Module 4 Flashcards Preview

FP514 OnDemand Tax Planning > Module 4 > Flashcards

Flashcards in Module 4 Deck (23)
Loading flashcards...

Louisa and Gerald file MFJ each year. Louisa is employed by an internet provider and receives a monthly salary. Gerald is self-employed and should make quarterly deposits of his federal taxes. At the time of filing, the couple owed an unpaid tax liability equal to half of what Gerald should have deposited with the IRS. Louisa is unwilling to pay any of the liability to be remitted with the return, telling Gerald to take it from his business. Which of the following statements regarding Louisa’s situation is CORRECT?

I. If Louisa and Gerald file MFJ, they owe the remaining tax liability jointly, and the IRS may require either or both of them to pay it.
II. If Louisa is unwilling to pay the tax liability based on Gerald’s earnings, she should file as MFS instead.

Both I and II

Under the Tax Code, spouses who file a joint income tax return have joint and several liability for the payment of the taxes owed, no matter who the unpaid balance may be attributed to. If Louisa files as MFS (alone) instead of MFJ with Gerald, she will not be responsible for Gerald’s unpaid taxes.


Alex and Lucinda are getting a divorce. Their two minor children will live with Lucinda but, because of the couple’s current financial situation, Lucinda’s parents will provide for most (more than 50%) of the children’s support for the current year. Who can claim the children as dependents?

A. Lucinda
B. Alex
C. Lucinda’s parents
D. Whomever the divorce decree specifies


Because Lucinda’s parents will provide for more than 50% of the children’s support, they will be able to claim the children as dependents. This result occurs regardless of the divorce decree specifications because the support test (for tax purposes) is determinative.


Jackson, a single taxpayer, is meeting with his CPA/financial planner to discuss his tax return. His father has been diagnosed with Alzheimer’s disease and can no longer live on his own. Jackson placed him in a nursing home and is paying the difference between what his father can pay and the actual costs. He also paid medical expenses for his father throughout the year. He wants to know how these expenses will affect his own income tax return this year. What should the CPA/financial planner tell Jackson?

A. Because Jackson is paying for part of the nursing home care and paid the medical expenses, all expenses are deductible on his own Form 1040.
B. Because his father has an income of his own, Jackson may not deduct anything.
C. Jackson needs to provide the details of his father’s income and expenses, and how much of his father’s support Jackson has provided, to determine what Jackson may do.
D. Jackson and his father may split the standard deduction amount in proportion to the expenses each paid.


Jackson must provide documentation for the amounts spent on his father’s expenses by himself and from his father’s funds. If Jackson provided for more than 50% of his father’s support, he can identify him as a dependent on his return for the purpose of claiming head of household filing status, and the medical expenses may be combined with any medical expenses Jackson has to reach the AGI floor for deductibility.


Macy’s younger daughter, Logan, is 26 and was severely injured in an automobile accident last year. She is now living with Macy because she is physically, but not mentally, disabled. Macy’s only income is from a trust, and it provides her with a very comfortable lifestyle. Logan filed a successful lawsuit and was awarded compensatory damages in the form of an annuity, which begins September 1 of the current year, as well as reimbursement for medical expenses incurred from the accident until the lawsuit was settled. Until that time, she will be supported entirely by Macy. Which of the following statements is CORRECT?

A. The annuity Logan will receive is taxable.
B. Macy can take the child and dependent care credit for Logan this year.
C. If Logan reimburses Macy for amounts expended supporting her since her accident, Macy cannot claim Logan as a dependent even if she lives in her home the entire year.
D. The annuity is treated as earned income for income tax purposes.


The earnings on the annuity are not taxable income to Logan. The child and dependent care credit is available only for employment-related expenses incurred that allow the caretaker to work while keeping a home for a qualifying individual. Macy is not employed. The annuity is not earned income.


Which of the following are requirements for alimony deductions under a divorce or separate maintenance decree finalized before January 1, 2019?

I. The agreement specifies that the payments are not alimony.
II. The payor and payee are not members of the same household at the time the payments are made.
III. There is no liability to make the payments after the payee’s death.
IV. The payments are not for the support of the payor’s children.


It is not necessary to specify that payments are alimony. However, the agreement cannot specify that the payments are not alimony.


Ed was divorced from his spouse, Julie, in 2018. Julie received custody of their only child, Sally, age 5. Ed was ordered to pay $2,500 of alimony and child support per month to Julie until Sally reaches age 18. At that time, the payments are to decrease to $1,000 per month. What portion of each payment is deductible by Ed as qualifying alimony?

