Term
| Angelica receives the following items in one tax year: 1)50,000 salary 2)$1,000 year-end bonus 3)$5000 gift from mother and 4)bequest from her father's estate, which includes $1,000 in dividends that had been declared before her father's death but not payable until after. What is included in Angelica's gross income? |
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Definition
| Angelica's salary and her year end bonus are both included in her gross income. The gift from her mother is not. The dividend income received from her father's estate is income in respect of a decedent and Angelica must report it in gross income. A will be able to receive a tax deduction, however, for any estate tax paid that was attributable to the inclusion of the IRD in her father's estate. |
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Term
| Owen owns a house that he rents to Larry. Larry pays yearly rent of $15,000. Larry also agreed to pay Owen's mortgage on the house in the amount of $1000 per month. Larry has built a swimming pool on the property which increased the value of the property by $7,000. What is Owen's rental income for the year? |
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Definition
| Larry's payment of Owen's mortgage expense is considered additional income. Owen therefore has total rental income of $27,000, which must be included in gross income. The improvements made by Larry are not included in Owen's income unless Larry agreed to make the improvements as part of the rental agreement. |
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Term
| In 2012, Angelica receives her first payment of $10,000 under an annuity contract. The payment is received after the annuity starting date. Angelica had paid $60,000 in premiums on the contract. The expected return under the contract, calculated according to IRS actuarial tables, is $100,000. What is included in Angelica's gross income in 2012? |
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Definition
| In 2012, $4,000 is included in Angelica's gross income. Gross income does not include the amount of the annuity payment attributable to Angelica's investment in the contract. The calculation is: total investment divided by the expected return. In Angelica's case the calculation is $60,000/$100,000=0.60, or 60 percent. Thus the $10,000, 60 percent (or $6,000) is not included in gross income, leaving a balance of $4,000 that is included. |
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Term
| An individual receives a $400,000 lump-sum distribution in 2012. What benefit would there be to rolling over the distribution into an IRA rather than retaining it? |
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Definition
| If the individual retains the $400,000, she might be able to pay income taxes under the 10-year averaging method. On the other hand, if the $400,000 is rolled over into an IRA, it could be placed in an investment undiminished by current income taxation. When the full amount of the IRA is withdrawn, the after-tax amount available to the individual will be greater than if the rollover option were not chosen. |
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Term
| Benedict has a gross income of $100,000 and expenses of $5,000 attributable to rental property and $3,000 in medical expenses. Benedict made charitable contributions of $8,000 and contributions to a Keogh plan of $5,000. Benedict sold a parcel of land for $50,000; his adjusted basis in the property was $60,000. He had no capital gain. What is Benedict's AGI? |
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Definition
| Benedict can subtract the $5,000 in expenses related to rental property, the $5,000 contribution to his Keogh plan, and $3,000 loss from the sale of the land. (if capital losses exceed capital gains, the amount of the excess loss that can be claimed is $3,000) His medical expenses and charitable contributions are disregarded when calculating AGI. Thus Benedict's AGI is $87,000. |
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Term
| What is excluded from gross income? |
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Definition
| 1)Life Insurance and death benefits (with some exceptions) 2)Gifts and inheritances 3)Interest on state and municipal bonds 4)compensation for personal injuries or sickness 5)Fringe benefits 6)Cafeteria plans 6)Return of capital 7)Unrealized appreciation |
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Term
| What can be deducted from gross income to reach AGI? |
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Definition
