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Course 4: Income Tax Planning > Module 3: Charitable Gifts, Estates & Trusts, Kiddie Tax and AMT > Flashcards

Module 3: Charitable Gifts, Estates & Trusts, Kiddie Tax and AMT Flashcards

1
Q

The Grantor

A

The person who creates the trust

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2
Q

How to have a trust qualify as a separate taxpayer

A

The grantor will have to give up virtually all rights in and to the property

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3
Q

Grantor Trust Rules

A

Require that the trust’s income be taxed to the grantor if the grantor retains too much power over, or interest in, the assets transferred into the trust

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4
Q

Grantor Trust Rules (Spouse)

A

The grantor is treated as holding any power or interest that is held by the grantor’s spouse.

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5
Q

Reversionary Interest Rule

A

Any income from property transferred to a trust in which the grantor (or grantor’s spouse) has more than 5% reversionary interest is taxed to the grantor.

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6
Q

Adverse party

A

A beneficiary whose economic interest in the trust may be diminished by the grantor’s exercise of the power of disposition.

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7
Q

When will the grantor not be taxed as owner of a trust

A
  • by retaining power to allocate income or principal among charitable beneficiaries
  • retaining power to allocate receipts and disbursements between income and principal
  • retaining power to withhold income during the legal disability of a beneficiary
  • retaining power to withhold income during the period that any income beneficiary is under age 21
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8
Q

When will the grantor be taxed as owner of the trust

A
  • if the grantor directly or indirectly retains certain administrative powers like purchasing, exchanging, borrowing or dealing with trust assets without adquate interest or security
  • If the income is or may be used for the benefit of the grantor or the grantor’s spouse
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9
Q

Juvenile Education Trust

A

A complex trust that allows people to use the gift exclusion to their children while also deferring the chance for them to get the money until they’re 21 years old

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10
Q

For a trust to qualify as irrevocable

A

the grantor cannot retain any right to alter, amend, revoke, or terminate the trust.

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11
Q

How is irrevocable trust income taxed

A

all income from the trust property will be taxed to the trust as a separate entity or to the trust beneficiaries, and not to the grantor.

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12
Q

What is a trust?

A

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

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13
Q

Who can trust income be taxed to?

A
  1. Trust - if income is accumulated in the trust
  2. Beneficiary - if income is distributed from the trust
  3. Grantor - if the trust is grantor trust
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14
Q

What is an estate?

A

A legal entity that comes into existence upon the death of an individual and remains in existence until the decedent’s assets pass to the heirs.

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15
Q

What does an estate do?

A
  • holds and protects the assets, collects income from those assets, and satisfies obligations of the estate until all the assets are distributed
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16
Q

What is a fiduciary on an estate or trust?

A

A person or entity that is responsible for the trust and estate

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17
Q

What are the types of trusts?

A
  • Simple Trust
  • Complex Trust
  • Grantor Trust
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18
Q

Simple Trust Rules

A
  • Trust is required to distribute all income to beneficiaries each year
  • Charitable donations are prohibited
  • Principal Distributions are prohibited
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19
Q

Complex Trust Rules

A
  • Can accumulate income
  • Principal can be distributed
  • trust pays tax on accumulated income
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20
Q

Grantor Trust Rules

A
  • If a trust is a grantor trust, the grantor pays tax on all trust income
  • Trust is ignored for income tax purposes
  • A trust will be a grantor trust if the grantor retains the power to control enjoyment
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21
Q

What are the grantors “power to control enjoyment”?

A
  • add or remove beneficiaries
  • determine the timing of distribution
  • alter the beneficiaries share of principal or income
  • retain a reversionary interest in either corpus or income
  • control the beneficial enjoyment
  • retain certain administrative powers
  • revoke the trust
  • retain the ability to take income distributions, apply the income to Life Insurance Policies or accumulate the income for future distributions to the owner or a nonadverse party
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22
Q

Accounting income of a fiduciary is determined by

A

The decedent’s will (in case of an estate) or the trust instrument (in case of a trust)
- each fiduciary may have its own unique set of rules

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23
Q

Difference between fiduciary accounting income and fiduciary taxable income

A

Treatment of Capital Gains

  • Accounting Purposes - Cap gains generally represent an increase in the value of the principal and are not available for distribution to the income beneficiaries
  • Tax Purposes - capital gains represent taxable income
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24
Q

Trustee Fees Taxation

A
  • generally deductible but may be treated as either income or principal for trust accounting purposes.
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25
Q

