executor made the required periodic distribution of $9,000 from estate income to Lyon’s sole heir.

The following pertains to the estate’s income and disbursements in 2015:
2015 Estate Income
$20,000 Taxable interest
10,000 Net long-term capital gains allocable to corpus
2015 Estate Disbursements

$ 5,000
Administrative expenses attributable to taxable income

Lyon's executor does not intend to file an extension request for the estate fiduciary income tax return. By what date must the executor file the Form 1041, U.S. Fiduciary Income Tax Return, for the estate's 2015 calendar year?
	A.  	March 15, 2015.
	B.  	April 15, 2016.
	C.  	June 15, 2015.
	D.  	September 15, 2015.

Answer 1

B - The rules for when estate’s Form 1041, U.S. Fiduciary Income Tax Return, are the same as those for individuals. Thus, the return must be filed on or before the 15th day of the fourth month after the close of the taxpayer’s tax year. For calendar year taxpayers, the deadline for filing is April 15th. Short period returns must be filed on or before the 15th day of the fourth month after the close of the short period. Since Lyon died in January, the executor must file a short period return on or before the 15th day of the fourth month after the close of the short period. The estate’s short period closed at the end of the calendar year, so the estate’s Form 1041 must be filed on or before April 15, 2016.

Question 2

The standard deduction for a trust or an estate in the fiduciary income tax return is
	A.  	$0
	B.  	$650
	C.  	$750
	D.  	$800

Answer 2

A

Question 3

The Simone Trust reported distributable net income of $120,000 for the current year. The trustee is required to distribute $60,000 to Kent and $90,000 to Lind each year. If the trustee distributes these amounts, what amount is includible in Lind’s gross income?

Answer 3

$72,000 - The amount of income recognized by the beneficiaries is the lower of the amount distributed ($150,000) or distributable net income ($120,000). Thus, Kent and Lind will recognize income of $120,000. Since they received total distributions of $150,000, the income recognized is 80% ($120,000/$150,000) of the amount received. Thus, Lind’s income is 80% x $90,000, or $72,000

Question 4

Income in respect of a cash basis decedent
A. Covers income earned before the taxpayer’s death but not collected until after death.
B. Receives a stepped-up basis in the decedent’s estate.
C. Must be included in the decedent’s final income tax return.
D. Cannot receive capital gain treatment.

Answer 4

A - Income is only included on a cash-basis taxpayer’s final income tax return if the taxpayer had actually or constructively received the income before death. After death income with respect to the decedent is reported by the decedent’s estate. Thus, income in respect of a cash basis decedent covers income earned before the taxpayer’s death but not collected until after death

Question 5

Astor, a cash-basis taxpayer, died on February 3. During the year, the estate’s executor made a distribution of $12,000 from estate income to Astor’s sole heir and adopted a calendar year to determine the estate’s taxable income.
The following additional information pertains to the estate’s income and disbursements for the year:

Estate income Taxable interest 	$65,000 Net long-term capital gains allocable to corpus 	5,000 Estate disbursements: 	    Administrative expenses attributable to taxable income 	14,000    Charitable contributions from gross income to a public charity, made under the terms of the will 	9,000

For the calendar year, what was the estate’s distributable net income (DNI)?

Answer 5

$42,000 -

Taxable interest $65,000
Estate disbursements
Administrative expenses attributable to taxable income (14,000) (2)
Charitable contributions from gross income to a public charity, made under the terms of the will ( 9,000) (1)
Estate’s distributable net income (DNI) $42,000

1.An estate qualifies for a deduction for amounts of gross income paid or permanently set aside for qualified charitable organizations. The adjusted gross income limits for individuals do not apply. However, to be deductible by an estate, the contribution must be specifically provided for in the decedent’s will. If there is no will, or if the will makes no provision for the payment to a charitable organization, then a deduction will not be allowed even though all of the beneficiaries may agree to the gift. 2.Expenses of administering an estate can be deducted either from the gross estate in figuring the federal estate tax on Form 706 or from the estate’s gross income in figuring the estate’s income tax on Form 1041. However, these expenses cannot be claimed for both estate tax and income tax purposes

Question 6

Which of the following fiduciary entities are required to use the calendar year as their taxable period for income tax purposes?

1. Estates
2. Trusts(except those that are tax exempt)

Answer 6

2 only - Estates may use either the calendar year or a fiscal year for its tax year. Trusts, except those that are tax-exempt, are required to use the calendar year for its tax year. This response correctly indicates that estates are not required to use the calendar year as its tax year and that trusts, except those that are tax-exempt, are required to use the calendar year

Question 7

Jay properly created an inter vivos trust naming Kroll as trustee. The trust’s sole asset is a fully rented office building. Rental receipts exceed expenditures. The trust instrument is silent about the allocation of items between principal and income.

Among the items to be allocated by Kroll during the year are insurance proceeds received as a result of fire damage to the building and the mortgage interest payments made during the year.

Which of the following items is(are) properly allocable to principal?

1. Insurance proceeds on building
2. Current mortgage interest payments

Answer 7

1 only - Only extraordinary items are allocated to principal; that is, payments that are made irregularly. Regular payments are allocated to interest.
The insurance proceeds are unusual and were made only once. They are allocated to principal. The interest payments are made at regular intervals and so are allocated to interest

Question 8

Sam’s year 2 taxable income was $175,000 with a corresponding tax liability of $30,000. For year 3, Sam expects taxable income of $250,000 and a tax liability of $50,000. In order to avoid a penalty for underpayment of estimated tax, what is the minimum amount of year 3 estimated tax payments that Sam can make?

Answer 8

$33,000 - No penalty is imposed if the tax payments during the year are at least 90% of current year taxes or 100% of last year’s taxes. If the taxpayer’s AGI exceeds $150,000, then tax payments during the year must be at least 110% of last year’s taxes. $30,000 x 110% = $33,000.

Question 9

A taxpayer filed his income tax return after the due date but neglected to file an extension form. The return indicated a tax liability of $50,000 and taxes withheld of $45,000.

On what amount would the penalties for late filing and late payment be computed?

Answer 9

$5,000 - The late filing and late payment penalty is based upon the balance due. $50,000 owed less $45,000 withheld = $5,000 net due.