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April 10, 2014
You Make the Call is written by our tax research experts.
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Question: Your client walks into your office with a Form 1098-T, Tuition Statement, for their daughter, whom they claim as a dependent. Included on this statement is an amount in Box 1 for $2,300 and an amount in Box 5 for $3,000. The grant received can be used on expenses other than tuition, such as room and board. The parents are wondering if they can claim the education credit by choosing to include the grant as taxable income on the daughter’s return and then claim an education credit on the expenses paid. Is this possible?
Answer: Yes, it is possible for the daughter to choose to include the grant in her taxable income and for the parents to take an applicable education credit as long as the terms of the grant permit the amount received to be used to pay expenses other than tuition [Reg. §1.25A-5(c)(3)]. The disadvantage of choosing to tax the grant is that it could cause the daughter to be subject to kiddie tax. A child is subject to kiddie tax when unearned income is greater than $2,000. Unearned income includes all taxable income other than earned income. It has always been a question of whether or not taxable scholarships and grants are earned or unearned income because they are reported on Line 7, Form 1040. In 2013, the IRS updated the instructions to Form 8615 to indicate that unearned income includes a taxable scholarship or grant not reported on a Form W-2.
April 3, 2014
Question: Bill, has come to you with a Form 1099-S for the sale of his vacation home. He only used the home for personal purposes since he purchased it in 2009. Bill tells you that he had to sell it at a loss because the value of the property had dropped drastically in the last 3 years. Bill feels that since he sold it at a loss he should be able to claim the loss on the sale. Is the loss deductible on Bill’s individual income tax return?
Answer: No, Bill cannot deduct the loss on the sale of his personal residence or any personal use assets. A loss on the sale of a personal residence is not a deductible loss unless the loss is due to casualty or theft under §165(c).
March 27, 2014
Question: Your client drops off stacks of paperwork, including receipts for charitable contributions. While adding the contributions, one organization states in the acknowledgment letter:
“Thank you for renewing your membership to XYZ organization. As a 501(c)(3) organization, your dues are fully deductible! Included in your membership is free admission to events, discounted magazines and free publications updating you on XYZ organization. We look forward to seeing you at the events along with the 1,000 members who support us!” The organization claims the dues are deductible, but are they?
Answer: Generally no. Despite the statement by the organization, if the taxpayer receives benefits such as newsletters, admission to events, use of facilities or other privileges, the dues are presumed to be nondeductible. If it can be shown that the dues paid are in excess of the value received, part of the membership may be deductible [Rev. Rul. 68-432].
March 20, 2014
Question: James sold a home to his son Matthew for $200,000. The fair market value of the home at the time of the sale was $300,000 and James’s adjusted basis was $175,000. What is Matthew's basis when the property is received through a part sale/part gift transaction?
Answer: Matthew’s adjusted basis is the larger of James’s adjusted basis or the amount paid for the property. Matthew’s basis is $200,000 since that is what he paid for the home and is larger than James's adjusted basis of $175,000. James will report a gain of $25,000 and a gift of $100,000 [Reg § 1.1015-4(a)].
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