Quiz 3
Which of the following statements regarding charitable deductions by corporations is CORRECT? The corporate statutes of most states permit corporations to make charitable contributions, and the Tax Code permits a charitable deduction for contributions by a corporation. The charitable deduction is limited to a maximum of 20% of the corporation's adjusted taxable income. In the event the contribution is in excess of 20% of the corporation's adjusted taxable income, the balance can be carried forward for up to five years. A) I only B) II only C) Neither I nor II D) Both I and II
A) Statement II is incorrect because the charitable deduction is limited to a maximum of 10% of the corporation's adjusted taxable income.
Which of the following tax preference items are used in calculating the alternative minimum tax (AMT) for an individual? Tax-exempt income from a State of Louisiana general obligation municipal bond Percentage depletion in excess of basis on a mining property Tax-exempt interest on a private-activity bond issued in 2012 Exclusion of gain on the sale of certain qualified small business corporation stock A) II, III, and IV B) I only C) I, II, and III D) I, II, III, and IV
A) Tax-exempt income from a general obligation municipal bond is not a preference for AMT. All of the other items are tax preference items for AMT purposes.
Claudia, who has an AGI of $40,000, wants to donate a painting of an ancestor who served in the American Revolution to the museum in her town that houses a collection of Revolution Era items. Her basis in the painting is $1,750, and it has a fair market value of $2,000. How much can she potentially deduct as a charitable contribution this year, assuming it is her only donation? A) $2,000 (It is related-use capital gain property.) B) $600 (The museum is a 30% organization, so she must use FMV.) C) $1,750 (It is related-use capital gain property, so she must use basis.) D) None (It is the portrait of a relative.)
A) The painting is related-use, capital gain property. Claudia may deduct an amount up to 50% of her AGI if she uses the basis of the painting and 30% of AGI if she uses FMV. As long as Claudia's AGI is greater than $6,667, she can deduct the FMV of the portrait.
Chris Burdick anticipates adjusted gross income of $200,000 for the current tax year. He contributed appreciated stock to a public charity. Chris's adjusted basis in this stock is $50,000. The stock has a current fair market value of $140,000. Chris has owned the stock for 12 years. If Chris does gift the stock to the United Way, what is the maximum allowable charitable deduction he can receive in the current tax year? A) $50,000 B) $60,000 C) $100,000 D) $140,000
B) A gift of long-term capital gain property to a 50% organization is based on the FMV of the property, with the deduction for the current year limited to 30% of AGI.
Charley lent his friend, Richard, $17,000 for a down payment on a home in a no-interest loan early in the current year. Charley had investment income of $750, and Richard had investment income of $1,200 in the same year. The federal interest rate is 3.5%. Richard has been making payments each month. What recommendations do you make for accounting for the loan made to Richard by Charley? A) Because this is a gift loan greater than $10,000 but less than or equal to $100,000, no interest will be imputed to the loan. B) Imputed interest is calculated on the loan to Richard and is considered a gift to Richard from Charley. C) Because Charley's investment income is less than $1,000 this year, no interest is imputed to the loan. D) Charley must develop an amortization schedule using the federal rate of 3.5% to account for Richard's payments of principal and interest.
B) In a gift loan, the amount of the imputed interest constitutes a gift from the lender to the borrower. For gift loans greater than $10,000 and less than or equal to $100,000, no interest is imputed if the borrower's investment income for the year does not exceed $1,000. For a gift loan of more than $100,000, the prevailing federal rate of interest will be imputed. For this loan, Richard's investment income exceeds $1,000 and interest will be imputed.
Molly's grandparents gifted her with substantial securities at her birth eight years ago. In 2023, she has dividends of $10,000 and brokers' fees of $800 on the activity in the account her parents manage for her. What is her net unearned income taxed at her parents' rate? A) $9,100 B) $7,500 C) $8,750 D) $10,000
B) Some of Molly's unearned income is taxed at her parents' rate and is calculated as follows: $10,000 UI - $1,250 (standard deduction) - $1,250 (greater of $1,250 for 2023 or amount of allowable itemized deductions directly connected with the production of the unearned income) = $7,500
Which of the following itemized deductions would be adjustments to regular taxable income in arriving at alternative minimum taxable income (AMTI)? Casualty losses State income taxes paid Standard deduction Charitable donation made to the local university A) I and III B) II and III C) I and IV D) II, III, and IV
B) Statement I is incorrect because casualty losses are deductible for both regular tax and AMT; no adjustment is necessary. Statement II is correct because state taxes are not deductible for AMT purposes. Statement III is correct because the standard deduction is a positive adjustment when calculating AMT income. Statement IV is incorrect because charitable contributions are deductible for both regular income tax and AMT; no adjustment is necessary.
