AC561 Taxation Of Estates And Trusts

According to the Internal Revenue Code (IRC), when a trust makes a distribution to a beneficiary in form of dividends, interest and rent as well as other similar types of income, the distributions should be deducted. However, the beneficiary is required to include in his gross income the amount distributed to him by the trust. It is necessary to deduct the distribution in order to avoid the income from being taxed twice. The deductions are meant for offsetting the amount previously included in the gross income of the trust (American Bar Association, 2012).

Therefore, the beneficiaries are required to pay income tax on distributions received from the trust. In this case, Dale, who is a beneficiary in this trust, receives distributions amounting to $20,000 in dividends and $10,000 interest from the securities transferred to the trust. His gross income can therefore be calculated by summing up the distributions as follows:

Gross income for Dale = $20,000 + $10,000

                                         = $ 30,000

1. Amount of Gross Income Recognized by John

 The gross income of a trustee comprises of all income earned by the trust during the year that is not vested absolutely in the beneficiary in the course of the year of the income. It also includes earnings that were realized by the trust but payments or applications were not made to benefit the beneficiary within a duration of six months upon ending the income year (Zirinis & Nixon, 2014). In this case, John is the trustees and his gross income is therefore arrived at as follows:

Gross income for John = $200,000 – ($20,000 + $10,000)

                                      = $170,000

Question 2:

1. Income Tax Saved by the Family as a Result of Gift

According to the 2016 tax guidelines of the Internal Revenue Service (IRS), a gift tax is levied whenever an individual transfers property to another in return for nothing, or in exchange for a less value than that of the property. Gifts from relatives are generally exempted from taxes. According to the Income Tax Act of 1961, gifts received from relatives at any time of the year for any amounts are considered tax free (Schoenblum, Schoenblum & Tax Management Inc., 2012). In this case, Joyce receives a gift from her parents in form of stock worth $28,000, which was jointly purchased for $12,000 six years ago. Therefore, the amount of income taxes saved by the family as a result of this gift can be calculated as shown below:

Income Tax on the gift = 35% ($39,000 + 2,100)

                                      = 0.35 * $41,100

                                      = $14,385

Therefore, the family saves a total of $14,385 which would otherwise be paid as income taxes if the gift had not been transferred to Joyce.

1. Transfer Taxes Resulting From This Gift

There are no transfer taxes resulting from this gift. However, when Joyce’s parents transfer the stock to her, they need to make a declaration of the stock as a gift to their daughter. This however, does not obligate the parents to payment of any transfer taxes since according to the tax guidelines by the IRS, an individual is allowed to offer gifts for up to $14,000 per person during a year. By offering a stock valued at $28,000 to their daughter, each parent made a gift of $14,000 to her, which is within the range accepted by the IRS without any associated transfer taxes (CCH Incorporated, 2009).

Total value of gift made to Joyce       = $28,000

Therefore, each Parent Gifted an amount of $14,000 to their daughter, calculated as below:

                                                                        = $28,000/2

                                                                        = $14,000

            Gift Limit allowed by IRS for each individual annually        = $14,000

Therefore, the parents were not liable for paying any transfer taxes since the total amount of stock gifted to Joyce was within the range allowed by IRS (Schoenblum, Schoenblum & Tax Management Inc., 2012).

References

American Bar Association. (2012). The American Bar Association guide to wills & estates: Everything you need to know about wills, estates, trusts & taxes. New York: Random House Reference.

CCH Incorporated. (2009). 2010 U.S. master tax guide. Chicago: CCH.

Schoenblum, J. A., Schoenblum, J. A., & Tax Management Inc. (2012). U.S. estate and gift tax treaties. Arlington, VA: Tax Management.