Transcript Presentation Title

EA Exam Prep – Part 1
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1
EA Exam Prep – Part 1
John O. Everett, Phd., CPA
Cherie J.Hennig, Phd., CPA
Learning Objectives
After attending this seminar, you should be able to:
• Identify the main components of the individual tax formula
• Recognize the key tax rules related to itemized deductions,
individual credits, and travel & entertainment expenses
• Determine the appropriate tax reporting for capital gain and
loss transactions
• Apply the special tax limitations associated with vacation
rental homes
• Determine the correct contribution and deduction for
payments to an Individual Retirement Account
• Recognize the key components of gift & estate taxes
3
Two Rules for Studying for the EA Exam
• Rule 1 – There are absolutely NO shortcuts in studying
for the EA Exam
• Rule 2 – Refer to Rule 1
4
Topic 1
Individual Tax
Computation
Format
1A Individual Taxation Format
Basic Components of Individual Formula:
Gross Receipts
(Statutory Exclusions)
Gross Income
(Deductions for Adjusted Gross Income)
Adjusted Gross Income
(Personal Exemption Deductions - $3,950 each)
(Larger of Itemized or Standard Deduction)
Taxable Income
6
1B The Standard Deduction
• 2014 Inflation-Adjusted Amounts: $6,200 (S),
$12,400 (MJ or SS), $6,200 (MS), and $9,100 (HH)
• Additional Amounts for Blindness and Age 65 $1,200 for MJ or MS, $1,550 for all others
• Limits on Full Standard Deduction – Married – Separately - Consistency requirement
– Eligible Dependent – Larger of (1) $1,000 or (2) Earned
Inc. + $350
• Question 1
7
Question 1
Mary Allen, age 12, earned $800 from a paper route
and received $1,200 of taxable interest during 2014.
Mary is claimed as an exemption by her parents.
Mary’s standard deduction for 2014 is:
a.
b.
c.
d.
$800
$1,000
$1,150
$6,200
8
1C Requirements to File
• General Rule – Gross income > (standard
deduction + exemption deduction of TP and
spouse)
• Additional Amounts - ($1,200 or $1,550) added to
the total, but only for taxpayer and spouse
• Social Security – generally excludable if gross
income plus ½ SS less than $25,000 S ($32,000 M)
• Question 2
9
Question 2
Mr. Todd, who is 43 years old, has lived apart from his wife
since May 2014. For 2014, his two children, whom he can
claim as dependents, lived with him the entire year, and he
paid the entire cost of maintaining the household. Assuming
that Mr. Todd cannot quality to file a joint return for 2014, he
must, nevertheless, file a return if his gross income is at
least:
a.
b.
c.
d.
$3,950
$6,200
$10,000
$13,050
10
1D Filing Req. - Exceptions
• Married – Separate - > $3,950 requirement
• Eligible Dependents - > $1,000 unearned income
• Self-Employed - > $400 net self-employment income (but
don’t forget gross income rule)
• Others – Tip income, special taxes, refunds
• Question 3
11
Question 3
In 2014, Mr. Oak quit his job to start his own sole
proprietorship. Prior to quitting his job, he had earned $5,000
in wages. At the end of the year, his sole proprietorship
showed $50,000 in sales. Mr. Oak will not have to file a
return if his sole proprietorship expenses are at least:
a. $49,601
b. $50,000
c. $50,400
d. a return will be required in any case
12
1E Exemptions – General
• Exemption Deductions - Available for taxpayer, spouse,
and any dependent meeting 5 tests (discussed below)
• $3,950 Deduction - For each exemption
• Year of Death – Full deductions allowed
• Dependents – Cannot take deduction on their own return
if eligible as a dependent of another
• Special Cases –
– Divorced Parents – Custody claims, unless waived in writing
– Multiple Support Rule – 10% minimum support, others waive
13
1F Exemptions – Five Tests of
Dependency
1. Relationship (family, including half- & step-, other than
cousins, nonrelative living with TP entire year qualifies)
2. Gross income (limited to amount of exemption, unless
child under age 19 or full-time student)
3. Support (>50% living necessities, include all, taxable
and nontaxable, except scholarships)
4. Filing Status (not MJ, unless no gross tax due)
5. Citizenship (US, and part-time resident of Mexico or
Canada)
14
Question 4(a)
Mr. and Mrs. White filed a joint return. During the year they provided
more than 50% support for the following individuals, all of whom are U.S.
citizens:
• The Whites’ single daughter, age 22, was a full-time student for eight
months. During the summer she earned $4,200, which was spent on
her support.
• Mr. White’s cousin, age 15, lived with them from May to December.
• Mr. White’s widowed mother, age 70, lived with them and had no
income.
• The Whites’ single daughter, age 20, lived with them the full year. She
had gross income of $4,300.
15
Question 4(b)
• Mrs. White’s widowed father, age 64, lived alone, and his sole source of
income was Social Security of $3,000.
• The Whites’ legally adopted son, age 10, lived with them from February
to December.
How many total exemptions may Mr. and Mrs. White claim on their
return?
a. 5
b. 6
c. 7
d. 8
16
Question 5
Ada lived with her son Robert and his wife Barbara. Ada’s only income
was a $1,500 fully taxable pension, which she spent on clothes and
recreation. Robert and Barbara paid Ada’s medical and drug expenses of
$600 for the year. Robert and Barbara’s total food expense for the
household was $6,000. The fair rental value of the lodging provided Ada
was $1,200 for the year, based on the cost of similar room facilities. What
was Ada’s total support for the year for purposes of determining whether
Robert and Barbara can claim Ada as a dependent?
a. $1,800
b. $3,330
c. $5,300
d. none of the above
17
Topic 2
Itemized
Deductions: A
Broad Brush
2A Medical Expenses - Family
• Deduction – Those of TP, spouse, dependent (10% of AGI
floor, 7.5% if age 65 or older through 2016)
• Dependent – Ignore gross income & filing status tests
• Expense – Must be for specific disease/illness
• Nonqualified – Over the counter drugs, cosmetic surgery
(unless deformity), health club dues, meals
Capital Expenditures Increasing Value of Property – Deduct
only to extent of not increasing the value of the property
(e.g., elevator, swimming pool, etc.)
• Question 6
19
Question 6
Billy had bypass heart surgery in February. At the advice of his doctor, he had
an elevator installed in his home so that he would not have to climb stairs. The
costs associated with this capital improvement are as follows:
• Cost of elevator installed
$5,000
• Increase in value of home due to elevator
2,500
• Cost of decorative lattice work over elevator
500
• Increase in value of home due to lattice work
0
• Maintenance and repair of elevator
500
None of the expenses were covered by insurance. How much would qualify as
deductible medical expenses, before any limitation?
a. $3,000
b. $2,500
c. $3,500
d. $5,500
20
2B State, Local & Foreign Taxes
• Personal Property Taxes – Deduct if based on value
• Taxes on Realty – Deductible only by owner, always based
on actual period of ownership (not payment; allocate
deduction, adjust selling price and basis)
• Assessments – Not deductible if add to value (e.g.,
sidewalks, streetlights, etc.)
