Study Unit 3 Flashcards by Diona Moss

Ms. Guy’s books and records reflect the following for 2020:
Salary $57,000
Interest on money market account (credited to her
account in 2020, withdrawn in 2021) $1,865
Deposit from the pending sale of her rental property $4,000
Interest on savings account (credited to her account in
2019, withdrawn in 2020) $200
What is the amount Ms. Guy should include in her gross income for 2020?
A. $62,865
B. $58,865
C. $63,065
D. $45,865

How well did you know this?

Not at all

Perfectly

Mr. and Mrs. Apple received the following income during 2020:
• $200 in interest credited to their bank account but not withdrawn or used by them during the year
• $2,000 in interest received as a beneficiary in a trust established by Mr. Apple’s father and included on Schedule K-1 from the trust
• $100 in interest on a bond issued by the State of Georgia
• $1,000 bond interest, City of Atlanta municipal bond
How much taxable interest income must Mr. and Mrs. Apple report on their 2020 tax return?
A. $1,300
B. $3,300
C. $2,200
D. $0

How well did you know this?

Not at all

Perfectly

Maria had municipal bond interest of $6,000, certificate of deposit interest of $4,000, reinvested corporate bond interest of $2,000, mutual fund municipal bond interest of $7,000, and savings account interest of $1,000. What is Maria’s taxable interest?
A.	$3,000
B.	$20,000
C.	$7,000
D.	$16,000

How well did you know this?

Not at all

Perfectly

In December of the current year, Mr. Stone cashed qualified Series EE U.S. Savings Bonds, which he had purchased 10 years ago. The proceeds were used for his son’s college education. All of the following statements are true concerning the exclusion of the interest received EXCEPT
A. He cannot file as married filing separate.
B. Before he figures his interest exclusion, he must reduce his qualified higher educational expenses by certain benefits.
C. Eligible expenses include room and board.
D. If the proceeds are more than the expenses, he will able to exclude only part of the interest.

How well did you know this?

Not at all

Perfectly

All of the following are taxable interest income EXCEPT
A. Fair market value of a gift received for opening a savings account.
B. Original Issue Discount (OID)
C. Interest on federal tax refunds.
D. Interest income received on a municipal bond.

How well did you know this?

Not at all

Perfectly

Which of the following is NOT subject to federal income tax?
A. Discount income in installment payments received on notes bought at a discount.
B. Interest on U.S. Treasury bills, notes, and bonds issued by an agency of the United States.
C. Interest on New York State bonds.
D. Interest on federal income tax refund.

How well did you know this?

Not at all

Perfectly

Interest from the following bonds is generally tax exempt EXCEPT
A.	Qualified private activity bonds.
B.	Local government bonds.
C.	U.S. savings bonds.
D.	State government bonds.

How well did you know this?

Not at all

Perfectly

In the current year, Uriah Stone received the following interest payments:
• Interest of $400 on refund of federal income tax for a previous year
• Interest of $300 on award for personal injuries sustained in an automobile accident in a previous year
• Interest of $1,500 on municipal bonds
• Interest of $1,000 on United States savings bonds (Series HH)
What amount, if any, should Stone report as taxable interest income on his current-year tax return?
A. $3,200
B. $1,700
C. $0
D. $700

How well did you know this?

Not at all

Perfectly

Ms. Smith’s books and records reflect the following for Year 2:
• Salary $35,000
• Interest on money market account (credited to her account in Year 1,
withdrawn in Year 2) $1,000
• Interest on money from a long-term savings plan from which interest
cannot be withdrawn until December 31, Year 2, but principal can be
withdrawn at any time (she has principal of $5,000 and accumulated
interest of $700) $500
What is the amount Ms. Smith must include in her gross income for Year 2?
A. $35,500
B. $36,000
C. $35,000
D. $36,500

How well did you know this?

