jainen

>How convenient that she earned just about the perfect amount for max EIC.<< Well, no, and that's one of the weird things. Her EIC would be about $4200, a thousand dollars below max, and offset by $3800 SE tax. So I don't think this is a tax fraud, at least not on her part. I would be willing to help if she has a bona fide tip log. But for some reason the employer doesn't run his business in the ordinary way. I don't have time for weird stuff right now, so the most I would do is offer to file an extension.

>>.I hate giving bad news.<< How is that bad news? It sounds like a very savvy investment, taking near-maximum advantage of an obscure exception to the rule that 401(k) money is locked up. Would you have advised him to avoid the $800 penalty to incur the far greater cost of a lost opportunity? Just dodging mortgage insurance would pay for it all, without even thinking how interest replaces non-deductible rent. Or if he had to borrow $8000 more it would only take a couple of years for the extra interest to exceed the penalty. And what about the potential for highly-leveraged capital gain? In case you haven't noticed, we seem to be at the very bottom of the real estate market, with the lowest interest rates any of us will ever see. Would he really be better off leaving it in the managed money funds that are earning nothing or even losing equity these days? Remember our standard advice is that tax consequences should be secondary in any financial decision. If you still aren't convinced yet, consider the non-financial benefits of home ownership. This deal was so good that even incorrect tax advice couldn't hurt it!

>>a notarized letter from the bar owner indicating that she is a full-time batender<< Ummm--this is too weird even for me.

>>What do you guys think?<< I think she should claim her daughter for 2012--and then amend 2009, 2010, and 2011 to claim her for those years too! And 2008 on the Wisconsin return!

>>Am I in-line with this?<< Yes. >>Missing anything?<< No. >>Thanks so much!<< Okay.

>>I have yet to find the definition of a tax home. I think the IRS does not want to define it.<< Please read my earlier post, in which I QUOTED the IRS defining "tax home." Although that's just from a pub, every word comes from actual language in regs, revenue rulings, and court decisions. The IRS position has hardly changed under many challenges over decades, It all derives from Section 162(a)(2), deduction for business expenses, which is why it is defined as a business location rather than personal residence. In my opinion, the Sacramento metropolitan region extends more than 35 miles, intervening farmland notwithstanding. On the other hand, some of those rulings I mentioned say that a "temporary" job location is not the same as a "main" job location.

>>I am confused by the term tax home<< Living in Hollister, you surely can not think 35 miles is a particularly long commute. That would barely get your neighbors to Salinas, and not even to San Jose. And what of the 50,000 cars over Pacheco Pass every day? Pub 463 explains, "Generally, your tax home is your regular place of business or post of duty, regardless where you maintain your family home. It includes the entire city or general area in which your business or work is located." There are additional definitions for workers with no regular or main place of business.

>>A tax prep office with a security guard with an AR-15<< AR-15 yes, security not so much. What an irresponsible and dangerous stunt, shooting blind through a wall into an occupied room!

>>I'm doing RDPS/SSMC returns<< Pub 555 says, "Each of you must complete and attach Form 8958 to your Form 1040 showing how you figured the amount you are reporting on your return. On the appropriate lines of your separate Form 1040, list only your share of the income and deductions on the appropriate lines of your separate tax returns (wages, interest, dividends, etc.). The same reporting rule applies to RDPs and individuals in California and Washington who are married to an individual of the same sex." When numbers aren't where IRS thinks they should be, then IRS has to look around to find them. Generally, that's not what we want IRS to do.

>>it counts it as According to the Instructions for Form 1040, investment income for EIC is the sum of Lines 8a, 8b, 9a, and 13.

>>client then had to repay the insurance company in 2012<< See "repayments" on page 33 of Pub 525. It might not seem fair, but that's the way you have to do it.

>>does he have to file form 8615 and will I need his parents taxable income<< Yes, and yes. According to the Instructions for Form 8615, "If the parent's taxable income, filing status, or the net investment income of the parent's other children is not known by the due date of the child's return, reasonable estimates can be used."

>>our greedy bastards in this state (otherwise known as politicians) have not evolved the tax code to apply to every city and municipality in the state yet.<< Actually, they did the opposite--it is illegal for California cities and counties to assess income tax. At least so far, although San Francisco keeps submitting new legislation which might pass now that we have a one-party system. Meanwhile, of course, we have the highest state income tax in the nation, AND the highest state sales tax AND 1.5% local sales tax! No big deal--surf's up!

>>I use an adjustment on line 21<< IRS instructions have always said put the allocated amounts directly on the relevant lines of Form 1040. Otherwise it gets too confusing with tax-exempt interest affecting MAGI, carryovers, etc. The new Form 8958 is very nice and should make the division clear. As usual, I recommend doing it the way the IRS expects it to be done.

>>TP didn't come home much<< That doesn't matter after age 24. But co-signing a loan is not the same as providing support since Dad didn't actually get the money to spend. Unless there is more to this story, I don't think the student is a dependent.

