Module 4 Tax Implications of Special Circumstances Flashcards
What could you advise a client, concerning taxation, if a premarital agreement initiates a transfer of funds?
You would be better off with a transfer for consideration, which would likely not be taxed.
If a gift transfer is made, one spouse would likely have considerable income added.
A)
Both I and II
B)
Neither I nor II
C)
I only
D)
II only
b
The income tax consequences of the premarital agreement depend in large part upon whether the transfer under the agreement is treated as a gift (where income tax is avoided) or as a transfer for consideration (which will probably result in the recognition of significant income by one party).
LO 4.1.2
Jan and Martha have one child, age 8, who is in day care while they work outside of the home. During the current year, they spent $3,900 on qualifying child care expenses. Their AGI is $44,908. What is the amount of the child care credit that they may claim?
A)
$200
B)
$600
C)
$780
D)
$1,050
b
The child care credit is based on qualifying expenditures of up to $3,000 per child, up to $6,000 for two or more children. The qualifying expenditures are multiplied by an applicable percentage of 20% (for taxpayers with an AGI of $43,000 or more). For the student, it is important to remember the $3,000 for one child, $6,000 for two or more children, and the 20%. It is highly unlikely that the CFP Board would test a child care credit calculation where the AGI is less than $43,000.
LO 4.2.1
Terry has just been divorced. He is asking his planner, Marianne, for recommendations of amending his financial plan given his newly single status. Which of the following actions should Marianne take?
Marianne should review the beneficiary designations on Terry’s life insurance policies to be certain the beneficiaries are in line with his wishes post-divorce.
Marianne should ask for any documentation on property settlements and other court-ordered financial transactions.
Marianne should inquire whether a qualified domestic relations order was issued by the court and obtain a copy to ascertain its effect on Terry’s financial plan.
Marianne should inform Terry that the transfer-for-value income tax rule makes the transfer of any life insurance policies a taxable event.
A)
I, II, and III
B)
I and IV
C)
III only
D)
II and IV
a
Statement IV is incorrect. The transfer-for-value income tax rule does not apply in situations when a life insurance policy is transferred from one spouse to another as a result of a property settlement.
LO 4.2.3
Which of the following is necessary for a premarital agreement to be valid and enforceable?
A)
It cannot have been signed under duress.
B)
Signatories cannot be greater than 37½ years apart in age.
C)
It cannot include complete disclosure of the assets of both parties.
D)
It must include contractual obligations about who is responsible for house cleaning.
a
A premarital agreement cannot be signed under duress. The age disparity of the signatories is not in and of itself relevant. It must include full disclosure of assets. It cannot include contractual obligations, such as who is responsible for house cleaning.
LO 4.1.2
Which of the following is the main reason for a premarital agreement?
A)
It financially protects the parties if the death of one occurs, particularly the one who has more assets.
B)
It financially protects the parties if the death of one occurs, particularly the one who has fewer assets.
C)
It financially protects the parties in a divorce, particularly the one who has fewer assets.
D)
It financially protects the parties in a divorce, particularly the one who has more assets.
d
Explanation
A premarital agreement financially protects the parties in a divorce, particularly the one who has more assets.
LO 4.1.2
Which of the following statements regarding child support payments is CORRECT?
They are nontaxable to the payee.
They are nondeductible by the payor.
A)
Both I and II
B)
Neither I nor II
C)
II only
D)
I only
Child support payments are nontaxable to the payee and nondeductible by the payor.
LO 4.2.3
Lois and Clark recently divorced. Clark was ordered to pay child support and alimony. Clark works as a police officer at the local precinct. Lois expressed concern that he may be killed in the line of duty. Therefore, the judge has ordered him to obtain a life insurance policy. Which of the following is true?
A)
Clark must be the owner of the policy.
B)
Clark must pay the life insurance premiums in addition to alimony.
C)
Clark can treat the premiums as alimony.
D)
Clark should claim he is uninsurable because of his profession.
c
Explanation
Some states require alimony payors to obtain life insurance. Clark can include the money he spends on life insurance as part of his overall alimony payment. Lois has the insurable interest and therefore should be the owner of the policy. Although Clark’s premiums may be higher due to his profession, his profession will not prevent him from becoming insured.