Differences between trust taxable income and individual taxable income

A
  • a trust is entitled to a deduction for distributions made to beneficiaries
  • A trust is not entitled to the standard deduction
  • A trust is entitled to a personal exemption of #300 for a simple trust and $100 for a complex trust
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26
Q

If an administrative expense is claimed as a deduction on the estate tax return of a decedent

A

It may not also be claimed as a deduction on the income tax return of the decedents estate

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27
Q

Two ways medical expenses paid for the care of the decedent before death can be handled

A
  1. if paid within one year after death, can be deducted from EITHER the decedent’s final income tax return or the decedents estate tax return. Want to do it on the estate tax return normally because there is no 10% minimum threshold.
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28
Q

How are deductions for distributions made to beneficiaries treated?

A
  • The fiduciary is allowed a deduction for the amount of distributions made to beneficiaries during the year
  • The amount deductible by the fiduciary is the same amount that is taxable to the beneficiaries
  • the income distribution deduction is calculated as the lesser of the distributable net income or the amount distributed
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29
Q

Distributable Net Income

A
  • Similar to fiduciary accounting income
  • includes most normal income/expense items
  • excludes items relating to corpus, such as capital gains, stock splits, and depreciation of business assets
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30
Q

What and when do fiduciaries file for taxes?

A

Fiduciaries file form 1041 on or before the 15th day of the fourth month after the tax year. Grantor trust may also file a form 1041

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31
Q

What is considered a “tax year” for Estates and Trusts for filing?

A

Estates - may adopt either a calendar year or a fiscal year, the first taxable year begins on the day following the decedents death.
Trust - must adopt a calendar year

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32
Q

Tax Treatment of Distributions Made to Beneficiaries

A
  • The beneficiary is taxed on an amount equal to the distribution deduction
  • Fiduciary receives a deduction for distribution
  • Income distributed to the beneficiary retains its character (LTCG or OID)
  • Beneficiary who receives a distribution will receive a Schedule K-1
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33
Q

Dependent’s Standard Deduction

A

$1,100, may be used against unearned income
OR
$350 plus any earned income, not to exceed the full standard deduction

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34
Q

Who does the Dependent’s Standard Deduction Apply to?

A
  • all taxpayers eligible to be treated as a dependent on another taxpayer’s return
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35
Q

Kiddie Tax Rule

A
  • $1,100 standard deduction
  • next $1,100 taxed at child’s marginal tax rate
  • rest of the unearned income is taxed to the child at the parent’s marginal income tax rate (if higher than the child’s marginal income tax rate)
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36
Q

Who does the Kiddie Tax apply to?

A
  • a child under 19 years old

- under age 24 if a full-time student

37
Q

Who does the kiddie tax not apply to?

A
  • a child who is married and files a joint return for the tax year
  • the child has earned income that exceeds half his support.
  • must have one living parent
38
Q

Kiddie Tax with earned income calculation

A
  • AGI (earned plus unearned) - earned income deduction
  • calculate unearned income taxable
  • subtract the unearned income taxable from the earned taxable income * marginal tax rate
  • do regular unearned income taxation
  • add those together
39
Q

Tax reduction techniques using the Kiddie Tax

A
  • Gifts to Minors (use UGMA and UTMA)

- Employment of Family Members

40
Q

Gifts that qualify for the charitable deduction (2)

A
  • direct gift of cash or property to the charitable organization
  • indirect gift that includes the provision of goods and services to the charity to make possible tha achievement for charitable purposes
41
Q

Examples of Indirect Gifts for charitable contributions

A
  • using a taxpayer’s car for an organizations charitable purposes (14 cents per mile
  • the cost of meals and lodging for the taxpayer on a charitable business for which the taxpayer receives no reimbursement
  • The basis in something created (like the cost of creating a painting, not the value of the painting itself)
42
Q

Four exceptions to the “less than a donor’s entire interest” rule

A
  • a gift of an undivided portion of the donor’s entire interest
  • a gift of a remainder interest in a personal residence or farm
  • a gift to a public charity of a remainder interest in a real property granted solely for conservation purposes
  • a gift of a partial interest transferred through a qualifying form of trust
43
Q

What is a qualifying charity?

A
  • no part of the corporations earnings can benefit any private shareholder or similar individual
44
Q

When is a gift considered to be given for tax purposes?

A
  • delivery of the gift to the charitable organization determines the date of the gift. The USPS is considered to be the agent of the recipient, so when the receive it it counts.
45
Q

What does the IRS require for proof of the gift?