Five years ago, Tom bought 10,000 shares at $10 per share in an intermediate-term bond fund. Today, the shares are worth $200,000 and are paying a nonqualified dividend of $8,000 per year. Tom feels that the stock will continue to appreciate at a rate of 5% per year, including the dividend. Tom wants to establish a college education fund for his two daughters, ages 18 and 9. Neither child has any earned income. Which of the following statements is true? If Tom gives 2,500 shares to his 18-year-old daughter, all income from the 2,500 shares will be taxed in her income tax bracket. If Tom gives 2,500 shares to his 9-year-old daughter, all dividends from the 2,500 shares will be taxed at her marginal rate. Two years from now, if Tom's older daughter sells her 2,500 shares at $30 per share, Tom will need to report the gain as a long-term capital gain on his personal income tax return. All interest income received by his 9-year-old daughter that exceeds $2,500 in 2023 will be taxed at the parents' marginal tax rate. A) II and III B) IV only C) I and IV D) I and II
B) Statement IV is the only correct statement. The kiddie tax applies to children under 19 years of age. It also applies to children under age 24 if they are full-time students. The kiddie tax does not apply if the child's earned income exceeds one-half of the child's support. Thus, I and II are incorrect. There is no requirement that the proceeds of a future sale be reported on the donor's return.
Which of the following are allowable itemized deductions for purposes of computing the alternative minimum tax? Charitable deductions Qualified housing interest Gambling losses to the extent of gambling winnings Property taxes A) I and III B) I, II, and III C) I and II D) II, III, and IV
B) Statement IV, property taxes, is the only itemized deduction listed that is not allowed for AMT purposes. State and local income taxes are also disallowed.
Teddy, age 12, has interest income of $1,275. He also has earned income from an after-school job that totals $15,000. Teddy is eligible to be treated as a dependent on his parents' return. What is the amount of Teddy's standard deduction for 2023? A) $1,675 B) $13,850 C) $1,250 D) $15,400
B) The standard deduction for an individual eligible to be claimed, or treated, as a dependent is the greater of the limited standard deduction of $1,250 or the amount of earned income plus $400, not to exceed the full standard deduction amount of $13,850 (for 2023). $15,000 + $400 = $15,400, but the deduction is limited to the full standard deduction amount of $13,850.
Which of the following statements regarding the kiddie tax is CORRECT? The kiddie tax provision limits income shifting by preventing families from transferring large amounts of unearned income to children and making the shift effective for income tax purposes. If a child under the age of 19 has unearned income above a specified amount, the excess is taxed at the parents' marginal tax rates for the year, rather than at the child's marginal rate. A) Neither I nor II B) I only C) Both I and II D) II only
C) Both statements are correct. The kiddie tax applies to unearned income for children under the age of 19 and full-time students until they reach age 24.
Which of the following are preference items or adjustments for purposes of the individual alternative minimum tax? Interest on qualified private-activity municipal bonds issued in 2008 Excess of percentage depletion over the property's adjusted basis Investment interest expense in excess of net investment income Qualified housing interest A) I only B) II and III C) I and II D) I, II, III, and IV
C) By definition, investment interest expense in excess of net investment income and qualified housing interest are not preference items or adjustments for purposes of the alternative minimum tax. Remember that interest on qualified private-activity municipal bonds issued in 2009 and 2010 is not a preference item.
In the current year, Jeff makes the following charitable donations: Basis, FMV Inventory used in Jeff's business (sole proprietor): $8,000, $6,000 Stock in ABC Co. (acquired 2 years ago): $10,000, $40,000 Personal coin collection (acquired 10 years ago): $1,000, $7,000 The ABC stock was given to Jeff's church, and the coin collection was given to the a private orphanage. Both donees promptly sold the property for the stated FMV. Ignoring percentage limitations on AGI, Jeff's maximum charitable contribution valuation for deduction purposes available for the current year is A) $53,000. B) $19,000. C) $47,000. D) $55,000.