| 1)Deductions attributable to the taxpayers trade or business. 2)Expenses paid or incurred by a qualified performing artist in connection with the performances of services in the performing arts as an employee 3)Losses from the sale or exchange of property 4)Deductions attributable to property held for the production of rents or royalties 5)deduction for depletion or depreciation allowed to life tenants and income beneficiaries of property 6)Expenses paid or incurred by an employee in connection with the performance of services as an employee, but only if the employee is entitled to reimbursement from the employer under a nonaccountable plan and the employee can substantiate the expenses 7)Contributions by self employed persons to pension, profit sharing and annuity plans 8)Contributions to an IRA 9)Amounts forfeited to a bank as a penalty for premature withdrawal of funds from a time savings account or CD. 10)Alimony payments 11)Amortization of reforestation expenses 12)Interest on educational loans, but only for amounts 1)due and paid after Dec 31, 1997 2)Due during the first 60 months for which interest is required |
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Term
| Diamond pays $15,000 in annual interest on a mortgage taken to acquire a condominium, which she uses as a vacation home during the month of January. She rents the vacation home for the remaining 11 months of the year. Can D deduct the interest as qualified resident interest? |
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Definition
| No. A qualified residence is either the taxpayer's principal residence or another residence that is used by the taxpayer for the greater of 14 days or 10 percent of the days that the residence is rented at fair rental. Diamond rented the home for 334 days. She used the home for only 31 days, which is less than 10% of the number of days the home was rented. She maybe able to deduct the interest, however, as interest incurred in the production of rental income. |
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Term
| Kitty has $40,000 in dividend and interest income and $15,000 in income from rental property, which she actively manages, although she did not spend more than 750 hours on management activities. Kitty also has expenses of $45,000 attributable to the rental property. How much of a deduction is Kitty allowed in the current year for these expenses? |
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Definition
| Kitty can deduct $40,000 in the current year. Kitty's rental property income is passive activity income. Her interest and dividend income is portfolio income. Kitty's passive activity losses can be taken as deductions against her $15,000 in passive activity income. Generally, Kitty could not deduct her passive activity losses against her portfolio income. Because Kitty actively participated in the rental activity, however, she also can take up to $25,000 of her passive activity losses as a deduction against portfolio income. The remaining $5,000 in passive activity losses may be carried forward to a succeeding tax year. |
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Term
| Puggy has assets producing $15,000 of income per a year, which he transfers in 2012 to his three children, ages 5, 8, and 15, who would otherwise have no income. Puggy and his spouse file a joint return and are in the 28% tax bracket. Who is taxed on the income and at whose rate? |
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Definition
| After the transfer, each child has unearned income of $5,000, of which $1900 is taxed at the child's marginal rate and $3,100 is taxed at the parents' 28% rate. The children are liable for the tax unless the parents elect to include the children's income on their return. |
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Term
| Madonna pays $6,000 per year for childcare for her two children, ages 5 and 9. Madonna's AGI is $60,000. What deduction or credit is available to Madonna in 2012? |
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Definition
| in 2012 a credit is allowed for up to 35% of child care expenses. The max percentage of 35 % is reduced by 1% for each $2,000 or fraction thereof by which Madonna's AGI exceeds $15,000, but the credit does not go below 20%. The max amount of exps to which the percentage can be applied is $6000 for two or more dependents. Therefore, Madonna is allowed a credit of $1200 ($6,000x20%) |
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Term
| in 2011, Maggie had federal income tax liability of $40,000. In 2012, Maggie expects a tax liability of $50,000. Only $3000 per month is being withheld from Maggie's wages. How can Maggie prevent being assessed a penalty for underpayment of $14,000 ($50,000-$36,000) in taxes? Assume that Maggie has met her tax liability since 1986 through withholding. |
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Definition
| Maggie must make quarterly estimated tax payments to avoid being assessed a penalty for underpayment. No penalty will be assessed fi the payments equal 100 percent of last year's tax liability ($40,000) or 90 percent of the current year's tax liability, which is estimated at $45,000 (90%X$50,000). Maggie can defer payment of taxes to a greater extent if she uses the 100 percent of last year's tax liability method. If she uses the 100 % method, she must make quarterly estimated tax payments of 25% of last year's tax less any taxes paid through withholding. Thus she must pay estimated taxes of $1000 per quarter, which is $10,000 estimated tax liability based on the 100 % method less $9000 of withholding per quarter. |
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Term
