Module 3: Tax Reduction and Management Techniques - Charitable Gifts, Estates & Trusts, Kiddie Tax, and AMT Flashcards
What has to happen for the trust to qualify as a taxpayer separate from the grantor?
The grantor has to give up all right in and to the property.
What is the grantor trust rule, and what is the exception?
The rule that the trust’s income be taxed to the grantor, if they retain significant interest in the trust. Exception: reversion occurs because death before age 21 of beneficiary who is lineal descendant of grantor.
What form do trusts and estates use to file annual income taxes?
IRS Form 1041.
To whom is the income to beneficiaries taxed?
The beneficiary.
What is the definition of a trust?
A legal arrangement whereby an individual transfers legal ownership of property to a trustee.
To whom can the income in a trust be taxed and under what scenarios?
To the trust if income is accumulated there, to the grantor if the trust is a grantor trust, or to the beneficiary if income is distributed from it.
What are the qualities of a simple trust?
Required to distribute all income to beneficiaries each year, and charitable donations and principal distributions are prohibited.
What are the qualities of a complex trust?
One that can accumulate income, can distribute principal, and pays tax on accumulated income.
What are the qualities of a grantor trust?
The trust pays tax on all trust income, is ignored for income tax purposes, and the grantor retains the power to control enjoyment.
What is the common difference between fiduciary accounting income and fiduciary taxable income?
For tax purposes, capital gains represent taxable income.
How are trustee fees calculated in income?
Generally deductible, but may be treated as either income or principal for trust accounting purposes.
What are three major differences between the trust taxable income and individual taxable income?
Trust is entitled for a deduction for a distribution made to a beneficiary, not entitled to a standard deduction, and a personal exemption of $300 for a simple trust and $100 for a complex trust.
For what body are administrative expenses for an estate deducted?
Either the estate tax return of the decedent, or the income tax return of the estate.
Medical expenses for care of decedent before death - how are they handled?
If paid within a year after a death, either deducted on the decedent’s final tax return, or estate tax return but not both. Better to do on the Form 706 (estate tax return), because there is no 7.5% threshold requirement for deductibility like there is on the individual return, the 1040.
If not paid within a year, then only deductible on the Form 706 (estate tax return).
What is the distribution deduction calculation for the distributions made to beneficiaries?
The lesser of distributable net income (DNI) or the amount actually distributed to the beneficiaries.
When do fiduciaries need to file Form 1041?
On or before the 15th day of the fourth month after the close of the tx year.
What portions of fiduciary taxable income are taxed at the long-term capital gain rate?
Any component that consists of long term credit gain.
How is income characterized to the beneficiary?
It maintains its character.
What form does a beneficiary receive?
A K-1.
What portion of the beneficiary’s income is taxable?
The same proportion of the trust’s assets that are taxable.
What is the deduction for a dependent with earned income?
Either the limited deduction ($1,150) or the total earned income plus $400, not to include standard deduction.
What is the kiddie tax?
There is a standard deduction of $1,150 against unearned income on the income tax return. The next $1,150 is taxed at the child’s marginal rate, and any surplus is taxed at the parents’ marginal income tax rate.
To whom does the kiddie tax apply?
A child under the age of 19, or under 24 if a full-time student.
How is the kiddie tax computed when there is a combination of earned an unearned income?
First the AGI must be reduced by the standard deduction, or the amount of earned income plus $400. Then, the unearned income is reduced by $2,300. Total amount minus reduced unearned income is the remaining taxable income that is subject to the child’s tax rate schedule.
