Unit 21 (2)

Question 1

What is included in distributable net income in a trust?

Answer 1

Dividends, interest - including from tax free muni bonds, and rents. NOT included is capital gains reinvested into the corpus of the trust

Question 2

What is not included in DNI of a trust?

Answer 2

Capital gains reinvested into the corpus of the trust

Question 3

What type of trust distributes all income every year?

Answer 3

Simple trust

Question 4

What trust allows income to be retained?

Answer 4

Complex trust allows income to be retained and is reported on form 1041

Question 5

What form does a complex trust use to report retained income?

Answer 5

Form 1041

Question 6

Generation skipping trust

Answer 6

Skips your children and goes directly to grandchildren

Question 7

What form does a sole proprietorship use to file its business information?

Answer 7

Schedule C

Question 8

Schedule C is used for which type of business?

Answer 8

Sole proprietorship

Question 9

Schedule K-1 is for

Answer 9

Limited partners
LLC members
S corp shareholders

Question 10

What form do limited partners, members of LLCs, and S corps use?

Answer 10

K-1

Question 11

Which gets a cost step up, inherited stock or gifted stock?

Answer 11

Inherited stock gets a step up to the value at the time of death

Question 12

What basis does the donee get for gifted stock?

Answer 12

The buyers original cost basis

Question 13

What form does estate tax use?

Answer 13

Form 706. To remember this think death since it’s estate tax 666 - 706

Question 14

Can an executor use an alternative valuation date?

Answer 14

Yes. 6 months after death

Question 15

When are estate taxes due?

Answer 15

Nine months after the date of death and reported on form 706

Question 16

Form K-1 is not used by?

Answer 16

Sole proprietorship does not use K-1 it uses schedule C of the form 1040.

Question 17

Who uses form K-1?

Answer 17

Legal entities that pass through income or loss use form K-1 to indicate the amount of that income or loss attributable to the individual shareholder/member/partner

Question 18

You buy 100 ABC at 20 in Jan, 200 at $25 in April, and 100 at $30 in July. CMV is $22 and you decide to sell 200 shares. Which method is the best for tax considerations?

Answer 18

LIFO. This allows you to designate the 100 shares purchased at $30 and 100 of the shares purchased at $25 to result in a short term loss of $800. $500 on the July shares and 300 on the April shares. That loss may be used against realized gains or, if this is the investors only transactions, deducted in full against ordinary income. The average cost method is only available for mutual funds

Question 19

For what security can you use average cost method?

Answer 19

Mutual funds

Question 20

When are estate taxes due?

Answer 20

9 months after death. Based on the valuation at death or 6 months after death

Question 21

The last dollar of income is taxed at?

Answer 21

The marginal tax rate. As you make more money, you pay tax at a higher rate incrementally.

Question 22

Effective tax rate

Answer 22

Average rate you pay on all your income

Question 23

What do interest on interest reinvestment plans and dividend and capital gains reinvestment plans have in common? (Dividend and capital gains plan is one plan)

Answer 23

In both plans, all income is taxable in the year received, whether reinvested or not.

Question 24

Interest on interest plan

Answer 24

Like a passbook savings plan where the interest is credited and compounded

Question 25

What can you buy that doesn’t violate the wash sale rule?

Answer 25

Puts. Puts allow the buyer to sell, not buy

Question 26

Requirements for head of household

Answer 26

Unmarried or considered unmarried on the last day of the year
Qualifying person lives with you more than half the year, usually a child.

Question 27

What is subject to AMT?

Answer 27

1. Accelerated depreciation
2. Costs assoc with LPs like RnD and excess intangible drilling costs
3. Local tax and interest on investments that don’t gen. income
4. Interest from private activity muni bonds
5. Incentive stock options where fair market value is greater than the strike price of the option

Question 28

When comparing tax treatment of c corps, s corps, and LLCs it would be correct to state that

Answer 28

The c Corp is the only one that pays taxes. It is the only one that is a separately taxed entity.

Question 29

Where does the income of a S Corp or LLC flow through to?

Answer 29

The shareholders/members

Question 30

What is the tax filing date for the 2 flow through entities, S corps and LLCs?

Answer 30

March 15

Question 31

When is the tax filing date for a C Corp?

Answer 31

15th day of the 4th month after the end of the fiscal year. For calendar year filers, that is April 15

Question 32

When is your marital status decided for tax returns?

Answer 32

Dec 31st

Question 33

Highest rate paid on income in a progressive tax system?

Answer 33

Marginal tax rate

Question 34

Marginal tax also referred to as

Answer 34

next dollar received/last dollar received

Question 35

A person making 220k is given a 10k bonus. What is the bonus taxes at?

Answer 35

Marginal (top) income tax rate

Question 36

Single Parent with dependent children should file as

Answer 36

Head of Household

Question 37

5 diff filing options

Answer 37

Single
Married filing jointly
married filing separately
head of household
qualifying widow with dependent child

Question 38

Other factors influencing individual taxation

Answer 38

Age
state of residence
citizenship

Question 39

Earned income

Answer 39

salary, bonuses, tips, income derived from active participation in a trade or business

Question 40

Alimony

Answer 40

Generally deductible to the payor and included in income for receiver. may be paid directly to ex-spouse or third party on ex-spouses behalf like paying their life insurance premiums.

Question 41

You purchase a bond issued by the government of Sweden. What level of taxation is it exempt from?

Answer 41

None. It is taxed at the federal, state, and local level

Question 42

Are funds from a policy loan considered taxable?

Answer 42

No. Funds obtained from a policy loan are not considered taxable income

Question 43

What price do you inherit mutual fund shares and what price do you sell them?

Answer 43

You inherit at the nav and you sell at the nav