| Diamond died on February 1, 2012. An executor was appointed for his estate on March 1, 2012. What income tax returns must Diamond's executor file? |
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Definition
| If Diamond has not filed his 2011 income tax return, Diamond's executor must file it. The executor must also file Diamond's final income tax return, covering the period from January 1, 2012 through February 1, 2012 (DOD)by April 15, 2013. If no executor had been appointed, Diamond's surviving spouse or another person charged with Diamond's property would have been required to file those returns. Diamond's executor must also file Form 1041 income tax returns for the estate. |
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Term
| Ghandi transferred property to himself as trustee for his daughter, Dandelion, for her life, remainder to her children. Ghandi is the sole trustee and has power to distribute the trust principal and income to Dandelion for her best interests. The trust earns $4,000 in income in 2012, and the trustee distributes $2000 of this to Dandelion. Who is taxed on the income and to what extent? |
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Definition
| Ghandi is taxed on all of the income. Ghandi is treated as teh owner of the trust property because he retains power to distribute to Dandelion that is not limited by an ascertainable standard. |
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Term
| Ghandi transferred property to Tarzan as trustee for his 12 year old daughter, Dandelion, for her life, remainder to her children. Trust income may be used to satisfy Ghandi's legal obligation to support Dandelion. In 2011, Tarzan distributes $2,000 to Dandelion, which discharges Ghandi's legal obligation of support and $2000 for other purposes. Who is taxed on the income and to what extent? |
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Definition
| Ghandi is taxed only on the $2000 actually used to support Dandelion. The trust is taxed on the other $2000. To the extent that the distribution not taxed to Ghandi carries out DNI, it it will be taxed to Dandelion. Because Dandelion is under 19 years of age, however, a portion of her unearned income will be taxed at Ghandi's marginal tax rate. Any amount over $1900, the figure for 2012, will be taxed at Ghandi's marginal tax rate. |
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Term
| A trust requires annual distributions of $5000 of income to Jewel. The trustee may at her discretion to distribute any remaining income and principal to Kippy and Lippy. She distributes the required $5000 to Jewel and makes discretionary distributions of $10,000 to Kippy and $5000 to Lippy. In the taxable year, the trust has DNI of $18,000. Who is taxed on the income? |
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Definition
| DNI is allocated first to Jewel because the distribution to Jewel, a tier-one beneficiary, must be made currently.Therefore $5000 of DNI is carried out to Jewel. DNI is carried out to Kippy and Lippy, tier-two beneficiaries, pro rata because the distributions to them are discretionary. Of the remaining $13,000 of DNI, Kippy picks up $8667 ($13,000 X $10,000/$15,000) and L picks up $4,333 ($13,000 X $5000/$15,000 |
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Term
| In 2011, a trust has DNI of $15,000. The trustee, who has discretion to distribute income and principal to Apple, distributes $10,000 to Apple in 2011 and retains $5,000 in income. In 2012 , the trust again has DNI of $15,000. The trustee distributes $16,000 to Apple. What are the tax consequences in 2011 and 2012? |
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Definition
| The distribution in 2011 carried out $10,000 of DNI to Apple. The trust is responsible for paying the tax on the other $5,000 in income. In 2011, $15,000 of DNI is carried out to Apple. All amounts distributed from the trust are treated as income to Apple to the extent that the trust has DNI for the taxable year in question. The trust receives a deduction for the amount of DNI distributed to Apple in each year. The amount of taxable income shifted to Apple and the deduction allowed to the trust for its distributions, cannot exceed DNI. |
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Term
| On February 28, 2011, Dinky's basis in INC. stock was $10 per share. Dinky died on March 1, 2012. His estate includes 1000 shares of INC. stock, whose fair market value at the date of death was $20 per share. Dinky left $10,000 to Egor and the residual of his estate to Fantasia. On September 1, 2012, when the fair market value of the stock is $25 per share, Dinky's executor distributes 400 shares of stock to Egor in satisfaction of the $10,000 bequest and distributes the remaining 600 shares to Fantasia as the residuary beneficiary of Dinky's estate. What gain, if any, is recognized, and what are Egor's and Fantasia's basis in their shares of INC? |
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Definition
