Tax Implications of Changing Circumstances Flashcards
Requirements for premarital or prenuptial agreements
-in writing and signed by both parties
-full and complete disclosure of net worth
-not intended to promote procurement of divorce
-execute willingly without duress/coercion
MFJ requirements
-married last day of tax year, according to state law definition
- can be filed on year of death if not re-married
- both must have same tax year (unless death)
- only if nonresident aliens agrees to report all income
Disadvantages of MFS
may lose all/part of the
- benefits of contributions or deductions for IRAs
- childcare credit (a tax credit that offsets your taxes in a direct dollar-to-dollar manner for child and dependent care expenses)
- Earned Income Credit (a tax credit available to low-income taxpayers, which effectively serves as a negative income tax)
Qualifying widower
Can file joint return for 2 years if:
-not remarried
-US Citizen/resident
-qualified for joint return in year of death
-have at least one dependent child living at home entire year and pay over half of home expenses
Head of HH requirements
- unmarried last day of tax year
- not be surviving house
-US citizen/resident
-Pay>half costs maintaining home as HH in which dependent relative lives for >half tax year, includes unmarried dependent who lives with tax payer or dependent parent if not living with taxpayer
-abandoned spouse must have dependent child
Dependency qualification
- qualifying identification number
- citizenship test
- separate return test
- Not themselves claim another person as a dependent
Qualifying children:
- relationship- taxpayer’s children, foster child, sibling/descendent
-age: under 19/24 if full time student at the end of year /disabled
-abode: lived with taxpayer >half year
-support: dependent can’t provide more than half of support
- joint return: dependent can’t file joint return
if qualifying taxpayer has higher AGI than qualifying parent, then can claim qualifying child as dependent
If qualifying parent has higher AGI, then is the only one who can claim
Qualifying relatives:
-relationship
-gross income
-support
Child tax credit
2023 w dependents <17 by end of year w/SSN
- credit of $2,000/child (partially refundable + earnings threshold to claim up to $1,500 (Additional child tax credit))
2022-2025: child must be claimed as dependent and live at same residence for >half year, and can’t provide >half of own financial support
Parents AGI<200,000 and 400,000 MFJ to claim full credit, for every $1,000> threshold, -$50 credit.
Child and dependent care credit requirements
-Child/dependent care expenses must be incurred to enable the taxpayer to be gainfully employed, and
- must maintain a household for a dependent under the age of 13 or an incapacitated dependent or spouse.
Child and dependent care credit
35% of qualifying expenses (after ceiling limitations of $3,000 - individual or $6,000 - family have been applied); and reduced by 1% for each $2,000 of AGI >$15,000, but goes no lower than 20% if over $43,000
Dependent Care Assistance
Employee may exclude up to $5,000 for dependent care assistance programs paid by employer from gross income and is limited to earned income of employee/lesser of either spouse. Eligible expenses for credit are reduced by amount of assistance excluded from gross income.
American Opportunity Tax Credit (AOTC)
up to a $2,500 credit for tuition and related expenses paid during the taxable year for each qualified student, max of 4 years postsecondary (100% of first $2,000 + 25% of second $2,000 of qualified expenses)
-only 40%/up to $1,000 is refundable credit
-based on tax year paid
-must be at least half normal FT courseload
- can’t be convicted of a federal or state felony offense for the possession or distribution of a controlled substance as of the end of the taxable year for which the credit is claimed
-must be reduced by the amounts received under other sections of the tax law, such as scholarships (IRC Section 117), employee-sponsored educational reimbursement plans (IRC Section 127), Qualified tuition programs (IRC Section 529), Coverdell Educational Savings Accounts (IRC Section 530), or other provisions of the tax law.