LO 4.2.2
Ron, age 43, and Sandy, age 41, are married with two children: Michael, age 12, and Victoria, age 8, who has been blind since her birth. Ron is an architect and general partner with XYZ partnership. Sandy is self-employed as an attorney and works out of a home office. Her home office is exclusively and regularly used for business, and the home office is her principal place of business. Their information for the tax year 2023 is as follows:
Adjusted gross income: $217,300
Itemized deductions (including qualified residential mortgage interest, taxes paid, and charitable contributions): $33,000
Early in the current year, Sandy’s father died. Sandy is the sole beneficiary of her father’s entire estate. The estate is presently in the probate process. Sandy’s mother, Lisa, age 68, has moved in with them but provides her own support. She was married to Sandy’s father when he died earlier this year.
This is Ron’s second marriage. He makes monthly support payments to his former spouse and his daughter.
Because both Ron and Sandy are considered to be self-employed, they make quarterly estimated tax payments each year to cover both their income tax and self-employment tax obligations.
Assume Ron’s ex-spouse successfully petitions the court to require Ron pay their daughter’s private school tuition of $1,000 per month for the nine months of the school year. How much can Ron deduct on his income tax return for these payments?
A)
$4,500
B)
$0
C)
More information is needed
D)
$9,000
b
This is additional child support and is not tax deductible.
LO 4.2.3
If approved by a valid court, the assets divided and transferred by a qualified domestic relations order (QDRO) are
A)
nontaxable.
B)
gift taxable.
C)
sometimes taxable.
D)
fully taxable.
a
If approved by a court of competent jurisdiction, the transfer of assets incident to a divorce is not taxable.
LO 4.2.2
Paul was divorced from his spouse, Patricia, late last year. As part of the property settlement agreement, Paul agreed to transfer his interest in a residential real estate tract to Patricia. Paul’s cost basis in this real estate tract was $50,000. The tract was appraised at a fair market value of $100,000 at the time of its transfer to Patricia. Which of the following income tax implications is true of Paul’s transfer of the real estate to Patricia?
A)
Paul’s basis in the real estate is carried over to Patricia for income tax purposes.
B)
Patricia receives a basis in the real estate equal to the fair market value at the time of transfer.
C)
Paul is allowed a deduction equal to the excess of the fair market value over the basis in the property.
D)
Paul must recognize the gain on the real estate at the time of transfer at ordinary income rates.
a
A transfer of property incident to divorce is tax free. The transferee takes a carryover basis in the asset.
LO 4.2.3
Which of the following statements regarding the tax implications of divorce is NOT correct?
A)
Any transfer of property between spouses incident to a divorce is always income tax free.
B)
As a result of divorce, the custodial parent may list the children as a dependents unless there is a written agreement to the contrary.
C)
Child support payments are taxable to the payee and deductible by the payor.
D)
The transfer-for-value income tax rule does not apply when a life insurance policy is transferred from one spouse to another as a result of a property settlement.
c
Child support payments are nontaxable to the payee and nondeductible by the payor. All other choices are correct.
LO 4.2.3
Lowell and Thelma Jordan are married and will file a joint return for the current tax year. Lowell and Thelma are contributing to their respective 401(k) plans through their employers. They have provided you with the following information.
Lowell’s salary (after 401(k) contributions) $75,000
Thelma’s salary (after 401(k) contributions) $50,000
Alimony payments to Lowell’s ex-spouse $24,000
Net long-term capital loss $7,000
Property taxes $2,000
IRA contribution—Lowell $6,500
IRA contribution—Thelma $6,500
Lowell’s divorce was finalized in 2015. Based on the information given, what is their adjusted gross income for the current tax year?
A)
$81,000
B)
$85,000
C)
$118,000
D)
$83,000
b
The salaries of $125,000 reduced by the $24,000 of alimony payments equals $101,000. This is further reduced by $3,000 of net capital losses. Remember that only $3,000 of net capital losses are deductible in a given year, with an indefinite carryforward of the excess. The $13,000 of IRA contributions is also deductible. Even though both spouses are active participants in company-maintained retirement plans, their MAGI (AGI without the IRA contributions) is only $98,000. This is under $116,000—the beginning of the phaseout range for married couples filing jointly, where both spouses are active participants. The property taxes are an itemized deduction and do not affect the AGI.
LO 4.2.3
Ruth and Doug divorced last year. They have two children, ages 7 and 9. Their divorce decree states that Ruth has custody of both children. There is no written agreement for listing the children as dependents on their returns. However, Doug provides 75% of the child support, amounting to $15,000 per year. Based on this information, which parent is entitled to show the children as dependents on their income tax returns?
