This move is not a change in control, but a strategic and marketing decision as we continue to grow our suite of services geared for tax and accounting professionals.
How does this affect you?
Actually, not at all.
We are the same great team you have come to depend on.
We have been using the CountingWorks brand for our marketing automation platform for several years. It had become confusing to our customers when we communicated through both brand names.
We will slowly be replacing the ClientWhys name throughout our product line. This includes on TaxCPE.com, The Big Book of Taxes, and a facelift to our webinar presentations. There will be a transition period where you might see the old ClientWhys logo on older material. So please bear with us.
Our path forward is clear.
We will continue to focus on providing quality tax updates and education for independent tax and accounting professionals. We will blend our education and coaching division with our marketing automation and digital front office solution.
Our address and contact information will remain the same.
CountingWorks, Inc.
2459 Eastbluff Drive, #448
Newport Beach, CA 92660
CPE Site: TaxCPE.com
Marketing Automation and Digital Front Office: CountingWorksPRO.com
Thank you for trusting us for so many years.
Lee Reams II
CEO
Lee Reans Sr.
Editor-in-Chief
But as a tax professional yourself, you know that there’s a big difference between tax preparation and tax planning. If your clients reach out to you for tax prep services and you don’t mention your tax planning abilities, there’s a good chance that you’re leaving money on the table, both in terms of potential savings for your client and additional professional fees for yourself. More importantly, you can’t change time and make up for mistakes that proactive tax planning would have identified had they been planned for.
There’s no question that your clients could benefit from comprehensive tax advice, but few know that they should ask for it. Most assume that tax preparation includes suggestions for how to maximize tax savings, but that is an entirely different service. When a client approaches you for tax preparation, the job is simply to help them file their tax returns in a way that is accurate and compliant with federal tax law as well as their state and local tax requirements. A client who learns later that they could have saved money had they only taken a specific step may feel ill-served, but if they only contracted for tax preparation services then that is all they would have gotten. It is up to tax professionals who are qualified to provide tax planning services to explain the difference between the two and how tax planning can help them in the long run (versus the short-term service of tax preparation).
What Qualifies a Tax Preparer to Provide Tax Planning?
While tax preparation professionals have the training needed to ensure that their clients comply with federal, state, and local tax laws, they do not always have the knowledge needed to provide advanced tax planning strategies. Investment and insurance planning, retirement planning, and estate planning are the realms of those with CPA/PFS or CPA/EA + CFP® designations.
Proactive tax planning advice can help your clients offset investment gains, lower their tax bracket, and maximize charitable contributions or medical expenses in order to take advantage of deductions. It can help them properly time Roth conversions and taking money out of taxable and retirement accounts as well as how best to minimize inheritance taxes for their beneficiaries. It can mean saving tens of thousands for business owners when you suggest the use of the R & D Tax Credit or QSBS stock (or much more in this case).
Though taxpayers may have the expectation that these services are part of tax preparation, tax planning is an entirely separate function that requires time, additional information, and significant analysis. Qualified tax professionals who explain the vast differences between tax preparation and tax planning can then offer their strategic services to existing clients as a separate service from which they will gain real, tangible value.
It is learning how to price your services for this value that is key. Before you get to the pricing and marketing discussion, it is important to identify any tax planning tools that can save you time and provide you an insight into the next planning approach.
Software products like Corvee and BNA Income Tax Planner help you advise your clients in less time with various options. Tax research products like The Big Book of Taxes 365 further keep you up-to-date on the latest law changes and strategies.
When it comes to pricing, we suggest either a value price model or packaging. There is some trial and error to see what best fits your client profile. To learn more about packaging, check out this blog article.
Once you take the plunge, we recommend starting with an online discovery call, where you can probe the client about their current challenges and how your expertise will assist them. If done properly, you can start optimizing a one-call close process, where you qualify, present your offer and start the engagement in one call.
The current uncertain tax climate has made it more important than ever for tax professionals to pivot to tax planning. Start by identifying the segment of your client base that would be targeted. Business owners, medical professionals, attorneys, and high-income taxpayers will be perfect for your pitch. Develop an outreach program and add sections to your website or targeted tax planning landing pages.
The rest is a little trial and error. Test different price packages and track your results. In no time you can increase your income while improving your quality of life.
]]>As part of the 2020 Tax Update and Review Conference Virtual Conference series, we field questions from our students throughout the presentation. We have highlighted some of the common questions and the answers you might find valuable.
Lesson 8 covers legal expenses, disaster losses, and gambling income and losses, AMT, kiddie tax, tax credits, tax penalties, and other issues including: child & dependent care credit, child (CTC) & other dependent credit, earned income tax credit (EITC), claim of right, saver’s credit, adoption credit, pension start-up credit, automatic enrollment credit, solar and home energy credits, premium tax credit, general business credits, employee retention credit, credit for building an energy efficient home, business energy credits, work opportunity credit, repayment of first-time homebuyer credit, recovery rebate credit, electric vehicle credit, fuel cell vehicle credit, 2-wheeled vehicle credit, refueling property credit, research credit, paid family & medical leave credit.
QUESTION: Stimulus question. Taxpayer claimed brother aged 68, who is on social security, as dependent. Taxpayer got the $1,200 stimulus payment but not stimulus for her dependent brother. The brother received his own $1,200 stimulus since he is on social security. Is this how it was intended to work? In other words, is the brother as social security recipient entitled to his own $1,200 when his sister claimed him as a dependent?
ANSWER: The 2020 stimulus payments for a dependent under the age of 17 was $500. This brother dependent did not qualify for the $500…so that answers that question. Then the IRS used the SS Admin list and sent payments to all SS recipients that did not file a return. Obviously, the Treasury did not reconcile those on the SSA list with those also being a dependent of another taxpayer. However excess payments do not have to be returned.
Since there is no longer an exemption amount for a dependent, he might not want to claim his brother any longer unless there is some other reason.
For the rebate coming up it also a dependent under the age of 17.
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QUESTION: Can a parent claim a child's 1099R Income from the deceased other parent?
ANSWER: Parents may elect to include their child's interest and dividend income (including capital gain distributions) on their own tax return instead of the child filing a return of his/her own. If the child has other types of income, either earned or unearned, this election cannot be made. Thus, the child will have to file their own return.
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QUESTION: Are energy credits available on rental properties?
ANSWER: Property that is eligible for the general business credit is tangible property for which depreciation is allowable (Sec. 48(a)(5)(D)). Solar panels installed on a residential rental would meet that requirement.
But, as noted in the Form 3468 instructions and per the code, business credits are generally not available for property that is used predominantly to furnish lodging (Sec. 50(b)(2)). However, there is an exception: Sec. 50(b)(2)(D) provides the restriction to property used predominantly to furnishing lodging does not apply to the energy credit. Thus, rental property would qualify.
One more hurdle: because rentals are considered passive activities for purposes of the Sec 48 energy credits, before the credit from the 3468 can pass onto the Form 3800, the credit must first pass-through Form 8582-CR – Passive Activity Credit Limitations or Form 8810 – Corporate Passive Loss and Credit Limitations. See Chapter 911 in the Big Book of Taxes.
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QUESTION: Wasn't Kindergarten considered optional and did qualify previously?
ANSWER: It has been that way since 2007 - The expenses of nursery, pre-school, or similar programs for children below the kindergarten level are considered to be for care and may be employment-related expenses, if otherwise qualified, even if education is a significant part of these programs. In contrast, expenses for programs at the level of kindergarten and above aren't employment-related. However, expenses for before- or after-school care of a child in kindergarten or a higher grade may be for the care of a qualifying individual. (Reg § 1.21-1(d)(5)), effective 8/14/2007.
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QUESTION: If a business owner's son is unemployed for a long time and if he hires his son, can the business claim work opportunity credit? Any limitations to family members?
ANSWER: No credit is allowed for an employee who is related to the employer or to certain owners of the employer, or who is a dependent of the employer.
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QUESTION: Lee, is there any information available for 2020 related to married filing jointly with dependents that did not get the stimulus for the dependents, how will this be reconciled on the 1040? I know it is not in this course, but it has not come up in course 1-3 or 5-8...so I am curious and wanted to ask. We get a lot of questions on the stimulus.
ANSWER: The CARES Act included a refundable 2020 credit referred to as an Economic Impact Payment. The IRS subsequently decided to refer to them as stimulus payments. Because the need was so great, the payments were paid in advance. However, on the 2020 return taxpayers must reconcile the advance payments against the credit computed on the 2020 return. If it turns out the advanced payment exceeds the amount computed on the return the excess is forgiven. However, if the advanced payment was less than computed on the 2020 return, the additional amount will be allowed as refundable credit on the 2020 return. Thus, if the $500 credit for the child was not paid in advance the TP will get it on the 2020 return.
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QUESTION: On adoptions, can it be an adoption from a foreign country?
ANSWER: For a foreign adoption, the credit is allowed only in the year the adoption becomes final (Code Sec. 23(e)(2)), and no credit is allowed if the adoption doesn't become final. (Code Sec. 23(e)(1)) However, for expenses paid or incurred in a tax year after the adoption becomes final, the credit may be taken in the year the expenses are paid or incurred.
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QUESTION: EITC Documentation - Besides completing and retaining Form 8867 & EITC worksheet - what reasonable inquiries should be documented?
ANSWER: The data entered on the Form 8867 must be based on information provided by the taxpayer or otherwise reasonably obtained by the preparer. The preparer must retain for the period described in the Form 8867 instructions copies of any documents provided by the taxpayer and on which the preparer relied on completing Form 8867 and the EIC worksheet.
The tax return preparer must also contemporaneously document in the files the reasonable inquiries made and the responses to these inquiries. If the preparer receives conflicting information from two different taxpayers, the return preparer has an affirmative duty to request verification from both taxpayers to determine which information is correct and only file a return with the information the return preparer does not know or have reason to know is incorrect.
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QUESTION: Can we take the paid family leave when we gave COVID leave but can’t take that credit due to accepting PPP Loans?
ANSWER - We do know the FFCRA program is mandatory so if your client had any employees that qualified under FFCRA the employer was obligated to make the sick and family leave payments under that program. Did not cost the employer anything since they reimbursed employer for the leave payment either as a payroll tax credit or cash reimbursement where payroll credit was not enough. Thus, since the government paid those wages, the employer cannot double dip and also claim PPP loan forgiveness for same wages.
Q&A #19 - FFCRA leave wages are not eligible as “payroll costs” for purposes of receiving loan forgiveness for a PPP Loan under Sec 1106 of the CARES Act. (Q&A #19)
From the sounds of your question the employer did not comply with the FFCRA mandate which came out long before PPP. However, the employer can back into the program…If an employer does not initially pay an employee qualified leave wages when the employee is entitled to those wages, the employer can pay those wages at a later date and claim a credit for those wages as long as the qualified leave wages relate to leave taken during the period beginning on April 1, 2020, and ending on December 31, 2020. (Q&A #43)
While the wages can only be for periods of leave between April 1, 2020, and December 31, 2020, a payment of qualified leave wages that is made after the end of this period may nonetheless be eligible for the credits if the wages are for leave that an employee took between April 1, 2020, and December 31, 2020. Q&A #48)
You can register for the 16-Hour CPE Virtual Tax Update & Review Conference here.
]]>As part of the 2020 Tax Update and Review Conference Virtual Conference series, we field questions from our students throughout the presentation. We have highlighted some of the common questions and the answers you might find valuable.
Lesson 7 covers Standard deduction, unusual medical, taxes, SALT, home mortgage interest, home refinance issues, points, investment interest, contributions, and miscellaneous deductions.
QUESTION: Is there a limitation for how many properties you can deduct property taxes for? (e.g. 1st home, investment property, vacation home, 2nd home?)
ANSWER: There is no limit on the properties you can deduct taxes for. But of course, there is that overall $10,000 itemized deduction limit on all taxes.
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QUESTION: Son and daughter inherited rental property (4-plex) from parents 20 years ago on a 50/50 split. If son buys out sister's half, does property assessment remain the same per Prop 13?
ANSWER: I believe Prop 13 dealt with replacing personal residences and inheritances from parents. With one child is selling to another, I don’t believe that would count under Prop 13. Plus, we just had Prop 19 pass in the November election, and it becomes effective at various times during 2021. I don’t see provisions for transfers between siblings. So, I believe the purchased portion would be reassessed. Although I am not well versed in property assessments.
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QUESTION: Taxpayer has been living in a nursing facility, has a private room, gets meals, but does not really have medical treatments---just for old age--for ten years. She is 88 years old. Are payments a medical expense? She never has claimed them.
ANSWER: This is a tough question. Medical expenses include amounts paid for the cost of inpatient care at a hospital or similar institution if the main reason for being there is to receive medical care. This includes amounts paid for meals and lodging. I think you should investigate a little more and see if she is there because she needs supervision or can’t live independently. I would think if she didn’t need some form of care, she would be living in a retirement home not a nursing facility. I have included the following tax court case where even some of the expenses of a retirement home counted as medical.
Allocation of retirement residence fees to resident's medical expenses - Delbert L. Baker, (2004) 122 TC - The Tax Court has approved the use of the percentage method for determining what portion of monthly fees paid by a taxpayer to a continuing care retirement community qualified as deductible medical expenses. In doing so, the Tax Court rejected IRS's contention that the deductible amount had to be determined based on an actuarial analysis taking into account life expectancy and health care level expectancy. But no deduction was allowed for costs related to use of the pool and spa at the facility.
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QUESTION: Medical expenses of a surrogate mother who carried the child? What if in a foreign country?
ANSWER - As with in vitro fertilization, this issue is not specifically addressed in the Code, Regs, etc. The Code does tell us that medical expenses are only deductible for the taxpayer, spouse and dependents. The definition of a dependent for medical purposes ignores the gross income and joint return tests. Therefore, it appears that a surrogate mother’s medical expenses can only be deducted if she qualifies as a “medical dependent.” The unborn fetus is not a dependent until actually born. So, it makes no difference whether the surrogate is a resident or non-resident, she would have to be the taxpayer’s medical dependent in order for the taxpayer to to deduct the surrogate mother’s expenses. Plus, the surrogate is generally paid and therefore would not be a medical dependent. Bottom line, it is rare that the expense of a surrogate would be deductible.
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QUESTION: How about inherited property from parent’s home couches.....dishes....crystal given to charity is valued at $2000. What would substantiation look like?
ANSWER: That is a tough one. If a home is inherited it would have to be appraised. Technically the same would be true of anything else that is inherited. How did you come up with a nice round $2,000? Obviously, the cost of an appraisal would probably be more than the tax benefit. There are charities out there that will provide an appraisal. All that may be more than a client is willing to go through. So, settle for $249?
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QUESTION: .07.08.08 says you need an appraisal for "similar items" if aggregate over the year is over $5000. If the items make up various household items, clothing, etc. are those all considered "similar"?
ANSWER: Similar items of property means property of the same generic category or type, such as stamp collections (including philatelic supplies and books on stamp collecting), coin collections (including numismatic supplies and books on coin collecting), lithographs, paintings, photographs, books, non publicly traded stock, non publicly traded securities other than non publicly traded stock, land, buildings, clothing, jewelry, furniture, electronic equipment, household appliances, toys, everyday kitchenware, china, crystal, or silver (Reg § 1.170A-13(c)(7)(iii)).
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QUESTION: Self-employed paying for extra insurance for parent (PPO). Deductible on face of return?
ANSWER: A self-employed individual (or a partner or a more-than-2%-shareholder of an S corporation) can deduct as an above-the-line expense 100% of the amount paid during the tax year for medical insurance on behalf of himself, his spouse and his dependents subject to the following requirements (Code Sec. 162(l)(1)(B)): So, the parent would have to be a dependent.
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QUESTION: What if someone has a property acquired prior to 12/15/17 and acquires a second home after? Please advise on the limit to use.
ANSWER: Well first of all, the existing home mortgage is grandfathered in up to $1M limit. However, the limit after 12/15/17 is $750K which would include any grandfathered debt.
Example #1 – If the grandfathered debt is $800K then no additional debt would be qualified after 12/15/17 ($750K - $800K).
Example #2 - If the grandfathered debt, for example is $400K then an additional debt of $350K ($750K - $400K) qualified debt.
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QUESTION: What if you already made an unsecured election prior to TCJA?
ANSWER: The election is irrevocable without IRS consent. (Reg. 1.163-10T(o)(5)). So once made it continues to apply.
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QUESTION: Medical expenses - are supplements recommended by a doctor as an alternative cancer treatment deductible? (When the taxpayer undergoes ONLY alternative treatments) What about certain medical devices, such as single infrared sauna, infrared biomat? Thank you!!!