C) Jeff's maximum valuation for deduction purposes available for the current year is $47,000 as follows: Inventory: $6,000 (as ordinary income property, limited to lesser of basis or FMV) Stock in ABC Co.: $40,000 (the maximum possible deduction is FMV for this long-term capital gain property) Personal coin collection: $1,000 (tangible personal property depends on dedicated use of property from standpoint of the charity; this is use-unrelated property because it was given to the private orphanage also limited to the lesser of basis or FMV)
Nancy is a single taxpayer and 67 years old. She has the following itemized deductions: Home mortgage interest (first mortgage) $15,950 State income taxes $3,120 Property taxes $1,480 Charitable contributions $2,000 Gambling losses $1,500 Unreimbursed employee business expenses $4,600 Tax return preparation fee $400 Medical expenses $18,980 Nancy's AGI for 2023 is $250,000. Included in the AGI is $500 of gambling winnings. What amount of Nancy's itemized deductions would be allowed for purposes of the AMT? A) $17,950 B) $34,950 C) $18,680 D) $18,950
C) Of the itemized deductions listed, only the qualifying home mortgage interest of $15,950, the charitable contributions of $2,000, and the gambling losses to the extent of winnings of $500, and the $230 of medical expenses are allowable for purposes of the AMT. The medical expenses are deductible to the extent they exceed 7.5% of AGI for both regular and AMT purposes.
Kevin Riley anticipates adjusted gross income of $120,000 for the current tax year. He has made no charitable gifts during the year, but now he wants to give his church a stamp collection with a fair market value of $70,000. Kevin paid $38,000 for the collection five years ago. The collection is appreciated tangible personal property that is unrelated to the church's exempt function. What is the maximum allowable charitable deduction Kevin can receive during the current year if he makes an immediate gift of the stamp collection? A) $60,000 B) $24,000 C) $38,000 D) $36,000
C) The answer is $38,000. Since this is use-unrelated property, the allowable deduction is limited to his basis.
Marion donated a truck to the local food bank to use for picking up food donations. Marion had purchased the truck several years ago for $15,000, and it currently has a value of $3,400. Which of the following statements regarding the documentation Marion must have to support his charitable contribution of the truck is CORRECT? A) An appraisal must be attached to Marion's income tax return for the year of the donation. B) A noncash contribution under $5,000 needs no documentation to support the donation. C) The documentation must have the description of the property, the name of the receiving charitable organization, the date of the contribution, and the amount of the donation. D) A letter from the food bank thanking him for the donation of the truck is sufficient documentation.
C) The donor-taxpayer must have a canceled check, bank record, or a receipt from the donee organization to substantiate the deduction. The documentation must have the amount of cash or description of property, the name of the receiving charitable organization, the date of the contribution, and the amount of the donation. An appraisal is not required for noncash property over $500 and less than or equal to $5,000. However, taxpayers may wish to get an independent appraisal to support the deduction claimed.
Kris Swenson anticipates adjusted gross income of $100,000 for the current tax year. She is considering making a gift of a painting to the American Red Cross in the current tax year. Kris's basis in the painting is $35,000. The painting has a current fair market value of $50,000. Kris has owned the painting for 15 years. If Kris does gift the painting to the American Red Cross this year, what is the maximum allowable charitable deduction she can receive in the current tax year? A) $50,000 B) $30,000 C) $35,000 D) $20,000
C) The painting would be considered use-unrelated tangible personalty. The deduction for use-unrelated tangible personalty is limited to basis, with a 50% of AGI limitation. Thus, the current-year deduction is $35,000. If the painting had been donated to an art museum, for example, the contribution would be of use-related tangible personalty. Since the painting had been held for the long-term holding period, the deduction would have been $30,000 (long-term capital gain property to a 50% organization uses FMV with a 30% of AGI limitation) with a $20,000 carryforward.
Alicia is age 16 and she received $6,000 in municipal bond interest income and $900 in other interest income in 2023. Her parents' marginal tax rate is 24%. What is the total federal income tax due on her income in 2023? A) $90 B) $1,472 C) $735 D) $0
D) Alicia owes no federal income taxes in 2023. Municipal bond interest income is not taxable. The $900 in other interest income is less than Alicia's $1,250 standard deduction amount (for 2023).
