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

July 13, 2017

Question: Troy, a U.S. citizen, lived and worked in Michigan during 2016. His wife, a nonresident alien, lived in Canada all year with their daughter, Gabriella, who is 10 and has no income. Troy’s wife worked part-time in Canada, and didn’t have any U.S. gross income. Can Troy claim his daughter as a dependent on his U.S income tax return?

Answer: It depends. Troy can claim his daughter as a dependent if she is a qualifying child or a qualifying relative. Gabriella is not his qualifying child because she did not live with him for more than half the year and fails the residency test. However, Gabriella may be his qualifying relative if she is not a qualifying child of any other taxpayer, he provides more than half her total support, and her gross income does not exceed $4,050 for 2016. In general, Gabriella meets the tests to be a qualifying child of her mom. However, there is an exception to this general rule. If the person the child lives with is not a U.S. citizen and has no U.S. gross income, the child is not the qualifying child of any other taxpayer. Thus, Gabriella is Troy’s qualifying relative and can be claimed as his dependent if he provided more than half her total support.

July 6, 2017

Question: A taxpayer works at a furniture store as an employee. She received an incentive award or spiff from the furniture manufacturer that was reported to her on Form 1099-MISC. How does she report this on her tax return?

Answer: The spiff or incentive award is reported on Form 1040, Line 21, not subject to self-employment taxes. A spiff or spiv is an immediate bonus for a sale paid by a manufacturer or employer directly to the salesperson for selling a specific product. These are most prevalent in the automotive industry.

This link to the IRS website is a brief two page document on reporting incentive payments in the automotive industry: https://www.irs.gov/pub/irs-pdf/p3204.pdf.

Fun history on the spiff payment from Wikipedia: An early reference to a spiff can be found in a slang dictionary of 1859; "The percentage allowed by drapers to their young men when they effect sale of old-fashioned or undesirable stock." An article in the Pall Mall Gazette of 1890 on the practices in London shops used the term as follows:

a "spiff" system is usually adopted, spiffs being premiums placed on certain articles, not of the last fashion, indicated by a marvelous hieroglyphic put on the price ticket. These marks are well known by the assistant, and the almost invisible mystic sign explains why an article, wholly unsuitable, is foisted on the jaded customer as "just the thing."

June 29, 2017

Question: You completed the 2016 return for your client, Sam. He decided to apply the refund from the return as a 2017 tax payment. Last month, Sam contacted you regarding a Form 1099-R that was missed on the 2016 return. After amending the return to include the income, there is a balance due. Can the overpayment credited to the 2017 tax return be used to pay the liability?

Answer: No. Once the overpayment is credited, no other claim for credit or refund of the overpayment will be allowed for the year in which it arose [§301.6513-1(d)]. In Maxwell v. Campbell, 44 AFTR 87 (205 F.2d 461), the courts found if it's later determined that there was no overpayment, the result will be either a deficiency or an underpayment in the first year. The credit to the second year isn't disturbed.

June 22, 2017

Question: Husband and wife are 50/50 owners of an LLC that is taxed as an S corporation. The LLC operates a trade or business and the husband materially participates. The husband and wife decide to divorce. As part of their divorce, the husband borrows $350,000 to buy the wife’s ownership interest in the LLC. Can he deduct the interest expense he personally pays?

Answer: Yes. He will follow the rules for deducting interest to acquire a pass-through entity (PLR 9031022). Since the LLC, taxed as an S corporation, operates a trade or business in which he materially participates, this will be reported as "business interest" on Line 28 of Schedule E, column (h), (Notice 88-37). In the April 2017 edition of the TAXPRO Monthly, NATP published a how-to-article about deducting interest for debt used to acquire or make a capital contribution to a pass-through entity.

June 15, 2017

Question: Your client volunteers for his child’s community sports club, which has been operating locally for over 20 years. The client mentioned he would like you to prepare the required tax returns, but noticed the organization did not have an Employer Identification Number (EIN). The previous treasurer of the club had an EIN for the bank account, but the number was directly tied to the treasurer’s social security number and that person is no longer active with the club. Does the club need a new EIN? Should the treasurer apply for the EIN, and if so, should he use his name or SSN, directly associating your client to that EIN?

Answer: Yes, the organization should apply for their own EIN but it should be associated with the club, not the treasurer specifically. Organizations that are exempt under a group exemption letter and that meet certain other requirements can file their annual returns on a group basis using the annual accounting period of their common central (parent) organization [Reg. 1.6033-2(d)(1) and (3)]. The parent organization’s EIN is used for this filing, but at the local level, the club will need an EIN for banking purposes.

June 8, 2017

Question: Can vet bills for a dog that has been prescribed by a doctor to alert of a medical emergency be deducted on Schedule A as a medical expense?

Answer: It depends. If you can prove that these expenses meet the qualifications as mentioned in the sentence below then they would be deductible as a medical expense.

The costs of buying, training and maintaining a service animal to assist an individual with mental or physical disabilities may qualify as medical care if the taxpayer can establish that the taxpayer is using the service animal primarily for medical care to alleviate a mental defect or illness and that the taxpayer would not have paid the expenses but for the disease or illness.

June 1, 2017

Question: Several years ago, John created a revocable living grantor trust. The trust indicates that John retains the right to use and receive the income until the date of his death. John reported the properties expenses and any income earned on his personal Form 1040. Upon his death the trust became irrevocable. John died in 2017. Will John’s property receive a step-up in basis or will the trust deny the basis increase?

Answer: Code Sections 2036 and 2038 state the basis in property that is included in a taxpayer’s estate receives FMV on the date of the decedent’s death. Because the assets are included in the decedent's estate, they are eligible for either a step-up or step-down in basis under §1014(a).

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.”

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