ANSWER: If the doctor prescribes the use of the biomat then it would be a taxable deduction as would the supplements. As for an infrared sauna, if is the permanent variety installed in the home, then special rules apply. Amounts paid for special equipment installed in the home, or for improvements may be included in medical expenses, if their main purpose is medical care for the taxpayer, the spouse, or a dependent. The cost of permanent improvements that increase the value of the property may be partly included as a medical expense. The cost of the improvement is reduced by the increase in the value of the property. The difference is a medical expense. If the value of the property is not increased by the improvement, the entire cost is included as a medical expense. This may require an appraisal of the home with and without the sauna to determine the deductible portion. If audited an auditor would surely question the deductibility so make sure your client retains documentation of the Doctor’s prescription and the more difficult documentation of how the portion of the sauna was determined.
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QUESTION: Contributions rules for donations to Armenia? If allowed at all?
ANSWER: Generally, deductible contributions to foreign charities are not permitted. However, do not mistake U.S. Charities that do charitable work in foreign countries as foreign charities. So, to make deductible donations for Armenian relief one would have to find a U.S. Charity that supports Armenian relief.
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QUESTION: Is an IRS Agent a “Public Safety Officer”?
ANSWER: I wasn’t sure if you were kidding or not... But anyway, here is the definition of a public safety officer: A public safety officer is an individual serving a public agency in an official capacity, with or without compensation, as a law enforcement officer, a firefighter, a chaplain, or as a member of a rescue squad or ambulance crew.
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QUESTION: Are the charitable expenses such as meals, entertainment, uniforms, etc. still subject to the tier 2 subject to 2% of AGI, not a charitable deduction?
ANSWER: They have always been deductible as a charitable contribution, never as a Tier 2 itemized. The meals are allowed in full (no 50% haircut).
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QUESTION: If you purchased a home in 2015 - $1,100,000/$900,000 loan - and then refinanced in 2020 and replenish your remodeling cost of 100,000. New loan $900,000. Is this allowed?
ANSWER: Several issues here…
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QUESTION: There is a college in San Jose that you have to be 18 to attend and mentally deficient such as Downs. They use the arts to teach these kids. Some of the kids are really gifted. For almost all of them, this college is the first time in their lives they have been complimented on work they have done. I actually have two paintings done by two different students and the paintings are really good. I was just wondering if the tuition there would count as medical. This college is providing a service not available elsewhere and it is helping the kids develop.
ANSWER: This is tough one and what court cases are made from. What is interesting, is the college an accredited public, nonprofit, or proprietary post-secondary institution eligible to participate in the student aid programs administered by the Department of Education? If so, the education would qualify for the education credits. If not, you could make the case it is a “special school” for mentally impaired students. To that end I researched this a little and found the pertinent regulation along with some court cases. You will note that all of the court cases focused on the term “special school”. From what you have indicated this school may be a special school. But that determination is yours. Really hope this helps. Looks like it may be a borderline call.
Reg Sec 1.213-1(e)(1)(v)(a) - Where an individual is in an institution because his condition is such that the availability of medical care (as defined in subdivisions (i) and (ii) of this subparagraph) in such institution is a principal reason for his presence there, and meals and lodging are furnished as a necessary incident to such care, the entire cost of medical care and meals and lodging at the institution, which are furnished while the individual requires continual medical care, shall constitute an expense for medical care. For example, medical care includes the entire cost of institutional care for a person who is mentally ill and unsafe when left alone. While ordinary education is not medical care, the cost of medical care includes the cost of attending a special school for a mentally or physically handicapped individual, if his condition is such that the resources of the institution for alleviating such mental or physical handicap are a principal reason for his presence there. In such a case, the cost of attending such a special school will include the cost of meals and lodging, if supplied, and the cost of ordinary education furnished which is incidental to the special services furnished by the school. Thus, the cost of medical care includes the cost of attending a special school designed to compensate for or overcome a physical handicap, in order to qualify the individual for future normal education or for normal living, such as a school for the teaching of braille or lip reading. Similarly, the cost of care and supervision, or of treatment and training, of a mentally retarded or physically handicapped individual at an institution is within the meaning of the term “medical care”.
Walton, TC Memo 1982-648 — Definition of medical care—cost of special education and training. Medical expenses deduction denied for private school tuition and cost of tutor. School wasn't “special school” and tutor didn't have any specialized training for dealing with emotionally disturbed students. Taxpayers' daughter, who suffered from emotional stress and had academic trouble in public schools, was sent to private school where she excelled. School didn't consider itself to be school for students with handicaps.
Pfeifer, TC Memo 1978-189 - Definition of medical care—cost of special education and training—scope of includible expenses. Deduction denied parents for cost of sending child with learning disabilities to private school; No special program, staff psychologists or psychiatrists, medical services was provided by school. Curriculum was standard college-preparatory; school didn't meet Regs.' definition of “special school.”
Feinberg, TC Memo 1966-145 — Definition of medical care — cost of special education and training. Medical expense deduction denied parents for cost of private schools for son with general physical weakness and speech impairment. Medical resources and services weren't available at schools. Although these private schools helped relieve child's depression, expenses weren't for type of medical care provided by statute.
Glaze, TC Memo 1961-244 —Definition of medical care—cost of special education and training. Deduction denied for tuition paid for attendance of taxpayer's mentally retarded son at military school which provided no special treatment for mentally retarded children. Taxpayer enrolled his son at the military school after the public elementary school had requested the son's withdrawal from school. The withdrawal was requested because of the child's failure to comprehend the material taught and to adjust to the school activities. But the cost of education even for a mentally retarded child is not a deductible medical expense. The taxpayer failed to show that the payments he made were for medical care rather than education, While the military school accepted mentally retarded boys, it provided no special services or treatment for them and the child received none beyond the normal treatment given to all students.
You can register for the 16-Hour CPE Virtual Tax Update & Review Conference here.
]]>As part of the 2020 Tax Update and Review Conference Virtual Conference series, we field questions from our students throughout the presentation. We have highlighted some of the common questions and the answers you might find valuable.
Lesson 6 covers Coverdell savings accounts, employer education assistance, American Opportunity and Lifetime Learning education credits, how to allocate scholarship funds to maximize education credits, qualified state tuition programs (Sec 529 plans), ABLE accounts, military moving, higher education interest, foreign earned income exclusion, savings bond education exclusion, worker’s compensation, above-the-line education expense deduction, and the educator’s above-the-line deduction.
QUESTION: If a student pays tuition expenses that were in dispute after the year expenses were incurred, are the expenses deductible in the year paid?
ANSWER: The deduction will be allowed for qualified tuition and related expenses for any year only to the extent the expenses are in connection with enrollment at an institution of higher education during that tax year, (IRC §222(d)(3)(A)) except that the deduction will be allowed for qualified tuition and related expenses paid during a tax year if those expenses are in connection with an academic term beginning during that tax year or during the first 3 months of the next tax year.
However, it may be academic because the recent legislation (COVIDTRA) repealed the above the line education expenses deduction for years after 2020.
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QUESTION: Can the 529 withdrawal be made up until filing deadline, allowing for tax prep first?
ANSWER: Apparently, reimbursements from the 529 plan can be made in a year other than the year of the expenses since the code and publications are all silent on the issue.
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QUESTION: Regarding the AOTC - It is for the first 4 years of post-secondary education. More and more students are taking college classes while finishing their high school studies. Are they eligible for AOTC although they aren't yet post-secondary, but are taking post-secondary courses?
ANSWER: An eligible student for the AOTC must be enrolled at an eligible educational institution for at least one academic period beginning in the tax year of the credit and must be enrolled at least half-time in a program leading to a degree, certificate, or other recognized educational credential. So simply taking a course or two at the college level will not meet the half-time requirement.
However, the student may qualify for the Lifetime Learning Credit. Although it does include the “one academic period” requirement, there is no “half-time student requirement. Both the AOTC and the LLC details are included in chapter 5.03 of the seminar text (Big Book of Taxes).
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QUESTION: In regard to form 5500/5500EZ filing requirement – Is one participant (owner) SEP IRA having assets over $250,000 required to file form 5500EZ?
ANSWER: A one participant SEP plan is not subject to the 5500-filing requirement.
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QUESTION: Can EE Savings Bonds (Inherited) be used to pay student loans and get the tax benefit same as if it was used to pay qualified higher education expenses?
ANSWER: The individual must have bought the bond(s) after reaching age 24 (Code Sec. 135(c)(1)(B)) and must be the sole owner (or joint owner with spouse). The exclusion isn't available to the owner of a bond that was bought by another individual (other than a spouse). Nor is it available to a parent who buys the bonds and puts them in the name of a child or other dependent. But the owner may designate an individual (including a child) as the beneficiary for amounts payable at death without losing the exclusion.
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QUESTION: Does a very low IQ count as a disability to quality for this?
ANSWER: I assume you are referring to an ABLE Account... An individual is an eligible individual for a tax year if, during that tax year:
A disability certification is one made by the eligible individual, or his parent or guardian, that certifies that:
The certification must include a copy of the individual's diagnosis relating to the individual's relevant impairment(s), signed by a licensed physician meeting the criteria of Sec. 1861(r)(1) of the Social Security Act. (Code Sec. 529A(e)(2)(A))
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QUESTION: How about when a scholarship pays tuition?
ANSWER: If the scholarship is tax-free, then the tuition paid by the scholarship does NOT qualify for education credits. However, please see page 5.03.06 of the Big Book of Taxes that includes a strategy to allocate scholarship funds to maximize tuition credits.
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QUESTION: How does one exclude foreign earned income if their work in a foreign country starts during the year where they weren't a resident for the entire year, nor did they meet the 330-day test? Is there a proration?
ANSWER. The physical presence test is based upon a 12-month period, not a calendar year. 330 full days in a 12- month period. Thus, in the first and last year a taxpayer will virtually always prorate the exclusion. There is an in-depth discussion and illustration on page 6.03.04 of the Big Book of Taxes.
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QUESTION: Does a very low IQ count as a disability to qualify for an ABLE account?
ANSWER: An eligible beneficiary - must be severely disabled before turning age 26, based on marked and severe functional limitation or receipt of benefits under the SSI or Disability Insurance (DI) programs. However, an individual does not
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QUESTION: This question is regarding inheriting an IRA that needs to be distributed within 10 years. Is the beneficiary allowed to convert it to Roth as a strategy to pay the required tax but still keep the proceeds in a Roth IRA?
ANSWER: I do not believe so. The SECURE Act does not address that. But I believe the answer lies in the fact that the funds cannot be rolled into a beneficiary’s account and must remain in the decedent’s account until distributed. Thus, it seems to me the beneficiary has no right to roll the decedent's account into a ROTH. At least that is my take on the issue.
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QUESTION: I have a grandmother who bought these for her grandchildren when they were young, grandchildren now in college. If they cash them and use for college, is it tax-free? It doesn't sound like it unless I missed something
ANSWER: An individual who pays qualified higher education expenses with redemption proceeds from Series EE or I bonds issued after ’89 can potentially exclude from income the bond interest. No exclusion is available to a taxpayer using the married filing separate filing status. Form 8815 is used to compute the exclusion. Form 8818 may be used to keep a record of such bonds. The bonds must meet the following requirements for the exclusion to apply:
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QUESTION: I have a taxpayer asking how many times this account can be transferred and what else can be done with the funds if not used for education?
ANSWER: Actually, there is no specific limit on how many times a 529 plan can be transferred without the earning being taxable and not being a taxable gift so long as the new beneficiary is:
(1) Is a member of the family of the old beneficiary, and
(2) Is assigned to the same generation as the old beneficiary.
The principle amount of the 529 plan if withdrawn is never taxable. However, if the earnings from the 529 Plan are withdrawn and not used for qualified education expenses, the earnings withdrawn will be subject to both regular taxes and a 10% penalty. When applicable, the penalty is computed on Form 5329.
You can register for the 16-Hour CPE Virtual Tax Update & Review Conference here.
]]>As part of the 2020 Tax Update and Review Conference Virtual Conference series, we field questions from our students throughout the presentation. We have highlighted some of the common questions and the answers you might find valuable.
Lesson 5 deals with many changes made by the SECURE Act for all future years and the special provisions of the CARES Act. Lesson includes pensions & annuities, annuity tables (including the new RMD table), lump sum distributions, rollovers, 2020 coronavirus distributions, self-certifying a late rollover, traditional IRA, Roth IRA, backdoor Roth IRA, Roth conversions, qualified Roth contribution plans, early withdrawal exceptions, self-employed retirement plans, form 5500 filing requirements, SEP plans, 401(k) plans, Sec 403(b) tax-sheltered annuities, required minimum distributions (RMDs), 2020 RMD waiver, solo 401(k) plans, Sec 457 government Plans. Sec 408(p) simple plans, qualified charitable distributions (QCD) and health savings accounts.
QUESTION: If a taxpayer waived IRA req min distribution in 2020, will the taxpayer be required to take double the RMD in 2021?
ANSWER: No. Unless there are additional changes, the RMDs will resume in 2021 as normal and no make-up for the 2020 waiver is required.
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QUESTION: Are HSA Contributions for a more than 2% S Corp shareholder treated the same as health insurance paid by the corporation?
ANSWER: No, but the contributions to an HSA may be limited if the insurance paid by the corporation is not a high deductible plan. See chapter 4.21 in the seminar text (the Big Book of Taxes) for additional details and qualifications related to an HSA.
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QUESTION: If sole proprietor with solo 401k who is over 72, is he/she required to take RMD if still working for same employer, i.e. still self-employed in original RMD year and in subsequent years?
ANSWER: This is an excerpt from the seminar text (Big Book of Taxes)
STILL WORKING RULE TO DELAY RMDS - Generally, taxpayers that are participants is qualified retirement plans are required to start taking required minimum distributions (RMDs) from the plan no later than April 1 of the year after which they reach the mandatory distribution age.
Still Working Exception - However, there is an exception that applies to certain plan participants who are still working. An employee's RBD (required beginning date) for receiving distributions from a qualified plan is April 1 of the year following the later of the calendar year the employee:
CAUTION: The employer’s plan may require the retirement plan participant to begin RMDs under the normal rules, in which case the taxpayer cannot take advantage of the “still working “exception.
CAUTION: The above rule does not apply to distributions from IRAs (including those established in conjunction with a SEP or SIMPLE IRA plan) and distributions from qualified plans to more-than-5% owners.
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QUESTION: IRA contributed to charity – can it be claimed on Sch A?
ANSWER: I am assuming you are referring to a qualified charitable distribution (QCD). A QCD charitable contribution is a direct transfer from and IRA to a charity. The distribution is not taxable and therefore no charitable contribution is allowed. You can see more on QCDs beginning on page 4.17.06 of the seminar text (Big Book of Taxes).
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QUESTION: Does the CARES Act and subsequent acts provide an exception from increased Medicare premiums due to increased income in 2019? In other words, can being impacted by COVID be an adequate reason to waive increase? Example RMD waived for 2020 which shows less income?
ANSWER: The Medicare premiums are based upon the taxpayer’s MAGI two years prior. There has been no change to that in any of the COVID legislation. So, the 2021 Medicare premiums will be based upon the 2019 MAGI.
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QUESTION: How about excess contribution to a SEP IRA? What is the penalty, if any, and how do you fix the problem?
ANSWER: An employee may avoid the 6% excise tax on excess SEP contributions, and the 10% early distribution tax on the early withdrawal of the excess contributions, by withdrawing excess contributions from his SEP-IRA on or before the due date (including extensions) for filing the employee's income tax return for the tax year for which the contributions were made (Code Sec. 408(d)(4)).
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QUESTION: What qualifies for “adverse financial consequences“ for a COVID distribution up to $100K in order to avoid the early distribution penalty and have 3 years to repay?
ANSWER: Being furloughed or laid off or having work hours reduced due to such virus or disease, being unable to work due to lack of child care due to such virus or disease, closing or reducing hours of a business owned or operated by the individual due to such virus or disease, or other factors as may be determined by the Secretary of the Treasury.
However, I have not seen any additional circumstances issued by the Secretary of the Treasury.
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QUESTION: At what age can kids under 18 contribute to a Roth IRA?
ANSWER: There is no specific age limit to contribute to a Traditional IRA or a Roth IRA. There is only a need for earned income. In fact, even the prior upper limit of 70.5 was eliminated by SECURE Act for years after 2019.
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QUESTION: Could the self-certified rollover letter work for 2020 RMDs where client did not know they did not need to take it and it's past the 60 days ? Excuse being Delayed Info?
ANSWER: I don’t believe so. The self-certification rule actually specifies reasons when you can use it.
(a) an error was committed by the financial institution receiving the contribution or making the distribution to which the contribution relates;
(b) the distribution, having been made in the form of a check, was misplaced and never cashed;
(c) the distribution was deposited into and remained in an account that the taxpayer mistakenly thought was an eligible retirement plan;
(d) the taxpayer’s principal residence was severely damaged;
(e) a member of the taxpayer’s family died;
(f) the taxpayer or a member of the taxpayer’s family was seriously ill;
(g) the taxpayer was incarcerated;
(h) restrictions were imposed by a foreign country;
(i) a postal error occurred;
(j) the distribution was made on account of a levy under § 6331 and the proceeds of the levy have been returned to the taxpayer; or
(k) the party making the distribution to which the rollover relates delayed providing information that the receiving plan or IRA required to complete the rollover despite the taxpayer’s reasonable efforts to obtain the information.
