Tax Exam 4

John moves to Denmark on October 1, 2020, the 274th day of the year. He works there for more than two years, earning a salary of $20,000 per month. What is the amount of his foreign earned income exclusion for 2020? Round your answer to the nearest dollar.

$26,753 The foreign earned income exclusion for 2020 is $107,600 (the annual exclusion) / 366 days = $293.99 per day. As such, John's exclusion for 2020 is (365 - 274 = 91 days) x $293.99 per day = $26,753.

Paolo pays tuition in the amount of $40,000 for Angel at Big University, making payments directly to the bursar's office at the school. He also gives his grandson Gus $50,000 to pay medical school tuition. What is the amount of Paolo's qualified tuition payments, if any, not subject to gift tax for the current year?

$40,000

Alvilda died on January 23 of the current year. Her estate included 10,000 shares of Nordic Corporation stock, which was traded on the NASDAQ exchange. On the date of her death, the highest price at which the stock traded was $57.80 per share and the lowest price was $55.60 per share. At the close of trading, the stock's price was $57.50 per share. At the end of the current year, the closing price for the stock was $65.10 per share. At what price should a share of stock be valued in Alvilda's estate?

$56.70

Deferral Corporation, a U.S. corporation, owns all the stock of Foreign Corporation, a foreign corporation. In 2020, Foreign Corporation earns $100,000 but pays no dividends. Foreign Corporation generates no income in 2021 and 2022. The company pays no dividends in 2021. In 2022, Foreign pays a dividend of $50,000. How much income will Deferral report from ownership of Foreign in 2020, 2021, and 2022?

2020: $0; 2021: $0; 2022: $50,000

In order to qualify for installment payments of estate taxes under Section 6166, a closely held business must comprise more than ________ of the gross estate.

35%

What requirements must be satisfied to qualify a U.S. citizen or resident living abroad for the​ foreign-earned income​ exclusion?

A U.S. citizen must have been a resident of a foreign country for an entire tax year and must have maintained a tax home in a foreign country during the period of residence or must be physically present in a foreign country for at least 330 full days during a 12 month period and must have maintained a tax home in a foreign country during the period of residence.

Which of the following will NOT be taxed on worldwide income by the United States?

A foreign corporation with a U.S. branch U.S. citizens and resident aliens are taxed on worldwide income, as are U.S. parent corporations with foreign branches and foreign corporations with U.S. subsidiaries. However, a foreign parent with a U.S. branch will be taxed by the United States only on U.S. income.

How is a nonresident​ alien's U.S. source investment income​ taxed?

A nonresident​ alien's U.S. source investment income that is not connected with the conduct of a U.S. trade or business is taxed at a​ 30% rate without regard to any deductions.

Explain the alternatives available to individual taxpayers in accounting for foreign taxes paid or accrued on their taxable income.

An annual election is available to individual​ taxpayers, allowing them to deduct or credit any foreign income taxes that have been paid or accrued. Simplified reporting rules apply to taxpayers with small foreign tax credit amounts from passive income sources.​ However, almost all taxpayers elect to claim the foreign tax credit.

What is the due date for gift tax returns?

April 15 All gift tax returns must be filed on a calendar year basis and are generally due no later than April 15 of the following year.

James has established a trust for the benefit of his siblings. Under the terms of the trust, beneficiaries can demand a distribution from the trust each year equal to the lesser of the annual exclusion or the amount transferred to the trust during the year and James will be able to use the annual exclusion. It appears that James has established a ________ trust.

Crummey The Crummey trust is named for a Ninth Circuit Court of Appeals decision holding that trust beneficiaries received a present interest (and thus entitled the donor to an annual exclusion) as a result of language in the trust instrument that entitled each beneficiary to demand a distribution by a certain date each year.

In what circumstances might a taxpayer prefer to​ deduct, rather than​ credit, foreign​ taxes? A. A taxpayer might prefer to​ deduct, rather than​ credit, foreign income taxes when the taxes are not creditable because they are levied on property or​ production, not income. B. A taxpayer might prefer to​ deduct, rather than​ credit, foreign income taxes when the taxpayer is in a net foreign tax credit position. C. A taxpayer might prefer to​ deduct, rather than​ credit, foreign income taxes when the taxpayer wants to increase a current net operating loss. D. All of the above.