A)
Ruth, because she has custody and there is no written agreement that Doug could claim the children
B)
Doug, because he provides at least $1,200 per year for the children’s support and Ruth cannot prove she contributes more than this amount
C)
Ruth, because the court awarded her custody of the children
D)
Doug, because he provides over half of the child support
a
The parent with custody for a greater portion of the year is treated as providing more than half of a child’s support, where the child receives more than half of his total support for the year from either or both parents who are divorced.
LO 4.2.3
Lisa owns a fourplex in which she lives and rents out two of the other three units for $1,200 per month each. Her parents, who are both age 70 and retired, live in the fourth unit and do not pay Lisa any rent. Residents pay their own utilities. Lisa has asked her financial planner how this arrangement with her parents will affect her income tax return. What should her planner tell her?
A)
The planner needs to know how much this rent makes up the total support of her parents and if any other amounts are paid for their care and support by Lisa before making any recommendations.
B)
The $14,400 of forgone rent constitutes support, and Lisa may use the head of household filing status.
C)
Living rent-free with their daughter does not mean she is providing any support to them.
D)
Because the parents are not the planner’s clients, a determination cannot be made.
a
To make a determination on whether or not Lisa’s parents are her dependents, the planner needs complete information of how much Lisa has paid, if anything, in addition to the forgone rent for their support and what percentage that is of her parents’ total support.
LO 4.2.1
Carl and Rita are legally separated on December 31 this year. Carl earned $50,000 this year, and Rita earned $95,000. They live in a common law state and have no dependents. They have come to a tax preparer to determine how they must file their income taxes this year. What does the planner tell them?
A)
They must each file as MFS, each reporting their own income.
B)
They must each file as single, each reporting their own income.
C)
They may file as MFJ as they were not legally separated until the end of the year.
D)
They must each file as single, each reporting $60,000 (half of the total of $120,000) in income.
b
Single (S) filing status is used for an unmarried, legally separated, or divorced individual who does not qualify for any other filing status.
LO 4.2.3
Which of the following elements is NOT required for alimony?
The divorce agreement must specify that the payments are alimony.
The payor and payee are not members of the same household at the time the payments are made.
There is no liability to make the payments after the payee’s death.
The payments are not for the support of the payor’s children.
A)
I only
B)
I, II, and IV
C)
II, III, and IV
D)
II and III
a
Statement I is correct. It is not necessary to specify that payments are alimony. However, the divorce agreement cannot specify that the payments are not alimony.
LO 4.2.3
Which of the following is CORRECT concerning married individuals filing a joint income tax return?
Legally married spouses may file a joint return even though one spouse has no income or deductions.
Legally married spouses’ tax years must begin on the same date.
Legally married spouses are not legally separated under a decree of divorce or separate maintenance on the last day of the calendar year.
Neither legally married spouse is a nonresident alien at any time during the year.
A)
I, II, and IV
B)
IV only
C)
I, II, III, and IV
D)
II and III
c
Explanation
All statements are required for legally married spouses to file a joint income tax return.
LO 4.1.1
Ed was divorced from his spouse, Julie, in 2018. Julie received custody of their only child, Sally, age 5. Ed was ordered to pay $2,500 of alimony and child support per month to Julie until Sally reaches age 18. At that time, the payments are to decrease to $1,000 per month. What portion of each payment is deductible by Ed as qualifying alimony?
A)
$0
B)
$2,500 of each payment
C)
$1,500 of each payment
D)
$1,000 of each payment
d
Explanation
Amounts tied to a contingency or the occurrence of an event relating to the child are presumed to be nondeductible child support. Thus, $1,500 is tied to the child’s reaching age 18 and would not be deductible. The remaining $1,000 per month is deductible alimony.
LO 4.2.3
Haley’s great-grandmother, Sylvia, lives in her own home, but Haley provides direct support for her. Sylvia uses $4,200 of her Social Security income (her only income) for her own support, including paying her Medicare premiums. Haley can document that she paid $6,550 in support for Sylvia. Haley is a single taxpayer. Can she list Sylvia as a dependent and claim head of household filing status?
A)
Yes, Sylvia’s Social Security is nontaxable and is not used in the support test.
B)
No, Sylvia does not live with Haley, so she fails as a qualifying relative.
C)
No, Sylvia used Social Security benefits for some of her own support.
