FEDERAL INCOME TAX (28 QUESTIONS)

Question 1

What is gross income for purposes of federal income tax filings?

Answer 1

Gross income – includes all income you receive in the form of money, goods, property and services that isn’t exempt from tax and includes sources outside of the USA

Question 2

Do you include social security benefits as part of your gross income for federal tax filings?

Answer 2

You include part of your social security benefits if:

(a) you were married filing a separate return and you lived with your spouse at any time; or

(b) if ½ of your social security benefits, plus your other gross income and tax exempt interest is more than $25,000 individually or $32,000 jointly (these threshold amounts do not increase for inflation).

Question 3

Are you required to report as part of your gross income sources of income outside of the US?

Answer 3

Yes

Question 4

What is the threshold for having to report social security benefits as gross income for individual tax returns and jointly filed returns?

Answer 4

If ½ of your social security benefits, plus your other gross income and tax exempt interest is more than $25,000 individually or $32,000 jointly (these threshold amounts do not increase for inflation).

Question 5

Do the social security benefit threshold amounts increase for inflation?

Answer 5

No - individual is $25k and joint is $32k and these amounts do not increase for inflation

Question 6

What date is used to determine your filing status?

Answer 6

Filing Status – this is determined on the last date of the tax year, which is December 31st for most tax payers

Question 7

What is considered a child’s earning?

Answer 7

Amount child earns in performing services is gross income of child and not parent, even if under local law the parent has the right to earnings and may receive them

Question 8

What happens if a child fails to pay taxes on their earnings?

Answer 8

If a child doesn’t pay tax due on income, the parent is liable for the tax.

Question 9

When can a parent elect to include their child’s income on their tax return?

Answer 9

If the child is under 19, or was full time student under 24, a parent may elect to include child’s income on parent’s return

Question 10

Who is considered a self employed person?

Answer 10

You are a self-employed if you:

(a) carry on a trade or business as a sole proprietor;

(b) an independent contractor;

(c) a member of a partnership; or

(d) in business for yourself in any other way.

Question 11

What is a self employed person required to do?

Answer 11

You will need to use Schedule SE to figure your self-employment tax, which is comparable to SS and Medicare tax withheld from an employee’s wages

Question 12

What is a schedule SE used to figured self employment tax comparable to?

Answer 12

It is comparable to SS and Medicare tax withheld from an employee’s wages

Question 13

Are aliens treated the same for federal income tax purposes?

Answer 13

Different tax rules apply to resident aliens, non-resident aliens and dual-status (i.e. resident alien part of year and non-resident alien part of year).

Question 14

Even if you are not required to file a federal income tax return, when / why should you file anyway?

Answer 14

You should file a return to get money back if you had federal income tax withheld or made estimated payments or you qualify for a credit (i.e. earned income credit, additional child tax credit, premium tax credit, health coverage tax credit, etc.)

Question 15

Who is a dependent for federal income purposes?

Answer 15

A dependent means a qualifying child or qualifying relative.

Question 16

What does it mean if you can claim a dependent child on your federal income tax return?

Answer 16

You may be entitled to a child tax credit for each qualifying child who is under the age of 17 at the end of the year you are claiming that child as a dependent

Question 17

What are the exceptions to being able to claim a dependent?

Answer 17

EXCEPTIONS:
a) if you can be claimed as a dependent by anyone, you can’t claim anyone else as a dependent (so if you are filing MFJ and your spouse may be claimed as dependent by someone else, your spouse cannot claim any dependents on your MFJ return);

(b) you generally cannot claim a married person as a dependent if he/she files a joint return unless the couple filing the joint return are only doing so because of a tax refund for income tax withheld or estimated tax paid (credits don’t apply; must be because you paid tax!).

Question 18

What is the general rule for claiming a dependent?

Answer 18

Generally dependent must be US citizen, US resident alien, US national or resident of Canada or Mexico (exception if adopted child).

Question 19

What is the test for a qualifying child?

Answer 19

Five tests must be met:
(1) relationship;
(2) age;
(3) residency;
(4) support; and
(5) joint return.

Question 20

What is required under the relationship test for a qualifying child?

Answer 20

Relationship test means the child must be your son, daughter, step child, foster child or a descendant of any of them (i.e. grandchild), OR brother, sister half-brother/sister, step-brother/sister or a descendant of any of them (i.e. niece).

Question 21

What is required under the age test for a qualifying child?

Answer 21

Age test provides child must be:
(a) under age of 19 and younger than you (or your spouse if joint return, only need to be younger than one of couple filing joint return and not both spouses),

(b) a student under age 24 and younger than you (or your spouse if joint return, only need to be younger than one of couple filing joint return and not both spouses),

(c) permanently and totally disabled regardless of age. Note that a school offering courses only through internet is not a “school.”

Question 22

What is required under the residency test for a qualifying child?

Answer 22

For the Residency test, the child must have lived with you for more than ½ of the year.

Question 23

What are exceptions to the residency test requirement?

Answer 23

There are exceptions for temporary absences (i.e. illness, vacation, education, business, detention in juvenile facility, military service).

Question 24

What is the general rule of who can claim a child as a dependent in a divorce?

Answer 24

Usually a child of a divorced or separated parent is the qualifying child of the custodial parent because of the residency test.

Question 25

When can the non-custodial parent claim a child as a qualifying child?

Answer 25

The child of a divorced parent will be treated as a qualifying child for the non-custodial parent if all 4 statements are true:
(1) the parents are:
(a) divorced or legally separated by a decree,
(b) separated under a written agreement, or
(c) lived apart during last 6 months;

(2) child received over ½ of his/her support from the parents;

(3) child is in custody of one or both parents for more than ½ of the year; and

(4) custodial parent signs a written declaration that he/she wont claim child as dependent that year.

Question 26

If a non custodial parent can claim a child as a qualifying child, can they also claim HOH?

Answer 26

Even if all 4 are true allowing a noncustodial parent to claim a child as a qualifying child, this doesn’t allow the noncustodial parent to claim head of household filing status, the credit for child and dependent care expenses, the exclusion for dependent care benefits, the earned income credit, or the health coverage tax credit.

Question 27

If a child lived with each parent for the same number of nights, which parent is considered the custodial parent?

Answer 27

If child lived with each parent for same number of nights, the parent with the higher AGI is considered the custodial parent.

Question 28

What is required under the support test for a qualifying child?

Answer 28

For the Support test, the child can’t have provided more than half of his or her own support for the year.

Question 29

What is required under the joint return test for a qualifying child?

Answer 29

For the Joint Return test, the child can’t file a joint return for that year unless child is filing joint return with his/her spouse to claim a refund of income tax withheld or estimated tax paid

Question 30

Can more than 1 person meet all 5 test to claim a child as a qualifying child?

Answer 30

Sometimes a child meets all 5 tests but may be a qualifying child for more than 1 person.

Question 31

Can more than 1 person claim a child as a qualifying child?

Answer 31

No - only 1 person

Question 32

What benefits can a person claim when they claim a qualifying child and meet the 5 tests?

Answer 32

1 person can actually treat qualifying child to take all of the following tax benefits:
(a) child tax credit or other dependent credits;
(b) HOH;
(c) credit for child and dependent care expenses;
(d) exclusions from income for dependent care benefits; and
(e) earned income credit.

Question 33

Can two people who meet the 5 tests agree to split these benefits of a qualifying child?

Answer 33

You and the person cannot agree to divide these benefits between the two of you.

Question 34

How do we determine the tie breaker between two people who meet the 5 tests for a qualifying child?

Answer 34

To determine which person can treat child as qualifying child to take credits, the following tiebreaker rules apply:

(1) if only one person is a parent, then parent gets it;

(2) if parents file joint return together, child is qualifying child for both parents;

(3) if parents don’t file joint return and each claims, IRS will give to parent whom child lived with longer or if same amount of time then with parent with higher AGI;

(4) if no parent can claim child, child is treated as qualifying child of person with higher AGI.;

(5) if a parent can claim the child as a qualifying child but no parent does so claim the child, the child is treated as the qualifying child of the person who had the highest AGI for the year, but only if that person’s AGI is higher than the highest AGI of any of the child’s parents who can claim the child (i.e. if mom and grandma can claim child as qualifying child, but mom’s AGI is higher than grandma’s AGI, then grandma cannot claim even if mom wants to let grandma claim)

Question 35

What tests must be met in order to be a qualifying relative for federal income tax purposes?

Answer 35

Four tests must be met:
(1) not a qualifying child;
(2) member of household or relationship test;
(3) gross income test;
(4) support test.

Question 36

Is there any age requirement for a qualifying relative?

Answer 36

No - can be any age unlike qualifying child

Question 37

What is the Member of Household or Relationship Test for a qualifying relative?

Answer 37

Either (a) lives with you all year; or (b) be related to you (i.e. child, grandchild, sibling (half/step), stepparent, niece, nephew, uncle, aunt, in-laws (son/daughter/mom/father).

Question 38

For a qualifying relative under the member of house hold or relationship test, does the relationship established terminate upon divorce or death?

Answer 38

No - any of these relationships established are not ended by divorce or death.

Question 39

What is the gross income test for the qualifying relative test?

Answer 39

A person’s gross income for the year must be less than 42,000

Question 40

What is the support test for the qualifying relative test

Answer 40

You generally must provide more than half of a person’s total support during the calendar year

Question 41

How many filing status’ are there?

Answer 41

5

Question 42

What are the different filing status’?

Answer 42

(1) Single;
(2) Married Filing Jointly;
(3) Married Filing Separately;
(4) Head of Household; and
(5) Qualifying Widow(er).

Question 43

When are you considered unmarried for purposes of federal income tax filings?

Answer 43

You are considered unmarried for the whole year if on the last day of the tax year you are unmarried or legally separated under a decree (state law governs whether you are legally separated).

Question 44

When are you considered married for federal income tax filings?

Answer 44

You are considered married for the whole year if on the last day of the tax year you are:
(a) married and living together;
(b) living together in common law marriage recognized in state where you now live or where common law marriage began Divorce and Remarriage – if you obtain a divorce for sole purpose of filing tax returns as unmarried individuals and intend and do marry following year, you and your spouse must file as married individuals in both years

Question 45

What is your filing status if your marriage is annulled?

Answer 45

If you obtain a court decree of annulment which holds no valid marriage existed, you are considered unmarred even if you filed joint returns for earlier years.

Question 46

What should you do if you filed joint married returns in a marriage that was ultimately annulled?

Answer 46

You should file an Amended US Income Tax Return claiming single or HOH for all tax years affected by annulment and not closed by SOL for filing a tax return.

Question 47

When may you file as HOH?

Answer 47

You may be able to file as HOH if you are:
(1) unmarried or considered unmarried,

(2) you paid more than ½ of the cost of keeping up a home for the year, and

(3) a qualifying person lived with you in the home for more than ½ of the year (except for temporary absences such as school), but if qualifying person is your parent, parent doesn’t have to live with you.

Question 48

For purposes of claiming HOH when may you be considered unmarried?