Unfortunately, the COVID relief gave taxpayers until August 31 to complete a rollover.
COVID Relief: The 2020 waiver of RMDs was not announced until the CARES Act was passed on March 27, 2020. Normally an RMD cannot be rolled over, but the CARES Act essentially changed 2020 RMDs into eligible rollover distributions, which can be rolled over within 60 days of being distributed. Some individuals subject to the RMD requirements had already taken their RMD before the CARES Act was enacted and did not have the opportunity to roll the RMD back into their retirement account if the 60-day rollover period had expired. That issue was first alleviated by Notice 2020-23 that said that any 60-dayrollover period that ends on or after April 1, 2020 and before July 15, 2020 was extended through July 15, 2020. The July date was further extended to August 31, 2020 by Notice2020-51. That notice also clarified that an RMD rollover would not be subject to the one IRA rollover per year limitation and allows taxpayers that took RMDs at any time earlier in 2020 to complete a rollover by August 31, 2020.
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QUESTION: Do we have any more information as to what qualifies as financial hardship for the coronavirus distribution withdrawal? I have several clients that want to withdraw the money up to 100k and pay off bills or invest in real estate property. They all have had about a 25-50% reduction in pay. And they all make over 100k in family income, even after the income reduction of wages and commission. They are being told that they qualify due to paycheck reduction from their financial advisors. I thought I heard that there are questions in the Big Book that we need to ask, but I was unable to find them. I'm hoping to notify these clients before they pull the money out, if possible. Also, what kind of verification will the IRS require to show that they do qualify? Should we be concerned about preparer penalties? Most of these clients feel that their income has been drastically affected...I'm concerned that it may be a matter of perception.... Thank you.
ANSWER: The CARES Act specified what constituted a qualified taxpayer for purposes of a Coronavirus-related distribution. A qualified taxpayer for this purpose is one (Act Sec 2202(a)(4)(A)):
(I) That is diagnosed with the virus SARS-CoV-2 or with coronavirus disease 2019 (COVID-19) by a test approved by the Centers for Disease Control and Prevention,
(II) Whose spouse or dependent is diagnosed with such virus or disease by such a test, or
(III) Who experiences adverse financial consequences as a result of being quarantined, being furloughed or laid off or having work hours reduced due to such virus or disease, being unable to work due to lack of child care due to such virus or disease, closing or reducing hours of a business owned or operated by the individual due to such virus or disease, or other factors as may be determined by the Secretary of the Treasury.
Have not seen any other factors specified by the Secretary of the Treasury. But (III) may work for your clients. This is covered in chapter 4.05 of the Big Book.
It can be a problem for practitioners where clients do not qualify. There is no special preparer penalty.
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QUESTION: Could the 2020 RMD be deposited to a ROTH recognizing the income on the return?
ANSWER: In a normal year, a taxpayer must do the RMD for the year before converting any of the IRA funds to a Roth IRA. However, RMDs are suspended for 2020 so a taxpayer can make a conversion at any time. The conversion is not limited to any specific amount, the taxpayer can convert as much or as little as they like.
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QUESTION: Taxpayer is sole proprietor, has 401K for self and employees, with 4% match on employee contributions and year-end profit sharing. Plan discontinued before end of year. Only employee contributions and matches were made, no profit sharing, nothing for the taxpayer himself. Can this taxpayer now contribute to his own IRA and get a tax break?
ANSWER: If individuals wish to maximize their retirement contributions, they may become involved in more than one plan and end up with a combination of plans. Although there are maximum contribution restrictions to qualified plans or combination of qualified plans, a taxpayer can also have an IRA in addition to qualified plans. So yes, your client can also have an IRA.
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QUESTION: I have an unusual situation where I converted a private LLC $100,000 IRA investment to ROTH IRA in 2020, then the investment sponsor lost pretty much all of our money and there will be no profit whatsoever. Is there some way to recharacterize the 2020 conversion in this odd set of circumstances? (Wishfully thinking...) Thank you!
ANSWER: Sorry no, TCJA repealed the special rule that allows a traditional IRA to Roth IRA conversions to be later unwound. Thus, for example, under the provision, a conversion contribution to a Roth IRA during a taxable year can no longer be recharacterized as a contribution to a traditional IRA (thereby unwinding the conversion). The provision is effective for taxable years beginning after December 31, 2017. (IRC Sec. 408A(d)(6)(B)(iii) as amended by TCJA Sec. 13611(a).
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QUESTION: Has California conformed to the 3-year payback?
ANSWER: Since California automatically conforms to the IRC Sec 72(t) early withdrawal penalty (except at a rate of 2.5% instead of 10%), California will conform to the waiver of the penalty when the distribution qualifies for federal purposes as a coronavirus-related distribution. California will also conform to the option to spread the tax on the distribution over 3 years, or the taxpayer can elect to include all of the income in the 2020 return. A separate California election can be made to report all of the income in 2020. California will follow the federal provision that permits the taxpayer to re-contribute the distribution to the IRA or retirement plan within the 3-year period.
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QUESTION: Client makes $132000 gross salary with 401k contribution. Single. Can she still put money in a Roth IRA?
ANSWER: Yes, but subject to the Roth AGI phase outs which are based on filing status. See the Big Book text page 4.06.02 for phaseouts. However, A taxpayer can contribute to a traditional IRA and then convert that traditional IRA to a Roth IRA. This also gives rise to an opportunity to defer income from one year to another by making a deductible IRA contribution in one year and converting it to a Roth IRA in a subsequent year. Options:
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QUESTION: Can you contribute to an IRA if you are 75 or 78?
ANSWER: For Tax Years after 2019: The SECURE Act, repealed the maximum age for making traditional IRA contributions. Thus to the extent of an individual’s earned income and not exceeding the IRA contribution limit, an individual can make IRA contribution at any age.
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QUESTION: Can you take a full IRA Deduction and a SIMPLE Deduction regardless of amount of Income?
ANSWER: Multiple Plan Limitations – If individuals wish to maximize their retirement contributions, they may become involved in more than one plan and end up with a combination of plans. This is where some overall limitations apply and where individuals can unknowingly make excess contributions, resulting in penalties and having to make corrective distributions.
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QUESTION: Can a husband and wife take the 100,000 for each?
ANSWER: I’ll assume you are talking about a coronavirus distribution. Yes, but only from their respective retirement accounts. In other words, if for example, one spouse has a retirement and the other does not, then only the one with the retirement plan can take a distribution.
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QUESTION: Slide 4.06.01. For clarification, can a Taxpayer who is not required to take his RMD in 2020 withdraw from his Traditional IRA an amount equivalent to what his RMD would have been convert this amount to a Roth IRA?
ANSWER: Under normal circumstance one would have to take the year’s RMD before converting a traditional IRA to a Roth IRA. However, for 2020 RMDs are suspended so one can convert to a Roth without first taking an RMD.
You can register for the 16-Hour CPE Virtual Tax Update & Review Conference here.
]]>As part of the 2020 Tax Update and Review Conference Virtual Conference series, we field questions from our students throughout the presentation. We have highlighted some of the common questions and the answers you might find valuable.
Lesson 4, the second part of business issues, includes excess business losses, disallowance of business interest, real estate professional, repairs and capital improvements (cap & repair regs), cannabis issues, reasonable compensation for s-corporation working shareholders, employee retention credit, deferral of employer payroll taxes, Families First Coronavirus Response Act, self-employment tax, farming and fishing averaging, tax penalties, underpayment of estimated taxes, household employees, gift planning, Installment agreements and small employer HRA.
QUESTION: If a schedule C and pay child age 15 to help file, sort, help w/ payments etc. When issuing a 1099 to child for wanting to start a Roth - how do I exclude the SE Tax as it is child under 18 on her return? 1099 would make do schedule C to report income for Roth.
ANSWER: Unfortunately, there is no way a child age 15 working for a parent can meet the criteria to be an independent contractor. The child is a W-2 employee. If the business is unincorporated, wages paid to the child under age 18 are not subject to social security taxes. Pub 15 specifically requires income tax withholding but specifically exempts Social Security withholding for a child under the age of 18. So, file a W-2. Nowhere in the W-2 instructions of Pub 15 does the IRS provide instructions how ID that this is a W-2 for a child under 18. We recommend the SS wages box and the withholding box not be blank but enter $0.00 in both.
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QUESTION: Regarding FFCA Sick Leave Pay, are S-Corporation owners eligible use this credit if they contract COVID? Are there any limitations for S-Corp owners if they are employees?
ANSWER: Equivalent childcare leave and sick leave credit amounts are available to self-employed individuals under similar circumstances. These credits will be claimed on their income tax return and will reduce estimated tax payments.
An eligible self-employed individual is defined as an individual who regularly carries on any trade or business, and would be entitled to receive qualified sick leave wages or qualified family leave wages under the FFCRA if the individual were an employee of an eligible employer (other than himself or herself) that is subject to the requirements of the FFCRA.
Eligible self-employed individuals are allowed an income tax credit to offset their federal self-employment tax for any taxable year equal to their “qualified sick leave equivalent amount” or “qualified family leave equivalent amount.”
More information is available is available beginning on page 3.33.04 of the Big Book of Taxes.
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QUESTION: If someone has increased wages due to a PPP loan (normal were $75,000 and PPP loan provided $25,000) and they do a SEP-IRA, can they do the SEP-IRA 25% on a $100K wages or $75K wages?
ANSWER: They have $100K of wages, the corporation cannot deduct the full $100K of wages because the $25K PPP portion is forgiven but can they take the full 25% SEP-IRA deduction on a $100K of wages. The taxpayer has $100K of personal income.
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QUESTION: Can you pay back the PPP loan and take the Employee Retention Credit instead?
ANSWER: A Paycheck Protection Program Loan makes an employer ineligible for the Employee Retention Credit created in the CARES Act. However, where an employer returned the loan funds, the employer will be eligible to claim the retention credit.
The employee retention credit is a refundable payroll tax credit and is 50% of qualified wages, up a maximum wage of $10,000 per employee. (Act Sec. 2301(a)). Thus, $5,000 is the maximum credit for qualified wages paid for any employee.
So, you will need to carefully analyze the benefit of the employee retention credit, because once the PPP Loan funds are retuned there is no going back.
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QUESTION: With respect to gifting – If a couple gifts $30,000 to each child in a year, does an IRS form need to be filed outlining the details? If so, what is the form?
ANSWER: As long as annual gifts are less than the annual exception which is currently $15,000 per person there are not any forms required to be completed. Thus, a married couple can each gift $15,000 ($30,000 combined) with no reporting requirements. If the annual exception is exceeded, the Form 709-Gift Tax return must be filed.
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QUESTION: How does one 'elect' to defer payment of SE tax in 2020? Is there somewhere on the 1040 form that this detail is input?
ANSWER: For self-employed individuals, the deferral applies to 50% of the Self-Employment tax liability (including any related estimated tax liability). Thus, they simply reduce their estimated tax payments accordingly. Then the deferral is handled on the Schedule SE. I have attached the draft Schedule SE and its instructions.
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QUESTION: Is the safe harbor for high income taxpayers the lower of the two amounts?
ANSWER: The only absolute safe harbor is 110% of the prior year’s tax.
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QUESTION: Is there a way to get the interest accessed by the IRS removed/abated?
ANSWER: Yes, reasonable cause and first-time abatement. I suggest you refer to chapter 10.01 in the seminar text (Big Book of Taxes) specifically pages 10.01.04 through 10.01.08.
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QUESTION: Are you saying you ONLY need to prepare Part 6 or do we need to file a complete 706?
ANSWER: No, the entire 706 must be completed, Part 6 is only the part dealing with portability. That is the problem with the portability election, a surviving spouse needs to pay for an expensive return to preserve portability. That will become a bigger concern after 2015 when the estate tax exemption drops back to pre-TCJA levels.
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QUESTION: I have a client who is single and selling her house. She will have a gain of $450,000 before Sec 121 exclusion. So, her taxable gain after Sec 121 exclusion will be $200,000. To defer all the gain by reinvesting in a QOF, does the client have to invest the $450,000 or the gain after Sec 121 of $200,000? When the deferred long-term gain is included in the 2026 tax return, is it taxed at the long-term tax rates of 2026?
ANSWER: First time I have encountered the idea of deferring home gain into a QOF. The code says any capital gain can be deferred so it would apply to home gain since it is a capital gain. The reportable capital gain would be the amount after the Sec 121 exclusion so $200,000 could be invested into the QOF. I had not previously seen a citation on this so went looking and found the following in Pub 523…
Pub 523 - TIP: If you have gain that can't be excluded, you generally must report it on Form 8949, Sales and Other Dispositions of Capital Assets, and Schedule D (Form 1040 or 1040-SR), Capital Gains and Losses. Report the sale on Part I or Part II of Form 8949 as a short-term or long-term transaction, depending on how long you owned the home. In addition, you may be able to temporarily defer capital gains invested in a. Qualified Opportunity Fund (QOF). You may also be able to permanently exclude capital gains from the sale or exchange of an investment in a QOF if the investment is held for at least 10 years. For more information, see the Instructions for Form 8949.
The deferred gain retains its character so as of now it would be taxed as a long-term capital gain in 2026. BUT…Biden wants to tax all capital gains as ordinary income. I would assume there would be an exception for QOFs, but we don’t know for sure. Tough to do any planning in the current environment.
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QUESTION: Is it enough to be a real estate agent who owns and manages their own rental properties?
ANSWER: No, there other requirements that I have cut/pasted from page 3.26.01 of the Big Book of Taxes:
A taxpayer is a real estate professional (qualifying taxpayer) for a particular tax year if he meets BOTH of the qualifications below:
A taxpayer who owns at least one interest in rental real estate and who meets the above tests is a real estate professional. (Reg § 1.469-9(b)(6))
Being a Full-Time Real Estate Professional Isn’t Enough – The IRS audited two years of returns of a couple that filed joint returns and disallowed their rental losses, contending the losses were passive losses (taxpayers’ incomes exceeded the cap for the $25,000 loss allowance so no amount of loss was allowed). The taxpayers’ position was that the wife’s full-time occupation as a real estate professional meant that all rental losses are automatically nonpassive and deductible, regardless of material participation. The key question before the court was whether the taxpayers must establish their material participation in their rental real estate activities separate and apart from the wife’s undisputed material participation in her profession as a real estate agent. The Court concluded that they must, but had not, because she kept no records documenting the hours spent in her rental activities since she (erroneously) thought that as a real estate professional she didn’t have to prove material participation in the rental activities. (Gragg v Comm., U.S. Court of Appeals, Ninth Circuit; 14-16053, August 4, 2016, affirming DC Calif. decision)
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QUESTION: So, what kind of account can cannabis businesses use?
ANSWER: From Page 3.28.03 of the Big Book of Taxes - According to federal law, banks and financial services companies cannot knowingly establish accounts with businesses that sell illegal drugs. Banks that handle marijuana money can be charged with money laundering. Businesses restricted to cash are also “targets for assaults” that endanger the public. The lack of banking services can lead marijuana businesses to have problems making federal deposits using the required electronic funds transfer. The business has to make arrangements for its payroll service or another trusted third party to make electronic deposits on its behalf. Some credit unions and small banks that are chartered by their state, not the federal government, have tried to fill the void by offering basic banking services to the cannabis industry.
The IRS has established a payment option for individual taxpayers who need to pay their taxes with cash. In partnership with ACI Worldwide’s OfficialPayments.com and the PayNearMe Company, individuals can now make a payment without the need of a bank account or credit card at certain retail establishments nationwide. There is a $1,000 limit and the number of deposits is limited by the type, generally only two per month. Details at: https://www.irs.gov/payments/pay-with-cash-at-a-retail-partner
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QUESTION: How do you claim these COVID-related self-employment credits? Are they expenses on the schedule C or is it a credit against the tax? I understand the principle, but not the application.
ANSWER: I assume you are referring to the Families First Coronavirus Response Act. From Page 3.33.04 of the Big Book of Taxes: Equivalent childcare leave and sick leave credit amounts are available to self-employed individuals under similar circumstances as employees except these credits will be claimed on their income tax return and will reduce estimated tax payments.
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QUESTION: If an employer is behind on 941 payments from prior quarters, but has sick leave to pay due to an employee having COVID, would the IRS honor the credit for sick leave wages on 7200 or would they likely apply the credit to past amounts due? Actual scenario a new client of mine is currently dealing with! Thank you!
ANSWER: I am assuming you are referring to the Families First Coronavirus Response Act. Participating in that program is not optional and the Government reimburses the employer in two ways; (1) by allowing the employer a credit against payroll tax and (2) if the payroll deposit is not enough request payment via form 7200. Since this is a government mandated program for which the government must reimburse the employer, I don’t believe they can apply the credit against past due amounts. But I am only guessing and have no experience with that issue and the Form 7200 does mention the issue.