D)
Yes, Sylvia satisfies all of the criteria for a qualifying relative.
d
Sylvia satisfies all of the criteria for a qualifying relative. The income test is satisfied because she has no taxable income. The support test is satisfied because the money she used for her own support was less than 50% of her total support. A great-grandmother is a direct ancestor of a taxpayer and is a relative that does not have to live in the same household as the taxpayer.
LO 4.2.1
What could you advise a client, concerning taxation, if a premarital agreement initiates a transfer of funds?
You would be better off with a transfer treated as a gift, which would likely not be taxed.
If a transfer for consideration is made, one spouse would likely have considerable income added.
A)
Neither I nor II
B)
I only
C)
Both I and II
D)
II only
c
Explanation
The income tax consequences of the premarital agreement depend in large part upon whether the transfer under the agreement is treated as a gift (where income tax is avoided) or as a transfer for consideration (which will probably result in the recognition of significant income by one party).
LO 4.1.2
When filing as married filing separately, which of the following are true?
If one spouse itemizes deductions, the other spouse must also itemize.
The couple avoids joint and several liability for the other spouse’s return.
Married filing separately is usually more advantageous for a couple than married filing jointly.
A)
I and II
B)
I, II, and III
C)
III only
D)
II only
a
Explanation
As an alternative to filing jointly, married individuals may file separate returns. This is known as married filing separately (MFS), and, in a few cases, the individuals may derive some tax benefit. However, the filing of returns MFS is usually not advantageous for married individuals.
LO 4.1.1
Which of the following is necessary for a valid and enforceable premarital agreement?
A)
There should be full disclosure of each party’s net worth prior to signing.
B)
The agreement needs to be orally agreed upon.
C)
Only one party needs to agree on the terms.
D)
It must specify alimony payments to be provided upon divorce of the parties.
a
Explanation
To be valid, a premarital agreement must be in writing and contain a complete disclosure of each party’s financial situation. It may not be used to regulate an award of alimony.
LO 4.1.2
ustin was divorced in February 2023. As part of the divorce decree, Justin is paying $3,000 per month in child support and alimony to his ex-spouse, Casey. When his youngest child becomes 18, this payment will be reduced to $1,000. Justin would like to know the tax implications of the child support and alimony he is paying. After evaluating Justin’s circumstances, what should you tell Justin regarding the tax treatment of these payments?
None of the payments are taxable income to his ex-spouse.
Justin may deduct the alimony but not the child support.
A)
II only
B)
Neither I nor II
C)
I only
D)
Both I and II
c
Child support is not deductible by the payor or taxable to the payee, and, beginning in 2019, the tax treatment is the same for alimony.
LO 4.2.3
Max has taxable income of $80,000 from wages and will list his mother as a dependent on his tax return. Max will take the standard deduction this year. He wants to file on as simple an income tax form as he can. Which form will fit Max the best?
A)
Form 1040NR
B)
Form 990
C)
Form 709
D)
Form 1040
Max can use the 1040. 990 is for nonprofits. 709 is for gift tax. 1040NR is for nonresident aliens.
LO 4.2.1
Herman and Clarisse are married and come to you for tax advice. Herman is a U.S. citizen and Clarisse is not. What can you tell them about options for filing their taxes?
Clarisse can elect to file taxes as a nonresident or as a resident alien.
If filing as a resident alien, Clarisse will only need to fill out Form 1040NR.
If filing as a resident alien, Clarisse and Herman will need to pay taxes on all of their income (worldwide).
This will create an immigration benefit for Clarisse.
A)
I and III
B)
I only
C)
II, III, and IV
D)
II and IV
If married to a U.S. citizen or resident alien, the nonresident alien can elect to be treated as a resident alien for tax purposes only. Tax status does not necessarily reflect immigration status. If this election is made, the couple must pay U.S. taxes on their worldwide income. In this situation, the nonresident alien spouse should obtain an Individual Tax Identification Number (ITIN). Depending on their individual situation and intentions, they may apply for a Social Security number with the Social Security Administration.
LO 4.1.1
Lucy’s son, Alex, has been severely disabled since he was a small child. He has just turned 22, and Lucy provided all of his support until this year when he was placed in an extended care facility. With increased expenses not covered by insurance, Lucy will have to split his support. Lucy will provide one-third of the support, and Alex’s grandmother will pay one-third, with Alex’s aunt paying the final third. Because this is a new situation this tax year, Lucy has come to her financial planner to understand who can list Alex on their tax return for the purposes of filing status and possible credits. What does the planner tell Lucy?