Answer 48

You may be considered unmarried if:

(a) you file a separate return,

(b) you paid for more than ½ of costs of keeping up your home,

(c) your spouse didn’t live during the last 6 months of the tax year (note a spouse is considered to live in your home if he or she is temporarily absent due to special circumstances),

(d) your home was the main home of a qualifying person (i.e. your child, stepchild or foster child, and in some situations, parent, grandparent, brother or sister if dependent, but there is a special rule for parent and may be eligible even if parent didn’t live with you so long as you can claim parent as a dependent) for more than ½ of the year, and

(e) you must be able to claim the qualifying person as a dependent (if a child you may still meet this test if you cannot claim only because the noncustodial parent can claim). Usually if you qualify as HOH, your tax rates are lower than single or MFS.

Question 49

What are the consequences of filing married filing jointly?

Answer 49

Both may be held responsible jointly and individually for the taxes, interest and penalties due on the joint return.

Question 50

Upon divorce, who is responsible for tax consequences of previously filed married filing joint returns?

Answer 50

If divorced, this responsibility still applies even if your decree state that your former spouse will be responsible for any amounts owed on prior joint returns

Question 51

What are the three types of relief from joint responsibility on a married filing joint return?

Answer 51

(1) innocent spouse; separation of liability (available only to joint filers who are divorced, widowed, legally separated or haven’t lived together for the 12 months ending on the date the election for this relief is filed); and (2) equitable relief.

Question 52

Are both spouses required to sign a jointly filed return?

Answer 52

Generally, yes, but there exceptions.

Question 53

What are the exceptions to having both spouses sign a joint return

Answer 53

Exceptions:

(a) if spouse died before signing, executor or administrator may sign;

(b) injury or disease prevents signing;

(c) guardian of spouse;

(d) spouse in combat zone;

(e) power of attorney.

Question 54

Can a tax refund be applied to pay past due amounts of your spouse’s debts?

Answer 54

A tax refund may be applied to pay the past due amounts of your spouse’s debts and you must file and claim “injured spouse.”

Question 55

If a tax refund on a joint return is used to pay a spouse’s past debt, what can you do?

Answer 55

You must file and claim injured spouse

Question 56

How do qualify to claim injured spouse?

Answer 56

To claim injured spouse you cannot be legally obligated for the debt and have made and reported tax payments (either holdings or estimated payments) or claimed a refundable tax credit.

Question 57

What is the general rule on taxes when you file married filing separate?

Answer 57

You will generally pay more combined tax on separate returns than you would on a joint return due to special rules.

These rules include not being able to take many credits (i.e. earned income credit, education credits, etc). If filing separately, you can deduct on the separate return the property tax, mortgage insurance if the property is held as tenants by the entirety and you alone paid it. As for casualty loss, neither spouse may report the total casualty loss for a home owned as tenants by the entirety. If medical expenses are paid with funds from a joint account, half of the total medical expenses may be paid unless you can show you alone paid the expenses

Question 58

What are the specials rules the result in couples paying more when filing separate?

Answer 58

These rules include not being able to take many credits (i.e. earned income credit, education credits, etc).

Question 59

If filing separately, when can you claim certain deductions for properties?

Answer 59

You can deduct on the separate return the property tax, mortgage insurance if the property is held as tenants by the entirety and you alone paid it.

Question 60

Can one spouse claim total casualty loss on their separate return ?

Answer 60

NO- neither spouse may report the total casualty loss for a home owned as tenants by the entirety.

Question 61

Can you claim medical expenses as a deduction on a separate return?

Answer 61

If medical expenses are paid with funds from a joint account, half of the total medical expenses may be paid unless you can show you alone paid the expenses

Question 62

Can you amend your return change MFS returns to MFJ returns?

Answer 62

Yes

Question 63

Can you amend your return to change to MFJ to MFS?

Answer 63

NO - UNLESS the personal representative for a decedent does this 1 year from date of the return.

Question 64

Can you file married filing jointly in the year a spouse died?

Answer 64

You may be able to file as MFJ for the year spouse died, and then following 2 years after your spouse died you can file as Qualifying Widow(er).

Question 65

What are the eligibility requirements to file as a qualifying widower as MFJ up to two years after your spouse has died?

Answer 65

You may be eligible if you meet all of the following tests:
(a) you didn’t remarry,
(b) you have a child or stepchild you can claim as dependent,
(c) the child lived in your home all year,
(d) you paid more than ½ of the costs keeping up a home for the year.

Question 66

Example. You, your husband, and your 10-year-old son lived together until August 1, 2019, when your husband moved out of the household. In August and September, your son lived with you. For the rest of the year, your son lived with your husband, the boy’s father. Which parent can claim the child as a qualifying child?

Answer 66

Your son is a qualifying child of both you and your husband because your son lived with each of you for more than half the year and because he met the relationship, age, support, and joint return tests for both of you.

Question 67

Same example. At the end of the year, you and your husband still weren’t divorced, legally separated, or separated under a written separation agreement – can the rule for children of divorced or separated parents (or parents who live apart) apply?

Answer 67

NO - it does not aply

Question 68

Same example. You and your husband will file separate returns. Your husband agrees to let you treat your son as a qualifying child. This means, if your husband doesn’t claim your son as a qualifying child, you can claim your son as a qualifying child for the child tax credit and exclusion for dependent care benefits (if you qualify for each of those tax benefits). Can you claim HOH?

Answer 68

You cannot claim head of household filing status because you and your husband did not live apart for the last 6 months of the year. As a result, your filing status is married filing separately, so you cannot claim the earned income credit or the credit for child and dependent care expenses.

Question 69

The facts are the same as in example above, except that you and your husband both claim your son as a qualifying child. Who prevails?

Answer 69

In this case, only your husband will be allowed to treat your son as a qualifying child. This is because, during 2019, the boy lived with him longer than with you.

Question 70

In the example above, what will happen if you if you claim your child as a qualifying child?

Answer 70

If you claimed the child tax credit for your son, the IRS will disallow your claim to the child tax credit.

Question 71

In the same scenario, what happens if you do not have another qualifying child or dependent?

Answer 71

If you do not have another qualifying child or dependent, the IRS also will disallow your claim to the exclusion for dependent care benefits.

Question 72

In that example, can your Husband claim HOH?

Answer 72

No - because you and your husband didn’t live apart for the last 6 months of the year, your husband can’t claim head of household filing status.

Question 73

What does it mean if he cannot file HOH?

Answer 73

As a result, he has to file married filing separately, which means he can’t claim the earned income credit or the credit for child and dependent care expenses.

Question 74

What is your “basis” for tax purposes?

Answer 74

Your basis is the amount on your investment in property for tax purposes.

You use the basis to figure the gain or loss on the sale, exchange or other disposition of property.

It is also used to figure out deductions for depreciation, amortization, depletion, and casualty losses.

Question 75

What is typically the basis of property you buy?

Answer 75

The cost of the property - it can also include sales tax, freight, installation and testing, excise taxes, legal and accounting fees, recording fees, real estate taxes

Question 76

What are the different basis for gains and losses on property?

Answer 76

A. Cost Basis
B. Adjusted Basis
C. Basis Other Than Costs

Question 77

What is the cost basis?

Answer 77

It’s basically what you paid for the property (including the mortgage, sales tax, revenue stamps, legal fees, etc.)

Question 78

What is the adjusted basis?

Answer 78

Your adjusted basis is generally your cost in acquiring your home plus the cost of any capital improvements you made, less casualty loss amounts and other decreases.

Increases to basis will include things such as capital improvements while decreases can include any depreciation or tax credits you’ve already claimed.

(The basis will be increased i.e. higher than the cost you paid for it by adding the improvements

Likewise, the basis will decreased from the cost you paid for it by the basis of any property by all items that represent a return of capital for the period you held the property (i.e. if casualty or theft losses you decreases basis by any insurance proceeds, depreciation of your qualifying business property, easements)

Question 79

What are other basis’ than costs?

Answer 79

1. Property received for services
2. Taxable exchanges
3. Nontaxable exchanges
4. Like-Kind Exchanges
5. Property Transferred from a Spouse
6. Property Received as a Gift
7. Inherited Property
8. Property Changed From Personal to Business or Rental Use
9. Stock and Bonds

Question 80

What do you do if you receive property for your services?

Answer 80

You include the FMV of the property in income and the amount you include in income becomes your basis.

Question 81

What is the basis for taxable exchanges ?

Answer 81

One where gain is taxable and loss is deductible, and is also known as recognized gain or loss. The basis of the property you receive is usually its FMV at the time of the exchange.

Question 82

What is a bargain purchase?

Answer 82

It is purchase of an item for less than its FMV

Question 83

What is a taxable exchange?

Answer 83

A taxable exchange is one in which the gain is taxable or the loss is deductible

Question 84

What is a taxable gain or loss also known as?

Answer 84

A recognized gain or loss

Question 85

What is the basis if you receive property in ex-change for other property in a taxable ex-change?

Answer 85

The basis of the property you receive is usually its FMV at the time of the exchange.

Question 86

What is a nontaxable exchange

Answer 86

A nontaxable exchange is an exchange in which you’re not taxed on any gain and you can’t deduct any loss.

Question 87

What is your basis if you receive property in a nontaxable exchange?

Answer 87

Its basis is generally the same as the basis of the property you transferred

Question 88

What is the basis for nontaxable exchanges?

Answer 88

An exchange where you are not taxed on any gain and cannot deduct any loss. The basis is generally the same as the basis for the property transferred.

Question 89

What is the basis of Like-Kind Exchanges

Answer 89

The exchange of property for the same kind of property, such as 1031 exchanges for real property held or used for business or investment. The basis for the property you receive is generally the basis for the property you gave up. If you paid money, then the adjusted basis of the property you gave up is increased by the money you paid.

Question 90

What is the basis Property Transferred from a Spouse

Answer 90

The basis of the property transferred to you is the same as your spouse’s adjusted basis.

Question 91

What is the basis of Property Received as a Gift

Answer 91

Need to know its adjusted basis to the donor before it was given, its FMV at the time it was given, and any gift tax paid on it.

Question 92

What is the basis Property Changed From Personal to Business or Rental Use

Answer 92

You can deduct depreciation for business use at the time of the change.

Question 93

What is the basis for Stock and Bonds

Answer 93

This is generally the purchase price plus any costs of purchase, such as commissions and fees. If you get stocks other than by purchase, your basis is usually determined by the previous owner’s adjusted basis. You reduce your basis when you receive non-taxable distributions as they are a return of capital. If you receive additional stock from nontaxable stock splits, reduce your basis for the stock (i.e. 2:1 stock split, you buy 100 shares for $10 p/s, your basis is now $5 p/s for 200 shares)

Question 94

What is a sale of property

Answer 94

A sale is a transfer of property for money or promise to pay money (mortgage, note, etc.)

Question 95

What is a trade for property

Answer 95

A transfer of property for other property or services and may be taxed in the same way as a sale.

Question 96

Is a trade for property taxed?

Answer 96

It may be taxed in the same way as a sale.

Question 97

Is a redemption in stock subject to tax?

Answer 97

It is subject to capital gain or loss provision unless the redemption is a dividend or other distribution of stock.

Question 98

How is the stock redemption treated?

Answer 98

It depends on each case how redemption is treated. The redemption is treated as a sale or trade of stock if:
(a) the redemption isn’t essentially equivalent to a divided,
(b) there is a substantially disproportionate redemption of stock,
(c) there is a complete redemption of all the stock of the corporation owned by the shareholder, or
(d) the redemption is a distribution in partial liquidation of a corporation.

Question 99

How is redemption or retirement of bonds treated?

