Unit 13

Question 1

What type of taxpayer can use accelerated or deferred deductions?

Answer 1

Cash basis only

Question 2

John has AGI of 100k in current year. Sole medical expense of 7k unpaid. If he pays expense this year he will get no deduction bc only medical expense > 7.5% AGI are deductible. But next year he will make $70k. What should he do?

Answer 2

If he delays payment to next year he can deduct $1750. (7000 - $5250 (7.5% of 70k)) = $1750

Question 3

If Mary is subject to AMT in the current year because of ISO option exercise, should she pay her state income tax this year?

Answer 3

Since state income tax is not deductible for AMT purposes, she should wait to pay the tax until next year.

Question 4

Net investment income calculation relates to

Answer 4

How much investment interest is deductible.
Also to calculate imputed interest on a no/low interest loan

Question 5

Beginning in 2018 gross investment income is equal to net investment income why

Answer 5

Due to the elimination of the investment expense deduction of advisory fees, tax preparation costs, etc.

Question 6

Since 2013 individs are subject to 3.8% special medicare tax that applies to what

Answer 6

Lesser of net investment income or the excess of MAGI over a certain threshold

Question 7

3.8% Medicare tax MAGI thresholds

Answer 7

MFJ: $250,000
Single/HoH: $200,000
MFS: $125,000

Question 8

Spencers file a joint return with $280k MAGI including $18k of net investment income. What amount do they pay the 3.8% additional Medicare tax on?

Answer 8

Amount = lesser of MAGI - threshold OR net investment income so
280k - 250k = $30,000 vs $18,000 net invest income

They pay the tax on the $18k

Question 9

gross investment income includes

Answer 9

all dividends both qualifying and nonqualifying, all capital gains both long and short, all rental income, all royalty income included in Gross investment income and thus net investment income as well as

Question 10

Most significant benefit of transferring property to other family members

Answer 10

Wealth transfer or utilizing estate planning techniques

Question 11

What has reduced the income tax benefits of intra family transfers?

Answer 11

The compression of tax brackets from 11-50% in 1986 to 10-37% currently

Question 12

To have your child be legitimate employee they must meet 2 qualifications

Answer 12

-Wage must match market based rate
- child must qualify and have the skill set necessary for the job

Question 13

What would be the tax advantage of employing your child?

Answer 13

Children have lower tax rates

Question 14

Could your child be employed as a computer data analyst at your company?

Answer 14

As long as they have the skills and are being paid a fair wage they can have any role - the child would have to know data analysis

Question 15

Biggest advantage to sale lease-back and gift lease-back

Answer 15

transfer wealth relatively quickly with some income tax advantages

Question 16

What is the most appropriate type of property to be included in a sale lease-back or a gift lease-back?

Answer 16

property used in a trade or business. for example a dentist in a high tax bracket could sell or gift his office equipment to his child in lower tax bracket. Parent makes lease payments to the child which are tax deductible. Child pays income but is in a lower bracket than parent. Child can also depreciate the asset.

Question 17

In a sale lease-back what is the child’s basis?

Answer 17

the purchase price is the child’s basis

Question 18

In a gift lease-back what is the child’s basis?

Answer 18

the child assumes the parents basis

Question 19

In a sale lease or gift lease what is the most important thing re: rates

Answer 19

must structure using prevailing market rates

Question 20

In a sale lease-back when would 1245 recapture apply?

Answer 20

If the parent sold for > than their basis

Question 21

Is a family limited partnership a taxable entity?

Answer 21

No

Question 22

How is income distributed in a family limited partnership?

Answer 22

income is distributed to the partners in proportion to their ownership %

Question 23

How do you transfer ownership to children in a family limited partnership

Answer 23

You would transfer shares at a significantly discounted price. Parent can maintain control as general partner with as little as 1% ownership. Would still have unlimited personal liability as GP

Question 24

Family limited partnership most appropriate for income from personal service co or capital resources?

Answer 24

capital resources - real estate development/management. If income is from personal service corp IRS might challenge due to assignment of income doct.

Question 25

Biggest advantage of installment sale

Answer 25

-seller can defer recognition of cap gain over several years
-prorate the gain over period of time specified in promissory note

Question 26

In order for installment sale to be structured properly note must be secured how?

Answer 26

with underlying asset being sold. seller must receive at least 1 payment in year after asset is sold. allows seller to report gain in a year when in lower tax bracket

Question 27

Self cancelling installment note works when/how

Answer 27

When installment seller is near death. If they die, present value of remaining installment payments are included in the deceased’s estate.

With SCIN outstanding payments not included in estate

Unrealized cap gains from remaining payments is accelerated - recognized on estate’s tax return if exceeds sellers basis

Question 28

Robert has biz that is sold on July 1 of current yr for 1mil. Terms require down payment of 30% with a 7 year note at 6%. Adjusted basis in the business is $125k and was purchased 12 years ago.

What is the monthly installment payment?

Answer 28

N = 84 (7, 12x)
I = .5 (6, 12divide)
PV = 700,000 CHS
PMT = $10,225.99

$10,225.00

Question 29

Robert has biz that is sold on July 1 of current yr for 1mil. Terms require down payment of 30% with a 7 year note at 6%. Adjusted basis in the business is $125k and was purchased 12 years ago.

What is the cashflow in year 1?

Answer 29

$300,000 (down payment)
N = 84 (7, 12x)
I = .5 (6, 12divide)
PV = 700,000 CHS
PMT = $10,225.99

Then 6 months of payments which were $10,225 * 6

$300,000 + $61,355.93 = 361,355.93 first year cashflow