| At Dinky's death, the shares of stock receive a stepped up basis to $20 per share. The distribution of 400 shares to Egor is treated as if it were a sale and results in gain to the estate of $2000, the difference between the stock's fair market value of $25 per share and its $20 cost basis. Egor's basis in the shares is $25 per share, which is the estate's $20 basis plus the gain recognized by the estate. The distribution of 600 shares to Fantasia results in no gain to the estate because it was not made in satisfaction of a pecuniary bequest. Fantasia receives a carryover basis of $12,000 (600 shares x $20 per share) |
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Term
| In 2011, a trustee distributes to a beneficiary trust property valued at $7000. The trust's basis in the property is $10,000. In 2012, the beneficiary sells the property for $8,000. Who recognizes gain and loss and to what extent? |
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Definition
| Under IRC 267, the trustee recognizes no loss when it distributes the property to the beneficiary. The beneficiary receives a carryover basis in the property of $10,000. In 2012, the beneficiary is therefore allowed a loss of $2000. |
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Term
| Diamond died in 2008. His right to receive installment payments in 2010 through 2013 is included in his gross estate as income in respect of a decedent (IRD). Rachel as residuary beneficiary of Diamond's estate receives Diamond's right to installment payments. Rachel receives installment payments of $10,000 each in 2010 and 2011. In 2012, she sells her right to future installment payments to Sunny for $35,000. Who pays the tax on the IRD item, and when is it paid? |
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Definition
| In 2010 and 2011, Rachel includes the portion of the $10,000 in income that represents the same gross profit percentage that Diamond used during life but does not include in income the portion that represents Diamond's return of capital. There is no step-up basis for the obligation. In other words, the gross profit percentage is not recalculated based on a stepped up basis for the property sold by Diamond. In 2012 Rachel includes in income the fair market value of the installment sales obligation or the $35,000 consideration received, whichever is greater, reduced by the basis of the obligation - Diamond's basis, adjusted for all installment payments received through 2011. Sunny includes the installment income in each year it is received, but Sunny's basis is $35,000 - the consideration paid - rather than Diamond's basis. |
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Term
| Xavier contributes $100,000 in cash to his private foundation, his only charitable gift that year. His contribution base in the year he makes the gift is $150,000. What can Xavier tax as a charitable deduction on his federal income tax return for the year in which he makes the gift? |
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Definition
| Cash gifts to a private foundation are subject to a maximum limitation of 30 percent of the donor's contribution base for the year in which the donor makes the gifts. Xavier's maximum charitable deduction of the year in which he makes the gift is $45,000. The balance can be carried over to future years. Had Xavier's gift been to a public charity, he could have deducted up to 50% of his contribution base, or $75,000. |
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Term
| Apple wishes to give an art museum that is a public charity a painting presently worth $100,000 that she bought five years ago for $40,000. Apple has a contribution base of $100,000 for the year. This is her only charitable gift during the year. What is her maximum charitable deduction for the year? |
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Definition
| Because the charitable donee is a public charity, and because Apple's painting is considered long term capital gain property, Apple has two choices: a)If she values the painting at its fair market value of $100K, Apple can take a maximum charitable deduction of 30% of her contribution base, $30,000, in the current year. The balance of $70,000 will have to be carried over to future years. b)If she values the painting at its basis of $40,000, a 50% limitation will apply. Apple can deduct the entire $40,000 because it is less than 50% of her contribution base, but she will have not further deductions in future years. |
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Term
| Queeny dies this year, leaving $500,000 to a private foundation established by her father. Queeny has a taxable estate of $1.2 million. How much can the estate deduct for federal estate tax purposes? |
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Definition
| Queeny's estate can deduct the entire $500,000 for federal estate tax purposes. There are no percentage limitations on federal estate tax charitable deduction. |
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Term
| Xavier plans to create a charitable remainder annuity trust of which she will be the sole non charitable income beneficiary. She plans to fund the charitable remainder annuity trust with $100,000 in cash. the amount of the annuity will be $4000. The present value of the charitable remainder is $9000. Is this a valid charitable remainder annuity trust? |
