GraceNY

Over the years, I too had seen conflicting information on this subject so I finally decided to delve into myself. Still having some unanswered questions, here's what I found: See § Reg.1.25A-5©(3)(i) below: (3) Scholarships and fellowship grants. For purposes of paragraph ©(1)(i) of this section, a scholarship or fellowship grant is treated as a qualified scholarship or fellowship excludable under section 117 except to the extent -- (i) The scholarship or fellowship grant (or any portion thereof) may be applied, by its terms to expenses other than qualified tuition and related expenses within the meaning of section 117((2) (such as room and board) and the student reports the grant (or the appropriate portion thereof) as income on the student's federal income tax return if the student is required to file a return; or (ii) The scholarship or fellowship grant (or any portion thereof) must be applied, by its terms, to expenses other than qualified tuition and related expenses within the meaning of section 117((2) (such as room and board) and the student reports the grant (or the appropriate portion thereof) as income on the student's federal income tax return if the student is required to file a return. The presumption is that for § 25A purposes a scholarship or fellowship is treated as excludable under § 117 unless one of the two conditions (see above) are met. This is illustrated in Reg. § 1.25A-5©(4), Example (1): The example states that University X charges student A a total of $8,000 ($3,000 for tuition and $5,000 for room and board) and awards Student A a $2,000 scholarship, the terms of which permit it to be used to pay any of the student's costs of attendence, including room and board. Student A pays the $6,000 balance due from a combination of savings and amounts earned from a summer job. Because student A does not report any portion of the award in income (and because the terms of the award do not require it to be used on non-qualified expenses), Student A is treated for purposes of calculating the education tax credit, as having paid only $1,000 ($3,000 tuition minus $2,000 excludible scholarship) of qualified tuition and related expenses. Also, see Reg. § 1.25A-5©(4), Example (2): The facts are the same as in Example (1), except that Student A reports the entire scholarship as income on the student's federal income tax return. Since the full amount of the scholarship may be applied to expenses other than qualified expenses (room and board) and Student A reports the scholarship as income, the exception in paragraph ©(3) of this section applies and the scholarship is not treated as a qualified scholarship under section 117. Therefore, for purposes of calculating an education tax credit , Student A is treated as having paid $3,000 of qualified tuition and related expenses to University X. Correct me if I am wrong, but it seems to me that one would have to look to the terms and conditions of the scholarship and/or grant to determine whether it was a "restricted" scholarship (must be used to pay qualified expenses) or an "unrestricted" scholarship (may be used to pay any of the student's cost of attendence such as room and board) first. But, are there any ordering rules if one determines that the scholarship is "unrestricted?" In other words, do you first apply any scholarship or grant money to qualified expenses and then to non-qualified ones or can you pick and choose? If the cost of education for the period exceeds the scholarship received, a student could argue that he/she used the scholarship for room and board and used other funds for qualified expenses; the scholarship would then be taxable. I don't beleive that Section 117 provides tracing rules for spending the scholarship? The Worksheet (1-1) contained in PUB 970, asks you to subtract out the amount of your scholarship that was used for qualified expenses in order to arrive at the tax-free part of the scholarship income. No where does it give you any ordering rules. Here's an actual taxpayer situation: According to the college's website, "scholarships and grants are financial aid that does not need to be repaid, and they will be applied to the comprehensive fee (my emphasis added) on your bill each semester, not paid to you directly." Tuition and Fees 2011-2012 Tuition: $42,000 Room: $ 6,000 Board: $ 5,000 Student Actvity Fee: $ 400 ------------ TOTAL $53,400 Comprehensive Fee Total Scholarship Awarded: $ $45,000 On the actual student's account transcript, there is no matching of the billing items with the scholarship amount. In other words, it lists the items above, applies the scholarship as a credit and bills for the difference. Without looking at the actual terms of the scholarship (I'm working on getting a copy of the award letter/agreement) and just going with the fact that the scholarship is applied to the comprehensive fee, can I legally allocate $11,000 of the scholarship monies to Room and Board and report in student's income? And, therefore, free up amounts to used for education credit?

I am filing Form 8855 (Election To Treat a Qualified Revocable Trust as Part of an Estate) [see attachment] and am looking to clarify an item on that form. In Part I, I filled in the Estate name, address and the Estate's tax id #, but I am not sure what form is referring to when it asks "type of entity prior to the election."? Which "entity" is it referring to....trust or estate? (probably a dumb question, but I'm having doubts...) Thanks in advance for your assistance Grace Form 8855.pdf

Franchise Fee is $20,000. Taxpayer puts down $10,000 up front and is financing the balance. I know francise fees are amortized over 180 months. Therefore, I know I would amortize the $10,000 up front payment, but how do I handle the $10,000 being financed? Thanks in advance for your input. Grace