Answer 99

Usually retirement of bonds or notes at maturity is treated as a sale or trade.

Question 100

How is Surrender of Stock treated?

Answer 100

If by a dominate shareholder who retains ownership of more than half of the corporations voting shares , it is treated as contribution to capital rather than as an immediate loss deducible from taxable income

Question 101

How is worthless securities treated?

Answer 101

Stocks or bond that become completely worthless during the tax year are treated as though they were sold on the last date of the tax year. This affects whether your capital loss is short or long term.

Question 102

How do you figure gains or losses

Answer 102

You figure the gain or loss by subtracting the adjusted basis of the property from the amount you realize on the sale or trade.

The amount realized from the sale or trade is everything you receive for the property minus your expenses related to the sale (i.e. fees, commissions).

The amount realized includes money you received plus the FMV of any property or services you receive.

Also, if you have a debt against the property, the amount realized includes the debt paid off (i.e. you owe $8,000, your basis is $6,000 and buyer pays off loan and pays you $20,000 your amount realized is $28,000 and the gain is $22,000).

Question 103

What are nontaxable trades?

Answer 103

1. Corporate reorganizations
2. Stock for stock of the same corporation
3. Convertible stocks and bonds
4. Insurance policies and annuities

Question 104

When is a corporate reorganization a nontaxable trade

Answer 104

If you exchange common stock for preferred stock, or stock in one corporation for stock in another, and this is as a result of merger, recapitalization, corporation acquisition, etc., you don’t recognize gain or loss

Question 105

When is Stock for stock of the same corporation a nontaxable trade

Answer 105

You can exchange common stock for common stock or preferred stock for preferred stock in the same corporation without having recognized a gain or loss

Question 106

When is convertible stocks and bonds a nontaxable trade

Answer 106

You generally won’t have a recognized gain or loss if you convert bonds into stock or preferred stock into common stock of the same corporation according to a conversion privilege in the terms of the bond or the preferred stock certificate.

Question 107

When is insurance policies and annuities a nontaxable trade

Answer 107

You won’t have a recognized gain or loss if the insured or annuitant is the same under both contracts and you trade:
(a) a life insurance contract for another life insurance contract, or for an endowment, or annuity or qualified long term care insurance contract;
(b) an endowment contract for another endowment contract, or annuity or qualified long term care;
(c) or an annuity contract for another annuity or qualified long term insurance contract; or (d) a qualified long term insurance contract for another qualified long term insurance contract.

Question 108

What is the general rule for transfers of properties between spouses?

Answer 108

Generally no gain or loss is recognized on a transfer of property from an individual to (or in trust for the benefit of) a spouse, or if incident to a divorce, a former spouse.

Question 109

When does the general rule for transfers of properties between spouses not apply?

Answer 109

This does not apply if the recipient spouse or former spouse is a nonresident alien, or property is transferred in trust and liability exceeds basis.

Question 110

In a transfer of property to a spouse incident to divorce, what is the basis

Answer 110

The recipient’s basis in the property will be the same as the adjusted basis of the giver immediately before the transfer.

Question 111

What is the rule called for a recipient’s basis in the property will be the same as the adjusted basis of the giver immediately before the transfer.

Answer 111

This carryover basis rule applies whether the adjusted basis of the transferred property is less than, equal to, or greater than either its FMV at the time of transfer or any consideration paid by the recipient.

Question 112

What does the carryover basis rule apply to?

Answer 112

This rule applies for purposes of determining loss as well as gain. Any gain recognized on a transfer in trust increases the basis.

Question 113

When is a property deemed a transferred incident to divorce?

Answer 113

A transfer of property is incident to a divorce if the transfer occurs within 1 year after the date on which the marriage ends, or if the transfer is related to the ending of the marriage.

Question 114

A property transfer is incident to your divorce if the transfer:

Answer 114

1. Occurs within 1 year after the date your marriage ends, or
2. Is related to the end of your marriage.

Question 115

What does divorce mean under these circumstances?

Answer 115

A divorce, for this purpose, includes the end of your marriage by annulment or due to violations of state laws.

Question 116

When is a transfer incident to divorce related to the end of the marriage?

Answer 116

A property transfer is related to the end of your marriage if both of the following conditions apply:
(a) the transfer is made under your original or modified divorce or separation instrument; and
(b) the transfer occurs within 6 years after the date your marriage ends.

Question 117

If the transfer does not occurs within 1 year after the date your marriage ends, or is not related to the end of your marriage, the transfer is presumed not to be related to the end of your marriage. When will that presumption not apply?

Answer 117

This presumption won’t apply if you can show that the transfer was made to carry out the division of property owned by you and your spouse at the time your marriage ended.

Question 118

What would be an example of this?

Answer 118

For example, the presumption won’t apply if you can show that the transfer was made more than 6 years after the end of your marriage because of business or legal factors which prevented earlier transfer of the property and the transfer was made promptly after those factors were taken care of.

Question 119

What is the holding period for Long Term Capital Gain or Loss & Short Term Capital Gain or Loss

Answer 119

Long Term Capital Gain or Loss – hold the investment property for more than 1 year

Short Term Capital Gain or Loss – hold the investment property for 1 year or less.

Question 120

When do you begin counting the holding period?

Answer 120

You begin counting on the date after the day you acquired the property, but the day you disposed of the property is part of your holding period

Question 121

For example, y bought property on February 5, 2018, and sold it on February 5, 2019, what is your holding period

Answer 121

Your holding period isn’t more than 1 year and you have a short-term capital gain or loss; but if you sold it on February 6, 2019 then you have a long term gain or loss because holding period is more than 1 year)

Question 122

When can you take a bad debt deduction?

Answer 122

You can take a bad debt deduction only in the year the debt becomes worthless.

Question 123

What is required in order to deduct a bad debt?

Answer 123

To deduct a bad debt, you must have a basis in it—that is, you must have already included the amount in your income or loaned out your cash.

Question 124

What would be an example?

Answer 124

For example, you can’t claim a bad debt deduction for court-ordered child support not paid to you by your former spouse. If you are a cash method taxpayer (as most individuals are), you generally can’t take a bad debt deduction for unpaid salaries, wages, rents, fees, interest, dividends, and similar items.

Question 125

What are the basis’ for selling your home?

Answer 125

1. Cost as basis
2. Adjusted Basis

Question 126

What is the cost as basis method?

Answer 126

This is the amount you paid for it in case, debt obligations, other property or services. This is the purchase price, some settlement fees and closing costs.

Question 127

What is the adjusted basis method?

Answer 127

This is the cost or other basis increased or decreased by certain amounts. This includes improvements, but not repairs. As for decreases, this would be deductible casualty loses, insurance payments received or expected for casualty losses, payments received for granting an easement, depreciation allowed if you used your home for business or rental purposes.

Question 128

What is the maximum gain exclusion on the sale of your house

Answer 128

You can exclude up to $250,000 ($500,000 if married and filing MFJ) of the gain (other than gain allocated to periods of nonqualified use) on the sale of your main home if all of the following are true:
1. You meet the ownership test (i.e. you owned the home for at least 2 years for 5 years preceding sale of home).
2. You meet the use test (i.e. you lived in the home as your main home for at least 2 years for 5 years preceding sale of home).
3. During the 2-year period ending on the date of the sale, you didn’t exclude gain from the sale of another home Gains or Losses

Question 129

What are three things that must be met in order to utilize the maximum gain exlcusion?

Answer 129

1. You meet the ownership test (i.e. you owned the home for at least 2 years for 5 years preceding sale of home).
2. You meet the use test (i.e. you lived in the home as your main home for at least 2 years for 5 years preceding sale of home).
3. During the 2-year period ending on the date of the sale, you didn’t exclude gain from the sale of another home Gains or Losses

Question 130

What is the use test

Answer 130

You lived in the home as your main home for at least 2 years for 5 years preceding sale of home).

Question 131

What is the ownership test

Answer 131

You owned the home for at least 2 years for 5 years preceding sale of home

Question 132

What are exceptions to the use test

Answer 132

There are exceptions to the use test due to disability (you become physically or mentally unable to care for yourself AND you owned and lived in your home as your main home for a least 1 year during the 5 year period before the sale of your home; you still must meet the ownership for 2 years test for 5 years preceding sale of home

Question 133

What is required to utilize the maximum exclusion gains under the disabilities exception

Answer 133

you become physically or mentally unable to care for yourself AND you owned and lived in your home as your main home for a least 1 year during the 5 year period before the sale of your home; you still must meet the ownership for 2 years test for 5 years preceding sale of home

Question 134

Do the ownership and use test periods have to be continuous?

Answer 134

The Ownership and Use 2 year period don’t have to be continuous and they both don’t have to occur at the same time, but they must be meet during the 5 year period preceding the sale

Question 135

What happens to the $500k exclusion if your spouse died and you didn’t remarry before the date of sale?

Answer 135

You are considered to have owned and lived in the property as your main home during any period of time when your spouse owned and lived in it as a main home. You can exclude up to $500,000 if the sale or exchange took place no more than 2 years after the date of death, you haven’t remarried, and:

1. You meet the ownership test (i.e. you owned the home for at least 2 years for 5 years preceding sale of home).
2. You meet the use test (i.e. you lived in the home as your main home for at least 2 years for 5 years preceding sale of home).
3. During the 2-year period ending on the date of the sale, you didn’t exclude gain from the sale of another home Gains or Losses

also apply to your spouse.

Question 136

Beginning in 2008, Helena Perez lived in a rented apartment. The apartment building was later converted to condominiums, and she bought her same apartment on December 2, 2016. In 2017, Helena became ill and on April 14 of that year she moved to her daughter’s. Can Helena utilize the max exclusion gain

Answer 136

Helena can exclude gain on the sale of her condominium because she met the ownership and use tests during the 5-year period from July 8, 2014, to July 7, 2019, the date she sold the condominium. She owned her condominium from December 2, 2016, to July 7, 2019 (more than 2 years). She lived in the property from July 8, 2014 (the beginning of the 5-year period), to April 14, 2017 (more than 2 years). The time Helena lived in her daughter’s home during the 5-year period can be counted toward her period of ownership, and the time she lived in her rented apartment during the 5-year period can be counted toward her period of use.

Question 137

Emilio sells his home in June 2019 for a gain of $300,000. He marries Jamie later in the year. He meets the ownership and use tests, but Jamie doesn’t. How much can he exclude?

Answer 137

Emilio can exclude up to $250,000 of gain on a separate or joint return for 2019. The $500,000 maximum exclusion for certain joint returns doesn’t apply because Jamie doesn’t meet the use test.

Question 138

Kari owned and used a house as her main home since 2015. Kari and Wilma married on July 1, 2019, and from that date they use Kari’s house as their main home. Kari died on August 15, 2019, and Wilma inherited the property. Wilma sold the property on September 2, 2019, at which time she hadn’t remarried. What exclusion can Wilma claim

Answer 138

Although Wilma owned and used the house for less than 2 years, Wilma is considered to have satisfied the ownership and use tests because her period of ownership and use includes the period that Kari owned and used the property before death.

Question 139

What is the reduced maximum exclusion

Answer 139

If you don’t meet the ownership and use test or have used the exclusion within 2 years of selling your current home, you may qualify for a reduced maximum exclusion if you sell your main home because: (a) a change of employment;
(b) health; or
(c) unforeseen circumstances (i.e. events you couldn’t have reasonably foreseen occurring before buying and occupying main home).

