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July 22, 2021

Question: Tom and Larry are a legally married same-sex couple attempting to have a child through an unrelated surrogacy. When they file their tax return, can they claim on Schedule A the medical expense deduction for costs they paid for egg retrieval, in vitro fertilization (IVF), the surrogate's childbirth expenses and other expenses related to the surrogacy?

Answer: No. A male couple may only deduct as medical expenses costs directly incurred to have a baby related to the medical care of themselves, their spouse or their children, for expenses that exceed 7.5% of AGI. For IRS purposes, the term “medical care” means amounts paid for the diagnosis, cure, mitigation, treatment or prevention of disease, or for the purpose of affecting any structure or function of the body [§213(d)(1)(A)].

Tom and Larry do not have any underlying medical condition or “defect” preventing either from naturally conceiving children for which the costs incurred were meant to affect. The surrogate is not their dependent. Therefore, the IRS identifies their costs of attempting to have a child as nondeductible personal expenses (§262). If any of the paid costs incurred were to actually impact Tom’s or Larry’s own bodies and all other requirements were met, those costs would be eligible to be deducted on Schedule A [PLR 202114001].

July 15, 2021

Question: Zuri owns a small, non-farm business and asked you, as the tax preparer, whether the business was required to claim all expenses to show a lower self-employment income from the business. What do you tell Zuri?

Answer: Yes, Zuri must report all business expense deductions. A business owner who does not fall under the exception of certain farm operators may not pick and choose expenses to report on their business tax return and must claim all their allowable deductions, including depreciation (Rev. Rul. 56-407).

July 8, 2021

Question: Sue and Matt are married, and Sue is in the military. In 2014, after buying a house in the U.S., Sue was stationed overseas in a foreign country under government orders of official extended duty. In 2021, they sold their U.S. house. Are they eligible for the §121 exclusion of gain from sale of principal residence?

Answer: Maybe. There is a military exception for the §121 exclusion of gain from sale of principal residence that allows suspending the five-year test period for ownership and use of the home by up to 10 years for a total of up to a 15-year test period when on “qualified official extended duty.” If all the special military exception rules apply, the taxpayer applies the §121 rules using that extended period instead of the regular five-year test period.

The five-year test period for ownership and use of a home can be suspended during any period the taxpayer or spouse serves on qualified official extended duty as a member of the Armed Forces §121(d)(9). This means that a taxpayer may be able to meet the two-year use test even if, because of their service, they did not actually live in the home for the required two years during the five-year period ending on the date of sale.

An individual is on official extended duty when they are either at a duty station at least 50 miles from their main home or while living in government quarters under government orders [§121(d)(9)(C)] for a period of more than 90 days or an indefinite period.

The suspension period cannot last more than 10 years, which allows for a total testing period of 15 years. Additionally, the five-year suspension period can apply to only one property at a time. The choice to suspend the five-year period is revocable at any time. Presumably, this is done by filing an amended return for the year of sale or exchange of the residence to include the gains from the sale of the property.

Often, military personnel rent their homes while on military duty. The rental of the property impacts the gains eligible for the exclusion. First, the exclusion cannot be claimed to the extent of depreciation adjustments attribution to periods after May 6, 1997 [§121(d)(6)].

July 1, 2021

Question: A U.S. corporation hires employees from the Dominican Republic who want to be paid in U.S. dollars. The payments are made directly to these employees who perform services in the Dominican Republic for the U.S. corporation. Is there a federal income tax withholding requirement for the wages paid?

Answer: No, there is no federal income tax withholding requirement for the wages paid to these employees. These wages are for services performed outside the U.S. and these employees are nonresident aliens. If the services had been performed within the U.S., generally, compensation for providing services in the U.S. is treated similarly to that of resident aliens and U.S. citizens [§ 861(a)(3)].

June 24, 2021

Question: Mariana and Luis regularly contribute $600 cash annually to their favorite charity and ask you if they may take the above-the-line deduction for the $600 on their 2020 tax return for which they file MFJ. What do you tell them?

