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Tax Planning - Roth Case

The Roth Case

Tax Planning

Your clients, Ira and Flora Roth, have come to you for some basis tax planning advice and guidance. Here are the facts you need to help them.

• Ira's earned income: $65,000
• Flora's earned income: $52,000
• They live in Kansas and own a municipal bond issued by the city of Wichita (not a private activity bond). The bond's face value is $100,000 and it has a 3.5% coupon
• Ira paid $12,000 in a alimony for the year to former spouse
• During the year they had a the following transactions

o Sold XXP stock for $11,000; originally purchased many years ago for $5,000

o Purchased 100 shares of HHP stock for $3,000 in April of the year

o Sold KSU corporate bond originally purchased on February 6 of the year for $15,000 (basis); they received $11,000 for the bond on November 12,

o Redeemed $4,300 worth of EE savings bonds in July that they had held for 12 years; the bonds earned 6% interest and had doubled in value

o Sold 1,000 shares of UNR stock at $7 per share that they had purchased earlier in the year for $13 per share.

* Flora age 61 received annuity distributions of $22,000 from a nonqualified annuity. T the beginning for the year, the annuity had a value of $300,000 and an after tax basis of $100,000. Her remaining life expectancy is 13.64 years

• Ira age 57 terminated employment and took a distribution of $199,99 from his 401K plan with the intent of rolling the money over to a Fidelity IRA in 30 to 45 days. His remaining life expectancy is 14.80 years.
• Ira and Flora paid $3,000 in housing expenses for their grandchild Chuck as a way to help offset some of his college expenses. They paid the $3,000 directly to Chuck.
• During the year, they paid the following items:

o $12,600 in unreimbursed medical expenses.
o $7,000 in mortgage interest
o $3,500 in property taxes
o $3,000 in state income taxes
o $2,800 in state and local sales taxes
o $1,000 to the salvation Army
o $2,400 to their church
o $750 to Kansas State University
o $500 in legal fees
o $100 in safe deposit box fees

• They contributed $3,200 to a Section 529 plan to help pay for Chuck's college expenses

CASE QUESTIONS

#1) How much in long term capital gains did the Roths have for the year

a) -$3,000
b) $0
c) $1,000
d) $6,000

#2) Which of the following statement is true?

a) The Roths had $1,000 in short term losses for the year
b) The Roths had $4,000 in short term losses for the year
c) The Roths had $10,000 in short term looses for the year
d) The ROths had $15,000 in short term losses for the year

#3) How much (rounded) of Flora's annuity distribution in taxable this year?

a) 33%
b) 67%
c) 75%
d) 100%

#4) Which of the following statements is true?

a) Ira's employer will withhold $20,000 in federal taxes from the 401K distribution
b) Ira will owe an immediate 10% penalty on the 401K distribution
c) Ira will need to contribute only $80,000 to IRA rollover to avoid penalties
d) Ira needed to roll over the money to the IRA within 30 days to avoid taxes and penalties

#5) Had the Roths decided to give the XXP stock to a charity, they should have

I. sold the stock first and then made the donation for a deduction
II. donated the stock first and then taken he deduction
III. donated cash to the charity then sold the stock

a) I only
b) II only
c) III only
d) I,II, or III because they result in the same tax outcome

#6) Assuming they had decided to donate the KSU bond to a charity, they should have

I. Sold the bond first and then made the donation for a deduction
II. Donated the bond first and then taken the deduction
III. Donated the bond first and then deducted the loss

a) I only
b) II only
c) III only
d) I, II, III because they result in the same tax outcome

#7) How much can the Roths deduct from their federal taxes for the ss 529 plan contribution?

a) $0
b) $1,000
c) $2,000
d) $1,600
e) $3,2000

#8) In addition to the information already known about the Roths, you learn that Flora owns a vacant lot in Topeka that she purchased as an investment. She would like to exchange the lot so that she does not incur a tax liability. Which of the following properties can she take in trade to receive like kind tax treatment?

a) A duplex in Wichita
b) Collector coins owned by a coin dealer
c) A mortgage on a rental house in Topeka
d) A or C only

#9) Instead of doing a straight exchange with someone, assume that Flora finds a person who is willing to provide her a combination of property and cash for her vacant lot. Flora will receive $5,000 cash and a vacant lot in town valued at $10,000 (basis of $8,000). If her original lot has a fair market value of $20,0000 and a basis of $5,000, how much will Flora realize on this transaction?

a) $0
b) $5,000
c) $8,000
d) $10,000
e) $15,000

10) using the information in the previous question, how much gain must Flora recognize on the exchange for income tax purposes?

a) $0
b) 5,000
c) $10,000
d) $15,000
e) $20,000

Solution Preview

#1) How much in long term capital gains did the Roths have for the year

d) $6,000

XXP stock $6,000

#2) Which of the following statement is true?

c) The Roths had $10,000 in short term loses for the year

KSU bond $(4,000)
UNR stock $(6,000)

#3) How much (rounded) of Flora's annuity distribution in taxable this year?

a) 67%

$100,000 cost/$300,000 value = 33% excluded portion
Taxable portion = 100% - excluded portion = 100% - 33% = 67%

#4) Which of the following statements is true?

a) Ira's employer will withhold $20,000 in federal taxes from the 401K distribution

10 percent tax is withheld if amount is not paid directly to a ...

Solution Summary

This solution discusses the taxation of property transactions.

$2.19