A)
While one of the taxpayers may list Alex as a dependent in an agreed upon year, no tax credits would be available to that taxpayer.
B)
No one can list Alex on their return because no one has paid more than half of Alex’s support.
C)
The three relatives are free to agree among themselves who will list Alex on their return.
D)
Only Lucy, as his mother, can list Alex on her return.
c
Eligible taxpayers are generally free to agree among themselves who will list an individual as a dependent and who will claim any available credits when an individual can be claimed by more than one taxpayer.
LO 4.2.1
Which of the following is necessary for a premarital agreement to be valid and enforceable?
A)
It may be holographic.
B)
The agreement may be oral or in writing.
C)
Both signatories must utilize the same attorney.
D)
It must be in writing.
d
Explanation
To be valid, a prenuptial agreement must be in writing, witnessed, and reviewed by an attorney. Each party should obtain independent counsel.
LO 4.1.2
Floyd is a single U.S. citizen and the sole support of his father, Jacob, who is a qualifying relative. What filing status is best for Floyd to use this year?
Single
Head of household
A)
II only
B)
I only
C)
Both I and II
D)
Neither I nor II
a
Explanation
Only statement II is correct. Because Floyd’s father can be listed as his dependent on his tax return, Floyd should use the head of household filing status.
LO 4.2.1
As part of a 2022 divorce decree, Patrick was required to transfer all of his existing life insurance policies to his former spouse, Marlene. She became the owner and beneficiary of the policies. Patrick is now required to continue making the premium payments on all of the policies. How will the life insurance premium payments be treated?
A)
They are included as income.
B)
They are considered alimony.
C)
They are included as tax deductions.
D)
They are included as taxable income on Marlene’s return.
b
When a taxpayer transfers ownership and control of life insurance policies to a former spouse, any premium payments that the taxpayer makes on those policies are considered alimony to the ex-spouse.
LO 4.2.3
Which of the following statements regarding married couples who file joint tax returns is NOT correct?
A)
When spouses file jointly, each spouse is liable for only one-half of the tax due.
B)
Spouses who file a joint return have joint and several liability for the payment of any tax due.
C)
Spouses may file a joint return even if one spouse has no income.
D)
The law provides for innocent spouse relief, which may excuse one spouse for the failure of the other spouse’s tax obligation.
a
Spouses who file a joint return have joint and several liability for the payment of any tax due. This means each spouse is responsible for the entire tax liability and not just one-half.
LO 4.1.1
Which of the following statements concerning alimony is CORRECT?
A)
No payments except cash can be considered alimony.
B)
Payments to maintain property used by the payee spouse, but owned by the payor spouse, qualify as alimony.
C)
Cash payment of the payee spouse’s mortgage made by the payor spouse as required by the divorce or separation instrument qualifies as one-half alimony.
D)
Payments made with respect to jointly owned property are considered one-half alimony.
d
Cash payment of the payee spouse’s mortgage, rent, tuition, or tax liability made by the payor spouse as required by the divorce or separation instrument may qualify as alimony. Payments to maintain property used by the payee spouse, but owned by the payor spouse, do not qualify as alimony, even if required under the instrument. Payments made with respect to jointly owned property are considered one-half alimony. These property-related expenditures may include mortgage payments, real estate taxes, and homeowners insurance.
LO 4.2.2
Colin and Lucy are meeting with their financial planner, Jorge, before the tax year ends to discuss changes in their situation. In March of this year, Lucy’s father, Curtis, was diagnosed with dementia and required placement in a nursing home. Colin and Lucy paid for about half of his expenses until his death in December of this year. They would like to know what tax relief they may have for supporting Curtis this year. What does Jorge tell the couple?
A)
The couple can take a partial tax credit for Curtis this year.
B)
The couple is assured of at least being able to list Curtis on their tax return this year.
C)
Because they paid for only half of his nursing home expenses for Curtis, the couple is not entitled to the dependent care credit on their tax return.
D)
Jorge should ask for documentation to establish Curtis’ income, the amounts spent on his own support, and how much the couple spent before he can provide any recommendations.
d
Explanation
Jorge cannot provide any answers to Colin and Lucy until he has more documentation to support his recommendations.
LO 4.2.1
Legally married spouses may file a joint return
A)
if neither spouse is a nonresident alien at any time during the year.
B)
even if their tax years do not begin on the same date.
