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

Question 1

Philip’s grandmother gave securities to him when he was born nine years ago. In 2023, he has dividends of $15,000 from the securities. What is his net unearned income taxed at his parents’ marginal tax rate?

A)
$12,500
B)
$13,850
C)
$14,000
D)
$9,200

Answer 1

a

Some of Philip’s unearned income is taxed at his parents’ marginal tax rate and is calculated as follows: $15,000 UI – $1,250 (standard deduction) – $1,250 (greater of $1,250 for 2023 or amount of allowable itemized deductions directly connected with the production of the unearned income) = $12,500

LO 3.1.1

Question 2

Which of the following statements regarding below-market loans is CORRECT?

A)
If the borrower’s net investment income for the year does not exceed $1,000, no interest is imputed on loans of more than $100,000.
B)
In a compensation-related loan, the employer has interest income and compensation expense in the amount of the imputed interest, but the employee has received a gift from the employer in the same amount.
C)
For gift loans greater than $10,000 and less than or equal to $100,000, a minimum of $1,000 of interest must be imputed.
D)
For a gift loan, the amount of the imputed interest is treated as a gift from the lender to the borrower.

Answer 2

d

In a gift loan, a gift has been made by the lender to the borrower in the amount of the imputed interest. In a compensation-related loan, the employer 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, for the same amount. For gift loans greater than $10,000 and less than or equal to $100,000, if the borrower’s net investment income for the year does not exceed $1,000, no interest is imputed. For a gift loan of more than $100,000, the prevailing federal rate of interest will be imputed.

LO 3.3.1

Question 3

Maxine, an individual taxpayer, donated $100,000 in cash to a qualified public charity in Year 1. Her adjusted gross income was $150,000 in Year 1 and $150,000 in Year 2. She makes no donations to charity in Year 2. How much of a tax deduction will she be allowed for this gift in each of the two tax years?

A)
Year 1: $45,000; Year 2: $0
B)
Year 1: $75,000; Year 2: $5,000
C)
Year 1: $45,000; Year 2: $35,000
D)
Year 1: $90,000; Year 2: $10,000

Answer 3

d

Individual cash donations to qualified public charities are limited to 60% of adjusted gross income, but excess amounts may be carried over in subsequent tax years. Sixty percent of Maxine’s Year 1 AGI was $90,000. In Year 1, she can deduct $90,000 of the gift. In Year 2, she can deduct the remainder of $10,000.

LO 3.2.2

Question 3

Which of the following is NOT an allowable itemized deduction against alternative minimum taxable income?

A)
Medical expenses greater than 7.5% of adjusted gross income
B)
Qualified housing interest
C)
Charitable contributions
D)
State and local income taxes

Answer 3

d
Explanation
State and local income taxes, as well as property taxes, are not allowable itemized deductions. A deduction is allowed for medical expenses in excess of 7.5% of adjusted gross income. A deduction is allowed for charitable contributions. A deduction is allowed for qualified housing interest.

LO 3.3.2

Question 4

Jamaal owns a professional service corporation. While capital is not a material income-producing factor, he does use certain equipment in his practice. Jamaal would like to assist his 18-year-old son, Jarod, in financing his education at a college located in another state.

Which one of the following intrafamily transfer techniques would be most appropriate?

A)
Convert to S corporation status and give Jarod some of the stock.
B)
Gift the equipment to Jarod and then lease it back from him.
C)
List Jarod as an employee and pay him a salary, even though he cannot provide any meaningful services.
D)
Set up a short-term revocable trust for Jarod’s benefit.

Answer 4

b

The answer is gift the equipment to Jarod and then lease it back from him as the most appropriate intrafamily transfer technique.

LO 3.3.1

Question 5

Which of the following statements regarding the alternative minimum tax is CORRECT?

If the regular income tax after credits equals or exceeds the individual AMT, then no individual AMT payment is required.
If the regular income tax after credits is less than the individual AMT, then the AMT is not due.
A)
Neither I nor II
B)
I only
C)
II only
D)
Both I and II

Answer 5

b

Statement II is incorrect. If the regular income tax after credits is less than the individual AMT, then the AMT must be paid with this difference, referred to as the AMT payable.

LO 3.3.2

Question 6

Tony made a $10,000 pledge to his church building fund that he would like to fulfill before the end of the year. He owns stock with a basis to Tony of $15,000 that currently has a FMV of $10,000. He is meeting with his planner to discuss year-end planning and tells the planner about the stock he wants to use as payment of the donation to the church building fund. What should the planner tell Tony?

A)
Tony cannot donate loss property.
B)
Tony should sell the stock and make a cash donation to his church.
C)
Tony should hold on to the stock and gift other property or cash instead.
D)
Tony should donate the stock with the stipulation that the church sells it immediately and take advantage of the capital loss.

Answer 6

b

Tony should sell the stock and take advantage of the capital loss on his income tax return. He can donate the cash from the stock sale to fulfill his pledge to the church building fund.

LO 3.2.2

Question 7

Which of the following children have income subject to federal income tax at the parent’s marginal tax rate 2023?

Brittney, age 16, earned $5,000 in salary.
Kate, age 14, received $2,800 in mutual fund dividends.
Tony, age 5, received $951 in savings account interest.
Amanda, age 19, a part-time college student, received $2,600 in dividends and interest.
A)
Kate and Tony
B)
Brittney
C)
Kate
D)
Kate, Tony, and Amanda

Answer 7

c

This question involves application of the kiddie tax, which applies to unearned income in excess of $1,250 (for 2023) by a child under the age of 19 before the close of the tax year or a full-time student who has not attained age 24 before the close of the taxable year. Brittney, although under age 18, has only earned income. Amanda is age 19 and only a part-time college student, so she is not subject to the kiddie tax. Finally, Tony, age 5, has unearned income, but it is less than $1,250. Only Kate is subject to the tax.

LO 3.2.1

Question 8

Imputed loan interest is usually taxable and occurs when

A)
the loan is secured by specific real property.
B)
a company loan is provided to an employee.
C)
a loan is provided by a related person at below-market terms.
D)
bonds are gifted by an employer.

Answer 8

c

Imputed loan interest is usually taxable and occurs when a loan is provided by a related person at below-market terms.

LO 3.3.1

Question 8

Jim made charitable contributions of cash to a local university, a qualifying charitable organization. Jim’s cash contributions for the current year totaled $80,000. Jim has an AGI of $120,000. What is the amount of charitable contribution deduction that Jim may claim in the current year?

A)
$60,000
B)
$72,000
C)
$24,000
D)
$36,000

Answer 8

b

Gifts of cash to a 50% organization are limited to 60% of AGI under TCJA. Sixty percent of the $120,000 AGI equals $72,000. Jim would also have an $8,000 carryforward.

LO 3.2.2

Question 9

Which of the following are items of tax adjustments for the individual alternative minimum tax?

Medical expenses in excess of 7.5% of adjusted gross income
Percentage depletion deduction in excess of adjusted basis
Deduction for gambling losses to the extent of gambling income
Tax-exempt interest on qualified private-activity bonds issued in 2011
A)
I, III, and IV
B)
I and III
C)
II and IV
D)
II, III, and IV

Answer 9

c

By definition, the percentage depletion in excess of adjusted basis and the tax-exempt interest on qualified private-activity bonds are preference items for purposes of the AMT. Remember that interest on private-activity municipal bonds issued in 2009 and 2010 is not a preference item for the AMT. The medical expenses in excess of 7.5% of adjusted gross income and the gambling losses to the extent of gambling income are both treated as allowable itemized deductions / adjustments for AMT purposes.

LO 3.3.2

Question 10

Which of the following adjustment/preference items is also an exclusion item for the purposes of the alternative minimum tax (AMT)?

ISO bargain element
Exclusion of gain from Section 1202 qualified small business stock
Percentage depletion of oil and gas properties in excess of the taxpayer’s adjusted basis at year end
A)
II and III
B)
III only
C)
II only
D)
I and III

Answer 10

a

Statements II and III are correct. Statement I is incorrect. The ISO bargain element is not an exclusion item; it is a deferral item.

LO 3.3.2

Question 11

As a planner, you have grown increasingly concerned about the impact of the alternative minimum tax. Which of the following clients is least likely to have exposure to the alternative minimum tax?

A)
The client who is heavily invested in private-activity municipal bonds
B)
The client who has exercised incentive stock options during the tax year
C)
The client who has no itemized deductions
D)
The client who is invested in oil and gas activities

Answer 11

c

Investment in oil and gas activities often causes AMT exposure due to the intangible drilling costs and percentage depletion. The bargain element on the exercise of an ISO and the interest from private-activity municipal bonds are preference items for AMT purposes. The client least likely, in this case, to have an AMT exposure is the one with no itemized deductions. Clients with state and local income taxes and property taxes may have an AMT problem because those itemized deductions are not allowed for AMT purposes. Note that interest on private-activity municipal bonds issued in 2009 and 2010 is not a preference item for the AMT.

LO 3.3.2

Question 11

Which of the following are items of tax preference or adjustments for the individual alternative minimum tax?

Deduction for gambling losses
Excess intangible drilling costs
Bargain element on exercise of an ISO
Cost depletion deductions
A)
II, III, and IV
B)
II and III
C)
I, II, and IV
D)
I and III

Answer 11

By definition, the excess intangible drilling costs (from an oil and gas activity) and the bargain element on exercise of an ISO are preference items or adjustments for the individual AMT. Cost depletion is not an AMT preference item, but percentage depletion is. Gambling losses (to the extent of gambling winnings) is an itemized deduction for both regular tax and AMT purposes.

