SEE 1-Specialized Returns

Gift Tax

100

Which of the following entities are required to file Form 709, United States Gift Tax Return?  

 

•  An individual
•  An estate or trust
•  A corporation
•  All of the above

An individual 

Only individuals are required to file gift tax returns. If a trust, estate, partnership, or corporation makes a gift, the individual beneficiaries, partners, or stockholders are considered donors and may be liable for the gift and GST taxes.

200

On June 30, 20X1, John Smith made a gift of $10,000 to his daughter. John will need to file a gift tax return (Form 709) on or after January 1, 20X2, but no later than:

 

•  March 15, 20X2
•  April 15, 20X2
•  June 15, 20X2
•  John will not have to file a gift tax return for this gift

John will not have to file a gift tax return for this gift 

No gift tax return is required because this gift is below the 2021 annual gift tax exclusion amount of $15,000.

300

Which of the following situations would require the filing of Form 709 for 2021?

 

•  You and your spouse agree to split your gifts, which total $20,000 
•  You gave more than $15,000 during the year to any one donee 
•  Any of the gifts you made were of a future interest 
•  All of the above 

All of the above 

Use Form 709 to elect gift splitting (both taxpayer and spouse must file a separate Form 709) and to report gifts in excess of the annual gift tax exclusion amount ($15,000 in 2021). Form 709 is also required when a gift is of a future interest. Therefore, all of the above are correct.

 

Generally, a taxpayer must file a gift tax return on Form 709, Gift (and Generation-Skipping Transfer) Tax Return, if any of the following apply:

 

• Gifts to a person (other than a spouse) are more than the annual gift tax exclusion for the year ($15,000 for 2021)
•  
• The taxpayer and his spouse are splitting a gift
•  
• The taxpayer makes the gift to someone (other than a spouse) of a future interest that the recipient cannot actually possess, enjoy, or receive income from until some time in the future
•  
• The taxpayer gave his spouse an interest in property that some future event will end

400

Donald is a tax return preparer. His client, Jody Black, told him that she had made several gifts during 2021 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 her parents' medical bills, $11,000 for her father and $8,000 for her mother
•  
• Bought a sports car for her son, the cost was $37,000
•  
• Gave $16,000 cash to her church
•  
• Prepared her will leaving her vacation cabin, valued at $75,000, to her sister
•  
• Sent a wedding gift of $1,000 to her niece

 

What is Donald's best answer to Jody's questions?

 

•  No return is due because gifts to family are excluded
•  Must file gift tax return and will owe tax on $22,000
•  Must file gift tax return but no tax will be owed because of the unified credit
•  None of the above

Must file gift tax return but no tax will be owed because of the unified credit 

Medical expenses paid directly to the medical institution are exempt; therefore, Judy's gift of paying her parents' medical bills is not a reportable gift.

 

The gift to her son is Jody's only taxable gift as it is more than the annual gift tax exclusion for the year. The 2021 annual gift tax exclusion is $15,000.

 

Since Jody has never made a taxable gift in the past, she has not used any of the applicable credit, therefore, the full applicable credit is available to offset any gift tax due. The applicable credit exempts up to $11.7 million in taxable gifts from gift tax in 2021.

 

A gift tax return, Form 709, must be filed for any reportable gift over the annual gift tax exclusion amount, even if no tax is due. The gift to her son of $37,000 is a reportable gift and therefore, Judy must file a gift tax return but no tax will be owed because of the applicable credit.

 

Charitable contributions to qualified charity – A taxpayer does not have to file a gift tax return to report deductible gifts made to charities if they do not have other reportable gifts. If a taxpayer is required to file a return to report noncharitable gifts and made gifts to charities, the taxpayer must include all charitable gifts on Form 709. The taxpayer can claim a deduction for charitable gifts on the return.

500

Joe is contemplating retirement and decided to simplify his financial situation by disposing of some assets. He had the following transactions during the current tax year:

• Sold his business to his son for $100,000. The fair market value of the business at the time of the sale was $175,000.
• Paid college tuition directly to NC State University of $15,000 for his brother's child.
• Gave stock valued at $12,000 to his alma mater. The school qualifies for an exemption from tax under 501(c)(3).
• Paid the hospital $20,000 relating to medical expenses for his sister who had no insurance.

What is the total amount of gifts (before exclusion) that should be reported on his gift tax return?

 

•  $87,000
•  $90,000
•  $102,000
•  $122,000

$87,000 

Generally, tuition or medical expenses paid directly to a medical or educational institution for anyone is not a gift. The $75,000 (amount sale was below FMV) to his son and the $12,000 to his alma mater are considered gifts.