• Sales Tax Option – May elect to deduct state & local sales
taxes rather than state & local income taxes (increase table
amount by taxes on large purchases)
• Question 7
21
Question 7
Humberto purchased a new home on March 15, 2014 in a county that
assesses real estate property taxes in the succeeding year (i.e., 2013
taxes assessed in 2014). At the closing on his new home, Humberto
received the following credits against the purchase price of the home:
– 2013 real estate property taxes
$2,000
– 2014 real estate property taxes pro-rated
420
In 2013, when the property tax bill for 2012 came in, Humberto had to
pay $2,000. The property tax bill for 2013 rose to a total of $2,350
which he paid when received in 2014. What are his tax deductions?
2013
a.
b.
c.
d.
$2,220
$ 200
$
0
$
0
2014
$2,350
$1,930
$1,930
$1,880
22
2C Interest Expense
• Interest Expense on Investments – Deduction is limited to
net investment income; excess is carryover
• Qualified Acquisition Indebtedness – Interest on 1st
$1,000,000 loans secured by home (two homes) and
spent on home; pre-10/14/87 debt qualifies, reduces
$1,000,000
• Home Equity Indebtedness – Interest on 1st $100,000 of
loans secured by home (two homes qualify) but NOT spent
on home; no limit on pre-10/14/87 debt
• Points – On a primary residence are deductible
• Question 8
23
Question 8
Earl took out a mortgage on his home for $250,000 in 1996. He
filed as single for the current year. In April, when the home had a
fair market value of $430,000, Earl took out a home equity loan for
$140,000. He used the proceeds as follows:
• $90,000 for home improvements
• $30,000 for payment of credit card debt
• $20,000 for purchase of securities which produce tax-free income
How much of the $140,000 loan would produce deductible interest?
a. $0
b. $90,000
c. $120,000
d. $140,000
24
2D Charitable Deductions
• Deductible – Cash, property, & credit card to listed orgs.
(not needy individuals); services not deductible
• Out-of-Pocket Exp – Deduct ($.14 per mile for auto)
• Overall Limit – 50% of AGI for both (5 year carryover)
• Public Limit – 50% of AGI (deduct first)
• Private Limit – 30% of AGI (deduct last)
• Special Rules – Property (FMV, limited to 30%AGI, or 50%
AGI if TP reduces FMV by gain not recognized), and
stringent dollar limit documentation rules
• Question 9
25
Question 9
Jerry’s adjusted gross income for the year is $40,000. How much of the
following contributions after limitations, if any, can he deduct on Schedule
A?
• $1,000 paid at a charity auction for a week at a fishing resort. The trip
is valued at $1,000.
• $500 to the local Chamber of Commerce.
• Land adjacent to his church for use as a parking lot. The fair market
value of the land is $35,000. Jerry paid $20,000 for the land. He doesn’t
elect to reduce the fair market value to qualify for a different AGI limit.
a. $20,000
b. $12,000
c. $10,500
d. $8,000
26
2E Casualty & Theft Losses
• Casualty – Fire, storm, shipwreck or other sudden destruction
• Temporary Living Expenses – Taxable, reduce by excess cost
• Initial Deduction – Lesser of (1) cost or (2) decrease in FMV of
property (could be repairs); reduce by insurance
• Personal Loss Floors - $100 per casualty/theft, and 10% AGI on
total net personal C&T loss
• Business Losses – No floors, and if completely destroyed, deduct
adjusted basis of property
• Casualty in Federally Declared Disaster Area – May elect to
deduct on prior-year return
• Question 10
27
Question 10
A flood damaged a personal auto owned by Mr. and Mrs. Montez. The area
of the flood was a federally-declared disaster area. Based on the following
facts, what is the amount of the Montez’s casualty deduction for the year
(assume election was not made to file an amended return for prior year)?
• Fair market value before the flood
$ 7,000
• Fair market value after the flood
1,300
• Cost basis
9,500
• Insurance proceeds
2,000
• Replacement thru disaster relief
1,100
• Adjusted gross income for the year
18,000
a. $700
b. $2,500
c. $3,600
d. $4,500
28
2F Miscellaneous Itemized
• Miscellaneous Itemized Not Subject to 2% Floor–
– Impairment-related work expense
– Deductions against Income in Respect of a Decedent
– Unrecovered annuity or pension costs of decedent
– Gambling losses of amateur, to extent of winnings
– Limited expenses of certain performing artists
• Miscellaneous Itemized Subject to 2% Floor:
– Investment expenses for other than rent or royalty income
– Allocated investment fees of nonpublic mutual funds (public funds
net these on Form 1099-DIV)
– Tax return preparation and litigation fees
– Legal fees related specifically to tax advice
– Certain hobby expenses
• Question 11
29
Question 11
Mr. G, a construction worker, had adjusted gross income of $20,000.
He incurred the following employment- and investment-related
expenses:
• Safety shoes
$ 100
• Union initiation fees
2,000
• Union dues
300
• Life insurance
800
• Jeans and flannel shirts used for work
200
• Management fees on taxable income-producing investments 1,200
• Legal expenses for drafting a will
100
He was not reimbursed for any expenses. What is the amount of his
miscellaneous expense deduction after any limitations?
a. $3,200
c. $3,600
b. $3,400
d. $4,600
30
Topic 3
Travel & Entertainment
Expenses
31
3A Meals and Entertainment
• Deductible Entertainment – Either directly related (bus.
discussion during entertain) or associated with (before or
after)
• Tickets - Treat as entertainment if TP present, and either
as gift or entertainment if TP is not present)
• 50% Disallowance – On M&E to ultimate payor
• Entertainment Facilities – Maintenance cost not deductible
• Country Club Memberships – Not deductible, but any direct
costs incurred at facility (e.g., lunch) may be
• Gifts - $25 limit per donee per year ($400/$1,600 for
service awards); related party rules apply
• Question 12
32
Question 12
Mr. Banks incurred the following unreimbursed business
expenses for which he has adequate proof for amounts &
purpose:
• Business meals
$2,000
• Business entertainment
1,000
• Business gifts (10 @ $30 each to 10 different people) 300
Based on the above, what is the amount Mr. Banks can deduct
before the percentage of adjusted gross income limitation?
a. $1,625
b. $1,650
c. $1,750
d. $2,650
33
3B Transportation and Auto Exp.
• Deductible Commuting Costs – Office to client, or
between two jobs, incremental costs for
tools/equip.
• Auto – Deduct larger of actual or standard mileage
• Actual Costs – All actual operating costs (gas, oil,
insurance, depreciation), prorate for business
usage
• 2014 Std. Mileage Rates - $.56 per business mile
Parking & Fees – If business, add to either method
• Actual Costs & Accelerated Depreciation – May not
switch to Standard Mileage Method
34
3C Travel Expenses
• Travel Expenses – Includes transportation, meals,
lodging, incidentals while “away from home” on
bus.