Answer: No, they may not claim all $600. For 2020, Mariana and Luis are allowed to deduct up to $300 of cash qualified charitable contributions as a deduction before AGI if they claimed the standard deduction [§62(a)(22)]. For 2020, whether filing as single or MFJ, the amount is still only $300, not $600. For 2021, a similar provision would allow a deduction of up to $600 for MFJ filers as a deduction from AGI [§§ 170(p) and 63(b)(4)]. To verify their favorite charity is a qualified organization to receive deductible contributions, use the IRS Tax Exempt Organization Search tool​. The Coronavirus Aid, Relief, and Economic Security Act changed the law for 2020 charitable contributions, and for 2021 the Consolidated Appropriations Act, 2021 changed the law.

June 17, 2021

Question: Erin’s 2020 Form 1040 was extended. She is eligible for the child tax credit (CTC) and will claim the credit on her 2020 return. If Erin’s tax return does not get filed until October 2021, is she eligible for the advance CTC payments in 2021?

Answer: Yes, advance payments will be estimated from information included in an eligible taxpayer’s 2020 tax returns, or their 2019 returns if the 2020 returns are not filed and processed yet.

For tax year 2021, families claiming the CTC will receive up to $3,000 per qualifying child between the ages of 6 and 17 at the end of 2021. They will receive $3,600 per qualifying child under age 6 at the end of 2021.

Advance payments of the 2021 CTC will be made regularly from July through December to eligible taxpayers who have a main home in the United States for more than half the year. The total of the advance payments will be up to 50% of the CTC.

June 10, 2021

Question: In March 2020, Roberta lost her full-time job and was no longer able to afford the rent on her apartment in New York City. Roberta decided her best option was to move into her childhood home with her elderly parents. During the first three months of 2020, Roberta earned $12,000 (as reported on her W-2), most of which was used for her living expenses until May 2020, when she moved to Kansas. When her parents file their 2020 tax return, due in October, can they claim Roberta as a qualifying relative?

Answer: No. Although the parents may have provided over half of Roberta’s support for 2020, her W-2 wages exceed the threshold amount. A qualifying relative must meet four requirements, one of which is gross income for the year has to be less than the exemption amount without regard to the reduction to zero for 2018-2025 ($4,300 for 2020) (Rev. Proc. 2019-44).

June 3, 2021

Question: Cesar is a plumber, with a Schedule C business. On May 6, 2020, his son, Cesar Jr., who is 10 years old was diagnosed with coronavirus by a test approved by the Centers for Disease Control and Prevention. Cesar was told by his doctor to quarantine since he was exposed and to care for his child until further notice. Cesar was unable to work for 60 days since he was taking care of his child. Cesar’s tax preparer is reading about Form 7202 and is wondering, does Cesar qualify for the sick leave credit for certain self-employed individuals?

Answer: Yes. Cesar can claim the refundable credit for the applicable days on his 2020 tax return. He can do so by filing Form 7202, Credits for Sick Leave and Family Leave for Certain Self-Employed Individuals, which is attached to his Form 1040.

The credit is limited to the lesser of 100% of average daily self-employment income or $511 per day ($5,110 in total) if the self-employed individual is:

  1. Subject to a federal, state, or local quarantine or isolation order related to COVID-19
  2. Advised by a health care provider to self-quarantine due to concerns related to COVID-19; or
  3. Experiencing symptoms of COVID-19 and seeking a medical diagnosis

The qualified sick leave equivalent amount is limited to 67% of average daily self-employment income or $200 per day ($2,000 in total) if the self-employed individual is:

  1. Caring for an individual who is subject to a federal, state, or local quarantine or isolation order related to COVID-19, or who has been advised by a health care provider to self-quarantine due to concerns related to COVID-19
  2. Caring for a child whose school or place of care is closed, or childcare provider is unavailable due to COVID-19 precautions; or
  3. Experiencing a substantially similar condition specified by the government

May 27, 2021

Question: Maya and Bruno are divorced. Bruno has custody of their minor child Callum. Bruno follows the requirements to waive dependency to Maya and her Form 1040 reflects the dependency exemption. During the year, Bruno and Maya agree to split the costs of Callum’s dental expenses and each pay $6,000. Since Bruno waived claiming Callum, can Maya deduct the full sum of $12,000 on her Schedule A (Form 1040)?