D. All of the above.

What advantages does a cash method taxpayer gain by electing to accrue foreign taxes for foreign tax credit​ purposes? A. By electing to accrue their income​ taxes, it may prevent taxpayers from losing foreign tax credits because of timing differences between the year in which the income is reported for U.S. tax purposes and the year when the foreign taxes are paid to the foreign government. B. By electing to accrue their income​ taxes, this can accelerate the claiming of a tax credit for their tax payments from the year in which a payment is made to the year in which the income is subject to U.S. taxation. C. If an election to accrue income taxes is​ made, most income items will not change the year in which the related foreign tax credit is claimed.​ Whereas, for some income​ items, this election will obviate the need to carryback or carryover foreign tax credits from one tax year to another. D. All of the above.

D. All of the above.

What types of foreign taxes are eligible to be​ credited? A. Excess profits taxes paid to a foreign country or to a U.S. possession are creditable. B. War profits taxes paid to a foreign country or to a U.S. possession are creditable. C. Income taxes paid to a foreign country or to a U.S. possession are creditable. D. All of the above.

D. All of the above.

Which of the following sources of income is NOT eligible for the foreign earned income exclusion?

Dividends paid by a German corporation Interest earned in a Swiss bank account

Which of the following is U.S. source income for a nonresident alien? Interest from a U.S. bank Dividends paid by a U.S. corporation Annuity paid by Greek insurance company $2,500 salary received as a personal assistant to a nonresident alien during a 12 day visit to the U.S.

Dividends paid by a U.S. corporation

A foreign national may make an election to be taxed as a resident alien by making an election. This election is available if a number of conditions are met:

Does not qualify as a resident under the lawful residency or substantial presence test for the calendar year for which the election is made. Does not qualify as a resident for the calendar year preceding the election year. Qualifies as a resident under the substantial presence test in the calendar year following the election year and was present in the U.S. for as least 31 consecutive days and for at least 75% of the days during the period. However, a nonresident alien present in the U.S. for at least 300 days in the election year would be ineligible to make the election.

Which of the following does NOT have a U.S. trade or business?

Emily is a citizen of the UK and a nanny for a British family. She accompanies the family to the U.S. for a two-week vacation, earning $500 per week. Giles is a poet and resident of Scotland. He travels to the U.S. for a 14-day book tour to promote his most recent collection of poems and is paid $2,500 by the publisher.

Alex, a U.S. citizen, has been transferred to the Danish office of his employer. To be eligible for the foreign earned income exclusions, Alex must be physically present in Denmark for ________ days out of a 12-month period.

For a U.S. taxpayer to exclude foreign earned income, they must be physically present in the other country for at least 330 days out of a 12-month period.

An individual taxpayer claiming the foreign tax credit will file ________.

Form 1116

The foreign earned income and housing cost exclusions are claimed on ________.

Form 2555

Which of the following should be EXCLUDED from the gross estate?

Gift of stock made in the year prior to death The gross estate, which is more all-encompassing than the probate estate, includes amounts that may have been excluded as dower or curtesy rights under state law, transfers of life insurance on the decedent within three years of the date of death, and transfers with a retained life estate. However, gifts made prior to death are not included in the gross estate, although they are included in the estate tax base.

Why is it important for a foreign national to ascertain whether he or she is a resident of the United​ States?

It is important because if a foreign national is a resident of the United​ States, the taxpayer is taxed on their worldwide income at progressive individual tax rates. If a foreign national is a resident of a country other than the United​ States, different rules apply such​ as, passive investment income is taxed at a flat​ 30% rate to a nonresident alien while trade or business income is taxed at progressive individual rates.​ Generally, such an individual is taxed only on income earned in the United States.

Which of the following gifts is eligible for the $15,000 annual exclusion?

Jocelyn gives her daughter a gift of $25,000, paid in cash during the current year. Julie gives her neighbor a gift of a painting with a $20,000 FMV during the current year.

Angela is a nonresident alien. Ignoring weekends and holidays, she must file her 1040-NR for tax year 2018 no later than ________.

June 15, 2019

Your elderly client, Lola, is very wealthy, yet has several friends and family members in financial need. Which of the following is an advantage to Lola and her friends and family of making a gift during her lifetime, rather than bequeathing her entire estate upon her death?

Lola can exclude up to $15,000 per recipient for year from transfer taxes through the annual exclusion. The advantage to Lola and her friends and family of inter vivos gifts relates to the annual exclusion. Up to $15,000 per year per recipient may be excluded from transfer taxes on gifts. This exclusion is not available for bequests made upon her death. However, these gifts are not deductible from her income and recipients will assume Lola's basis in the property (rather than the stepped-up basis available for bequests made upon her death). Additionally, Lola cannot take a deduction for unrealized losses on gifted property - although the recipients will assume her basis in the property and potentially be able to take advantage of the losses when they dispose of the gifted property.