Question 140

Can you utilize the exclusion for a used for Business Use or Rental of Home

Answer 140

You may be able to exclude gain but you must meet the ownership and use test

Question 141

When is there a loss on sale

Answer 141

If the amount realized is less than the adjusted basis, the difference is a loss. A loss on the sale of your main home can’t be deducted

Question 142

Do you have to report the gain upon sale of your home to the IRS

Answer 142

You don’t have to report the gain on the sale of your house unless you have a gain and don’t qualify to exclude all of it, you have a gain and chose not to exclude it, you received a form 1099-S

Question 143

When can you claim a capitol loss deduction

Answer 143

If your capital losses are more than your capital gains, you can claim a capital loss deduction. You can use your total net loss to reduce your income dollar to dollar up to the $3,000 limit.

Question 144

What is the dollar figure limit you can claim on a capitol loss deduction

Answer 144

You can use your total net loss to reduce your income dollar to dollar up to the $3,000 limit.

Question 145

What is a capital loss carryover

Answer 145

You can carry over the unused part to the next year. A long-term capital loss you carry over will reduce that year’s long term capital gains before it reduces that year’s short term capital gains. However use your short term capital losses first even if you incurred them after long term capital loss.

Question 146

Can you carry over the loss of a decedent

Answer 146

NO - Capital Loss of a decedent cannot be carried over

Question 147

If you and your spouse once filed separate returns and are now filing a joint return, can you combine your filed separate returns and are now filing a joint return, can you combine your separate capital loss carry overs?

Answer 147

YES

Question 148

If you and your spouse filed a joint return and later file separate returns, what happens to the capital loss carryover from the joint return ?

Answer 148

The capital loss carryover from the joint return can be deducted only on the return of the spouse who actually had the loss

Question 149

What is net capital gain

Answer 149

The amount by which your net long term capital gain for the year is more than your net short term capital loss.

Question 150

What happens if your regular tax computation is lower than the capital gain rate?

Answer 150

You are subject to the lower rate. For example, if capital gain rate on collectible is 28% and you are in a lower tax bracket, the lower rate applies.

Question 151

When did alimony stop being deductible for payors

Answer 151

After December 31, 2018, alimony is no longer deductible by payor and no longer taxable to recipient.

Question 152

What rules apply for divorce or separation agreements executed before January 1, 2019

Answer 152

The following rules apply to alimony:
(a) payments to a 3rd party may be considered alimony (i.e. medical expenses, housing, tuition);

(b) payments for life insurance premiums if on your life and your spouse owns policy and you pay premiums is considered alimony;

(c) payments for expenses for a home owned by you and your spouse may be alimony (i.e. ½ of mortgage and interest, taxes and insurance if held as tenants in common but if held as tenants by the entirety, none of your payments for taxes and insurance are alimony)

Question 153

What happens to the taxability of alimony for divorce decree prior to 1/1/19 is modified?

Answer 153

It must expressly state alimony is non-taxable and non-deductible otherwise the old rule apply or that the new post 12/31/18 rules apply.

Question 154

What happens if the divorce is pending and they sign an agreement in 2018 but the agreement is not ratified and approved by court until 2019?

Answer 154

Then all payment payments made in 2019 are taxable/deductible because the alimony payments were made under the written separate agreement that was executed before 12/31/18.

Question 155

What costs of divorce can you NOT deduct

Answer 155

You can’t deduct the costs of personal advice, counseling, or legal action in a divorce. These costs aren’t deductible, even if they are paid, in part, to arrive at a financial settlement or to protect income-producing property

Question 156

Can you deduct legal fees you pay for a property settlement?

Answer 156

You can’t deduct legal fees you pay for a property settlement. However, you can add it to the basis of the property you receive. For example, you can add the cost of preparing and filing a deed to put title to your house in your name alone to the basis of the house.

Question 157

How soon do you have to file for innocent spouse

Answer 157

You must file the form 2 years after the date on which the IRS first attempted to collect the tax from you

Question 158

Can IRS omit contact a spouse if there was domestic violence?

Answer 158

The IRS must contact your spouse or former spouse. No exceptions even if there is domestic violence

Question 159

How long does the IRS have to collect the tax after it is assessed?

Answer 159

The IRS has 10 years from the date of the tax liability was assessed to collect the tax

Question 160

What does it mean that transferee liability is not affected by innocent spouse relief provisions. The innocent spouse relief provisions do not affect tax liabilities that arise under federal or state transferee liability or property laws

Answer 160

Even if you are relieved of the tax liability under the innocent spouse relief provisions, you may remain liable for the unpaid tax, interest, and penalties to the extent provided by those laws. Therefore IRS may collect deficiency from the innocent spouse to the extent permitted under federal or state transferee liability or property laws

Question 161

What conditions must be met to qualify for innocent spouse relief

Answer 161

1. You filed a joint return.
2. There is an understated tax on the return that is due to erroneous items (i.e. you never paid or incurred the expense deducted, the expense doesn’t qualify as a deduction) of your spouse (or former spouse).
3. You can show that when you signed the joint return you did not know, and had no reason to know, that the understated tax existed (or the extent to which the understated tax existed).
4. Taking into account all the facts and circumstances, it would be unfair to hold you liable for the understated tax.

Question 162

What is separation of liability relief

Answer 162

Under this type of relief, the understated tax (plus interest and penalties) on your joint return is allocated between you and your spouse (or former spouse). The understated tax allocated to you is generally the amount you are responsible for

Question 163

What is required in order to request separation of liability relief

Answer 163

You must have filed a joint return and meet either one of the following requirements:
(1) You are no longer married to, or are legally separated from, the spouse with whom you filed the joint return for which you are requesting relief. (Under this rule, you are no longer married if you are widowed); or
(2) you e not a member of the same household as the spouse with whom you filed the joint return at any time during the 12 month period ending on the date you file the form 8857 relief.

Question 164

Can you claim separation of liability relief if you have actual knowledge of the underreported tax?

Answer 164

NO - if you have actual knowledge of the underreported tax, then you cannot get this relief for portion you had actual knowledge of.

Question 165

Is there any exception to the actual knowedlge rule

Answer 165

There is an exception if you can establish you were a victim of domestic violence.

Question 166

When can you seek equitable relief

Answer 166

You can get equitable relief form an understated tax or an unpaid tax. An unpaid tax is amount you properly reported on return but failed to pay.

Question 167

What will courts consider

Answer 167

Court will consider if you are married or no longer married to your spouse. If not married, this weighs in your favor of relief and if married its neutral

Question 168

What requirements must be met to meet equitable relief

Answer 168

1. You are not eligible for Innocent Spouse or Separation of Liability Relief
2. You filed a joint return
3. You timely filed your claim for relief
4. You and your spouse (or former spouse) did not transfer assets to one another as a part of a fraudulent scheme. A fraudulent scheme includes a scheme to defraud the IRS or another third party, such as a creditor, former spouse, or business partner.
5. Your spouse (or former spouse) did not transfer property to you for the main purpose of avoiding tax or the payment of tax.
6. You did not knowingly participate in the filing of a fraudulent joint return.
7. The income tax liability from which you seek relief is attributable (either in full or in part) to an item of your spouse (or former spouse) or an unpaid tax resulting from your spouse’s (or former spouse’s) income. If the liability is partially attributable to you, then relief can only be considered for the part of the liability attributable to your spouse (or former spouse). The IRS will consider granting relief regardless of whether the understated tax, deficiency, or unpaid tax is attributable (in full or in part) to you if any of the following exceptions apply:

(a) the item is attributable or partially attributable to you solely due to the operation of community property law. If you meet this exception, that item will be considered attributable to your spouse (or former spouse) for purposes of equitable relief.

(b) If the item is titled in your name, the item is presumed to be attributable to you. However, you can rebut this presumption based on the facts and circumstances.

(c) You did not know, and had no reason to know, that funds intended for the payment of tax were misappropriated by your spouse (or former spouse) for his or her benefit. If you meet this exception, the IRS will consider granting equitable relief although the unpaid tax may be attributable in part or in full to your item, and only to the extent the funds intended for payment were taken by your spouse (or former spouse).

Question 169

What factors will the Court Will Consider in Granting Equitable Relief

Answer 169

1. Marital Status: Court will consider if you are married or no longer married to your spouse. If not married, this weighs in your favor of relief and if married its neutral.
2. Economic Hardship
3. Knowledge or Reason to Know understated tax or unpaid tax. Court will also consider abuse by your spouse when considering this factor.
4. Legal obligation to pay the debt
5. Significant Benefit you will receive
6. Compliance with Income Tax Laws
7. Mental or Physical Health

Question 170

What happens to refunds if you are granted relief

Answer 170

• You will be permitted a refund under innocent spouse and equitable relief but NOT separation of liability
• You will only get a refund if you provide proof of payment made with your own money
• No credit for refunds of payments made with joint return, joint payments.

Question 171

What is the purpose of your filing status?

Answer 171

It is used to determine whether you must file a return, your standard deduction and the correct tax.

It can also be used to determine if you can claim certain other deductions and credits.

Question 172

The filing status you choose depends partly on your marital status as of when?

Answer 172

On the last day of your tax year.

Question 173

What is your filing status if you are unmarried?

Answer 173

Single or if you meet certain requirements HOH or qualifying widower

Question 174

What is your filing status if you are married?

Answer 174

Your filing status is either married filing a joint return or married filing a separate return

Question 175

If you obtain a divorce by the last day of the tax year, are you considered unmarried for the whole year?

Answer 175

YES

Question 176

What is the exception to the rule that says you are unmarried the whole year if you are divorced as of the last day of the tax year i.e. December 31st?

Answer 176

If you and your spouse divorced by the last day of the tax year for the sole purpose of filing a tax return as unmarried but at the time of the divorce you intend to remarry in the next tax year, you and your spouse must file as married individuals

Question 177

What happens to a return previously filed as “married” if you ultimately have the marriage annulled?

Answer 177

You MUST amend your turns because an annulment means the marriage never existed for all tax years affected EXCEPT the years precluded by the statute of limitations

Question 178

When does the statute of limitations for purposes of having to amend your returns as a result of annulling your marriage?

Answer 178

It generally doesn’t end until 3 years (including extensions) after the date you file your original return or within 2 years after the date you pay the tax

Question 179

On an amended return as a result of an annulled marriage, what is your filing status?

Answer 179

Single OR HOH if you meet certain requirements

Question 180

When are you considered married for a whole year for tax purposes?

Answer 180

If you are married as of the last day of the tax year i.e. Dec 31st i.e. have not obtained a divorce decree yet

Question 181

Is an interlocutory decree considered a final decree for filing status purposes for taxes?

Answer 181

No - which means you are still married for purposes of your filing status.

Question 182

Can an individual who entered into a registered domestic partnership, civil union, or other similar relationship considered a marriage for federal tax filing status purpose?

Answer 182

If those things aren’t considered marriage in the state they are in then they are not deemed married for filing status purposes for their federal tax purposes.

Question 183

What is required under health law?

Answer 183

You must have qualifying health care coverage

Question 184

What is qualifying health coverage under the health care law?