Answer: No. Maya cannot claim the full $12,000 on her Schedule A (Form 1040) as a medical expense deduction. Bruno and Maya may each claim $6,000 because each parent may deduct a qualifying child’s medical expenses even when they are not claiming the child. In divorced situations, the child is treated as a dependent of both parents for claiming dependent medical expenses [§213(d)(5)] as itemized deductions on Schedule A (Form 1040).

May 20, 2021

Question: Jack and Allie are an unmarried couple who live together with two children of their own. Jack makes $50,000 per year and Allie makes $400,000 per year. Because Allie makes $400,000 per year, most of the credits for the children including the recovery rebate credit would be phased out, but Jack would qualify for them. What can each of them claim as far as the children are concerned? For example, can Allie claim HOH and Jack claim both children for EIC, child tax credit, and receive the recovery rebate credit for 2020?

Answer: No, they cannot split the benefits. When the children live in the same home with unmarried parents, both parents are custodial parents. When there are two unmarried custodial parents filing separate returns, only one parent can claim all the five child-related tax benefits: HOH filing status, dependency exemption, EIC, child tax credit and child and dependent care credit for the child. What this means is that if Jack, having earned $50,000, claims both children, he would likely need to file as single because Allie, who made $400,000, more than likely provided more than half of the cost of keeping up the home. She would be the only one who could potentially file as HOH. Allie cannot use the HOH status however, because Jack is claiming the children.

Since Jack claims the children as dependents, he is eligible for the recovery rebate credit. If they could not agree and both tried to claim the same children, the one with the higher AGI would meet the tie breaker rule, which in this case would be Allie. However, if they agree, the IRC allows the unmarried parents living in the same home to decide which parent claims all the benefits for the children and the other is not entitled to claim any tax benefits for the children.

May 13, 2021

Question: The client’s son is age 25 and lives at home with his parents. His only source of income is $14,000 of Supplemental Security Income (SSI). The son uses the SSI to chip in on household expenses and otherwise support himself. The parents provide all other support for their son. Can the parents claim the son as a dependent on their tax return?

Answer: Maybe. There are three tests for being a qualifying relative. One: the individual must have a qualifying relationship, or have lived in the taxpayer’s home for every day of the year. A son is a qualifying relationship. This test is met. Two: the individual’s gross income cannot exceed $4,300 (2020 and 2021). None of the SSI will generate gross income. This test is met. Third: the parents must have provided more than 50% of their son’s support. This test may or may not be met because the $14,000 of SSI does count as support provided by the son. The parents will need to determine what the son’s overall support was for the tax year. If the son’s overall support is $28,000 or less, the test is not met because the son will have provided 50% or more of his own support and not the parents. If on the other hand, the son’s overall support is greater than $28,000, the parents will have provided more than 50% of the son’s support and the test would be met.

May 6, 2021

Question: Troy, a self-employed landscaper, files a Schedule C every year. He has one daughter, Sally, who is sixteen and works for him during the summer helping with various landscaping projects. In the past, Troy has issued Sally a W-2 for her work and has been told that her wages are exempt from FICA and FUTA.

This year, Troy converted to an S corporation; this was the only business change. He plans to continue hiring his daughter during the summer and paying her wages, reportable on a W-2 like he has always done. Can he continue paying his daughter wages, exempt from FICA and FUTA?

Answer: No. Children employed by a parent-owned business are exempt from FICA until age 18 and exempt from FUTA until age 21. This exemption applies only to Schedule C, sole proprietorships. It does not apply to a child employed by an incorporated business owned by the parent or by a partnership that has partners who are not parents of the child.

April 29, 2021

Question: Before the 2020 tax year’s filing deadline, you filed the tax return of Jiang and Kwan that included unemployment compensation and used MFJ filing status. Still, before the 2020 tax year filing deadline, they have come back to you because of new guidance regarding the portion of unemployment income being nontaxable income and ask you to change their filing status to MFS because it is overall more beneficial to them. Can they change their filing status from MFJ to MFS?