If the only gifts you made during the year are deductible as gifts to charities, you do not need to file a return as long as you transferred your entire interest in the property to qualifying charities. If you transferred only a partial interest, or transferred part of your interest to someone other than a charity, you must still file a return and report all of your gifts to charities. If a taxpayer is required to file a return to report noncharitable gifts and he made gifts to charities, he must include all charitable gifts on Form 709. The taxpayer can claim a deduction for charitable gifts on the return.

The taxpayer will receive a charitable deduction, however, the question asks for the total amount of the gifts that should be reported on his gift tax return. Reportable gifts are reported on Form 709, before exclusions and deductions. Therefore, Joe's reportable gifts are $87,000 ($75,000 + $12,000).

Estate Tax

100

John died on June 1, 20X1. After determining that an estate tax return will be required, his executor decided to use the alternate valuation date for valuing the gross estate. Which of the following dates will be the alternate valuation date?

 

•  April 15, 20X2
•  December 31, 20X1
•  December 1, 20X1
•  On or before the due date of the Federal Estate Tax Return 

December 1, 20X1 

The alternate valuation date (if assets not sold) is 6 months from the date of death, which is December 1, 20X1.

200

Which of the following statements concerning the alternate valuation election is correct?  

 

•  The alternate valuation election may be made even if no estate tax will be paid if the election is not made.
•  If the alternate valuation election is made, it is possible for some but not all of the assets to be included in the decedent's estate at a higher FMV than on the date of death.
•  If the alternate valuation election is made, assets that are disposed of within 6 months of the decedent's death are generally valued on the date of death.
•  None of the statements are correct.

If the alternate valuation election is made, it is possible for some but not all of the assets to be included in the decedent's estate at a higher FMV than on the date of death. 

A taxpayer may elect an alternate valuation date only if it will result in a lower value of the gross estate and lower taxes paid than if the election is not made. Assets disposed of under alternate valuation date rules before the 6 month time frame are valued at FMV (usually the sales price) as of the date of disposition, not the FMV as of the date of death.  Only answer B is correct.

300

For 2021, the IRS requires the executor of an estate to file the following tax returns (provided return filing thresholds are met):

 

1. The final income tax return (Form 1040) for the decedent
2.  
3. Fiduciary income tax returns (Form 1041) for the estate during administration
4.  
5. Estate Tax Return (Form 706), if the fair market value of the assets of the estate exceeds $11.7 million

 

•  1 only
•  1 and 2 only
•  2 and 3 only
•  1, 2 and 3

1, 2 and 3 

For 2021, the executor of an estate is required (when applicable) to file the following tax returns:

 

• The final income tax return (Form 1040) for the decedent (provided return filing thresholds are met)
•  
• Fiduciary income tax returns (Form 1041) for the estate during administration (provided return filing thresholds are met)
•  
• Estate Tax Return (Form 706), if the fair market value of the assets of the estate exceeds $11.7 million

 

A taxable estate in excess of the applicable exclusion ($11.7 million for 2021) may be subject to the estate tax.

400

Sam Waterduck’s father died at the first of the current year. However, because of interest and royalties, the estate made enough taxable income over the next few months that an estate income tax return had to be filed by Sam. What amount can be deducted on this estate income tax return as an exemption?

 

•  Zero
•  $600
•  $300
•  $100

$600 

The federal government allows a set $600 exemption on the filing of an estate income tax return. Note that this is not an estate tax (on the value of the estate) but rather a tax on the income earned by the estate.

500

Following the death of her husband, the executrix of his estate paid the following:

1. Medical expenses of the decedent paid within six months of the date of death and not claimed on the decedent's final income tax return
2. Funeral expenses of her husband
3. State inheritance taxes
4. Qualified charitable contributions, as a bequest dictated by the Will of her husband

Which of the preceding generally would be allowable deductions in determining the taxable estate on the Federal Estate Tax Return (Form 706)?

 

•  1 and 3 only 
•  1, 2 and 4 only 
•  2 and 3 only 
•  All items are allowable deductions

All items are allowable deductions 

All of these are allowable deductions in determining the taxable estate on Form 706 Federal Estate Tax Return.

Final Return

100

Medical expenses for a decedent paid after death:

1. are liabilities of the estate and must be claimed on decedent's estate tax return
2. are liabilities of the estate and may be claimed on decedent's estate tax return
3. are deductible on decedent's final return if paid during the one-year period after death and the estate elects to treat them as paid by the decedent
4. are nondeductible

 

•  I
•  II
•  IV
•  II, III

II, III 

Medical expenses that were not paid before death are liabilities of the estate and appear on the federal estate tax return (Form 706). If the estate pays medical expenses for the decedent during the one-year period beginning with the day after death, the executor may elect to treat all or part of the expenses as paid by the decedent at the time the decedent incurred them. An executor making this election may claim all or part of the expenses on the decedent’s income tax return as an itemized deduction, rather than on the federal estate tax return (Form 706).

