Question

5. Name three financial accounting vs. tax accounting items that create timing or permanent differences.

6. Which of the following is false regarding the U.S. tax system? The income tax system is progressive tax system. The marginal tax rate is the highest tax bracket a taxpayer reached in a given year. Capital gains are always taxed at 15%. The sales tax is a proportional tax.

7. Alec Rondeau was never married and never made taxable gifts until 2017. In 2017 he gifted $6,500,000 of marketable securities to his five adult nephews, outright. Each nephew received 1/5th. What are Alec's taxable gifts and gift tax liability?

8. Why would a taxpayer NOT want to use the installment method to defer a realized gain?

Answer 1

Answer 5:

Three financial accounting vs. tax accounting items that create timing differences:

Depreciation: Due to difference in rates and method used for depreciation, depreciation creates timing differences.

Bad Debts: While in Financial accounting, provision created for doubtful/bad debt is allowed as expense, in tax accounting it is accounted for only when bad debt is written off.

Warranty Expenses: Whereas warranty expenses are accounted for when provision is created, in tax accounting warranty expenses are allowed only when the same is actually spent.

Three financial accounting vs. tax accounting items that create timing or permanent differences:

Municipal bond interest: This is income for financial accounting purpose. But, as this interest is tax exempted, it is not considered in tax accounting

Penalties and fines: This is considered as expense in financial accounting. But in tax accounting this is not deductible expense.

Meals and entertainment: This is recognized as expense in financial accounting. But in Tax accounting it is recognized partially only.

Answer 6: Which of the following is false regarding the U.S. tax system?

Correct answer is:

Capital gains are always taxed at 15%.

Explanation:

The tax rate on most net capital gain is no higher than 15% for most taxpayers. Some or all net capital gain may be taxed at 0% if one is in the 10% or 15% ordinary income tax brackets. However, a 20% tax rate on net capital gain applies to the extent that a taxpayer's taxable income exceeds the thresholds set for the 39.6% ordinary tax rate. (Source: https://www.irs.gov/taxtopics/tc409)

Other three statements are True.

Answer 7:

For 2017, the estate and gift tax exemption is $5.49 million per individual,

For 2017, the annual gift tax exclusion is $14,000

As Alec has given the gift to his five adult nephews 1/5th each, taxable gift = [$6,500,000 - (5* $14,000)] - $5,490,000 = $940,000

Gift tax applicable based on slab = 39%

Gift tax liability = $940,000 * 39% = $366,600

Answer 8:

The reasons are:

1. Tax rate change: Tax rate applied to installment sale income is determined in the year of the payment. If tax rate is expected to increase a Tax payer would not want to use the installment method to defer a realized gain.

2. AMT exemption: t might make sense not to use the installment method to defer a realized gain in order to exhaust fully one year's AMT exemption and have the exemption fully available in the future.