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REG1, REG120074, REG118122, REG118743, REG119066, REG118156, REG118321,…

- - - - 120,000
- - - - The Tax Cuts and Jobs Act of 2017 (TCJA) imposes a one-time transition tax on a U.S. shareholder’s (who owns 10% or more stake) pro-rata share of any specified foreign corporation (SFC)’s accumulated post-1986 deferred foreign income. The prior law allowed deferral of U.S. tax on foreign active business income earned by foreign corporate subsidiaries until repatriated, leading to the accumulation of untaxed foreign earnings.
      - For this purpose, US shareholder is defined as a U.S person (resident or citizen, domestic partnership, domestic corporation state or trust) who owns directly, indirectly, or constructively 10 percent of voting stock.
      - A Specified Foreign Corporation (SFC) is one that includes:
      - (i) All Controlled Foreign Corporations (CFC). A CFC is any foreign corporation in which more than 50% of the total value of the stock is owned directly, indirectly or constructively by U.S. shareholders and (ii) Any foreign corporation, which has a U.S. corporate shareholder.
      - Here, Smith Corporation is a US corporate and owns 12% stake in Aduna, a foreign corporation. Therefore, it is a US shareholder by definition.
      - Statement I is correct. Aduna is an SFC because it is a foreign Corporation with more than 10% owned by US corporate shareholder (Smith).
      - Statement II is incorrect. Aduna in an SFC as per the above explanation provided. The requirement of US shareholders to hold more than 50% in a foreign corporation is applicable to Controlled Foreign Corporation (CFC) and not SFC.
      - Statement III is correct. Smith Corporation is a US shareholder of an SFC and is liable to transition tax as per section 965
- - - - Dividends received from two of the three avenues are non-taxable to the taxpayers.
      - (i) Dividend income from a tax-free municipal bond is non-taxable even, if invested through a mutual fund.
      - (ii) Dividends received from life insurance companies are treated as a return of capital and are not taxable, as long as they do not exceed the basis that the investor has in the life insurance policy.
      - Generally stock dividends are non taxable; the current basis of $12,500 (500 stock x $25 per stock) is simply spread over the new total number of stock, namely 500 stock + 30 stock offered as dividends, over 530 stocks. However, when the taxpayer has the option of receiving cash, then the dividend is taxable at the FMV of the stock on date of distribution. Given than the FMV was $30 per stock when the 30 stock dividends were distributed, the taxable income to the Jones' is $900 ($30 x 30 stocks).
- - - - Brad’s gross income is calculated as:
      - Particulars Amount
      - Business income $50,000
      - Investment income $18,000
      - Passive income $14,000
      - Less: Passive loss ($30,000)
      - Net passive loss ($16,000)
      - Net passive loss adjusted from active / ordinary income $0
      - Gross income $68,000
      - Gross income is a taxpayer's world-wide income including wages, investment income, capital gain income, passive income and portfolio income. Losses and expenses from each of these categories of income may be subject to loss limitation rules.
      - Gross Income includes:
      - 1) $50,000 Professional fees - This comes from Schedule C on Form 1040, net of business expenses. Unless otherwise, stated, a taxpayer's business income from Sch C is an active income with material participation and any losses from such activity can offset other baskets of income.
      - 2) $18,000 Investment Interest - This is the gross investment interest that flows from Schedule B on Form 1040. The related interest expense of $3,000 is a Schedule A itemized deduction (subject to investment income limitation) and is used in determining the taxable income.
      - 3) $0 Loss from S Corp - Unless otherwise, stated S corporation losses to a shareholder are considered passive. Passive activity losses cannot offset ordinary or portfolio income i.e. passive activity losses can only be offset with passive activity income. Any unapplied passive activity losses can be carried forward indefinitely or until the activity is disposed. Passive activities can further be described as:
      - Trade and business activities in which the taxpayer does not participate materially during the year.
      - Rental activities even if the taxpayer materially participates, unless he / she is a real estate professional.
      - Rental activities of a real estate professional in which he does not materially participate. Exception: On active participation, rental losses are deductible from any active or portfolio income to an amount of ($25,000 less 50% x (AGI - $100,000)); if AGI > $150,000, no deduction [same limits for Single as well as MFJ filers] up to $25,000.
      - From the total passive loss of $30,000 from S Corp, Brad can only utilize losses to the extent of income from rental real estate (discussed next) of $14,000. The remaining passive lioss of $16,000 is disallowed and carried forward to the future years
      - 4) $0 Rental Real Estate- Brad's income from rental real estate is considered passive income with active participation (He is involved in business decisions such as determining the tenant and managing the repairs). Since the inome is passive, it is subject to the passive loss rules discussed above and the passive losses from S Corp of $14,000 offset the passive rental income of $14,000. Therefore, the income on Form 1040 is $0 from the rental real estate activity.