200

A net operating loss or capital loss that cannot be used on a decedent's final return:

 

•  is deductible on the estate’s income tax return
•  is not deductible on the estate’s income tax return
•  is deductible on the estate tax return
•  can be used to file a claim for refund

is not deductible on the estate’s income tax return 

A decedent’s net operating loss deduction from a prior year and any capital losses (including capital loss carryovers) can be deducted only on the decedent’s final income tax return. An unused net operating loss or capital loss on a decedent's final return is not deductible on the estate’s income tax return.

300

Medical expenses for a decedent paid before death:

 

•  are nondeductible
•  can be claimed on the decedent's estate tax return
•  can be claimed on decedent's final return
•  can be claimed on either decedent's final return or decedent's estate tax return

can be claimed on decedent's final return 

Medical expenses paid before death by the decedent are deductible, subject to limits, on the final income tax return if deductions are itemized. This includes expenses for the decedent, as well as for the decedent’s spouse and dependents.

400

Joe, a cash method taxpayer, died on August 22 and he received the following:

• July rental income received August 1 $3,500
• August rental income received September 1 $2,500
• September rental income received August 15 $1,500
• Dividend declared on August 10 and received on August 20 $4,000
• Dividend declared on August 20 and received on August 30 $3,000
• Dividend declared on August 30 and received on September 10 $2,000

What amount of income should Joe include on his final tax return?

 

•  $16,500
•  $14,500
•  $13,000
•  $9,000

$9,000 

The decedent’s income includible on the final return is generally determined as if the person were still alive except that the taxable period is usually shorter because it ends on the date of death. 

The method of accounting used by the decedent also determines the income and expenses includible on the final return.

• Cash method – The final return includes items actually or constructively received before death.
  • The decedent constructively received interest from coupons on bonds if the coupons matured in the decedent’s final tax year but had not been cashed. Include the interest on the final return.
  • Generally, the decedent constructively received a dividend if it was available for use by the decedent without restriction. If the corporation customarily mailed its dividend checks, the dividend was includible when received. If the individual died between the time the corporation declared the dividend and the time it arrived in the mail, the decedent did not constructively receive it before death. Do not include the dividend in the final return.
• Accrual method – Generally, under an accrual method of accounting, report income when earned. If the decedent used an accrual method, only the income items normally accrued before death are included in the final return.

Joe should include on his final tax return income of $9,000, calculated as follows:

$3,500  July rental income received August 1

$1,500 September rental income received August 15

$4,000 Dividend declared on August 10 and received on August 20

$9,000Total income Joe received before he died on August 22 

500

An individual taxpayer dies on March 12, 20x2 before filing his 20x1 income tax return. If the decedent met the filing requirements at the time of his death, the individual responsible for filing the decedent's tax return should file:

 

•  decedent's 20x1 tax return
•  decedent's 20x2 tax return
•  decedent's 20x1 and 20x2 tax return
•  since the taxpayer died, no tax return is due

dec

An income tax return must be filed for a decedent (a person who died) if the decedent met the filing requirements at the time of his death. The individual responsible for filing the return may be a surviving spouse, relative, executor, administrator, or legal representative. 20x1 is not the decedent's final return, as the decedent was alive for a few months into 20x2. 20x2 is the decedent's final return.

Therefore, the individual responsible for filing the decedent's tax return should file decedent's 20x1 and 20x2 tax return.

edent's 20x1 and 20x2 tax return

Foreign Taxpayers and Accounts

100

Which filing status is available on form 1040NR for a nonresident alien that is not a resident of Canada, Mexico, South Korea, or a U.S. national?

 

• Single

• Head of household

• Married Filing Jointly

• Qualifying widow(er)

Single 

The only filing status options available to nonresidents from most countries (except Canada, Mexico and South Korea) are Single, or Married Nonresident Alien Filing Separately. A resident of Canada, Mexico, South Korea, or a U.S. national may file as a Qualifying widow(er) if certain requirements are met. A taxpayer that is a nonresident alien at any time during the tax year cannot file as head of household.

200

What is the penalty for failure to disclose income on Form 8938?