I'm tired and really wrestling with filing status and dependent exemption issues which involve a retired taxpayer whose daughter lives with her. She owns her own home and pays more than the requisite "more than half the cost of keeping up the home" for head of household purposes. Her daughter, who is in her 40's, is collecting approximately $1,100/mo on SSI due to her being disabled for mental health reasons. (1) Is there a difference between SSI and SSDI? Sometime ago (could be confusing old rules), I recall reading that SSI was a form of welfare and therefore considered provided by a third party, not provided by the child. Whereas SSDI was considered the child's money and counts as money used for their support. (2) The support test is different for QC as opposed to QR. For QC, the child can be any age as long as totally and permanently disabled and the support test is met as long as the child did not provide more than half their own support. So if SSI is third-party provided, then child would not have means to provide more than 50% of their own support. Whereas with a QR, the taxpayer (retired mother) would have to provide more than 50% of the person's total support. And, that may not be the case if SSI is considered third party support. In either case, the support test is at issue here and that's why I wanted to know if there was a distinction between SSI and SSDI? (3)If the taxpayer (retired mother) is able to claim disabled daughter as either a QC or a QR, then she can file HOH as long as she meets those HOH requirements? For some reason, I keep thinking that a QR does not qualify you to use HOH. (4)Lastly, does any one know if by claiming this disabled child puts their SSI benefits at risk? Thanks in advance for any input on this. Grace

I stand corrected on my earlier response. You are right. Under the MSRRA, the spouse's wages are not subject to NY tax. (I apologize. I relied on memory and an older version of my CCH Guidebook to NYS taxes). Fill out IT-203. Include the military spouses' "exempt" income in the Federal Amount column, but do NOT include this "exempt" income in the NYS Amount column. If there is "0" in the NYS column, then there won't be any tax calculated. It should show a $7 refund. Enter the Special Condition Code "M2" in the box at item F on the front of IT-203. This will allow the NYS Tax Dept to properly process the return. This will also avoid any matching problems if NYS looks for a return due to NYS W-2 income. If this spouse currently meets the conditions and is still working in NYS, she should fill out the IT-2104-E, Certificate of Exemption from Withholding, and give it to her employer. Grace

NYS Publication 361 is a great resource for your questions and is available at www.nystax.gov According to that Publication, your Military employee is not consider a NY resident and not subject to tax on their income for military service unless they have changed their domicile with intent to establish a NY residence.However, income from non-military NY sources is subject to NY income tax and must be reported oon a non-resident return. If spouse was also a TX resident, then she would file MFS, as Non-Resident of NY, on IT-203 to report her NY wages on W-2. If she is a NY resident, then she reports her W-2 income MFS, NY resident of NY on It-201. West Point would not be considered a combat zone. Combat zones are the usual suspects like Irag, Afghanistan, etc. However, service members directly supporting operations in Iraq from other locations, who are receiving imminent danger pay or hostile fire pay, are deemed to be serving in a combat zone. Hope this helps. Grace

I am not proficient in this so please allow some leeway in my description. Taxpayer moved from Florida to NY in 2010. Original AB Trust drawn up under Florida law back in the 80's. Spouse has been deceased for several years. Prior preparer has been preparing Trust B 1041 as a simple trust. In tax year 2010, mutual funds are sold and result is a net loss of $7,519. How to handle on the 1041? I read: For Allocation of Income & Principal ALWAYS look to governing instrument first, even before State Law. If Fiduciary is granted discretion in instrument, discetion trumps state law. I look at trust agreement and find: "TRUST B. Disposition of Income and Corpus: the Co-Trustees of Trust B are to distribute the net income derived from Trust B in quarterly installments, to the Grantor's Spouse, Jane Doe, or apply the same for her benefit, so long as she shall live. If the income payable to Jane Doe, supplemented by income (other than capital gains) available from other sources, to her shall not be sufficient to meet her reasonable needs, then and in that event, the Grantor authorizes the Co-Trustee to pay to or apply for the benefit of the Grantor's Spouse, Jane Doe, so much of the principal of this trust as the Co-Trustee, in her sole discretion, shall from time to time deem necessary or desirable to meet the reasonable needs of the Grantor's Spouse, Jane Doe, even to the full extent of the entire principal of this trust." Yet, I read Sch D 1041 instructions and find: "If the losses from the sale or exchange of capital assets are more than the gains, the net loss must be alllocated to the estate or trust and not to the beneficiaries." In my search for an answer, I come across a multitude of tax-question-posting websites debating this issue with no clear answer. Also, for NY Preparers: Since this is a Florida Trust am I correct in only preparing just a 1041 and not a NYS IT-205? Your input would be geatly appreciated. Grace

My clients return was rejected 'cuz grandma "inadvertently/mistakenly" claimed grandaughter on her return. It really was an oversight as circumstances in prior years allowed her to claim the granchild and grandma's preparer forgot to remove the dependent and it got e-filed. MY QUESTION: Can an amended return be filed for grandma (removing grandchild) and sent in along with (in the same envelope)with a paper return for my client claiming the dependent in order to be processed concurrenty and speed up my clients refund? And, if so, has anyone done this....and how long did it take for refund? Thank you in advance to all who reply. Grace