>>Normally, to capitalize expenses means to depreciate them<< No, capitalize just means to treat as an asset (balance sheet) rather than a deductible expense (P&L). MACRS only applies to particular assets, mostly tangible, Pub 535 explains, "When you start a business, treat all eligible costs you incur before you begin operating the business as capital expenditures which are part of your basis in the business. Generally, you recover costs for particular assets through depreciation deductions. However, you generally cannot recover other costs until you sell the business or otherwise go out of business." Section 195 itself says, "If a taxpayer elects the application of this subsection with respect to any start-up expenditures— (A) the taxpayer shall be allowed a deduction for the taxable year in which the active trade or business begins in an amount equal to the lesser of-- (i) the amount of start-up expenditures with respect to the active trade or business, or (ii) $5,000, reduced (but not below zero) by the amount by which such start-up expenditures exceed $50,000, and (B ) the remainder of such start-up expenditures shall be allowed as a deduction ratably over the 180-month period beginning with the month in which the active trade or business begins." Summary: Deduct in 2013, except amortize anything ove $5000. Or, leave on the books to reduce capital gain when the business is sold.

>>There's an election to waive the election.<< Yes? According to Pub 535, "You can choose to forgo this election by affirmatively electing to capitalize your start-up costs." I believe "capitalize" means you can't recover the expenses until the business is sold.

>>electing to fully amortize<< Can you still do that? I thought after 2008, the election is to deduct the first $5000, and only amortize the rest.

>>mom appears to fail the support test<< What support test?

This is a socially “liberal” town and we don’t see a lot of newlyweds, so I was pleased when one of my clients brought his new family to the tax interview. I routinely asked the spouse if she had notified Social Security of her name change. “”Well, no,” she objected. “I’m keeping my maiden name so I’ll continue to file my own taxes under that.” I told her that the name was no problem and it would still be best to use Married Filing Joint status. Now it was the gentleman’s turn to object. “We have already agreed that I am Head of Household.” I started to explain what that means for tax purposes, but he went right on. “It means I am responsible for all the major family decisions, while my wife takes care of the minor issues.” Marriage counseling is a little outside my job description so I didn’t want to appear to be endorsing one side or the other. I turned to his better half to ascertain if she had a similar understanding of the family dynamic. “Oh yes!” she purred sweetly. “It’s working perfectly, and so far we haven’t had any “major” issues….”

(Don't actually believe this--I made it up!) The IRS is seeking public comment on a plan to eliminate the Head of Household filing status and replace it with a Qualified Single Parent filing status. The change is proposed for tax years starting after 12/31/13. “Head of Household” is a confusing term because it means different things in Food Stamps, energy rebates, and other common programs. The IRS also feels that it does not reflect the way taxpayers are actually living these days. The new filing status would be similar to Qualifying Widow. It would be available for a maximum of two years following a year in which the taxpayer filed either Married Filing Joint with a dependent child under the age of 14, or Single with a dependent child under the age of 1. Conforming to a recent law that removes the question of support in determining dependent exemptions, QSP status would not require the payment of household costs or other support for children who live with the parent. However, the Qualified Single Parent status would not be available to any taxpayer whose primary residence is also the primary residence of another taxpayer with higher AGI.

>>amounts charged for... << A couple of years ago California came up with a clever idea. They would require the Assessor's Parcel Number for any property tax deduction, so they could cross-check because the rule is that only "ad valorem" taxes are deductible. Those are the ones that are based on property value. Then an interesting thing happened, which shows that the IRS is not such a monolithic evil as we usually think. Some government lawyer pointed out that the LAW doesn't actually limit it to value-based taxes, just whatever is "for the general good." Of course, nobody knows what that means because nobody can agree on what this country needs. And (in my opinion) Congress will be the last ones to figure it out. So we just deduct everything. If you pay it to the tax collector, it's a tax. Not counting late fees.

>>LOL<< I'm not laughing. There's at least three business entity returns with depreciation schedules, If S-corps or partnerships, that's six k-1's which presumably get charged to the entity and again to the individual 1040. Apparently passive loss carryforward. I would guess a return for a family with more than a quarter million dollars income has significant deductions, credits, and investment activity, and at least AMT if not phaseout or other worksheets. Also it seems they didn't do advance tax planning for the rentals; they might need some consultation going forward. So, yeah.

>>I had not seen that before<< Now, I COULD do it for my own clients because I live in a community property state. But I still wouldn't anyway--the reason they set up separate limited liability companies was to separately limit liability, right? I hope that thought will help you explain that tax preparation this year will cost them upwards of $2000.

>>I have elected to treat them as a QJV and report on Sch E<< According to this IRS fact sheet about qualified joint venture, http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Election-for-Husband-and-Wife-Unincorporated-Businesses. "A business owned and operated by the spouses through a limited liability company does not qualify for the election. Only businesses that are owned and operated by spouses as co-owners (and not in the name of a state law entity) qualify for the election." In my opinion, this Colorado couple is required to file a separate partnership or corporation return for EACH property.