• Tax Home – Workplace, determined by time spent,
activity, & total income; may be personal residence
Temporary Location – In travel status unless (1)
more than one year, or (2) indefinite; in both
cases, tax home has moved to new location
• Transportation Costs – For domestic travel,
deductible if trip is “primarily business” (bus. days
> personal days); travel days are business days
35
Topic 4
Tax Credits for Individuals:
A Broad Brush
36
4A Child & Depend. Care Credit
• Credit – Qualified amount x Qualified percentage
Qualified Amount – Smallest of:
– Actual qualifying child care expenses
– $3,000 (one dependent), $6,000 (two or more)
– Earned income of lesser earning spouse (impute at $250/
$500 mo. for each month spouse is disabled or full-time
student)
• Qualified Percentage –
– 35% if AGI <= $15,000
– decreases 1% for each additional $2,000 AGI
– constant at 20% once AGI > $43,000
• Question 13
37
Question 13
Ed and Sue both work and their daughter attends
day care. The cost of day care is $300 per month.
Ed’s earned income for the year was $10,000;
Sue’s earned income was $40,000. They had no
other income or adjustments. What amount of
child care credit can they claim?
a. $480
b. $600
c. $720
d. $900
38
4B Credit for Elderly & Disabled
• Credit – For (1) taxpayers age 65 or older with
limited social security, or (2) permanently disabled
individuals of any age
• Formula for Credit – 15% of:
–Initial Amount*=$5,000 S, $7,500 MJ, $3,750 MS
–Less any social security payments received
–Less ½ AGI > $7,500 S, $10,000 MJ, $5,000 MS
* Disabled substitute disability pay, if smaller
• Question 14
39
Question 14
Dan and Marge filed a joint return for 2014. Dan
was 67 years old and Marge’s 65th birthday was
January 1, 2015; neither of them is disabled.
During 2014, they received total nontaxable
income of $3,800 from Social Security. Their
adjusted gross income was $15,000. How much
can they claim as a credit for the elderly?
a. $0
b. $120
c. $180
d. $375
40
4C Earned Income Tax Credit
• E/I Credit – Refundable if no tax due (up to 60%)
• Married – Must file MJ; if divorced, custody parent
• Claimant – May not be a “qualifying child”
• Investment Income Limit for Credit - $3,350 (2014)
• Qualifying Child –Natural/step/foster/adopted, if <
19 or F/T student < age 24, lived w/ TP > ½ yr.
• Qualifying Earned Income – Deferred comp, meals
& lodging, excluded fringes (but not alimony,
unemployment compensation)
• Computation – Max for >1; phaseouts apply
• Question 15
41
Question 15
Which taxpayer may claim an earned income credit for 2014?
a. Ginger, 50 years of age, who has a qualifying child for
whom she provides sole support. She received $15,000 in
Social Security and $500 in interest income in 2014.
b. Cinnamon, 42 years old, was divorced the entire year. She
had investment income of $2,800 and wages of $7,000.
c. Woody, age 51, is single and lived in a homeless shelter
during 2014, and received retirement benefits of $5,000.
d. Cherie, age 35, who is single and has one qualifying
child. She had $48,000 wages and AGI of $50,000.
42
4D Child Tax Credit
• Child Tax Credit - $1,000 for qualifying child
< age 17 (natural/step/foster, brother/sister
& step, or direct descendant of any of
these); limited to tax liability
• Phaseout of Credit - $.50 for each $1,000
AGI > $110,000 (MJ), $75,000 (S or HH),
$55,000 (MS)
• Refundable Portion – 15% of taxpayer’s
earned income (+ combat pay) > $3,000
43
4E Education Credits
• Credits – For higher education expenses other than
room & board; claimed by person eligible to take
exemption (even if paid by dependent)
• American Opportunity Scholarship Credit – Up to
$2,500 per student for first 2 years of postsecondary education expenses (100% of first
$2,000, 25% of next $2,000); $2,500 max
• Lifelong Learning Credit – 20% per TP for first
$10,000 expenses for all courses ($2,000 max)
• AGI Phaseouts – $160,000-$180,000 MJ &
$80,000-$90,000 S for AOS, $100,000-$120,000 MJ
& $50,000-$60,000 S for LLC
• Question 16
44
Question 16
Jerry has two dependent children, Greg and Mandy, who are
attending an accredited college in 2014. Greg is a graduate
student (fifth year of education) who spent $12,000 for tuition
and fees. Mandy, a freshman with no prior post-secondary
education, had tuition expenses of $4,000. Jerry meets all the
income and filing status requirements for the education credits.
There is no tax-free assistance to pay these expenses. Jerry’s
tax liability before credits equals $12,000. What is the maximum
credit that Jerry may claim on his 2014 tax return?
a. $2,500 Lifetime Learning Credit (LLC)
b. $3,000 American Opportunity Credit (AOC)
c. $2,500 AOC and $2,000 LLC
d. $2,500 AOC and $1,800 LLC
45
4F Other Individual Credits
• Residential Energy Credits – $500 maximum,
reduced by any previous year RE credits
• Adoption Credit – Up to $13,190 for qualified
expenses (automatically use maximum amount for
special needs child, even if cost is less)
• Excess FICA Taxes Paid – If more than one
employer and total wages exceed $117,000
• Elective Deferrals and IRA Contributions –
50%, up to $2,000, depending on income limits
46
Topic 5
Determining the
Adjusted Basis
of Property
47
5A Basis of Purchased Property
• Adjusted Basis = Cost + Installation + Capital
Improvements – Depreciation/Cost Recovery
• Taxes & Closing Costs – Add to basis
• Above-Mkt. Price – If business, excess is goodwill
• Liabilities Assumed – Always in basis
• Property as Compensation – FMV of property received is
taxable, and that becomes basis
• Securities – Use specific ID; otherwise, FIFO flow; if
stock split, reallocate cost to all
48
5B Stock Dividends & Securities
• Stock Dividends – Nontaxable; spread original cost
over old & new shares (tack holding periods); if
blocks of securities, allocate within each block
• Fractional Shares – Allocate basis (relative FMVs)
• Stock Dividends – Different Class – if nontaxable,
allocate old cost by relative FMVs of both stocks
• Proportionate Stock Rights – If nontaxable,
allocation required if FMV rights > 15% FMV of
stock
• Question 17
49
Question 17
On January 3rd of the current year, Wilson purchased 300 shares
of common stock in Corporation Why for $120 per share. Four
months later he purchased 100 additional shares at $180 per
share. On December 10th of the current year, Wilson received a
20% nontaxable stock dividend. The new and the old stock are
identical. What is the amount of Wilson’s basis in each share of
Corporation Why stock after the stock dividend?
