Sara EA

Since the child did not live with Dad half the year, better use Form 8332,

The current W4 essentially asks the taxpayer to complete next year's tax return this year and is a disaster.  Does it even account for the additional Medicare tax when one spouse is over the threshold and having the extra taken out but the other isn't?  When there is glaring underwithholding, I tell clients to put Single, zero exemptions on the W4 and leave the other lines blank.  (Not many want their employer to know what their spouse earns or their other sources of income.)  Then we'll look at it at the end of the year and adjust accordingly.

On 2/7/2024 at 7:23 AM, BulldogTom said:

Box 2a should show the taxable amount, box 1 less basis (premiums).

The premiums paid are not the cost basis.  The policy holder is paying for insurance, don't forget, plus some administrative costs.  In other words, he bought something with a portion of those annual payments.

He is still a qualifying child if he does not provide more than half of his own support.  Dependents cannot claim education credits.  Filing his own return (not claiming himself) might work if he has paid student loan interest.

Usually when incomes are roughly the same, MFS costs way more than MFJ because the tax rates are so much higher and deductions/credits limited.  The SALT deduction for MFS, for example, is limited to $5k each.  It can work if medical expenses aren't 7.5% of joint income but exceed that using one income.

A lot of people ask about MFS when they learn they can't itemize.  They think they are losing out on claiming their mortgages, charities, etc.  Actually, if your standard deduction is $27,700 and your itemized deds are $25k, you are winning!

My son, who works in IT security, once told me, "Mom, if you knew what I know about the internet, you'd never use it."  Scary that he's probably right.  Never, ever respond to those emails from people supposedly looking for a new tax pro.  Of the tens of thousands of tax preparers in this nation, they just randomly picked you?

I just read a piece on IRS's new Direct File pilot, where taxpayers from certain states can efile their returns for free on the IRS website. I originally thought this was a great development, getting those simple returns off our desks and saving folks money. Now I'm not so sure.

The program handles common items like W2s, EITC and CTC, etc.  It doesn't handle Sch B, child care expenses, ACA forms, and the saver's credit.  I think a lot of filers don't know enough about these things and may overlook them.  I've seen a number of self-prepared returns where people pay for child care with flexible spending accounts and forget to reconcile that on their tax returns thinking they aren't claiming any expenses, only to have the IRS add the amount to their income.  Many who enroll in the ACA ignore those forms, and most have no idea what the Saver's Credit is and are surprised when I tell them they got some.extra money.  The IRS program handles student loan interest, but I've seen many parents claim it when they are not on the loan.  Direct File would be a great program if the tax code were simpler, but as it stands I'm not convinced it's a good option for anyone with more than W2 income.

On 12/21/2023 at 9:24 AM, ILLMAS said:

Wow it sounds like she has no compassion for tax preparers.

Worse than that. She went on and on about how she KNOWS we all make up basis figures to benefit our clients. I think at that point every practitioner in the room went through their mental notes of how many hours they had spent trying to come up with a reasonable basis for multiple clients. No Karen, we don't make this stuff up.

We had a client with a basis issue, and he put an attorney relative on speaker phone to tell us that it was legal to use 90% of selling price as basis.  "WHAT?", we all said, and demanded the code section.  The call ended with us insisting the client go through records and give us the real basis.  He produced it quickly--exactly 90% of the selling price for every single stock.  Let Karen Hawkins blame us for that one!

Just don't forget your annual Ethics, Terry.  It does get old.  My best Ethics course was taught by an IRS agent who started the meeting with "I know I'm preaching to the choir."  Second best didn't use a text but scenarios used for class participation.  Worst was one presented by Karen Hawkins, then head of OPR, who literally spent the two hours reading us Circular 230 and making it clear that all tax professionals are dishonest and will be penalized.

This website offers Excel for free, but I haven't read the fine print:  https://www.microsoft.com/en-us/microsoft-365/excel

Excel is included in Microsoft 365 (formerly Microsoft Office).  It includes word, Excel, powerpoint, OneNote, etc.  I can't imagine working without it, both in the office and personally.  I think it costs about $100 a year now, and lifetime licenses are available too.  

I hate that everything is going to subscriptions now.  I really want to upgrade Adobe but the extra features aren't worth the cost to me.  Don't get me started with Quickbooks.  The online version is awful, but that's all you can get now.

There was a case presented in my Ethics course this week that I'm still laughing about.  A CPA paid an IRS agent $1,250 in a bribe.  Not bad enough?  He told the clients he was representing that the IRS agent wanted $2k, which the clients paid him and he pocketed the difference (and needless to say didn't report on his own tax return).  I didn't really need an ethics course to instruct me not to try either maneuver.

TaxAct is one of the companies that was sharing client info via pixels or whatever to advertisers and who knows who else.  How about TurboTax?  They have different packages that might fill your needs at a reasonable price (or not).

The escrow amount has nothing to do with it and is confusing you.   The sales price is the key factor.  Money is held is escrow all the time.  It doesn't mean the seller won't get it ever; it just means that some contingency must be met before it is released.  In your case, the contingency is the payment of back taxes, which affects the brothers but not your client.  He paid $79k and got the property.  The brothers will get their share of the proceeds minus the taxes THEY owe.  They each received $26,633 in the transaction.  It doesn't matter if they used that money to pay their back taxes or to take a cruise. 

