Taxation principles Chapter 28

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Seminar: Taxation Current Issues
Chapter 28
Answer to Question No 1:
Slide No.
Contents
Purpose 01:
As far as banking is concerned, a trust can be described as a fiduciary agreement to make a third party a trustee in such a way as to make it trustworthy for a beneficiary community.
The trustee shall hold and retain the properties of the beneficiary.
The terms and conditions of the trust may be different.
The essence of the trust will say when and how the assets will be transferred back to the beneficiary.
Introduction 02 2.
In a trust, assets can be moved beyond probation, saving time, court fees and can help reduction of estate taxes.

Trust does not revoke any estate tax and thereby saves money for the beneficiaries.

Advantages

03

A trust provides easy possession to assets than will because it is designed to avoid probate. Beneficiaries can enjoy quick turnaround.

Provides control to the beneficiaries’ wealth.

Terms and conditions regarding the time of maturity and handover can be specially mentioned in trust.

For example, a person can create a trust to which he can have access until death and then the trust automatically passes through to the beneficiaries; it remains functional in complex cases like where the beneficiaries come from different marriage children.

Function

04

It protects legacy and enable the beneficiaries prevent their assets from being lost in mismanagement.

Probate and privacy saving. A trust can be kept private rather than probate, which is rather a public matter. Going beyond probate can save substantial amount court money.

Function (Continued)

Answer to question number 2:

A C corporation is a separate entity from its owner in terms of paying legal taxes.

A partnership is a business entity formed between two or more parties, and pays taxes.

A S corporation is a separate taxable entity from its parent corporation and enjoys the benefits of incorporation and taxed as a subchapter K. It has not more than 100 shareholders.

A trust may be defined as a fiduciary arrangement to make a third party a trustee in such way to make him trustworthy to a beneficiary group.

Answer to question number 3:

Trust:

A trust may be defined as a fiduciary arrangement to make a third party a trustee in such way to make him trustworthy to a beneficiary group.

The trustee keeps and maintains assets of the beneficiary.

The terms and conditions of the trust can be of different forms.

The nature of trust will tell when and how the assets will be passed back to the beneficiaries.

Estates

Estate implicates tax consequences of all property that a deceased person leaves before they are get to be distributed to the heirs.

AMT:

Alternative Minimum Tax (AMT) is a supplemental income tax that is designed by the federal government of the US in order to provide a tax relaxation to the beneficiary, individuals, corporation and other taxpayers through providing a lower tax rate than the standard tax rate.

Answer to question number 4:

Taxes paid through the trust or through the beneficiary’s personal return could be affected by whether the trust document specifies that is a simple or complex trust.

A simple trust is one that does not make charitable contributions and which must be distributed to beneficiaries in the tax year that it is earned.

A personal exemption of $300 applies when calculating the trust’s taxable income.

A complex trust can make charitable contributions and is not required to pay out all income in the year that it is earned by the trust.

In a complex trust, the principal value of an asset may also be paid out. A personal exemption of $100 applies when calculating the trust’s taxable income.

Answer to question number 5:

The computation of a fiduciary entity’s accounting income, taxable income, and distributable net income are performed following this sequence: Accounting income 🡪 Taxable income 🡪 distributable net income. It is to be mentioned that the taxable income is computed before distributive deduction.

Answer to question number 6:

In the given scenario, if Liu trust distributes the land to Yang, the trust won’t be able to recognize any gain or losses on the land distribution unless the grantor opts to recognize the gain or loss based on the trust documents.

Answer to question number 8:

Mona can deduct depreciation in her Form 1040 in the ratio of accounting income.

Thus, depreciation which Mona can claim

= Mona’s share of accounting income/Total trust’s accounting income × depreciation

= 500000/2500000 × 100000 = 20000; therefore, Mona can claim $20000 of depreciation as deduction in Form 1040.

Answer to question number 9:

In this case, even if the payment is being made in the following tax year, the deduction is available to the taxpayer. Certain non-US entities and individuals other than the organization that are qualifying charitable institution for accepting gifts also provide deduction for the gifts received by them. The taxpayer is eligible for deduction, then the contribution towards charity is being made in the following year of tax.

