Ch7 – Income Tax Planning Issues For Special Needs Family

Question 1

List the FOUR deductions related to special needs.

Answer 1

1) Impairment-Related Work Expenses
2) Unreimbursed Medical Expenses Deductions
3) Medical Conferences and Seminars
4) Special Instruction Qualifying as Medical Expense Deductions (education that helps alleviate the handicap of the child - 7.5% AGI floor)
* Note: Exemptions for qualifying children (including special needs dependents) are no longer allowed as of 2018*

Question 2

What are the ABLE Account total contribution limits for friends and family members combined?

Answer 2

$15K per year (plus $12,060 for any earned income)

Question 3

Allowable distributions from an ABLE account are defined as any expense related to the designated beneficiary as a result of “living a life with disabilities”. Name FOUR types of “qualified disability expenses”?

Answer 3

a) housing/transportation
b) education
c) health care expenses
d) employement

Question 4

What is the disability requirement for an ABLE Account? (3)

Answer 4

• the disability must have occurred before age 26
• qualified for SSI or meet the criteria for SSI
• only ONE account per individual.

Question 5

a) What is considered gross income?
b) What is excluded from gross income?

Answer 5

a) All income (money or property) from whatever source derived.
b) Anything the internal revenue code specifically excludes.

Question 6

Name the EIGHT exclusions from gross income.

Answer 6

1) gifts/inheritances
2) public purpose municipal bond income
3) worker’s compensation benefits
4) death proceeds from life insurance
5) benefits paid from medical expense insurance policies
6) SS benefits (below certain income levels)
7) certain dependent-care-assistance programs
8) educational assistance programs and certain qualified scholarships

Question 7

What is the difference between exclusions and deductions?

Answer 7

exclusions = NOT included in gross income

deductions = IS included in gross income, but later deducted to reduce the amount of income that is subject to tax

Question 8

What is the difference between tax-exempt and tax-deferred?

Answer 8

tax-exempt = is a transaction that eliminates taxation altogether (not taxed)

tax-deferred = non-recognition transaction in current tax year (taxed later)

Question 9

Deferral is based on the taxpayer’s ________ in the property.

Answer 9

basis

Question 10

Basis = _____________ + _____________

Answer 10

the cost of the property + the improvements to the property

Question 11

Robert owns a rental property that he originally purchased for $100,000. He has made improvements of $20,000 to the property. The FMV of the property is $180,000. What would Robert’s tax treatment be if he exchanges the property for another condominium in a transaction that qualifies for non-recognition treatment under the IRC?

Answer 11

Robert’s recognized taxable gain in the current year is zero because the exchange qualifies for non-recognition treatment. Robert’s basis in the new property will be the same as his basis in the old property ($120,000). In the future, if Robert sells the property, he will recognize taxable gain at that time.

Question 12

When does capital gain and capital loss occur?

Answer 12

capital gain = when an asset is sold for MORE than the property’s basis

capital loss = when an asset is sold for LESS than the property’s basis

Question 13

For individuals taxpayers, net capital losses can be deducted against ordinary income and capital gains up to $_______ per year.

Answer 13

$3,000 ($1,500 if MFS).

Question 14

Short-term capital gains are taxed at _______ rates.

Long-term capital gains are taxable at _______ rates.

Answer 14

Short-term = ordinary income rates.

Long-term = capital gains rates.

Question 15

How are capital gains addressed under the Tax Cuts and Jobs Act?

Answer 15

New tax brackets were created for capital gain income based on taxable income, rather than tax bracket.

Question 16

What type of filers will be taxed at the maximum rate (20%) for capital gains under the Tax Cuts and Jobs Act?

Answer 16

very high-income filers

Question 17

What is the computation for taxable income?

Answer 17

Gross Income

– Above-The-Line-Deductions

Adjusted Gross Income

– Below-The-Line Deductions (Standard/Itemized)

= Taxable Income

Question 18

Define Above-the-Line deductions.

Answer 18

Deductions attributable to a trade or business carried on by the taxpayer whether or not they itemize, if such trade or business does not consist of the performance of services by the taxpayer as an employee. (eg- impairment-related work expenses)

Question 19

What is the standard deduction for 2018?

Individual = __________

Head Of Household = __________

Married = __________

Answer 19

Individual = $12K

Head Of Household = $18K

Married = $24K

Question 20

Itemized deductions are consider below-the-line deductions. List the FIVE below-the-Line deductions.

Answer 20

1) unreimbursed medical and dental expenses
2) interest expense
3) taxes paid (personal property taxes up to $10K)
4) charitable deductions
5) casualty and theft losses

Question 21

What are the following tax credit amounts for Special Needs Families?

Child Tax Credit = ___________

Non-Dependent Tax Credit = ___________

Child and Dependent Care Tax Credit = ___________

Adoption Expenses Credit = ___________

Answer 21

Child Tax Credit = $2K

Non-Dependent Tax Credit = $500

Child and Dependent Care Tax Credit = $3K single ($6K double) with no phase outs!

Adoption Expenses Credit = $13,840

Question 22

Name TWO credits that could be used to offset alternative minimum tax liability.

Answer 22

a) child tax credit
b) adoption credit

Question 23

A tax-advantage account for individuals or family members of a special need individual to pay for the qualified disability expenses.

Answer 23

ABLE Account

Question 24

Investments in an ABLE account can be adjusted up to ______ per year.

Answer 24

TWO times per year

Question 25

Investment income in an ABLE account is _______, and contributions to the account are _______.

Answer 25

a) tax-exempt​
b) not tax-deductible

Question 26

ABLE Accounts can also receive 529 Plan rollovers up to the state limit of $_______ of earned income annually.

Answer 26

$15K