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QUESTION: Are you aware of any reason why a 25% owner of a partnership would receive a W2 for wages? I can't find anything on this.
ANSWER: You mean the partnership issued him a W-2? If so, that is incorrect. It should have been guaranteed payments to partners.
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QUESTION: PPP Loan proceeds have to be used for payroll (60%+) and if not then have to be repaid to the lender? If this is true and funds are paid to the officer/employee does the ER get a deduction for this wage payment? Is there any portion of the PPP Loan that turns into a grant?
ANSWER: The expenses that are used to justify PPP loan forgiveness are not deductible. However, expenses or payroll that does not make up the forgiveness and are part of the loan that must be repaid would certainly be deductible.
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QUESTION: For real estate professionals, what does "more than 50% personal services" mean?
ANSWER: To qualify as a real estate professional an individual must meet two qualifications: • QUALIFICATION #1 - More than half of the personal services (see below) the taxpayer performs during that year are performed in real property trades or businesses (see below) in which the taxpayer materially participates (Code Sec. 469(c)(7)(B)(i)), AND
QUALIFICATION #2 - The taxpayer performs more than 750 hours of services during that year in real property trades or businesses in which he materially participates. (Code Sec. 469(c)(7)(B)(ii))
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QUESTION: What happens if you did not file a form 706 on the deceased taxpayer? Should I amend to add to the final return?
ANSWER: A 706 is a separate estate tax return is not attached to nor filed with the 1040. Generally, a 706 is not required if the deceased’s estate is less than $11.4 Million. But there is a portability issue that you may want to read about on page 11.05.04 of the Big Book of Taxes (the course text).
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QUESTION: For a first-time home buyer who uses IRA funding to repair the newly purchased home at age 55, will the 10% penalty be waived if the property is not a US property (not a luxury property, just a regular home to be used at the time of retirement)?
ANSWER: It must be their primary residence and purchased within 120 days after the withdrawal. There is nothing that restricts it from being located in the U.S.
First-Time Homebuyer Exception - To qualify for treatment as a first-time homebuyer distribution, the distribution must meet all the following requirements:
When added to all the taxpayer’s prior qualified first-time homebuyer distributions, if any, the total distributions cannot be more than $10,000. A husband and wife meeting the definition of first-time homebuyers and purchasing an eligible home together can each withdraw up to $10,000 from each of their respective IRAs without incurring any penalty for early withdrawal.
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QUESTION: Why wouldn't a plumber, whose principal asset is his knowledge and skill in plumbing, be an SSTB?
ANSWER: That is because the final regulations defined “reputation and skill” and it does not include plumbers, painters mechanics etc. See the excerpt below which defines reputation and skill for purposes of Sec 199A. The excerpt is taken from page 3.24.08 for the seminar text (the Big Book Taxes):
Reputation or Skill - The original legislation included in its list of trades or businesses that were SSTBs, those where the principal asset of a trade or business is the reputation or skill of one or more of its employees or owners. Did this mean, for example, that a self-employed plumber who provided his skill for the business wouldn’t be eligible for the 199A deduction? Luckily, in a taxpayer-friendly interpretation, the tax regulations have generally defined “reputation and skill” to mean:
(1) Receiving income for endorsing products or services for which the individual provides endorsement services;
(2) Licensing or receiving income for the use of an individual’s image, likeness, name, signature, voice, trademark, or any other symbols associated with the individual’s identity; or
(3) Receiving appearance fees or income (including fees or income to reality performers performing as themselves on television, social media, or other forums, radio, television, and other media hosts, and video game players).
Examples: Alex Trebek endorsing Colonial Penn Insurance, Shaquille O’Neal – Celebrity Cruise Lines and the General Insurance
(4) Investing and investment management – see description in Reg. 1.199A5(b)(2)(xi)
(5) Trading – see description in Reg. 1.199A-5(b)(2)(xii)
(6) Dealing in securities (as defined in section 475(c)(2)), partnership interests, or commodities (as defined in section 475(e)(2)) – see description in Reg 1.199A-5(b)(2)(xiii)
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QUESTION: What about a director of a non-profit corporation and SE tax?
ANSWER: Corporate payments - Fees received for performances of services as a director of a corporation, including director meeting attendance, are SE income. A shareholder’s portion of an S corporation’s taxable income is not SE income. I had never heard of anything special for non-profit directors nor do I see why their pay would not be subject to SE tax like other directors. But I did some research and could not find anything of that nature.
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QUESTION: Regarding Families First Coronavirus Response Act, for Self-employed, how do we know what the net income for average daily self-employment is?
ANSWER: - The short answer: the average Daily Self-Employment Income is an amount equal to the net earnings from self-employment for the taxable year divided by 260. (IRS Q&A #62). However I strongly suggest you read pages 3.33.04 through 3.33.05 of the Big Book of Taxes (seminar text) for considerable information and examples related to the FFCRA and self-employed individuals.
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QUESTION: Non-resident alien, has business in the US, received 1099 reported on ITIN, has expenses, and has profit. Please clarify, there is no need to compute SE tax?
ANSWER: Generally nonresident aliens don’t pay self-employment tax. Residents of the Virgin Islands, Puerto Rico, Guam, or American Samoa, however, are subject to the tax.
Nonresident and resident aliens employed in the U.S. by an international organization, a foreign government, or a wholly-owned instrumentality of a foreign government are not subject to SE tax.
If the individual is a self-employed nonresident alien living in the United States, they must pay SE tax if an international social security agreement in effect determines they are covered under the U.S. social security system.
If the self-employment income is subject to SE tax, complete Schedule SE and file it with your Form 1040-NR.
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QUESTION: Can all "animal" capturing (farming) in the ocean be called farming assuming it is legal? Example, lobster capturing, sea-urchins, etc?
ANSWER: I don’t really understand your question. The code refers to them as fishermen and they enjoy a lot of the same benefits that are available to farmers but they are not called farmers.
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QUESTION: When did the late filing penalty change? I thought it was 5% per month with a maximum of 25%.
ANSWER: It has not changed. For as long as I can recall it has been 4.5% per month for filing late and 0.5% per month for paying late for a combined total of 5% with a combined total of 25% for the first 5 months.
The 0.5% penalty for paying late is not limited to 5 months. This penalty will continue to increase to a maximum of 25% until the taxpayer pays the tax in full. The maximum 25% penalty for paying late is in addition to the maximum 22.5% late filing penalty for a total penalty of 47.5%
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QUESTION: If a taxpayer has a Form 8300 filing obligation and files late, how is he or she penalized?
ANSWER: The 8300 is due by the 15th day after the date the cash was received. If that date falls on a Saturday, Sunday, or legal holiday, file the form on the next business day.
A minimum penalty of $25,000 may be imposed if the failure is due to an intentional or willful disregard of the cash reporting requirements.
Violations may also be subject to criminal prosecution which, upon conviction, may result in imprisonment of up to 5 years or fines of up to $250,000 for individuals and $500,000 for corporations or both.
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QUESTION: Should an Airbnb be reported on Schedule E or C?
ANSWER: That would depend upon the average duration of each rental. When a taxpayer rents property for a short period, special (and sometimes complex) taxation rules come into play, which can make the rents excludable from taxation; other situations may force the rental income and expenses to be reported on Schedule C (as opposed to Schedule E). The following is a synopsis of the rules governing short-term rentals.
The 7-Day and 30-Day Rules: Rentals are generally passive activities. However, an activity is NOT a rental activity if (Reg Sec 1.469-1T(e)(2)(ii)):
More related to short term rentals can be found in the seminar text (the Big Book of Taxes) on page 3.17.04.
You can register for the 16-Hour CPE Virtual Tax Update & Review Conference here.
]]>As part of the 2020 Tax Update and Review Conference Virtual Conference series, we field questions from our students throughout the presentation. We have highlighted some of the common questions and the answers you might find valuable.
Lesson 3, the first half of business issues, includes a variety of issues encountered by self-employed individuals plus profit motive and hobbies, Form 1099-K AND 8300, failed business expenses, spouses and partnership rules, at-risk rules, start-up and organizational expenses, above-the-line health insurance, employing family members, partner expenses, MACRS/ADS property, bonus depreciation, qualified improvement property, Sec 179, employee or independent contractor, intangibles, meals & entertainment, vehicle expenses, travel expenses, travel outside the U.S., home office, NOLs, personal property rentals, real property rentals, short-term rentals, vacation home rentals, installment sales, 1031 exchanges and the Sec 199A deduction including how to determine whether or not an individual is a specified service trade or business and rentals as qualified trades or businesses.
QUESTION: About room rental – if the room is not used by the client for any purpose except rental, do the expenses have to be allocated based on days used?
ANSWER: Yes, because it falls under the vacation home rental rules
ROOM RENTAL - Expenses allocable to a portion of a dwelling unit rented out are deductible under the vacation home rules. The amount of the deductible rental expenses would be the expenses attributable to that portion of the unit. And the days to be taken into account under that limitation rule would be the days on which the portion of the unit is rented at fair rental during the tax year and the days on which the portion of the unit is used for any purpose during the tax year.
Any reasonable method for dividing the expenses may be used. The two most common methods for allocating expenses, such as mortgage interest and heat for the entire house, are based on the number of rooms in the house and square footage of the home.
Under Sec 210 of the Taxpayer Certainty and Disaster Tax Relief Act of 2020, for 2021 and 2022 taxpayers will be able to deduct 100% of business meal expenses where the food or beverages is provided by a restaurant, provided:
The food and beverages are provided to a current or potential business customer, client, consultant, or similar business contact. Final regulation 1.274-12(b)(3) defines “business associate” as a “person with whom the taxpayer could reasonably expect to engage or deal in the active conduct of the taxpayer's trade or business such as the taxpayer's customer, client, supplier, employee, agent, partner, or professional adviser, whether established or prospective.”
Entertainment is still not deductible.
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QUESTION: For health insurance (3.00.05) - S-Corp owner, can family insurance premiums also be included? Personal question - we have 4 plans. Mine is now through business (was a marketplace one last year), son is through State Child Health Ins, husband is disabled, so we have Medicare and Medigap. I have never taken my son's premiums or husband's as deductions (just paid personally and no deduction).
ANSWER: Yes, but I suggest you read the seminar text (Big Book of Taxes) beginning on pages 3.00.08 through 3.00.09 for extensive coverage of the issue.
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QUESTION: Is Airbnb income subject to SE tax?
ANSWER: Profit from a rental activity that is reported on Schedule E is not subject to self-employment (SE) tax. But what about short-term rentals reported on Schedule C – are they subject to SE tax? Even though Pub 527, Page 12, indicates taxpayers “may” have to pay self-employment tax on short-term rental income, the “may” applies to real estate dealers. To quote Pub 334, “You are a real estate dealer if you are engaged in the business of selling real estate to customers with the purpose of making a profit from those sales. Rent you receive from real estate held for sale to customers is subject to SE tax. However, rent you receive from real estate held for speculation or investment is not subject to SE tax.” (IRC Sec 1402(a)(1))
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QUESTION: Is the annual party for the business 100% deductible or 50%?
ANSWER: It would appear that the expense would be 100% deductible, based upon #1:
Employer-Provided Meals - The 50% rule will apply to employers providing meals through an in-house cafeteria effective for 2018 through 2025. (IRC Sec. 274(n)(2) as amended by TCJA Sec. 13304(b)(1)) Previously the employer could deduct 100% of these costs. And as of January 1, 2026, an employer’s deduction for meals for the convenience of the employer, including in-house cafeterias, is disallowed. (IRC Sec. 274(o) as amended by TCJA Sec. 13304(d)(2))
The 50% limit doesn't apply to:
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QUESTION: Are you allowed to deduct 100% of meals that are purchased for the convenience of the employer (e.g. food is brought in so employees can continue to work while they eat from their desk)?
ANSWER: Prior to TCJA, expenses for food and beverages (and facilities used in connection therewith) furnished on the business premises of the taxpayer primarily for his employees are fully deductible. (Code Sec 274(e)(1)) Prior to the TCJA, the code said that food or beverage expenses that are excludable from the gross income of the recipient under the de minimis fringe benefit rules are allowed in full. (Code Sec. 274(n)(2)(B) prior to being stricken by TCJA) The term “de minimis fringe” (Code Sec 132(e)) means any property or service the value of which is (after taking into account the frequency with which similar fringes are provided by the employer to the employer's employees) so small as to make accounting for it unreasonable or administratively impracticable.
Under TCJA, The 50% rule will apply to employers providing meals through an in-house cafeteria effective for 2018 through 2025. (IRC Sec. 274(n)(2) as amended by TCJA Sec. 13304(b)(1)) Previously the employer could deduct 100% of these costs. And as of January 1, 2026, an employer’s deduction for meals for the convenience of the employer, including in-house cafeterias, is disallowed. (IRC Sec. 274(o) as amended by TCJA Sec. 13304(d)(2))
Of course, you would still have to satisfy the requirements of “convenience of the employer” see Reg. 1.119-1.
And your client may be running afoul of the state's labor laws having the employees working during a meal break. That is probably a bigger concern than the tax issue if one of the employees takes it to the labor board.
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QUESTION - We had a typo on client's tax return which caused taxpayer to have additional tax liabilities and we had to pay for the error that we made. Was the amount that we paid because of our error tax-deductible? Thank you.
ANSWER: Yes, that would be a cost of doing business and therefore a business deduction. As an aside, most preparers just pay the penalties and interest because they would have owed the tax anyway.
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QUESTION: Would a home-worker be considered a nanny?
ANSWER: Yes, a nanny, among others who work in the home under the direction and control of their employer, would be considered a household employee.
However not all individuals hired to work in a taxpayer’s home are considered household employees. For example, a taxpayer may hire a self-employed gardener who handles the yard work for the taxpayer and others in the taxpayer’s neighborhood. The gardener supplies all tools and brings in other helpers needed to do the job. Under these circumstances, the gardener isn’t an employee and the person hiring him/her isn’t responsible for paying employment taxes.
For additional information see chapter 11.04 of the Big Book of Taxes (the seminar text).
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QUESTION: Don't I have to take Section 179 before I take bonus depreciation?
ANSWER: That is correct. In fact, where you have the option to use both, it is better to use bonus because there are no recapture requirements for bonus depreciation like there is Sec 179 if the asset is taken out of service early.
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QUESTION: My understanding is that according to AB5, if we as the preparer list that payment as a deduction and the client should have paid their vendor as an employee, the client gets fined $5k per incorrectly issued 1099 and the preparer gets fined $5k for each as well. And those are the minimum fines.
My question is what kind of due diligence are we required to do in order to avoid that penalty? For example, can I have my client sign something saying they attest the 1099s that were issued follow the AB5 rules?
ANSWER: Like I indicated earlier, I did not believe the $5,000 would apply to a preparer when preparing the employers' tax return or the workers. So, we research AB5 and there is no mention of that penalty.
The penalty you are referring to was instituted way back in 2011 long before AB5 was ever passed. Here is a cite:
[SB 459] "SEC. 2. Section 2753 is added to the Labor Code, to read:
So, you are only subject to a penalty if you knowingly advise an employer to treat an individual as an independent contractor to avoid employee status.
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QUESTION: Where would I find processes and planning strategies on how a company would implement this benefit? (Employing Family Members).
ANSWER: The following is from pages 3.00.05 and 3.00.06 of the seminar text (Big Book of Taxes).
Strategy - Employing a Child - By employing a child, the income tax advantages include obtaining a business deduction for a reasonable salary paid to that child and reducing the self-employment income and tax of the parents (business owners) by shifting income to the child. Since the salary paid to a child is considered earned income, it is not subject to the “Kiddie Tax” rules that apply to children through age 18 and full-time students ages 19 through 23. The Kiddie Tax won’t apply at all to the 19- through 23-year-old student who has earned income that exceeds one-half of his or her total support, another incentive to employ a child in some situations.
The maximum standard deduction available to the child in 2020 is $12,400 (up from $12,000 in 2019). Therefore, the standard deduction eliminates all tax on that amount of income if the child is paid $12,400 in compensation.* If the business is unincorporated, wages paid to the child under age 18 are not subject to social security taxes. Not only are there significant income tax advantages to employing the child, but the parent-employer may provide him or her with fringe benefits, such as group-term life insurance and qualified pension plan contributions.
Strategy - Employing a Spouse - Reasonable wages paid to a spouse entitles the employer-spouse to a business deduction. The wages are subject to FICA taxes, and the spouse may qualify for Social Security benefits to which he or she might not otherwise be entitled. In addition, the spouse may also be eligible to receive coverage under the business’ qualified retirement plan, and the employer-spouse may obtain a business deduction for health insurance premium payments made on behalf of the employed spouse. While maintaining the same family coverage, the business deductions could be increased by providing the spouse with family health insurance coverage as an employee. These wages are subject to income tax.