No, the answer in the part A will not change if the check was issued on the 1st May 2017. Therefore, the grace period would account for a complete tax year.

Answer to question number 10:

DNI performs several key roles in subchapter J, which are listed below:

DNI gives the highest amount of distribution, on which taxes are imposed on beneficiaries.

DNI serves to the computation of distributive deduction and hence total taxable income, which is highly important.

Answer to question number 13:

$19,786.

Answer to question number 14:

$3,800

Answer to question number 15:

$11,200; trust agreement allocates fees and capital gains to corpus.

Explanation:

ParticularsAmount

Taxable interest $3,200

Tax exempt interest $8,000

Trust Accounting Income $11,200

$9,400; when fees are allocated to income

ParticularsAmount

Taxable interest $3,200

Tax exempt interest $8,000

Less: Fees$1,800

Trust Accounting Income $9,400

Answer to question number 19:

The excel sheet with all required results are offered below:

Answer to question number 21:

Adjusted gross income = Business income + tax exempt interest = 80000 + 40000 = $120,000

1. Sanchez is a cash basis individual

Deduction limit is 50% of the AGI for the individuals with certain limits to 30% and 20% but Sanchez cannot claim the deduction as the payment is made in the next year. For individuals, both cash basis and accrual basis, deduction of charitable contribution is available in the year of payment of the contribution.

2. Sanchez is an accrual basis corporation

For accrual basis corporation, the deduction is allowed if the payment of such contribution is made after the close of taxable year and on or before the 15th day of the fourth month following the close of taxable year.

Deduction limit is 10% of the AGI and the remaining balance is carried over to the subsequent 5 years.

Deduction = 10% x $120,000 = $12,000

$,8000 is carried over

3. Sanchez is a trust

Deduction for contribution to charity by trust is without any limit but such contribution should be paid in the taxable year. Hence, no deduction.

Answer to question number 22:

Person-L

L’s share of income = net income × ½ = ($100,000 + $30,000) × ½ = $65,000

Person-E

E’s share of income = net income × ½ = ($100,000 + $30,000) × ½ = $65,000

Thus, both L and E have income share of income of $65,000

Here is the Distributable Net Income (DNI)

Details

Amount

Ordinary income

$100,000

Add: Long-term capital gains

$30,000

Total income

$130,000

Less: Trustee commission expense

$5,000

Distributable Net Income (DNI)

$125,000

The Taxable income/ loss is as shown below:

Details

Amount

Distributable Net Income (DNI)

$125,000

Less: Personal Exemption

$300

$124,700

Less: Deduction on distribution

$125,000

Taxable income/ loss

-$300

Person-L

L’s share of income = net income × ½ = $125,000 × ½ = $62,500

Person-E

E’s share of income = net income × ½ = $125,000 × ½ = $62,500

Thus, both L and E have income share of income of $62,500

Answer to question number 25:

Income deemed to have been distributed to Brenda and to Del is as calculated below:

Dividend Income

Taxable Interest Income

Passive activity Income

Tax-exempt interest Income

Brenda

20,000/100,000× 50,000

10,000

20,000/100,000× 8,000

1,600

20,000/100,000× 30,000

6,000

20,000/100,000× 12,000

2,400

Del

20,000/100,000×50,000

10,000

20,000/100,000×8,000

1,600

20,000/100,000× 30,000

6,000

20,000/100,000×12,000

2,400

Total

20,000

3,200

12,000

Answer to question number 26:

Amount of taxable interest in DNI = 40000/60000 × 51000 = 34000

Nontaxable DNI = 51000 – 34000 = 17000

Lydia has taxable interest of 34000/51000×26000 = $17333.33333

Lydia has nontaxable interest of 17000/51000 × 26000 = 8666.66667

Kent has taxable interest of 34000/51000 ×13000 = 8666.66667

Kent has nontaxable interest of 17000/51000 × 13000 = 4333.33333

So, rounding to nearest $ answer is:

Lydia has $ 17333 of taxable interest and $ 8667 of tax-exempt interest.

Kent has $ 8667of taxable interest and $ 4333 of tax-exempt interest

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