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​Please note that the question and answer provided does not take into account all options or circumstances possible.

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.

March 30, 2017

Question: Jana is age 48 and has had her Roth IRA for five years to which she made contributions of $20,000. In 2017, she took a distribution of $17,500 from her Roth IRA to pay household bills. Is her distribution taxable and subject to a 10% early distribution penalty in 2017?

Answer: No. While the amount received from her plan is deemed a nonqualified distribution from the Roth because she is under the age of 59½, the amount is nontaxable and not subject to a 10% penalty. This is because Jana’s distribution is less than her $20,000 basis in the plan. She will file Form 8606 to report the distribution and reduce her basis for later distributions.

Withdrawals from a Roth IRA that are not qualified distributions are includable in income to the extent attributable to earnings. However, Roth IRA distributions are treated first as a return of contributions [IRC Sec. 408A(d)(4)].

March 23, 2017

Question: Joe sold rental real estate for $300,000. He had an adjusted basis in the property of $100,000. After Joe deposited the money into his bank account, he subsequently purchased rental real estate property for $350,000. What is Joe’s basis in the purchased property?

Answer: $350,000. Joe received cash proceeds upon the sale of the first property, which resulted in $200,000 of recognized gain. The subsequent purchase is simply a purchase. While the real estate Joe sold and purchased is otherwise qualifying property, it does not qualify as a like-kind exchange because he first received cash. Had he utilized a qualified intermediary—and the transaction qualified as a like-kind exchange—the adjusted basis would have been $150,000 ($350,000 purchase - $200,000 deferred gain).

March 16, 2017

Question: The sole shareholder of an S corporation is going to sell all his stock to an unrelated individual who is otherwise an eligible S corporation shareholder on June 30, 2017. Is the S corporation required to file a short-year return?

Answer: No. An S corporation does not terminate when the stock is sold from one eligible shareholder to another. A corporation, including an S corporation, is an entity that continues to exist, despite the change in ownership, and its tax filing is unaffected by the sale of stock. The shareholders may, however, elect under §1377 to “close the books” of the S corporation to report the first six months of operation to the seller and the latter six months to the buyer. Otherwise, the general rule for an S corporation is that the income and loss must be reported by each shareholder on a per-share-per-day calculation. In this case, the general rule would render a 50/50 allocation to each shareholder due to the sale in the middle of the year, regardless of when the income or loss occurred.

March 9, 2017

Question: Lloyd’s IRA was invested in a Ponzi scheme. Lloyd made deductible and nondeductible contributions to this IRA; he doesn’t have any other IRAs. Can he claim a theft loss on his personal income tax return?

Answer: Unfortunately, Lloyd cannot claim a theft loss on his personal income tax return because it's an economic loss within a tax-deferred IRA. Lloyd cannot claim a loss for amounts he deducted or excluded from gross income. However, Lloyd can take a miscellaneous itemized deduction, subject to the 2% of AGI limit, to the extent he has unrecovered basis after the distribution of his entire interest in the IRA (INFO 2010-0234).

March 2, 2017

Question: Adam and Sara are married and have a 3-year-old son, Kyle. Both Adam and Sara work and they hired Sara’s father, Fred, to babysit for Kyle and do household work, such as landscaping and floor washing. They paid Fred a total of $8,000 for the year, withheld no taxes and had no other household employees. Will Adam and Sara need to file Schedule H and provide Form W-2 to Fred for the year?

Answer: No. Schedule H and Form W-2 only need to be filed if the household employee is subject to social security and Medicare taxes and/or had federal taxes withheld. In this case, Fred being a parent meets the exceptions (below) and is therefore not subject to employment taxes. Adam and Sara will not need to file Schedule H or Form W-2 with regards to Fred because he was not subject to employment tax withholding and he did not have any federal taxes withheld.

The exception rules state if the household employee is your spouse, your child under age 21, your parent or an employee under the age of 18 at any time during the year and none of the following apply, then you do not have to withhold or pay employment taxes.

  1. Your child is under 18 and lives with you or had a physical or mental condition that requires personal care of an adult for at least four continuous weeks during the calendar quarter in which the services are performed.
  2. You were divorced and not remarried, a widow(er) or married to and living with a person whose physical or mental condition prevents him or her from caring for the child during the four-week period of time.

Additionally, if the questions on lines A, B and C on Schedule H are answered no, Schedule H will not need filing.

However, Fred is still obligated to pay federal and state (if applicable) taxes on the earnings. To do so, report the amount on Form 1040, Line 7, with HSH on the dotted line next to line 7. This is very much like reporting a taxable scholarship. See Form 1040 instructions for Line 7. When the exceptions do not apply, taxpayers paying more than $2,000 to a household employee will need to withhold and pay FICA and Medicare employment taxes, file Schedule H and file Form W-2.

February 23, 2017

Question: Aunt Sally’s estate contained both recourse and nonrecourse debt on real properties. You are preparing Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return. Are the recourse and nonrecourse debts reported the same way on Schedule A, Real Estate?

Answer: No. The full value of the properties subject to recourse debt would be reported on Schedule A, with the amount of the liabilities included on Schedule K, Mortgages and Liens. Only the equity (FMV less outstanding debt) of the properties subject to nonrecourse debt would be reported on Schedule A [Reg. §20.2053-7].

February 16, 2017

Question: A taxpayer called and asked if he needed to save receipts for the year because he had heard that Congress passed a $42.4 billion rebate program on purchases made in 2016. Is this true?

Answer: With the 2015 PATH Act, Congress did make the option to claim a state and local general sales tax deduction permanent. Therefore, taxpayers who would benefit from claiming an itemized deduction for state and local general sales taxes rather than state and local income taxes can elect to do so on Schedule A, Itemized Deductions. Saving receipts to prove purchases would only be necessary when a taxpayer uses the actual expense method or for large purchases allowed in addition to the applicable amount obtained from the optional sales tax tables.

February 9, 2017

Question: A client owns a small resale shop downtown. Over the past year, the owner paid independent contractors for minor repairs, window washing and snow removal. The payments were made using a combination of either cash, check or credit card. As the accountant issuing Forms 1099-MISC, do you include the amounts paid by credit card with the cash and check payments to these independent contractors?

Answer: According to the 2016 Instructions for Form 1099-MISC, no. The instructions specifically state the payment settlement entity is the responsible party for reporting such payments using Form 1099-K, Payment Card and Third Party Network Transactions. Some accounting software has integrated these instructions so that a company using the software in real time, meaning the bookkeeper tracks all payments live, cannot include the credit card payments in a report for independent contractors. If the client did not track how payments were made, either by cash, check or credit card, a thorough reconciliation of the bank and credit card statements should provide this information.

February 2, 2017

Question: What are the procedures when an employee loses his/her Form W-2?

Answer: An employer who provides a new Form W-2 to an employee who has lost or destroyed his/her original form should mark the new Form W-2 "Reissued Statement." A copy of the reissued statement should not be filed with the Social Security Administration.

Per IRS Service Center Advice 1997-013, the employer is permitted to charge a fee for the replacement W-2.

It would be a good idea that the request be in writing.

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