Unit 21 Summed

Alternative Valuation Date

-executor may choose to value assets in an estate as of: a. date of death, or b. 6 months later -beneficial if assets decrease in value following death of decedent **if sold at a greatly reduced price that the does meet the definition of FMV as defined by the IRS...then IRS will use higher value** for mutual funds, the FMV is the NAV

Form 1099

1099 deals with tax info of distributions for the yr

Last year, an investor had a $5,000 loss after netting all realized capital gains and losses. This year the investor has a $1,000 capital gain. After netting his gains and losses, what will be his tax situation this year?

5000 minus the 3000 allows for can dbe deducted againstthat years income 2000 and can offset 1000 of it with his gain offset balance credits offset debits If an investor holds stock for more than 12 months and sells it for a gain, the gain will be treated as a long-term capital gain. The advantage of long-term capital gains is that the maximum tax rate on long-term capital gains is lower than the maximum rate on ordinary income. If an investor holds stock for 12 months or less, though, any gain will be considered a short-term capital gain and will be taxed at the same rate as ordinary income.

An investor would have to pay the alternative minimum tax when

A taxpayer must pay the alternative minimum tax in any year that it exceeds regular tax liability. Tax-preference items are re-input in figuring AMT, but the AMT is paid only if that amount is higher than the regular income tax.

Gifts to recognized 501(c)(3) charities, such as the American Red Cross, are never subject to the gift tax. If the spouse is a non-citizen, there is a limit ($152,000 in 2018) and anything in excess of $15,000 to a grandchild or sibling is taxable unless the donor elects to use the excess against the lifetime exclusion ($11.2 million in 2018).

AMerican Red cross

beneficiary inherits mutual funds at their NAV ($9.50) Sale (redemption) takes place at the NAV ($14.25)

An investor inherits 1,000 shares of the ABC Global Growth Fund when NAV is $9.50 and POP is $10.00 and elects to receive all distributions in cash. Two years later, sells all when NAV is $14.25 and POP is $15.00. What are the tax consequences of this sale? for a profit of $4.75 per share (times 1,000 shares). Long-term capital gain of $4,750

Which of the following vehicles make use of the unified estate tax credit?

Both the bypass trust and the generation-skipping trust are tools used by estate planners to reduce estate taxes. They do so by passing the amount in the unified credit (currently $5.34 million for 2014) to heirs other than the spouse, usually grandchildren in the case of the GST.

Investors who are subject to the alternative minimum tax (AMT) will lose the tax benefits normally associated with tax preference items.

Certain items receive favorable tax treatment from the IRS. One example is tax-exempt interest on private purpose municipal revenue bonds. Another example is accelerated depreciation. These types of items are known as tax preference items. For investors who are subject to the alternative minimum tax (AMT), the benefits normally associated with tax preference items are lost, because these items must be added back into the investor's taxable income.

Customer sells at the bid

Closed end fund, prices are based upon supply and demand know its a closed-end company because only they can have an ask price lower than NAV

The proper term is "tax preference items." Those would include the following:

Deductions taken for accelerated (but not straight-line) depreciation; Excess intangible drilling costs; Capital gains on incentive stock options; and Otherwise tax-exempt interest from specified private activity bonds.

Stock dividends, unlike cash dividends, are not taxable in the year of receipt. Instead, they reduce the owner's cost basis and, when sold at a price above that cost basis, are treated as capital gain rather than ordinary income.

Deferred annuities never generate anything but ordinary income, and qualified withdrawals from Section 529 plans result in no taxation on the earnings. If they are not qualified, there is ordinary income tax plus a penalty.

If a married couple establishes a JTWROS account with a balance of $25 million and the wife dies, what is the husband's estate tax liability?

Establishing a joint tenants with right of survivorship account allows for the transfer of assets to the survivor upon death. The surviving spouse is not taxed on assets transferred in this manner because under current tax law, there is an unlimited marital deduction.

AGE adjusted gross estate

Expenses that are deducted from gross estate to arrive at AGE Funeral expenses, charitable contributions debts of the decedent then once those are subtracted unlimited marital and charitable deductions are subtracted to arrive at the taxable estate

Partial withdrawal of cash value from a variable life insurance

FIFO rules apply no tax consequences until the amount withdrawn exceeds the cost basis in the policy

Form 709

Federal Gift Tax Return

Investors who buy shares in state-specific municipal bond funds may be subject to

Interest received from municipal bonds and municipal bond funds is generally income tax free on a federal basis, but taxable in states other than the state of issue. State-specific funds avoid that problem. These investments are subject to capital gains taxes if sold at prices above investors' cost.

