Practice Test 1

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School

Liberty University *

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Course

412 D

Subject

Finance

Date

Jan 9, 2024

Type

pdf

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Uploaded by BrigadierAtom5781

This year Gerry's friend, Dewey, was disabled. Gerry paid $14,300 to Dewey's doctor for medical expenses and paid $13,200 to State University for college tuition for Dewey's son. Required: a-1. Has Gerry made taxable gifts? No a-2. What is the amount of the taxable gift? - 0 Explanation a-1. & a-2. Both payments are complete gifts, but both are exempt from the gift tax if the payments were made directly to the college or doctor. Last year Nate opened a savings account with a deposit of $15,300. The account was in the name of Nate and Derrick, joint tenancy with the right of survivorship. Derrick did not contribute to the account, but this year he withdrew $5,100. Required: a-1. Has Nate made a complete gift? Yes a-2. What is the amount of the complete gift, if any, and when was the gift made? Amount of complete gift $5,100 At the time of withdrawal Explanation a-1. & a-2. No gift was made at the time of the deposit, but a complete gift of $5,100 was made once Derrick made the withdrawal. Rami and Wendy are married, and they own a parcel of realty, Blackacre, as joint tenants with the right of survivorship. Rami owns an additional parcel of realty, Redacre, in his name alone. Suppose Rami should die when Blackacre is worth $857,500 and Redacre is worth $784,500. 857,500 784,500 What value of realty would be included in Rami's probate estate, and what value would be included in Rami's gross estate? Value of realty in probate estate 784,500 Value of realty in gross estate 1,213,250 Redacre ($784,500) would be included in Rami's probate estate because the title of this parcel would need to be changed through probate. In contrast, Blackacre would not be included in Rami's probate estate because the title would be changed automatically to Wendy's name. Rami's gross estate would include the value of the property subject to probate ($784,500) and half the value of the property held by husband and wife with the right of survivorship ($428,750). Banele had a taxable estate of $16.8 million when they died this year. 16,800,000 Calculate the amount of estate tax due (if any) under the following alternatives. (Refer to Exhibit 25-1 and Exhibit 25-2.) Note: Enter your answers in dollars and not in millions of dollars. a. Banele's prior taxable gifts consist of a taxable gift of $1 million in 2005. 1,000,000 40% Estate tax due $1,952,000 Explanation a. The exemption equivalent for gifts in 2005 was $1 million so Banele has no tax for adjusted taxable gifts associated with the 2005 transfer. Banele's executor would calculate the estate tax as follows: Adjusted taxable gifts $1,000,000 Taxable estate 16,800,000 Cumulative taxable transfers $17,800,000 Tax on cumulative taxable transfers $7,065,800 Credit for prior gifts at current rate - Tentative estate tax $7,065,800 Applicable credit -5,113,800 Estimated estate tax due $1,952,000 Note that the top estate tax rate is 40 percent of the cumulative transfers in excess of the exemption equivalent ($17.8 million − $12.92 million = $4.88 million and $4.88 million × 40% = $1.952 million). b. Banele's prior taxable gifts consist of a taxable gift of $1.5 million in 2005. $1,952,000 Oisha gave a parcel of realty to Julie valued at $178,750 (Oisha purchased the property five years ago for $75,500). 178,750 75,500 17,000 a. Compute the amount of the taxable gift on the transfer, if any. b. Suppose several years later Julie sold the property for $185,550. What is the amount of her gain or loss, if any, on the sale? 185,550 Amount of taxable gift 161,750 Amount of gain 110,050 Explanation a. The gift is $161,750 after the $17,000 annual exclusion ($178,750 − $17,000). There would likely be no gi Ō tax due unless Oisha has used her en Ɵ re applicable credit. Julie takes a carryover basis in the property (plus the gi Ō tax paid, if any, on the apprecia Ɵ on). b. Julie realizes a gain of $110,050 upon the eventual sale ($185,550 − $75,500).

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