a. 480 shares at $112.50 a share
b. 360 shares at $120 a share and 120 shares at $180 a share
c. 360 shares at $120 a share and 120 shares at $150 a share
d. 360 shares at $100 a share and 120 shares at $150 a share
50
5C Basis – Gift Property
• Gift Basis – Gain – Always use donor’s basis
• Gift Basis – Loss – Use lesser of (1) donor’s basis
or (2) FMV of gift at date of gift
• If FMV < Donor’s Basis – And amount realized is
between the two possible bases, no gain or loss
• Gift-Tax Add-On – To donor’s basis, portion of gift
tax related to appreciation in value (100% for pre77)
• Donor Holding Period – Tacks if donor basis used
• Figure 1(a) and 1(b)
• Questions 18 and 19
51
Figure 1(a)
Facts: Taxpayer receives 100 shares of stock as a gift on
4/1/2014, cost of stock to donor on 1/1/2011 was $10,000,
and donor paid a gift tax of $1,200. FMV of stock on date of
gift was $15,000. Results assuming various sales prices are:
a. $18,000 - $7,600 LT gain [$18,000 – ($10,000 + ($1,200 x
5/15))]
b. $6,000 - $4,400 LT loss [$6,000 – ($10,000 + ($1,200 x
5/15))]
c. $12,000 - $1,600 LT gain [($18,000 – ($10,000 + ($1,200 x
5/15))]
Note – In all three cases, gain or loss was long-term because the donor’s
basis was used; therefore, holding periods tack
52
Figure 1(b)
Facts: Taxpayer receives 100 shares of stock as a gift on
4/1/2014, cost of stock to donor on 1/1/2011 was $10,000,
donor paid a gift tax of $1,200. FMV of stock on date of gift
was $8,000. Results assuming various sales prices are:
a. $18,000 - $8,000 LT gain ($18,000 – $10,000; no addon)
b. $6,000 - $2,000 ST loss ($6,000 – $8,000; no add-on)
c. $8,500 - $0 gain or loss (SP between basis for gain and
loss)
Note – In case (b), loss was short-term because the donor’s basis
was not used; therefore, holding periods do not tack (4/1/2014)
53
Question 18
In 2008, Paul received a boat as a gift from his father. At the
time of the gift, the boat had a fair market value of $60,000
and an adjusted basis of $80,000 to Paul’s father. After Paul
received the boat, nothing occurred affecting Paul’s basis in
the boat. In 2013, Paul sold the boat for $75,000. What is the
amount and character of Paul’s gain?
a. ordinary income of $15,000
b. long-term capital gain of $15,000
c. long-term capital loss of $5,000
d. neither a gain or a loss
54
Question 19
Juan received a gift of property from his uncle. At
the time of the gift, the property had a fair market
value of $100,000 and an adjusted basis to his uncle
of $40,000. Juan’s uncle paid a gift tax on this
transfer of $18,000. What is Juan’s basis in the
property?
a. $40,000
b. $50,800
c. $60,000
d. $128,000
55
5D Basis – Inherited Property
• General Rule – FMV at date of death (state
valuation if no federal estate tax return)
• Jointly –Held – FMV on inherited portion
• Alternate Valuation Date (AVD) – 6 months after
date of death; may elect only if (1) value of
adjusted gross estate decreases, and (2) estate tax
decreases
• Distributed Prior to AVD – Use FMV @ distribution
• Holding Period – Automatically long-term for all
• Question 20
56
Question 20
Mr. Hill inherited 1,000 shares of Pro Corporation stock from his
father who died on March 8, 2013. His father paid $10 per share
for the stock on September 1, 1990. The fair market value of the
stock on the date of death was $50 per share. On September 8,
2013, the fair market value of the stock was $60 per share. Mr.
Hill sold the stock for $75 a share on December 5, 2013. The
estate qualified for, and the executor elected, the alternate
valuation method. A federal estate tax return was filed. What
was Mr. Hill’s basis in the stock on the date of sale?
a. $50,000
b. $60,000
c. $75,000
d. $150,000
57
5E Basis of Personal Property
Converted to Business Use
• Basis for Gain – Always cost of property
• Basis for Loss – Lesser of (1) cost or (2) FMV of property
on date of conversion
• Loss Basis – Is always the depreciation basis
• Date of Conversion – Determines the cost recovery
method (e.g., ACRS, MACRS, etc.)
• Question 21
58
Question 21
Mary converted her personal residence ($200,000
cost) to rental property at a time its fair market
value was $170,000. Mary sold the property for
$100,000, after properly deducting $40,000 of
depreciation. Mary’s loss on the sale is:
a. $0
b. $30,000
c. $70,000
d. $100,000
59
Topic 6
Netting Capital Gains &
Losses
of Individuals
60
6A Capital Asset Definition
• Capital Asset Definition – NEVER includes:
– Property held for resale (e.g., inventory)
– Property used productively in a trade or business
– Copy, literary or artistic composition (c/o basis)
– Ordinary accounts or notes receivable
– U.S. Government. publications issued at a discount
– Commodities and derivatives, hedges, business supplies
• What is a Capital Asset? – Purely personal assets
and Investment properties
• Question 22
61
Question 22
Yang and May Ling owned a fashionable handbag sole proprietorship in
New York. They had the following transactions in 2014:
• $600,000 on sale of a rare coin collection May inherited in May 2010
• $100,000 in accounts receivable from sales of 500 bags in May 2014
• $50,000 from sale of stocks held in their personal account that were
purchased in 2010
• $5,000 for the purchase of supplies such as computer paper,
invoices, etc. used in the business
What is the proper gross amount and characterization of capital
transactions that Yang and May Ling should report for 2014?
a. $650,000 as long-term capital gain
b. $695,000 as ordinary income
c. $50,000 as long-term capital gain
d. $95,000 as short-term capital gain
62
6B Capital Gain & Loss Netting
• 3-Step Process – (1) Net all S/Ts, (2) Net all L/Ts
(held > 1 yr.), (3) if same sign, add separately to
income under four basic rules below; if opposite
signs, add net difference to income under four
basic rules below.
• Final Result – 4 Basic Rules (for final net result):
– S/T Capital Gain – Treat as ordinary income
– S/T Capital Loss - $3,000 offset against ordinary income
– L/T Capital Gain – 15% max. rate (0% if 10%/15%
bracket, 20% if 39.6% bracket)
– L/T Capital Loss - $3,000 offset against ordinary income
• Figure 2
63
Figure 2
2010
2011
2012
Current-Year Capital Transactions (Before c/o):
ST Gain
$16,000
$18,000
$ 3,000
ST Loss
(18,000)
(26,000)
( 2,000)
LT Gain
24,000
2,000
8,000
LT Loss
(12,000)
( 1,000)
( 2,000)
Net Result:
Net ST
( 2,000)
( 8,000)
( 3,000)
Net LT
12,000
1,000
6,000
Adjusted Gross Income:
Salary
$70,000
$70,000
$70,000
Capital
10,000*
( 3,000)
3,000*
AGI
$80,000
$67,000
$73,000
Capital Loss Carryovers (c/o):
ST Loss c/o
0
( 4,000)
0
LT Loss c/o
0
0
0
* Qualifies for 15% maximum rate
2013
2014
$ 2,000
( 6,000)
4,000
( 8,000)
$ 9,000
( 1,000)
8,000
( 6,000)
( 4,000)
( 4,000)
7,000
( 2,000)
$70,000
( 3,000)
$67,000
$70,000
5,000
$75,000
( 1,000)
( 4,000)
0
0
64
6C Preferential Tax Rates for
Long-term Capital Gains
• If Net L/T Gain – Sort by appropriate rates
(ST,15/20,25,28)
• 15% (or 0% or 20%) - Basic rate for most L/T capital gains
• 25% - For “unrecaptured Sec. 1250 gain” on realty
• 28% - For collectibles, Sec. 1202 stock gain, all c/o’s
• Netting Process – Four columns for 4 rates:
– If 15/20% Nets to a Loss – Net against 28% result first
– If S/Ts Net to a Loss – Net against 28% result first
– If 28% Nets to a Loss – Net against 25% result first
– If 25% Nets to a Loss – Net against any 15% gain result
• Figure 3
• Question 22
65
Figure 3
All
28%
25%
15%
Short-Term Long-Term* Long-Term Long-Term
(4,000)
9,000
(9,000)
(5,000)
14,000
(10,000)
4,000
6,000
12,000
1,000
(3,000)
(4,000)
8,000
14,000 ** (3,000)
|
(3,000) <-------------------------v
v--------- (4,000)
1,000 **
* Includes any long-term capital loss carryover
** Result - $1,000 taxed at a 28% rate, and $14,000 taxed at
a 25% rate
66
Question 23
In December, Emily sold an antique rug for $4,100. She
bought the rug two years ago for $1,100. What is her
taxable gain and at what maximum rate will it be taxed?