 

•  Up to $5,000 for failure to disclose and an additional $5,000 for each 30 days of non-filing after IRS notice of a failure to disclose, for a potential maximum penalty of $10,000.
•  Up to $10,000 for failure to disclose and an additional $10,000 for each 30 days of non-filing after IRS notice of a failure to disclose, for a potential maximum penalty of $60,000.
•  Up to $5,000 for failure to disclose and an additional $5,000 for each 30 days of non-filing after IRS notice of a failure to disclose, for a potential maximum penalty of $10,000; criminal penalties may also apply.
•  Up to $10,000 for failure to disclose and an additional $10,000 for each 30 days of non-filing after IRS notice of a failure to disclose (up to $50,000), for a potential maximum penalty of $60,000; criminal penalties may also apply.

Up to $10,000 for failure to disclose and an additional $10,000 for each 30 days of non-filing after IRS notice of a failure to disclose (up to $50,000), for a potential maximum penalty of $60,000; criminal penalties may also apply. 

The penalty for failure to disclose income with Form 8938 is up to $10,000 for failure to disclose and an additional $10,000 for each 30 days of non-filing after IRS notice of a failure to disclose (up to $50,000), for a potential maximum penalty of $60,000. Criminal penalties may also apply.

300

The requirement to file the FinCEN Form 114 applies to U.S. Persons with a financial interest in or signature authority over any foreign financial account(s), if the aggregate value of these accounts, at any time during the calendar year, exceeds:

 

•  $1,000.
•  $5,000.
•  $7,500.
•  $10,000.

$10,000. 

The FinCEN Form 114 reporting threshold (total value of assets) is $10,000 at any time during the calendar year.

IRS, Bank Secrecy Act, (31 U.S.C. § 5314); 31 C.F.R. §§ 1010.350; 1010.306(c); Publication 4261.

400

When the law requires withholding on a payment of U.S. source income to a nonresident alien, the payor must generally withhold at what rate?  

 

•  15%
•  30%
•  28%
•  10%

30% 

Most types of U.S. source income received by a foreign person are subject to U.S. tax at a rate of 30%. A reduced rate, including exemption, may apply if there is a tax treaty between the foreign person's country of residence and the United States.

500

Which of the following taxpayers must file Form 1040-NR?

 

•  Jose, a full year resident of Puerto Rico with U.S. source income.
•  Abigail, an Irish citizen who spends one month in the United States each year to check on her highly lucrative business selling t-shirts outside of Celtics games.   
•  Joy, a Canadian citizen who will file a tax return jointly with her husband Martin who is a U.S. citizen.  Joy visits the United States each summer and earns $25,000 for four months of work.
•  Lupe, who spent the last nine months of the year in Mexico to care for her parents and help with the family business.  She has a green card, and intends to return to the United States. 

Abigail, an Irish citizen who spends one month in the United States each year to check on her highly lucrative business selling t-shirts outside of Celtics games. 

Resident aliens must file a tax return following the same rules that apply to U.S. citizens. A resident of Puerto Rico is treated like a resident for tax purposes. Only nonresidents file a 1040-NR return. A nonresident alien who is married to a U.S. citizen or resident at the end of the year can choose tax treatment as a U.S. resident. A lawful permanent resident (immigrant) of the United States, at any time during the current year, who took no steps to be treated as a resident of a foreign country under an income tax treaty is not treated as a nonresident for tax purposes

Foreign Taxpayers and Accounts

100

When e-filing their federal return, a taxpayer who meets the requirements to file both Form 8938, Statement of Specified Foreign Financial Assets and Form 114, Report of Foreign Bank and Financial Accounts should

 

•  attach both forms to their federal return.
•  attach only the Form 8938 and file the Form 114 separately.
•  attach only the Form 114 as it contains the 8938 information.
•  send both forms in separately to the Internal Revenue Service.

Attach only the Form 8938 and file the Form 114 separately. 

Certain taxpayers may also have to complete and attach to their return Form 8938 Statement of Special Foreign Financial Assets. The FBAR Form 114 is not filed with a federal tax return, it is filed electronically through FinCEN’s BSA E-Filing System.

The FATCA Form 8938 requirement does not replace or otherwise affect a taxpayer’s obligation to file an FBAR Form 114. 

Form 8938 Instructions; Publication 4261

200

All of the following require a US person to file FBAR Form 114 EXCEPT:

 

•  You are the owner of a foreign based corporation who has more than 50% of total share.
•  You receive more than 50% of the beneficial interest from a foreign trust.
•  You hold signature authority over a foreign partnership and receive over $80,000 in annual income from the partnership.
•  You have $7,000 in non-interest based foreign income during the tax year and do not hold signature authority over a foreign account.

