Individual Taxpayer IssuesChapter 7 pp. 223-262

2015 National IncomeTax Workbook™

Individual Taxpayer Issuespp 224-262

Home Mortgage Interest Sch A Tax Deductions Gambling Sessions Virtual Currencies Innocent Spouse Rules

Individual Taxpayer Issuespp 224-262

Asset Transfers Gift Tax Returns Imputed Interest Schedule K-1

Issue 1: Home Mortgage In-terest pp

Qualified Home Mortgage Interest▪ Acquisition▪ Construction▪ Substantial Improvement

Issue 1: Home Mortgage In-terest pp

Who deducts the interest▪ Right to possess▪ Responsible for maintenance▪ Insures property▪ Risk of loss▪ Pays taxes

Alternate Signerpp

Taxpayer claims interest if:▪ Legal owner ▪ Bearer of risk ▪ Responsible for maintenance ▪ Pays RE taxes

Example 7.1 pp

Can Juan claim the interest▪Mother signed loan▪ Juan pays all expenses▪ Juan can claim if mortgage is

paid directly

Down Payment Options pp

Down payment loan interest▪ Only if secured loan

Gifted down payment▪ Taxpayer claims interest▪ Donor may have gift tax return

Issue 2: Schedule A Tax De-ductions pp 226-227

Includable Taxes▪ Income Tax▪ Sales Tax▪ RE Tax▪ Personal Property

Allocating RE Taxespp226-227

Sale of property▪ Days owned / 365 X RE taxes

Delinquent taxes▪ Seller claims▪ Ex. 7.3 increases cost of home

purchased.

Issue 3: Gambling Sessionspp 227-229

Safe Harbor Method for Electron-ically Tracked Machines▪ Definition of a session

Same type machine

Same day

Day = calendar day

Breaks do not end session

Session Gambling p 228

Example 7.4▪ Break does not end session

Example 7.5▪Not electronically tracked▪ Separate sessions

Tracking Gains and Lossespp 228-229

Example 7.6▪ <$500>, $700 up = $200▪ Three other sessions:

<300>, 100, <600>▪ Ln 21 = $300 net win▪ Itemizes $300 allowed loss

Issue 4: Virtual Currenciespp 229-232

Digital representations▪ Bitcoin is most recognized▪ http://bitcoin.org

Stored and traded electronically▪ http://coinmarketcap.com/all/

Using Virtual Currencypp 230-231

Three step process▪ Step 1. Digital Wallet

Bitcoins storage

Phone, computer or web

Military cryptology security

Using Virtual Currencypp 230-231

Step 2. Getting Bitcoins▪ Purchased thru exchange▪ Purchsed from a person▪Received for goods or ser-

vices.

Using Virtual Currencypp 230-231

Step 3. Spending the bitcoins▪ As of 9/7/2015 there were

4,380 accepting businesses▪ http://usebitcoins.info/

Taxation of Virtual Currencypp 231-232

Wages use W-2 Independent Contractors use

1099 misc. Speculation▪Gain or loss could be capital

asset treatment

Issue 5: Innocent Spouse Rules pp 232-238

Four conditions to be met▪ Filed MFJ▪ Erroneous items by other spouse▪ No knowledge▪ Unfair liability

MFJ Exception p 232

Exception to MFJ▪Community property state▪Community income not in-

cluded in gross income

Erroneous Items p 233

Unreported income Incorrect deductions Incorrect credits Incorrect basis

Knowledge p 233

Could the spouse have known▪Nature and amount▪ Financial situation of spouse▪ Educational and business

background

Knowledge p 233

Could the spouse have known▪ Extent of participation▪Were reasonable questions

asked▪Different from usual reporting

Is it Fair p 233

Did the spouse receive signifi-cant benefit

Did spouse separate or divorce Did spouse desert the other Did the spouse receive any

benefit

Hazel and Harry Harrisonp 233

Harry took care of the business

Harry used secret gambling winnings to take family trip

Did not report winnings

Audited and Hazel is out of there

Hazel and Harry Harrisonp 233

Is Hazel an Innocent Spouse▪No involvement… plus▪Gambling was secret… plus▪Hazel is single now… plus▪Hazel benefited … oops