Not at all

Perfectly

Ms. B received the following interest in the current year:
• Luggage for purchasing a 4-year certificate
of deposit (fair market value)
$50
• Interest on passbook savings account
$15
• Interest on certificate of deposit
$200
• Dividends on share account in credit union
$150
• Interest on State of Mississippi bonds issued
to finance state highway construction
$300
What is the amount of interest income to be included in income?
A. $365
B. $265
C. $715
D. $415

How well did you know this?

Not at all

Perfectly

Gary and Gladys invest in bonds. In the current year, they received the following interest:
•	California general revenue bonds
$800
•	New York City sanitation fund bonds
$1,000
•	Seattle School District bonds
$400
•	AT&T 20-year bonds
$600
The state and local bonds are neither private activity bonds nor arbitrage bonds. How much interest income may Gary and Gladys exclude from gross income on their joint return?
A.	$1,800
B.	$800
C.	$2,200
D.	$0

How well did you know this?

Not at all

Perfectly

In a tax year in which the taxpayer pays qualified education expenses, interest income on the redemption of qualified U.S. Series EE Bonds may be excluded from gross income. The exclusion is subject to a modified gross income limitation and a limit of aggregate bond proceeds in excess of qualified higher education expenses. Which of the following is (are) true?
I. The exclusion applies for education expenses incurred by the taxpayer, the taxpayer’s spouse, or any person whom the taxpayer may claim as a dependent for the year.
II. “Otherwise qualified higher education expenses” must be reduced by qualified scholarships not includible in gross income.
A. II only.
B. I only.
C. Neither I nor II.
D. Both I and II.

How well did you know this?

Not at all

Perfectly

Clark bought Series EE U.S. Savings Bonds. Redemption proceeds will be used for payment of college tuition for Clark’s dependent child. One of the conditions that must be met for tax exemption of accumulated interest on these bonds is that the
A. Purchaser of the bonds must be the sole owner of the bonds (or joint owner with his or her spouse).
B. Bonds must be bought by the owner of the bonds before the owner reaches the age of 24.
C. Bonds must be transferred to the college for redemption by the college rather than by the owner of the bonds.
D. Bonds must be bought by a parent (or both parents) and put in the name of the dependent child.

How well did you know this?

Not at all

Perfectly

Janice dropped off her annual records for preparation of her tax return. Determine the amount of taxable interest to be reported on Janice’s return.
• $1,000 interest earned on her 19-year-old son’s savings account (he had no other income and did not file a tax return)
• $50 interest income reported on Form 1099-OID
• $200 interest earned on a certificate of deposit (your client borrowed the entire $3,000 to purchase this CD)
• $30 value of a calculator that was a gift from the bank for opening a savings account
• $6,000 received on a prior year installment sale, of which $4,000 is interest and $2,000 is principal
A. $5,250
B. $4,250
C. $7,280
D. $4,280

How well did you know this?

Not at all

Perfectly

In February of the current year, Paul and Jean, a married couple, cashed a qualified Series EE savings bond they bought in November 2010. They received proceeds of $7,132, representing principal of $5,000 and interest of $2,132. In the current year, they helped pay their daughter’s college tuition. The qualified education expenses they paid in the current year totaled $4,000. They are not claiming an education credit for the expenses, and they do not have an education IRA. How much interest income can Paul and Jean exclude?
A.	$1,196
B.	$2,132
C.	$1,000
D.	$4,000

How well did you know this?

Not at all

Perfectly

All of the following are taxable interest income EXCEPT
A. Interest on U.S. Treasury bills.
B. Interest on a federal tax refund.
C. Interest on GI insurance dividends.
D. Interest on an IRA before its withdrawal.

How well did you know this?

Not at all

Perfectly

Johnny has various investments. He earns interest and dividends on a certificate of deposit (CD), a savings account, mutual funds, corporate stocks, and corporate bonds. Johnny files his tax returns using the cash method. The interest on the CD is rolled into a new CD with the old principal. He receives the interest from the corporate bonds and savings account on a semi-annual basis. The earnings from the mutual funds are not distributed and are used to purchase additional shares. The dividends from the corporate stocks are reinvested. What income does Johnny have to report for the current year?
A. Savings account and CD interest.
B. Corporate bond and savings account interest.
C. Corporate stock and mutual fund dividends.
D. All of the answers are correct.