-allowable credit (including both the AOTC and the lifetime learning credit) is reduced for taxpayers who have modified AGI above certain amounts. The phase-out for taxpayers filing joint returns for 2023 is $160,000 to $180,000 ($80,000 to $90,000 for other taxpayers). The AOTC and Lifetime Learning Credit are ratably phased out for joint filers using the formula below:
Tentative AOTC X (Modified AGI - $160,000)/$20,000
Lifetime Learning Credit
20% of max of $10,000/yr of qualified tuition and fees for 1+ eligible students: up to $2,000 per student each year. The Consolidated Appropriations Act (CAA) increased the Lifetime Learning Credit phase-out range to $80,000 and $90,000 MAGI for unmarried individuals & $160,000 and $180,000 for MFJ.
-unlimited number of years and may be used for undergraduate, graduate, and professional degree expenses.
Adoption Credit
nonrefundable credit of up to $15,590 is allowed for qualified adoption expenses the year adoption is finalized- AGI phaseout and cutoff thresholds for 2023 were adjusted to a range of $239,230 to $279,230 or more
Qualified adoption expenses include reasonable and necessary adoption fees, court costs, attorney fees, and other expenses that are directly related to the legal adoption by the taxpayer of an eligible child.
Common Law
- Common law: income is taxed to individual who earns income
Community Income
- Community property- any property acquired during marriage represents joint ownership and shares community income: doesn’t include assets each spouse owned individually before the marriage or gifts and inheritances acquired during marriage that have been kept separate.
Upon the death of either the husband or the wife, the surviving spouse automatically receives one-half of the community property. The remaining portion of the property is disposed of according to the will, or, in absence of a will, according to state law.
Separate Maintenance Payments
Alimony,
Child support, or
Property settlement
Tax law definition of alimony
- in cash (not property)
- pursuant to a divorce, separation, or a written agreement between spouses
- Terminate at the death of the payee
- Not designated as being other than alimony (such as child support)
- Be made between people living in separate households
Child support
- payment that benefits a common child during/after divorce/separation and is not deductible/taxable until the following contingent events of child:
Becoming employed,
Dying,
Leaving the household,
Leaving school,
Marrying, or
Reaching a specified age or income level.
Property Settlement
division of property pursuant to a divorce, not taxable/deductible
Qualified Domestic Relations Order (QDRO)
Judgment, decree, or court order (including an approved property settlement agreement) issued under a domestic relations law that:
-Relates to the rights of someone other than a participant to receive benefits from a qualified retirement plan such as most pension and profit-sharing plans or a tax-sheltered annuity,
-Relates to payment of child support, alimony, or marital property rights to a spouse, former spouse, child, or other dependents of the participant, and
-Specifies the amount or portion of the participant’s benefits to be paid to the participant’s spouse, former spouse, child, or dependent.
QDRO benefits to spouse
must be included in income, prorated share of cost is used to calculate taxable amount
QDRO benefits to child
treated as paid to the participant
Final Income Tax Return
- filed by personal representative/fiduciary/executor, if cash accounting, then final return should show only the items of income the decedent actually received, that were credited to his account, or that were made available to him without restriction before death. Generally, expenses the decedent paid before death should be deducted on the final return.
Deceased due dates and filing requirements
Same as deceased if alive, extension may be available
Difference between executor and administrator
Administrator is appointed by probate court if no executor was named or if unable to serve
Final return status
Deceased- with name, DoD written on top. If join, then surviving signs -if no other rep appointed, then “filing as surviving spouse” otherwise “personal representative”
Claiming decedent’s refund
If not surviving spouse or court-appointed/certified personal representative filing an original return, then need to file 1310 (Statement of Person Claiming
Refund Due a Deceased Taxpayer)
To be considered a qualifying person for the Child and Dependent Care Credit, a dependent must be under age _____ when the care is provided.
13
Choose the filing status(es) that require that the taxpayer has a dependent.
Hof HH/qualifying widower
An owner is allowed to rent a property for _____ or less and keep its characterization as a Personal Use Property.
14 days
If married, to qualify for the Section 121 exclusion _____ spouse(s) must meet the usage test, _____ spouse(s) needs to meet the ownership test.
If married, both spouses must meet the usage test but only one spouse needs to meet the ownership test.
