Both the motheer and the child live in Arizona.
Child:12 years old, opend, opened on-line business at age 8, selling clothing for pets. the company operate under Sole proprietorship.
Mother's cash inflows:
Annual bonus: $75,000Interest
Payment from the father: $48,000(per year) =50% of the expenses of being a signle parent.
Mother's cash outflows:
IRA contribution: $5,000
mortgage principal and interest: $18,000
Cash charitable contribution
to church: $20,000State
taxes paid this year for last year's tax return: $5,000
Current year state withholding
Current year federal
withholding: $45,000Payroll taxes
State sales taxes
: $2,500Medical expenses
Financial and tax planning
Gifts to family and friends: $24,000
Entertainment and travel: $48,000
Saving to 529 plan: $24,000
Roth 401K contribution: $12,000 (the mother is fully vested)
House and yard upkeep: $24,000
tuition: $15,000 (the mother anticipate the tuition will increase 5% a year until the child graduates. The child wants to attend a 4-year college, currently costs $18,000 a year with 7% annual inflation adjustment
. The mother expects the child to finish his undergraduate degree in 4 years and start 2-year master program (costs $35,000 per year, with projected a 10% annual inflation adjustment on the cost of this Master program.)
Checking account: $10,000
401K: $450,000 (under investigation by the office of comtroller currenct and should be shut down)
ABC corp stock: $52,000 (received from grandfather who passed away: the value of the stock: $50,000 on the grandfather's date of death). Currently, the stock is worth $55,000. The mother plan to donate the stock to the church this year.
Global mutual fund: $250,000 (The global mutual fund paid $500 in Greman taxes on the mother's behalf this year.) 5000 shares purchase for $55 a share three years ago. The mother wants to sell 1000 shares of the global mutual fund and have her IRA purchse 1000 shares of the global mutual fund.
IRA: $100,000 (the child is the primary beneficiary
, and the mother's estate list the child as the contingent beneficiary)
Home: $400,000 (including $100,000). Asking price. If mother decides to sell and move to Australia, she would have to pay 5% commistion to the realtor.
Auto and personal property: $150,000
Lake property (land received from the grandfather): $ 60,000 (the value on the granfather's date of death; currently worth-$65,000)
Beach house: $1,250,000 ($800,000 for the land. The mother lost money on the rental property
every year for at least 5 years. ($32,000 loss from previous years. Current year loss of $5,000. Mr. Smith wants to exchange the mother's beach house to piece of land in Montana valued at $1,000,000 plus $270,000 cash. If mother decides to exchange, she would use the Montana land for the investement purposes. In addition, she would give Mr. Smith $50,000 of beach equipment. Mr. Smith would aslo give the mother $30,000 of property.
Another party offers to pay $1,250,000 for the beach house.
TOTAL ASSETS: $2,832,000Liabilities
Home mortgage: $150,000 (the mother refinanced 6 years ago to combine togther the first mortgage with a $100,000 home equity loan. The loan is for 30 years with a 6.25% fixed interest rate
NET WORTH: $2,680,000
Additional information about the mother:
She established a trust for th ebenefit of her grandmother. She can modifiy the trust at her chosing. The trust earns $15,000 of interest income each year is invested soley in bonds. The trustee made a $10,00 distribution
earlier this year to the grandmother.
Investment information: 401K
Large balanced funds: 100% allocation
5-year return: 5.00%
5-year Standard deviation: 17.00%
MNO technology fund: 100%
5-year return: -10.00%
5-year Standard deviation: 25.50%
The mother: face value: $1,000,000 (30-year term)
Cash value: $0
Annual premium: $1,500
Bought 5 years ago.
$10,000 a month
to age 65
Inflation rider: 3%
Premium: $5,000 a year (100% of permium-paid by employer)
HMO: $15 per office visit
Permium: paid by the employer.
HO-5 Arizona home
Dwelling Amount: $300,000
Contents covrage: $150,000 replacement cost
Dwelling Amount: $400,000
Contents covrage: $200,000 replacement cost
Type: Personal auto policy
Liability limits: 100/300/100
Collision: $500 broad from deductible
Comprahensive (other-than Collision): $250 deductible
1. donate ABC stock to her church this year
2. develop a plan to better protect her assests from estate taxes
and pass them to the child.
3. The child wants to develop a sucession plan for the business in the event of his death or disability.
4. The mother wants to expand her insurnace coverage to minimize her risk exposure.
5. The mother wants to change her assets allocation to better match her risk-tolerance level.
6. The mother wants to pay 25% of the child undergraduate tution.
a. What's the mother adjusted gross in come?
b. If the mother gives the ACB stock to the church now, what's the total amount of her charitable contribution this year?
c. What's the income tax treatment of the trust the mother create for her grandmother? (any taxes paid on the $10,000 distribution or how much tax paid for the $15,000 of interest income?)
d. What's the amount of exepmtion the trustee can claim on the income tax return for the trust mother created for her grandmother?
e. If mother sells the lake property today, what's the gain if she incurs $1,000 in transaction
f. If the moher enters the transaction with Mr. Smith,
-what's the amount of her recognized gain on the sale of the beach house?
- what's the amount of her gain on the sale of the beach house?
-what's Mr. Smith basis in the beach house?
h. if the mother accepts the offer on her home, what's her taxable gain
on the transaction?
i. the mother is concerned about paying AMT this year, should she:
-prepay $3,000 of the child's tution for next year?
or contribute $3000 more to the Roth 401K plan
or pay $3000 more this month with her mortgage payment
or prepay $3000 of next year's anticipated contributions to the church?
j.Which of the transaction will reduce the mother tax liability
the most next year?
-contributing $10,000 from her checking account to a 529 plan for the child?
-contributing $2,000 from her checking accoutn to an ESA for the child?
k. If the mother won't sell the beach house, what's net amount
of cash she deduct this year related to beach house rental activities?
l. If the mother decides to sell the beach house to the second interested party at the end of this year, what's net loss amount can she deduct this year related to the beach house rental activites?
m. What is the amount the mother will have to report as a loss if she implements her idea about ehe global mutual fund when the stock is trading at $51 a share?
n. How much can the ex-husband deduct on his idivudual income tax return this year to his payment ro the ex-wife?