Alex established a 2503(c) trust for his daughter, Julie, when she entered college four years ago. Alex decided to name his attorney as trustee and give Julie the right to revoke the trust at age 23, when she finished college. Julie did not revoke the trust and chose to allow the trust to continue until she is age 30. Which of the following correctly identifies the taxpayer, if any, who must pay tax on the trust income? A) Alex, because this is required by law B) The attorney as trustee C) The trust, because it is irrevocable and a separate taxable entity D) Julie, because she allowed the trust to continue past age 23
D) Because Julie waited past age 23 when she had the right to revoke the trust, she is responsible for taxes on the trust given to her
Your clients, Joseph and Jane, have read many articles in financial publications about the alternative minimum tax (AMT) and are concerned that some of their investments and activities may cause AMT problems. Which of the following are preference items or adjustments for purposes of the individual AMT? Interest from qualified private-activity municipal bonds issued in 2008 Bargain element on the exercise of an incentive stock option Excess of percentage depletion over the property's adjusted basis Cost depletion deductions A) I and IV B) II, III, and IV C) I, II, III, and IV D) I, II, and III
D) By definition, the only listed item that is not an AMT preference item or adjustment is the cost depletion deduction. Note that interest on private-activity municipal bonds issued in 2009 and 2010 is not a preference item for the AMT.
In 2023, Floyd, age 15, is a dependent on his parents' income tax return. When Floyd was born, his parents established an UGMA with corporate bonds and have contributed a little to it every year since. This year, the account generated $5,000 of interest income. There were no distributions from the account this year. Floyd's parents file jointly and have taxable income of $175,000 and are in the 24% MFJ tax bracket. What is Floyd's income tax liability for the current year? A) $275 B) $125 C) $1,250 D) $725
D) Floyd's liability is $725. This is computed as follows: $5,000 ($1,250) limited standard deduction ($1,250)taxed at child's rate of 10% $1,250×10%=$125 $2,500 taxed at parents' rate of 24%=$600 $725
Frank Swanson anticipates adjusted gross income of $80,000 during the current tax year. He is considering making a gift of real estate to the public university he attended. Frank's adjusted basis in this real estate is $50,000. The real estate has a current fair market value of $70,000. Frank has owned the real estate for 19 months. If Frank donates the real estate, what is the maximum allowable charitable deduction Frank can receive for the current tax year? A) $70,000 B) $50,000 C) $24,000 D) $40,000
D) If Frank makes a 50% election, he must utilize the basis of the property but may deduct up to 50% of AGI. This yields a $40,000 current-year deduction with a $10,000 carryforward. If no 50% election were made, the deduction would be based on the fair market value of the property but would be limited to 30% of AGI, which is $24,000, with a $46,000 carryforward.
Imputed interest on a below-market loan (with the IRS providing accepted loan rates) will be paid, unless the gift loan is A) less than $5,000 and the loan recipient has no interest income. B) between friends. C) from a corporation to a shareholder. D) less than $10,000 and the gift loan recipient has less than $1,000 in interest income.
D) In a gift loan, the amount of the imputed interest constitutes a gift from the lender to the borrower. For gift loans greater than $10,000 and less than or equal to $100,000, no interest is imputed if the borrower's investment income for the year does not exceed $1,000. For a gift loan of more than $100,000, the prevailing federal rate of interest will be imputed.
Jeffrey and Karen have given cash gifts to their children over the years. In addition, in 2023 Mark, age 13, earns $2,500 in salary. Jennifer, age 19, who attends community college for approximately three months per year, earns $2,500 in dividends and capital gains. Nancy, age 12, earns $2,950 in dividends and interest. Steven, age 10, earns $900 in dividends and interest. Whose income is subject to the tax at the parents' marginal rate? A) Nancy's and Mark's B) Steven's C) Jennifer's and Nancy's D) Nancy's
D) Nancy is the only child up to and including age 18 with unearned income in excess of $2,500 for 2023. Earned income is not subject to taxation at the parental rate. Jennifer is not subject because she is not a full-time student. The kiddie tax applies to children under 19 years of age. It also applies to children under age 24 if they are full-time students. The kiddie tax does not apply if the child's earned income exceeds one-half of the child's support. A full-time student is an individual who is a full-time student for at least five calendar months during the tax year.