How well did you know this?

Not at all

Perfectly

Scott and Dawn, husband and wife, are equal partners in a law firm. They had gross receipts of $120,000, less expense of $40,000 resulting in net income of $80,000 for the law firm. Dawn received an inheritance of $20,000. In addition, they had municipal bond interest of $3,000 and savings account interest of $2,000. What is their adjusted gross income on a married-filing-joint return?
A.	$102,000
B.	$105,000
C.	$82,000
D.	$142,000

How well did you know this?

Not at all

Perfectly

Cyril, who is 68 years of age, received Social Security benefits of $12,000, wages of $5,000, interest and dividends of $4,000, unemployment compensation of $3,000, and municipal bond interest of $1,500. Calculate Cyril’s adjusted gross income.
A.	$25,500
B.	$19,200
C.	$12,000
D.	$22,200

How well did you know this?

Not at all

Perfectly

In December 2020, Jim and Tina, a married couple with $50,000 in gross income, cashed qualified Series EE U.S. Savings Bonds, which they had purchased in January 2017. The proceeds were used to help pay for their son’s 2020 college tuition. They received gross proceeds of $3,500, representing principal of $3,000 and interest of $500. The qualified higher educational expenses they paid during 2020 totaled $2,100. Their modified adjusted gross income for 2020 was $80,000. How much of the $500 interest can Jim and Tina exclude from income for 2020?
A.	$225
B.	$200
C.	$500
D.	$300

How well did you know this?

Not at all

Perfectly

From the items listed below, determine the interest income includible on Mr. F’s tax return for the current year:
Received on deposits in a federal savings and loan association
$320
Received on share accounts in a credit union
$125
Received on money market certificates at fixed intervals of 1
year or less
$50
Toaster received for opening an account in a mutual savings bank
$26
Increase in the value of prepaid premiums applied to the payment
of premiums due on a life insurance policy
$95
A. $616
B. $526
C. $445
D. $465

How well did you know this?

Not at all

Perfectly

In December 2020, Fred and Tina, a married couple, cashed qualified Series EE U.S. Savings Bonds, which they had purchased in January 2018. The proceeds were used to help pay for their son’s 2020 college tuition. They received gross proceeds of $5,250, representing principal of $4,500 and interest of $750. The qualified higher educational expenses they paid during 2020 totaled $3,150. Their modified adjusted gross income for 2020 was $90,000. How much of the $750 interest can Fred and Tina exclude from income for 2020?
A.	$750
B.	$450
C.	$300
D.	$337.50

How well did you know this?

Not at all

Perfectly

Which of the following bonds can be a tax-exempt bond if issued in the current year so that the interest therefrom may be excluded from gross income?
A. $1 million of bonds issued by a municipality with 50% of the proceeds to be used by a private developer to create an industrial neighborhood of offices and warehouses. The developer will use sales and rents to repay 50% of the bond issue.
B. $1 million of bonds issued by a city with 50% of the proceeds to be invested in higher-yielding corporate bonds.
C. $1 million of bonds issued by a city with all the proceeds to be used to help finance a sports stadium owned by a nongovernment company.
D. $1 million of bonds issued by a state with all the proceeds to be used to finance student loans.

How well did you know this?

Not at all

Perfectly

In the current year, Ms. Smith withdrew her funds from a time-savings account before maturity and was charged a penalty of $2,000 for early withdrawal. The interest earned on the account in the current year was $1,600. Ms. Smith had no other interest income. How should Ms. Smith report this transaction on her current-year individual income tax return?
A. Report $1,600 interest income; the $2,000 penalty is not deductible.
B. Report $1,600 interest income; deduct penalty of $2,000 as an itemized deduction.
C. Report $1,600 interest income; deduct penalty of $1,600 as an adjustment to gross income to arrive at adjusted gross income.
D. Report $1,600 interest income; deduct penalty of $2,000 as an adjustment to gross income to arrive at adjusted gross income.

