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Unformatted text preview: CHAPTER 4 3. How can gifts be used to lower the overall tax paid by a family? Because gifts are not subject to income tax, a high bracket taxpayer can make a gift of income producing property to a low bracket member of his/her family (father to son, grandmother to granddaughter, etc.). By using the annual gift tax exclusion and the lifetime gift and estate tax exclusion, payment of the gift tax on the gift property can also be avoided. When the property produces income, it will be taxed at a lower marginal tax rate, thus reducing the overall tax paid by the family. 24. Herman inherits stock with a fair market value of $100,000 from his grandfather on March 1. On May 1, Herman sells half of the stock at a gain of $10,000 and invests the $60,000 proceeds in Jordan County school bonds. The bonds' annual interest rate is 6%, which is paid on July 31 and January 31. On October 15, Herman receives a $2,200 dividend on the remaining shares of stock. How much gross income does Herman have from these transactions? Herman must include the $10,000 capital gain from the sale of half of the stock and the $2,200 of dividend income in his gross income. The receipt of the inherited stock is excluded from income. However, any subsequent earnings on the stock is not part of the inheritance and must be included in gross income. The interest Herman receives from the Jordan County school bonds is excludable municipal bond interest. 26. Allison dies during the current year. She is covered by a $1,000,000 life insurance policy payable to her husband Bob. Bob elects to receive the policy proceeds in 10 annual installments of $120,000. Write a letter to Bob explaining the tax consequences of the receipt of each installment. Life insurance proceeds are excluded from tax. Therefore, the $1,000,000 face value of the policy is excluded as it is received. However, the earnings on the policy during the time it is held by the insurance company are not excludable. The total interest earned is $200,000 [($120,000 x 10) - $1,000,000]. As each payment on the policy is received, Bob will exclude $100,000 ($1,000,000 ÷ 10) and include $20,000 ($200,000 ÷ 10) in gross income. 27. Earl is a student at Aggie Tech. He receives a $5,000 general scholarship for his outstanding grades in previous years. Earl is also a residence hall assistant, for which he receives a $1,000 tuition reduction and free room and board worth $6,000 per year. Earl's annual costs for tuition, books, and supplies are $8,000. Does Earl have any taxable income from the scholarship or the free room and board? Earl has $7,000 ($6,000 + $1,000) of income from the receipt of the free room and board. Even if the room and board were considered to be a scholarship, it could not be excluded because it is designated for payment of costs that are not direct education costs. The $5,000 general scholarship is excluded because it is less than the actual direct costs....
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This note was uploaded on 04/18/2008 for the course ACCT 3013 taught by Professor Murphy during the Spring '08 term at Oklahoma State.
- Spring '08