A
  • name and address of organization
  • date of the gift
  • description of property
  • date acquired by taxpayer
  • fmv of property and how value was obtained
  • taxpayer’s adjusted basis in any appreciated property gift
  • any reduction in the value of the appreciated property claimed by the taxpayer
  • terms of any agreement with the charitable organization
  • amount claimed as a deduction
46
Q

Qualified Appraisal

A
  • required for donated property when the claimed value is over $5,000, or in the case of closely held stock, $10,000
47
Q

Qualified Vehicle

A
  • automobile, boat, or airplane
48
Q

Deduction limits for qualified vehicles

A
  • generally limited to the amount that the charity receives from the sale of the vehicle unless the organization plans to use it, in which case the taxpayer may value the donation at the time of the contribution, using reasonable methods.
49
Q

Amount of taxpayer deduction allowed for “appreciated property”

A

depends on the purpose for which the recipient charity uses or does not use the property.

50
Q

Use-unrelated Property

A
  • if the recipient charity does not have a related use for the gifted tangible personal property, the maximum deduciton allowed is limited to the lesser of the FMV of the property or the donor’s tax basis in the property (limited to 50% or 20% of AGI annually)
51
Q

Use-related property

A

if the charity does have a use for the property, and the taxpayer chooses to deduct the tangible personal properties FMV, then the taxpayer is limited to 30% or 20% of AGI annually.
- if they choose to deduct the basis in the property, the limits move up to 50% and 20%.

52
Q

Ordinary Income Property Definition

A

Property that, if sold, would result in recognition of ordinary income by the taxpayer (like a work of art from the taxpayer)

53
Q

Types of income property

A
  • cash
  • short-term capital gains property
  • works of art, books, or letters, when given by the person who produced them
  • Inventory
54
Q

How are gifts of Ordinary Income Property Deducted?

A

it is based on the lesser of the FMV or the adjusted basis.

55
Q

Contributions of Clothing and Household Items

A
  • should be deducted by the taxpayer at their current FMV as estimated by the taxpayer, not at their original retail value.
56
Q

Public Charities Deduction Limits

A
  • considered 50% organization, because for gifts of ordinary income property, taxpayers generally may not deduct more than 50% of their AGI for donations to public charities.
57
Q

What is considered a public charity?

A
  • churches, schools, hospitals and medical research organizations, and governmental units.
58
Q

When does a 50% charity only allow for a 30% deduction?

A

if donating long-term capital gain property if the deduction is based on the FMV of the property

59
Q

Donor Advised Funds

A
  • a taxpayer may lump several years worth of charitable contributions into a single DAF contribution, take the charitable contribution deduction in that year, and then direct that grants to their selected charities be paid from the DAF over the next few years
60
Q

Private Charities Deduction Limits

A
  • called 30% organization
61
Q

What is considered a 30% organization?

A

private nonoperating foundations, veterans groups, fraternal associations, and other not-for-profit associations.

62
Q

When does a 30% charity only allow for a 20% deduction?

A

if donating long-term capital gain property if the deduction is based on the FMV of the property

63
Q

The 50% election

A
  • The taxpayer elects a deduction of up to 50% of AGI in a given year, but they are limited to the adjusted basis of the property as the total allowable amount of the deduction. This election only applies to contributions of long-term capital gain property made to 50% organizations.
64
Q

Excess Contributions Carryforward

A

The taxpayer is entitled to carry forward excess deductions for up to five years.

65
Q

Qualified Charitable Distribution Limits

A

$100,000 per year, but the QCD will be reduced by the cumulative post 72 IRA contributions

66
Q

Sole Proprietor Charitable Contribution

A
  • ## Charitable contributions will be claimed on their schedule A rather than schedule C
67
Q

Contributions by Flow-Through Entities

A
  • not deductible in computing the net income of the entity, but instead retains its character as it flows through to the individual from the S corp or partnership on the K-1 and that person will claim the charitable deduction on their schedule A
68
Q

Contributions by C Corps

A

A corporation may normally only deduct, in a given tax year, up to 10% of its taxable income.
- in-kind donations of food are normally limited to 15%

69
Q

Depreciated or Loss Property

A
  • Only the current lower value may be deducted as a charitable contribution, any capital loss inherent to the loss of value on the property is non deductible.
70
Q

Nondeductible Property

A

If money or property is given to:
- Foreign Organizations (except certain Canadian, Israeli, and Mexican charities)
- Individuals
- Political Groups or candidates for public office, political campaigns, or political parties
Money or property paid FOR the following:
- Cost of raffle, bingo, or lottery tickets
- tuition
- Value of a person’s time or services donated to the charity

