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Enrolled Agent: Individual Exam 2020 > Interest: Below Market Loans (BML), Bonds, Education Bonds, Original Issue Discount (OID) > Flashcards

Interest: Below Market Loans (BML), Bonds, Education Bonds, Original Issue Discount (OID) Flashcards

1
Q

When is interest reported on the tax return?

A
  1. When credited to your account AND
  2. can be withdrawn from your account
    “Constructive Receipt”
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2
Q

What is a nominee distribution? Is it included in the TP’s GI?

A

A distribution where several individuals are entitled to the interest but only one TP’s name is on the account.
TP:
1. reports entire amount of the interest
2. can deduct interest attributed to others
3. Files two copies of 1099-int for others (1-IRS, 1- other taxpayer)
4. Sends form 1096 to IRS saying the TP is the filer

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3
Q

What is a merchandise premium and is it taxable?

A

A gift/service for opening an account at a savings institution.
Taxable if:
Deposit < $5000 and Gift > $10
Deposit > $5000 and Gift > $20

Report the FMV of gift as interest

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4
Q

A TP made an early withdraw from a deferred interest account before the maturity date and paid a penalty. Can the TP reduce taxable interest by the amount of the penalty?

A

No: All interest income must be reported

However, the TP could deduct the penalty amount on the 1040 line 7

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5
Q

Is interest a beneficiary receives from an estate/trust taxable?

A

Yes. The TP should receive a K1 indicating their share of the interest income to include in GI

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6
Q

Is interest income from a source outside the United States (foreign payer) reported on the United States tax return?

A

Yes, unless exempt by U.S. law

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7
Q 
Are amounts earned on deposit for the following treated like dividends or interest? 
Cooperative bank
Credit Union
Domestic Building and Loan
Domestic Savings and Loan
Federal Savings and Loan 
Mutual Savings and Loan
A

Interest

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8
Q

Are amounts earned on a money market account from a non-financial institution (Mutual Fund or Stock Broker) treated as interest or dividends?

A

Dividends

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9
Q

What is usurious interest? Is it taxable?

A

Interest charged at an illegal rate. Not taxable unless state law changes the interest to a payment on principal.

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10
Q

Is interest income on frozen deposits taxable?

A

No. Exclude any amount credited to your account that you an unable to withdraw. (usually due to threat of bankruptcy)

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11
Q

Installment sales agreement contracts allow for deferred payments and the payments usually include interest. Is the interest taxable?

A

Yes. A portion of each payment will be treated as interest even if no specific amount of interest is stated in the contract.

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12
Q

Is interest on a Traditional IRA taxable?

A

Yes - when withdrawn

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13
Q

Is interest earned on a Roth IRA taxable?

A

Never

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14
Q

Is interest on insurance dividends left on deposit with the VA taxable?

A

No

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15
Q

Is interest on a local, state or federal refund taxable?

A

yes

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16
Q

Is interest on a U.S. obligations taxable on the federal return?

A

yes

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17
Q

Sayla borrows $5000 from her bank and uses $5000 she has deposited at the bank to buy a CD for $10,000. The certificate at maturity earned $565 and Sayla received $200. $365 (565-200) was the interest Sayla paid on the loan for the year. What are the tax consequences?

A
  1. Sayla must report the entire $565 received as taxable interest
  2. Sayla can deduct on Sched A $365 as net investment expense.
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18
Q

What is a Below Market Loan (BML)? What are two types of BMLs?

A

A loan made with no interest or interest below the federal level charged (AFR).
Types:
- Demand Loans
-Term Loans

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19
Q

What is a demand loan?

A

A loan that is payable in full at any time the lender “demands” payment or a loan that has an indefinite maturity.

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20
Q

What is a term loan?

A

A loan for a specific amount with a specific repayment schedule.

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21
Q

What is AFP?

A

Applicable Federal Rate of interest that is published by the IRS each month

22
Q

What is forgone interest?

A 
For any period: 
Amount of AFR interest that would have accrued
- interest actually paid
\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_
forgone interest
23
Q

What is imputed interest?

A 
Amount of forgone interest on a Below Market Loan that is typically included as income. 
AFP accrued
-interest paid
\_\_\_\_\_\_\_\_\_\_
imputed (forgone) interest
24
Q

How is imputed interest treated by the lender?