Please keep in mind that when a family member is employed in a family business, the wages should be reasonable for the work performed and that the services performed are necessary to the business.
*Actually, only $12,050 of wages would need to be paid since the Kiddie Tax rules allow as the standard deduction for 2020 the lesser of $12,400 or the sum of $350 plus earned income, with a minimum standard deduction of $1,100. Thus $12,400 - $350 = 12,050.
The child may also make deductible contributions to an IRA for 2020 of the lesser of earned income or $6,000. By combining the standard deduction and the maximum deductible IRA contribution, a child could earn $18,400 of wages and pay no income tax. If the child balks at contributing his or her hard-earned money to an IRA, the parent might consider giving the child part or all of the IRA contribution as a gift.
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QUESTION: Regarding start-up expenses - is each category entitled to $5000 or is the the total $5000 for all expenses?
ANSWER: Start-up costs include amounts paid or incurred to create an active trade or business or to investigate the creation or acquisition of an active trade or business. Organizational costs include the costs of creating a corporation or a partnership. These costs are generally capital expenses, but by election, can be deducted or amortized, starting with the month the active trade or business begins. Each category is entitled to the $5,000 if they otherwise qualify.
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QUESTION: Define active participation.
ANSWER: Under Code Sec. 469, to actively participate in a rental real estate activity for purposes of the $25,000 offset, a taxpayer must participate in the activity in a significant and bona fide sense. A taxpayer participates if he or she makes management decisions, e.g., approves new tenants, decides on rental terms, approves capital or repair expenditures or arranges for others to provide services (such as repairs). The taxpayer need not have regular, continuous and substantial involvement in operations. But, a merely formal and nominal participation in management, without a genuine exercise of independent discretion and judgment, is insufficient.
The participation of a taxpayer's spouse is taken into account in determining whether the taxpayer actively participates. (Code Sec. 469(i)(6)(D))
A taxpayer is not treated as actively participating (except as regs may provide) with respect to any interest as a limited partner. (Code Sec. 469(i)(6)(C))
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QUESTION: What do you do if the employee won’t change the 1099 to a W-2?
ANSWER: I am a little unsure of your question. It is not up to the worker (employee) to decide whether or not they receive a 1099-NEC or W-2. That is the employer’s responsibility and the employer is the one that risks the penalties from the state's labor department if the employer misclassified the worker. As a preparer, you simply go with whichever form the taxpayer hands you and should not get involved with classification issues.
If you are a CA preparer you should be aware that you are at risk for some nasty penalties over this issue. The following is except from the Big Book of Taxes page 3.09.14.
Paid Advisors Also Subject to Penalty - Under this law, paid advisors (excluding attorneys and employees of the company) who "knowingly advise" employers to treat an individual as an independent contractor to avoid employee status for that individual are jointly and severally liable for any penalties imposed on the employer if the individual is found not to be an independent contractor. (CA Labor Code Section 2753)
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QUESTION: If a business is paying a VENDOR with a credit card, I have been told that they can then avoid the requirement to send a 1099-Misc or 1099-NEC (if they would otherwise be required to do so). Can you confirm this? The idea being that the transaction would be reported and included in the 1099-K.
ANSWER: This is from the 2020 1099-MISC/NEC instructions:
Form 1099-K. Payments made with a credit card or payment card and certain other types of payments, including third-party network transactions, must be reported on Form 1099-K by the payment settlement entity under section 6050W and are not subject to reporting on Form 1099-MISC. See the separate Instructions for Form 1099-K.
And this is from 1099-K instructions:
Reporting under sections 6041, 6041A, and 6050W. Payments made by payment card or through a third party payment network after December 31, 2010, that otherwise would be reportable under sections 6041 (payments of $600 or more) or 6041A(a) (payments of remuneration for services and certain direct sales) and 6050W are reported under section 6050W and not section 6041 or 6041A. For purposes of determining whether payments are subject to reporting under section 6050W, rather than section 6041 or 6041A, the de minimis threshold, discussed later under Box 1a, is disregarded.
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QUESTION: What constitutes "away from home"? Is it 50 miles?
ANSWER: There is no mileage definition for away from home. It is based upon what constitutes the individual’s tax home.
“Tax home” - is generally the location of a taxpayer’s main place of business (not necessarily the place he/she lives). If taxpayers work regularly in more than one area, the main work location controls--look at such factors as total time, amount of work, and relative income at each location to determine main business place (amount of income is first in order of importance).
For a taxpayer with no main business location, residence may be considered tax home if a taxpayer:
(1) Does some business in the area of his/her residence and actually uses it for lodging while doing business;
(2) Duplicates living expenses at his/her residence because the job requires being away from home;
(3) Has not left the area of his/her traditional home, close family resides there, or taxpayer often uses the home for lodging.
If all three factors apply to the taxpayer, tax home is where the taxpayer’s home is. If only two factors apply, facts and circumstances determine. If only one factor applies, the taxpayer is an itinerant and no away-from-home expenses are deductible.
Example - Determining Tax Home - Tom, an outside salesperson whose territory covers the western U.S., is employed by a firm whose main office is in Denver. Tom spends about one month a year in Denver for both business and nonbusiness purposes, but the majority of the time he is on the road for his sales job.
He owns a home in Denver where his wife, Tina, lived all year; the home has been the couple’s residence for a number of years. Tom’s tax home is Denver, because he meets all three factors listed above
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QUESTION: I have a client who (I believe) is abusing the meals deduction on his S-Corp business. He eats out almost EVERY day! Many times – the meals are JUST for him and do NOT include anyone else. He lives in a remote area and his internet is not great. He spends a LOT of time at a local Starbucks, coffee shops and local restaurants where he uses his laptop. Are those meals deductible?
ANSWER: Unless he is having a business meal with a client, the only way he can deduct his meals is while traveling “away from home”. A taxpayer isn't away from home unless they are away overnight, or at least long enough to require rest or sleep (IRS Pub 463, Page 3).
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QUESTION: Slide 3.15.03. Do not carryover home interest or taxes for business use of home. If not itemizing this goes down with insurance etc. Is this not then carried over?
ANSWER: Not sure I completely understand your question. But looking at 3.15.03 it says home office carryover never includes home mortgage interest, property taxes or disaster losses since they allowed currently on Schedule A whether or not a home office is claimed. However, insurance is not a schedule A deduction so would be included along with other expenses in the carryover. Hope this answered your question.
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QUESTION: Where do we put expenses for home office/supplies, etc. due to Covid-19? Any word on that?
ANSWER: Unfortunately, TCJA eliminated Tier 2 misc. deductions and that is where the home office deduction for employees is included. So far Congress has done nothing to change that. So, the answer is no deduction for employees on the federal return. Of course, self-employed can still include home office on their business schedule. Some states including California have not conformed to the elimination in which case the home office would be allowed in the state return.
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QUESTION: An S-Corp construction co. received payment by checks of sometimes $15K to $25K...Does the company need to file the Form 8300?
ANSWER: The Form 8300 only applies to CASH transactions.
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QUESTION: What is going to happen with all the office in home for self-employed if you are still paying rent due to COVID? Probably no deduction?
ANSWER: Interesting question. To qualify for office in the home, the office area must be used exclusively in a taxpayer’s trade or business on a regular, continuing basis. Taxpayer must be able to provide sufficient evidence to show the use is regular. Exclusive use means there can be no personal use (other than de minimis) at any time during the tax year. Use of only a portion of a room is acceptable as long as the taxpayer shows that section is totally for business.
In addition, it must be:
Thus, if the self-employed taxpayer is working at home full time because of COVID I see no reason why the taxpayer cannot deduct the home office and I don’t see why they would be precluded from deducting the rent on the office lease.
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QUESTION: Short term real estate rentals do not pay SE tax, correct?
ANSWER: You are correct. Here is an excerpt from the Big Book of Taxes (seminar text) page 3.17.04.
Profit from a rental activity that is reported on Schedule E is not subject to self-employment (SE) tax. But what about short-term rentals reported on Schedule C – are they subject to SE tax? Even though Pub 527, Page 12, indicates taxpayers “may” have to pay self-employment tax on short-term rental income, the “may” applies to real estate dealers. To quote Pub 334, “You are a real estate dealer if you are engaged in the business of selling real estate to customers with the purpose of making a profit from those sales. Rent you receive from real estate held for sale to customers is subject to SE tax. However, rent you receive from real estate held for speculation or investment is not subject to SE tax.” (IRC Sec 1402(a)(1))
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QUESTION: Unused PAL's for community property: Taxpayers get divorced. Husband retains the activity. Do the unused PAL's free up for Wife, or do the PAL's go to the Husband who retained ownership? Or is the answer something else?
ANSWER: For separately owned property, the carryover goes to the spouse that owns the property. Where the property is jointly owned by both or is community property:
You can register for the 16-Hour CPE Virtual Tax Update & Review Conference here.
]]>As part of the 2020 Tax Update and Review Conference Virtual Conference series, we field questions from our students throughout the presentation. We have highlighted some of the common questions and the answers you might find valuable.
Lesson 2 deals with a variety of compensation issues including: collectibles, crowdfunding, Cryptocurrency, unemployment, non-cash prizes, workers compensation, sick pay, automotive dealer incentives, surrogacy fees, Medicaid waiver payments, renter lease buy out, W-2 after death, utility rebates, misclassified employees, tip income, social security, capital transactions, wash sales, employee stock options, qualified small business stock, uncommon home sale issues, debt relief and exclusions, personal injury, statutory employee, insurance sales and viatical settlements, interest tracing rules and qualified opportunity funds.
QUESTION: Sometimes an individual starts as a subcontractor but at a later date becomes an employee - will the employee receive both 1099NEC and W2?
ANSWER: That is true, sometimes an employer may treat a worker as an independent contractor for a period of time and switch to an employee. The worker was probably an employee all along and was misclassified by the employer. We have seen employers pay bonuses to employee and treat the bonus as 1099-NEC payment which is an absolute no-no.
However, it is the employer’s responsibility to make the classification so you should go with what you are presented by your client, be it a W-2, 1099-NEC or both.
Other states may have different rules, but in CA paid advisors (excluding attorneys and employees of the company) who "knowingly advise" employers to treat an individual as an independent contractor to avoid employee status for that individual are jointly and severally liable for any penalties imposed on the employer if the individual is found not to be an independent contractor. (Labor Code Section 2753)
Given the advisor liability provision, consultants, Enrolled Agents, CPAs, return preparers and others who might otherwise advise their clients on how to classify workers should instead refer the client to an employment attorney.
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QUESTION: Regarding the sale of the home by divorced spouses. What does "Some Time" mean? What would the period of time be for that? My client's ex-wife sold the house after 20 years and he received a 1099S for half. Does 20 years qualify as "Some Time"?
ANSWER: Some period of time is indefinite if all of the other criteria are met. The following is from the seminar text (Big Book of Taxes) page 2.08.13:
Sale after ex-spouse retains property for some period of time - Only for purposes of this exclusion is an individual treated as using property as the individual’s principal residence during any period of ownership while the individual’s spouse or former spouse is granted use of the property under a divorce or separation instrument. This means that if a husband (or wife) continues to own the home after a divorce, and his/her former wife (husband) is granted use of the property under a divorce instrument, the exclusion could be available when the husband (wife) sells the house if he (she) meets the ownership requirement and his wife (her husband) meets the use requirements. (Reg. §1.121-4(b)(2))
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QUESTION: For home sale, a duplex where owner lives in one half and rents out the other half (they assign rental basis 50% of original cost), so when they sell, how is the sale price allocated? Would the sales price be allocated by how the cost basis was? So, 50%?
ANSWER: Since the property is a duplex, one unit is a rental and the other is a principal residence. When it was originally purchased the purchase basis should have been allocated by square foot and the rental unit depreciated. Now you are separately selling a home and a rental. The sales price, and sales costs should also be allocated between two based upon square feet. Only the home gain would be subject to the Sec 121 exclusion. The rental portion will be taxable, and the rental basis adjusted for the depreciation claimed in the prior years when determining the rental gain. I may have provided more than you asked for, but just to be on the safe side.
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QUESTION: Regarding the W-2 requirement for an on-site apartment manager - Would this apply to a property manager for a condo homeowner association? I have this situation where the HOA owns the condo unit, the property manager lives on-site rent-free and also receives a contract amount. Is paid as a sub-contractor and received a 1099.
ANSWER: This is from the seminar text which provides additional details. See page 2.01.06. Landlords will often hire a resident manager to handle the day-to-day tasks of running an apartment building. In some locales and depending upon the number of units in the apartment complex, resident managers are required. For example, in California, resident managers are required where there are 16 or more units, while the requirement applies for 9 units in NY City.
The managers may be compensated for their services, provided reduced or free rent, or a combination of both. The tax implications to the landlord and resident manager are:
Resident Manager – If the resident manager is compensated monetarily, they are treated as an employee and as such are subject to payroll withholding, and FICA. If they are provided reduced or free rent, that reduction is not included in taxable income (Reg. Sec. 1.119-1(b)) if:
If the above conditions are NOT met, the rental FMV is taxable income to the manager reported on a W-2 by the landlord or other employer (Letter Ruling 9404005).
From Pub 15-B, page 17 (2020):
Example of nonqualifying lodging - A hospital gives Joan, an employee of the hospital, the choice of living at the hospital free of charge or living elsewhere and receiving a cash allowance in addition to her regular salary. If Joan chooses to live at the hospital, the hospital can't exclude the value of the lodging from her wages because she isn't required to live at the hospital to properly perform the duties of her employment.
Landlord - If the resident manager is compensated monetarily, then the manager is a W-2 employee of the landlord and subject to the normal W-2 withholding and reporting requirements. Where the landlord reduces or provides free rent, whether or not also compensating the manager monetarily, and the three conditions listed under resident manager are met, the landlord has no reporting requirements regarding the free rent and no deduction for the free rent since the lack of the rental income constitutes his adjustment for the lost rental income.
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QUESTION: Please clarify. Are Medicaid waiver payments from IHSS excluded from income as well as available for EITC credit?
ANSWER: The IRS, way back in 2014, issued Notice 2014-7 specifying that Medicaid waiver wages would be mandatorily excludable from gross income under IRC Sec 131 (qualified foster care payments) if they meet certain requirements. The notice also said this exclusion applied regardless of whether or not the caregiver and the care recipient were related. Payments can be Medicaid waiver payments only if a particular state applied for and was granted a Medicaid waiver.
The Notice went on to say that the exclusion applies to the caregivers of patients who are “placed” in their home or those receiving difficulty of care payments.
This change was a double-edged sword, as some caregivers qualified for the earned income tax credit (EITC) and additional child tax credit (ACTC) based on Medicaid waiver wages. As a result of these payments being mandatorily excluded from income, these caregivers lost their EITC and ACTC based upon that income.
The Feigh Case - Taxpayers, the Feighs, received Medicaid waiver payments as wages for caring for their disabled adult children in their own home. When the Feighs filed their tax return they excluded the income but still treated it as earned income for EITC and refundable child tax credit (much like excludable combat pay is treated). The IRS took umbrage to that position and the case ended up in Tax Court.
The Tax Court held that Notice 2014-7 could not reclassify the taxpayer’s Medicaid waiver payment to remove a statutory tax benefit. Specifically, the Court found that where income does not fall within the plain text of a statutory exclusion from gross income, IRS cannot reclassify that income through a Notice so that it no longer qualifies as "earned income" for the purpose of determining tax credits. The Court reasoned that IRS cannot remove a statutory benefit provided by Congress.
IRS Acquiescence - On March 30, 2020 the IRS issued an Action on Decision (IRB 2020-14). That AOD states the following:
“The Service will follow the Feigh opinion. Accordingly, in cases in which the Service permits taxpayers, pursuant to the Notice, to treat qualified Medicaid waiver payments as difficulty of care payments excludable under § 131, the Service will not argue that payments that otherwise fall within the definition of earned income under § 32(c)(3) are not earned income for determining eligibility for the EIC and the ACTC merely because they are excludable under the Notice”.
What this means is where applicable, returns back to 2016 can be amended to claim EITC or refundable CTC. This is especially important for 2016 as the statute of limitations for refunds expires July 15, 2020.
TAS Reporting Tip - A Taxpayer Advocate Service Tax Tip explains how to report qualified non-taxable Medicaid waiver payments (MWPs) as earned income for earned income tax credit (EITC) and additional child tax credit (ACTC) purposes on a tax return, even though MWPs are not taxable income.
TAS says that on line 1 of the tax return (wages) include MWP received as wages that the taxpayer chooses to include in earned income for purposes of claiming the EITC or the ACTC, even if a Form W-2 was not received reporting these payments.
Then, on Schedule 1, line 8, (other income) subtract the nontaxable amount of the MWP from any other income reported on line 8 and enter the result. If the result is less than zero, enter it in parentheses.