LO 3.3.2

Question 12

Pierre, a U.S. citizen, is meeting with his financial advisor regarding some transactions he made during this tax year. He has ample income and has made several charitable donations. They were as follows:

$30,000 to his church for a building addition fund
$100,000 to an orphanage in France in the city his parents lived as children
$10,000 to the United Way
$15,000 to a nonprofit organization in New Orleans that teaches French to children
$50,000 to a gubernatorial campaign in his state
Without regard to AGI limitations, how much of his donations may be deductible on his income tax return?

A)
$105,000
B)
$40,000
C)
$205,000
D)
$55,000

Answer 12

d

Of the listed donations, the $100,000 to the orphanage is nondeductible because it is a charity located in France. The $50,000 given to the gubernatorial campaign is a nondeductible political donation. The $30,000 given to the church, the $10,000 given to the United Way, and the $15,000 given to the nonprofit organization are deductible donations.

LO 3.2.2

Question 13

Your clients, Mike and Elizabeth, have a 17-year-old dependent son, Josh, who has a part-time job during the summer months. They have heard of the kiddie tax but are unsure of how it would impact the taxation of Josh’s summer wages. Which of the following statements is CORRECT regarding the taxation of Josh’s income for 2023?

Josh has a limited standard deduction (up to $1,250) available.
Josh has a full standard deduction (up to $13,850) available.
Any income in excess of the available standard deduction and $1,250 is taxable at Mike and Elizabeth’s marginal income tax rate.
The income is not subject to the kiddie tax rules because it is earned income.
A)
II and III
B)
I only
C)
I and III
D)
II and IV

Answer 13

d

The unearned income rules (the kiddie tax rules) do not apply to earned income. Thus, Josh may utilize up to the full standard deduction ($13,850 for 2023) against earned income.

LO 3.2.1

Question 14

Amy, age 12, is claimed as a dependent on her parents’ income tax return. During 2023, she earned $2,500 from a summer job. She also earned $2,800 in interest and dividends from investments that were given to her by her grandfather five years ago. How much of Amy’s income, if any, will be taxed to her in 2023 using her grandfather’s marginal tax rate of 32%?

A)
$2,500
B)
$300
C)
$2,800
D)
$0

Answer 14

d

When applying the kiddie tax, the parents’ marginal tax rate is always used (regardless of the source of unearned income). Therefore, none of the income is taxed to Amy using the grandfather’s tax rate. $300 of income ($2,800 − $2,500) is taxed to Amy at her parents’ marginal tax rate.

LO 3.2.1

Question 15

It is January and Baxter is meeting with his financial planner to discuss planning strategies for the AMT for the year. He will be including the bargain element for the incentive stock options he will exercise this year in his AMTI. His current tax bracket is 32%. What does the planner tell Baxter he can do to try to minimize his AMT liability?

Baxter should prepay as many itemized expenses, such as medical expenses, taxes, and other miscellaneous itemized deductions, to offset the ISO bargain element.
Baxter should accelerate other items of income to this tax year.
A)
II only
B)
I only
C)
Neither I nor II
D)
Both I and II

Answer 15

a

Statement I is incorrect. Moving deductions to an AMT year reduces regular taxable income and makes for a greater exposure to the AMT. Statement II is correct. Increasing regular income decreases the possibility that the AMTI will be greater than the regular taxable income.

LO 3.3.2

Question 16

Francine and Marshall have three children: Bill, Curt, and Rachel. For 2023

Bill, age 11, has $1,350 of interest income.
Curt, age 13, has $3,050 of earned income from a part-time job.
Rachel, age 19, a part-time student for four months of the year, has $5,100 of dividends and capital gains.
Whose income is subject to income tax at the parents’ tax rate?

A)
Bill and Rachel
B)
Bill
C)
Curt
D)
None of the children

Answer 16

d

The parents’ marginal tax rate applies to unearned income above $2,500 for 2023. Rachel has unearned income above $2,500. However, because Rachel is 19 and is not a full-time student, she is not subject to the kiddie tax rules. The kiddie tax stops applying in the year that the child turns 19, if the child is not a full-time student. The parents’ tax rate does not apply to earned income, so Curt is not subject to the kiddie tax. The kiddie tax applies to children who are under 19 years of age, or who are under 24 if a full-time student. The kiddie tax does not apply to a child who is married and files a joint return for the tax year, or if the child has earned income that exceeds half of their support. Also, the kiddie tax applies only where the child has at least one living parent. (A full-time student is an individual who is a full-time student for at least five calendar months during the tax year.)

LO 3.2.1

Question 17

The kiddie tax rules apply

to the unearned income of a child under age 19 (under age 24 if a dependent full-time student providing less than 50% of own support).
to the earned income of a child under age 19 (under age 24 if a dependent full-time student providing less than 50% of own support).
A)
I only
B)
Both I and II
C)
II only
D)
Neither I nor II

Answer 17

a

Statement I is correct. The kiddie tax applies only to any unearned income (such as dividends and interest) of a child under age 19 (under age 24 if a dependent full-time student providing less than 50% of own support). For a dependent on another’s income tax return at any age, the standard deduction for earned income is the amount of earned income plus $400, but limited to an amount no greater than the standard deduction for a single taxpayer ($13,850 in 2023).

LO 3.2.1

Question 18

Hal and Jody created an irrevocable trust for the benefit of their dependent children. They named their attorney as trustee of the trust and authorized him to invest in stocks, bonds, and certificates of deposit. Included in the investment authority is the right to use trust income to purchase insurance on Hal and Jody’s lives. All funds are currently invested in high-yielding bonds paying 4% semiannual interest on a par value of $50,000. Which taxpayer must pay tax on the income of the trust?

A)
The trust, because it is irrevocable with no benefits to the grantor
B)
The attorney, because of his broad authority as trustee
C)
Hal and Jody, because the income is (or may be) used to purchase insurance on their lives
D)
The children, because they are the designated beneficiaries

Answer 18

c

Explanation
If the trust income is, or may be, used to purchase insurance on the life of the grantor or the grantor’s spouse, then the trust is a grantor trust.

LO 3.1.1

Question 19

The Kimble Family Trust has among its investments a 20% interest in a nonpublicly traded partnership, which generated income this year of $25,000. The trust also had a loss of $15,000 generated by its ownership interest in a real estate limited partnership (RELP). The trust also has portfolio income of $30,000. Which of the following statements is CORRECT?

A)
The passive activity loss rules do not apply to trust entities.
B)
The trust can net the RELP loss against its $25,000 nonpublicly traded partnership income.
C)
The trust can use the RELP loss to offset portfolio income.
D)
The trust may not own nonpublicly traded passive activity investments.

Answer 19

Explanation
Because RELPs are nonpublicly traded passive activities, the trust can net the $15,000 loss against the $25,000 income. Trusts may participate in the investment in passive activities and the passive activity rules apply to trusts that own such investments.

LO 3.1.1

Question 20

Which of the following statements regarding charitable gifts is CORRECT?

The total deduction of a cash gift is the fair market value of the cash, limited to an annual deduction of 50% of the donor-taxpayer’s AGI.
If the donor elects a total maximum deduction equal to the FMV of appreciated property (long-term capital gain property), the donor is limited to an annual deduction of no more than 30% of AGI if the recipient of the gift is a public charity.
If the recipient of a gift of appreciated property (long-term capital gain property) is a private charity or foundation, the donor is limited to an annual deduction of no more than 20% of AGI.
If a donor elects a total maximum deduction equal only to the tax basis in appreciated property (long-term capital gain property), the donor is permitted an annual deduction of up to 50% of AGI if the recipient of the gift is a private charity.
A)
I only
B)
III and IV
C)
I and IV
D)
II and III

Answer 20

d

Explanation
For a cash gift, the amount of the total deduction is the FMV of the cash, limited to an annual deduction of either 60% or 30% of the donor-taxpayer’s AGI, depending on the recipient of the gift. If the donor elects a total maximum deduction equal to the FMV of appreciated property (long-term capital gain property), the donor is limited to an annual deduction of no more than 30% of AGI if the recipient of the gift is a public charity. If the recipient of a gift of appreciated property is a private charity or foundation, the donor is limited to an annual deduction of no more than 20% of AGI. If a donor elects a total maximum deduction equal only to the tax basis in appreciated property, the donor is permitted an annual deduction of up to 50% of AGI if the recipient of the gift is a public charity. The donor is still limited to a 20% of AGI annual deduction if the recipient is a private charity.

LO 3.2.2

Question 21

In 2023, Glen, a single taxpayer, has the following itemized deductions:

Home mortgage interest (first mortgage) $7,950
Home mortgage interest (home equity loan) $4,350
State income taxes $4,120
Property taxes $1,880
Charitable contributions $2,600
Gambling losses (to extent of winnings) $1,200
The home equity loan was incurred to purchase what Glen describes as a “midlife crisis” sports car. What amount of itemized deductions, if any, would be allowed for purposes of the AMT?

A)
$11,750
B)
$17,750
C)
$16,100
D)
$7,950

Answer 21

a

Of the itemized deductions listed, only the qualifying home mortgage interest of $7,950, the charitable contributions of $2,600, and the gambling losses to the extent of winnings of $1,200 are allowable for purposes of the alternative minimum tax. For both regular income tax and AMT purposes, the interest on the home equity loan is only deductible if used for acquisition or renovation of the principal residence and/or one other residence. The taxes are not deductible for AMT purposes.

