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Unformatted text preview: nd income. The income portion of
the distribution is excluded from the beneficiary’s gross income if the entire distribution is
less than or equal to the amount of qualified education expenses for the year. If the distribution exceeds the qualified education expenses for the year, the beneficiary will be required to
include some of the distribution in gross income and will be required to pay a 10% penalty
tax on the amount included in gross income unless one of several exceptions applies. In
addition to this favorable treatment for federal income tax purposes, some states offer
income tax breaks as well, often only for residents of the state.
15. Describe the characteristics of a Coverdell Educational Savings Account that make it different from a college savings plan.
Some of the characteristics of a Coverdell Educational Savings Account that make it different from a college savings plan are:
• The maximum contribution per year per beneficiary is $2,000.
• The definition of qualified educational expenses includes (1) qualified elementary and
secondary school expenses, (2) certain special needs services, and (3) contributions to a
qualified tuition program (529 plan).
• Contributions must be complete by the time the beneficiary reaches age 18.
• Distributions from the account must be complete by the time the beneficiary reaches
• More investment options are available than for a Section 529 plan.
• The ability of the donor to contribute is phased out based on the modified adjusted
gross income (MAGI) of the donor. 22 CHAPTER 4: G ROSS INCOME FROM PERSONAL AND INVESTMENT ACTIVITIES 16. Under what circumstances can a prize or award be excluded from the recipient’s gross
If a prize is received and it is paid directly to a qualified charity at the request of the recipient, the recipient is allowed to exclude the prize from gross income if three requirements are
met: (1) the prize or award must be given primarily in recognition of religious, charitable,
scientific, educational, artistic, literary, or civic achievement; (2) the recipient must not
apply for the award; and (3) the recipient must not be required to render substantial future
services to receive the prize or award.
17. What are the requirements for treating a payment made between divorcing spouses as alimony?
In order to be treated as alimony, a payment related to divorce must meet all of the following requirements:
• It must be paid in cash;
• It must be received by a spouse under a divorce or separation instrument;
• The divorce or separation instrument must not identify the payment as anything other
• The payee and the payor must not be members of the same household at the time of the
• There cannot be any liability to make payments after the death of the payee spouse.
18. Summarize the imputed interest rules.
No interest is generally imputed if the total amount of loans from the lender to the borrower is $10,000 or less. For gift loans only, no interest is imputed if the total amount of
loans from the lender to the borrower is $100,000 or less unless the borrower has net inves...
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- Spring '12