Answer 184

1. Most coverage through government-sponsored pro-grams (including Medicaid coverage, Medicare parts A or C, the Children’s Health Insurance Program (CHIP), certain benefits for veterans and their families, TRICARE, and health coverage for Peace Corps vol-unteers);
2. Most types of employer-sponsored coverage;
3. Grandfathered health plans; and
4. Other health coverage the Department of Health and Human Services designates as minimum essential coverage.

Question 184

In what ways can your divorce or separation impact your health care law?

Answer 184

1. Special Marketplace Enrollment Period. If you lose your health insurance coverage due to divorce, you are still required to have coverage for every month of the year for yourself and the dependents you can claim on your tax return. Losing coverage through a divorce is considered a qualifying life event that allows you to enroll in health coverage through the Health Insurance Marketplace during a Special Enrollment Period.
2. Changes in Circumstances. If you purchase health insurance coverage through the Health Insurance Marketplace, you may get advance payments of the premium tax credit in 2019. If you do, you should re-port changes in circumstances to your Marketplace throughout the year. Changes to report include a change in marital status, a name change, and a change in your income or family size. By reporting changes, you will help make sure that you get the proper type and amount of financial assistance. This also will help you avoid getting too much or too little credit in advance.
3. Shared Policy Allocation. If you divorced or are legally separated during the tax year and are enrolled in the same qualified health plan, you and your former spouse must allocate policy amounts on your sepa-rate tax returns to figure your premium tax credit and reconcile any advance payments made on your behalf. The Instructions for Form 8962, Premium Tax Credit, has more information about the Shared Policy Allocation.

Question 185

Are you and your spouse required to be US citizens in order to file a joint return?

Answer 185

No, only one of you has to be a US Citizen or a resident alien at the end of the tax year i.e. December 31st

Question 186

Can you file a joint tax return if you or your spouse was a nonresident alien at any time during the tax year?

Answer 186

Yes, but only if you agree to treat the nonresident alien as a resident of the US - which means both of your incomes are subject to US income tax

Question 187

What is the general rule for signatures on a joint return?

Answer 187

Generally, you both have to sign it or it won’t be considered a joint return

Question 188

What is the ramification of signing a joint tax return with your spouse?

Answer 188

Both you and your spouse may be held responsible, jointly and individually, for the tax and any interest or penalty due on your joint return.

This means that one spouse may be held liable for all the tax due even if all the income was earned by the other spouse.

Question 189

What are the 3 types of relief a spouse may seek when seeking to be relieved of a joint tax, interest and penalties from a joint return?

Answer 189

1. Innocent spouse relief.
2. Separation of liability, which applies to joint filers who are divorced, widowed, legally separated, or who haven’t lived together for the 12 months ending on the date election of this relief is filed.
3. Equitable relief.

Question 190

What must a spouse file in order to seek relief from a joint tax, penalty or interest under innocent spouse, separation of liability or equitable relief?

Answer 190

Form 8857

Question 191

Can a tax refund be used to pay your spouses debts?

Answer 191

Yes - an over payment on a joint return can be used to pay the past due amount of your spouse’s debts - this includes federal tax, state tax, child or spousal support payments or federal nontax debt such as student loan

Question 192

Is there any circumstance in which you can get a refund for your share of the overpayment of a joint return used for your spouses liability?

Answer 192

Yes - if you qualify as an injured spouse

Question 193

When can you claim to be an injured spouse?

Answer 193

You are an injured spouse if you file a joint return and all or part of your share of the overpayment was, or is expected to be, applied against your
spouse’s past-due debts.

Question 194

In order to be considered an injured spouse, what do you have to prove?

Answer 194

1. Have made and reported tax payments (such as federal income tax withheld from wages or estimated tax payments), or claimed a refundable tax credit, such as the earned income credit or additional child tax credit on the joint return, and
2. Not be legally obligated to pay the past-due amount.

Question 195

What is required to prove you are an injured spouse in a community property state?

Answer 195

Must only show that you are not legally obligated to pay the past-due amount

Question 196

What form must you file if you are an injured spouse?

Answer 196

Form 8379 with your tax return

Question 197

If you qualify as an injured spouse, how long until you receive your refund?

Answer 197

If you haven’t filed your joint return and you know that your joint refund will be offset, file Form 8379 with your return & you should receive your refund within 14 weeks from the date the paper return is filed or within 11 weeks from the date the return is filed electronically.

If you filed your joint return and your joint refund was offset, file Form 8379 by itself. When filed after offset, it can take up to 8 weeks to receive your refund. Don’t attach the previously filed tax return, but do include copies of all Forms W-2, Wage and Tax Statement, and W-2G, Certain Gambling Winnings, for both spouses and any Forms 1099 that show income tax withheld.

Question 198

Is injured spouse the same thing as innocent spouse?

Answer 198

NO - an injured spouse uses Form 8379 and requests an allocation of the overpayment attributed to each spouse

An innocent spouse used Form 8857 to request relief from a joint liability for tax, penalties, interest and penalties on a joint return for items of the other spouse that were incorrectly reported or omitted from the joint return

Question 199

If you file a married filing separate tax return, can you deduct medical expenses?

Answer 199

If you paid with funds deposited in a joint checking account in which you and your spouse have an equal interest then you may deduct HALF of the total medical expenses, subject to certain limits, unless you can show that you alone paid the expenses

Question 200

If you file a married filing separate tax return, can you deduct state income tax?

Answer 200

If you file a separate state income tax return then you can deduct the state income tax you alone paid during the year.

If you file a joint state income tax return and you and your spouse are jointly and individually liable for the full amount of the state income tax then you can deduct the state income tax you alone paid during the year.

If you file a joint state income tax return and you are liable for only your own share of state income tax then you can deduct the smaller of:

-the state income tax you alone paid during the year, or

-the total state income tax you and your spouse paid during the year multiplied by the following fraction. The numerator is your gross income and the denominator is your combined gross income.

Question 201

If you file a married filing separate tax return, can you deduct property tax and mortgage interest?

Answer 201

If you paid the tax and mortgage interest on property held as tenants by the entirety then you can deduct the property tax and the mortgage interest you paid.

Question 202

If you file a married filing separate tax return, can you deduct casualty loss?

Answer 202

If you have a casualty loss resulting from a federally declared disaster on a home you own as tenants by the entirety, you can deduce half of the loss, subject to the deduction limits.

**Neither spouse may report the total casualty loss.

Question 203

What does it mean if you file married filing separately in a community property state?

Answer 203

Your income may be separate income or community income for income tax purposes

Question 204

Why is it that if you file married filing separately you will pay more in tax than if you filed married filing jointly?

Answer 204

1. Your tax rate generally is higher than it would be on a joint return.
2. Your exemption amount for figuring the alternative minimum tax is half of that allowed on a joint return.
3. You can’t take the credit for child and dependent care expenses in most cases, and the amount you can exclude from income under an employer’s dependent care assistance program is limited to $2,500 (instead of $5,000 on a joint return). If you are legally separated or living apart from your spouse, you may be able to file a separate return and still take the credit.

4.You can’t take the earned income credit.

5. You can’t take the exclusion or credit for adoption ex-penses in most cases.
   6.
   You can’t exclude the interest from qualified savings bonds that you used for higher education expenses.
6. If you lived with your spouse at any time during the tax year:
   a. You can’t claim the credit for the elderly or the dis-abled, and
   b. You will have to include in income a higher percentage (up to 85%) of any social security or equivalent railroad retirement benefits you received.
7. The following credits and deductions are reduced at income levels that are half those for a joint return.
   a. The child tax credit.
   b. The retirement savings contributions credit.
8. Your capital loss deduction limit is $1,500 (instead of $3,000 on a joint return).
9. If your spouse itemizes deductions, you can’t claim the standard deduction. If you can claim the standard deduction, your basic standard deduction is half the amount allowed on a joint return.
10. You can’t take the credit for higher education expenses (American opportunity and lifetime learning credits), the deduction for student loan interest, or the tuition and fees deduction.

Question 205

If you file a married filing separate return, can you amend and file jointly?

Answer 205

Yes, generally you have 3 years to amend

Question 206

What form to do you use to change your filing status?

Answer 206

Form 1040-X

Question 207

Can you amend your joint return to file married filing separate?

Answer 207

No BUT a personal representative for a decedent can change from a joint return elected by the surviving spouse to a separate return for the decedent 1 year from the due date

Question 208

What are the advantages of filing head of household?

Answer 208

1. You can claim the standard deduction even if your spouse files a separate return and itemizes deductions.
2. Your standard deduction is higher than is allowed if you claim a filing status of single or married filing separately.
3. Your tax rate usually will be lower than it is if you claim a filing status of single or married filing separately.
4. You may be able to claim certain credits (such as the dependent care credit and the earned income credit) you can’t claim if your filing status is married filing separately.
5. Income limits that reduce your child tax credit and your retirement savings contributions credit, for example, are higher than the income limits if you claim a filing status of married filing separately.

Question 209

What are the requirements in order to file HOH

Answer 209

1. You are unmarried or “considered unmarried” on the last day of the year.
2. You paid more than half the cost of keeping up a home for the year.
3. A “qualifying person” lived with you in the home for more than half the year (except for temporary absences, such as school). However, if the “qualifying person” is your dependent parent, he or she doesn’t have to live with you.

Question 210

When will you be considered unmarried on the last day of the year?

Answer 210

1. You file a separate return. A separate return includes a return claiming married filing separately, single, or head of household filing status.
2. You paid more than half the cost of keeping up your home for the tax year.
3. Your spouse didn’t live in your home during the last 6 months of the tax year. Your spouse is considered to live in your home even if he or she is temporarily ab-sent due to special circumstances.
4. Your home was the main home of your child, step-child, or foster child for more than half the year. (See Qualifying person, later, for rules applying to a child’s birth, death, or temporary absence during the year.)
5. You must be able to claim the child as a dependent. However, you meet this test if you can’t claim the child as a dependent only because the noncustodial parent can claim the child.

Question 211

What happens to your status if your spouse is a nonresident alien spouse who you do not wish to have treated as a resident for tax purposes?

Answer 211

You will be considered an unmarried person for HOH purposes.

However, your spouse is NOT a qualifying person for HOH purposes.

Question 212

Who is a qualifying person qualifying you to file as HOH?

Answer 212

1. The person is your qualifying child (such as a son, daughter, or grandchild who lived with you more than half the year and meets certain other tests) AND single THEN that person is a qualifying person, whether or not the child meets the Citizen or Resident Test
2. The person is your qualifying child (such as a son, daughter, or grandchild who lived with you more than half the year and meets certain other tests) AND he or she is married and you can claim him or her as a dependent THEN that person is a qualifying person.
3. The person is a qualifying relative who is your father or mother AND you can claim him or her as a dependent THEN they are a qualifying person
4. The person is a qualifying relative other than your father or mother (such as a grandparent, brother, or sister who meets certain tests) AND he or she lived with you more than half the year, and he or she is related to you in one of the ways listed under Relatives who don’t have to live with you AND you can claim him or her as a dependent THEN they are a qualifying person

Question 213

When will a qualifying child (such as a son, daughter, or grandchild who lived with you more than half the year and meets certain other tests) not be a qualifying person?

Answer 213

He or she is married and you can’t claim him or her as a dependent

Question 214

When will a qualifying relative who is your mother or father NOT be a qualifying person?