You have $7,000 in non-interest based foreign income during the tax year and do not hold signature authority over a foreign account. 

A United States person that has a financial interest in or signature authority over foreign financial accounts must file an FBAR if the aggregate value of the foreign financial accounts exceeds $10,000 at any time during the calendar year.  FBAR Form 114 must be filed with the Financial Crimes Enforcement Network to report a financial interest or signature authority over a foreign financial account.

Financial Interest – A United States person has a financial interest in a foreign financial account for which:

1. the United States person is the owner of record or holder of legal title, regardless of whether the account is maintained for the benefit of the United States person or for the benefit of another person; or
2. the owner of record or holder of legal title is one of the following:
   1. An agent, nominee, attorney, or a person acting in some other capacity on behalf of the United States person with respect to the account;
   2. A corporation in which the United States person owns directly or indirectly: (i) more than 50 percent of the total value of shares of stock or (ii) more than 50 percent of the voting power of all shares of stock;
   3. A partnership in which the United States person owns directly or indirectly: (i) an interest in more than 50 percent of the partnership's profits (e.g., distributive share of partnership income taking into account any special allocation agreement) or (ii) an interest in more than 50 percent of the partnership capital;
   4. A trust of which the United States person: (i) is the trust grantor and (ii) has an ownership interest in the trust for United States federal tax purposes. See 26 U.S.C. sections 671-679 to determine if a grantor has an ownership interest in a trust;
   5. A trust in which the United States person has a greater than 50 percent present beneficial interest in the assets or income of the trust for the calendar year; or
   6. Any other entity in which the United States person owns directly or indirectly more than 50 percent of the voting power, total value of equity interest or assets, or interest in profits.

Signature Authority – Signature authority is the authority of an individual (alone or in conjunction with another individual) to control the disposition of assets held in a foreign financial account by direct communication (whether in writing or otherwise) to the bank or other financial institution that maintains the financial account. Certain exceptions apply.

300

Fedor is a nonresident alien. Which filing status can he use on his Form 1040-NR?

 

•  All of the below
•  Single
•  Qualifying Widow(er)
•  Married Filing Separately

All of the below 

A nonresident alien filing Form 1040-NR can claim single, married filing separately, or qualifying widow(er) as the filing status.

400

Peter's wife Margo is a nonresident alien and does not have a SSN or ITIN. How can Peter file his tax return if Margo does not apply for an ITIN?

 

•  File a joint return with Margo
•  Both Peter and Margo must file a married separate return
•  Peter can file a married separate return
•  Peter can file as single

Peter can file a married separate return 

Peter can file a married separate return. He cannot file as single because he is legally married. 

If a taxpayer's spouse is a nonresident alien, the spouse must have either an SSN or an ITIN if:

• They file a joint return, or
• The spouse is filing a separate return.

Margo could apply for an ITIN by filing Form W-7, Application for IRS Individual Taxpayer Identification Number. Generally, a taxpayer files Form W-7 with the federal income tax return, and this could be an option but the question specifically states that she does not apply for an ITIN. If an ITIN is applied for on or before the due date of the tax return (including extensions) and the IRS issues an ITIN as a result of the application, the IRS will consider the ITIN as issued on or before the due date of the return. After the Form W-7 is processed, the IRS will assign an ITIN to the return and process the return.

500

Pradeep lives and works in Bangalore, India as a self-employed contractor where he helps U.S. companies outsource computer programming projects to Indian software designers. He is not a U.S. citizen or resident at any time during the year. All of Pradeep's income is from his U.S. contracts. Which of the following is true regarding Pradeep's tax obligations to the United States?

 

•  He has U.S. source income, and must report it on Form 1040NR.
•  His customers must withhold 30% of the payments made to him.
•  It is not necessary for Pradeep to file a U.S. income tax return.
•  Pradeep must file Form 1040-SS to report his income from self-employment.

It is not necessary for Pradeep to file a U.S. income tax return. 

If someone is not a US citizen he is considered a nonresident alien unless he meets one of 2 tests including either the green card test or the substantial presence test for the calendar year. It is not indicated that he meets either one of these tests, therefore, he is a nonresident alien. A nonresident alien (NRA) usually is subject to U.S. income tax only on U.S. source income.

In this case, it is indicated that Pradeep is a contractor. The income he receives is for personal services. For this type of income, the factor determining the source is where the services are performed.

The factor determining the source of Pradeep's income is the country where he performs the services. Pradeep's income from his personal services is not U.S. source income, and accordingly, he does not need to file a U.S. income tax return. A nonresident alien (NRA) usually is subject to U.S. income tax only on U.S. source income.