AC561 The Internal Revenue Code
For the first part of the final project, you will review the tax publications for gifts, estates, and trusts, and respond to the questions below. Use question numbers to clearly organize your responses.
1. John transfers investment securities worth $200,000 with a tax basis of $130,000 to a trust, naming himself as trustee. The terms of the trust agreement require the trustee to pay all dividends and interest to John's brother, Dale. John has the right to revoke the trust at any time and take back title to the securities. During the trust's first year, John, as trustee, distributes $20,000 in dividends and $10,000 interest from the securities to Dale. None of the income was tax exempt. In a Word Document, respond to the following questions using 2016 tax regulations:
a) How much gross income does Dale recognize from the payments? Show your calculations.
b) How much gross income does John recognize from the above? Show your calculations.
2. On January 15 of the current year, Joyce, age 24, receives stock worth $28,000 as a gift from her parents. Her parents jointly purchased the stock six years ago for $12,000. During the year, Joyce receives $2,100 dividend income on the stock. In December, she sells the stock for $39,000. In a Word Document, respond to the following questions using 2016 tax regulations:
a) Assuming this is Joyce's only income for the year, and her parents are in the 33 percent marginal tax bracket, how much income tax does the family save as a result of this gift? Show your calculations.
b) Are there any transfer taxes as a result of this gift? Explain. Show your calculations. Review the applicable tax publications and forms an
Answer:
According to the Internal Revenue Code (IRC), when a trust makes a distribution to a beneficiary in form of dividends, interest and rent as well as other similar types of income, the distributions should be deducted. However, the beneficiary is required to include in his gross income the amount distributed to him by the trust. It is necessary to deduct the distribution in order to avoid the income from being taxed twice. The deductions are meant for offsetting the amount previously included in the gross income of the trust (American Bar Association, 2012).
Therefore, the beneficiaries are required to pay income tax on distributions received from the trust. In this case, Dale, who is a beneficiary in this trust, receives distributions amounting to $20,000 in dividends and $10,000 interest from the securities transferred to the trust. His gross income can therefore be calculated by summing up the distributions as follows:
Gross income for Dale = $20,000 + $10,000
= $ 30,000
- Amount of Gross Income Recognized by John
The gross income of a trustee comprises of all income earned by the trust during the year that is not vested absolutely in the beneficiary in the course of the year of the income. It also includes earnings that were realized by the trust but payments or applications were not made to benefit the beneficiary within a duration of six months upon ending the income year (Zirinis & Nixon, 2014). In this case, John is the trustees and his gross income is therefore arrived at as follows:
Gross income for John = $200,000 – ($20,000 + $10,000)
= $170,000
Question 2:
- Income Tax Saved by the Family as a Result of Gift
According to the 2016 tax guidelines of the Internal Revenue Service (IRS), a gift tax is levied whenever an individual transfers property to another in return for nothing, or in exchange for a less value than that of the property. Gifts from relatives are generally exempted from taxes. According to the Income Tax Act of 1961, gifts received from relatives at any time of the year for any amounts are considered tax free (Schoenblum, Schoenblum & Tax Management Inc., 2012). In this case, Joyce receives a gift from her parents in form of stock worth $28,000, which was jointly purchased for $12,000 six years ago. Therefore, the amount of income taxes saved by the family as a result of this gift can be calculated as shown below:
Income Tax on the gift = 35% ($39,000 + 2,100)
= 0.35 * $41,100
= $14,385
Therefore, the family saves a total of $14,385 which would otherwise be paid as income taxes if the gift had not been transferred to Joyce.
- Transfer Taxes Resulting From This Gift
There are no transfer taxes resulting from this gift. However, when Joyce’s parents transfer the stock to her, they need to make a declaration of the stock as a gift to their daughter. This however, does not obligate the parents to payment of any transfer taxes since according to the tax guidelines by the IRS, an individual is allowed to offer gifts for up to $14,000 per person during a year. By offering a stock valued at $28,000 to their daughter, each parent made a gift of $14,000 to her, which is within the range accepted by the IRS without any associated transfer taxes (CCH Incorporated, 2009).
Total value of gift made to Joyce = $28,000
Therefore, each Parent Gifted an amount of $14,000 to their daughter, calculated as below:
= $28,000/2
= $14,000
Gift Limit allowed by IRS for each individual annually = $14,000
Therefore, the parents were not liable for paying any transfer taxes since the total amount of stock gifted to Joyce was within the range allowed by IRS (Schoenblum, Schoenblum & Tax Management Inc., 2012).
References
American Bar Association. (2012). The American Bar Association guide to wills & estates: Everything you need to know about wills, estates, trusts & taxes. New York: Random House Reference.
CCH Incorporated. (2009). 2010 U.S. master tax guide. Chicago: CCH.
Schoenblum, J. A., Schoenblum, J. A., & Tax Management Inc. (2012). U.S. estate and gift tax treaties. Arlington, VA: Tax Management.
Zirinis, B. S., & Nixon, K. (2014). Recent US developments in estate and trust law and taxation. Trusts & Trustees, 21(1-2), 86-97. doi:10.1093/tandt/tBuy AC561 The Internal Revenue Code Answers Online
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