How well did you know this?

Not at all

Perfectly

``` Henry Adams, an unmarried taxpayer, received the following amounts during the current year: Interest on savings accounts $1,000 Interest on municipal bonds used for road construction $500 Dividends on General Steel common stock $750 Dividends on life insurance policies $200 Adams should report taxable income, after exclusions, if any, from dividends and interest for the current year in the amount of A. $1,650 B. $1,850 C. $2,150 D. $1,750 ```

``` Al and Iris Oran, who are married, received $10,000 in the current year as dividends from taxable domestic corporations. In the Orans’ current-year joint return, the amount of these dividends subject to tax is A. $9,800 B. $9,900 C. $10,000 D. $7,000 ```

``` Reggie owned stock in a corporation that has a dividend reinvestment plan. Reggie chose to participate in the plan and, during the year, the corporation paid dividends. The plan allowed Reggie to use the $3,000 dividend to buy 50 additional shares of stock at $60 per share when the fair market value of the stock was $72 per share. How much dividend income must Reggie report on his income tax return? A. $3,000 B. $3,600 C. $600 D. $0 ```

``` During 2020, Jack sold 500 shares of stock. On December 31, 2020, he received a capital gain distribution of $750 from his mutual fund. He owned his mutual fund shares since June 30, 2019. How should Jack report the capital gain distribution on his 2020 tax return? A. $750 short-term capital gain. B. $750 ordinary dividend. C. $750 long-term capital gain. D. $0 ```

``` John and Mary, a married couple, have a wide variety of investments and are cash-basis taxpayers. Because their self-employment earnings are considerable, they reinvested the following: $4,000 of mutual fund dividends and $5,000 of certificate of deposit interest. They also earned dividends on corporate stock of $12,000 that they received and spent. Interest of $2,000 that had accrued on a loan to a friend was not paid until the following year. What is the amount of interest and dividends currently taxable to them? A. $23,000 B. $16,000 C. $14,000 D. $21,000 ```

Ms. X, a cash-method taxpayer, received notice from her mutual fund that it has realized a long-term capital gain on her behalf in the amount of $2,500. It also advised her that it has paid a tax of $500 on this gain. The mutual fund indicated that it will not distribute the net amount but will credit the amount to her account. All of the following statements are true EXCEPT A. X is allowed a $500 credit for the tax since it is considered paid by X. B. X does not report a long-term capital gain because nothing was paid to her. C. X must report a long-term capital gain of $2,500. D. X is allowed to increase her basis in the stock by $2,000.

``` Ed owned stock in a corporation that has a dividend reinvestment plan. Ed chose to participate in the plan and, during the year, the corporation paid dividends. The plan allowed Ed to use his $4,000 dividend to buy 50 additional shares of stock at $80 per share when the fair market value of the stock was $96 per share. How much dividend income must Ed report on his income tax return? A. $800 B. $4,800 C. $0 D. $4,000 ```

``` E-Z Corporation, which has a dividend reinvestment plan, paid dividends of $20 per share during the year. Carlos, who owned 100 shares of E-Z Corporation prior to the distribution, participated in the plan by using all the dividends to purchase 20 additional shares of stock. He purchased the stock for $100 per share when the fair market value was $125 per share. How much dividend income must Carlos report on his income tax return? A. $2,000 B. $0 C. $2,500 D. $500 ```

In the current year, Sam received the following corporate distributions: • $1,500 dividend on stock held in a public corporation that offers a dividend reinvestment plan that lets him choose to use the dividend to buy (through an agent) more stock in the corporation at a price equal to its fair market value instead of receiving the dividends in cash. Sam chose to take part in the plan. • $2,500 dividend on stock held in a public corporation that offers a dividend reinvestment plan that lets him choose to use the dividend to buy (through an agent) more stock in the corporation at a price less than its fair market value. The fair market value of shares Sam purchased through the plan on the dividend payment date in the current year was $3,000. • $2,000 return of capital distribution reported on Form 1099-DIV. Based on the above information, how much ordinary dividend income must Sam report on his current-year return? A. $6,000 B. $6,500 C. $4,500 D. $4,000

Amy bought shares in the Oppenheimer Mutual Fund for $250. She received a capital gain distribution, also known as a capital gain dividend, of $90 on Form 1099-DIV for the current year. How should Amy report the capital gain dividend on her tax return? A. Reduce the basis on the stock to $160. B. Report the $90 as long-term capital gain. C. Report $90 as ordinary income. D. Need not report it.

