Tax Planning - Module 4

Macy, age 22 and disabled, has been living with her older brother, Leon, since last December when their parents died in an auto accident. Leon has been providing all of her support as her share of the life insurance benefit was put into a trust for her college education. Leon is asking his planner about Macy's status as a qualifying relative because her life insurance benefit was $250,000. He hopes to use the head of household status this year. What does the planner tell him?

Because Leon provided all of Macy's support this year, he may claim her as a dependent.

Which of the following statements regarding installment payments pursuant to a divorce is CORRECT? It is usually in the best interest of the payor to spread the amount of payments over as many years as possible to take advantage of the time value of money. It is usually in the payee's best interest to immediately receive as much money as possible rather than receiving payments over a longer period.

Both I and II

Max is a widower who provides a home for himself and his dependent six-year-old daughter, Lucy. He has hired an individual to pick his daughter up from school each day, bring her home, cook dinner, and perform some housekeeping services until he gets home four hours later. He pays $1,600 per month for the service. How will this affect Max's income tax return? Max may be entitled to a child and dependent care credit. Max qualifies to list Lucy on his income tax return as a dependent. Because Lucy attends school during the day, the child or dependent care credit is not available. Max must allocate the $1,600 per month between child care and housekeeping services.

I and II School attendance does not affect the availability of the credit. The $1,600 in expenses incurred each month to enable Max to work outside the home do not have to be divided between child care and housekeeping services.

Which of the following must be true in order for an adult child or elderly parent to be claimed as a dependent for another taxpayer? A dependent may not have more than $4,400 (2022) of gross income. The taxpayer must provide over 75% of the dependent's support. A person who dies during the year may be identified as a dependent. Social Security payments are always included in the dependent's gross income.

I and III An adult dependent (i.e., not a "qualifying child" may not have more than $4,400 (2022) 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.

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

I and IV

Now that their parents have died, Joseph is assuming the responsibility for the care of his 25-year-old disabled sister. Joseph has told his financial planner there is a trust for his sister to provide funds sufficient for her to live in an assisted-living facility or to reimburse him for the cost of an at home caregiver and his sister's other expenses if she stays in his home. He would prefer for his sister to live with him but does not want to cause her any problems with tax issues on any income she gets if she does. His sister is adamant that she does not want to be anyone's dependent. What advice can the planner give to Joseph? If his sister's income from the trust is paying for all of her needs, then she is not a dependent on anyone's income tax return. If Joseph's sister lives in an assisted-living facility, she cannot be a dependent of Joseph.

I only Statement I is correct. If all of his sister's support is paid for by funds she receives from the trust, she cannot be a dependent of Joseph. Statement II is incorrect. Simply not living with Joseph does not preclude him from listing his sister as a dependent. If Joseph provided more than half of the support for his sister, he would be allowed to list her as a dependent and take any tax credits that may be available.

Gary has just divorced. He is asking his planner, Ruth, for recommendations of amending his financial plan given his newly single status. Which of the following recommendations should Ruth make? Gary should review the beneficiary designations on his life insurance policies to be certain the beneficiaries are in line with his wishes post-divorce. Ruth should ask for any documentation on property settlements and other court-ordered financial transactions. Ruth should inquire whether a qualified domestic relations order was issued by the court and obtain a copy to ascertain its effect on Gary's financial plan. Ruth should inform Gary that the transfer-for-value income tax rule makes the transfer of any life insurance policies a taxable event.

I, II, and III

Which of the following are characteristics of a valid and enforceable premarital agreement? It may be orally executed by the parties that are affected. There should be a full and complete disclosure of each party's net worth prior to signing. It may be used to regulate an award of alimony upon divorce of the parties. There should be a written agreement with the willingly executed signatures of both parties.

II and IV

As part of the property settlement after Lori and Gordon divorced, Gordon transferred ownership of a life insurance policy to Lori. Lori is the beneficiary of the policy, and Gordon is the insured. Which of the following statements regarding the property settlement is CORRECT? The transfer of the life insurance policy is subject to the transfer-for-value rule. The death proceeds of the policy will be income tax free at Gordon's death.

II only

Which of the following statements concerning alimony is CORRECT?

Payments to maintain property used by the payee spouse but owned by the payor spouse do not qualify as alimony. 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.

Lois, age 29, and Clark, age 31, recently divorced. Lois is taking custody of their three children ages four, two, and one. Clark will pay alimony and child support of $1,000 per month. They live in a state that requires alimony payors to obtain a life insurance policy. Clark obtained a group term life policy for $50,000 through his employer to meet this obligation. Clark's lawyer claims this satisfies his legal obligation. Which of the following should a financial planner recommend to Lois?

