Module 3: Tax Reduction and Management Techniques - Charitable Gifts, Estates & Trusts, Kiddie Tax, and AMT

Question 1

What has to happen for the trust to qualify as a taxpayer separate from the grantor?

Answer 1

The grantor has to give up all right in and to the property.

Question 2

What is the grantor trust rule, and what is the exception?

Answer 2

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.

Question 3

What form do trusts and estates use to file annual income taxes?

Answer 3

IRS Form 1041.

Question 4

To whom is the income to beneficiaries taxed?

Answer 4

The beneficiary.

Question 5

What is the definition of a trust?

Answer 5

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

Question 6

To whom can the income in a trust be taxed and under what scenarios?

Answer 6

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.

Question 7

What are the qualities of a simple trust?

Answer 7

Required to distribute all income to beneficiaries each year, and charitable donations and principal distributions are prohibited.

Question 8

What are the qualities of a complex trust?

Answer 8

One that can accumulate income, can distribute principal, and pays tax on accumulated income.

Question 9

What are the qualities of a grantor trust?

Answer 9

The trust pays tax on all trust income, is ignored for income tax purposes, and the grantor retains the power to control enjoyment.

Question 10

What is the common difference between fiduciary accounting income and fiduciary taxable income?

Answer 10

For tax purposes, capital gains represent taxable income.

Question 11

How are trustee fees calculated in income?

Answer 11

Generally deductible, but may be treated as either income or principal for trust accounting purposes.

Question 12

What are three major differences between the trust taxable income and individual taxable income?

Answer 12

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.

Question 13

For what body are administrative expenses for an estate deducted?

Answer 13

Either the estate tax return of the decedent, or the income tax return of the estate.

Question 14

Medical expenses for care of decedent before death - how are they handled?

Answer 14

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).

Question 15

What is the distribution deduction calculation for the distributions made to beneficiaries?

Answer 15

The lesser of distributable net income (DNI) or the amount actually distributed to the beneficiaries.

Question 16

When do fiduciaries need to file Form 1041?

Answer 16

On or before the 15th day of the fourth month after the close of the tx year.

Question 17

What portions of fiduciary taxable income are taxed at the long-term capital gain rate?

Answer 17

Any component that consists of long term credit gain.

Question 18

How is income characterized to the beneficiary?

Answer 18

It maintains its character.

Question 19

What form does a beneficiary receive?

Answer 19

A K-1.

Question 20

What portion of the beneficiary’s income is taxable?

Answer 20

The same proportion of the trust’s assets that are taxable.

Question 21

What is the deduction for a dependent with earned income?

Answer 21

Either the limited deduction ($1,150) or the total earned income plus $400, not to include standard deduction.

Question 22

What is the kiddie tax?

Answer 22

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.

Question 23

To whom does the kiddie tax apply?

Answer 23

A child under the age of 19, or under 24 if a full-time student.

Question 24

How is the kiddie tax computed when there is a combination of earned an unearned income?

Answer 24

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.

Question 25

What is the special requirement for a donation of a qualified vehicle?

Answer 25

The deduction amount is limited to the amount that the organization receives from the sale of the vehicle, unless they intend to use it.

Question 26

What is constructive receipt?

Answer 26

If a taxpayer has the right to bring funds under their personal control, they are said to have received it. For example, delaying picking up a check issued on December 31 does not change the tax year for that income.

Question 27

To what loans does the imputed interest rule applyy?

Answer 27

To those below the federal market rate.

Question 28

What rate is used to calculate imputed interest?

Answer 28

The federal government’s borrowing rate or the difference between that and the actual rate that was charged.

Question 29

What are the imputed interest rules for gift loans?

Answer 29

The lender has interest income, and the borrower has interest expense to the extent of imputed interest. In addition, a gift has been made to the borrower in the amount of imputed interest. These may only occur between individuals.

Question 30

What are the imputed interest rules for compensation-related loans?

Answer 30

The corporation has interest income and compensation expense for the amount of the imputed interest. The borrower will have compensation income and interest expense, which may or may not be deductible.

Question 31

What are the imputed interest rules for a corporation-shareholder loan?

Answer 31

The corporation will have interest income and a dividend distribution for the amount of the imputed interest. The shareholder-borrower will have dividend income and interest expense which may or may not be deductible for the same amount.

Question 32

What are the exceptions and limitations to the imputed interest rules?

Answer 32

No interest is imputed on total outstanding gift loans in the aggregate of $10,000 or less between individuals, unless the proceeds are used to purchase income-producing property. Also, there is an exception for compensation-related or corporation-shareholder loans that are less than or equal to $10,000. On loans between individuals between $10k and $100k, the imputed interest cannot exceed the borrower’s investment income for the year. If the borrower’s investment income for the year is less than $1k, no interest is imputed on loans of $100k.

Question 33

What is the AMT?

Answer 33

The alternative minimum tax - a second income tax system to ensure that taxpayers who reduce their tax liability below a certain point by using tax preference items, income received that would otherwise have been received tax-free.

Question 34

What are some itemized deductions allowed against the alternative minimum taxable income?

Answer 34

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 to the extent of qualified net investment income, estate taxes paid on a decedent’s income, and charitable contribution deductions.

Question 35

What is a positive adjustment?

Answer 35

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

Question 36

What is the calculation for the AMT?

Answer 36

The adjusted gross income is increased by any tax prefernce items and increase or decreased by the appropriate adjustments. That figure is then reduced by the allowable deductions, and the resulting amount is the alternative minimum taxable income. That amount is reduced by the exemption to arrive at the AMT base, and then that amount is taxed. The AMT is then compared to the regular tax amount. The AMT payment required is then reduced by any credits, including personal nonrefundable credits.

Question 37

What is the limit for state, local and property tax deductibility?

Answer 37

$10k per year.

Question 38

To whom is the income of a revocable trust taxed?

Answer 38

The grantor.

Question 39

What is the maximum you may deduct for charitable contributions?

Answer 39

Up to 50% of your adjusted gross income

Question 40

What is the maximum