Answer: While Jiang and Kwan cannot file an amended return after the return’s filing time has expired to change from MFJ to MFS (§1.6013-1(a)(1)), they may file a superseding return before the 2020 tax year filing deadline to make the change. When a superseding return is filed on or before the original tax return filing due date, it corrects the initial return filed instead of the IRS viewing it as an amended return. The IRS treats the superseding return’s corrections as modifying the original return filed. Thus, if it is determined that the filing status of MFS is better than MFJ overall for the couple after the 2020 MFJ return was filed, then filing a superseding return before the filing deadline may be a useful option.

April 22, 2021

Question: You are preparing the 2020 tax return for Bjorn Enterprises, a calendar year S corporation. The corporation has a valid extension with the IRS until Sept. 15, 2021, and does not have a workplace retirement plan. The corporation has greater profit than expected and Robert, the shareholder, mentioned he would like to adopt a 401(k) plan for 2020 since he had read that the Setting Every Community Up for Retirement Enhancement Act (SECURE Act) gave businesses extra time to establish a new retirement plan. Bjorn Enterprises has 20 employees. Can Bjorn Enterprises establish a workplace 401(k) plan for 2020?

Answer: No. The SECURE Act contains a provision giving businesses extra time to establish certain new qualified retirement plans. The new deadline only applies to qualified plans that are 100% employer funded. Profit sharing plans would be an example of a 100% employer funded retirement plan that would qualify as a plan meeting the new extended deadline. The new deadline does not apply to 401(k) plans. If Bjorn Enterprises would like to establish a profit-sharing plan for 2020, it could do so by Sept. 15, 2021. The deadline for establishing new qualified plans is now the same as the deadline for setting up new SEP IRAs.

For plans adopted for tax years beginning after 2019, an employer may elect to treat a qualified retirement plan adopted after the close of a tax year, but before the due date (including extensions) of the employer's tax return for the tax year, as having been adopted as of the last day of the tax year. [§401(b)(2)]. This does not, however, allow retroactive adoption of a qualified cash or deferred arrangement (CODA) [Reg. §1.401(k)-1(a)(3)(iii)(A)].

April 15, 2021

Question: Michael is a college student, supported by his parents, and claimed as a dependent in the previous tax years. Assuming he can still be claimed as a dependent this year, regarding the stimulus payments and the recovery rebate credit, can Michael file a tax return to claim this credit?

Answer: No. To claim the recovery rebate credit (RRC), an "eligible individual" is any individual other than a nonresident alien or an individual who is a dependent of another taxpayer for the tax year. A dependent of the taxpayer, as defined for purposes of the dependency exemption by §152(c), includes a qualifying child and a qualifying relative.

April 8, 2021

Question: Katie and Andrew have a 17-year-old daughter who lives with them. The daughter has income but provides less than half her own support. Katie and Andrew can’t get the child tax credit due to their high income. They’re wondering if their daughter can file her own tax return without checking the box on Form 1040 where it says she can be claimed as a dependent and get the full recovery rebate credit and full standard deduction?

Answer: No. If she qualifies as a dependent, she is not eligible for the recovery rebate credit. Children who can be claimed as a dependent by their parents are not eligible individuals, even if they have enough income to have to file a return. For purpose of the recovery rebate credit, an “eligible individual” is any individual, other than a nonresident alien or an individual for whom a §151 dependency deduction is allowable to another taxpayer for the tax year. Thus, a child, a student who can be claimed on a parent’s return, or a dependent parent who is claimed on their child’s return is ineligible.

April 1, 2021

Question: CLS, Inc., a service corporation formed on May 1, 2021, hires you to do their accounting and tax work. In a meeting, you discover the company’s Form SS-4, Application for Employer Identification Number (EIN), was approved with a fiscal year-end of April 30, 2022.

Chris, the sole shareholder of CLS, Inc., did not realize the year-end was approved this way. Can this be changed to a calendar year-end?

Answer: Chris need not worry about changing his tax year from a fiscal to calendar year-end. Under Reg. §1.441-1(c)(1), the adoption of a tax year is not made with Form SS-4. The new corporation will adopt its tax year by filing its first federal income tax return. The date used on that return will determine its year-end for all future filings, unless the entity has another required year under the tax code.

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