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Definition
| No. The annuity amount must not be less than 5% of the initial FMV. In addition, the remainder interest on the date of contribution must be at least 10% of the value of the property contributed. |
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Term
| What income tax is a charitable remainder trust required to pay? |
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Definition
| A charitable remainder is exempt from income tax unless it is has UBTI for the year. If so it is taxed under the rules related to a non-charitable trust. |
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Term
| With $100,000, Puggy creates a charitable lead trust that will pay to a private foundation previously created by Puggy and his wife $6000 per year for 10 years. After 10 years, the property in the trust will pass to Puggy's children. Puggy is trustee of the private foundation and determines how its funds will be disbursed. If Puggy dies five years after creating the charitable lead trust, will it be taxed in his estate? |
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Definition
| Yes because he maintained control of the private foundation. In order for it to be exempt, he would have to designate specific charities or give up control of the foundation. |
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Term
| Cookie has AGI of $50,000 in this tax year. During this tax year, Cookie made charitable contributions of $20,000 to a private foundation. He has medical expenses of $5,000 and paid $2,000 for business travel expenses that were not reimbursed by his employer and $2000 in child support. What deductions can Cookie take? |
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Definition
| Private foundations are 30% type organizations. thus Cookie's deduction is limited to 30% of his contribution base (AGI) |
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Term
| Rachel was a beneficiary of a trust created by her father. Under the terms of the trust, Rachel received all the income during her lifetime and such amounts of principal as the trustee might from time to time designate. On Rachel's death, the trust property was to be distributed to such of Rache.'s descendants as she might by will appoint. What portion of the trust is included in Rachel's gross estate? Why? |
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Definition
| Nothing is included in Rachel's estate because Rachel's beneficial interest terminated upon her death. Rachel had a limited POA which will cause the property to not be included in her gross estate. |
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Term
| Abby and Bobby, who are not married to each other, owned Blackacre as joint tenants, Abby having paid the whole purchase price for the property. If Bobby dies before Abby, what portion is included in Bobby's gross estate? If Abby dies before Bobby, what portion is included in Abby's estate? |
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Definition
| If Bobby dies before Abby, nothing is included in his gross estate, provided that Bobby's executor can prove that Abby supplied all of the funds for purchase. If Abby dies before Bobby, the whole value will be included in the Abby's gross estate. |
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Term
| Lulu dies on April 8, 2012, owning 1000 shares of TX stock. A dividend of $2 a share had been declared on March 20, payable April 11th to holder of record on April 4. What would Lulu's gross estate include? |
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Definition
| Both the shares of TX stock and the right to receive the dividend. |
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Term
| Othello dies in 2011. In 2012, Othello's executor files a claim for a refund for income taxes paid by Othello in 2009 and 2010. Would the value of the claim be included in Othello's estate? |
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Definition
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Term
| Queen died owning a life insurance policy on his own life. Because the proceeds of the policy are included in Queen's gross estate under IRC 2042, they should be reported on Schedule D of the Queen's estate tax return, and nothing should be included in Schedule F on account of Q's ownership of the policy. Would a policy on the life of someone else be covered by 2042? Would it be included in Queen's gross estate? |
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Definition
| A policy on the life of another person is included ina person's gross estate under IRC 2033. Its value should be reported as property owned by the decedent on Schedule F. Only the FMV of the policy, not its face value, would be included in Queen's estate. |
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Term
