Tax Preparation IRS Rules, Retirement, and Special Topics 2 — Questions and Answers
Question 1: The Alternative Minimum Tax (AMT) was designed to ensure that:
- Low-income taxpayers pay more tax
- High-income taxpayers pay a minimum level of tax regardless of deductions (Correct answer)
- All businesses pay corporate tax
- Retirement income is taxed at a flat rate
Correct answer: High-income taxpayers pay a minimum level of tax regardless of deductions
The AMT is a parallel tax calculation that adds back certain preference items and deductions to ensure high-income taxpayers pay at least a minimum tax.
Question 2: Foreign tax credits allow US taxpayers to:
- Exclude all foreign income from US taxes
- Offset US tax on foreign income with taxes paid to a foreign government (Correct answer)
- Avoid filing US returns on foreign income
- Deduct foreign living expenses
Correct answer: Offset US tax on foreign income with taxes paid to a foreign government
The foreign tax credit (Form 1116) reduces US income tax by the amount of income tax paid to a foreign government on the same income.
Question 3: What is the annual gift tax exclusion for 2024?
- $15,000
- $16,000
- $17,000
- $18,000 (Correct answer)
Correct answer: $18,000
The annual gift tax exclusion for 2024 is $18,000 per recipient, meaning a donor can give up to $18,000 to any number of individuals without gift tax consequences.
Question 4: Under the like-kind exchange rules (Section 1031), tax deferral is available for the exchange of:
- Stocks and bonds
- Real property held for investment or business use (Correct answer)
- Personal use property
- Foreign currency
Correct answer: Real property held for investment or business use
After the TCJA, Section 1031 like-kind exchanges apply only to real property held for productive use in a trade or business or for investment.
Question 5: A taxpayer inherits stock worth $50,000 that the deceased purchased for $10,000. What is the heir's tax basis?
- $10,000 (carryover basis)
- $50,000 (stepped-up basis) (Correct answer)
- $30,000 (average of cost and FMV)
- $0 (inheritance is tax-free)
Correct answer: $50,000 (stepped-up basis)
Inherited property receives a stepped-up basis equal to the fair market value at the date of death, eliminating built-in gain from the decedent's holding period.
Question 6: The kiddie tax rules tax a child's unearned income above a threshold at the:
- Child's tax rate
- Parent's marginal tax rate (Correct answer)
- Flat 15% rate
- Corporate tax rate
Correct answer: Parent's marginal tax rate
The kiddie tax applies to unearned income of children under 19 (or under 24 if full-time students) above the annual threshold, taxed at the parent's rate.
Tax Preparation IRS Rules, Retirement, and Special Topics 2
The Alternative Minimum Tax (AMT) was designed to ensure that: