Chapter 26

2011 Federal Taxation (with H&R BLOCK At Home(TM) Tax Preparation Software CD-ROM)

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CHAPTER 26—FAMILY TAX PLANNING TRUE/FALSE 1. Grandfather GF, a single taxpayer, has current year taxable income of $300,000. His granddaughter GD, also single, has current year taxable income of $210,000. An income shift of $15,000 from GF to GD during the current year would not result in any tax savings to the family. ANS: T Both GF and GD are in a 33 percent marginal tax bracket. PTS: 1 REF: p. 16-3 and § 1(c) 2. In the current taxable year, married couple H and W give a completed gift of a $20,000 certific- ate-of-deposit bearing simple interest to their 15-year-old child, C. The interest on the certificate paid to C during the current year totals $1,600. Under the assignment-of-income doctrine, the $1,600 must be included in the gross income of H and W. ANS: F Because H and W made a completed gift of capital to C, C is the owner, and therefore the income from the capital (i.e., the interest) is taxed to C. PTS: 1 REF: p. 16-4 3. Married taxpayers have the option of filing a joint income tax return or filing as two single taxpayers. ANS: F Married taxpayers may file a joint return or they may each file a return using the married filing separ- ately rate schedule. PTS: 1 REF: footnote 6, p. 16-4, and § 6013 4. D, the seven-year-old daughter of Mr. and Mrs. M, is a very successful child model. Because Mr. and Mrs. M provide more than 50 percent of D's support and claim her as a dependent, D's earnings as a model must be reported on her parent's income tax return. ANS: F A child who earns income is a taxpayer in his or her own right, even if claimed as a dependent on an- other taxpayer's return. PTS: 1 REF: p. 16-6 and Reg. § 1.73-l (a) 5. Individual S is the sole shareholder of Corporation S. The corporation employs S's college-aged grand- daughter as secretary-treasurer for the summer, paying her $25,000 for three months work. If the In- ternal Revenue Service determines that the granddaughter is not a bona fide corporate employee and disallows the entire $25,000 salary deduction, the $25,000 payment could be reclassified as a dividend to the granddaughter. ANS: F The constructive dividend would be to grandfather S. The receipt of the funds by granddaughter would be considered a gift from S.
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PTS: 1 REF: p. 16-8 6. A family member will be recognized as a legitimate partner if he or she owns a capital interest in a partnership in which capital is a material income-producing factor, even if the family member does not perform any services for or on behalf of the partnership. ANS: T If the family partnership is one in which capital is a major income-producing factor, the mere owner- ship of a capital interest will entitle a family member to participate in partnership income. This is true even if the family member received his or her interest as a gift. PTS:
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