Answer 214

If you cannot claim them as a dependent

Question 215

When will a qualifying relative other than your mother or father (i.e. grandparent, brother or sister) NOT be a qualifying person?

Answer 215

1. He or she didn’t live with you more than half the year
2. He or she isn’t related to you in one of the ways listed under Relatives who don’t have to live with you and is your qualifying relative only because he or she lived with you all year as a member of your household; OR
3. you cannot claim him or her as a dependent

Question 216

When are you considered to be “keeping up a home”?

Answer 216

Only if you pay more than half the cost of its upkeep for the year. This includes rent, mortgage interest, real estate taxes, insurance on the home, repairs, utilities, and food eaten in the home. This doesn’t include the cost of clothing, education, medical treatment, vacations, life insurance, or transportation for any member of the household

Question 217

What is the general rule for a qualifying person to claim HOH

Answer 217

They must live with you more than half the year UNLESS it’s your parents so long as you can claim them as dependent and paying more than half the cost of keeping up their main home for the year

Question 218

What is considered a temporary absence for which your spouse can still claim to have lived with you?

Answer 218

Illness, education, business, vacation, military service, or detention in a juvenile facility.

It must be reasonable to assume that the absent person will return to the home after the temporary absence. You must continue to keep up the home during the absence

Question 219

What must you prove in order to be eligible to file a HOH for a child who is your qualifying person has been kidnapped?

Answer 219

1. The child is presumed by law enforcement authorities to have been kidnapped by someone who isn’t a member of your family or the child’s family.
2. In the year of the kidnapping, the child lived with you for more than half the part of the year before the kid-napping.
3. In the year of the child’s return, the child lived with you for more than half the part of the year following the date of the child’s return.
4. You would have qualified for head of household filing status if the child hadn’t been kidnapped.

This treatment applies for all years until the earliest of:
1. The year the child is returned,
2. The year there is a determination that the child is dead, or
3. The year the child would have reached age 18.

Question 220

When can a child be deemed a qualifying child of a noncustodial parent?

Answer 220

If all of the 4 statements are TRUE:
1. The parents:
a Are divorced or legally separated under a decree of divorce or separate maintenance,
b. Are separated under a written separation agreement, or
c. Lived apart at all times during the last 6 months of the year, whether or not they are or were married.

2. The child received over half of his or her support for the year from the parents.
3. The child is in the custody of one or both parents for more than half of the year.
4. Either of the following applies.
   a. The custodial parent signs a written declaration, discussed later, that he or she won’t claim the child as a dependent for the year, and the noncustodial parent attaches this written declaration to his or her return. (If the decree or agreement went into effect after 1984 or separation agreement that went into effect after 1984 and before 2009, or Post-2008 divorce decree or separation agreement, later).
   b. A pre-1985 decree of divorce or separate maintenance or written separation agreement that applies to 2019 states that the noncustodial parent can claim the child as a dependent, the decree or agreement wasn’t changed after 1984 to say the noncustodial parent can’t claim the child as a de-pendent, and the noncustodial parent provides at least $600 for the child’s support during the year.

Question 221

When can you not claim a dependent or a spouse if filing jointly?

Answer 221

If they could be claimed as as a dependent by another tax payer

Question 222

What is the exception to the rule that you can’t claim a married person who files a joint return as a dependent?

Answer 222

If the married person is only filing the joint return to claim a refund of withheld income tax or estimated tax paid

Question 223

What is the residency requirement in order to claim someone as a dependent?

Answer 223

You can’t claim a person as a dependent unless that person is a U.S. citizen, U.S. resident alien, U.S. national, or a resident of Canada or Mexico

Question 224

You cannot claim a person as a dependent UNLESS

Answer 224

They are your qualifying child or qualifying relative

Question 225

What is the test to be a qualifying child?

Answer 225

1.
2.
3.
4.
5.
The child must be your son, daughter, stepchild, foster child, brother, sister, half brother, half sister, stepbrother, stepsister, or a descendant of any of them.
The child must be (a) under age 19 at the end of the year and younger than you (or your spouse if filing jointly), (b) under age 24 at the end of the year, a student, and younger than you (or your spouse if filing jointly), or (c) any age if permanently and totally disabled.
The child must have lived with you for more than half of the year.2
The child must not have provided more than half of his or her own support for the year.
The child must not be filing a joint return for the year (unless that joint return is filed only to claim a refund of withheld income tax or estimated tax paid).
A child isn’t a qualifying child unless he or she meets items (1) through (5).

Question 226

What is the test to be a qualifying relative

Answer 226

1.The person can’t be your qualifying child or the qualifying child of anyone else.

2. The person either (a) must be related to you in one of the ways listed under Relatives who don’t have to live with you in Pub. 501 or (b) must live with you all year as a member of your household 2 (and your relationship must not violate local law).
3. The person’s gross income for the year must be less than $4,200.
4. You must provide more than half of the person’s total support for the year.

A person isn’t a qualifying relative unless he or she meets items (1) through (4).

Question 227

Who is considered the custodial parent?

Answer 227

The parent with the greater number of nights during the year

Question 228

When is a child treated as living with a parent for a night

Answer 228

If the child sleeps at that parent’s home whether or not the parent is present OR

In the company of the parent, when the child doesn’t sleep at a parent’s home (for example, the parent and child are on vacation together).

Question 229

Who is the custodial parent if the parents have equal overnights in a year?

Answer 229

The parent with the higher adjusted gross income

Question 230

The night of Dec 31st is treated as part of which year

Answer 230

As part of the year in which it begin e.g. December 31, 2019 is part of 2019

Question 231

Who is an emancipated child considered living with?

Answer 231

Neither

Question 232

If a child wasn’t with either parent on a particular night (because, for example, the child was staying at a friend’s house), who gets the overnight?

Answer 232

The child is treated as living with the parent with whom the child normally would have lived for that night, except for the absence. But if it can’t be deter-mined with which parent the child normally would have lived or if the child wouldn’t have lived with either parent that night, the child is treated as not living with either pa-rent that night.

Question 233

If a parent works nights but has the child a greater number of days but not nights, what happens?

Answer 233

If, due to a parent’s nighttime work schedule, a child lives for a greater number of days but not nights with the parent who works at night, that pa-rent is treated as the custodial parent. On a school day, the child is treated as living at the primary residence registered with the school.

Question 234

You and your child’s other parent are divorced. In 2019, your child lived with you 210 nights and with the other parent 155 nights. Who is custodial parent?

Answer 234

Parent with 210 overnights

Question 235

In 2019, your daughter lives with each parent for alternate weeks. In the summer, she spends 6 weeks at summer camp. How is her time treated at camp?

Answer 235

During the time she is at camp, she is treated as living with each parent for 3 weeks because this is how long she would have lived with each parent if she hadn’t attended summer camp.

Question 236

Your son lived with you 180 nights during the year and lived the same number of nights with his other parent, your ex-spouse. Your adjusted gross income is $40,000. Your ex-spouse’s adjusted gross income is $25,000. Who is the custodial parent

Answer 236

Parent with higher AGI is treated as custodial parent

Question 237

Your son normally lives with you during the week and with his other parent, your ex-spouse, every other weekend. You become ill and are hospitalized. The other parent lives in your home with your son for 10 consecutive days while you are in the hospital. How are those 10 days treated?

Answer 237

Your son is treated as living with you during this 10-day period be-cause he was living in your home.

Question 238

When your son turned age 18 in May 2019, he became emancipated under the law of the state where he lives. Who can claim custodial parent

Answer 238

He isn’t considered in the custody of his parents for more than half of the year. The special rule for children of divorced or separated parents (or parents who live apart) doesn’t apply

Question 239

Your daughter lives with you from January 1, 2019, until May 31, 2019, and lives with her other parent, your ex-spouse from June 1, 2019, through the end of the year. She turns 18 and is emancipated under state law on August 1, 2019. Who is the custodial parent

Answer 239

Because she is treated as not living with either parent be-ginning on August 1, she is treated as living with you the greater number of nights in 2019. You are the custodial parent

Question 240

What is Form 8332 use for?

Answer 240

The custodial parent must use either Form 8332 or a similar statement (containing the same information required by the form) to make a written declaration to release a claim to an exemption for a child to the noncustodial parent. Although the exemption amount is zero for tax year 2019, this release allows the noncustodial parent to claim the child tax credit, additional child tax credit, and credit for other dependents, if applicable, for the child

Question 241

Is Form 8332 good for only 1 year?

Answer 241

The release can be for 1 year, for a number of specified years (for example, alternate years), or for all future years, as specified in the declaration

Question 242

Does Form 8332 apply to other other tax benefits, such as the earned income credit, dependent care credit, or head of household filing status?

Answer 242

NO

Question 243

What may a noncustodial parent provide in lieu of Form 8332 if their divorce agreement went into effect after 1984 and before 2009?

Answer 243

The noncustodial parent may be able to attach certain pages from the agreement instead of Form 8332.

The agreement must state all three of the following.
1. The noncustodial parent can claim the child as a dependent without regard to any condition, such as payment of support.

2. The custodial parent won’t claim the child as a dependent for the year.
3. The years for which the noncustodial parent, rather than the custodial parent, can claim the child as a dependent.

The noncustodial parent must attach all of the following pages of the decree or agreement to his or her return.
*The cover page (write the other parent’s SSN on this page).
*The pages that include all of the information identified in items (1) through (3) above.
*The signature page with the other parent’s signature and the date of the agreement.

Question 244

Can a noncustodial a parent use their agreement in lieu of form 8332 if their agreement is post 2008?

Answer 244

NO

Question 245

Can a custodial parent revoke a release of claim to an exemption?

Answer 245

YES - custodial parent can revoke a release of claim to an exemption that he or she previously released to the noncustodial
parent.

For the revocation to be effective for 2019, the custodial parent must have given (or made reasonable efforts to give) written notice of the revocation to the noncustodial parent in 2018 or earlier.

The custodial parent can use Part III of Form 8332 for this purpose and must attach a copy of the revocation to his or her return for each tax year he or she claims the child as a dependent as a result of the revocation.

Question 246

If you get married, how is the support provided to you by your new spouse treated?

Answer 246

It is treated as provided to you

Question 247

How is all child support payments actually received from the noncustodial parent under a pre-1985 agreement treated?

Answer 247

It is considered support of the child.

Question 248

Under a pre-1985 agreement, the noncustodial parent provides $1,200 for the child’s support. How is the $1,200 viewed as used?

Answer 248

This amount is considered support provided by the noncustodial parent even if the $1,200 was actually spent on things other than support.

Question 249

Does the rule for for divorced or separated parents apply to parents who never married and lived apart at all times during the last 6 months of the year?

Answer 249

YES

Question 250

How are payments to your spouse that are includible in his or her gross income as either alimony, separate maintenance payments, or similar payments from an estate or trust treated?

Answer 250

They aren’t treated as a payment for the support of a dependent.

Question 251

What are the tax benefits for a person who can claim a qualifying child

Answer 251

1. The child tax credit, the credit for other dependents, and the additional child tax credit.
2. Head of household filing status.
3. The credit for child and dependent care expenses.
4. The exclusion from income for dependent care benefits.
5. The earned income credit.

Question 252

Can you agree to divide the tax benefits of claiming a qualifying child?

Answer 252

NO

Question 253

To determine which person can treat
the child as a qualifying child to claim these tax benefits, what are the tiebreaker rules ?