a. $3,000 long-term capital gain, taxed at regular rate
b. $3,000 long-term capital gain, taxed at 28% rate
c. $1,500 long-term capital gain, taxed at regular rate
d. $1,500 long-term capital gain, taxed at 28% rate
67
6D Reporting Net Capital Losses
• $3,000 – Maximum total ordinary income offset for
net S/T and net L/T losses each yr. (use S/T first)
• $1,500 – Married – filing separately limit
• If Taxable Income < Capital Loss – Full limit (up to
$3,000) still assumed utilized in computing
carryover
• Capital Loss Carryover – Indefinite (retain
character)
• Decedent’s Return – No carryovers possible
• Question 24
68
Question 24
During the current year, Nancy had the following transactions:
– Short-term capital loss
$(2,400)
– Short-term capital gain
2,000
– Short-term capital loss carryover from 2013
(1,400)
– Long-term capital gain
3,800
– Long-term capital loss
(8,000)
What is the amount of her capital loss deduction, and what is the
amount and character of her capital loss carryover to the next year?
•
Deduction
Carryover
a.
$0
$6,000 long-term
b.
$3,000
$3,000 long-term
c.
$6,000
$-0d.
$3,000
$3,000 short-term
69
Topic 7
Vacation Home Rentals
Under Sec. 280A
70
7A Sec. 280A Classifications
• Sec. 280A – 3 Basic Vacation Home Rules:
– De Minimis – Ignore income and expenses if rental days < 15
– Insignificant Personal Usage – If <= larger of 14 days or 10% days
rented, deduct loss (passive?)
– Significant Personal Use – If > larger of 14 days or 10% days rented,
deductions limited to income (carryover any unused losses to future
years)
• If Limit Applies – Deduct (1) interest/taxes/casualty & theft
losses first, then (2) non-depreciation expenses, then (3)
depreciation, up to the point of $0 net income
71
7B Sec. 280A Loss Limitations
• Allocations of Expenses to Rental & /Personal – IRS
(days actually used), Bolton decision (365 days for
int./taxes)
• Co-owner Use & Swaps – Count as personal days
• Repair Days (substantial) – Not personal days
• Figure 4
• Questions 25 and 26
72
Figure 4
J owns a cabin by the beach that was held out for rent for the entire
year of 2014. J actually rented the cabin for 120 days and used the
cabin for 30 days of personal vacation. J received $2,850 gross rents
for the 120-day period and incurred the following expenses in 2014:
interest, $1,600; taxes, $1,200; repairs, $500; utilities, $800; and
depreciation, $1,500. Since her personal usage (30 days) exceeds the
greater of 14 days or 10% of the days rented (12 days), her expense
deductions under the two methods would be as follows:
IRS
Method
Gross rents
$2,850
Less expenses otherwise deductible:
Interest ($1,600) (*120/150 & **120/365) (1,280)*
Taxes ($1,200) (*120/150 & **120/365) ( 960)*
Limit on Remaining Rental Expenses
$ 610
Bolton
Method
$2,850
( 526)**
( 394)**
$1,930
73
Question 25
Peter owned a cottage on the lake that he bought in 2013. In
2014, he rented the cottage for 10 days to a stranger and
used the cottage for 20 days for his own personal use. The
cottage was not used the rest of the year. Peter had rental
income of $1,000 and he paid $600 for repairs. How should
he report these activities on his 2014 return?
a. $1,000 income, $600 expense
b. $333 income, $200 expense
c. $-0- income, $-0- expense
d. $667 income, $400 expense
74
Question 26
Mr. Lee rents his vacation home. Given the following information, determine
the correct treatment of the rental income and expenses on his 2014 return.
• Days rented in 2014 to unrelated parties at a fair rental price 56
• Days used for personal purposes in 2014
18
• Total income and (expenses) during 2014:
Gross rental income
$ 5,000
Allocated interest and taxes
(4,000)
Other allocated expenses
(1,500)
Net rental loss
(500)
a. $500 loss should be shown on Schedule E, Form 1040
b. interest & taxes deducted on 1040 Schedule A, as itemized deductions
c. Mr. Lee should include none of the income or expenses from beach house
d. rental expenses (other than interest & taxes) limited to the gross rental
income in excess of deductions for interest & taxes allocated to rental use
75
Topic 8
Individual Retirement
Accounts
76
8A IRAs – Qualifications
• Required – Earned comp., < age 70½ at year end
• Spouses – Each has account (total comp. limit)
• Contributions – Up to due date (no extension);
owner cannot be trustee (bank or fiduciary is OK)
• Investments in IRA – Not allowed in saving bonds
or collectibles (except U.S. gold or silver coins OK)
• Rollovers – If w/d, redeposit w/i 60 days; no loans
• Death – IRA included in estate, can only be rolled
over by spouse, can combine with spouse, basis
carryover
77
8B IRAs – Earned Compensation
• “Earned” – Limits IRA contribution/deduction
• Does Not Include - Deferred comp, unearned
sources (interest, dividends, pension income, etc.),
or a limited partner’s share of income
• Includes – Wages/salary/commissions, S/E income
(less ½ SE tax & other retirement contributions),
taxable alimony & separate maintenance payments
• S/E Loss – Does not offset salary for limit
• Question 27
78
Question 27
Which of the following is compensation for the purpose of
contributions to individual retirement accounts?
a.
b.
c.
d.
deferred compensation received
foreign earned income excluded from income
pension or annuity income
taxable alimony and separate maintenance
79
8C IRAs: Prohibited Transaction
• Prohibited Transactions – Plan and D/Q Person:
– Transfer income/assets to “disqualified” person
– Fiduciary acting in its own self-interest
– Consideration to fiduciary from plan party
– Any acts between plan/disqualified Person (sell, lending)
• IRA Rule – If prohibited transaction, lose IRA
status as of 1st day of year, treated as distribution
of cash (FMV of account) as of first of year
80
8D Maximum Contrib. & Deduct.
• Maximum Contribution – Lesser of $5,500 per spouse
($6,500 if 50 or older), or TPs’ combined earned income
• Maximum Deduction – Depends on other plan participation:
• Neither Spouse Participates – Maximum $5,500/$6,500
each
• Both Spouses Participates – Reduce $5,000/$6,000
proportionately for AGI between $60,000 and $70,000
($96,000 and $116,000 if married filing jointly)
• One Spouse Participates – If covered, same as both; if not
covered, AGI phaseout over $181,000-$191,000 [$200
minimum contribution allowed]
• Question 28
81
Question 28
Lenny and Norma file a joint return for tax year 2014. Lenny
is covered by a retirement plan but Norma is not. Norma
wishes to make a contribution to a traditional IRA, and her
earnings alone are $1,500. The combined earnings on the
joint return are $163,000 (the same as the modified AGI).
