Question

1. Phil’s father, who died on January 10, 2019. had owned stock for 20 years with a basis of $45,000 that was transferred to Phil as a gift on August 10, 2018, when the stock was worth $430,000. Phil's father had paid no gift taxes. This stock was worth $566,000 at the date of the father’s death. Phil sold the stock for $545,000 net of commissions on February 23, 2019.

1. What is the amount of Phil’s gain or loss from the sale of this property?
2. What is the nature(character) of Phil’s gain or loss from the sale of this property?

2. Bob and Sally are married, file a joint tax return, report AGI of $120,000, and have two children. Del is beginning her freshman year at State College during fall 2019, and Owen is beginning his senior year at Southwest University during fall 2019. Owen completed his junior year during the spring semester of 2018 (i.e., he took a “leave of absence” during the 2018-2019 school year). Both Del and Owen are claimed as dependents on their parents’ tax return. Del’s qualifying tuition expenses and fees total $5,000 for the fall semester and Owen’s qualifying tuition expenses were $6,100 for the fall 2019 semester. Del’s room and board costs were $3,200 for the fall semester. Owen did not incur room and board costs because he lived with his aunt and uncle during the year. Full payment is made for the tuition and related expenses for both children at the beginning of each semester. In addition to the children’s college expenses, Bob also spent $3,000 on professional education seminars during the year in order to maintain his license as a practicing dentist. Bob attended the seminars during July and August 2019.

1. Calculate and classify the amount and type of available education tax credits for Bob and Sally in 2019.

Answer 1

Ans 1)

a) Calculation of Amount of Gain/ (Loss) on sale of Stock

Selling Price = $545,000

Purchase Price = $45,000. (Cost of acquisition of the assets gifted by family member would be the cost actually incurred by previous owner or original buyer)

Capital Gain = $500,000 ($545,000 - $45,000)

b) While computing the nature of capital gain, holdin period of previous owner is also considered. Therefore, the resultant capital gain is long term capital gain as Phil's father holds shares for last 20 years.

Ans 2)

Education tax Credit is available in 2 forms:

a) American Opportunity Credit

b) LIfetime Learning Credit

In the given case, both Bob and Sally are eligible for American Opportunity Credit for $2,500 each.

Bob Lifetime Learning Credit = 20% of $3,000 - Phaseout

= $600 - 20% of $600

= $480

Therefore, Total Education Tax Credit = $5,480 ($2,500 + $2,500 + $480)