IV. Federal Taxation of Individuals-Individual Tax Issues

Question 1

IV. Federal Taxation of Individuals

3. Individual Tax Issues
4. Tax Dependents

Sara Hance, who is single and lives alone in Idaho, has no income of her own and is supported in full by the following persons:

Amount of Support Percent of Total

Alma (unrelated friend) $2,400 48

Ben (Sara’s brother) 2,150 43

Carl (Sara’s son) 450 9

Total $5,000 100

Under a multiple support agreement, Sara qualifies as a dependent for:

1. No one
2. Alma
3. Ben
4. Carl

Answer 1

3.

Correct! Ben has provided over 10% of Sara’s support and all of the qualifying relative tests are met (gross income, joint return, citizen) except for the support test, but it is met through the multiple support agreement. The individuals as a group have provided over 50% of Sara’s support.

Question 2

IV. Federal Taxation of Individuals

3. Individual Tax Issues
4. Tax Dependents

Which one of the following is not included in determining the total support of a dependent?

1. Tax-exempt income received by the dependent and used for support.
2. Social security benefits received by the dependent and used for support.
3. Birthday presents given to the dependent.
4. Federal and state income taxes paid from the dependent’s own income.

Answer 2

4.

This answer is correct. Support includes food, FMV of lodging, medical, recreational, educational, and certain capital expenditures made on behalf of a dependent. Excluded from support is life insurance premiums, funeral expenses, nontaxable scholarships, and income and social security taxes paid from a dependent’s own income.

Question 3

IV. Federal Taxation of Individuals

3. Individual Tax Issues
4. Filing Status

Answer 3

I. Abandoned Spouse—An abandoned spouse is a married taxpayer who is allowed to file as though they are unmarried. An abandoned spouse may file as a head of household. The following requirements must be met:

1. The taxpayer’s spouse has not lived in the home for the last six months of the calendar year.
2. The taxpayer must provide more than half the cost of maintaining a home for self and a dependent child.

II. Surviving Spouse—Taxpayers, who are not married, may nonetheless qualify for a more advantageous tax rate schedule if they are a surviving spouse. A surviving spouse is also known as a qualifying widow(er).

• A surviving spouse may use the married-joint rates for two years after the taxpayer’s spouse has died.

III. The “mini” standard deduction is $1,100 (2019).

• A dependent can earn a regular standard deduction by earning income. The amount of the standard deduction is the greater of the mini standard deduction or earned income plus $350 (2019) (limited to the regular standard deduction).

Question 4

IV. Federal Taxation of Individuals

3. Individual Tax Issues
4. Alternative Minimum Tax and Other Taxes

I. Self-Employment Tax

Answer 4

1. The first part of the SE rate (Social Security) is 12.4% on the first $132,900 (2019) of SE income (the ceiling).
2. The second part of the SE rate (Medicare) is 2.9% on all SE income (no ceiling).

C. Nanny Tax—Taxpayers who employ domestic workers, must withhold and pay FICA if cash wages exceeds $2,100 (2019).

Question 5

IV. Federal Taxation of Individuals

3. Individual Tax Issues
4. Alternative Minimum Tax and Other Taxes

V. Alternative Minimum Tax

1. These modifications generally serve to increase taxable income by adding items of income not recognized by regular tax and disallowing deductions that do not necessarily represent economic outlays.
2. The AMT applies only to taxpayers whose net regular liability is less than the tentative tax calculated under the broad AMT rules.

Answer 5

Formula for Computing the AMT

Regular taxable income

± Adjustments

+ Preferences

AMT income

— Exemption

AMT base

x Rate

Tentative minimum tax before credits

— Certain credits (see discussion below)

Tentative minimum tax

— Regular tax liability

AMT (if positive)

Note

There is no difference between AMT cost recovery and regular cost recovery for real property. Different methods are required only for personalty.

Question 6

IV. Federal Taxation of Individuals

3. Individual Tax Issues
4. Alternative Minimum Tax and Other Taxes

V. Alternative Minimum Tax

C. Preferences—These always increase AMT income. The most common preference items for individuals are:

Answer 6

1. Tax-exempt interest on private activity bonds has been a preference item for many years, but a few recent exceptions have been enacted.
   
   1. For bonds issued after July 30, 2008, the interest on tax exempt housing bonds is not treated as a preference item if the bonds are for low-income housing developments, mortgage bonds, or mortgage bonds for veterans.
   2. For any private activity bonds issued in 2009 and 2010, the interest earned from these bonds will not be included as AMT income.
2. Percentage depletion in excess of cost basis on certain mineral properties.
3. Qualifying Small Business Stock (QSBS)
   
   1. For QSBS that was purchased before September 28, 2010, the general rule for this preference item is that 7% of the gain excluded from income under the qualified small business stock provision (see the “Capital Gains and Losses” lesson for more detail) is a preference item for the AMT. Gain is excluded only if the stock was held for more than five years.
   2. Gain on the sale of qualified small business stock that was acquired after September 27, 2010, and is sold more than five years after the purchase date will not be subject to the AMT. This gain is also completely excluded from regular tax.