Applying for Relief p 234

Three types of relief▪ Innocent spouse▪ Separation of relief▪ Equitable relief

Form 8857 to apply

Applying for Relief p 234

Deadline to file ▪ 2 years after IRS first attempt to

collect

IRS offset MFJ return

IRS claim in court

IRS files suit

IRS issues notice to levy

Exceptions p 234

3 years from filing date in commu-nity property state vs. 2 years.

Relief for decedent▪ Executor files Form 8857▪ Marital status on earlier of re-

quest or date of death

Separation of Liability Reliefp 235

Requirements▪Divorced or separated ▪Did not live together during

prior 12 months Burden of Proof is on applicant

Exception p 235

Spousal abuse or domestic vio-lence▪Removes knowledge re-

quirement

Harvey and Harriet p 235

Involved in business so no in-nocent spouse

Feared Harvey so MFJ invalid File MFS and report her income Apply for separation of liability

Equitable Relief pp 235- 236

No dispute over amount Only relief for unpaid tax▪ Three step analysis

Equitable Relief pp 236-237

Step One. Seven threshold conditions▪ MFJ▪ No other relief▪ Timely filed▪ No asset transfer▪ Bad spouse did not transfer assets to

good spouse

Step One Thresholds p 236

Did not knowingly participate in filing a fraudulent return

Tax liability is due to an item of the bad spouse▪ Exception for community

property

Step Two p 236

Three conditions to meet▪Divorced or separated and no

living together prior 12 months▪ Economic hardship inevitable▪No Knowledge of understate-

ment

Step Three p 237

If not streamlined IRS considers

▪ 1.Marital status 2.Economic hardship

3.Knowledge 4.Legal obligation

5.Significant benefit 6.Compliance

▪ 7.Mental and physical health

Hattie and Homer p 237

Unpaid tax No knowledge of $2000 No significant benefit Hattie divorced Homer Hattie qualifies for Equitable Re-

lief

Issue 6: Asset Transferspp 238-249

Basis Rules Family Asset Transfer Planning Tax Planning with DSUE

Basis Rules pp238-240

Purchased assets ▪Cash paid + debt assumed▪ Adjust for trade in allowance

Gifted assets▪ Start with donors adjusted ba-

sis

Basis Rules pp 239-240

If FMV lower than adjusted ba-sis▪ Adjusted basis for gain▪ FMV for loss▪ Increase basis by gift tax paid

Gifted Basis Examples p 239

Ex. 7.11 Use adjusted basis of building

Ex. 7.12 Adj. Basis $375k, FMV $350k▪ $375k for depreciation▪ $350k for sale at loss

Inherited Assets p 240

Basis is FMV at date of death▪ Marketable securities ▪ Real property may need to be de-

termined

Alternate valuation election

Value lower and estate taxes re-duced

Family Asset Transfer Plan-ning pp 241-244

Sale of assets to family member▪ Installment sale▪ Part sale and part gift

Retained Interest▪ Life estate allows use while alive▪ Step up basis at death

Life Estate Example p 241

David rents farm to his son Thor▪ Thor can’t afford to buy▪ David has low basis▪ David needs rent▪ Life estate solves problem▪ David files gift tax return

Transfer to Trust pp 242-244

Intentionally Defective Grantor Trust▪ Income taxed to the grantor▪ Avoids asset appreciation

Income only trust▪ Alternative to life estate

Grantor Trusts p 243

Grantor keeps trust income Grantor controls to who and

when on distributions Grantor has power to recover

assets thru exchange

Deceased Spousal Unused Execlusion pp 244-248

DSUE can be transferred to surviving spouse

Careful planning required Is the estate really too small to

worry?