Good point.  In my experience, tax sales are usually forced sales and the county does not take possession.  Different states may have different approaches, so do find out who sold the property.  If the county, the brothers will receive 1099A.  If the brothers were the sellers, they will get 1099S. 

A like-kind exchange has to go through a qualified intermediary.  Tell your client to contact one to see if his scheme is possible.

I see this as two transactions, which simplifies things.  The county sold the property for $79k, and a 1099A or S should be issued.  Each brother had a basis of $33k (1/3 FMV when inherited) minus any depreciation they took since they owned it.  Their share of the sales price is $26,333.  They cannot take the loss because the property was sold to a related party.  What they did with their share is irrelevant.  When people sell a home and use the proceeds to pay off the mortgage, it doesn't affect the selling price on the 1099S at all.  Same with back taxes, water bills, etc. 

The amount in escrow is irrelevant to the selling price.  The property was sold for $79k, period.  If some of the proceeds is used to pay back taxes, the brothers can each deduct those on their Sch A (but not penalties).

The unallowed loss transfers to the buyer, so your client's basis is $79k + $20k.  His gain on the sale will be long-term, since he was an owner of the property since 2012.

mcb is right.  Those old deeds and abstracts are fascinating.  We have the deed to my in-law's home that they bought (for more than $1) from their father.  The deed passed from owner to owner, starting from when the house was built in the late 1800s.  The land boundaries are defined by from a certain tree to a certain boulder or neighbor (all long gone).  The tax stamps are actual stamps--the kind you lick and stick on--in a variety of colors.  Kind of like old stock certificates, which were works of art.

In most places, there has to be a monetary amount for a deed transfer to be recorded.  That's why gifted property is often shown with a sales price of $1, although the recipient never actually paid that dollar.  The deed transfer has nothing to do with the actual basis.  A donee will have the giver's basis; your client will have whatever s/he actually paid.  Get the actual sales docs.  Why do people try so hard to avoid cap gains tax?  They don't realize that the cg tax rate is much lower than ordinary income tax rates, in some cases zero.

AI is wrong on the joint ownership part.  This from Pub 551.  Just above this quote there is an example for surviving tenants that shows the same math I used above.  You can all stop worrying about whether assets were held as tenants in common or w/ right of survivorship.  I give AI a C.

Qualified Joint Interest

Include one-half of the value of a qualified joint interest in the decedent's gross estate. It doesn't matter how much each spouse contributed to the purchase price. Also, it doesn't matter which spouse dies first.

A qualified joint interest is any interest in property held by married individuals as either of the following.

Tenants by the entirety.

Joint tenants with right of survivorship if the married couple are the only joint tenants.

Basis.

As the surviving spouse, your basis in property you owned with your spouse as a qualified joint interest is the cost of your half of the property with certain adjustments. Decrease the cost by any deductions allowed to you for depreciation and depletion. Increase the reduced cost by your basis in the half you inherited.

To avoid any future hassles, I'd file using the current date and surviving spouse.  (You'll need a new 8879, but you can go ahead a file before you get it--you're covered.)  Who knows what the IRS systems will do with this situation, and you don't want to cause the widow any more grief than she already has.  You can efile the federal return, but check with your state.

Agree that (a) is correct.  I've had cases where a rental property was jointly owned.  When one spouse died, that half gets stepped-up value and starts depreciation anew.  The surviving spouse gets half the original basis and accumulated depreciation (because the other half belonged to the deceased).  You have to get rid of the old asset and start two new ones.  Using the numbers in the OP, the wife would have a basis of $500k + $200k - $175k.

I've sent lots of clients to the local SSA office to get copies of their 1099s.  In the cases discussed here, however, the clients are not able to go and there don't appear to be court-appointed fiduciaries who could get info from SSA or an IRS transcript.  In that case, I'd take their last actual SSA1099, look up the increases and Medicare amounts for each year, and just file the return with the estimated numbers.  If they're off, the IRS will send a correction if it changes the tax.  They will also send a correction if withholding was off, so don't worry about it.

When all else fails, I have looked up the lowest price a fund or stock ever traded for in its history.  The taxpayer can't have purchased it for less than that amount.

How many times have every one of us corrected prior year returns that were self-filed?  Sometimes people bring them to us after they get an IRS notice.  Other times they come to us because of some unusual item in the current tax year but we notice an error when we review their prior year.  Often the errors are in the taxpayer's favor.  I once had clients who took money out of a retirement plan year after year and paid taxes and early-withdrawal penalties.  They had a child in college.  I amended three years of returns and got them back enough so they didn't have to make another withdrawal for tuition that year.  Doubt these folks will use IRS's free program in the future.

Catherine is right about the failure to file penalty.  Once they miss the extension deadline, it goes all the way back to April, so your clients are already facing six month's worth.  They must file ASAP and apply for CNC when they get the first notice.

At some point likely all of us have waived our fee for a client in distress.  Know your client, though.  Some might be embarrassed by accepting "charity."