Question 7

IV. Federal Taxation of Individuals

3. Individual Tax Issues
4. Alternative Minimum Tax and Other Taxes

V. Alternative Minimum Tax

D. AMT exemption—Taxpayers are entitled to an AMT exemption of $111,700 if married filing jointly ($71,700 if not married) in 2019.

Answer 7

1. The exemption is subject to a phaseout triggered by AMTI over $1,020,600 if married, $510,300 if single (2019).
2. The phaseout rate is 25% of the amount of AMTI over the trigger.
3. For children subject to the kiddie tax, the AMT exemption cannot exceed the sum of the child’s earned income plus $7,750 (in 2019).
4. The AMT has two tax brackets, 26% and 28%.

Example

For a married taxpayer with AMTI of $1,256,900, the phaseout is triggered because AMTI exceeds the $1,020,600 trigger. This taxpayer is $236,300 over the trigger, which means that $59,075 of the exemption will be lost ($236,300 × 25%).

Question 8

IV. Federal Taxation of Individuals

3. Individual Tax Issues
4. Alternative Minimum Tax and Other Taxes

V. Alternative Minimum Tax

Alternative minimum tax preferences include

Tax-exempt interest from private Charitable contributions of

activity bonds issued after August 7, 1986 appreciated capital gain property

1. Yes Yes
2. Yes No
3. No Yes
4. No No

Answer 8

B.

Correct! The alternative minimum tax ensures that all taxpayers share the tax burden fairly by preventing taxpayers with substantial income from avoiding significant tax liability. The alternative minimum tax equals the excess (if any) of the tentative minimum tax over the regular tax. In computing a taxpayer’s alternative minimum taxable income, several adjustments and preferences are made to a taxpayer’s taxable income.

Adjustments are a substitution of an amount used in computing alternative minimum tax for an amount used computing regular tax. Preferences involve the addition of the difference between alternative minimum tax and regular tax treatments. There are numerous adjustments and preferences, including depreciation adjustments and preferences. Charitable contributions of appreciated capital gain property are not preference items.

Question 9

IV. Federal Taxation of Individuals

3. Individual Tax Issues
4. Tax Planning Strategies for Individuals Results

Appropriate strategies for reducing the alternative minimum tax include all of the following except:

1. Do not exercise incentive stock options.
2. Make additional charitable contributions.
3. Increase home mortgage interest on primary mortgage.
4. Increase mortgage interest on a home equity loan used to purchase a car.

Answer 9

D.

Mortgage interest on a home equity loan used to purchase a car is not deductible for AMT purposes so increasing these will not reduce the AMT.

Question 10

IV. Federal Taxation of Individuals

4. Individual Tax Issues
5. Tax Planning Strategies for Individuals Results

Orleans has owned land as an investment for five years. His basis in the land is $70,000 and the land’s current fair market value is $50,000. Which of the following statements is correct with regard to this land?

1. If Orleans sells the land to his father he can deduct the $20,000 loss in the land.
2. If Orleans gives the property to an unrelated friend he can deduct the $20,000 loss in the land.
3. Orleans should sell the land, recognize the $20,000 capital loss, and then gift the $50,000 cash from the sale to his friend.
4. If the land is sold to an unrelated party, the $20,000 loss cannot be recognized since the land is not depreciable.

Answer 10

1. The loss would be disallowed since the land was sold to a related party.
2. If the property is gifted, the loss is not recognized since there was not a sale or disposition of the land.
3. If Orleans gives the property to his friend, the $20,000 loss disappears since the friend’s loss basis in the land will be its fair market value of $50,000. Therefore, Orleans should sell the land so he can recognize the loss. He can then contribute the cash from the sale to his friend.
4. If the land is sold to an unrelated party the $20,000 loss can be recognized. Whether the property is depreciable makes no difference for this tax result.

Question 11

IV. Federal Taxation of Individuals

3. Individual Tax Issues
4. Tax Planning Strategies for Individuals Results

Jose has owned stock for eight years that has a basis of $20,000 and fair market value of $100,000. Jose contributes the stock to a qualified charity. Which of the following is a proper tax consequence from this transaction?

1. Jose has recognized gain of $80,000.
2. Jose has a charitable contribution of $100,000.
3. Jose has a charitable contribution of $80,000.
4. Jose has a charitable contribution of $20,000.

Answer 11

B.

When long-term capital gain property is contributed to a qualified charity, the fair market value of the property can be deducted as a charitable contribution.