A

It is considered received by the borrower and then retransferred as either:

  • gift
  • compensation for employee (taxable income)
  • dividend for a corporate shareholder (taxable investment income)
25
Q

How is imputed interest treated by the borrower?

A
  1. Imputed interest is deemed transferred by borrower to lender on 12/31 and is deductible for the borrower
  2. Lender transfers imputed interest back as :
    - gift (usually non-taxable) - gift rules apply
    - compensation(taxable)
    - dividends (taxable)
26
Q

What types of loans are subject to BML rules? (5)

A
  1. gift loans
  2. pay-related loans
  3. Corporate shareholder loans
  4. loans to Qualified Care Facilities under continuing care contract
  5. tax avoidance loans
27
Q

De Minimis Loan: What is the imputed interest exception for below market gift loans between individuals?

A

No interest is included in GI if:
1 . loan is <= $10,000
2. Loan amount is not directly used to buy or carry income producing assets
3. demand loans only

28
Q

What is the imputed interest exception for below market pay related loans or corporate shareholder loans?

A

No interest is included in GI if:

  1. demand loan
  2. loan <= $10,00
  3. principal purpose on the loan was not tax avoidance
29
Q

What is the limit on imputed interest for gift loans between individuals? How are amounts above the limit reported?

A
  1. If gift loan is <= $100, 000 then
    -imputed interest = borrower’s net investment income amount
    - If borrower’s net investment income <= $1000 then imputed interest is considered to be 0
  2. The lender includes amount above limit as income
    Borrower can deduct the amount above the limit as investment expense
30
Q

What are the requirements for a below market imputed interest exception for Continuing Care Facilities?

A
  1. Loan is made to a Qualified Continuing Care facility
  2. there is a contract
  3. TP/Sp are the lender and <=62 years old
31
Q

BML with no “significant tax effect” are an exception to the imputed interest rule. What is the requirement to meet this exception? What are examples of this type of loan?

A

Requirement: No significant tax liability due to the loan for either the lender or the borrower
Examples:
- loans to charity
- employee relocation loan
- loans subsidized by government under a special program

32
Q

Which entities can issue bonds that are not taxable on the federal level?

A
  1. Entities:
    - local
    - state and District of Columbia
    - US possessions and political subdivisions
    * Includes: Registered - bonds, installment agreements and commercial debt

NOT: Private Activity Bonds and Arbitrage Bonds

33
Q

A TP bought a series EE bond for $2200.
In 2016, the TP traded that series EE bond for $2500 in series HH Bonds PLUS $223 in cash.
In 2019, the TP cashes in the series HH bonds at maturity and receives $2500.
What are the tax consequences?

A

In 2016: the taxpayer must declare the $223 in cash as income.
In 2019: TP must report $300 in income

Redemption value HH bonds 2500
- Original Cost EE bond (basis) (2200)
_________________________________
Taxable Amount 300

34
Q

What types of US Savings bonds are currently offered to individuals? When does a taxpayer report the interest income?

A
  1. Series EE and Series I
  2. Report:
    Accural TP: report as interest accrues (is earned) each year
    Cash Method TP: usually when interest is actually paid
35
Q

What is a Zero Coupon Bond?

A 
A bond with no interest.  OID income is reported. 
Maturity value
-Purchase Price (Issued Amount)
\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_
OID income
36
Q

When can Private Activity Bond interest be excluded from GI?

A 
It is a Qualified Activity Bond: 
1. residential housing
2. public facility (airport)
3. Qualified Mortgage
4. Qualified Small Issue Bond
5. Qualified Student Loan 
6 Qualified Redevelopment bond
7. Qualified Exempt Organization Bond
8. VA bond
37
Q

When must Private Activity Bond interest be included in GI?

A
  1. > 10% proceeds used in a private business AND
    10% principal or interest is secured by a private property

OR
2. more than 5% OR 5 million dollars of proceeds are used for private loans

38
Q

Requirements for excluding bond interest under the Education Savings Bond Program?