``` Bob owned stock in a corporation that has a dividend reinvestment plan. Bob chose to participate in the plan and, during the year, the corporation paid dividends. The plan allowed Bob to use his $5,000 to buy 50 additional shares of stock at $100 per share when the fair market value of the stock was $120 per share. How much dividend income must Bob report on his income tax return? A. $1,000 B. $6,000 C. $0 D. $5,000 ```

Joe has owned shares in a company that has a dividend reinvestment plan since 2006. The plan allows him to invest more cash to buy additional shares of stock at a price less than fair market value. In the current year, Joe took advantage of that option and purchased 100 additional shares for $30 each. On the dividend payment date, the fair market value of the shares he purchased was $32 per share. Based on this information, Joe must report A. $200 of long-term capital gain income, based on the fact that Joe has owned shares in the company for more than 12 months. B. $200 of short-term capital gain income, based on the fact that Joe could not have taken advantage of the option to buy the shares at the discounted price if he had not taken part in the dividend reinvestment plan. C. $0. No income must be reported until the shares are sold. D. $200 as ordinary income, based on the difference between the amount Joe paid and the fair market value of the shares.

``` Joan owned stock in W Corporation, which has a dividend reinvestment plan. Joan decided to participate in the plan, and during the current year the corporation paid dividends. The plan allowed Joan to use her $3,000 dividend to buy 30 additional shares of stock at $100 per share when the fair market value of the stock was $130 per share. How much dividend income must Joan report on her current-year income tax return? A. $0 B. $900 C. $3,900 D. $3,000 ```

The following statements about dividends received from a dividend reinvestment plan are true EXCEPT A. Reinvested dividends are treated as ordinary dividends. B. Reinvested dividends are not taxable if not removed from the plan. C. Reinvested dividends are taxable and are added to the basis of the stock or mutual fund. D. Reinvested dividends are taxable in the year paid.

``` Matthew Kennedy received a dividend from Mayflow Corporation. Matthew has elected, using Mayflow’s dividend reinvestment plan, to purchase additional stock at FMV with the dividend received. The dividend was $1,500 and the FMV of the stock purchased was $1,475. A $25 service charge was applied to this transaction. What must Matthew report as dividend income on his tax return for the current year? A. $1,500 B. $0 C. $1,525 D. $1,475 ```

``` Geraldine works for a corporation with a dividend reinvestment plan. In lieu of dividends, Geraldine, who currently owns 1,500 shares of stock, bought 100 additional shares of stock at $2 a share and paid a service charge of $4.75. The FMV of the stock was $12. The service charge was deducted from the dividends prior to the purchase of the stock. What must she report on her tax return as dividend income? A. $1,204.75 B. $1,195.25 C. $200 D. $1,200 ```