LO 3.3.2

Question 22

Abby, age 16, has earned income of $8,605 and interest income of $750 in 2023. She is claimed as a dependent on her parents' income tax return. What is Abby's taxable unearned income in 2023? A) $1,250 B) $750 C) $2,500 D) $0

Answer 22

d Abby's taxable unearned income in 2023 is $0 ($750 unearned income − $1,250 standard deduction for unearned income). The standard deduction cannot create a negative amount. LO 3.2.1

Question 23

Kelly established an irrevocable trust for the benefit of her two young grandsons. She named her attorney as the trustee. The trust documents stipulate that the income from the trust be accumulated within the trust for distribution to each grandchild when the youngest reaches age 21. Which of the following parties will be currently taxed on the income from the trust? A) The grandsons B) Kelly C) The attorney D) The trust

Answer 23

d Currently, until the youngest reaches age 21, income from the irrevocable trust will be taxed to the trust. LO 3.1.1

Question 24

Carla anticipates adjusted gross income of $90,000 during the current tax year. She is considering making a gift of real estate to the United Way. Carla's adjusted basis in this real estate is $20,000. The real estate has a current fair market value of $55,000. Carla has owned the real estate for three years. If Carla gifts the real estate to the United Way this year, what is the maximum allowable charitable deduction she can receive for the current tax year? A) $55,000 B) $27,000 C) $20,000 D) $45,000

Answer 24

b The gift of long-term capital gain property to a 50% organization is limited to 30% of AGI, which is $27,000. The deduction is based on the FMV of the property contributed. There would be a five-year carryforward of $28,000. The use-related or use-unrelated provisions do not apply here, as the distinction is relevant only with respect to tangible personalty, not realty. LO 3.2.2

Question 25

Mira is a single taxpayer, age 67. She has the following itemized deductions: Home mortgage interest (first mortgage) $15,950 State income taxes $3,000 Property taxes $1,500 Charitable contributions $2,000 Gambling losses $1,500 Unreimbursed employee business expenses $4,600 Tax return preparation fee $400 Medical expenses $26,000 Mira's AGI for 2023 is $250,000. Included in the AGI is $500 of gambling winnings. What amount of Mira's itemized deductions would be allowed for purposes of the alternative minimum tax (AMT)? A) $18,950 B) $34,950 C) $25,700 D) $17,950

Answer 25

c Of the itemized deductions listed, the qualifying home mortgage interest of $15,950, the charitable contributions of $2,000, the gambling losses to the extent of winnings of $500, and the $7,250 of medical expenses are allowable for purposes of the AMT. The medical expenses are deductible to the extent they exceed 7.5% of AGI for both regular and AMT purposes. LO 3.3.2

Question 25

Which of the following would be a planning strategy to limit the imposition of the alternative minimum tax in a given tax year? Avoid purchasing most private-activity bonds. Move deductions into an AMT year. Move income into a non-AMT year. A) II and III B) I only C) II only D) I and III

Answer 25

b Statement I is correct. Taxpayers should time the recognition of certain AMT adjustments and tax preference items. For example, a taxpayer should avoid the purchase of most private-activity bonds unless the bonds were issued in 2009 and 2010. Deductions should be moved into a non-AMT year and income to an AMT year, if possible. LO 3.3.2

Question 26

John is a former University of Georgia student. The Alumni Relations Office allows John to purchase season football tickets in advance. The price is the usual amount charged or $160 per seat. If John purchases two seats for this year's football season, how much of a tax deduction is he entitled to take on his tax return? A) $160 B) $320 or 30% of his adjusted gross income, whichever is less C) $320 or 50% of his adjusted gross income, whichever is less D) $0

Answer 26

d Explanation This is not a donation. It is a purchase. If the $320 was considered a charitable contribution, it would only be deductible to the extent that it exceeded the value of the product or service. In this case, it clearly states that John is allowed to purchase the tickets in advance, although he must pay the usual price for the tickets. There is no charitable gift in this situation. LO 3.2.2

Question 27

Francine and Marshall have three children: Bill, Curt, and Rachel. For 2023 Bill, age 11, has $1,350 of interest income. Curt, age 13, has $2,950 of salary from a part-time job. Rachel, age 19 and not a full-time student, has $5,100 of dividends and capital gains. Whose income is subject to application of the parents' marginal rate? A) None of the children B) Curt C) Bill and Rachel D) Bill

Answer 27

a The parents' marginal rates apply to unearned income above $2,500 received by an individual under the age of 19 at the close of the tax year, if the individual is not a full-time student. Bill has unearned income under $2,500. Curt has earned income, so the parental rate does not apply. Rachel is 19 and is not a full-time student, therefore the parental rate does not apply. LO 3.2.1

Question 28

Mary created an irrevocable trust for her two minor sons. She named her bank as trustee. The trust property earned $75,000 in the first year and had taxable income of $68,000 after deducting expenses. This income was left to accumulate for future distributions to be made to each son equally when the youngest son attains age 18. To which of the following will the income of the trust be taxable? A) The trust B) The sons equally C) Mary D) The oldest son after attaining age 18, then to the sons equally after the youngest son attains age 18

Answer 28

a Explanation The trust will pay the taxes since the trust is irrevocable and no distributions are allowable until the youngest son attains age 18. LO 3.1.1

Question 29

Andrew and Olivia want to maximize their charitable deduction for this year. They are interested in several charities. The couple's AGI is $70,000. They have received an inheritance of $100,000 in cash they wish to use to further their charitable interests. What amount may the couple donate to maximize their charitable deduction this year, without using the carry forward option? A) $35,000 to either a 30% or 50% charity B) $100,000 to a 50% charity C) $42,000 to a 50% charity D) $21,000 to a 30% charity

Answer 29

c The maximum amount of charitable deduction the couple may take would be for a $42,000 donation to a 50% charity (allowing a donation of up to 60% of AGI for a cash donation in a given tax year). LO 3.2.2

Question 30

Which of the following forms of gifting to a charity will qualify for the income tax charitable deduction? Gift of stock to a 50% charity Gift of cash to a supporting foundation Gift of land to a 30% charity A) I, II, and III B) I and II C) II and III D) III only

Answer 30

a Explanation All of these forms of gifting to a charity will qualify for the income tax charitable deduction. LO 3.2.2

Question 31

Jim is planning to make a charitable contribution to a local university, a qualifying charitable organization. He is going to contribute a piece of real estate that he has owned for six years. The fair market value of the property is $80,000 and his basis in it is $55,000. He has an AGI of $120,000. What can you accurately tell Jim about the effect of a 50% election? A) The current-year deduction is $60,000 with a $20,000 carryforward. B) The current-year deduction is $55,000 with no carryforward. C) The current-year deduction is $40,000 with a $15,000 carryforward. D) The current-year deduction is $55,000 with a $25,000 carryforward.

Answer 31

b Explanation A 50% election allows a deduction based on the property's basis with a 50% of AGI limitation. Remember that the election applies to gifts of long-term capital gain property to a 50% organization only. LO 3.2.2

Question 32

Which of the following statements regarding the kiddie tax is CORRECT? The standard deduction for a child with both earned and unearned income is always earned income plus $400. The child's tax rate is 10% for all income received. The excess of unearned income above $2,500 is tax to the child at the parents' top marginal tax rate. The kiddie tax provision limits the effectiveness of income shifting, wherein families are prevented from transferring large amounts of unearned income to children and making the shift effective for income tax purposes. A) I only B) III and IV C) III only D) I, II, and III

Answer 32

b Statements I and II are incorrect. The standard deduction for a child with both earned and unearned income is the greater of $1,250 (2023) or earned income plus $400, but it is limited to the standard deduction for a single taxpayer, $13,850 in 2023. The child's tax rate is determined by the amount of taxable income the child has. Statements III and IV are correct.

Question 33

Which of the following individuals will be subject to the kiddie tax at the parents' marginal tax rate in 2023? Kyle, age 19, and a full-time freshman at State University, who earned $5,000 from his summer employment. He is listed as a dependent on his parents' income tax return. Devin, age 22, has $1,100 in dividend income this year. She is a full-time student and her parents' dependent. Jordan, age 14, received $1,400 of interest income this year. Lisa, age 19 and living at home but not attending school, is listed as a dependent on her parents' income tax return and received $2,600 interest and dividends in 2023. A) None of these B) I, II, and III C) IV only D) III and IV

Answer 33

a The kiddie tax applies to any unearned income (such as dividends and interest) of a child under age 19 (under age 24 if a dependent full-time student providing less than 50% of own support). None of these individuals are subject to the kiddie tax. Kyle has only earned income. Devin and Jordan received less than $2,500. Lisa is not a full-time student under age 24. LO 3.2.1

Question 34

Jasmine and Luke, a married couple, bought 100 shares of Mutual Fund B for $3,200 on March 2 of this year. On December 19 of this year, they sold the 100 shares of Mutual Fund B for $3,500. They used the proceeds to purchase a trailer for its FMV of $3,500 and immediately donated it to their church to use for special events. What are the tax consequences of this sale? A) There is no recognized gain on the sale because the proceeds were used for a donation. B) The couple has donated appreciated property. C) The couple has a short-term capital gain of $300 on the sale. D) The couple has a long-term capital gain.