Which of the following is correct?
a. Norma may make a nondeductible contribution of
$2,000
b. Norma may make a deductible contribution of $5,500
c. Norma may not make any contribution
d. Norma may make a deductible contribution of $3,000
and a nondeductible contribution of $2,500
82
8E Roth IRAs
• Roth IRA – No age limit for contributions, contribute up to
$5,500/$6,500; nondeductible, but no tax on withdrawals
after 5-year period; reduce $5,500/$6,500 by contributions
to regular IRA
• Phaseout – MJ($181,000-$191,000), S($114,000-$129,000)
• Tax-Free Distributions – After 5 yrs. if age 59½, disabled,
or first-time home buying
• Regular IRA – May be converted to Roth, but must
recognize deferred income at conversion
Recharacterizations – Possible if trustee to trustee
• Question 29
83
Question 29
Which of the following is correct regarding contributions to a
Roth IRA?
a. contributions may be made regardless of age provided
other requirements are met
b. contributions may be deducted if you are within certain
income limits
c. contributions may be deducted if you are not covered
under a retirement plan
d. contributions may not be deducted, but earnings are
taxable when distributed
84
8F Educational (Coverdell) IRA
• Educational IRA – Designate as such, for education
expenses of beneficiary (child < 18)
• Contributions - $2,000 maximum total per child, no
deduct; AGI phaseouts begin at @$95,000 (single,
over $15,000 range) or $190,000 (MJ, over
$30,000 range)
• Amounts Spent – Nontax. if for qualified education
exp; any excess taxed @ regular tax rate + 10%
• Req. Withdrawal – Within 30 days of beneficiary
reaching age 30, or date of death if before
• Exceptions – Special needs, military advanced ed.
• Question 30
85
Question 30
Which of the following is correct regarding a Coverdell
(education) IRA?
a. contributions are deductible
b. contributions other than cash may be made
c. contributions may be made until age 30
d. the annual contribution limit is $2,000 for
each child, no matter how many education
IRAs are set up for that child
86
8G Sec. 401(k) Plans
• CODA – Employee choice - cash or deferred annuity
• Contributions – Excluded, 100% vested, deferred
taxes, tax-free accumulations
• Nondiscrimination - Tests for highly comp.
• Sec. 403(b) Plan – Similar plan for educators
• Maximum Contribution - $17,500 per year ($23,000 if
age 50 or older) – not excluded from payroll tax
• Overall Limit on Contribution – Lesser of 25% comp or
$51,000, less all contributions to qualified plans
87
Topic 9
Federal Gift Tax –
A Quick and Dirty
Overview
88
9A Filing Requirements
• Certain “Gifts” Are Not Gifts for Gift Tax Purposes:
– Tuition ore medical expenses paid for someone else
– Political contributions
– Gifts to spouse or charity
– Gifts to 3rd party <= $14,000 (if present interest)
• Spouses – No “joint return,” but may elect to split gifts
• Generation-Skipping Transfer Tax – Any gift to “skip”
(2 generations younger), taxed at maximum rate,
$5,340,000 exemption
• Unified Credit (below) – Means no tax on first
$5,340,000 of taxable transfers.
• Question 31
89
Question 31
Donald is a tax return preparer. His client, Jody Black, told him that she
had made several gifts during 2013 and asked if she should file a gift tax
return, and if so, how much tax she would owe. Jody has never given a
taxable gift before. Donald reviewed Jody’s gift transactions as follows:
• Paid medical bills, of $15,000 for her father and $8,000 for her mother
• Bought a sports car for her son; cost was $37,000
• Gave $15,000 cash to her church
• Prepared her will leaving her $75,000 vacation cabin to her sister
• Sent a wedding gift of $1,000 to her niece
What is Donald’s best answer to Jody’s questions?
a.
b.
c.
d.
no return is due because gifts to family are excluded
must file gift tax return and will owe tax on $37,000
must file gift tax return but no tax owed due to the unified credit
none of the above
90
9B Types of Gifts
• Types of Gifts – Include bargain sales, release of
general power of appointment, forgiveness of debt
(family), below-market loans, beneficiary
assignment, property settlements in divorce,
exchanging single annuity for joint annuity
• Donee Disclaimer – Donor must receive from
donee within 9 months of gift; if so, no gift has
been made
• Due Date – By April 15th after year end (penalties
exist for late filing and/or payment)
• Deceased Donor – Due date is earlier of (1) gift tax
due date (2) estate tax due date (plus extensions)
91
9C Computing Taxable Gifts
• Gift-Splitting – By married couple, splits gifts in
half; (must file 709 with signature agreements)
• Annual Exclusion - $14,000 per donee per year for
gifts of present interest (can currently enjoy)
• Marital Deduction – Unlimited for any gift to (U.S.