Which of the following would be exempt from the generation skipping transfer tax?

Mom, aged 90, gives a gift to Daughter, aged 35. The generation skipping transfer tax (GSTT)'s purpose is to ensure that some form of transfer taxation is imposed one generation at a time. It includes any disposition that provides more than one generation of beneficiaries who are in a younger generation than the transferor or provides an interest solely for a person two or more generations younger than the transferor. Generations are measured with respect to family relationships rather than age, so a transfer to a daughter is not a "skip."

Which of the following is NOT an element of the unified transfer tax system?

Personal holding company tax The unified transfer tax system includes the gift tax, estate tax, and generation skipping transfer tax.

Which of the following is NOT a primary purpose of a tax treaty?

Reduce the scope of income subject to U.S. taxation for U.S. citizens

Which of the following is a controlled foreign corporation?

Small Corporation is a foreign corporation with respect to U.S. tax law. There are three shareholders: A (a U.S. person) owns 30%; B (a U.S. corporation) owns 35%; C (a foreign corporation) owns the remaining 35%.

Which of the following would NOT be U.S. sourced income?

Taxpayer receives dividends from a French corporation.

Which of the following would be U.S. sourced income?

Taxpayer sells real property in Alaska to a foreign corporation Maria, an Italian citizen, sells real property in Florida to an Italian corporation

What three factors have the drafters of U.S. tax laws considered in determining the scope of U.S. tax jurisdiction over​ individuals? Explain the importance of each factor.

The three factors​ are: (1) the​ taxpayer's country of​ citizenship, which determines whether the taxpayer is a U.S. citizen or an​ alien, (2) the​ taxpayer's country of​ residence, which determines alien status which are divided into two​ classes: resident and​ nonresident, and​ (3) the location where the income is​ earned, which determines whether passive income or trade or business income is subject to U.S. tax for nonresident aliens. It is also important for U.S. citizens and residents in determining any potential foreign earned income exclusion or foreign tax credit.

What planning​ tool(s) is​ (are) available to reduce the tax rate below​ 30%? What mechanism is used to collect the​ tax?

The​ 30% tax rate may be reduced by treaty if the alien is a resident of a foreign country with whom the U.S. is a treaty partner. The U.S. tax levy is collected by having the U.S. payor withhold the taxes at the source of the payment.

Which of the following is a QTIP transfer, assuming an appropriate election?

Wanda transfers $400,000 to a trust which will pay all of the income to her spouse Harold for life. Harold determines who will receive the property upon his death.

Which of the following is NOT a requirement for a foreign national to make an election to be treated as a resident alien?

Was present in the U.S. for at least 300 days in the election year

In international law, the authority to tax income earned by corporations generally is based on all of the following factors EXCEPT ________ .

citizenship of executive team

U.S. citizens may elect to claim ________.

either the foreign tax credit or deduct foreign taxes from their gross income

Which of the following results in an addition to the gross estate?

general power of appointment

In a(n) ________, U.S. corporations with substantial foreign-source income reorganize as foreign corporations for the purposes of tax avoidance.

inversion

The tentative tax on the estate tax base is reduced by all EXCEPT which of the following?

marital deduction The marital deduction reduces the gross estate in calculating the taxable estate. However, to arrive at the actual estate tax payable, the tentative tax is reduced by: post-1976 gift taxes unified credit credit for pre-1977 gift taxes credit for taxes on prior transfers foreign death tax credit

A transferor who conveys property to a ________ makes an incomplete transfer because the creator of the trust can change the trust provisions, including the identity of the beneficiaries.

revocable trust A revocable trust allows the donor to retain the power to change the trust provisions, including the trust beneficiaries.

Estate taxes may be paid in up to ________ annual installments in certain situations where the gross estate includes a significant interest in a closely held business.

ten

A nonresident alien reports income on Form 1040-NR on or before ________, assuming there is no withholding.

the fifteenth day of the sixth month following the close of the tax year

A gift tax return must be filed when

the gift is qualified terminable interest property given to the spouse of the donor

Proceeds from a life insurance policy are includable in the decedent's gross estate if the individual makes a gift of the life insurance policy on his or her own life within ________ years of dying.

three

A corporation having excess foreign taxes because of the foreign tax credit limitation may record a(n) ________ if they do not expect to have foreign income in future years.

valuation allowance