She should demand an increase in coverage and request a permanent policy.

Bob and Bonnie were divorced in 2016. As a result of a court order, Bob pays Bonnie $700 per month in alimony. He makes each month's payment with a money order. Earlier this year, Bonnie moved in with Bob, and they now share a two-bedroom apartment. Which of the following statements is accurate concerning the alimony payments by Bob?

The payments are not deductible because the taxpayers are living together at the time of payment.

Jack and Emily are legally separated on December 31 this year. Jack earned $40,000 this year, and Emily earned $80,000. 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?

They must file as single, each one reporting their own income.

Paul was divorced from his spouse, Pat, late in 2022. As part of the property settlement agreement, Paul agreed to transfer his interest in a residential rental property to Pat in exchange for release of marital claims. 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 Pat. Which of the following is an income tax implication of Paul's transfer of the real estate tract to Pat?

Paul's basis in the real estate is carried over to Pat for income tax purposes.

Which of the following is necessary to include in a premarital agreement?

Financial resources and net worth of both parties

John and Karen will spend $7,000 on day care for their two children (ages 9 and 10) in the current tax year. These expenses were incurred to allow both John and Karen to work outside the home. Their adjusted gross income is estimated at $138,000. What is the amount, if any, of child care credit to which they are entitled?

$1,200 The maximum amount of qualifying expenditures on which the credit may be based is $3,000 per child, or $6,000 for two or more children. This is multiplied by 20% for taxpayers with an AGI greater than $43,000. Thus, $6,000 × 20% = $1,200.

Which of the following statements regarding alimony paid under a 2022 divorce agreement is CORRECT?

Alimony payments must terminate on the death of the payee spouse.

Max and his mother, Lucy, live together in his home. Lucy is bedridden, and Max must pay a caregiver to provide meals and other aid during the day so he can leave the house and work. He pays $5,000 annually for this service. His mother has no income, and he is her full support. What tax relief may be available to Max for the expenses of caring for his elderly mother? A greater standard deduction amount Child and dependent care credit

Both I and II

When spouses who are legally married use the married filing jointly filing status, what is their liability for the combined income tax owed?

Each spouse has joint and several liability for payment of the entire tax.

Dan and his spouse, Gina, are getting divorced. Dan has an IRA with a balance of $400,000. Part of the balance was rolled over from his 401(k). He claims the IRA is a gift because it was funded predominantly with cash gifts from his parents during their 15-year marriage. Gina does not have a retirement account. Which of the following is correct?

Gina can request a domestic relations order and, if granted, claim a portion of the IRA funds.

What important information could you tell your nonresident client (married to a U.S. citizen) about electing to be treated as a resident alien for tax purposes? You will need to pay taxes only on your U.S. income. You will need to pay taxes on your worldwide income. This will create an immigration benefit. You should obtain an individual taxpayer identification number (ITIN) or Social Security number.

II and IV

Ruth and Doug divorced last year. They have two children ages seven and nine. Their divorce decree states that Ruth has custody of both children. There is no written agreement for listing the children as dependents on Ruth's or Doug's income tax returns. However, Doug provides 75% of the child support, amounting to $15,000 per year. Based on this information, which parent is entitled to list the children as dependents for income tax purposes?

Ruth, because she has custody and there is no written agreement stating Doug could list the children on his return. The parent with custody for a greater portion of the year is treated as providing more than one-half of a child's support. In these circumstances, however, Ruth could potentially sign IRS Form 8332 which would constitute a written agreement that would allow Doug to claim their two children as dependents on his tax return in the current year.

Which of the following married couples may file their federal income tax return using the married filing jointly (MFJ) status?

Sara has income for the tax year but Jack does not.

Which of the following would result in higher taxation of one party with a premarital agreement?

Transfer for consideration is made

Trudy is a single taxpayer. Her Aunt Diane has come to live with her after it was determined she could no longer live independently. She is physically challenged and needs full-time care. Diane's deceased parents set up a trust for her that supplies all of her support, including paying for in-home care and all medical bills. Trudy wants to know how this will affect her own income tax situation. What does the planner tell her?

Trudy must file as single.

As part of their divorce decree, Judy, age 44, was forced to split her IRA with Alex, age 36. Alex received a check in April for $100,000 from the IRA custodian. Alex put the proceeds into a one-year CD account at the local bank. As a result, Alex will

have to pay ordinary income tax on the $100,000.