TAS notes that for an electronically filed return, enter "Notice 2014-7" as an explanation for the MWP amount reported on Schedule 1, line 8. For a paper return, write “Notice 2014-7” on the dotted line for Schedule 1, line 8.
Another complication, at least in California, is that back when Notice 2014-7 was issued the California Department of Social Services (CDSS) allowed affected taxpayers to self-certify on Form SOC2298 that they resided in the same home as the individual for whom they were providing the care. Those who self-certified are no longer issued a W-2 for the Medicaid waiver payments. So, another form of income documentation will be needed when filing an amended return. The following is suggested copy to be used when amending a return (use at your own risk).
This return is being amended to be in accord with the Tax Court ruling in Feigh v. Commissioner, 152 T.C. No. 15 (2019) T.C. Docket No. 20163-17 and confirmed in IRS acquiescence in an AOD Dated March 30, 2020 (IRB 2020-14). Based on the court case and the AOD excluded Medicare waiver payments are treated as earned income for purposes of computing the taxpayer’s earned income tax credit (EITC) and where applicable, the additional child tax credit (ACTC). In fact, these Medicare payments are earned income regardless of whether the payments are excludable
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QUESTION: If the taxpayers buy and live at this home for only 3 years then sell the home, can they exclude the gain for $500,000?
ANSWER: Yes, the qualification is they must own and occupy the home as their personal resident for 2 out the most recent 5 years. So, if they buy the home, live in it for 2 years and then sell it, they will qualify.
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QUESTION: If debt for solar is financed separate from the mortgage is it deductible interest? If it is financed by the solar company directly?
ANSWER: Yes, since it is a substantial improvement to the home which would make it acquisition debt …PROVIDED the debt is secured by the home.
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QUESTION: Wait, why aren't we using 1099-MISC for 2020? I haven’t heard this yet.
ANSWER: The Internal Revenue Service has resurrected a form that hasn’t been used since the early 1980s, Form 1099-NEC, Nonemployee Compensation. Since 1983, the IRS has required businesses to instead file Form 1099-MISC for contract workers and freelancers. The revival of Form 1099-NEC is part of an effort mandated by Congress in the PATH Act of 2015 to require businesses to file information returns about any non-employee compensation by Jan. 31 of each year. However, there were problems with the IRS’s processing systems because there was still a March 31 due date for any Form 1099-MISC that didn’t contain non-employee compensation. You can download the “new” 1099-NEC, from the IRS Website.
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QUESTION: For reduction of SS Benefits, do S-Corp earnings count as SE income?
ANSWER: Not sure I fully understand your question, but I will give it a shot...An S-Corp is required to pay working shareholders reasonable compensation via payroll. The profit from the corporation is passed through to the shareholders on a K-1 and that income is not subject to SE tax, thus is not earned income and would not be included as earned income for the SS limit.
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QUESTION: What about legal fees paid through Social Security in order to get a lump-sum amount from SSA? Deductible?
ANSWER: Sometimes individuals will incur legal expenses to produce or collect taxable income or in connection with the determination, collection, or refund of any tax. The legal expenses cannot be used to offset the SS benefits and can only be deducted as a Tier 2 miscellaneous itemized deduction. In addition, the deduction is limited to legal expenses for collecting only the taxable part of the taxpayer's benefits. Thus, prorate to determine the amount of legal expense attributable to the taxable Social Security (Rev Rul 87-102).
Caution: The TCJA of 2017 suspended the Tier 2 miscellaneous itemized deductions for years 2018 through 2025, so even the legal fees prorated to the taxable Social Security award aren’t deductible.
If your client is a CA taxpayer, even though CA still allows tier II deductions, because SS is not taxable to CA the legal fees would not be deductible for purposes.
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QUESTION: When electing SS withholding percentages, I can never figure out how the SSA came up with the ACTUAL amount to withhold. Math never works.
ANSWER: I have never double checked their math. Of course, they are supposed to withhold 7%, 10%, 12%, or 22% of the total benefit payment. I did look on the SSA and IRS websites as well as the internet itself and could not find anything related any adjustments the percentages.
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QUESTION: Taxpayer owns home jointly with father. Father provided down payment and is only one on loan. Taxpayer paid all costs of the home, taxes, mortgage payments, repairs, utilities, etc. Taxpayer has reported 100% on her return for every year. Taxpayer meets both use and ownership. For the sale of the home can the entire sale be reported by the taxpayer or does some portion need to be reported on the parent's return?
ANSWER: This question comes up all the time in one form or another. The parent is probably on the loan because the child would not otherwise qualify for the loan. However here are some of the issues.
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QUESTION: What happens to NOL when debt is cancelled but not taxable due to insolvency? I have this coming up this year and need to know what to do on the tax return. I guess this follows the tax attribute rule reduction - right?
ANSWER: When COD income is excluded (insolvency exclusion) the form 982 must be completed and the taxpayer’s tax attributes reduced to the extent the COD income is excluded. The reduction of attributes is made in a specific sequence. NOLs are third in that sequence, line 6 on the 982.
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QUESTION: If a spouse dies and the taxpayer stayed in the home until he got married again and then sold the home to move into the new spouse’s house - does the taxpayer get the $500K exclusion because he is now married again?
ANSWER – The first issue is that when the spouse passed away the taxpayer (TP) got an adjustment to basis. Depending upon state law and how title was held, the adjustment would be to 50% of the basis or 100% of the basis. This is commonly referred to as step-up in basis but is actually FMV at the date of death. So, the TP may not need more than $250K anyway.
Next, a surviving single spouse qualifies for the up-to-$500,000 exclusion if the sale occurs not later than 2 years after their spouse's death and the requirements for the $500,000 exclusion were met immediately before the spouse's death. (Code Sec. 121(b)(4)).
Next, if the home is sold after remarrying, and the new spouse meets the 2 out of 5 occupancy (use) requirements for the living in the home the TPs exclusion would be $500K. Note, the new spouse need only meet the occupancy requirement not the ownership test.
Finally, if the new spouse does not meet the occupancy (use) requirement for the TP home, the exclusion would be limited to $250K.
As you can see there are several outcomes depending on the circumstances.
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QUESTION: If a trustee (who is also a beneficiary) pays themselves for settling the estate, does this income go on the 1099-MISC as other income or on the 1099-NEC (subject to self-employment tax). This is not their normal job (fiduciary work).
ANSWER - A person who administers the estate of a deceased person (i.e., the fiduciary) is subject to SE tax if:
(a) the person is a professional fiduciary.
(b) the person is a nonprofessional fiduciary who manages an estate that includes an active trade or business. Nonprofessional fiduciaries are generally not treated as receiving income from a trade or business unless all of the following are met:
There are numerous examples in the Big Book of Taxes, page 8.03.05. So, the 1099-NEC would apply if subject to SE Tax.
You can register for the 16-Hour CPE Virtual Tax Update & Review Conference here.
]]>As part of the 2020 Tax Update and Review Conference Virtual Conference series, we field questions from our students throughout the presentation. We have highlighted some of the common questions and the answers you might find valuable.
Lesson one concentrates on status items and includes uncommon filing status issues, some complicated “who gets the dependent” disputes, alien spouse, divorce issues, death of a taxpayer, tax treatment of clergy, concerns related to co-owned property, special treatment of military, non-resident and resident aliens, community property, foreign reporting requirements (FBAR, 8938, foreign rentals, foreign pensions, foreign gifts, etc.), and more.
QUESTION: What happens when the TP is an army member and wants to sell the home before 2 years? Is there an exception ?
ANSWER: There is no blanket exception for the military. However, the individual would qualify for a reduced exclusion if a taxpayer doesn’t meet the ownership, use or once every-two-years requirements due to a change in the place of employment, health or (to the extent provided in regs) unforeseen circumstances. You might look at the list of unforeseen circumstances as well.
Chapter 2.08 of the seminar text (Big Book of Taxes) has extensive coverage of home sales and page 2.08.09 includes more info related to reduced exclusions and unforeseen circumstances.
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QUESTION: California allows separated or divorced spouse to live together and still qualify as separated. Does this not affect Federal treatment or just CA treatment?
ANSWER: The following is from the seminar text (Big Book of Taxes) page 1.00.04. Note that CA differences are included at the end of each chapter in the Big Book.
Qualifying for Head of Household While Still Married - California follows the federal rule that allows a married individual to use the head of household status if he or she:
(a) lived apart from their spouse at least the last six months of the year, and
(b) paid more than one-half of the cost of maintaining as his or her home a household which is the principal place of abode for more than one-half the year of a child, stepchild or eligible foster child for whom the taxpayer may claim a dependency exemption.
The “lived apart” requirement is unchanged by an amendment to the California Family Code (SB 1255, Stats. 2016, ch. 114, 7/25/16) regarding the definition of “date of separation.” Under that revision, date of separation is the date that a complete and final break in the marital relationship has occurred as evidenced by the spouse’s expression of his or her intent to end the marriage and conduct that is consistent with that intent. In other words, for purposes of the Family Code, the spouses don’t have to live in separate residences to establish a date of separation, but for Head of Household qualification purposes, they must still meet requirement (a) above. (FTB News, Sept. 2017)
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QUESTION: Does a disabled child's social security’s SSI count toward his own support when computing the support test for dependents?
ANSWER: The SS income is taxable to the recipient. But in the case of child who has no other taxable income, I doubt the SS amount is enough to exceed the $25,000 trigger to be taxable.
There is an age limit to be considered a qualified child. However, the age limit does not apply if the individual is permanently and totally disabled. Otherwise, it is less than age 19.
So, if the child meets the tests for a qualified child there is no gross income test, only…
However, a qualified child cannot be self-supporting and I seriously doubt the SS benefits would make the child self-supporting.
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QUESTION: What if a child pays for room and board at college with 529 plan where grandparent is owner and child is beneficiary. Can child say they pay for their support with 529 distribution. Again, parent is not owner of 529.
ANSWER: To date the IRS has not provided any guidance related to whether a distribution from a Sec 529 plan constitutes support to the student provided by the account owner or the account beneficiary (the student). Some tax professionals take the position that the distributions are support provided by the beneficiary (student) since the contributions to Sec 529 Plans are considered to be completed gifts. This issue can have a significant impact when determining whether the beneficiary is a dependent of his or her parents or is self-supporting, and who claims the beneficiary’s dependency, education credits, tuition deduction (in years when available), and other tax benefits.
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QUESTION: If a spouse died prior to 2020 and a stimulus payment was received for a married couple versus just the one spouse, will that have to be repaid?
ANSWER: The IRS has been strongly indicating that a payment made to a deceased individual should be returned. This is from the IRS Q&A A5:
A payment made to someone who died before receiving the payment should be returned to the IRS by following the instructions in Topic I: Returning the Economic Impact Payment.
Joint filers with a deceased spouse: For payments made to joint filers with a deceased spouse who died before receiving the payment, return the decedent’s portion of the payment. This amount will be $1,200 unless your adjusted gross income exceeded $150,000.
If you can’t cash or deposit the check: If you cannot cash or deposit the payment because it was issued to you and a deceased spouse, return the check as described in Topic I: Returning the Economic Impact Payment. After the IRS receives and processes your returned payment, an Economic Impact Payment will be reissued to you.
The IRS is aware that some surviving spouses weren’t issued their portion of the payment. We’re in the process of correcting this issue to send these payments as quickly as possible. We apologize for any inconvenience this may have caused. You can check the status of your payment using the Get My Payment tool. Eligible individuals who don’t receive a payment this year may be eligible to claim the Recovery Rebate Credit when they file their 2020 tax return.
The Bureau of the Fiscal Services (BFS) has cancelled outstanding Economic Impact Payment (EIP) checks issued to recipients who may not be eligible, including those who may be deceased. Recipients should still return these checks as described in Topic I: Returning the Economic Impact Payment instructions.
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QUESTION: Can an adult (over 18), disabled person, living with taxpayer, and taxpayer pays more than 50% of expenses, income is less than $4300 as disability income is NOT included, and NOT related ...... can they be a dependent for federal purposes? Can that disabled person qualify taxpayer for HOH?
ANSWER: The individual would need to meet the five tests for dependency. (1) Relationship of or member of the household, (2) Gross income test, (3) Joint return test, (4) Citizenship/residence test and (5) Support test. I would assume from your question the issue appears to be the gross income test.
The “dependent’s” gross income must generally be less than the personal exemption amount in order for an individual to qualify as a dependent. As part of tax reform, the federal deduction for exemptions has been suspended for tax years 2018 through 2025. However, the exemption amount ($4,300 for 2020, $4,200 for 2019, $4,150 for 2018) continues to be used elsewhere in the tax code for other purposes, including for the definition of a qualified relative. The amount is subject to inflation adjustment annually.
All gross income which is taxed counts towards this test (e.g., gross rents before expenses), but exempt amounts such as worker’s compensation or gifts are not counted. Social Security benefits are only counted to the extent they are taxable.
Gross income under this test does not include certain income from sheltered workshops for permanently and totally disabled individuals. To be excludable, the income must come from activities that are incidental to medical care during special training and it must be paid by an exempt organization or government agency.
For additional information related to qualifying for dependency see chapter 1.10.10 in seminar text.
As for the Head of Household, a qualified person generally includes a qualified child (the child’s exemption does not have to be claimed – it can be released to the other parent), or a relative for whom the taxpayer may claim a dependency exemption, OR Pay more than half the cost of maintaining a separate household that was the main home for a dependent parent for the entire year.
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QUESTION: Taxpayer is supporting parent more than 50%. The parent dies during year in May (so less than 6 months). Can taxpayer claim as dependent?
ANSWER: A person who died during the year but lived with the taxpayer as a member of the taxpayer’s household until death, will meet the relationship or member of the household test. The same is true for a child who was born during the year and lived with the taxpayer as a member of the taxpayer’s household for the rest of the year. The test also is met if a child lived with the taxpayer as a member of the taxpayer's household except for any required hospital stay following birth. If a dependent died during the year and the taxpayer therwise qualifies to claim that person as a dependent, the taxpayer can still claim that person as a dependent. (Pub 17, Page 33, 2019)
Example: The taxpayer's mother died on January 15. She met the tests as a qualifying relative.The taxpayer can claim her as a dependent.
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QUESTION: To clarify - divorce final in 2019, but payments were made to spouse while separated. That would not be claimed by either party unless the divorce was final or there is a written agreement - correct?
ANSWER: For divorce or separation instruments entered into after 12/31/2018, alimony is no longer deductible by the payer and it is not income to the recipient and no longer qualifies as earned income for an IRA deduction.
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QUESTION: So, a nonresident (they live in Mexico) who receives dividends and interest only on an investment account is that subject to 30%, correct?
ANSWER: Yes, that is correct if it is U.S. Source income.
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QUESTION: A married couple has a house as community property at the date of death. Double step up of basis (CA) value is date of death or 9 months later? Not a taxable estate.
ANSWER: I assume you mean one of the couple passed away. Although usually the case, it is not always step-up, it could be step-down. The law says FMV at the date of death not 9 months later. So, the surviving spouse’s basis becomes FMV at the date of death.
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QUESTION: A child of an illegal immigrant who entered the US as a child (DACA?) would need to file as a nonresident, correct?
ANSWER: I would think they would meet the substantial presence test and therefore would file as a resident alien. See page 1.09.02 in the Big Book.
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QUESTION - I have a client that purchased property in Jamaica. She is US resident. Does she report that property? Does this apply to the 30% withholding rule?
ANSWER - Foreign real estate held directly by the taxpayer is not subject to either the FBAR reporting or Form 8938 reporting. There is a table located on page 1.13.01 of the Big Bool of Taxes (the seminar text) that covers most FBAR and 8938 reporting. Not sure about your 30% withholding question. Why would there be any withholding requirement for simply owning property in Jamaica?
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QUESTION: Could you give an example on the Passive Loss Carryovers where only one spouse retains the property as it applies to 50% adjust basis and 50% carries over?
ANSWER: Transfers and Passive Loss Carryovers - Under §1041(b) and 469(j)(6), if a taxpayer transfers property to a spouse incident to a divorce, the exchange is treated as though it were a gift. Therefore, any suspended losses attributable to the spouse giving up the interest in the passive activity are added to the basis of the property transferred to the other spouse. For the receiving spouse, the basis will be increased by the ex-spouse’s suspended losses, but the receiving spouse’s suspended losses on the same property will still be considered suspended losses, which are available currently to offset passive income.
Jack and Jill divorce. They had jointly owned a rental with $50,000 passive carryover. In the divorce Jill gets the rental with an adjusted basis of $300,000. Thus, after the divorce, her basis becomes $325,000 and she has a $25,000 passive carryover.
–––––––––––––––––––––––––––––––––––––––––––––QUESTION: What if a Florida resident in the military on duty in California marries a California resident. Then they buy a home in California. Does this change their Florida residency?
