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.
–––––––––––––––––––––––––––––––––––––––––
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)
–––––––––––––––––––––––––––––––––––––––––
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…
- Residency Test,
- Relationship Test,
- Age Test, and
- Joint Return Test.
However, a qualified child cannot be self-supporting and I seriously doubt the SS benefits would make the child self-supporting.
–––––––––––––––––––––––––––––––––––––––––––––
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.
–––––––––––––––––––––––––––––––––––––––––––––
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.
–––––––––––––––––––––––––––––––––––––––––––––
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.
–––––––––––––––––––––––––––––––––––––––––––––
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.
–––––––––––––––––––––––––––––––––––––––––––––
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.
–––––––––––––––––––––––––––––––––––––––––––––
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.
–––––––––––––––––––––––––––––––––––––––––––––
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.
–––––––––––––––––––––––––––––––––––––––––––––
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.
–––––––––––––––––––––––––––––––––––––––––––––
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?
–––––––––––––––––––––––––––––––––––––––––––––
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.
–––––––––––––––––––––––––––––––––––––––––––––
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:
- And continues to be owned by both after the divorce, 50% of the carryover would go with each spouse.
- Where one spouse retains the property as part of a property settlement, 50% of the carryover becomes an adjustment to the basis of the property and the other 50% continues to be carryover for the spouse that retained the 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)).
–––––––––––––––––––––––––––––––––––––––––––––
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.
–––––––––––––––––––––––––––––––––––––––––––––
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.
–––––––––––––––––––––––––––––––––––––––––––––
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.
–––––––––––––––––––––––––––––––––––––––––––––
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.
–––––––––––––––––––––––––––––––––––––––––––––
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.
–––––––––––––––––––––––––––––––––––––––––––––
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.
–––––––––––––––––––––––––––––––––––––––––––––
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.
–––––––––––––––––––––––––––––––––––––––––––––
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.
–––––––––––––––––––––––––––––––––––––––––––––
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.
–––––––––––––––––––––––––––––––––––––––––––––
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.
–––––––––––––––––––––––––––––––––––––––––––––
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.
–––––––––––––––––––––––––––––––––––––––––––––
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.
–––––––––––––––––––––––––––––––––––––––––––––
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.
–––––––––––––––––––––––––––––––––––––––––––––
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.