Answer 253

1. If only one of the persons is the child’s parent, the child is treated as the qualifying child of the parent.
2. If the parents file a joint return together and can claim the child as a qualifying child, the child is treated as the qualifying child of the parents.
3. If the parents don’t file a joint return together but both parents claim the child as a qualifying child, the IRS will treat the child as the qualifying child of the parent with whom the child lived for the longer period of time during the year. If the child lived with each parent for the same amount of time, the IRS will treat the child as the qualifying child of the parent who had the higher adjusted gross income (AGI) for the year.
4. If no parent can claim the child as a qualifying child, the child is treated as the qualifying child of the person who had the highest AGI for the year.
5. If a parent can claim the child as a qualifying child but no parent claims the child, the child is treated as the qualifying child of the person who had the highest AGI
   for the year, but only if that person’s AGI is higher than the highest AGI of any of the child’s parents who can claim the child.

Question 254

You, your husband, and your 10-year-old son lived together until August 1, 2019, when your husband moved out of the household. In August and September, your son lived with you. For the rest of the year, your son lived with your husband, the boy’s father. Who can claim the child as a qualifying child?

Answer 254

Both parents bc kid lived with each for more than half the year and met the relationship, age, support and joint return test for both parents.

Question 255

In the same example above, if you and your husband still weren’t divorced, legally separated, or separated under a written separation agreement, can the rule for divorced or separate parents apply?

Answer 255

NO

Question 256

You and your husband will file separate returns. Your husband agrees to let you treat your son as a qualifying child. What does this mean?

Answer 256

This means, if your husband doesn’t claim your son as a qualifying child, you can claim your son as a dependent and treat him as a qualifying child for the child tax credit and exclusion for dependent care benefits, if you qualify for each of those tax benefits.

However, you can’t claim head of household filing status because you and your husband didn’t live apart the last 6 months of the year. And, as a result of your filing status being married filing separately, you can’t claim the earned income credit or the credit for child and dependent care expenses

Question 257

The facts are the same as in Example 1 above except that you and your husband both claim your son as a qualifying child. What happens?

Answer 257

In this case, only your husband will be allowed to treat your son as a qualifying child.

This is because, during 2019, the boy lived with him longer than with you. If you claimed the child tax credit for your son, the IRS will disallow your claim to the child tax credit.

If you don’t have another qualifying child or dependent, the IRS also will disallow your claim to the exclusion for dependent care benefits.

In addition, because you and your husband didn’t live apart the last 6 months of the year, your husband can’t claim head of household filing status.

And, as a result of his filing status being married filing separately, he can’t claim the earned income credit or the credit for child and dependent care expenses.

Question 258

If a child is treated as the qualifying child of the noncustodial parent under the rules for children of divorced or separated parents (or parents who live apart) described earlier, who can claim the child tax credit or the credit for other dependents for the child?

Answer 258

Only the noncustodial parent can claim the child tax credit or the credit for other dependents for the child.

However, the custodial parent, if eligible, or other eligible person can claim the child as a qualifying child for head of household filing status, the credit for child and dependent care expenses, the exclusion for dependent care benefits, and the earned income credit.

If the child is the qualifying child of more than one person for those tax benefits, the tie-breaker rules determine which person can treat the child as a qualifying child.

Question 259

You and your 5-year-old son lived all year with your mother, who paid the entire cost of keeping up the home. Your AGI is $10,000. Your mother’s AGI is $25,000. Your son’s father doesn’t live with you or your son. What happens under the rule of divorce or separated parents?

Answer 259

Under the rules for children of divorced or separated parents (or parents who live apart), your son is treated as the qualifying child of his father, who can claim the child tax credit for the child if he meets all the requirements to do so. Because of this, you can’t claim the child tax credit for your son.

However, your son’s father can’t claim your son as a qualifying child for head of household filing status, the credit for child and dependent care expenses, the exclusion for dependent care benefits, or the earned in-come credit.

Question 260

You and your mother didn’t have any child care expenses or dependent care benefits, but the boy is a qualifying child of both you and your mother for head of household filing status and the earned income credit because he meets the relationship, age, residency, support, and joint return tests for both you and your mother. (Note: The support test doesn’t apply for the earned income credit.) How-ever, you agree to let your mother claim your son. What does this mean?

Answer 260

This means she can claim him for head of household filing status and the earned income credit if she qualifies for each and if you don’t claim him as a qualifying child for the earned income credit. (You can’t claim head of household filing status because your mother paid the entire cost of keeping up the home.)

Question 261

The facts are the same as in Example 1 except that your AGI is $25,000 and your mother’s AGI is $21,000. Can your mom claim your son as a qualifying child

Answer 261

Your mother can’t claim your son as a qualifying child for any purpose because her AGI isn’t higher than yours.

Question 262

The facts are the same as in Example 1 except that you and your mother both claim your son as a qualifying child for the earned income credit. Your mother also claims him as a qualifying child for head of household filing status. What happens?

Answer 262

You, as the child’s parent, will be the only one allowed to claim your son as a qualifying child for the earned income credit. The IRS will disallow your mother’s claim to the earned income credit and head of household filing status unless she has another qualifying child.

Question 263

What is your “basis”

Answer 263

Your basis is the amount of your investment in property for tax purposes.

Use the basis to figure the gain or loss on the sale, exchange, or
other disposition of property. Also use it to figure
deductions for depreciation, amortization, depletion, and casualty losses.

Question 264

If you use property for business and personal, how much you allocate the basis?

Answer 264

Must allocate the basis based on the USE

Question 265

If you use property for business and personal, what can depreciate your basis?

Answer 265

Only the basis allocated to the business or the production of income part of the property can be depreciated.

Question 266

Can your original basis in property be adjusted?

Answer 266

Yes - it is increased or decreased by certain events.

For example, if you make improvements to the property, increase your basis. If you take deductions for depreciation or casualty losses, or claim certain credits, reduce your basis.

Question 267

What is your cost basis?

Answer 267

The cost is the amount you pay in cash, debt obligations, other property, or services. Your cost also includes amounts you pay for the following items.
* Sales tax.
* Freight.
* Installation and testing.
* Excise taxes.
* Legal and accounting fees (when they
must be capitalized).
* Revenue stamps.
* Recording fees.
* Real estate taxes (if you assume liability
for the seller).

Question 268

What is real property considered under the tax code

Answer 268

Real property, also called real estate, is land and generally anything built on, growing on, or attached to land.

Question 269

How do you allocate your basis if you buy buildings and the land on which they stand for a lump sum?

Answer 269

Allocate the cost basis according
to the respective fair market values (FMVs) of the land and buildings at the time of purchase.

Figure the basis of each asset by
multiplying the lump sum by a fraction.

The numerator is the FMV of that asset and the denominator
is the FMV of the whole property at the time of purchase

Question 270

If you buy a property and assume a mortgage, can you include the mortgage in your basis?

Answer 270

If you buy property and assume (or buy the property subject to) an existing mortgage on the property, your basis includes the amount you pay for the property plus the amount to be paid on the mortgage.

Question 271

What closing settlement cost for the purchase of real property can be included in your basis?

Answer 271

Your basis includes the settlement fees and closing costs you paid for buying the property.

(A fee for buying property is a cost that must be paid even if you buy the prop-erty for cash.) Don’t include fees and costs for getting a loan on the property in your basis.

Question 272

What are examples of settlement costs that can be included in your basis?

Answer 272

*Abstract fees (abstract of title fees).
*Charges for installing utility services.
*Legal fees (including fees for the title search and preparation of the sales con-tract and deed).
*Recording fees.
*Survey fees.
*Transfer taxes.
*Owner’s title insurance.
*Any amounts the seller owes that you agree to pay, such as back taxes or interest, recording or mortgage fees, charges for improvements or repairs, and sales commissions.

Question 273

What can settlement costs not include as part of your basis?

Answer 273

Settlement costs do not include amounts placed in escrow for the future payment of items such as taxes and insurance.

Question 274

What are examples of closing costs you cannot include in the basis of your property?

Answer 274

*Casualty insurance premiums.
*Rent for occupancy of the property before closing.
*Charges for utilities or other services rela-ted to occupancy of the property before closing.
*Charges connected with getting a loan, such as points (discount points, loan origi-nation fees), mortgage insurance premi-ums, loan assumption fees, cost of a credit report, and fees for an appraisal required by a lender.
*Fees for refinancing a mortgage

Question 275

When can you include real estate taxes as your basis?

Answer 275

f you pay real estate taxes the seller owed on real property you bought, and the seller didn’t reimburse you, treat those taxes as part of your basis. You can’t deduct the taxes as an expense.

Question 276

Can points be included in your basis?

Answer 276

NO - if you pay points to get a loan, do not add the points to the basis of the related property.
Generally, you deduct the points over the term of the loan.

Question 277

What is the adjusted basis of property?

Answer 277

Before figuring gain or loss on a sale, ex-change, or other disposition of property or figuring allowable depreciation, depletion, or amortization, you must usually make certain adjustments (increases and decreases) to the cost basis or basis other than cost (discussed later) of the property. The result is the adjusted basis.

Question 278

What are examples of items that can be used to increase your basis?

Answer 278

• Capital improvements: additions to your home, replace a rood, paving your driveway, install central AC, rewiring your home
• Assessments for local improvements: water connections, extending utility service lines, sidewalks, roads
• Casualty losses: - restoring damaged property
• Legal fees: Cost of defending and perfecting a title * Certain canceled debt excluded from
  Fees for getting a reduction of an assessment
• Zoning costs

Question 279

What are examples of items that can be used to decrease your basis?

Answer 279

• Exclusion from income of subsidies for energy conservation measures
• Casualty or theft loss deductions and insurance reimbursements
• Postponed gain from the sale of a home
• Alternative fuel vehicle refueling property credit
• Residential energy credit
• Depreciation and section 179 deduction
• Nontaxable corporate distributions
• Certain canceled debt excluded from income
• Easements
• Adoption tax benefits

Question 280

If your city changes the street in front of your store into an enclosed pedestrian mall and assesses you and other affected property owners for the cost of the conversion. What can you do with the assessment?

Answer 280

Add the assessment to your property’s basis. In this example, the assessment is a depreciable asset.

Question 281

You owned a duplex used as rental property that cost you $40,000, of which $35,000 was allocated to the building and $5,000 to the land. You added an improvement to the duplex that cost $10,000. In February last year, the duplex was damaged by fire. Up to that time, you had been allowed depreciation of $23,000. You sold some salvaged material for $1,300 and collected $19,700 from your insurance company. You deducted a casualty loss of $1,000 on your income tax return for last year. You spent $19,000 of the insurance proceeds for restoration of the duplex, which was completed this year. What is your basis?

Answer 281

Adjusted basis after restoration is $19,000

Basis in the land is its original cost of $5,000

Question 282

Can you exclude from gross income any subsidy you received from a public utility company for the purchase or installation of an energy conservation measure for a dwelling unit?

Answer 282

Yes - reduce the basis of the property for which you received the subsidy by the excluded amount.

Question 283

What is basis other than cost?

Answer 283

There are many times when you can’t use cost as basis. In these cases, the FMV or the adjusted basis of the property can be used.

Question 284

What do you do if you receive property for services?