Jean owns a $1 million life insurance policy on her mother, Clara. Jean is named as sole beneficiary, and so far she has paid $150,000 in premiums. If Clara dies, which of the following will occur? The proceeds will be exempt from income tax. The proceeds will not be included in Clara's estate.

Life insurance proceeds are generally free from income taxes and will be free from estate taxes, if the insured possesses no incidence of ownership. In other words, a beneficiary other than the deceased's estate has been named, and the owner is someone other than the insured.

A taxpayer's marginal tax rate is

Marginal tax rate is defined as the rate of taxation on any additional taxable income received. It is sometimes referred to as the tax on the "next" dollar or the "last" dollar of income. The effective tax rate is the overall rate paid on the total taxable income.

Last year, an investor had a $5,000 loss after netting all realized capital gains and losses. This year the investor has a $1,000 capital gain. After netting his gains and losses, what will be his tax situation this year?

Only $3,000 of last year's loss can be deducted against that year's income. Therefore, the losses carried forward from the previous year are the remaining $2,000. These losses are netted against the gain of $1,000 for a net loss of $1,000. That loss can be used to offset $1,000 of ordinary income. There are now no longer any losses to carry forward.

gross estate

Only property owned Dr. Howard dies. Which of the following life insurance policies will be included in his gross estate? Policy I—owned by Dr. Howard; he is the insured and his wife is the beneficiary. Policy II—owned by Mrs. Howard; she is the beneficiary. Policy III—originally owned by Dr. Howard; Mrs. Howard is the insured and he gave the policy to his daughter 5 years ago. Policy IV—owned by Dr. Howard; Mrs. Howard is the insured and he is the beneficiary.

Schedule K-1

Schedule K-1s are issued to owners of partnerships (limited or general), LLCs with more than one member, and S corporations.

Filing Dates for business tax returns

Sole Proprietorship - Schedule C-April 15 Single member LLC- Schedule C-April 15 Multiple member LLC, Partnership, S Corp- March 15th LLC and partnerships- Form 1065 S Corp Form 1120S C Corp April 15h or 15th day of 4th month after end of fiscal year- Form 1120

You have a client whose income from a real estate limited partnership is $11,000. During the same year, your client had net capital losses of $2,000 and losses from an oil and gas drilling program of $6,000. The effect of this investment activity would be to increase the client's taxable income by

The $11,000 passive income is offset by the $6,000 of passive loss giving the client $5,000 of passive income. Because capital losses up to $3,000 are deductible from taxable income, we can deduct the $2,000 in net losses giving a net increase to taxable income of $3,000.

The alternative minimum tax is designed to ensure that certain high-income taxpayers do not avoid all income tax through the use of various tax preference items. Those preference items are added back to the taxpayer's ordinary income on IRS Form 6251 and would include

The Internal Revenue Code provides that interest on specified private activity bonds is an item of tax preference. Therefore, this interest must be added to a taxpayer's regular taxable income in order to compute the taxpayer's AMTI.

The IRS defines earned income as wages, salaries, tips, and other taxable employee pay, such as bonuses.

The death benefit from a variable annuity policy is taxed as ordinary income, but is not earned. The death benefit from a variable life insurance policy is generally free of income tax so it cannot be earned income. Under the TCJA of 2017, alimony received from a divorce decree dated January 1, 2019 or later is not earned income.

A business organized as which of the following pays federal income tax on its income?

The income generated by a sole proprietorship is reported on Schedule C of the Form 1040 of the individual owner. The IRS considers that business as a taxable entity.

Owners of private activity municipal bonds might find themselves subject to the alternative minimum tax.

The interest on private activity municipal bonds, used for things like airports, student housing, etc., is exempt from federal taxation, but is considered a preference item for the AMT.

XYZ, Inc. is a C corporation in the 21% federal income tax bracket. Which of the following investments offers the company the highest after-tax return?

The key to this answer is that corporations have a 50% dividend exclusion on dividends received from other companies. The math looks like this: Only half of the 6% dividend is taxable. That means 3% per year is tax free and the other 3% is subject to tax at the 21% rate. So, we have 3% + 79% of the taxable 3% = 3% + 2.37% = 5.37% after-tax return.

The excess of the alternative tax over the regular tax is added to the regular tax amount.

The purpose of the alternative minimum tax is to ensure that certain taxpayers pay a tax consistent with their wealth and income.

William died in 2019 with the following assets and liabilities: $200,000 in securities left to his wife, $650,000 home left to his wife (the home cost $150,000), $250,000 life insurance policy with his daughter named as beneficiary, and $75,000 in debts and estate expenses. What is William's net estate?

