Module 3 Tax Reduction and Management Techniques—Charitable Gifts, Estates & Trusts, Kiddie Tax, and AMT Flashcards
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
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
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.
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
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
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
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
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
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.
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
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
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
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.
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
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
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
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.
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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.
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
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
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
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
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
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
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
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
d
Currently, until the youngest reaches age 21, income from the irrevocable trust will be taxed to the trust.
LO 3.1.1
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
a
Explanation
All of these forms of gifting to a charity will qualify for the income tax charitable deduction.
LO 3.2.2
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.
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
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
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.
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
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
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.
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
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
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
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
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
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
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