Answer 34

c Explanation The couple have a recognized short-term capital gain of $300. Separately, they have donated property with a value of $3,500 to the church. LO 3.2.2

Question 35

Your client has a small business that is operated as a sole proprietorship. He is considering employing his 15-year-old son in the family business. The child, who has no other income, will provide services such as dusting, sweeping, and vacuuming. Which of the following is CORRECT with respect to the wages paid to the son? Because there is no valid business purpose for the son's employment, the wages would not be deductible. Because the wages are paid to a family member under the age of 18, they are not subject to FICA. Any wages paid to the son in excess of $2,500 annually are subject to tax at the parental rate. Up to $13,850 of wages could be received free of income taxes by the son. A) II and IV B) II and III C) I and III D) I only

Answer 35

a The wages paid to a child under the age of 18 from an unincorporated business are not subject to FICA or unemployment taxes. Earned income is not subject to the kiddie tax, and the child's full standard deduction of up to $13,850 (for 2023) may be used to shelter his earned income. LO 3.2.1

Question 36

Which of the following statements regarding alternative minimum tax (AMT) are true? AMT reduces the tax benefits from certain types of deductions and tax preferences allowable for regular tax purposes. Depreciation allowable for AMT can never be the same as that allowable for regular tax purposes. It may be advantageous to accelerate ordinary income into years when AMT will be paid. It is often advantageous to not accelerate the payment of state income and real estate taxes when AMT will be paid in the current year. A) III and IV B) I, III, and IV C) I and II D) I, II, and IV

Answer 36

b The common strategies related to income tax planning are often reversed when dealing with the AMT. Thus, rather than accelerating certain itemized deductions, we often would defer payment (if possible) of those items that are not deductible for AMT purposes. We often will accelerate income that would have been taxed at the highest marginal rates in future years into the current year to be taxed at the AMT rates of 26% or 28%. LO 3.3.2

Question 36

Which of the following is a tax preference item for the purpose of calculating the alternative minimum tax? Tax-exempt interest from a private-activity bond issued in 2008 Cash contributions to charitable organizations Cash flows from limited partnerships Personal-service income in excess of tax losses A) I, III, and IV B) I only C) II only D) I and II

Answer 36

b Items II, III, and IV are not tax preference items. However, other AMT tax preference items include the part of the deduction for certain depletion that is more than the adjusted basis of the property and the excluded gain on the sale of certain small business stock (Section 1202). LO 3.3.2

Question 36

Laura donated $250 to her daughter's Girl Scout troop and also bought six raffle tickets at $5 each from the troop. She also performs bookkeeping services for her church monthly, reconciling bank statements and preparing financial statements. She is a certified public accountant and the services she performs would have cost the church $500 if she had charged them her normal fees. How much can Laura deduct as a charitable deduction (without regard to AGI limitations)? A) $780 B) $250 C) $280 D) $750

Answer 36

b Only the $250 donation is a deductible charitable donation. Raffle tickets and donation of services are nondeductible. LO 3.2.2

Question 36

The Taylors are concerned they may be subject to an alternative minimum tax liability for last year. Which of the following is NOT an adjustment added back to regular taxable income for calculating alternative minimum taxable income (AMTI)? A) Standard deduction B) Itemized deduction C) Charitable contributions D) Exclusion of gain from Section 1202 qualified small business stock (QSBS) purchased in August 2009

Answer 36

c Charitable contributions are not added back to regular taxable income when determining AMTI. LO 3.3.2

Question 37

Alternative minimum taxable income (AMTI) is calculated using which of the following methods? A) Adjusted gross income (from IRS Form 1040) + positive AMT adjustments − negative AMT adjustments + AMT preference items = AMTI B) Regular taxable income (from IRS Form 1040) + positive AMT adjustments − negative AMT adjustments + AMT preference items = AMTI C) Modified adjusted gross income (from IRS Form 1040) + positive AMT adjustments − negative AMT adjustments + AMT preference items = AMTI D) Regular taxable income (from IRS Form 1040) − positive AMT adjustments + negative AMT adjustments + AMT preference items = AMTI

Answer 37

b regular taxable income (from IRS Form 1040) + positive AMT adjustments − negative AMT adjustments + AMT preference items = AMTI LO 3.3.2

Question 38

Marco had an individual AMT credit two years ago and has not yet used it. Which of the following is correct regarding Marco's AMT credit? A) The credit can be carried forward indefinitely to be applied against a future alternative minimum tax liability. B) The credit can be carried forward indefinitely to be applied against a regular income tax liability. C) The credit must be applied against the AMT liability in the next year there is AMT to be paid. D) The credit must be applied against the regular income tax liability in the year the credit is created.

Answer 38

b The AMT credit created in any one year may be used as a credit against regular income tax in a future year. It may be carried forward indefinitely. LO 3.3.2

Question 38

Full imputed interest on a below-market loan (with the IRS providing accepted loan rates) will be paid with A) a gift loan of amounts more than $100,000. B) a gift loan of amounts more than $10,000. C) any gift loan given. D) a gift loan of amounts more than $5,000.

Answer 38

a In a gift loan, the amount of the imputed interest constitutes a gift from the lender to the borrower. For gift loans greater than $10,000 and less than or equal to $100,000, no interest is imputed if the borrower's investment income for the year does not exceed $1,000. For a gift loan of more than $100,000, the prevailing federal rate of interest will be imputed. LO 3.3.1

Question 39

Caroline, age 16, has earned income of $18,605 and interest income of $750 in 2023. She is listed as a dependent on her parents' income tax return. What is Caroline's standard deduction for earned income in 2023? A) $1,250 B) $13,850 C) $0 D) $20,800

Answer 39

b Caroline's standard deduction for earned income is $13,850 (for 2023), whereas her standard deduction for unearned income is only a maximum of $1,250 (limited to the $750 of actual unearned income in this instance). Caroline would, therefore, elect to offset her total income of $19,355 by the greater of the standard deductions, which is $13,850 in 2023. LO 3.2.1

Question 40

Which of the following are techniques of income shifting or splitting? An installment sale of an income-producing asset from a parent to a child Transfer of income-producing property from the grantor to a grantor trust Valid employment of a child in the parent's business A) I and III B) I, II, and III C) I and II D) II and III

Answer 40

a Of the listed choices, only option II is not an example of income shifting or splitting. The transfer of property to a grantor trust, by definition, involves the income being taxed back to the grantor. Thus, there would be no income shifting or splitting. LO 3.2.1

Question 41

In 2023, Lonnie, age 17, is claimed as a dependent on his parents' income tax return and has $3,200 of interest and short-term capital gain income from an UTMA account that was established many years ago. Lonnie's parents, who file jointly, have taxable income of $130,000 (22% MFJ tax bracket). What is Lonnie's income tax liability for 2023? A) $279 B) $565 C) $360 D) $505

Answer 41

a $3,200 unearned income ($1,250) standard deduction ($1,250) taxed at child's rate of 10%: $1,250 × 10% = $125 $700 taxed at parents' top marginal tax rate of 22%: $700 × 22% = $154 Total $279 The first $1,250 of unearned income is sheltered by the child's limited standard deduction. The next $1,250 is taxed to the child, at the child's marginal income tax bracket. All unearned income in excess of $2,500 (for 2023) is taxed to the child at the parents' top marginal tax rate. The parents' tax rate is 22% up to $190,750 of taxable income (rate schedule provided in textbook or downloaded from this online course dashboard). The kiddie tax applies to children who are under 19 years of age or who are under 24 if a full-time student. (A full-time student is an individual who is a full-time student for at least five calendar months during the tax year.) The kiddie tax does not apply to a child who is married and files a joint return for the tax year, or if the child has earned income that exceeds half of his support. Also, the kiddie tax applies only where the child has at least one living parent. LO 3.2.1

Question 41

The kiddie tax rules apply to the unearned income of a child under age 19 (under age 24 if a dependent full-time student providing less than 50% of own support). to the earned income of a child under age 19 (under age 24 if a dependent full-time student providing less than 50% of own support). A) II only B) I only C) Both I and II D) Neither I nor II

Answer 41

b Statement I is correct. The kiddie tax applies only to any unearned income (such as dividends and interest) of a child under age 19 (under age 24 if a dependent full-time student providing less than 50% of own support). For a dependent on another's income tax return at any age, the standard deduction for earned income is the amount of earned income plus $400, but limited to an amount no greater than the standard deduction for a single taxpayer ($13,850 in 2023). LO 3.2.1

Question 42

Carl Taylor has an AGI of $200,000. He donated vacant land valued at $130,000 that was purchased eight years ago to the local church. His basis in this land was $110,000. What is Carl's maximum allowable charitable contribution for the current year? A) $100,000 B) $60,000 C) $39,000 D) $33,000

Answer 42

a The 50% election would provide Carl with the maximum current-year deduction. If Carl makes a 50% election, he must utilize the basis of the property but may deduct up to 50% of AGI. This yields a $100,000 current-year deduction with a $10,000 carryforward. If no 50% election were made, the deduction would be based on the fair market value of the property but would be limited to 30% of AGI, which is $60,000 with a $70,000 carryforward. LO 3.2.2

Question 43

Alternative minimum taxable income (AMTI) is calculated using which of the following methods? A) Modified adjusted gross income (from IRS Form 1040) + positive AMT adjustments − negative AMT adjustments + AMT preference items = AMTI B) Regular taxable income (from IRS Form 1040) − positive AMT adjustments + negative AMT adjustments + AMT preference items = AMTI C) Adjusted gross income (from IRS Form 1040) + positive AMT adjustments − negative AMT adjustments + AMT preference items = AMTI D) Regular taxable income (from IRS Form 1040) + positive AMT adjustments − negative AMT adjustments + AMT preference items = AMTI