A) $1,000 of each payment
B) $0
C) $2,500 of each payment
D) $1,500 of each payment


Amounts tied to a contingency or the occurrence of an event relating to the child are presumed to be nondeductible child support. Thus, $1,500 is tied to the child's reaching age 18 and would not be deductible. The remaining $1,000 per month is deductible alimony.


Tax form study note

990 is for nonprofits. 709 is for gift tax. 1040NR is for nonresident aliens.


Haley's great-grandmother, Sylvia, lives in her own home, but Haley provides direct support for her. Sylvia uses $4,200 of her Social Security income (her only income) for her own support, including paying her Medicare premiums. Haley can document that she paid $6,550 in support for Sylvia. Haley is a single taxpayer. Can she list Sylvia as a dependent and claim head of household filing status?

A) Yes, Sylvia’s Social Security is nontaxable and is not used in the support test.
B) No, Sylvia does not live with Haley, so she fails as a qualifying relative.
C) Yes, Sylvia satisfies all of the criteria for a qualifying relative.
D) No, Sylvia used Social Security benefits for some of her own support.


Sylvia satisfies all of the criteria for a qualifying relative. The income test is satisfied because she has no taxable income. The support test is satisfied because the money she used for her own support was less than 50% of her total support. A great-grandmother is a direct ancestor of a taxpayer and is a relative that does not have to live in the same household as the taxpayer.


Which of the following statements regarding items of gross income is CORRECT?

I. Alimony or separate maintenance payments are includible in the gross income of the payee and are deductible for income tax purposes from the gross income of the payor if the divorce was finalized prior to January 1, 2019.

II. Child support payments are includible in the gross income of the payee and are deductible for income tax purposes from the gross income of the payor.

I only

Payments for child support are not deductible by the payor and are not included in gross income for the payee.


Herman and Clarisse are married and come to you for tax advice. Herman is a U.S. citizen and Clarisse is not. What can you tell them about options for filing their taxes?

I. Clarisse can elect to file taxes as a nonresident or as a resident alien.
II. If filing as a resident alien, Clarisse will only need to fill out Form 1040NR.
III. If filing as a resident alien, Clarisse and Herman will need to pay taxes on all of their income (worldwide).
IV. This will create an immigration benefit for Clarisse.


If married to a U.S. citizen or resident alien, the nonresident alien can elect to be treated as a resident alien for tax purposes only. Tax status does not necessarily reflect immigration status. If this election is made, the couple must pay U.S. taxes on their worldwide income. In this situation, the nonresident alien spouse should obtain an Individual Tax Identification Number (ITIN). Depending on their individual situation and intentions, they may apply for a Social Security number with the Social Security Administration.


Your client was divorced in 2017. Your client's ex-spouse has custody of their 10-year-old daughter. During the current tax year, your client made alimony payments of $12,000 paid to contractors and maintenance workers for upkeep of the ex-spouse's house. In addition, the client paid child support payments of $6,000 to the ex-spouse. Your client's adjusted gross income before any deductions for the listed expenses was $175,000. What is the appropriate amount of the alimony deduction on your client's current-year federal income tax return?


Payment made by the payor spouse to a third party as a result of a divorce or separation instrument can be 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. The child support payments are nondeductible by the payor and are not includible by the recipient.


As part of a 2021 divorce decree, Patrick was required to transfer all of his existing life insurance policies to his former spouse, Marlene. She became the owner and beneficiary of the policies. Patrick is now required to continue making the premium payments on all of the policies. How will the life insurance premium payments be treated?

A) They are considered alimony.
B) They are included as taxable income on Marlene’s return.
C) They are included as tax deductions.
D) They are included as income.


When a taxpayer transfers ownership and control of life insurance policies to a former spouse, any premium payments that the taxpayer makes on those policies are considered alimony to the ex-spouse.


Which of the following must be true for someone to be claimed as a dependent for another taxpayer?

I. A dependent may not have more than $4,300 (2021) of gross income.
II. The taxpayer must provide over 50% of the dependent's support.
III. A person who dies during the year may not be identified as a dependent.
IV. Social Security payments are always included in the dependent's gross income.

I & II

A dependent may not have more than $4,300 (2021) 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 payments between divorced spouses is considered entirely child support?