A
  1. US savings bond series EE or I issued after 1/31/89
    2, Bond is purchased by TP/SP when >= 24 yr old
  2. TP/SP/dependent attend qualified institution and have qualified expenses (tuition and fees)
  3. Phase outs apply
  4. MFS does not qualify
    *expenses already used for education credits or tax free education assistance can not be used here
39
Q

2019 Phase out range for Education Savings Bond Program exclusion?

A

Single: 81000-96100

MFJ; 121600-151600

40
Q

Calculation for determining excludable portion of interest for an Education Savings Bond

A
  1. Exclusion Ratio:
    Qualified Education Expense/Proceeds of Bond Interest Redeemed = Bond Proceeds - Original Cost
  2. Excluded Amount of interest:
    Exclusion Ratio * Interest on Bond
41
Q

In 2019 Tiffany and Joe (MFJ) cashed a series EE savings bond with total denomination of $10,000 that they bought in 2003 for $5000. They received $7100 in proceeds. They paid their daughter’s qualified education expenses of $4000. What amount can be excluded from GI?

A
  1. Exclusion Ratio:
    Qualified Education Expense/Proceeds of the bond
    4000/7100=.563
  2. Bond Interest = Proceeds - Original Cost
    7100-5000= 2100
  3. exclusion amount: Bond Interest * Ratio
    2100*.563 = 1183 interest excluded from GI
  4. Total Interest - excluded interest = included interest
    2100 - 1183 = 917 included in GI

IRS pub 550

42
Q

Is Original Issue Discount (OID) taxable?

A

Yes, as interest.
All debt instruments that pay no interest until maturity are presumed issued at a discount

Example: Zero Coupon Bond

43
Q

What is OID?

A

Original Issue Discount (OID)

A debt instrument has OID when issued for a price < its stated redemption price at maturity (discount).

Stated redemption price at maturity
- original issue price
__________________________
OID (considered a form of interest)

44
Q

When is a 1099-INT used to show taxable OID?

A 
For short term debt obligations. 
Proceeds TP received at Maturity of Bond
- Purchase Price for the TP
\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_
OID
45
Q

When is 1099-OID used to show taxable OID?

A

Long term debt instruments where the taxpayer had OID >=$10

46
Q

When is Long Term OID included in income? What types of obligations do OID rules not apply to?

A 
Generally, each year whether you receive the interest or not. 
Exceptions: 
- US Bonds
-tax exempt obligations
-Short term debt obligations
-Loans between individuals where: 
 a. lender isn't in the business of lending
 b. loan <=$10,000
 c. not a tax avoidance attempt
47
Q

What is De Minimis OID and is it taxable? Requirements for being considered De Minimis OID?

A

OID that is so small it is not considered taxable
De Minimis If:
(.0025)(Redemption Value)(yrs to maturity) is

Less Than

Maturity Price - Issue Price = OID Discount

48
Q

A taxpayer bought a 10 year bond with a stated redemption price of $1000 issued at $980.
What is the OID amount?
Is it De Minimis?

A
  1. (.0025)(1000)(10) =$25
  2. maturity price - issue price (1000-980= $20)
  3. OID < #1 calculation = de minimus
    20<25 De Minimis - exclude from GI
49
Q

A taxpayer bought a 10 year bond with a stated redemption price of $1000 issued at $950.
What is the OID amount?
Is it De Minimis?

A
  1. (.0025)(1000)(10) =$25
  2. maturity price - issue price (1000-950= $50)
  3. OID > #1 calculation = not di minimus
    50>25 include in GI
50
Q

Bill makes an interest free loan of $90,000 to his daughter, Katie, so that she can start a business. He forgoes interest of $4000 each year. In the first year, Katie has net investment income of $600. What are the tax consequences?

A

Katie pays no gift tax because $4000 is below the annual gift tax exclusion. She will include the $600 in her GI.

Bill has no interest income because Katie’s Net Investment income <= $1000

51
Q

Bill makes an interest free loan of $90,000 to his daughter, Katie, so that she can start a business. He forgoes interest of $4000 each year. In the first year, Katie has net investment income of $2500. What are the tax consequences?

A

Katie pays no gift tax because $4000 is below the annual gift tax exclusion. She will include the $2500 in her GI.

Bill must include $2500 in interest in his GI. Because Katie’s net investment income >$1000, Bill must include interest up to her net investment income level.

52
Q

Bill loans Sandy $20,000 for one year at 0.1% interest. The AFR for the loan is .64%. How much imputed interest does Bill need to declare as income?

A 
AFR interest (20000*.0064=128)
- Actual interest (20000*.001=20)
\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_
Imputed interest  ($108)

Enrolled Agent: Individual Exam 2020 (32 decks)

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