If the home is transferred to a taxpayer as a result of a divorce, the time that the divorced spouse owned the home is _______ the taxpayer’s period of ownership for Section 121 exclusion eligibility.
If the home is transferred to a taxpayer as a result of a divorce, the time that the divorced spouse owned the home is added to the taxpayer’s period of ownership when calculating qualifying eligibility for a Section 121 exclusion.
Each of the following are correct statements about FLPs EXCEPT:
Partnership interests retained by senior family members continue to appreciate in their estate.
Valuations of assets or business are eligible for a minority discount & a lack of marketability discount.
General partners in an FLP have unlimited liability.
Gifted shares of limited partnership receive a step-up in basis.
Gifts distributed through an FLP do not receive a step-up in basis. Thus, the limited partnership shares transferred to younger family members will carry the original basis.
Which of the following correctly describes income items used in the calculation of the taxation of Social Security benefits?
50% of Social Security benefits + tax-exempt earnings + AGI (without Social Security)
The Grabelle family has experienced several consecutive years in which there has been a cash flow shortfall. As a result of their financial situation, the family has decided to liquidate several accounts. To increase cash flow the following accounts have been liquidated:
5-month CD: $5,000 value, $45 penalty (October 2022)
2-year CD: $2,500 value, $75 penalty (January 2023)
5-year CD: $7,500 value, $125 penalty (May 2023)
What is the deductible amount of early withdrawal penalties incurred by the Grabelle family in 2023?
Penalty amounts for early withdrawal of CDs and time deposit accounts are available for deduction in year of penalty. The Grabelle family incurred $200 of early withdrawal penalties in 2023 ($75 + $125). Thus, $200 of the penalties are considered deductible.
Calculate the value of Samantha’s estate, assuming she passed away on 1/21/2023 and that her personal representative made an AVD election.
1/21/2023 7/21/2023
Primary Residence $400,000 $360,000
Investment Portfolio $100,000 $125,000
Automobile $35,000 $31,500
Vintage Guitar $105,000 $200,000
Intellectual Property $55,000 $75,000
Since the alternate valuation date (AVD) election was made by the personal representative, assets will be valued on the date six months from the decedent’s death. However, certain depreciable assets must be valued on the date of death, even if an AVD election is made.
In Samantha’s situation, the following assets are valued on the AVD (7/21/2023): Personal Residence ($360,000), Investment Portfolio ($125,000), and Vintage Guitar ($200,000). The Automobile and Intellectual Property (both depreciable assets) are exceptions and are valued as of the date of death (1/21/2023), at $35,000 and $55,000, respectively.
The valuation of Samantha’s estate is: $360,000 + $125,000 + $35,000 + $200,000 + $55,000 = $775,000.
Prudence owns 25% of a rental property and is significantly involved in the day-to-day management. Her MAGI in 2022 is $95,000. This year, her share of rental losses was $30,000. How much of the real estate losses may be used to offset active and portfolio income?
Prudence owns at least 10% of the property (25% ownership) and is involved in the overall management. Therefore, she is considered an ‘active participant’ and is eligible to deduct up to $25,000 of real estate losses.
Normally, real estate losses are considered ‘passive’ and can only be used to offset passive gains. When one is considered an ‘active participant’ they can use real estate losses of up to $25,000 to offset active income (i.e., earned income) and portfolio income (i.e., investment income).
Raphael, age 55, paid premiums of $350,000 from age 30 to age 50 into a flexible premium non-qualified variable tax-deferred annuity. Raphael is in a 24% marginal income tax bracket. The account value today is $600,000. If Raphael withdrawals only last year’s earnings of $35,000, what is the total amount of taxes he will pay attributable to the withdrawal?
Withdrawals are considered distributed on a LIFO basis. Raphael has not attained age 59 ½.
Since there are $250,000 of gains in the annuity (i.e., $600,000 - $350,000 = $250,000) the withdrawal is considered 100% earnings and is subject to ordinary income tax at 24% plus a 10% penalty tax for early withdrawal.
34% x $35,000 = $11,900.