71
Q

Bargain Sale Charitable Contribution

A
  • when a seller transfers property to a charity in exchange for a sum that is less than the FMV of the property.
72
Q

Bargain Sale Deduction

A
  • considered part sale and part charitable contribution, for which the donor’s basis in the property and any appreciation are allocated on a pro rata basis to both the sale and gift portions.
73
Q

Constructive Receipt Income Tax Rule

A

If there is no substantial limitation or restriction on a taxpayer’s right to bring the funds under personal control

74
Q

Imputed Interest

A

When a lender has engaged in a below-market-interest rate loan transaction, the lender may have to report interest income even without actually receiving this interest.

75
Q

How is imputed interest calculated?

A

Using the federal governments borrowing rate, compounded semiannually and adjusted monthly

76
Q

Types of below-market-rate loans:

A
  1. Gift Loans
  2. Compensation Related Loans
  3. Corporation-Shareholder loans
  4. Tax avoidance Loans
77
Q

Exceptions to the imputed interest rules

A
  • no interest is imputed on total outstanding gift loans in the aggregate of 10k or less between individuals, unless the proceeds are used to purchase an income-producing property
  • On loans between individuals greater than 10k but less than or equal to 100k, the imputed interest cannot exceed the borrower’s investment income (from all sources) for the year
78
Q

Alternative Minimum Tax

A

It was created to ensure that taxpayers who reduced their liability below a certain point by utilizing tax preference items will be required to pay at least a minimum amount of income tax.

79
Q

Tax Preference Items and Adjustments

A
  • Accelerate cost recovery deductions
  • Percentage depletion of adjusted basis
  • Excess intangible drilling costs
  • Bargain element on the exercise of an incentive stock
  • Research and experimental costs, circulation expenses, and mining exploration and development costs deducted over a 10 year amoritization
  • rapid amortization of a certified pollution control facility
  • The completed-contract method for long-term contracts entered into after feb 28 1986
  • Tax-exempt interest on qualified private-activity municipal bonds
  • passive farm losses
  • seven percent of the excluded gain from qualified business stock
80
Q

AMT Test Tip about Preference Items

A

It is not crucial for students to understand the intricacies of the various depreciation adjustments, however, it is important to realize that depreciation will often cause a potential AMT problem

81
Q

Itemized Deductions Against the AMT

A
  • medical expenses in excess of 7.5 of AGI
  • casualty losses in excess of 10 of agi and the 100 floor
  • gambling losses to the extent of gambling winnings
  • qualified housing interest
  • investment interest expense
  • estate taxes paid on a decedents home
  • charitable contribution deductions
82
Q

What is a positive adjustment?

A

When the deduction or exemption allowed for regular income tax purposes exceeds the deduction or exemption allowed for AMT purposes.

83
Q

What is a negative adjustment?

A

Made when the deduction allowed for AMT purposes exceeds that for regular income tax purposes

84
Q

AMT exemptions

A

Each taxpayer is allowed a special AMT exemption before calculating the AMT.

85
Q

AMT Tax Rates

A

26% for first 199,900

28% for the rest

86
Q

Steps for Calculating AMT

A
  1. AGI is increased by any tax preference items and increased or decreased by the appropriate adjustments.
  2. That figure is reduced by the allowable itemized deductions (this is your AMTI)
  3. The AMTI is reduced by the appropriate AMT Exemption amounts to arrive at the AMT Base
  4. Apply the tax rates to the AMT amount (LTCG rates apply the same as normal)
  5. the AMT amount is compared to the regular tax amount and if the regular tax is less than the AMT amount, then the difference is the AMT payment required
  6. The AMT payment is reduced by any refundable and nonrefundable credits and the allowable AMT foreign tax credits
87
Q

Tax Planning for AMT

A
  • Move income into an AMT year
  • Move deductions into a non-AMT year
  • Time the recognition of certain AMT adjustments and tax preference items
88
Q

AMT Credit

A

Available for years after an AMT liability has occurred. Based on deferral, but not exclusion preferences and adjustments. is available only to the extent the AMT was attributable to deferral items.

89
Q

Deferral Preferences

A

those other than the standard deduction and personal exemptions, disallowed itemized deductions, depletion adjustments, private activity muni bond interest, and small business stock exclusions.

Course 4: Income Tax Planning (8 decks)

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