      - The total gross income before above the line deductions is $68,000 and the passive activity loss carryforward is $16,000.
- - - - Kiddie tax is imposed on unearned income of a child above a certain threshold. Part of child's unearned income (investment income) may be subject to the Kiddie Tax, if:
      - i. Child's unearned income (taxable income other than earned income e.g., dividends, interest, capital gains, rents, royalties etc.) > $2,300 [Limit for 2022]
      - ii. Child is a dependent under age 18 or 18 years and did not have earned income more than half of the child's support or at least 19 years but under 24 years if full time student and did not have earned income more than half of child's support.
      - iii. Child is required to file a tax return
      - iv. Child does not file a joint return for the tax year
      - v. At least one of the child's parent was alive at the of the year
      - Child means own child, legally adopted child or step child
      - Kiddie tax rates for 2022:
      - first $1,150 - not taxable (child's standard deduction)
      - next $1,150 - taxed at child's tax rate
      - Above $2,300 - taxed at the parent's marginal tax rate if that is more than the child's tax rate
      - In the above case April has only earned income. Earned income of a child is subject to the same ordinary tax rates as a single taxpayer. Kiddie tax is applicable to April, only if she had unearned income above the threshold amount of $2,300 for 2022. Therefore, only Statement I is correct.
- - - - Interest income from corporate bonds are taxable. A bond holder who has purchased a taxable bond at a price that is higher than the baseline amount (face amount), has incurred a bond premium. The taxpayer can either elect to amortize the bond premium over the term of the bond, thus reducing the basis in the bond by such amortization or make no election and include the full amount of premium in the tax basis of the bond. When ever bond premium amortization applies, the amortization is done using the constant yield method and reduced from the stated interest income received in the bond holder's tax return. Here Jane Doe Inc., elected to amortize the bond premium; therefore, the amount of premium must reduce the interest income on the corporate tax return.
        Original Issue Discount (OID) is a form of interest and is the excess of a debt instrument's stated redemption price at maturity over its issue price. Zero coupon bonds or debt instruments that pay no interest, examples of debt instruments that have OID. Here the municipal band with zero coupon or no stated interest is a debt instrument with OID. OID from tax-exempt municipal bonds are non-taxable to the bond holder. However, the OID must be accrued and added to the basis to determine the gain or loss on disposition of the bond.
- - - - Gain or loss on sale of capital assets are reported on Schedule D of Form 1040. Short-term gains (holding period of <1 yr) are taxed at ordinary rates. Long-term gains (holding period >1yr) are taxed at capital gain rates. Capital losses are deductible against capital gains and net capital losses up to $3,000 can be deducted against other categories of income. Personal losses such as loss on sale of personal residence is not-deductible.
      - In this case, the net capital gain/loss is computed as follows:
      - Loss on sale of personal residence (non-deductible) $0
      - LT gain on sale of securities $5,000
      - ST loss on sale of municipal bonds $(9,000)
      - LT loss on sale of painting held as investment $(4,000)
      - Net ST capital loss $(8,000)
      - Since the maximum amount of capital loss that is allowed against other categories of income is $3,000, excess loss of $5,000 must be carried forward.
- - - - $57,550
- - - - The taxpayer cannot deduct the alimony, as both he and his spouse did not maintain separate residences, as required by law, for the alimony to be deductible.
  - - - Alimony terminates upon the death of the recipient. Therefore, the mortgage payments cannot be deducted as alimony after Sue's death. However, Charlie can continue to take the mortgage payments as itemized deductions on his Schedule A after Sue's death.
  - - - As stated in the divorce decree, both the monthly maintenance and the mortgage payments qualify as alimony payments. However, they are not deductible in 2018 to Charlie, as the taxpayers did not maintain separate residences after the divorce was finalized.
- - - - Investment interest expense is deductible only to the extent of investment interest income (Mnemonic: Mike Takes Interest in Charity and Casual Outings). Therefore, $1,000 investment interest expense deduction is limited to the investment interest income of $100, which is U.S Treasury bond income. Municipal bond income is tax exempt and therefore not considered as investment income in the computation of limitation for investment interest deduction. Also, rental income is considered a passive activity and excluded from investment income in the computation of limitation of investment interest deduction.
- - - - Accuracy-related penalty of 20% of underpayment is levied if tax underpayment is due to
      - Negligence or disregard of tax rules and regulations
      - Substantial understatement of federal income tax or gift/estate tax or
      - Substantial valuation overstatement or substantial overstatement of pension liabilities.
      - Therefore, both I and II applies to tax underpayment.