Please note that the question and answer provided does not take into account all options or circumstances possible.
May 25, 2017
Question: In December 2016, Michael donated $20,000 to a §501(c)(3) organization’s donor advised fund (DAF). This charity is a qualified sponsoring organization. The DAF does not distribute funds to the charity until 2017. Is the charitable contribution to the DAF deductible in 2016 or 2017, when the charity actually received the funds?
Answer: Michael can claim the $20,000 charitable contribution deduction in 2016 provided the sponsoring organization ultimately owns and controls the funds, and substantiation requirements specific to a DAF are met [§4966(d)(2)(A)(ii)]. In addition to the general substantiation requirements under §170(f), Michael also needs a contemporaneous written acknowledgement from the DAF's sponsoring organization that the organization has exclusive legal control over the assets contributed.
May 18, 2017
Question: Ray and May’s 20-year-old daughter, Kay, attended college both semesters in 2016, but she was not a full-time student because she only took eight credits each semester. Kay lived with her parents all year and did not earn any income. Her Form 1098-T indicates that she is at least a 1/2 time student. However, because Kay is over age18, she needs to be a full-time student to be a qualifying child of her parents. Can Ray and May still take advantage of the American Opportunity Tax credit (AOTC) on their return even though she is no longer a qualifying child?
Answer: Yes, because Kay is at least a half-time student, and her parents can claim her dependency exemption.
The AOTC only requires that the student be at least half-time, which Kay was. In this case, Kay does fail to be a qualifying child. However, she does meet the eligibility for a qualifying relative because she is their daughter and has less than $4,050 of income.
May 11, 2017
Question: Albert walks into your office and tells you that he bought a house from his parents. The house is worth $350,000, but his parents only made him pay $200,000. His parents paid $100,000 for this house a few years ago. After making several improvements, their adjusted basis in the home was $150,000 when they sold it to Albert. He did not assume any mortgages on the home. What is Albert’s basis in the home?
Answer: This is a part gift, part sale. Albert’s parents sold it for $200,000, and they gave him a gift of $150,000 ($350,000 FMV less $200,000 sales price). In a part gift, part sale, Albert’s basis is the greater of the amount he paid for it ($200,000), or his parent’s adjusted basis in the home ($150,000) at the time of transfer [Reg. §1.1015-4(a)(1)]. Thus, his basis is $200,000.
May 4, 2017
Question: Jamie and Claire are married and have total earned income of $40,000. They have a daughter, Bree, age 22 who graduated from college in May. After graduation, Bree moved back home with her parents and worked. She lived at home from June until December and earned $22,000.
Jamie and Claire would like to know if they are still eligible for the earned income tax credit (EITC) using Bree as a qualifying child for EITC purposes, and Bree would like to know if she may claim her own exemption when preparing her tax return this year.
Answer: Yes and yes. Under the qualifying child rules for purposes of dependency, Bree meets all the requirements except for support. Because she earns $22,000, she provides more than half of her own support. Therefore, Jamie and Claire may not claim her as a dependent. However, for EITC purposes because all the dependency tests under §152(c) are met, except for support, she is still a qualifying child for EITC [§32(c)(3)(A)]. Therefore, Jamie and Claire may still receive EITC using Bree as a qualifying child for EITC purposes.
Additionally, because Bree is no longer a qualifying child for dependency purposes, she may claim her own exemption when she files her return.
April 27, 2017
Question: David is a mystery shopper working as an independent contractor. His assignments involve going to restaurants to evaluate the customer service and the quality of the food. He is reimbursed for the cost of the meals. Can he deduct the full cost of the meals as a business expense?
Answer: No. David’s deduction is limited to 50% of the cost of meals. A taxpayer may not deduct personal, living or family expenses, pursuant to §262(a), unless otherwise expressly provided. Under §162(a), a taxpayer may deduct all the ordinary and necessary expenses paid or incurred in carrying on a trade or business. With a few limited exceptions, Section 274(n) generally provides that a deduction for any food or beverage expense is limited to 50%. According to INFO 2000-0380, this limitation reflects Congress' view that meal expenses inherently involve an element of personal living expenses: Generally, some portion of business meal and entertainment expenses represent personal consumption (even if the expenses serve a legitimate business purpose). The committee believes that denial of some part of the deduction is appropriate as a proxy for income inclusion of the consumption element of the meal or entertainment.
April 19, 2017
Question: The taxpayer’s mother lives in her home and she has provided care for her for several years. Her mother's only income is from social security. The taxpayer pays over half of the living expenses for her mother, therefore she is her dependent. If her mother dies in January, can the taxpayer still claim head of household in the year of death?
Answer: Yes, as long as the taxpayer is eligible to claim her mother as a dependent. For head of household purposes, “The taxpayer and such other person must occupy the household for the entire taxable year of the taxpayer. However, the fact that such other person is born or dies within the taxable year will not prevent the taxpayer from qualifying as a head of household if the household constitutes the principal place of abode of such other person for the remaining or preceding part of such taxable year” [Reg. §1.2-2(c)(1)]. There is a similar explanation for dependency purposes under Reg. 1.152-1(b) that states, “The fact that the dependent dies during the year shall not deprive the taxpayer of the deduction if the dependent lived in the household for the entire part of the year preceding his death.”
April 13, 2017
Question: A taxpayer created a new LLC to hold his rental property and while applying for the EIN, checked the box that it was a partnership. He wanted his spouse’s name included as a business owner. The taxpayers live in a community property state. Do they need to file a partnership return for the rental activity?
Answer: No, married taxpayers living in a community property state can file Schedule E, and are not required to file a partnership return. Preparing an initial and final Form 1065 with no activity should eliminate any future IRS correspondence about filing a partnership return for the issued EIN. According to information posted to the “Businesses” section of the IRS website, a qualified joint venture (QJV) includes only businesses that are owned and operated by spouses as co-owners and not in the name of a state law entity, including a general or limited partnership or LLC (Rev. Proc. 2002-69). This means that an LLC owned by spouses in a common law state cannot be classified as a disregarded entity, but must be treated as a partnership (or elect to be treated as a corporation) for federal tax purposes.
April 6, 2017
Question: John and Martha are married and filed a joint return with an AGI of $25,000. They have four children under the age of 17 who are qualifying children for EITC and CTC. Their oldest daughter, Samantha, is 29 years old, lived with them all year and had an AGI of $32,000. She paid over 50% of the household expenses including rent and utilities. Can John and Martha claim EITC and CTC for three of the children and Samantha claim head of household (HH), EITC and CTC with one sibling as her dependent?
Answer: Yes. Samantha can claim her sibling as a qualifying child for HH, EITC and CTC because her parents are not claiming that sibling.
If the parents are eligible to claim an individual as a qualifying child but no parent does, another taxpayer may claim the individual as a qualifying child, but only if that taxpayer's AGI is higher than the highest AGI of any parent of the individual [§152(c)(4)(C)]. If there is more than one taxpayer eligible to claim multiple qualifying children in the same household, it’s okay to divide the children among the taxpayers (assuming all other criteria is met). Splitting the tax benefits of one child between multiple taxpayers who all live in the same household, however, is not permissible.
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