Answer 43

d regular taxable income (from IRS Form 1040) + positive AMT adjustments − negative AMT adjustments + AMT preference items = AMTI LO 3.3.2

Question 44

Which of the following would be a planning strategy to limit the imposition of the alternative minimum tax in a given tax year? Avoid purchasing most private-activity bonds. Move deductions into an AMT year. Move income into a non-AMT year. A) II and III B) II only C) I only D) I and III

Answer 44

c Statement I is correct. Taxpayers should time the recognition of certain AMT adjustments and tax preference items. For example, a taxpayer should avoid the purchase of most private-activity bonds unless the bonds were issued in 2009 and 2010. Deductions should be moved into a non-AMT year and income to an AMT year, if possible. LO 3.3.2

Question 44

In 2023, Lonnie, age 17, is claimed as a dependent on his parents' income tax return and has $3,200 of interest and short-term capital gain income from an UTMA account that was established many years ago. Lonnie's parents, who file jointly, have taxable income of $130,000 (22% MFJ tax bracket). What is Lonnie's income tax liability for 2023? A) $505 B) $279 C) $565 D) $360

Answer 44

b $3,200 unearned income ($1,250) standard deduction ($1,250) taxed at child's rate of 10%: $1,250 × 10% = $125 $700 taxed at parents' top marginal tax rate of 22%: $700 × 22% = $154 Total $279 The first $1,250 of unearned income is sheltered by the child's limited standard deduction. The next $1,250 is taxed to the child, at the child's marginal income tax bracket. All unearned income in excess of $2,500 (for 2023) is taxed to the child at the parents' top marginal tax rate. The parents' tax rate is 22% up to $190,750 of taxable income (rate schedule provided in textbook or downloaded from this online course dashboard). The kiddie tax applies to children who are under 19 years of age or who are under 24 if a full-time student. (A full-time student is an individual who is a full-time student for at least five calendar months during the tax year.) The kiddie tax does not apply to a child who is married and files a joint return for the tax year, or if the child has earned income that exceeds half of his support. Also, the kiddie tax applies only where the child has at least one living parent. LO 3.2.1

Question 45

Which of the following statements regarding the alternative minimum tax is CORRECT? If the regular income tax after credits equals or exceeds the individual AMT, then no individual AMT payment is required. If the regular income tax after credits is less than the individual AMT, then the AMT is not due. A) I only B) Neither I nor II C) Both I and II D) II only

Answer 45

a Statement II is incorrect. If the regular income tax after credits is less than the individual AMT, then the AMT must be paid with this difference, referred to as the AMT payable. LO 3.3.2

Question 45

Claudia had her art collection appraised and discovered some of the artwork had declined in value since she inherited it from her mother. She wants to donate some of the pieces to charity. Can she take the cost of the appraisal fee as a deduction? A) Yes, she may deduct the appraisal fee attributable to the items she donates to the charity as a miscellaneous itemized deduction. B) No, this is not deductible. C) Yes, it is a part of her charitable deduction. D) Yes, she may deduct the appraisal fee.

Answer 45

b The costs of an appraisal are not deductible. LO 3.2.2

Question 46

Walter anticipates his adjusted gross income to be $200,000 for the current tax year. He has not made any charitable contributions during the year, but now wants to give his church a block of stock with a fair market value of $110,000. Walter paid $50,000 for the stock six years ago. What is the maximum allowable charitable deduction Walter may receive during the current tax year if he makes a contribution of the stock? A) $60,000 B) $33,000 C) $50,000 D) $110,000

Answer 46

a The answer is $60,000. The allowable deduction for a contribution of long-term capital gain property, such as stock to a public charity, is limited to 30% of AGI. The remainder ($110,000 – $60,000 = $50,000) may be carried forward up to 5 years. LO 3.2.2

Question 47

Full imputed interest on a below-market loan (with the IRS providing accepted loan rates) will be paid with A) any gift loan given. B) a gift loan of amounts more than $5,000. C) a gift loan of amounts more than $10,000. D) a gift loan of amounts more than $100,000.

Answer 47

d Explanation In a gift loan, the amount of the imputed interest constitutes a gift from the lender to the borrower. For gift loans greater than $10,000 and less than or equal to $100,000, no interest is imputed if the borrower's investment income for the year does not exceed $1,000. For a gift loan of more than $100,000, the prevailing federal rate of interest will be imputed. LO 3.3.1

Question 48

Jasmine and Luke, a married couple, bought 100 shares of Mutual Fund B for $3,200 on March 2 of this year. On December 19 of this year, they sold the 100 shares of Mutual Fund B for $3,500. They used the proceeds to purchase a trailer for its FMV of $3,500 and immediately donated it to their church to use for special events. What are the tax consequences of this sale? A) The couple has donated appreciated property. B) There is no recognized gain on the sale because the proceeds were used for a donation. C) The couple has a long-term capital gain. D) The couple has a short-term capital gain of $300 on the sale.

Answer 48

d The couple have a recognized short-term capital gain of $300. Separately, they have donated property with a value of $3,500 to the church. LO 3.2.2

Question 48

Imputed loan interest is usually taxable and occurs when A) a company loan is provided to an employee. B) bonds are gifted by an employer. C) a loan is provided by a related person at below-market terms. D) the loan is secured by specific real property.

Answer 48

c Imputed loan interest is usually taxable and occurs when a loan is provided by a related person at below-market terms. LO 3.3.1

Question 49

Mary created an irrevocable trust for her two minor sons. She named her bank as trustee. The trust property earned $75,000 in the first year and had taxable income of $68,000 after deducting expenses. This income was left to accumulate for future distributions to be made to each son equally when the youngest son attains age 18. To which of the following will the income of the trust be taxable? A) Mary B) The sons equally C) The oldest son after attaining age 18, then to the sons equally after the youngest son attains age 18 D) The trust

Answer 49

d The trust will pay the taxes since the trust is irrevocable and no distributions are allowable until the youngest son attains age 18. LO 3.1.1

Question 49

A grantor trust is a trust A) established by the grantor or settlor. B) whose income is taxed to the trust, but is considered owned by the grantor. C) whose income is taxed to the grantor. D) whose income is taxed to a beneficiary other than the grantor, but is considered owned by the grantor.

Answer 49

c A grantor trust is a trust whose income is taxed to the grantor. LO 3.1.1

Question 50

Carl Taylor has an AGI of $200,000. He donated vacant land valued at $130,000 that was purchased eight years ago to the local church. His basis in this land was $110,000. What is Carl's maximum allowable charitable contribution for the current year? A) $60,000 B) $33,000 C) $39,000 D) $100,000

Answer 50

d The 50% election would provide Carl with the maximum current-year deduction. If Carl makes a 50% election, he must utilize the basis of the property but may deduct up to 50% of AGI. This yields a $100,000 current-year deduction with a $10,000 carryforward. If no 50% election were made, the deduction would be based on the fair market value of the property but would be limited to 30% of AGI, which is $60,000 with a $70,000 carryforward. LO 3.2.2

Question 51

Which of the following forms of gifting to a charity will qualify for the income tax charitable deduction? Gift of stock to a 50% charity Gift of cash to a supporting foundation Gift of land to a 30% charity A) III only B) I and II C) II and III D) I, II, and III

Answer 51

d Explanation All of these forms of gifting to a charity will qualify for the income tax charitable deduction. LO 3.2.2

Question 52

Gwen is discussing her charitable contribution plans with her financial advisor, Rick. Her AGI is $40,000, and she has two charities to which she is considering making a cash donation of $15,000: The Hebert Family Foundation, established by her grandfather, or the American Cancer Society. A donation to either would be in honor of her aunt who succumbed to cancer this year. Gwen would like to maximize her charitable deduction this year. Which of the following statements Rick makes is CORRECT? A donation split 50/50 between the two charities would allow Gwen to deduct the entire $15,000 this year. Donating to The Hebert Foundation would allow Gwen a donation of up to 50% AGI and please her grandfather. A) Neither I nor II B) II only C) Both I and II D) I only

Answer 52

d explanation Only statement I is correct. If she split the donation and gave $7,500 to each one, her entire donation would be deductible this year. The Hebert Family Foundation is a 30% organization and her maximum available deductible donation this year would be $12,000. If she donated only to it, she would have to carry forward $3,000 until next year. The American Cancer Society is a 50% organization, and she could donate up to $24,000 (60% of AGI for cash) to it in a cash contribution this year. Halving the donation will still allow her to deduct the full $15,000 this year. LO 3.2.2

Question 53

David owns property with a current fair market value (FMV) of $60,000 and an adjusted basis of $80,000. He has an AGI of $200,000. He plans to donate the property to charity. Which of the following statements regarding the income tax implications of David's plan is CORRECT? If David donates the property to charity, he cannot recognize a capital loss of $20,000. If David donates the property to charity, he can deduct $80,000 as a charitable deduction. If David sells the property for $60,000 to a third party in an arms-length transaction, he can recognize a capital loss of $20,000 and donate the $60,000 cash received to the charity. A) I, II, and III B) II and III C) I and II D) I and III

Answer 53

d Statements I and III are correct. Statement II is incorrect. If David donates the property to charity, he can deduct only the current FMV of $60,000 as a charitable deduction and would not be able to recognize the capital loss of $20,000. LO 3.2.2

Question 54

Laura donated $250 to her daughter's Girl Scout troop and also bought six raffle tickets at $5 each from the troop. She also performs bookkeeping services for her church monthly, reconciling bank statements and preparing financial statements. She is a certified public accountant and the services she performs would have cost the church $500 if she had charged them her normal fees. How much can Laura deduct as a charitable deduction (without regard to AGI limitations)? A) $250 B) $780 C) $750 D) $280