citizen) spouse that is not a terminable interest
Charitable Deduction – Unlimited for gifts of
present interests to recognized charities
• Credits - $2,081,800 unified credit (UC), prior gift
taxes paid (UC was $2,045,800 in 2013)
• Figures 5, 6, 7 and 8 (note – uses 2013 UC)
• Question 32
92
Figure 5 No Gift-Splitting
Gifts made by Tom Baker
Cash to daughter Jill
Cash to charity (United Givers Fund)
Cash to wife Jan
Land to son Jack (fair market value)
Cash to granddaughter Alexandra
2013
$ 2,183,000
24,000
60,000
2,270,000
1,580,000
2014
$ 817,000
32,000
40,000
290,000
320,000
2015
$ 2,353,000
40,000
100,000
2,466,000
14,000
Gross gifts
Gift-splitting election (1/2 of all third-party gifts)
Annual exclusions (5, including United Givers Fund)
Charitable deduction (after reflecting exclusion)
Marital deduction (after reflecting exclusion)
6,117,000
(0)
(70,000)
(10,000)
(46,000)
1,499,000
(0)
(70,000)
(18,000)
(26,000)
4,973,000
(0)
(70,000)
(26,000)
(86,000)
Adjusted taxable gifts – current year
Add: Adjusted taxable gifts – prior years
5,991,000
0
1,385,000
5,991,000
4,791,000
7,376,000
Total taxable lifetime gifts
5,991,000
7,376,000
12,167,000
2,896,200
(296,400)
(2,045,800)
$ 554,000
4,812,600
(850,400) *
(2,045,800)
$1,916,400
Tax on total taxable lifetime gifts (from unified rates)
2,342,200
Less credit for prior gift taxes paid
0
Less unified credit (maximum)
(2,045,800)
$ 296,400
Net tax liability – current year
93
Figure 6 Gift Splitting – Tom
Gifts made by Tom Baker
Cash to daughter Jill
Cash to charity (United Givers Fund)
Cash to wife Jan
Land to son Jack (fair market value)
Cash to granddaughter Alexandra
2013
$ 2,183,000
24,000
60,000
2,270,000
1,580,000
2014
$ 817,000
32,000
40,000
290,000
320,000
2015
$ 2,353,000
40,000
100,000
2,466,000
14,000
6,117,000
(3,028,500)
(68,000)
(0)
(46,000)
1,499,000
(729,500)
(70,000)
(2,000)
(26,000)
4,973,000
(2,436,500)
(63,000)
(6,000)
(86,000)
Adjusted taxable gifts – current year
Add: Adjusted taxable gifts – prior years
2,974,500
0
671,500
2,974,500
2,381,500
3,646,000
Total taxable lifetime gifts
2,974,500
3,646,000
6,027,500
1,135,600
0
(2,045,800)
$
0
1,404,000
0
(2,045,800)
$
0
2,356,800
0
(2,045,800)
$ 311,000
Gross gifts
Gift-splitting election (1/2 of all third-party gifts)
Annual exclusions (5, including United Givers Fund)
Charitable deduction (after reflecting exclusion)
Marital deduction (after reflecting exclusion)
Tax on total taxable lifetime gifts (from unified rates)
Less credit for prior gift taxes paid
Less unified credit (maximum)
Net tax liability – current year
94
Figure
7
Gift
Splitting
–
Jan
Gifts made by Tom Baker Attributed to Jan
2013
2014
2015
Cash to daughter Jill
Cash to charity (United Givers Fund)
Cash to husband Tom
Land to son Jack (fair market value)
Cash to granddaughter Alexandra
$ 1,091,500
12,000
0
1,135,000
790,000
$ 408,500 $ 1,176,500
16,000
20,000
0
0
145,000
1,233,000
160,000
7,000
Gross gifts
Gift-splitting election (1/2 of all third-party gifts)
Annual exclusions (4, including United Givers Fund)
Charitable deduction (after reflecting exclusion)
Marital deduction (after reflecting exclusion)
3,028,500
0
(54,000)
(0)
(0)
Adjusted taxable gifts – current year
Add: Adjusted taxable gifts – prior years
2,974,500
0
671,500
2,974,500
2,381,500
3,646,000
Total taxable lifetime gifts
2,974,500
3,646,000
6,027,500
1,135,600
0
(2,045,800)
$
0
1,404,000
0
(2,045,800)
$
0
2,356,800
0
(2,045,800)
$ 311,000
Tax on total taxable lifetime gifts (from unified rates)
Less credit for prior gift taxes paid
Less unified credit (maximum)
Net tax liability – current year
729,500
0
(56,000)
(2,000)
(0)
2,436,500
0
(49,000)
(6,000)
(0)
95
Figure 8 Unified Transfer Tax
A
B
Taxable
Amount
Over:
Taxable
Amount Not
Over:
C
Tax on
Amount in
Column A
D
Rate of Tax on
Excess Over
Column A
$0
$10,000
$0
18%
$10,000
$20,000
$1,800
20%
$20,000
$40,000
$3,800
22%
$40,000
$60,000
$8,200
24%
$60,000
$80,000
$13,000
26%
$80,000
$100,000
$18,200
28%
$100,000
$150,000
$23,800
30%
$150,000
$250,000
$38,800
32%
$250,000
$500,000
$70,800
34%
$500,000
$750,000
$155,800
37%
$750,000
$1,000,000
$248,300
39%
---
$345,800
40%
$1,000,000
96
Question 32
Mr. Fred Wall bought a house that cost $50,000 for an unrelated
friend, Gloria Wilson, in 2014. Mrs. Wall made no gifts in 2014.
In filing their gift tax returns for 2014, Mr. and Mrs. Wall should
file Form 709, United States Gift Tax Return, as follows:
a. Mr. Wall should file a gift tax return reporting the $50,000
gift and taking a $14,000 annual exclusion.
b. File one joint gift tax return reporting the $50,000 gift and
taking a $14,000 annual exclusion for each spouse, or
$28,000 total.
c. File two gift tax returns, one for Mr. Wall and one for Mrs.
Wall, with each spouse signing the consent section of the
other’s gift tax return signifying that the spouse agrees to
treat all gifts as made one-half by each spouse. A $14,000
annual exclusion may be taken on each return.
d. Either a. or c.
97
Topic 10
Federal Estate Tax –
A Quick and Dirty
Overview
98
10A Estate Tax – Requirements
• Form 706 – Due 9 months after date of death
• Gross Estate – FMV of all properties owned by
decedent at death
• Required Filing – If sum of gross estate and
lifetime gifts > $5,340,000 (the exemption
equivalent of unified credit for the estate tax)
• Unified Credit – $2,081,800 in 2014 (equals the
unified transfer tax on an estate of $5,340,000)
• Questions 33 and 34
99
Question 33
What amount of a decedent’s taxable estate is effectively
tax-free in 2014 if the maximum unified estate and gift tax
credit is taken?
a. $12,000
b. $345,800
c. $1,000,000
d. $5,340,000
100
Question 34
Mr. Alexis died April 30, 2014. His gross estate
totaled $6.8 million dollars. Assuming no
extension is granted, the executor must file Form
706, United States Estate Tax Return, on or
before:
a. April 15, 2014
b. August 15, 2014
c. January 31, 2015
d. October 31, 2015
101
10B Gross Estate – Inclusions
• Gross Estate – FMV of all property at death, including any
outstanding loans and notes
• Incomplete Transfer Inclusions – Life insurance proceeds (if payable to estate or
retained incidents of ownership, e.g., loans, etc.)
– Life insurance proceeds (if transfer within 3 years)
– Any transfers within 3 yrs. with reversionary int.
– Gift taxes paid on gifts within 3 yrs. of death
102
10C Gross Estate Deductions
• Marital Deduction – Unlimited deduction for bequests of
non-terminable interest prop. (also for QTIP election
terminable interest property)
• Charitable Deduction – Unlimited for contributions to
recognized charities
• Administrative Exp. – Legal & accounting fees
• Others – Liabilities against property, casualty or theft loss
funeral costs,, last illness expenses (latter two may be on
1040 or 1041 instead)
103
10D Computation of Estate Tax
• Estate Tax – Computed on a cumulative basis:
– Add lifetime gifts to gross estate,
– Compute tax on total, then
– offset total tax with any gift taxes paid and unified credit
• Extensions to File/Pay – Are available
• Some Credits – Are available (see next slide)
104
10E Credits Against Estate Tax
• $2,081,800 Unified Credit - Available to each estate
to offset tax in 2014; $2,045,800 in 2013)
• Prior Gift Taxes Paid Credit – Allowed because total
tax includes lifetime gifts in base
• Prior Transfer Taxes Credit – Mitigates multiple
estate inclusions within 10 years; sliding %
inclusion depending on interval between the two
deaths(100% within 2 years, 20% drop for each 2
years, 0% for 10)
• Foreign Death Tax Credit – For amounts paid
• Figure 9 (uses 2013 UC)
105
Figure 9(a) – Example Facts
: Lois Carter died in 2013, leaving property worth $9,064,000. She had made taxable lifetime
gifts in 2012 totaling $1,250,000, on which gift taxes of $102,500 were paid (after reduction for
the unified credit). Her will provides for the following dispositions:
Asset
Fair Market Value
Cash
$ 30,000
Personal residence
1,900,000
7,000 shares of IBM common stock
4,910,000
700 shares of Xerox common stock
424,000
Life ins. proceeds (Lois kept rights)
1,800,000
Total estate
$9,064,000
Beneficiary
Ralph Carter (husband)
Ralph Carter (husband)
Jack and Jill (children)
Virginia Commonwealth Univ.