DSUE p 244

$5,430,000 for 2015▪ Assets double in 10 years at 7%

growth rate▪ Can be used in part or total ▪ Can be excluded in total▪ Remarriage loses former DSUE

DSUE p 247

Beware use on first spouse to die▪ Assets may appreciate over

life of surviving spouse▪Consider investment style and

age of surviving spouse

DSUE Considerationspp 247-248

Size of the estate Increase or decrease in FMV

between spouses passing When will the beneficiaries sell

the assets

Issue 7: Gift Tax Returnspp 249-253

Not gifts for gift tax purpose▪ First $14,000 per individual▪ Transfers to political orgs.▪ Payments on behalf of a person to:

Educational institutions

Medical care

Gift Tax Returns Calculationspp 249-250

From taxable gifts subtract▪Governmental donations▪Charities▪ Spouse

Gift Tax Calculationp 250

Add taxable gifts from prior years

Compute the tentative gift tax Subtract credits reduced by

prior year credits

Form 709 Filing Requirementspp 250-251

Single person gift > $14,000 yr. Gift of future interests Terminal interest gift to a spouse not in

a QTIP Gift to a non US citizen spouse >

$145,000 Deductible gift to a charity of less than

entire interest in an asset

Form 709 Filing Requirementspp 250-251

Spouses splitting gifts▪ Exception 1: ▪ If only one spouse gifted dur-

ing the year▪ Total value less than $28,000

Spousal Gift Splittingp 251

Exception 2:▪One spouse exceeded $14k

but not $28k▪Only gifts by other spouse

were < $14k

Penalty for Failure to Filepp 251-252

5% per month of tax due up to 25% max.

No tax due means no penalty Statute of limitations stays open▪ Filing return sets 3 year

statute

Disclosure Requirementsp 252

Description of property Relationship to done FMV method used Description of any contrary po-

sition taken

Disclosure Continued p 252

Qualified Appraisal▪ See p 252 for requirements

Appraiser Qualifications▪ Public recognition▪ Background, experience and

education

Appraiser Requirementspp 252-253

An appraiser IS NOT▪ The donor or done▪Member of the family of either▪ An employee of either

Burden of Proof p 253

Can be shifted to IRS if:▪Met substantiation requirements▪Maintained all adequate records▪Cooperated with reasonable re-

quests by IRS

Issue 8: Imputed Interestpp 253-256

Interest must be no less than the AFR

Little or no interest charged to a related party or friend can result in imputed interest.

Applicable Federal Ratesp 254

1 - 3 years…short term 4 – 9 years …. midterm Greater than 9 yrs … long term

Loans subject to Imputed In-terest p 254

Gift loans Compensation related loans Corporation–shareholder loans Tax avoidance loans

Exception: DeMinimus Loansp 254

Loans less than $10,000 Or these loans that fall below

$10,000 Does not apply to tax avoidance

loans

Investment Income Limitationpp 254-255

Gift loans < $100,000▪ Interest limited to investment

income of borrower▪ < $1000 is considered zero

Zoe and Zarina p 256

Loan > 10k investment income < $1000▪Q1: income producing asset▪Q2: imputed interest required

$75 + $950 > $1000

▪Q3: $120k use Midterm AFR

Issue 9: Schedule K-1(Form 1041) pp 256-262

Character of income is un-changed on individuals return

Other portfolio and non-busi-ness income▪ IRA, annuities, royalties▪Not passive income

Deductions Subject to Special Rules p 260

Directly apportioned deductions▪Depreciation, depletion, amor-

tization▪ Apportioned based on trust’s

accounting income▪Reported in box 9 with code A

Deductions Subject to Special Rules p 260

Estate tax deduction…IRD Final Year Deductions▪ Code A: Sch A misc deductions▪ Code B: short term capital loss▪ Code C: long term cap loss carry-

over

Deductions Subject to Special Rules p 260

Code D: NOL carryover Code E: AMT NOL carryover

And the Rest p 261

AMT items Credits and credit recapture Other Information▪Consider notes for relative

placement and if applicable

Questions?

74