ANSWER: The Service members Civil Relief Act of 2003 provides that a service member does not lose or acquire a residence or domicile for tax purposes with respect to his or her person, personal property, or income due to being absent or present in any tax jurisdiction in the U.S. solely to comply with military orders. There is nothing in that law that is affected by the military taxpayer owning a home in the state of residence.
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QUESTION: TP was in the process of divorce. TP was separated for 3 years before divorce. Rental property owned jointly. Husband took income and expenses on rental (and possible losses) when couple separated and filed separately...fast forward a couple of years, and rental property was sold. (Still joint property) 1099S was issued to both spouses. The spouse is my client. My understanding is she is entitled to suspended losses while the rental property was claimed when she filed jointly. Is that correct? Husband is not willing to release details of prior returns - so even computing depreciation recapture has proven difficult. Any ideas on how to compute?
ANSWER: I think there are more questions than answers here. If it were community property, why wasn’t she reporting it all along? When sold, did she get half the proceeds? Does she know the original community basis? Was her SSN on 1099-S? What did the divorce say about the division of the property?
Passive Loss Carryovers – For separately owned property, the carryover goes to the spouse that owns the property. Where the property is jointly owned by both or is community property:
I think you need to read pages 1.10.07 through 1.10.09. Especially the bottom of page 1.10.08 … Sec 66(b) Denial of Community Property Benefits - If a taxpayer acts as if he or she is solely entitled to the community income and fails to timely notify his or her spouse of the nature and amount of the income, IRS may deny any benefit of community property laws to that taxpayer (Reg Sec. 1.66-3(a)).
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QUESTION: Will the MFG payments now be reported on the 1099-NEC?
ANSWER: Not sure what you mean by MFG payments? However, because the IRS needed W-2s and 1099-MISC forms with non-employee compensation to be filed January 31 to combat EITC fraud they brought back the old 1099-NEC which only includes non-employee compensation. Thus, the 1099-MISC no longer has to be filed by January 31. If this doesn’t answer your question, please get back to me.
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QUESTION: When splitting tips, does the person (employee) claim the entire amount or can they break down their tips from those they tipped out?
ANSWER: Tips given to others under a “splitting” arrangement are not subject to the reporting requirement by the employee who initially receives them. That employee should report to the employer only the net tips received.
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QUESTION: Let's say parents have paid in enough to cover full tuition and board for students. So parents have very little out of pocket in tax year for a year of college. Parent's income is too high to claim their child as a dependent. The 529 paid out $32,500 to cover eligible costs and reported under the student's EIN. Do you agree that the student provided that support?
ANSWER: To date the IRS has not provided any guidance related to whether a distribution from a Sec 529 plan constitutes support to the student provided by the account owner or the account beneficiary (the student). Some tax professionals take the position that the distributions are support provided by the beneficiary (student) since the contributions to Sec 529 Plans are considered to be completed gifts. This issue can have a significant impact when determining whether the beneficiary is a dependent of his or her parents or is self-supporting, and who claims the beneficiary’s dependency, education credits, tuition deduction (in years when available), and other tax benefits.
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QUESTION: Wife receives alimony and was divorced in Canada. She receives monthly payments and also will receive one final property settlement payment after death of husband. Are the monthly payments taxable alimony to her?
ANSWER: Had to research this one since it deals with the U.S. – Canada Tax Treaty. This is what my research service, Checkpoint, came up with…Alimony and similar amounts (including child support payments) from Canadian sources paid to U.S. residents are exempt from Canadian tax. For purposes of U.S. tax, these amounts are excluded from income to the same extent they would be excluded from income in Canada if the recipient was a Canadian resident.
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QUESTION: Can a legally separated parent file a joint tax return? Court paper indicate legally separated but marital status not changed.
ANSWER: The marital status of husband and wife is terminated when the couple is legally separated under a decree of divorce or of separate maintenance (Code Sec. 2(b)(2), Code Sec. 7703(a)(2), Code Sec. 6013(d)(2)). This termination of the marital status for tax purposes is constitutional (Hamilton, Raleigh, (1977) 68 TC 603). An interlocutory (temporary) decree of divorce doesn't end a marriage until the decree becomes final (Reg § 1.6013-4(a), Rev Rul 57-368, 1957-2 CB 896). A couple living under a legal separation agreement but without any court decree isn't legally separated for tax purposes, because such an agreement could be abrogated by the parties upon reconciliation and resumption of cohabitation.
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QUESTION: Is the $10,000 FBAR rule per account or cumulative? For example, two accounts with $6,000 each. Is that subject to FBAR reporting rules?
ANSWER: The $10,000 FBAR filing requirement is based upon the sum of foreign accounts.
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QUESTION: I know someone who had a checking account with over $10,000 in it in 2019 and he is a green card holder. Does he have an FBAR filing obligation?
ANSWER: A green card holder is a resident of the U.S. and subject to the same tax laws as a U.S. resident. So yes.
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QUESTION: Lee, I have a client that has dual citizenship. US and Germany, she works in the US for the German Consulate. She is paid in Euros to a US Bank. Does she file a 1040? Or NR? She is given a letter from the consulate indicating that her income is non-taxable to the US.
ANSWER: If the individual is a US citizen who is required to file a return, then filing would be done on a 1040. Below is from the Germany-US treaty protocol - found on IRS web site. Reading this stuff is like reading Greek.
Article X of the Protocol replaces Article 19 (Government Services) of the Convention. The amendments made by this Article X of the Protocol will not have effect with respect to individuals who, at the time of the signing of the Convention, August 29, 1989, were employed by the United States, a political subdivision or local authority thereof.
Paragraph 1
Subparagraphs (a) and (b) of paragraph 1 deal with the taxation of government compensation (other than a pension addressed in paragraph 2). Subparagraph (a) provides that salaries, wages and other similar remuneration paid to any individual who is rendering services to that State, political subdivision, local authority, or instrumentality is exempt from tax by the other State (i.e., the host State). Under subparagraph (b), such payments are, however, taxable exclusively in the host State if the services are rendered in the host State and the individual is a resident of that State who is either a national of that State or a person who did not become resident of that State solely for purposes of rendering the services.
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QUESTION: What about spouses that are both service members? Can one elect the domicile of the other? I have those clients. Jag said no but I have not seen anything from the IRS on this issue.
ANSWER: Based on our readings of the codes, we don't think the switch can be done because neither spouse is with the other spouse solely to be with their spouse at the spouse's duty station. Presumably they are both where they are because of being assigned there by the military. Hope that make sense…
Based only on reading the text of the Act and 50 USC 4001(a)(2), below, it would seem to me that one of the spouses would need not to be in the military to meet the “solely” requirement highlighted below. Unknown whether Congress worded this as such deliberately or without thinking that both spouses could be military.
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This is the section of the Veterans Benefits and Transition Act of 2018
SEC. 302. RESIDENCE OF SPOUSES OF SERVICEMEMBERS FOR TAX PURPOSES.
(a) Residence for Tax Purposes.--Section 511(a)(2) of the
Servicemembers Civil Relief Act (50 U.S.C. 4001(a)(2)) is amended--
(1) by striking ``A spouse'' and inserting the following:
``(A) In general.--A spouse''; and
(2) by adding at the end the following new subparagraph:
``(B) Election.--For any taxable year of the
marriage, the spouse of a servicemember may elect to use
the same residence for purposes of taxation as the
servicemember regardless of the date on which the
marriage of the spouse and the servicemember
occurred.''.
(b) <<NOTE: 50 USC 4001 note.>> Applicability.--The amendments made
by subsection (a) shall apply with respect to any return of State or
local income tax filed for any taxable year beginning with the taxable
year that includes the date of the enactment of this Act.
50 U.S. Code § 4001 - Residence for tax purposes
(a) Residence or domicile
(1) In general
A servicemember shall neither lose nor acquire a residence or domicile for purposes of taxation with respect to the person, personal property, or income of the servicemember by reason of being absent or present in any tax jurisdiction of the United States solely in compliance with military orders.
(2) Spouses
(A) In general
A spouse of a servicemember shall neither lose nor acquire a residence or domicile for purposes of taxation with respect to the person, personal property, or income of the spouse by reason of being absent or present in any tax jurisdiction of the United States solely to be with the servicemember in compliance with the servicemember’s military orders if the residence or domicile, as the case may be, is the same for the servicemember and the spouse.
(B) Election
For any taxable year of the marriage, the spouse of a servicemember may elect to use the same residence for purposes of taxation as the servicemember regardless of the date on which the marriage of the spouse and the servicemember occurred.
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QUESTION: What's the purpose of the virtual currency box on the 1040?
ANSWER: The 1040 is signed under penalty of perjury. So, the purpose is the same as the FBAR question. If checked incorrectly and they are later found to have not reported their virtual currency transactions they will get hit with larger penalties.
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QUESTION: How does a parent prove their child spent more nights at their house than the other parent’s house?
ANSWER: I have always pondered that question myself. I think it would be a tough thing to prove if it came down to that. The only hope would be a good set of contemporaneous records. Just another IRS rule that is difficult to sort out.
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QUESTION: Blended families - could each "parent" file as HOH even though they share the same household? Unmarried living together.
ANSWER: One House – One Household Rule - IRS has ruled that a single house cannot contain more than one household. However, the Tax Court overruled the IRS’s view in Fleming, Jean Foster Estate, TC Memo 1974-137 where a family occupied a single house but with a certain amount of divisibility of quarters--one for mother and unmarried daughter, another for married daughter and family.
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QUESTION: Hello again, I have been looking for a requirement and I cannot find it. What is the Statute for filing the form 3520? Is it three years from the due date or six? Or no statute upon which penalties can be assessed for failure to file?
ANSWER: A retired minister of the gospel is furnished rent-free use of a home pursuant to official action taken by the employing qualified organization in recognition of his past services which were the duties of a minister of the gospel in churches of his denomination. In addition, he is paid a rental allowance, within the meaning of section 107(2) of the Internal Revenue Code of 1954, for utilities, maintenance, repairs and other similar expenses directly related to providing a home.
Held, that the rental value of the home furnished to the retired minister as part of his compensation for past services is excludable from his gross income under section 107(1) of the Code. Also, the rental allowance paid to him as part of his compensation for past services is excludable under section 107(2) of the Code, to the extent used by him for expenses directly related to providing a home. Rev Rul 63-156, 1963-2 CB 79
You can register for the 16-Hour CPE Virtual Tax Update & Review Conference here.
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CAUTION: This postponement does not include the 1065 or 1120-S returns which were due on March 16. Nor does it include FBAR filings. However, FBARs have an automatic extension to October 15 which effectively makes October 15, 2020 the FBAR due date.
In addition, there is no extension of the statute of limitations for 2016. Those returns or claims for refund must be filed by April 15, 2020.
Payment Due Date Postponement:
PRESUMPTION: It is presumed, unless further guidance is provided, that if an additional extension to October 15 is desired, it would require filing an extension and the payment of the tax estimated on the extension to avoid the normal interest and penalties. For extensions filed before July 15, any payment would not need to be made until July 15. Thus, if filing the extension before July 15 automatic payment withdrawals could be scheduled for July 15.
Late Filing and Late Payment Penalties – No late filing or late payment penalties will apply during the 3-month filing and payment postponement period. Unless further relief is provided these penalties will resume after July 15, 2020.
Other Filings – Notice 2020-18 makes it clear that no extension is provided for the payment or deposit of any other type of Federal tax, or for the filing of any Federal information return.
OTHER ISSUES NOT INCLUDED IN NOTICE 2020-18
2019 IRA Contributions – Normally the last day to make an IRA contribution for 2019 is the unextended due date of the 2019 tax return, i.e. April 15, 2020. That date has been extended to July 15, 2020. (Reference IRS COVID-19 Webpage Q&A #17).
2019 HAS & Archer MSA Contributions – Like the IRA due date, the due date for 2019 HSAs and Archer MSA contributions has been extended to July 15, 2020. (Reference IRS COVID-19 Webpage Q&A #17).
Cancelling Direct Withdrawals - If you have already filed a return that included direct withdrawals for the tax payment, and the withdrawal date has not yet passed, the direct withdrawal can be cancelled by the taxpayer calling the IRS e-file Payment Services 24/7 at 1-888-353-4537. But wait 7-10 days after the return was accepted before calling. Cancellation requests must be received no later than 11:59 p.m. ET two business days prior to the scheduled payment date.
Estimated Tax Payments - (Reference IRS COVID-19 Webpage Q&A #16).
Of course, one can continue make estimated tax payments in the manner and usual schedule.
Underpayment Penalties – No relief from the penalty for underpayment of 2019 taxes is provided. The only relief is via form 2210 for individuals and Form 2220 for corporations (Reference IRS COVID-19 Webpage Q&A #24.
California Filing & Payment Postponements – The FTB has postponed until July 15 the filing and payment deadlines for all individuals and business entities for:
Other State Filing & Payment Delays – The AICPA has posted a public webpage that provides up-to-date information about filing and payment postponements state by state. Here is the link to that web page:
]]>The Act also includes a provision that an employee qualifies if the employee Is experiencing any other substantially similar condition specified by the Secretary of Health and Human Services in consultation with the Secretary of the Treasury and the Secretary of Labor.
Hours of Sick Leave Time:
Sick Pay Benefit:
Other Issues:
Paid Family Leave (Referred to as Child Care Leave by the IRS)
Under the act employers with fewer than 500 employees are required to pay up to 12 weeks of employer-paid family leave for any employee who has employed by the employer more than 30 days.
Employee Qualifications - To qualify the employee must be unable to work, or work from home, because the employee must care for their child under 18 years of age, due to school or childcare closures related to a COVID-19 emergency.
Duration of the Leave – The maximum duration of the leave is 12 weeks.
Family Leave Benefit – Two-thirds of their normal rate of pay but limited to $200 per day and a maximum of $10,000.
Notice: Where the need for family leave is anticipated an employee should provide their employer with as much advance notice as possible. However, advance notice is not required.
Fear of Losing Job:
State Family Leave Programs – Some states provide family leave benefits and it will take time to see if there is nexus between the federal emergency benefits and state benefits. For example CA has a paid family leave program compensated by the state.
Social Security Payroll Tax Credit
Employers who provide Emergency Paid Sick Leave benefits and Emergency Child Care Leave benefits will be given refundable tax credits against their Social Security taxes that will refund them fully for qualified sick leave and childcare leave wages under the Act. A similar credit is available for self-employed individuals against their self-employment tax.
Procedure for Claiming this Credit (IR2020-27) - Under addition guidance that will be later released, eligible employers who pay qualifying sick or child care leave will be able to retain an amount of the payroll taxes equal to the amount of qualifying sick and child care leave that they paid, rather than deposit them with the IRS.
The payroll taxes that are available for retention include:
Accelerated Payment - If there are not sufficient payroll taxes to cover the cost of qualified sick and childcare leave paid, employers will be able file a request for an accelerated payment from the IRS. The IRS expects to process these requests in two weeks or less. The details of this new, expedited procedure are forthcoming.
Example - If an eligible employer paid $5,000 in sick leave and is otherwise required to deposit $8,000 in payroll taxes, including taxes withheld from all its employees, the employer could use up to $5,000 of the $8,000 of taxes it was going to deposit for making qualified leave payments. The employer would only be required under the law to deposit the remaining $3,000 on its next regular deposit date.
Example - If an eligible employer paid $10,000 in sick leave and was required to deposit $8,000 in taxes, the employer could use the entire $8,000 of taxes in order to make qualified leave payments and file a request for an accelerated credit for the remaining $2,000.
Self-Employed Individuals - Equivalent childcare leave and sick leave credit amounts are available to self-employed individuals under similar circumstances. These credits will be claimed on their income tax return and will reduce estimated tax payments.
Small Business Exemption - Small businesses with fewer than 50 employees will be eligible for an exemption from the leave requirements relating to school closings or childcare unavailability where the requirements would jeopardize the ability of the business to continue. The exemption will be available on the basis
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b. More than $16,389 in 2019 ($16,076 in 2018) (Rev Procs 2018-57 and 2018-18) from foreign corporations or foreign partnerships (including foreign persons related to such foreign corporations or foreign partnerships) that are treated as gifts.
Foreign Gifts - Foreign gifts generally include any amounts received from a person that isn't a U.S. person that the recipient treats as a gift or bequest. The term doesn't include any qualified tuition or medical payments made on behalf of a U.S. person.
Reporting Requirements:
Caution - If the ultimate donor is a foreign trust, then treat the amount as a distribution from a foreign trust. The penalty for not reporting a foreign gift that must be reported is 5% of the amount of the gift for each month the failure to report continues, up to a maximum of 25%. The penalty will be excused if reasonable cause for the failure to report can be established. (Code Sec. 6039F(c)(1)(B)).