Answer 54

a Only the $250 donation is a deductible charitable donation. Raffle tickets and donation of services are nondeductible. LO 3.2.2

Question 54

Jim made charitable contributions of cash to a local university, a qualifying charitable organization. Jim's cash contributions for the current year totaled $80,000. Jim has an AGI of $120,000. What is the amount of charitable contribution deduction that Jim may claim in the current year? A) $72,000 B) $60,000 C) $24,000 D) $36,000

Answer 54

a Gifts of cash to a 50% organization are limited to 60% of AGI under TCJA. Sixty percent of the $120,000 AGI equals $72,000. Jim would also have an $8,000 carryforward. LO 3.2.2

Question 55

Caroline, age 16, has earned income of $18,605 and interest income of $750 in 2023. She is listed as a dependent on her parents' income tax return. What is Caroline's standard deduction for earned income in 2023? A) $0 B) $20,800 C) $1,250 D) $13,850

Answer 55

d Caroline's standard deduction for earned income is $13,850 (for 2023), whereas her standard deduction for unearned income is only a maximum of $1,250 (limited to the $750 of actual unearned income in this instance). Caroline would, therefore, elect to offset her total income of $19,355 by the greater of the standard deductions, which is $13,850 in 2023. LO 3.2.1

Question 55

The Kimble Family Trust has among its investments a 20% interest in a nonpublicly traded partnership, which generated income this year of $25,000. The trust also had a loss of $15,000 generated by its ownership interest in a real estate limited partnership (RELP). The trust also has portfolio income of $30,000. Which of the following statements is CORRECT? A) The trust can net the RELP loss against its $25,000 nonpublicly traded partnership income. B) The trust may not own nonpublicly traded passive activity investments. C) The trust can use the RELP loss to offset portfolio income. D) The passive activity loss rules do not apply to trust entities.

Answer 55

a Because RELPs are nonpublicly traded passive activities, the trust can net the $15,000 loss against the $25,000 income. Trusts may participate in the investment in passive activities and the passive activity rules apply to trusts that own such investments. LO 3.1.1

Question 56

Which of the following individuals will be subject to the kiddie tax at the parents' marginal tax rate in 2023? Kyle, age 19, and a full-time freshman at State University, who earned $5,000 from his summer employment. He is listed as a dependent on his parents' income tax return. Devin, age 22, has $1,100 in dividend income this year. She is a full-time student and her parents' dependent. Jordan, age 14, received $1,400 of interest income this year. Lisa, age 19 and living at home but not attending school, is listed as a dependent on her parents' income tax return and received $2,600 interest and dividends in 2023. A) IV only B) III and IV C) I, II, and III D) None of these

Answer 56

d The kiddie tax applies to any unearned income (such as dividends and interest) of a child under age 19 (under age 24 if a dependent full-time student providing less than 50% of own support). None of these individuals are subject to the kiddie tax. Kyle has only earned income. Devin and Jordan received less than $2,500. Lisa is not a full-time student under age 24. LO 3.2.1

Question 57

Marco had an individual AMT credit two years ago and has not yet used it. Which of the following is correct regarding Marco's AMT credit? A) The credit must be applied against the regular income tax liability in the year the credit is created. B) The credit can be carried forward indefinitely to be applied against a future alternative minimum tax liability. C) The credit can be carried forward indefinitely to be applied against a regular income tax liability. D) The credit must be applied against the AMT liability in the next year there is AMT to be paid.

Answer 57

c Explanation The AMT credit created in any one year may be used as a credit against regular income tax in a future year. It may be carried forward indefinitely. LO 3.3.2

Question 58

Which of the following are items of tax adjustments for the individual alternative minimum tax? Medical expenses in excess of 7.5% of adjusted gross income Percentage depletion deduction in excess of adjusted basis Deduction for gambling losses to the extent of gambling income Tax-exempt interest on qualified private-activity bonds issued in 2011 A) II and IV B) II, III, and IV C) I, III, and IV D) I and III

Answer 58

a By definition, the percentage depletion in excess of adjusted basis and the tax-exempt interest on qualified private-activity bonds are preference items for purposes of the AMT. Remember that interest on private-activity municipal bonds issued in 2009 and 2010 is not a preference item for the AMT. The medical expenses in excess of 7.5% of adjusted gross income and the gambling losses to the extent of gambling income are both treated as allowable itemized deductions / adjustments for AMT purposes. LO 3.3.2

Question 59

Which of the following statements regarding charitable contributions is CORRECT? The amount deductible in a tax year is limited to a percentage of the individual taxpayer's adjusted gross income (AGI). Any amount in excess of the percentage of AGI limitation for the tax year may be carried back for two years and forward for five years. The percentage of AGI limitation depends solely on the type of organization to which the donation is made. A limit is imposed after applying the percentage of AGI limitation for the amount of a charitable deduction allowed for gifts of appreciated property. A) II and IV B) II and III C) I only D) I and IV

Answer 59

c Amounts in excess of the percentage of AGI limitation may be carried forward for only five years. The percentage of AGI limitation depends on both the type of organization to which the donation is made and the type of property donated. The limit applicable to the amount of a charitable deduction allowed for gifts of appreciated property is applied before applying the percentage of AGI limitation.

Question 60

Settings Bill and Rachel have three children: Mary, Ralph, and Don. In 2023 Mary, age 12, earns $4,000 in wages from a part-time job. Ralph, age 19 and not a full-time student, earns $3,500 in interest and short-term capital gains. Don, age 12, earns $2,550 in short-term capital gains and interest. Whose income is subject to the tax at the parents' marginal tax rate? A) Ralph and Don B) Mary, Ralph, and Don C) Don D) Ralph

Answer 60

c Explanation The parents' marginal tax rate applies to unearned income above $2,500 for children subject to the kiddie tax. Only Don has income that fits this criterion. Earned income is not subject to the kiddie tax (the application of the parental rate). Ralph is not a full-time student, so the kiddie tax stops applying in the year in which he turns 19. Remember that the kiddie tax applies to children who are under 19 years of age or who are under 24 if a full-time student. The kiddie tax does not apply to a child who is married and files a joint return for the tax year or if the child has earned income that exceeds half of his support. Also, the kiddie tax applies only where the child has at least one living parent. (A full-time student is an individual who is in school full-time for at least five calendar months during the tax year.) For an individual who is not a full-time student, the kiddie tax generally stops applying in the year in which the child turns 19. For a full-time student, the kiddie tax stops applying in the year in which the child turns 24.

Question 60

Danielle created a revocable trust for her two minor sons. She named her bank as trustee. The trust property earned $30,000 in the first year and had taxable income of $28,000 after deducting expenses. This income was left to accumulate for future distributions to be made to each son equally when the youngest son attains age 18. To which of the following will the income of the trust be taxable? A) The oldest son after attaining age 18, then the sons equally after the youngest son attains age 18 B) The trust C) Danielle D) Both sons equally

Answer 60

c The trust income will be taxed to the grantor, as the trust is revocable. A revocable trust is treated as a grantor trust. LO 3.1.1

Question 61

Charley lent his friend, Richard, $17,000 for a down payment on a home in a no-interest loan early in the current year. Charley had investment income of $750, and Richard had investment income of $1,200 in the same year. The federal interest rate is 3.5%. Richard has been making payments each month. What recommendations do you make for accounting for the loan made to Richard by Charley? A) Because Charley's investment income is less than $1,000 this year, no interest is imputed to the loan. B) Because this is a gift loan greater than $10,000 but less than or equal to $100,000, no interest will be imputed to the loan. C) Charley must develop an amortization schedule using the federal rate of 3.5% to account for Richard's payments of principal and interest. D) Imputed interest is calculated on the loan to Richard and is considered a gift to Richard from Charley.

Answer 61

d In a gift loan, the amount of the imputed interest constitutes a gift from the lender to the borrower. For gift loans greater than $10,000 and less than or equal to $100,000, no interest is imputed if the borrower's investment income for the year does not exceed $1,000. For a gift loan of more than $100,000, the prevailing federal rate of interest will be imputed. For this loan, Richard's investment income exceeds $1,000 and interest will be imputed. LO 3.3.1

Question 62

Alex established a 2503(c) trust for his daughter, Julie, when she entered college four years ago. Alex decided to name his attorney as trustee and give Julie the right to revoke the trust at age 23, when she finished college. Julie did not revoke the trust and chose to allow the trust to continue until she is age 30. Which of the following correctly identifies the taxpayer, if any, who must pay tax on the trust income? A) Alex, because this is required by law B) The trust, because it is irrevocable and a separate taxable entity C) The attorney as trustee D) Julie, because she allowed the trust to continue past age 23

Answer 62

d Because Julie waited past age 23 when she had the right to revoke the trust, she is responsible for taxes on the trust given to her. LO 3.1.1

Question 62

Alicia is age 16 and she received $6,000 in municipal bond interest income and $900 in other interest income in 2023. Her parents' marginal tax rate is 24%. What is the total federal income tax due on her income in 2023? A) $0 B) $90 C) $1,472 D) $735

Answer 62

a Alicia owes no federal income taxes in 2023. Municipal bond interest income is not taxable. The $900 in other interest income is less than Alicia's $1,250 standard deduction amount (for 2023). LO 3.2.1

Question 63

Imputed interest on a below-market loan (with the IRS providing accepted loan rates) will be paid, unless the gift loan is A) from a corporation to a shareholder. B) between friends. C) less than $10,000 and the gift loan recipient has less than $1,000 in interest income. D) less than $5,000 and the loan recipient has no interest income.

