Tax Calculations Flashcards
Jill, who is in the highest income tax bracket, directs her ER to pay $18,000 of her salary to her son, who is a college student in the lowest income tax bracket. What are the tax consequences of Jill’s actions?
- Jill cannot assign the income to her son.
- If ER pays $$ to her son, Jill’s W-2 will include the $18,000 and she will have deemed to have made a gift to her son of $18,000.
- Jill will be required to file a gift tax return.
Joe, a taxpayer in the highest income tax bracket, owns rental property that generates $2000 of rental income per month. Joe instructs his rental property to pay the rent to Joe’s daughter, Mary, who is in the 15% income tax bracket. What is the tax consequences of Joe’s decision?
- Joe is owner of the rental property, and the $$ to his daughter will be an assignment of income.
- Joe will be taxed on the rental income, even though his daughter received the actual payments
Cornelius, owns 20 shares of Q stock. Q declares a dividend on Sept 1 for shareholders of record Sept 15, payable Oct 15. If Cornelius sells his shares on September 16, what are the tax consequences?
Cornelius will have dividend income, even though he will not own the stock on the dividend payment date, but he owned it on the date of record
Carla is a calendar year taxpayer. She receives a K-1 on March 1 of the current year, from a partnership that has a Jan 31 year end. The income will be included in what year?
- The income will be included in her current tax year because she must report her partnership distributive share for the partnership tax year ending in her tax year.
Imputed Interest on a Gift Loan
On Jan 1, Richie loaned his daughter, Beth, $90,000 to purchase a new personal residence. There were no other loans outstanding between Richie and Beth. Beth’s only income was $30,000 salary and $4,000 interest income. Richie had investment income of $200,000. Richie did not charge Beth interest. The relevant Fed Rate is 9%. What are the tax consequences?
- Richie must recognize imputed interest of $4,000.
- The $100,000 exemption applies, and Richie’s imputed interest (and Beth’s imputed interest expense) is limited to Beth’s net investment income.
- Ritchie is deemed to have made a gift to Beth of $4,000.
- The gift is eligible for the annual exclusion
Wendy, a 55 year old taxpayer, has begun receiving an annuity over her life expectancy of 25.5 years. She receives $1,500/month. Her contributions to the annuity were after tax and amounted to $91,800 (her basis). Payments began April 1 of this year. How much of her monthly income can Wendy exclude from taxes this year.
Exclusion ratio: $91,800 / $459,000 (which is $1,500 x 12 x 25.5)
Exclusion ratio: = 20%
20% x $1,500 x 9 months
Calculate Section 79 Life Insurance costs includible in income
Tom is 51 and works for ER A. Tom’s coverage with ER A is $80,000. Tom pays premiums of $50/year. Calculate the amount to include in Tom’s income.
ER a coverage (in thousands) $80.00
Less exclusion (in thousands) (-50.00)
Excess Amount (in thousands) 30.00
Multiply by cost per $1000/month (from table) x$0.23
Cost of Excess insurance for 1 month (.23 x 30) $6.90
Multiply by number of full months coverage x 12.00
Cost of excess insurance for tax year $82.80
Less premiums paid ($50.00)
Cost to include income as wages (W-2) $32.80
On Jan 1, Year 1, David was awarded a postgraduate fellowship grant of $6,000 by a tax-exempt ed. Organization. David is not a candidate for a degree and was awarded the grant to continue his research. What are the tax consequences?
- David is not a candidate for a degree - include all the grant received on his year 1 tax return.
- The issue of proration between years is not relevant.
Erwin was recently certified by his physician as terminally ill. Erwin sold his life insurance policy with a face value of $500,000 to a viatical settlement provider (VSP) for $340,000. Erwin paid $30,000 in premiums over the last few years. What are the tax consequences?
- Because Erwin was certified terminally ill, none of the proceeds he received from the VSP will be taxable to him.
- If, he were certified as chronically ill, the proceeds would be excluded from his gross income only to the extent the proceeds were used for long term care services
Jack surrendered his whole life insurance policy with a CV of $80k. No policy loans or distributions from the policy prior to the surrender. Jack had made $70k in aggregate premiums on the policy. The cost of insurance was $11k. The amount taxed at ordinary income tax?
answer: $10,000 ($80,000 - $70,000)
Jack sold his whole life insurance policy to Marting, who is both unrelated and will not suffer an economic loss at Jack’s death, for $95,000. The cash value is $80,000. Jack made $70k total premium payments. The cost of insurance was $11,000. What are the tax consequences?
The amount of gain in excess of the ordinary income component of the cash surrender value is capital gain. The Total amount of gain is calculated as $95,000 - ($70,000 - $11,000), or $36.000. The ordinary income component of the total gain is calculated in the same manner as the cash surrender and is deducted from the total gain.
To arrive at the amount taxed at long-term capital gain rates: $36,000 - ($80,000 - $70,000) = $26,000
Jack sold his term life insurance with a monthly premium of $600 to Martin, who is both unrelated and will not suffer an economic loss at Jack’s death, for $25,000. How is this situation taxed?
- The policy had no cash value, the cost of insurance in a term policy is presumed to be the premium. If Jack sold the policy to Martin on Jan 15, his basis would only be the remaining prepaid and unused premium of $300.00. Jack would have no ordinary income because there are not earnings in the policy, and the gain on the sale is all capital gain.
Jack’s basis in the policy is $300 (the remaining unused premium), and his capital gain is $24,700 ($25,000 - $300)
Paul has net Schedule C income of $40,000. Calculate his self employment tax, and his deductible portion.
- Step 1: ($40,000 x .9235 x .153) = $5,652
2. Step 2: ($40,000 x .9235 x .0765) = $2,826, which is the his deductible portion of the self-employment tax
Any forfeited interest on w/d’s from CD’s is deductible for AGI.
Dan has an immediate need for a large amount of cash and his most liquid asset is a 3 year CD that does not mature for 18 more months. When he redeems the CD, the bank charges him 3 months of Interest. Is the interest reportable income?
Yes, the interest reported as income, but it is also a deduction for AGI.
Front Loading - Alimony Recapture
- Short cut formula: R3 = P1 + P2 - 2P3 - $37,500
* Formula will work only if there is income for P3. - Regular Formula:
R3 = R1 + R2
R2 = P2 - (P3 + $15,000)
R1 = P1 - (P2 - R2 + P3) divided by 2 + $15,000
R1 = Recapture Year 1 P1 = payments year 1 R2 = Recapture Year 2 P2 = Payments year 2 R3 = Recapture Year 3 P3 = Payments year 3