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A battery attached to solar panels is qualified solar electric property if it’s charged only by solar energy. A software-management tool is qualified solar electric property where the software is necessary to monitor the charging and discharging of solar energy from a battery attached to solar panels. Earlier installations of qualifying property don’t affect the availability of the solar credit for qualifying property in later years. Thus, where a qualifying solar panel system was installed in Year 1, an additional solar credit could be claimed in Year 2 for the installation of a battery that was connected to the system and was qualified solar electric property. (IRS Letter Ruling 201809003)
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2. Construction or Substantial Improvement - In the case of the construction or substantial improvement of a residence, debt incurred prior to the time the residence or improvement is complete may be treated as being incurred to construct or improve the residence to the extent of any expenditures to construct or improve the residence which are made no more than 24 months prior to the date that the debt is Debt incurred after the residence or improvement is complete, but no later than the date 90 days after such date, may be treated as being incurred to construct or improve the residence to the extent of any expenditures to construct or improve the residence which are made within the period beginning 24 months prior to the date the residence or improvement is complete and ending on the date the debt is incurred.
The Notice goes on to say regulations will be issued, but that has never happened. Notices can be relied on and cited as precedent by taxpayers. IRS is bound to what it says in an announcement or notice to the extent it would be with a Revenue Ruling or Revenue Procedure.
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For the Section 199A deduction, when the taxpayer’s 1040 taxable income exceeds the phaseout threshold plus $50K ($100K for MFJ), section 199A(b)(2)(B)(ii) limits the section 199A deduction for qualified trades or businesses (QTBs) (not specified service trades or businesses - SSTBs) to the lesser of:
1. 20% of QBI (net of certain required adjustments), orThus, in some cases a taxpayer’s 199A deduction may be based upon 25% of the wages paid by the business plus 2.5% of the business’s UBIA. With no W-2 wages the deduction may become just 2.5% of UBIA. The question presented by the use of a taxpayer’s home for business is this: Does the UBIA include the business use portion of the unadjusted basis of the home (net of land value)? The answer is maybe.
Reg Sec 1.199A-2(a)(3) provides: “The UBIA of qualified property is presumed to be zero if not determined and reported for each trade or business (or aggregated trade or business. This means that the UBIA must be “determined and reported” on the tax return. Where a taxpayer is figuring a business tax deduction for the portion of their home used for business, they have two options, either use the actual expense method or the simplified method prescribed by Rev Proc 2013-13. In using the simplified method, it is not necessary to calculate (“determine and report…”) the adjusted basis of the portion of the home used as an office. (See section 4.06 of Rev Proc 2012-13). However, if the taxpayer uses the simplified method in one year and the actual expense method in the next year the adjusted basis of the portion of the home used as an office must be computed in that subsequent year (see section 4.07(1) of Rev Proc 2012-13). So, it would seem that, if the simplified method is used in the first year or years, then the home office is not included in UBIA. However, if the taxpayer switches to the actual method in a subsequent year and the depreciation is “determined and reported,” then the home office would be included in UBIA for the year of the switch.
Qualified Property: Sec. 199A(b)(6) defines “qualified property” as meaning:
Except as outlined above, the section 199A regulations do not include any restrictions related to the inclusion in UBIA of the potion of the home used as an office.
It is significant to note that the benefit is generally trivial. The following example demonstrates that:
Example: Assume the home’s unadjusted basis is $500,000 and the land portion is valued at $200,000. If the business use of the home is 10% then the UBIA of the home office would be $30,000 (($500,000 - $200,000) x 10%). 2.5% of the $30,000 would be only $750 and that would increase the 199A deduction by only $150.
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The italicized description of the Rev. Proc. is essentially misleading, and a large number of tax professionals have been misled by this Rev. Proc. The problem is that the Revenue Procedure’s actual purpose is to provide safe harbors to determine fair market value of property for casualty loss purposes, NOT the casualty loss itself as implied in the “purpose”. A casualty loss is still the lesser of the adjusted cost basis or the fair market value on the date of the casualty reduced by any insurance reimbursement.
]]>Finding a citation as to what happens if her additional contributions are not returned by the deadline can be found in Pub 525, page 10. Also see Regulations 1.402(g)-1(e)(8)(i) & 1.402(g)-1(e)(8)(iii).
So, the way we understand it, the result of not correcting an excess 401(k) contribution by April 15 of the subsequent year is:
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The Notice goes on to say regulations will be issued, but that has never happened. Notices can be relied on and cited as precedent by taxpayers. IRS is bound to what it says in an announcement or notice to the extent it would be with a Revenue Ruling or Revenue Procedure.
Thus, the answer to the question is yes, if the loan was acquired within the time periods described in Notice 88-74.
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Stotis v. Commissioner, T.C. Memo. 1996-431, involves the case of a residential leasehold. Mr. Stotis, the petitioner, leased space in an apartment building that he used as a residence. The landlord, desiring to use the real estate for other purposes, entered into a surrender agreement with the petitioner whereby the petitioner exchanged his right in the property for a cash payment. The Tax Court held that the petitioner’s leasehold interest in a residence was a capital asset, and that the petitioner’s sale of the leasehold interest constituted a sale or exchange, taxable as capital gain.
Further, a taxpayer’s interest in a leasehold is either a capital asset under Section 1221 or real property used in a trade or business under Section 1231. Either way the sale of a leasehold interest is treated as a long-term capital gain if held over one year.
Thus, in such situations as this, it appears the FMV of the free rent and the cash payment, per Sec 61, constitute gross taxable income to the taxpayer. However, it also appears the character of the income is a capital gain.
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Special Election – When a donor’s total contribution to a QTP for the year exceeds the annual exclusion amount, the donor may make a special election treating the contributed funds as if they had been contributed ratably over a five-year period starting with the year of the contribution.
Example: Grandpa Lee contributes $75,000 to granddaughter Whitney’s QTP in 2019. By using the election grandpa’s contribution is treated as if the contribution was made ratably over a five-year period, i.e., treated as if he’d contributed $15,000 in each of 2019, 2020, 2021, 2022 and 2023. If grandpa makes any more QTP contributions during those years, those contributions would then exceed the annul gift limit and require a gift tax return to be filed. The same would be true if grandpa makes other gifts to Whitney.
To make the five-year election grandpa must file a Form 709, Federal Gift Tax Return, for the calendar year in which the contribution is made.
The election is available only with respect to contributions not in excess of five times the annual exclusion amount for the calendar year of the contribution. Any excess is treated as a taxable gift in the calendar year of the contribution. However, that does not necessarily mean any gift tax will be owed since the unified gift and estate tax lifetime exclusion (currently in excess of $11 million) will shield most taxpayers like grandpa from any gift tax.
If grandpa were married, he and grandma could make an election under the gift-splitting rules for the QTP contribution to be made one-half by each of them, thus allowing them to double up on the annual and the special 5-year amounts.
If in any year after the first year of the five-year period, the amount of the gift tax annual exclusion is increased for inflation, the donor may make an additional contribution in any one or more of the four remaining years up to the difference between the exclusion amount as increased and the original exclusion amount for the year or years in which the original contribution was made.
Example: In 2017 when the annual gift tax exemption was $14,000, grandpa made a $70,000 contribution to his granddaughter’s QTP and made the 5-year election. In 2018 the annual gift tax exemption was increased to $15,000. Thus, grandpa can make an additional $1,000 contribution for each of the remaining 4 years of the 5-year election period.
Change of Beneficiary – A change in the designated beneficiary, or a rollover to the account of a new beneficiary, is treated as a taxable gift if the new beneficiary is assigned to a generation below the generation of the old beneficiary. Such a transfer isn't a taxable gift if the new beneficiary is a member of the family of the old beneficiary, and is assigned to the same generation, as the old beneficiary. (Code Sec. 2651)
If the new beneficiary is assigned to a lower generation than the old beneficiary, the transfer is a taxable gift from the old beneficiary to the new beneficiary, regardless of whether the new beneficiary is a member of the family of the old beneficiary.
In addition, the transfer would be subject to the generation skipping transfer tax (GST) if the new beneficiary is assigned to a generation which is two or more levels lower than the generation assignment of the old beneficiary. The five-year averaging election may be applied to a transfer. (Code Sec. 529(c)(2)(B))
Example: Suppose Whitney had not used the funds from the QTP or finished her higher education and had some funds left over in the plan, and grandpa (or the trustee of the account if grandpa is not the trustee) decides to change the account beneficiary to his great- granddaughter Annabelle. Since Annabelle is in a generation lower than Whitney, the change of beneficiary represents a gift from Whitney to Annabelle. However, the five-year averaging election may be applied to the gift.
Direct Payment of Tuition – Some potential contributors to a QTP for family members may wish to pay for the tuition when it is actually incurred rather than saving for it in advance. If that individual makes the tuition payment directly to a qualified school, college or university the gift tax does not apply. (Code Sec. 2503(e))
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The IRS subsequently issued Notice 2018-61 notifying taxpayers that the IRS intended to issue regulations dealing with the issue and in the meantime the taxpayers could rely on guidance included in Notice 2018-61, which provides the following:
See also the beneficiary instructions to 2018 Form1041-K1, box 11, which also direct that the beneficiary’s share of Code A excess deductions are deductible on line 16 of the beneficiary’s Schedule A.
]]>Although not specifically addressed in the Code, Regs, etc., it would appear that vitro fertilization treatments would be deductible if performed on the taxpayer claiming the expense. The code specifically allows procedures that affect the structure or function of the body. (Code Sec 213(d)(1)(A)) It also would be allowed under discretionary surgery performed on the taxpayer. Discretionary medical costs are generally deductible where they are not illegal under Federal law. For example, abortions, vasectomies, and procedures to render the taxpayer incapable of getting pregnant have been held deductible. (Rev Rul 97-9, 73-201 & 73-603) According to IRS Pub. 502 the costs of procedures to overcome an inability to have children are qualified medical expenses. Such procedures include in vitro fertilization (including temporary storage of sperm or eggs) and surgery, including surgery to reverse a prior operation performed to prevent the person from having children.
In Vitro Fertilization Expenses Denied in Absence of Medical Condition - A taxpayer was denied a medical expense deduction for in vitro fertilization (IVF) expenses. He was a fertile man who used IVF for non-medical reasons. He had no physical or mental condition that prevented him from procreating without the use of IVF technologies. (W. Magdalin, TC Memo. 2008-293, Dec. 57,629(M)) Subsequently confirmed in appeals.
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However, Code Sec. 457 plans (government plans) are not included in the overall deferral limitations.
To the extent taxable, the distribution of the excess deferral is taxable in the year distributed (Reg. Sec. 1.402(g)-1(e)(8)(i)). Thus, an excess deferral for 2018 distributed in 2019 would be taxable in 2019. Such a distribution would appear on a 1099-R for 2019 with a code 8. It is not subject to the early distribution penalty of Sec 72(t).
Correcting Excess Contributions - After the close of the tax year, but not later than April 15 (or earlier as specified in the plan), the taxpayer may notify each plan under which elective deferral contributions were received by the plan for the year. The notification must also identify the extent, if any, the contribution consisted of designated Roth contributions (Reg. Sec. 1.402(g)-1(e)(2)(i)). No later than April 15 after the close of the taxable year, the plan may distribute the excess and any earnings associated with the excess contribution to the taxpayer (Reg. Sec. 1.402(g)-1(e)(2)(ii)).
Example: Sam is a 45-year-old individual who participates in employer Y's qualified cash or deferred arrangement. For January through July Sam deferred $12,800 into Y's qualified cash or deferred arrangement. Sam subsequently leaves employer Y’s employment and begins working for employer Z. During the remainder of 2018, Sam defers an additional $6,500 under Z's qualified cash or deferred arrangement. Sam’s elective deferral contributions for 2018 total $19,300. Since Sam is under age 50, Sam’s maximum allowable contribution for 2018 is $18,500 and he has $800 in excess contributions.
]]>Partial recognitions - if only part of the total realized gain is recognized (as with installment sales or tax-deferred exchanges), the gain/loss must be pro-rated. If, for instance, 20% of the total gain is currently recognized, then at least 20% of the overall losses will be allowed.
Partial disposition election — Reg. Sec. 1.168(i)-8(d)
As part of the Cap & Repair regulations that came out in 2014, a taxpayer may make an election under this provision to report the gain or loss on the replacement, retirement or other disposition of a partial asset. However, if the taxpayer makes this election the taxpayer must:
What does a partial disposition election accomplish? – It allows taxpayers to elect gain or loss on the replacement, retirement or other disposition of a partial asset. A good example of that would be replacing the roof on a building that is not completely depreciated. Prior to the release of the 2014 regulations the old roof would have to remain on the books as part of the whole asset and if not already depreciated to zero, continue to be depreciated.
Rev. Proc. 87-56 asset classes:
00.11 – Office furniture, fixtures and equipment
00.12 – Information systems (computers and peripheral equipment)
00.13 – Typewriters, calculators, adding and accounting machines, copiers, duplicating equipment
00.21 – Airplanes (not used in commercial or contract carrying of passengers or freight) and helicopters
00.22 – Automobiles, taxis
00.23 – Buses
00.241 – Light general-purpose trucks
00.242 – Heavy general-purpose trucks
00.25 – Railroad cars and locomotives
00.26 – Tractor units for use over-the-road
00.27 – Trailers and trailer-mounted-containers
00.28 – Vessels, barges, tugs and similar water transportation equipment
00.3 – Land improvements (sidewalks, roads, canals, waterways, drainage facilities, sewers, wharves/docks, bridges, fences landscaping shrubbery, radio/televisions transmitting towers)
00.4 – Industrial steam and electric generation and/or distribution systems
]]>This carryover basis rule applies whether the adjusted basis of the transferred property is less than, equal to, or greater than its fair market value at the time of transfer and applies for purposes of determining loss as well as gain, upon later sale by the transferee (Reg § 1.1041-1T(d)). There are exceptions that may apply to certain transfers in trust (Sec 1041(e)) and transfers of installment obligations into a trust (Sec 453B(g)).
Example: George owns land in which his basis is $10,000. He sells it to his wife Allison for $18,000, its fair market value. George does not report any gain on the sale. Allison is the new owner, but her basis is $10,000 (George's basis), even though she actually paid $18,000 for it.
There are other pertinent issues related to transfer of property between spouses that may be of interest.
Sale After Ex-Spouse Retains Property for Some Period of Time – In some instances in a divorce settlement both spouses will continue to own the “family” home and one will be granted the use of the property. This generally occurs when there are minor children and the custodial parent is granted use of the property until such time as the children reach the age of majority.
For purposes of this discussion we shall identify the spouse or ex-spouse that was granted use of the property as the in-spouse and the other one as the out-spouse. Sec121 includes a special provision where the out-spouse’s use of the home mirrors the in-spouse’s use period, and since they both own the property, both the in-spouse and the out-spouse can benefit from the Sec 121 home gain exclusion when the home is sold. The only time the out-spouse would not qualify is if the out-spouse had taken the Sec 121 exclusion on another home in the two years prior to the sale of the family home, and thus would not qualify because of the one exclusion every 2 years limit. (Reg. §1.121-4(b)(2))
Spousal Buy-Out Debt - In divorce situations, debt secured by the home to buy out a former spouse’s interest in a home is acquisition debt. This rule is applied without regard to Code Section 1041, which treats certain transfers of property between spouses incident to divorce as nontaxable events. (Notice 88-74, 1988-2 CB 385)
Transfers and Passive Loss Carryovers - If a taxpayer transfers property to a spouse incident to a divorce, the exchange is treated as though it were a gift. Therefore, any suspended losses attributable to the spouse giving up the interest in the passive activity are added to the basis of the property transferred to the other spouse. For the receiving spouse, the basis will be increased by the ex-spouse’s suspended losses, but the receiving spouse’s suspended losses on the same property will still be considered suspended losses, which are available currently to offset passive income. (Sec 1041(b) and Sec 469(j)(6))
Section 121 Home Gain Exclusion – One huge issue that is frequently overlooked is when one of the spouses is awarded sole ownership of the couple’s home as part of the property settlement. When that occurs, that spouse assumes the community basis, and as such is responsible for the tax on any gain not excludable under Sec 121. But keep in mind the exclusion just dropped from $500K to $250K.
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The Notice goes on to say regulations will be issued, but that has never happened. Notices can be relied on and cited as precedent by taxpayers. IRS is bound to what it says in an announcement or notice to the extent it would be with a Revenue Ruling or Revenue Procedure.
]]>Definitions:
Terminally Ill Individual - the term “terminally ill individual” means a person who has been certified by a physician as having an illness or physical condition that reasonably can be expected to result in death within 24 months of the date of certification.
Chronically Ill Individual – a “chronically ill” individual is one who has been certified within the previous 12 months by a licensed health care practitioner as:
(A) being unable to perform, without “substantial assistance” from another individual, at least two activities of daily living for at least 90 days due to a loss of functional capacity,
(B) having a similar level of disability as determined under IRS regs prescribed in consultation with the Dept of Health and Human Services, or
(C) requiring “substantial supervision” to protect the individual from threats to health and safety due to “severe cognitive impairment,” even if the individual is physically able.
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