``` Emily bought 50 shares of stock in Year 1 for $500. In Year 2, she received a return of capital of $100. She received an additional return of capital of $50 in Year 3. What must Emily report as long-term capital gain on her tax return for Year 3? A. $50 B. $100 C. $0 D. $150 ```

``` Mr. Z owned 200 shares of Corporation K common stock. During the current year, Mr. Z received distributions from Corporation K of $600 in cash dividends, 100 additional shares of K’s common stock, and rights to purchase 100 more shares. The distributions were not disproportionate and the shareholders were not given an option to receive cash instead of the stock and stock rights. The fair market value of the total stock dividend shares and the total stock rights were $200 and $100, respectively. What is the amount of income from these distributions that is includible in Mr. Z’s income for the current year? A. $700 B. $600 C. $900 D. $1,000 ```

Which of the following is NOT an example of income in respect of a decedent? A. The taxable portion of an inherited IRA. B. The taxable portion of payments received on an inherited installment obligation. C. Wages earned before death, but unpaid at the time of death. D. A dividend check that was received by the decedent, but cashed after death.

Income in respect of a decedent must NOT be included in the income of which of the following? A. The decedent’s final Form 1040 filing. B. Any person to whom the estate properly distributes the right to receive it. C. The decedent’s estate (if received by the estate). D. The beneficiary’s filing (if the right to income is passed directly to and received by the beneficiary).

Pablo died October 10 of the current year. Prior to his death, Pablo had done the following: He sold and delivered a truckload of oranges to a co-op but did not receive the $3,000 payment prior to his death. The payment was made to his executor. He sold a truck to Roscoe for $5,000, but the payment was not received until after his death. Pablo’s basis in the truck was $1,000. What is the amount of income in respect of a decedent for the above two payments? A. $3,000 for the oranges and $5,000 for the truck. B. No amount for either transaction. C. None of the answers are correct. D. $3,000 for the oranges and $4,000 for the truck.

Which one of the following statements concerning the consequences of income being classified as “income in respect of a decedent” is true? A. It receives no step-up in basis upon the decedent’s death. B. It is all treated as ordinary income to recipient. C. It must be included in the decedent’s final return. D. It is all taxable to the decedent’s estate.

Which of the following is income in respect of a decedent? A. Both cash received from a grandmother’s estate and royalties received on the deceased father’s published book; the right to receive these royalties was distributed from the father’s estate. B. Royalties received on the deceased father’s published book; the right to receive these royalties was distributed from the father’s estate. C. Cash received from a grandmother’s estate. D. Certificate of deposit received as a gift.

Ms. Smith, a cash-method taxpayer, died on September 30 of the current year. Subsequent to her death, but prior to December 31 of the current year, her beneficiary received the following: Rental income for September $1,500 Proceeds from a life insurance policy 20,000 Dividend declared on September 27of the current year 6,000 What amount is considered income in respect of a decedent? A. $3,000 B. $7,500 C. $1,500 D. $27,500

John, a retired insurance salesman, died in the current year. Using the information below, determine the amount of income in respect of a decedent (IRD) that must be reported on the estate’s Form 1041 income tax return. Wages Received before Death $10,000 Wages Received after Death $3,000 Renewal commissions received before death $20,000 Renewal commissions received after death $7,000 Life insurance (on John’s life) received before death $0 Life insurance (on John's life) received after death $100,000 A. $3,000 B. $10,000 C. $110,000 D. $170,000

Which of the following received after a decedent’s death is NOT income in respect of a decedent? A. Collection on a taxpayer’s accounts receivable that existed at the date of death. B. Installment gain in payments from a contract entered into prior to death. C. Rent for the month after the decedent’s death but pursuant to a lease entered into prior to death. D. Salary earned by the decedent but not received prior to death.

All of the following might include income in respect of a decedent EXCEPT A. The beneficiary’s return, if the right to the income is passed directly to the beneficiary and the beneficiary receives it. B. The return of any person to whom the estate properly distributes the right to receive the income. C. The estate’s return, if the estate receives it. D. The decedent’s final return.

Which of the following is false? A. Mr. Bryan, a single, accrual-basis taxpayer, died on November 10 of the current year. The salary earned and accrued by Bryan during the current year is not income in respect of the decedent. B. Income classified as income in respect of a decedent receives a step-up in basis upon the decedent’s death. C. Income in respect of a decedent is taxable as income to the recipient and is includible in the gross estate. D. Interest on installment debt accrued before the death of the cash-basis taxpayer is income in respect of a decedent.