| In 2010, Debbie gave Beanie a whole life insurance policy on Debbie's life. The policy has a death benefit of $100,000 and a value of $11,000 at the time of the gift. In 2011, Debbie pays a premium of $2,000 on the policy. She makes no other gifts to Beanie during 2011. Debbie dies in 2012. Are the proceeds of the policy included in her gross estate? Why or why not? |
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Definition
| Because the policy was transferred less than three years before Debbie's death, the proceeds of the policy will be included in her gross estate. The 2011 premium payment will not be included because it is an indirect cash gift to Beanie. |
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Term
| Handsome bought a life insurance policy and elected to ahve the insurance company to hold the proceeds after his death, paying interest thereon to his wife, Wilhemina. Upon Wilhemina's death, the proceeds are payable to their issue. Are the insurance proceeds included in Wilhelmina's gross estate when she dies after Handsome? |
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Definition
| They are not included in Wilhemina's estate. If the proceeds had been payable to Wilhemina on Handsome's death, and she had elected, either at his death or before under a settlement option, to receive only interest, the proceeds would be included in her gross estate because her election would constitute a transfer with a retained life interest in the income from the property. |
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Term
| Wilhemina established a trust to pay income to Handsome for his life, remainder to their issue. Later Handsome added some stock that he owned to the trust. Is the stock contributed to the trust included in Handsome's gross estate? Why or why not? |
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Definition
| On Handsome's death, the stock he contributed to the trust is included in his gross estate because he is the transferor of the property and because he retained a life interest in the income therefrom. If the stock he contributed were sold before his death and the proceeds were mixed with other trust assets, then a percentage of the trust estate would be included in Handsome's gross estate. |
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Term
| Sunny established a trust to pay income to Annie for life and on Annie's death to pay the principal to Barbie. Sunny retained the right to direct that the income in any given year be accumulated and added to principal. Sunny died before Annie. What would be included in Sunny's gross estate and why? |
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Definition
| All of it because Sunny retained the right to accumulate income and add it to principal. |
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Term
| Ugg transferred property to a trust, the income from which is distributable annually amount Ally, Buggy, Cally in such amounts as the trustees shall determine at their discretion. After 10 years, the trust corpus is to be distributed to Donny. The trustees are the Friendly Natl Bank and Ugg. Ugg died 5 years after making the transfer. What portion ofthe trust corpus is included in Ugg's gross estate? if the bank were an adverse party, then what portion of the trust corpus would be included in Ugg's gross estate? |
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Definition
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Term
| Tiffany transferred stocks to a trust, the income from which is payable to Tiffany for the rest of her life and upon Tiffany's death, the corpus is to be distributed to Yogi and his heirs. Within three years before her death in 2012, Tiffany relinquished her life income interest in the trust. Are the trust assets included in Tiffany's gross estate? |
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Definition
| Yes, based on the information given. |
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Term
| Harry established a trust to pay the income to his wife during her lifetime and then to pay the principal to their surviving issue or if no issue survive Wendy, then to Harry and his heirs. If Harry predeceases Wendy, leaving issue surviving him, what happens to the value of the remainder interest of the issue? Is Harry's reversionary interest included in his gross estate? |
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Definition
| The remainder interest of the issue is not included in Harry's estate under IRC 2037 because the issue did not have to survive Harry in order to obtain possession or enjoyment of the property as a vested remainder. The value of Harry's reversionary interest is included in his gross estate under IRC 2033, however, because a reversion does not terminate on the death of the owner and can be bequeathed by him or passed to his heirs under intestacy laws. Note that when 2037 applies, the entire value of the interest in the property that are dependent upon surviving the donor are included in the donor's gross estate. Under IRC 2033 only the value of the onor's reversionary interest, valued at the time of his death or alternate valuation date is included. |
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