I. Mark must pay his daughter's private school tuition until she graduates high school.
II. Sarah must pay her ex-spouse, Norman, $1,000 per month for five years or until he remarries. Norman has custody of their 15-year-old son.
III. Lucius is required to pay $5,000 per month to Anna, his child's mother, until the child is age 18.
IV. Jason is required to pay Lisa $3,000 per month until their daughter is 18, after which the payment is reduced to $1,400 per month.


Statements I and III are correct. Statement II is alimony because the condition does not relate to the child. Statement IV is both alimony and child support because only part of the payment is related to contingency related to the child.


Lois and Clark recently divorced. Clark was ordered to pay child support and alimony. Clark works as a police officer at the local precinct. Lois expressed concern that he may be killed in the line of duty. Therefore, the judge has ordered him to obtain a life insurance policy. Which of the following is true?

A) Clark can treat the premiums as alimony.
B) Clark should claim he is uninsurable because of his profession.
C) Clark must be the owner of the policy.
D) Clark must pay the life insurance premiums in addition to alimony.


Some states require alimony payors to obtain life insurance. Clark can include the money he spends on life insurance as part of his overall alimony payment. Lois has the insurable interest and therefore should be the owner of the policy. Although Clark's premiums may be higher due to his profession, his profession will not prevent him from becoming insured.


What could you advise a client, concerning taxation, if a premarital agreement initiates a transfer of funds?

I. You would be better off with a transfer for consideration, which would likely not be taxed.
II. If a gift transfer is made, one spouse would likely have considerable income added.

Neither I or II

The income tax consequences of the premarital agreement depend in large part upon whether the transfer under the agreement is treated as a gift (where income tax is avoided) or as a transfer for consideration (which will probably result in the recognition of significant income by one party).


Which of the following are characteristics of a valid and enforceable premarital agreement?

I. It may be orally executed by the parties that are affected.
II. There should be a full and complete disclosure of each party's net worth prior to signing.
III. It may be used to regulate an award of alimony upon divorce of the parties.
IV. There should be a written agreement with the willingly executed signatures of both parties.


To be valid, a premarital agreement must be in writing and contain a complete disclosure of each party's financial situation. It may not be used to regulate an award of alimony.


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?

A) $1,200
B) $1,400
C) $480
D) $960


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.


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?

I. A greater standard deduction amount
II. Child and dependent care credit

Both I & II

Max is entitled to both the standard deduction amount for the head of household filing status and the child and dependent care tax credit, subject to the limits based on Max's AGI.


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

A) not have to pay ordinary income tax on the $100,000.
B) have to pay ordinary income tax on the $100,000 plus a 10% early withdrawal penalty.
C) not have to pay income tax, but Judy will owe gift tax.
D) have to pay ordinary income tax on the $100,000.


Although the transfer itself is tax free, Alex should roll the assets distributed from Judy's IRA within 60 days into his own IRA or retirement plan. Because he failed to do so, he owes ordinary income tax on the entire distribution. When incident to a divorce, domestic relations orders (DROs) are however not subject to gift tax or early withdrawal penalties.


Which of the following statements concerning alimony is CORRECT?

A) No payments except cash can be considered alimony.
B) Payments to maintain property used by the payee spouse but owned by the payor spouse do not qualify as alimony.
C) Cash payment of the payee spouse’s mortgage made by the payor spouse as required by the divorce or separation instrument qualify as one-half alimony.
D) Payments made with respect to jointly owned property are considered full 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.


Dan and his spouse, Gina, were divorced almost four years ago. Under the terms of the decree, Dan must pay Gina 10% of his net business income each year for five consecutive years. Dan made alimony payments of $60,000 in his first post-separation year, $35,000 in the second year, and $5,000 in the third year. What is the tax result of the alimony payments made to Gina?

A) $15,000 of the payments is deductible because of the limit imposed by the front-loading rules.
B) None of the payments are deductible because the excess front-loading rules are violated.
C) $47,500 of the payments must be recaptured due to the front-loading rules.
D) All of the alimony payments are deductible because the front-loading rules do not apply to amounts tied to business profits.


Payments that fluctuate because of a continuing liability to pay a fixed portion of income from business, property, or services are not subject to the excess front-loading rules.


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?

A) Ruth, because she has custody and there is no written agreement stating Doug could list the children on his return
B) Doug, because he provides at least $1,200 per year for the children's support and Ruth cannot not prove she contributes more than this amount
C) Ruth, because the court awarded her custody of the children
D) Doug, because he provides over one-half of the child support


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.