``` Estate Z paid the following expenses (which did not relate to the income tax return) in its final taxable year: Attorney fees $6,000 Accountant fees $3,000 Executor fees $10,000 Miscellaneous administration expenses $4,000 How much can Estate Z deduct on its income tax return without waiving the deduction of these expenses for estate tax purposes? A. $0 B. $23,000 C. $19,000 D. $4,000 ```

``` Mr. A sold a tract of land and reported the sale using the installment method of accounting. The net sale price was $80,000, and the cost basis was $40,000. After A’s death, the final $10,000 installment (plus interest) was collected by his personal representative. What amount (other than interest) must be reported as profit on a Form 1041, U.S. Income Tax Return for Estates and Trusts, for the year in which the $10,000 was received? A. $0 B. $2,500 C. $5,000 D. $10,000 ```

Which of the following statements concerning income in respect of a decedent is true? A. Dividends declared and collected after the date of death are income in respect of a decedent. B. Income in respect of a decedent must be included in the decedent’s final income tax return. C. Collection of a cash-basis taxpayer’s notes receivable after the date of death is not income in respect of a decedent. D. Property that constitutes income in respect of a decedent has a carryover basis from the decedent.

Which of the following statements concerning the deduction for estate taxes by individuals is true? A. The deduction for estate tax can be claimed only for the same tax year in which the income in respect of a decedent must be included in the recipient’s income. B. None of the answers are correct. C. The estate tax deduction is subject to a 2% AGI floor. D. Individuals may claim the deduction for estate tax whether or not they itemize deductions.

Fred, a calendar-year, cash-basis taxpayer who died in June of the current year, was entitled to receive a $10,000 accounting fee that had not been collected before the date of death. The executor of Fred’s estate collected the full $10,000 in July of the current year. This $10,000 should appear in A. Only the decedent’s estate tax return. B. Only the estate’s fiduciary income tax return. C. Both the fiduciary income tax return and the estate tax return. D. Only the decedent’s final individual income tax return.

``` On January 1, Year 1, Mr. Shaw, a cash-basis taxpayer, sold land and reported the sale using the installment method of accounting. The net sales price was $300,000, and its cost basis was $150,000. The installment agreement called for five equal annual payments (plus accrued interest) due on January 1 beginning in Year 2. Since Mr. Shaw died on July 1, Year 5, the executor of his estate collected the final installment payment plus $5,000 of accrued interest. How much income in respect of a decedent should Mr. Shaw’s estate include on the Form 1041 for Year 6 (assuming the estate uses a calendar year as its tax year)? A. $32,500 B. $30,000 C. $5,000 D. $35,000 ```

Income in respect of a cash-basis decedent A. Covers income earned before the taxpayer’s death but not collected until after death. B. Receives a stepped-up basis in the decedent’s estate. C. Cannot receive capital gain treatment. D. Must be included in the decedent’s final income tax return.

Joseph died on November 2 of the current year. Joseph left all of his assets, including an IRA, to his two sons equally. From the information below, determine if Joseph’s sons qualify to claim an estate tax deduction on their returns when they report the taxable IRA distributions. Assets and Deductions House (no mortgage) $4,000,000 Stocks $7,920,000 IRA-distributed $400,000 Administrative expenses $60,000 A. Yes, because the amount of the income in respect of a decedent (the IRA) exceeds the estate’s deductions. B. No, because the amount of the income in respect of a decedent (the IRA) is less than $11,580,000. C. Yes, because the gross estate exceeds $11,580,000. D. No, because the amount of the taxable estate is less than $11,580,000.

Study Unit 3 Flashcards

(60 cards)