C)
if separated by a divorce decree, but the divorce is not final.
D)
only if both spouses have income or deductions.
a
Legally married spouses may file a joint return (even though one spouse has no income or deductions) if their tax years begin on the same date; they are not legally separated under a decree of divorce or separate maintenance on the last day of the calendar year; and neither is a nonresident alien at any time during the year.
LO 4.1.1
Which of the following taxpayers may use the married filing jointly filing status?
A married couple, even though one spouse did not have any income during the tax year
A married couple that is legally separated on the last day of the tax year if they share custody of a dependent child
A married couple that is legally separated on the last day of the tax year
A married couple that is not legally separated on the last day of the tax year
A)
II and IV
B)
I and IV
C)
I, II, and IV
D)
I, II, and III
b
A married couple may file a joint return even though one spouse has no income or deductions if they are not legally separated or divorced on the last day of the tax year.
LO 4.2.2
Nicholas and Ashley are married and file a joint tax return. Nicholas earns $80,000 annually, and Ashley earns $90,000 each year. What percentage of the tax liability does each spouse owe?
A)
100% for each spouse
B)
An amount based on each spouse’s percentage of income
C)
50% for each spouse
D)
Ashley has the highest salary; therefore, she owes 100%
a
Under the rule of joint and several liability, each spouse owes 100% of the tax liability, no matter who earned the income or in what proportion.
LO 4.1.1
Keith was divorced from Barbara in 2018. Barbara received custody of their two children. Keith was ordered to pay $1,000 per month to Barbara until the youngest child reaches age 18. At that time, the payments are to decrease to $400 per month. What portion, if any, is deductible by Keith as qualifying alimony?
A)
$0
B)
$1,000
C)
$500
D)
$400
d
A total of $600 is tied to an occurrence or contingency related to a minor child—the child reaching age 18. Thus, this amount is presumed to be nondeductible child support.
LO 4.2.3
Which of the following is necessary for a valid and enforceable premarital agreement?
A)
It must specify alimony payments to be provided upon divorce of the parties.
B)
There should be full disclosure of each party’s net worth prior to signing.
C)
The agreement needs to be orally agreed upon.
D)
It can be used to facilitate a divorce.
b
To be valid, a premarital agreement must be in writing and contain a complete disclosure of each party’s financial situation. It may not be used to regulate an award of alimony or facilitate a divorce.
LO 4.1.2
Which of the following payments between divorced spouses is considered entirely child support?
Mark must pay his daughter’s private school tuition until she graduates high school.
Sarah must pay her ex-spouse, Norman, $1,000 per month for five years or until he remarries. Norman has custody of their 15-year-old son.
Lucius is required to pay $5,000 per month to Anna, his child’s mother, until the child is age 18.
Jason is required to pay Lisa $3,000 per month until their daughter is 18, after which the payment is reduced to $1,400 per month.
A)
I and III
B)
IV only
C)
III and IV
D)
I only
a
Statements I and III are correct. Statement II is alimony because the condition does not relate to the child. Statement IV is both alimony and child support because only part of the payment is related to contingency related to the child.
LO 4.2.3
Ed was divorced from his spouse, Julie, in 2018. Julie was granted custody of their only child, Sally, age 5. Ed was ordered to pay $2,500 per month to Julie until Sally reaches age 18. At that time, the payments are to decrease to $1,200 per month. What portion of each payment, if any, is deductible by Ed as qualifying alimony?
A)
A total of $1,300 of each payment is deductible by Ed.
B)
None of each payment is deductible by Ed.
C)
A total of $1,200 of each payment is deductible by Ed.
D)
All of each payment is deductible by Ed.
c
Explanation
In a divorce decree, any amount tied to the happening of a contingency or an event related to a minor child is deemed to constitute nondeductible child support. In this situation, $1,300 is tied to Sally turning 18. Thus, only the remaining $1,200 is considered to be alimony.
LO 4.2.3
Barbara and Morgan were divorced last year and have a child age 13. The court ruled that Barbara must pay Morgan $2,000 per month to cover both alimony and child support. The divorce decree states that 70% of each payment is allocated for child support and the payments must last for five years. Based on this information, which of the following statements is CORRECT?
A)
Barbara can deduct $600 per month as child support.
B)
Barbara can deduct $1,400 per month as child support.
C)
Barbara cannot take a deduction.