The question is asking for the net estate, not the amount of estate tax due. The market value of all assets that William has an incident of ownership in will be included in the gross estate. All assets left to the spouse and the debts/expenses are allowable reductions to arrive at the net, or taxable estate. In this case, the $1.1 million gross estate is reduced by the $850,000 left to his wife and then by the $75,000 in debt and expenses. That leaves a net estate of $175,000. That is well below the estate tax exemption of $11.4 million in assets for 2019. All property he owned minus anything else forexpenses

Exempt from State Taxation

US treasuries (they're federally taxed)

A deceased client's trust account has over 90% of its value invested in a single common stock whose recent performance has been outstanding, resulting in a very large unrealized capital gain at the time of death. What action would most likely be taken by the investment adviser handling this account?

Under current tax law, a beneficiary inherits assets at their fair market value as of the time of death. This is known as a stepped-up basis (probably because these assets are generally at a higher price than when originally purchased). In this question, we are told that there is a large unrealized gain. Therefore, with a portfolio that is overconcentrated in 1 security, it would make sense to diversify while, at the same time, avoiding or minimizing capital gains taxes. It would be against the provisions of the UPIA for a fiduciary to ever engage in trading from his own account.

Study this

Upon death, the beneficiary inherits closed-end funds at their bid price (what the estate could have sold them for), or $9.00 per share. The sale two years later takes place at the bid ($14.50) for a profit of $5.50 per share (times 1,000 shares). Remember, in the case of a closed-end fund, the NAV does not figure into any computations; prices are based on supply and demand and have a bid and ask price, the same as any stock. How did you know this was a closed-end company? Only in the case of a closed-end company can the ask price be lower than the NAV (ask = $9.15, NAV = $9.50). customer sells at the bid

Provide estate liquidity. Insurance proceeds are removed from the estate of the insured for tax purposes.

Which of the following is (are) advantages of irrevocable insurance trusts?

Stock dividends, unlike cash dividends, are not taxable in the year of receipt. Instead, they reduce the owner's cost basis and, when sold at a price above that cost basis, are treated as capital gain rather than ordinary income. Deferred annuities never generate anything but ordinary income, and qualified withdrawals from Section 529 plans result in no taxation on the earnings. If they are not qualified, there is ordinary income tax plus a penalty.

Which of the following offers the opportunity to realize a capital gain rather than ordinary income?

It would be least likely for dividends paid on which of the following investments to meet the requirements to be considered qualified?

You may be asked about REITs, and their dividends do not meet the definition. In similar fashion, dividends on bond funds and money market funds are not qualified because the majority of those dividends represent interest earned by the fund.

Gross Estate

all property owned by the decedent that might be subject to federal estate taxes upon a person's death (property transferred to cahirty or wife can be included)

Portale of unused estate tax exemption under ATRA

allows wife to unused lifetime exception form 11.4 mil

IRS Form 706

computation of the estate tax is done on Form 706

Form 1041

estate income tax computations

TIPS

exempt from state and local being (US treasury) annual interest is Federally taxable (ordinary income) annual increase to principal taxed also

Inherited securities usually

fair market value as of date of death IRS treats any gains long term regardless

Limited partnership

general partner income is earned income and limited partner income is passive

Estate Tax imlications of life insurance

if you don't own it and put it in a irrevocable life insurance trust premiums paid by the insured may qualify for the annual gift tax eclusion (15,000 per yr, per beneficiary)

Bypast trust

lifetime exception of 11.4 million

Trust or estate has income

must be reported on IRS form 1041

DNI (Distributable Net Income)

realized gains not considered part of determines amount of income that may be taxed to the beneficiaries or grantor in event if is a revocable trust

Gift tax

responsibility of donor (giver of gift) if due

In the case of a gift of securities, the donee acquires the donor's cost basis, $9.21 per share. Sale (redemption) takes place at the NAV ($14.25) for a profit of $5.04 per share (times 1,000 shares).

sale redemption of open end (mutual funds takes place at NAV)

Margin interest

tax deductible expense

Muni bonds interest

tax free but not gains

The proper term is "tax preference items." Those would include the following: Deductions taken for accelerated (but not straight-line) depreciation; Excess intangible drilling costs; Capital gains on incentive stock options; and Otherwise tax-exempt interest from specified private activity bonds.

tax preference items Deductions taken for accelerated depreciation Excess intangible drilling costs Capital gains on incentive stock options tax-exempt interest from specified private activity bonds