Jack bought publicly traded stock seven years ago for $6,000. Its current value on the securities market is $11,000. He has donated this appreciated stock to a charity that provides housing for the homeless. What must Jack do to take the donation as a charitable deduction? Jack must have documentation from the charity substantiating the amount of the donation, the date donated, and the name of the charity. All donations of stock must have a qualified appraisal of the stock attached to the donor's income tax return. A) Both I and II B) II only C) Neither I nor II D) I only
D) Statement I is correct. In additional, the taxpayer must be in receipt of this documentation by the due date of the return or when the return is filed. Statement II is incorrect because it reads "all" donations of stock must have a qualified appraisal. A qualified appraisal is not required for closely held stock if the amount donated is less than $10,000. The appraisal itself is not attached to the tax return.
Marvin has all of the following items. All of them are AMT preference items except A) tax-exempt interest on certain private-activity bonds. B) percentage depletion in excess of adjusted basis on a mining property. C) exclusion of gain on the sale of certain qualified small business corporation stock. D) tax-exempt income from a State of Iowa municipal revenue bond.
D) Tax-exempt income from a municipal revenue bond is not a preference for AMT. All of the other items are preferences for AMT purposes.
Which of the following statements regarding the alternative minimum tax (AMT) or AMT planning are CORRECT? The AMT reduces the tax benefits from certain types of deductions and tax preferences allowable for regular income tax purposes. The starting point for determining alternative minimum taxable income (AMTI) is AGI as reported for regular income tax purposes. It is generally advantageous to defer the payment of real estate taxes to a future year when AMT will be paid in the current year. It is generally advantageous to accelerate ordinary income into years when AMT will be paid. A) I and III B) III and IV C) I, II, and IV D) I, III, and IV
D) The IRS notes that the starting point for determining AMTI is taxable income as reported for regular income tax purposes on a taxpayer's IRS Form 1040. Because real estate taxes are not deductible for AMT purposes, it is generally advantageous to defer the payment of such taxes to a year when AMT will probably not be payable. Also, if AMT will be payable in the current year, it is generally advantageous to increase the amount of regular taxable income (e.g., by accelerating ordinary income into the current year) because the total tax payable will likely not be affected by doing so.
Danielle created a revocable trust for her two minor sons. She named her bank as trustee. The trust property earned $30,000 in the first year and had taxable income of $28,000 after deducting expenses. This income was left to accumulate for future distributions to be made to each son equally when the youngest son attains age 18. To which of the following will the income of the trust be taxable? A) The trust B) The oldest son after attaining age 18, then the sons equally after the youngest son attains age 18 C) Both sons equally D) Danielle
D) The trust income will be taxed to the grantor, as the trust is revocable. A revocable trust is treated as a grantor trust
Paul, age 16, is listed as a dependent on his parents' income tax return. During 2023, he earned $2,700 from a summer job. He also earned $2,700 in interest and dividends from investments that were given to him by his uncle five years ago. How much of Paul's income, if any, will be taxed to him in 2023 using his uncle's marginal tax rate of 32%? A) $2,000 B) $2,700 C) $200 D) $0
D) When applying the kiddie tax, the parents' marginal tax rate is always used (regardless of the source of the property generating the unearned income). Therefore, none of the income is taxed to Paul using the uncle's tax rate. The $200 of income ($2,700 − $2,500) is taxed to Paul at his parents' marginal tax.
Jim is planning to make a charitable contribution to a local university, a qualifying charitable organization. He is going to contribute a piece of real estate that he has owned for six years. The fair market value of the property is $80,000, and his basis in it is $55,000. He has an AGI of $120,000. Jim wants to maximize the amount of charitable contribution deductions from the donation of the real estate. What is the amount of charitable contribution deduction that Jim may claim in the current year? A) $40,000 B) $60,000 C) $55,000 D) $36,000
D0 The gift of long-term capital gain (LTCG) property is generally based on the fair market value of the property. The university is a 50% organization, a public charity. LTCG property contributed to a 50% organization involves a 30% of AGI limitation, and 30% of $120,000 is $36,000. There is also a $44,000 carryforward for up to five years. Jim could have made a 50% election to maximize the current-year deduction, but that would have reduced his overall deductions. If Jim had made a 50% election, he could have deducted $55,000 in the current year. By forgoing the 50% election, he is allowed to deduct the full $80,000 fair market value—$36,000 this year and $44,000 over the next several years.