D)
Barbara can deduct $1,400 per month as alimony.
c
Explanation
Beginning in 2019, alimony payments are no longer deductible by the payor.
LO 4.2.3
Which of the following statements regarding items of gross income is CORRECT?
Alimony or separate maintenance payments are includible in the gross income of the payee and are deductible for income tax purposes from the gross income of the payor if the divorce was finalized prior to January 1, 2019.
Child support payments are includible in the gross income of the payee and are deductible for income tax purposes from the gross income of the payor.
A)
I only
B)
Neither I nor II
C)
Both I and II
D)
II only
a
Payments for child support are not deductible by the payor and are not included in gross income for the payee.
LO 4.2.3
Abby and her father, Ryan, live together in Abby’s home. Ryan is bedridden, and Abby must pay a caregiver to provide meals and other assistance to Ryan during the day so Abby can go to work downtown. Abby pays $5,000 annually for this service. Ryan has no income, and Abby is his full support. What tax relief may be available to Abby for the expenses of caring for her father?
Child and dependent care credit
A greater standard deduction amount
A)
Both I and II
B)
Neither I nor II
C)
I only
D)
II only
a
Abby is entitled to both the standard deduction amount for the head of household filing status and the child and dependent care tax credit, subject to the limits based on Abby’s AGI.
LO 4.2.1
In 2023, Alice provided over half the support of her son, Mike, age 20, who is a full-time college student. Assuming all of the other qualifying child tests are met, what is the maximum age that Mike can be a full-time student and still qualify to be listed as Alice’s dependent?
A)
23
B)
21
C)
19
D)
18
a
Mike must pass an age test (meet one of the following): (1) under age 19 at the close of the tax year, or (2) is a full-time student and under age 24 at the close of the tax year.
LO 4.2.1
Which of the following must be true for someone to be claimed as a dependent for another taxpayer?
A dependent may not have more than $4,700 (2023) of gross income.
The taxpayer must provide over 50% of the dependent’s support.
A person who dies during the year may not be identified as a dependent.
Social Security payments are always included in the dependent’s gross income.
A)
II and IV
B)
III and IV
C)
I and II
D)
I only
c
A dependent may not have more than $4,700 (2023) of gross income. Social Security income is excluded from the test if that is the elder’s only source of income. The taxpayer must also provide over 50% of the dependent’s support to claim them. Coincidentally, as long as all the tests are met, a person who dies during the year may still be identified as a dependent.
LO 4.2.1
Mavis and Bennet are married and file jointly. Mavis earns $30,000 and Bennet earns $70,000. What percentage of the tax liability does each spouse owe?
A)
100% for each spouse
B)
Depends on the percentage of income
C)
50% for each spouse
D)
Bennet earns the most, so he owes 100%
a
Under the rule of joint and several liability, each spouse owes 100% of the tax liability, no matter who earned the income or in what proportion.
LO 4.1.1
Michael was divorced after 12 years of marriage and recently died. He had two dependent children, ages four and six, who are cared for by their mother. He was currently, but not fully, insured under Social Security at the time of his death. The benefits that his survivors are entitled to include which of the following?
A lump sum death benefit of $255
A children’s benefit
A divorced spouse’s benefit
A parent’s benefit for deceased workers’ parents who are over the age of 62
A)
III and IV
B)
I, II, and III
C)
I and II
D)
I, II, III, and IV
c
A lump sum death benefit of $255 is payable to the surviving spouse or children of the deceased worker if he was fully or currently insured. The children’s benefit is payable because Michael was either currently or fully insured. The mother of the children would be entitled to a benefit because she is caring for Michael’s children who are under the age of 16. However, that is not called the divorced spouse benefit. It is the surviving spouse caring for a dependent child benefit. The parents are not entitled because Michael was not fully insured. Statements III and IV are benefits only available under fully insured status.
LO 4.2.3
If Gloria, after divorce, wants to change the beneficiary of a trust that names her spouse as beneficiary to her daughter, which of the following is true?
If the trust document does not allow the beneficiary to be removed, a new trust must be created.
If a new trust is created, a new beneficiary can be easily named.
Assets in an original trust can be decanted to a new trust.
A)
I only
B)
II and III
C)
I and III
D)
I, II, and III
c
Some trust documents do not allow the beneficiary to be removed. In this case, the original grantor may be able to create a new trust. The trustee of the old trust could then decant the assets to the new trust. However, this arrangement presupposes the agreement of the disinherited spouse.
LO 4.2.2