Answer 284

Include the FMV of the property in income

Question 285

What is your basis for property received for services?

Answer 285

The amount you include in income becomes your basis. If the services were performed for a price agreed on beforehand, it will be accepted as the FMV of the property if there is no evidence to the contrary.

Question 286

What is your basis if you receive property for your services and the property is subject to certain restrictions,

Answer 286

your basis in the property is its FMV when it becomes substantially vested.

Question 286

What is a bargain purchase

Answer 286

A bargain purchase is a purchase of an item for less than its FMV.

Question 287

What is your basis for a property that is a bargain purchase

Answer 287

Your basis in the property is its FMV (your purchase price plus the amount you include in income).

Question 288

what is a taxable exchange

Answer 288

A taxable exchange is one in which the gain is taxable or the loss is deductible.

Question 289

What is an involuntary conversion and was is the basis for an involuntary conversion?

Answer 289

If you receive replacement property as a result of an involuntary conversion, such as a casualty, theft, or condemnation, figure the basis of the replacement property using the basis of the converted property

Question 290

The state condemned your property. The adjusted basis of the property was $26,000 and the state paid you $31,000 for it. You realized a gain of $5,000 ($31,000 − $26,000). You bought replacement property similar in use to the converted property for $29,000. You recognize a gain of $2,000 ($31,000 − $29,000), the unspent part of the payment from the state. Your unrecognized gain is $3,000, the difference between the $5,000 realized gain and the $2,000 recognized gain. What is your basis of the replacement property?

Answer 290

$26,000 - it’s $29k minus gain not recognized $3k

Question 291

What is a like kind exchange

Answer 291

The exchange of property for the same kind of property may qualify as a nontaxable exchange under section 1031.

Question 292

What do nontaxable like-kind ex-change treatment under section 1031 apply to?

Answer 292

It only applies to exchanges of real property held for use in a trade or business or for investment, other than real property held primarily for sale.

Question 293

What is the most common type of exchange of real property

Answer 293

The exchange of real property for the same kind of real property is the most common type of nontaxable exchange

Question 294

What is necessary to qualify as a like kind exchange?

Answer 294

You must hold for business or investment purposes both the real property you transfer and the real property you receive. There must also be an exchange of like-kind property.

Question 295

What is the basis for a like kind exchange?

Answer 295

The basis of the property you receive is generally the same as the adjusted basis of the property you gave up.

If you trade property in a like-kind exchange and also pay money, the basis of the property received is the adjusted basis of the property you gave up increased by the money you paid.

Question 296

You exchange a parcel of real property (adjusted basis of $30,000) for another parcel of real property (FMV $75,000) and pay $40,000. What is your basis in the newly acquired property

Answer 296

Your basis in the newly acquired real property is $70,000 (the $30,000 adjusted basis of the old parcel plus the $40,000 paid).

Question 297

What is a partially nontaxable exchange

Answer 297

partially nontaxable exchange is an exchange in which you receive unlike property or money in addition to like-kind property.

Question 298

What is the basis of a partially nontaxable exchange?

Answer 298

The basis of the property you receive is the same as the adjusted basis of the property you gave up the following adjustments:

1. Decrease the basis by the following amounts.
   a. Any money you receive.
   b. Any loss you recognize on the ex-change.
2. Increase the basis by the following amounts.
   a. Any additional costs you incur.
   b. Any gain you recognize on the ex-change.

Question 299

What happens if the other party to the exchange assumes your liabilities?

Answer 299

Treat the debt assumption as money you received in the exchange

Question 300

How do you allocate your basis if you receive like-kind and unlike properties in the exchange?

Answer 300

Allocate the basis first to the unlike property, other than money, up to its FMV on the date of the ex-change. The rest is the basis of the like-kind property

Question 301

What is the basis of property transferred from a spouse?

Answer 301

The basis of property transferred to you or transferred in trust for your benefit by your spouse is the same as your spouse’s adjusted basis.

The same rule applies to a transfer by your former spouse that is incident to divorce.

However, for property transferred in trust, adjust your basis for any gain recognized by your spouse or former spouse if the liabilities assumed, plus the liabilities to which the property is subject, are more than the adjusted basis of the property transferred.

Question 302

What is the basis if the property transferred to you is a series E, series EE, or series I U.S. savings bond?

Answer 302

The transferor must include in income the interest accrued to the date of transfer.

Your basis in the bond immediately after the transfer is equal to the transferor’s basis increased by the interest income includible in the transferor’s income.

Question 303

What must the transferor do?

Answer 303

At the time of the transfer, the transferor must give you the records needed to determine the adjusted basis and holding period of the property as of the date of the transfer.

Question 304

How do you figure the basis of property received as a gift?

Answer 304

To figure the basis of property you receive as a gift, you must know:
-its adjusted basis to the donor just before it was given to you, -its FMV at the time it was given to you, and
-any gift tax paid on it.

Question 305

What if the fmv is less than the donor’s adjusted basis?

Answer 305

If the FMV of the property at the time of the gift is less than the donor’s adjusted basis, your basis depends on whether you have a gain or a loss when you dispose of the property.

Your basis for figuring gain is the same as the donor’s adjusted basis plus or minus any required adjustments to basis while you held the property.

Your basis for figuring loss is its FMV when you received the gift plus or minus any required adjustments to basis while you held the property.

Question 306

You received an acre of land as a gift. At the time of the gift, the land had a FMV of $8,000. The donor’s adjusted basis was $10,000. After you received the property, no events occurred to increase or decrease your basis. If you later sell the property for $12,000, what happens?

Answer 306

You will have a $2,000 gain because you must use the donor’s adjusted basis at the time of the gift ($10,000) as your basis to figure gain

Question 307

What if you sell the property for $7k?

Answer 307

You will have a $1,000 loss because you must use the FMV at the time of the gift ($8,000) as your basis to figure loss

Question 308

What happens if the sales price is between $8,000 and $10,000

Answer 308

you have neither gain nor loss

Question 309

If you hold the gift property as a business, what is your basis

Answer 309

If you hold the gift as business property, your basis for figuring any depreciation, depletion, or amortization deductions is the same as the donor’s adjusted basis plus or minus any required adjustments to basis while you hold the property

Question 310

What is your basis if FMV equal to or greater than donor’s adjusted basis

Answer 310

Your basis is the donor’s adjusted basis at the time you received the gift. Increase your basis by all or part of any gift tax paid, depending on the date of the gift.

Question 311

In 2019, you received a gift of property from your mother that had an FMV of $50,000. Her adjusted basis was $20,000. The amount of the gift for gift tax purposes was $35,000 ($50,000 minus the $15,000 annual exclusion). She paid a gift tax of $7,100 on the property. What is your basis?

Answer 311

Your basis is $26,106

FMV - $50,000 minus adjusted Basis ($20,000) = $30,000 net increase in value

Gift tax paid - $7,100 X .86 ($30k x. $35k) = $6,106 + adjusted basis of property to your mother of $20k = $26,106

Question 312

What is your basis in property you inherited?

Answer 312

It is generally one of the following.
*The FMV of the property at the date of the decedent’s death.

*The FMV on the alternate valuation date if the personal representative for the estate elects to use alternate valuation.

*The value under the special-use valuation method for real property used in farming or a closely held business if elected for estate tax purposes.

*The decedent’s adjusted basis in land to the extent of the value excluded from the decedent’s taxable estate as a qualified conservation easement.

Question 313

What is your basis in inherited property if you don’t’ have to file a federal estate tax return

Answer 313

Your basis in the inherited property is its appraised value at the date of death for state inheritance or transmission taxes

Question 314

How are married individuals considered to own property in community property states

Answer 314

They own half of the community property

Question 315

When either spouse dies in a community property state, what is the basis of the property

Answer 315

The total value of the community property, even the part belonging to the surviving spouse, generally becomes the basis of the entire property.

However, for this rule to apply, at least half the value of the community property interest must be includible in the decedent’s gross estate, whether or not the estate must file a return.

Question 316

You and your spouse owned community property that had a basis of $80,000. When your spouse died, half the FMV of the community interest was includible in your spouse’s estate. The FMV of the community interest was $100,000. What is your basis

Answer 316

The basis of your half of the property after the death of your spouse is $50,000 (half of the $100,000 FMV). The basis of the other half to your spouse’s heirs is also $50,000.

Question 317

If you hold property for personal use and then change it to business use or use it to produce rent, when can you begin to depreciate the property?

Answer 317

At the time of the change.

To do so, you must figure its basis for depreciation at the time of the change.

For e.g changing property from personal use to rental use would be renting out your former personal residence.

Question 318

What is the basis for depreciation

Answer 318

The basis for depreciation is the lesser of the following amounts.
* The FMV of the property on the date of the change.
*Your adjusted basis on the date of the change.

Question 319

Several years ago, you paid $160,000 to have your house built on a lot that cost $25,000. You paid $20,000 for permanent improvements to the house and claimed a $2,000 casualty loss deduction for damage to the house before changing the property to rental use last year. What is your adjusted basis in the house when you changed its use to rental property?

Answer 319

Your adjusted basis in the house when you changed its use to rental property was $178,000 ($160,000 + $20,000 − $2,000). On the same date, your property had an FMV of $180,000, of which $15,000 was for the land and $165,000 was for the house. The basis for figuring depreciation on the house is its FMV on the date of the change ($165,000) because it’s less than your adjusted basis ($178,000).

Question 320

What is the basis of a property you changed to business or rental use?

Answer 320

It will depend on whether you’re figuring a gain or loss

Question 321

How do you figure the basis for a gain?

Answer 321

The basis for figuring a gain is your adjusted basis in the property when you sell the property.

Question 322

Assume the same facts as in the previous example, except that you sell the property at a gain after being allowed depreciation deductions of $37,500. What is your adjusted basis for figuring the gain?

Answer 322

Your adjusted basis for figuring gain is $165,500 ($178,000 + $25,000 (land) − $37,500).

Question 323

How do you figure the basis for a loss?

Answer 323

Figure the basis for a loss starting with the smaller of your adjusted basis or the FMV of the property at the time of the change to business or rental use. Then make adjustments (in-creases and decreases) for the period after the change in the property’s use

Question 324

Assume the same facts as in the previous example, except that you sell the property at a loss after being allowed depreciation deductions of $37,500.

Answer 324

In this case, you would start with the FMV on the date of the change to rental use ($180,000) because it is less than the adjusted basis of $203,000 ($178,000 + $25,000 (land)) on that date. Reduce that amount ($180,000) by the depreciation deductions ($37,500). The basis for loss is $142,500 ($180,000 − $37,500).

Question 325

What is the basis of stocks or bonds?

Answer 325

The basis of stocks or bonds you buy is generally the purchase price plus any costs of purchase, such as commissions and recording or transfer fees.

Question 326

what is your basis is stocks or bonds if you receive it other than by purchase

Answer 326

If you get stocks or bonds other than by purchase, your basis is usually deter-mined by the FMV or the previous owner’s adjusted basis

Question 327

When must you adjust the basis of stocks?

Answer 327

For example, if you receive additional stock from nontaxable stock dividends or stock splits, reduce your basis for each share of stock by dividing the adjusted basis of the old stock by the number of shares of old and new stock.

This rule applies only when the additional stock received is identical to the stock held.

Also reduce your basis when you receive nontaxable distributions. The nontaxable distributions are a return of capital.