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
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