Income Tax and Estate Planning Quiz

1. Children pay lower income tax rates than adults.
a. True
b. False

2. What is a living trust?
a. A document that dictates life preserving wishes
b. A trust established to pay a surviving spouse
c. A trust established to hold your assets while you are alive

3. How long do you need to keep tax records?
a. Until your tax return is filed.
b. Two years.
c. Forever
d. Three years from when you filed your return.

4. Making a charitable contribution of shares of stock is often mentioned as a way to save income taxes. When you contribute stock to a charity, your charitable contribution tax deduction is equal to:
a. Your cost basis of the shares.
b. The fair market value of the shares.

5. If the value of your mutual fund shares went down during the year, there will be no income tax effect for the shares you own in a taxable (not an IRA or qualified plan) account.
a. True
b. False

6. What is probate?
a. The status of your 401(k) plan balance after you change jobs and before you roll it into an IRA.
b. The process by which assets in an estate are distributed under the terms of a will.

7. Putting assets in a child's name with a Uniform Transfer to Minor Account can avoid income taxes.
a. True
b. False

8. Once you file your individual income tax return, you can file an amended return for how long?
a. One year
b. Two years
c. Three years
d. Seven years

9. Proceeds from a life insurance policy are income tax free.
a. True
b. False

10. Getting an extension to file your income tax return allows you to delay paying the taxes (in addition to filing the return late?).

11. If you are in the 28% federal income tax bracket, all your taxable income is taxed at 28%.
a. True
b. False

1. b) False, generally. All taxpayers are subject to the same income tax rates. Usually, children pay lower taxes because they have lower incomes. A special tax provision known as the Kiddie Tax results in children under the age of 19 being subject to tax on unearned income (dividends, interest and capital gains) at their parents’ tax rates. In addition, children from 19 to 24 that are dependents and full time students are also subject to this Kiddie Tax. Consult your tax advisor for more details.

2. c) A revocable living trust is primarily a way to hold assets while you are alive to avoid having them be subject to probate when you die. These popular trusts are revocable and enable the grantor to still control the assets and withdraw them if needed. Consult your estate-planning advisor for more details.

3. d) Generally, the IRS has three years from when you filed your tax return to start an audit. However, there is no limit on how long the IRS has in the case of fraud. For investment records, this means you should keep records on purchases for three years after you file the return where you report the sale. Most people keep copies of their actual tax returns much longer.

4. b) Your deduction is equal to the fair market value when you make the contribution. If the shares have appreciated, you do not end up paying capital gains taxes on the appreciation. There are some rules about how much you can contribute this way, so you may want to consult your tax advisor to determine if this strategy is right for you.

5. b) False. You must report any distributions you received from the fund, including amounts you reinvested in additional shares. The mutual fund reports that to you on Form 1099.

6. b) When an estate is "probated", a court approves the estate's disposition of the assets based on the terms of the will. Some forms of asset ownership can be used to avoid this expense. Consult your estate attorney to make sure your estate plan minimizes any probate expenses.

7. b) False. Minor children are taxpayers just like adults. There can be some minor tax benefits, but they will pay income taxes if their unearned income exceeds $950. There are also some special rules for children under the age of 19 and those from 19 to 24 that are dependents and full time students.

8. c) Generally, you have three years from the due date (or extended due date, if you have an extension) of your tax return to file an amended 1040. If you find that you have forgotten income or deductions on your return, you can take advantage of this. The IRS also has the same three years to begin an audit of your return. However, there is no statute of limitations for fraudulent returns.

9. a) True. The proceeds from a life insurance policy are free from income tax. However, depending on how the policy was structured and owned, the proceeds may become part of the taxable estate and subject to estate taxes. A qualified estate planning professional can help structure the policy and explain why a life insurance trust may be appropriate.

10. b) False. Getting an extension to file your income tax return does not allow you to delay paying the tax. Your taxes are still due by the original due date of your return. If you delay paying your income taxes when due, there may be interest and/or penalties.

b) False. "Tax brackets" refer to the top marginal rate at which your income may be taxed. Of course, income taxes are complicated, but think of your tax rates as stair steps. The higher your income, the higher the tax rate on those incremental (marginal) dollars.
Generally speaking, segments of income at lower levels are taxed at lower rates and segments of income at higher levels are taxed at the higher marginal rates.

Financial articles provided by WestStar Bank are for information purposes only and are not to be construed as tax or investment advice. Please consult with a tax and/or investment professional if you have any questions or doubts about any of the information contained in the articles.

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