Jack and Jill (children)
Estate administrative costs were $85,000, and the will specifies that any estate taxes will be paid
out of the children’s share of the assets. State death taxes actually paid totaled $25,000, and are
not included in the $85,000 estate administrative costs.
106
Figure 9(b) (Estate Tax)
Fair market value of all property owned at death
Add: Incomplete gifts within three years of death
Gift taxes paid on any gifts with three years of death
Gross estate
Less: Administrative expenses
State death taxes paid
Liabilities
Losses
Adjusted gross estate
Less: Marital deduction (transferred: $30,000 + $1,900,000)
Charitable deduction (unlimited)
Total taxable estate
Add: Adjusted lifetime taxable gifts after 1976
Total taxable transfers
Gross unified transfer tax on total taxable transfers
Less: Credit for prior gift taxes paid
Unified credit
State death tax credit – limit (none allowed in 2013)
Prior transfer credit (est. taxes paid on property within 10 years)
Foreign death tax credit
Net transfer (estate) tax liability
$9,064,000
0
102,500
9,166,500
(85,000)
(25,000)
0
0
9,056,500
(1,930,000)
(424,000)
6,702,500
1,250,000
7,952,500
3,126,800
(102,500)
(2,045,800)
0
0
0
$ 978,500
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Bonus Topic
Individual Shared
Responsibility
Payments
Affordable Care Act—Individual
Mandate
• Since January, 2014, each taxpayer and member of the taxpayer’s
household must:
– have health insurance coverage throughout the year,
– qualify for an exemption from coverage, or
– make a payment when filing their tax return.
• Qualifying coverage includes:
– Coverage provided by an employer,
• employer’s share is reported on W-2, line 12d, code
DD
– Purchased by the taxpayer through the Health Insurance
Marketplace or a private carrier
– Government-sponsored coverage (Medicare, Medicaid)
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Individual Shared
Responsibility Payment
• ISRP payment is required for each month that the taxpayer or
taxpayer’s dependents do not have coverage and do not qualify for an
exemption.
• The 2015 payment is 2% of household income or a flat
dollar amount, whichever is greater, limited to the cost of
the average national premium for a bronze level health plan
available through the Marketplace.
– The flat annual dollar amount is $325 per adult and
$162.50 per child limited with a per household limit of
$975.
– The bronze level premium is $207 per individual per
month, with a maximum monthly premium of $1,035 for a
family with 5 or more members.
– Divide annual payment divided by 12 to get monthly
payment
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• Examples
• Single – Baylor, single with no dependents, has income
of $50,000 before the household exemption.
– His ISRP is $794, the greater of (1) $325 or (2)
$794 ($50,000 - $10,300) x 2%.
– The ISRP may not exceed $2,484 (the national
average for bronze coverage for singles).
• MFJ – Harold and Maude are married with three
children, one under the age of 18, have income of
$62,000 before the household exemption.
– Their ISRP is $975, the greater of (1) $975—
family maximum, or (2) $828 ($62,000 $20,600) x 2%.
– The ISRP may not exceed $12,420 (the national
average for bronze coverage for a family of five
or more individuals).
Computation of ISRP—Single
• Jim, is not married and has no dependents. He
does not have minimum essential coverage for
any month during 2015 and does not qualify for
an exemption. His household income of $40,000
reduced by the filing threshold of $10,300 is
$29,700.
• What is Jim’s ISRP?
a. $0
b. $325
c. $594
d. $2,484
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Computation of ISRP—MFJ
• Eduardo and Julia are married and have two
children under 18. They do not have minimum
essential coverage for any family member for any
month during 2015 and no one in the family
qualifies for an exemption. Their household income
is $70,000 reduced by their filing threshold of
$20,600 is $49,400.
• What is their ISRP?
a. $0
b. $975
c. $988
d. $9,936 ($204 x 4 x 12)
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2016 and beyond
• In 2016, the 2.0% penalty on household income
increases to 2.5% and the flat dollar amount
increases to $695 per adult ($347.50 per child under
18) with a maximum of $2,085.
• Maximum flat dollar amount may apply to families
with household income <$83,400 ($2,085/2.5%)
• After 2016, the percentage increase is based upon
the inflation adjusted increase in health care costs.
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Questions?
As Time Permits
Or contact:
NSA EA Review Blog
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Question
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
Answer
c
d
d
b
c
a
c
c
b
a
a
c
b
c
b
c
d
d
b
Explanation
Earned income + $350 exceeds $1,000 minimum S/D
Filing requirement is $3,950 exemption + $9,150 S/D (HH status)
Careful - <$400 net, but gross income is $50,000 (no deductions)
Exclude daughter (not F/T student), and cousin (not whole year)
$1,500 own + $600 medical + $2,000 food (1/3) + $1,200 lodging
The elevator cost less increase in value is deductible, as is upkeep
None of 2013 is deducted, $2,350-$420 credit deductible in 2014
$90,000 is acquisition debt, and the $30,000 is home equity debt
The land donation, FMV, is limited in one year to 30% of AGI)
$5,700 decline in FMV-$3,100 ins-$100 floor–10% AGI
Deduction = $100 + $2,000 +$300 + $1,200 – ($20,000 x .02)
50% of $3,000 M& E deductible, plus $25 max. per gift x 10 gifts
$3,000 maximum costs for one dependent x .20
[$7,500-$3,800-(($15,000-$10,000)x.50)]x.15 (age 65 on12/31)
< $3,350 invest. income (a & c no earned income; d too much)
AmOp ($2,500 maximum for Mandy), LL ($10,000 x.20 for Greg)
Basis of each block is allocated over the larger number of sh.
Selling price between two possible bases (FMV < donor basis)
Donor’s $40,000 basis inc. by (60,000/100,000 x $18,000 gift tax)
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20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
b
b
a
b
b
c
d
d
b
a
d
c
d
d
c
FMV at 6 months after date of death - alternate valuation date
Basis for loss is lesser of FMV at conv. or cost, reduced by depr.
Accounts receivable and supplies never qualify as capital assets
The antique rug is a collectible, taxed at a 28% rate
ST nets to $1,800 loss, LT nets to $4,200 loss ($1,200 deduct.)
Property was rented for less than 15 days, no reporting required
Significant personal usage, limits apply (int. & taxes deduct first)
Alimony qualifies as compensation for IRA qualification purposes
Earnings limit based on combined earnings of both spouses
There are no age restrictions on Roth contributions
Contributions in one year for a child are limited to $2,000 total
Gift to son necessitates filing a return (> $14,000), no tax due
Taxpayer has a choice of gift-splitting or not
Threshold is the unified exemption equiv. of $5,340,000 in 2014
The filing deadline is nine months following the date of death
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recorded version) to qualify to receive CPE credit.
National Society of Accountants
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Phone: (800) 966-6679
[email protected]
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