Answer 63

c In a gift loan, the amount of the imputed interest constitutes a gift from the lender to the borrower. For gift loans greater than $10,000 and less than or equal to $100,000, no interest is imputed if the borrower's investment income for the year does not exceed $1,000. For a gift loan of more than $100,000, the prevailing federal rate of interest will be imputed. LO 3.3.1

Question 63

Nancy is a single taxpayer and 67 years old. She has the following itemized deductions: Home mortgage interest (first mortgage) $15,950 State income taxes $3,120 Property taxes $1,480 Charitable contributions $2,000 Gambling losses $1,500 Unreimbursed employee business expenses $4,600 Tax return preparation fee $400 Medical expenses $18,980 Nancy's AGI for 2023 is $250,000. Included in the AGI is $500 of gambling winnings. What amount of Nancy's itemized deductions would be allowed for purposes of the AMT? A) $34,950 B) $17,950 C) $18,950 D) $18,680

Answer 63

d Of the itemized deductions listed, only the qualifying home mortgage interest of $15,950, the charitable contributions of $2,000, and the gambling losses to the extent of winnings of $500, and the $230 of medical expenses are allowable for purposes of the AMT. The medical expenses are deductible to the extent they exceed 7.5% of AGI for both regular and AMT purposes. LO 3.3.2

Question 64

Your clients, Joseph and Jane, have read many articles in financial publications about the alternative minimum tax (AMT) and are concerned that some of their investments and activities may cause AMT problems. Which of the following are preference items or adjustments for purposes of the individual AMT? Interest from qualified private-activity municipal bonds issued in 2008 Bargain element on the exercise of an incentive stock option Excess of percentage depletion over the property's adjusted basis Cost depletion deductions A) I and IV B) I, II, III, and IV C) II, III, and IV D) I, II, and III

Answer 64

d By definition, the only listed item that is not an AMT preference item or adjustment is the cost depletion deduction. Note that interest on private-activity municipal bonds issued in 2009 and 2010 is not a preference item for the AMT. LO 3.3.2

Question 64

Molly's grandparents gifted her with substantial securities at her birth eight years ago. In 2023, she has dividends of $10,000 and brokers' fees of $800 on the activity in the account her parents manage for her. What is her net unearned income taxed at her parents' rate? A) $7,500 B) $8,750 C) $9,100 D) $10,000

Answer 64

a Some of Molly's unearned income is taxed at her parents' rate and is calculated as follows: $10,000 UI – $1,250 (standard deduction) – $1,250 (greater of $1,250 for 2023 or amount of allowable itemized deductions directly connected with the production of the unearned income) = $7,500 LO 3.1.1

Question 65

In 2023, Floyd, age 15, is a dependent on his parents' income tax return. When Floyd was born, his parents established an UGMA with corporate bonds and have contributed a little to it every year since. This year, the account generated $5,000 of interest income. There were no distributions from the account this year. Floyd's parents file jointly and have taxable income of $175,000 and are in the 24% MFJ tax bracket. What is Floyd's income tax liability for the current year? A) $725 B) $125 C) $275 D) $1,250

Answer 65

a Floyd's liability is $725. This is computed as follows: $5,000 ($1,250) limited standard deduction ($1,250) taxed at child's rate of 10% $1,250 × 10% = $125 $2,500 taxed at parents' rate of 24% = $600 $725 LO 3.2.1

Question 65

Five years ago, Tom bought 10,000 shares at $10 per share in an intermediate-term bond fund. Today, the shares are worth $200,000 and are paying a nonqualified dividend of $8,000 per year. Tom feels that the stock will continue to appreciate at a rate of 5% per year, including the dividend. Tom wants to establish a college education fund for his two daughters, ages 18 and 9. Neither child has any earned income. Which of the following statements is true? If Tom gives 2,500 shares to his 18-year-old daughter, all income from the 2,500 shares will be taxed in her income tax bracket. If Tom gives 2,500 shares to his 9-year-old daughter, all dividends from the 2,500 shares will be taxed at her marginal rate. Two years from now, if Tom's older daughter sells her 2,500 shares at $30 per share, Tom will need to report the gain as a long-term capital gain on his personal income tax return. All interest income received by his 9-year-old daughter that exceeds $2,500 in 2023 will be taxed at the parents' marginal tax rate. A) I and II B) I and IV C) IV only D) II and III

Answer 65

c Statement IV is the only correct statement. The kiddie tax applies to children under 19 years of age. It also applies to children under age 24 if they are full-time students. The kiddie tax does not apply if the child's earned income exceeds one-half of the child's support. Thus, I and II are incorrect. There is no requirement that the proceeds of a future sale be reported on the donor's return. LO 3.2.1

Question 66

Teddy, age 12, has interest income of $1,275. He also has earned income from an after-school job that totals $15,000. Teddy is eligible to be treated as a dependent on his parents' return. What is the amount of Teddy's standard deduction for 2023? A) $13,850 B) $15,400 C) $1,250 D) $1,675

Answer 66

a The standard deduction for an individual eligible to be claimed, or treated, as a dependent is the greater of the limited standard deduction of $1,250 or the amount of earned income plus $400, not to exceed the full standard deduction amount of $13,850 (for 2023). $15,000 + $400 = $15,400, but the deduction is limited to the full standard deduction amount of $13,850. LO 3.2.1

Question 67

Jeffrey and Karen have given cash gifts to their children over the years. In addition, in 2023 Mark, age 13, earns $2,500 in salary. Jennifer, age 19, who attends community college for approximately three months per year, earns $2,500 in dividends and capital gains. Nancy, age 12, earns $2,950 in dividends and interest. Steven, age 10, earns $900 in dividends and interest. Whose income is subject to the tax at the parents' marginal rate? A) Jennifer’s and Nancy’s B) Nancy’s C) Steven’s D) Nancy’s and Mark’s

Answer 67

b Nancy is the only child up to and including age 18 with unearned income in excess of $2,500 for 2023. Earned income is not subject to taxation at the parental rate. Jennifer is not subject because she is not a full-time student. The kiddie tax applies to children under 19 years of age. It also applies to children under age 24 if they are full-time students. The kiddie tax does not apply if the child's earned income exceeds one-half of the child's support. A full-time student is an individual who is a full-time student for at least five calendar months during the tax year. LO 3.2.1

Question 68

Which of the following statements regarding the kiddie tax is CORRECT? The kiddie tax provision limits income shifting by preventing families from transferring large amounts of unearned income to children and making the shift effective for income tax purposes. If a child under the age of 19 has unearned income above a specified amount, the excess is taxed at the parents' marginal tax rates for the year, rather than at the child's marginal rate. A) II only B) Neither I nor II C) Both I and II D) I only

Answer 68

c Both statements are correct. The kiddie tax applies to unearned income for children under the age of 19 and full-time students until they reach age 24. LO 3.2.1

Question 69

Which of the following are allowable itemized deductions for purposes of computing the alternative minimum tax? Charitable deductions Qualified housing interest Gambling losses to the extent of gambling winnings Property taxes A) I, II, and III B) I and II C) II, III, and IV D) I and III

Answer 69

a Statement IV, property taxes, is the only itemized deduction listed that is not allowed for AMT purposes. State and local income taxes are also disallowed. LO 3.3.2

Question 70

Which of the following itemized deductions would be adjustments to regular taxable income in arriving at alternative minimum taxable income (AMTI)? Casualty losses State income taxes paid Standard deduction Charitable donation made to the local university A) I and IV B) II and III C) II, III, and IV D) I and III

Answer 70

b Statement I is incorrect because casualty losses are deductible for both regular tax and AMT; no adjustment is necessary. Statement II is correct because state taxes are not deductible for AMT purposes. Statement III is correct because the standard deduction is a positive adjustment when calculating AMT income. Statement IV is incorrect because charitable contributions are deductible for both regular income tax and AMT; no adjustment is necessary. LO 3.3.2

Question 71

Paul, age 16, is listed as a dependent on his parents' income tax return. During 2023, he earned $2,700 from a summer job. He also earned $2,700 in interest and dividends from investments that were given to him by his uncle five years ago. How much of Paul's income, if any, will be taxed to him in 2023 using his uncle's marginal tax rate of 32%? A) $2,000 B) $0 C) $2,700 D) $200

Answer 71

b When applying the kiddie tax, the parents' marginal tax rate is always used (regardless of the source of the property generating the unearned income). Therefore, none of the income is taxed to Paul using the uncle's tax rate. The $200 of income ($2,700 − $2,500) is taxed to Paul at his parents' marginal tax. LO 3.2.1

Question 72

Jim is planning to make a charitable contribution to a local university, a qualifying charitable organization. He is going to contribute a piece of real estate that he has owned for six years. The fair market value of the property is $80,000, and his basis in it is $55,000. He has an AGI of $120,000. Jim wants to maximize the amount of charitable contribution deductions from the donation of the real estate. What is the amount of charitable contribution deduction that Jim may claim in the current year? A) $55,000 B) $40,000 C) $36,000 D) $60,000

Answer 72

c The gift of long-term capital gain (LTCG) property is generally based on the fair market value of the property. The university is a 50% organization, a public charity. LTCG property contributed to a 50% organization involves a 30% of AGI limitation, and 30% of $120,000 is $36,000. There is also a $44,000 carryforward for up to five years. Jim could have made a 50% election to maximize the current-year deduction, but that would have reduced his overall deductions. If Jim had made a 50% election, he could have deducted $55,000 in the current year. By forgoing the 50% election, he is allowed to deduct the full $80,000 fair market value—$36,000 this year and $44,000 over the next several years. LO 3.2.2

Question 73

Frank Swanson anticipates adjusted gross income of $80,000 during the current tax year. He is considering making a gift of real estate to the public university he attended. Frank's adjusted basis in this real estate is $50,000. The real estate has a current fair market value of $70,000. Frank has owned the real estate for 19 months. If Frank donates the real estate, what is the maximum allowable charitable deduction Frank can receive for the current tax year? A) $40,000 B) $24,000 C) $70,000 D) $50,000

Answer 73

a If Frank makes a 50% election, he must utilize the basis of the property but may deduct up to 50% of AGI. This yields a $40,000 current-year deduction with a $10,000 carryforward. If no 50% election were made, the deduction would be based on the fair market value of the property but would be limited to 30% of AGI, which is $24,000, with a $46,000 carryforward. LO 3.2.2

Question 73

Which of the following tax preference items are used in calculating the alternative minimum tax (AMT) for an individual? Tax-exempt income from a State of Louisiana general obligation municipal bond Percentage depletion in excess of basis on a mining property Tax-exempt interest on a private-activity bond issued in 2012 Exclusion of gain on the sale of certain qualified small business corporation stock A) I only B) I, II, III, and IV C) I, II, and III D) II, III, and IV

Answer 73

Tax-exempt income from a general obligation municipal bond is not a preference for AMT. All of the other items are tax preference items for AMT purposes. LO 3.3.2

Question 74

Kris Swenson anticipates adjusted gross income of $100,000 for the current tax year. She is considering making a gift of a painting to the American Red Cross in the current tax year. Kris's basis in the painting is $35,000. The painting has a current fair market value of $50,000. Kris has owned the painting for 15 years. If Kris does gift the painting to the American Red Cross this year, what is the maximum allowable charitable deduction she can receive in the current tax year? A) $50,000 B) $20,000 C) $35,000 D) $30,000

Answer 74

c The painting would be considered use-unrelated tangible personalty. The deduction for use-unrelated tangible personalty is limited to basis, with a 50% of AGI limitation. Thus, the current-year deduction is $35,000. If the painting had been donated to an art museum, for example, the contribution would be of use-related tangible personalty. Since the painting had been held for the long-term holding period, the deduction would have been $30,000 (long-term capital gain property to a 50% organization uses FMV with a 30% of AGI limitation) with a $20,000 carryforward. LO 3.2.2

Question 75

Which of the following statements regarding the alternative minimum tax (AMT) or AMT planning are CORRECT? The AMT reduces the tax benefits from certain types of deductions and tax preferences allowable for regular income tax purposes. The starting point for determining alternative minimum taxable income (AMTI) is AGI as reported for regular income tax purposes. It is generally advantageous to defer the payment of real estate taxes to a future year when AMT will be paid in the current year. It is generally advantageous to accelerate ordinary income into years when AMT will be paid. A) I and III B) I, II, and IV C) III and IV D) I, III, and IV

Answer 75

d The IRS notes that the starting point for determining AMTI is taxable income as reported for regular income tax purposes on a taxpayer's IRS Form 1040. Because real estate taxes are not deductible for AMT purposes, it is generally advantageous to defer the payment of such taxes to a year when AMT will probably not be payable. Also, if AMT will be payable in the current year, it is generally advantageous to increase the amount of regular taxable income (e.g., by accelerating ordinary income into the current year) because the total tax payable will likely not be affected by doing so. LO 3.3.2

Question 75

Marvin has all of the following items. All of them are AMT preference items except A) tax-exempt interest on certain private-activity bonds. B) percentage depletion in excess of adjusted basis on a mining property. C) exclusion of gain on the sale of certain qualified small business corporation stock. D) tax-exempt income from a State of Iowa municipal revenue bond.

Answer 75

d Tax-exempt income from a municipal revenue bond is not a preference for AMT. All of the other items are preferences for AMT purposes. LO 3.3.2

Question 76

Which of the following statements regarding charitable deductions by corporations is CORRECT? The corporate statutes of most states permit corporations to make charitable contributions, and the Tax Code permits a charitable deduction for contributions by a corporation. The charitable deduction is limited to a maximum of 20% of the corporation's adjusted taxable income. In the event the contribution is in excess of 20% of the corporation's adjusted taxable income, the balance can be carried forward for up to five years. A) Neither I nor II B) I only C) II only D) Both I and II

Answer 76

b Statement II is incorrect because the charitable deduction is limited to a maximum of 10% of the corporation's adjusted taxable income. LO 3.2.2

Question 76

Kevin Riley anticipates adjusted gross income of $120,000 for the current tax year. He has made no charitable gifts during the year, but now he wants to give his church a stamp collection with a fair market value of $70,000. Kevin paid $38,000 for the collection five years ago. The collection is appreciated tangible personal property that is unrelated to the church's exempt function. What is the maximum allowable charitable deduction Kevin can receive during the current year if he makes an immediate gift of the stamp collection? A) $24,000 B) $36,000 C) $60,000 D) $38,000

Answer 76

d The answer is $38,000. Since this is use-unrelated property, the allowable deduction is limited to his basis. LO 3.2.2

Question 77

In the current year, Jeff makes the following charitable donations: Basis FMV Inventory used in Jeff's business (sole proprietor): $8,000 $6,000 Stock in ABC Co. (acquired 2 years ago): $10,000 $40,000 Personal coin collection (acquired 10 years ago): $1,000 $7,000 The ABC stock was given to Jeff's church, and the coin collection was given to the a private orphanage. Both donees promptly sold the property for the stated FMV. Ignoring percentage limitations on AGI, Jeff's maximum charitable contribution valuation for deduction purposes available for the current year is A) $55,000. B) $47,000. C) $53,000. D) $19,000.

Answer 77

b Jeff's maximum valuation for deduction purposes available for the current year is $47,000 as follows: Inventory: $6,000 (as ordinary income property, limited to lesser of basis or FMV) Stock in ABC Co.: $40,000 (the maximum possible deduction is FMV for this long-term capital gain property) Personal coin collection: $1,000 (tangible personal property depends on dedicated use of property from standpoint of the charity; this is use-unrelated property because it was given to the private orphanage also limited to the lesser of basis or FMV) LO 3.2.2

Question 78

Chris Burdick anticipates adjusted gross income of $200,000 for the current tax year. He contributed appreciated stock to a public charity. Chris's adjusted basis in this stock is $50,000. The stock has a current fair market value of $140,000. Chris has owned the stock for 12 years. If Chris does gift the stock to the United Way, what is the maximum allowable charitable deduction he can receive in the current tax year? A) $50,000 B) $140,000 C) $100,000 D) $60,000

Answer 78

d A gift of long-term capital gain property to a 50% organization is based on the FMV of the property, with the deduction for the current year limited to 30% of AGI. LO 3.2.2

Question 79

Claudia, who has an AGI of $40,000, wants to donate a painting of an ancestor who served in the American Revolution to the museum in her town that houses a collection of Revolution Era items. Her basis in the painting is $1,750, and it has a fair market value of $2,000. How much can she potentially deduct as a charitable contribution this year, assuming it is her only donation? A) None (It is the portrait of a relative.) B) $600 (The museum is a 30% organization, so she must use FMV.) C) $1,750 (It is related-use capital gain property, so she must use basis.) D) $2,000 (It is related-use capital gain property.)

Answer 79

d The painting is related-use, capital gain property. Claudia may deduct an amount up to 50% of her AGI if she uses the basis of the painting and 30% of AGI if she uses FMV. As long as Claudia's AGI is greater than $6,667, she can deduct the FMV of the portrait. LO 3.2.2

Question 80

Marion donated a truck to the local food bank to use for picking up food donations. Marion had purchased the truck several years ago for $15,000, and it currently has a value of $3,400. Which of the following statements regarding the documentation Marion must have to support his charitable contribution of the truck is CORRECT? A) The documentation must have the description of the property, the name of the receiving charitable organization, the date of the contribution, and the amount of the donation. B) A noncash contribution under $5,000 needs no documentation to support the donation. C) A letter from the food bank thanking him for the donation of the truck is sufficient documentation. D) An appraisal must be attached to Marion's income tax return for the year of the donation.

Answer 80

a The donor-taxpayer must have a canceled check, bank record, or a receipt from the donee organization to substantiate the deduction. The documentation must have the amount of cash or description of property, the name of the receiving charitable organization, the date of the contribution, and the amount of the donation. An appraisal is not required for noncash property over $500 and less than or equal to $5,000. However, taxpayers may wish to get an independent appraisal to support the deduction claimed. LO 3.2.2

Question 81

Jack bought publicly traded stock seven years ago for $6,000. Its current value on the securities market is $11,000. He has donated this appreciated stock to a charity that provides housing for the homeless. What must Jack do to take the donation as a charitable deduction? Jack must have documentation from the charity substantiating the amount of the donation, the date donated, and the name of the charity. All donations of stock must have a qualified appraisal of the stock attached to the donor's income tax return. A) II only B) I only C) Both I and II D) Neither I nor II

Answer 81

b Statement I is correct. In additional, the taxpayer must be in receipt of this documentation by the due date of the return or when the return is filed. Statement II is incorrect because it reads "all" donations of stock must have a qualified appraisal. A qualified appraisal is not required for closely held stock if the amount donated is less than $10,000. The appraisal itself is not attached to the tax return. LO 3.2.2