I'm no expert on military, but can point you to a NYS publication that may be helpful. Go to www.tax.ny.gov. Click on Tax Professionals at the top. Choose Guidance, Regs and Laws from the left hand column. Select Publications by number. Scroll down to Publication 361: NYS Income Tax Information for Military Personnel and Veterans. I think the only exemption pertains to "combat pay." Then, you would use C7 in Box E on the NYS return. Hope this helps... Grace

Taxpayer received 1099-Misc reporting a Length of Service Award Program payment in the amount of $800 in box 3 (Other Income). Has anyone else seen this and how did they handle on tax return? Based on my reading, it looks like it would just be reported on Line 21 as other income, not subject to SE (Rev. Rul. 2003-47). Additionally, and interestingly, I read that the amount reported for this award is a subtraction adjustment under the pension and annuity income exclusion on the NYS income tax return (TSB-M-03(5)I). Thank you in advance for any input or feedback. Grace

Taxpayer did not take 2010 RMD (approximately $500). Penalty would be $250 when calculated on Form 5329. Form 5329 Instructions indicate that IRS can waive part or all of this tax if taxpayer can show that any shortfall in the amount of distributions was due to reasonable error and the taxpayer is taking reasonable steps to remedy. Anyone ever request this waiver? What was the reason? Was the waiver granted? Background: Taxpayer mailed me his tax documents. I noticed one IRA 1099-R was missing and questioned it. Taxpayer checked with financial institution and found out that no distribution was made in 2010. Taxpayer recalls having had this set-up on automatic every year. Accoridng to institution, no. When checking their documents, they find a letter from this institution stating "if you do NOT return this form to us, we will automatically process and send your 2010 RMD." This obviously did not happen. When taxpayer called institution in regards to this letter, they denied any culpability. Interesting though was the fact that institutions rep indicated that there were other calls concerning the same issue. No lectures on personal responsibility, please. I'm just trying to minimize the tax liability of an older taxpayer in their mid 70's who is of limited means and made an innocent mistake. Thank you in advance for any input. Grace

Taxpayer paid for and took a course to become a certified Yoga instructor/teacher last year (2010) Did not start her own business as a certified yoga instructor until this year (2011). Is the course expense incurred in 2010 lost since the business did not begin 'til 2011? Or, is there something that can be done on the 2010 tax return to preserve this expense? Or, would it be considered a start-up cost (cost incurred before business begins)which then could be deducted/amortized on the 2011 Sch C? Thanks in advance for input. Grace

Yes, it appears that T/P can claim child as a dependent. "Qualifying Child" = under 24 and f/t student and the CHILD could not have provided more than his/her own support during the year (vs T/P providing more than 1/2 the support). I say "appears" 'cuz other tests for dependency must also be met (relationship, residency, citizen, and joint return). Yes, it also appears that T/P can claim child for EIC as well. For EIC, the support test does NOT apply. Once again, other tests need to be met. When you have a student, the support test could become tricky. If the child/student takes out loans on their own and in his/her own name, the monies used to pay college tuition is considered support provided by the dependent.

According to IT-201 Instructions, page 73 (Standard or Itemized Deduction): "If you are married and filing separate returns, both of you must take the standard deduction unless both of you itemized deductions on the federal returns and both of you "elect" (my emphasis) to itemize deductions on your NY returns." BOTH Itemized on Federal Returns, however, I am taking Standard Deduction (neither spouse is "electing" to itemize) on BOTH NYS returns. Problem/Issue: Even when I UNcheck the box on the NYS return (Under Resident Options Tab, "If you are MFS and your spouse itemizes deductions on NY return, check box."), the itemized deduction is still taken. I've tried deleting and recreating the IT-201 to no avail. I could override, but don't like doing that. Only resolution so far is duplicating return, taking SCH A off of Federal, and that changes NY to Standard Deduction. What am I doing wrong? OR Is this just a software issue? Grace

Med Student received 1099-MISC reporting $3,000 in box 3 (Other Income). Med Student traveled to Uganda to perfrom medical care/services. This amount was to help offset cost of air fare and lodging. PAYER = University where he is studying. I'm thinking F-1040, line 21, other income. NOT subject to S/E Tax. What say you? Grace

What is the "Cross Reference" to which you refer? I'm looking at an actual return and reading the form lines one by one and carrying the numbers to where the line tells me to. The IT-201-ATT, Sec B, line 3 number comes from IT-249, Sch F, line 14 which shows the total credit (current year plus any carry overs from 2008). In your case that would be $494 from IT-249, SCH F, line 14. The $494 then goes to IT-201-ATT, Section B, line 3, and if no other credits for Section B, it ends up on the TOTAL line, line 7. From there it goes to IT-201, line 42 per the line instructions. In regards to IT-249, Sect H: line 22 is the amount of credit you want carried over to 2010. In your case, $51. That wouldn't flow to the IT-201-ATT. Only current year credits go on the IT-201-ATT. From your original numbers, they should flow as follows: IT-249, SCH F, line 14: $494 and then it goes to IT-201-ATT, Sect B, line 3: $494 and line 7: $494 and then to IT-201, line 42: $494. Each one of the lines instructs you to the next step to carry the number. IT-249, SCH H, Line 20: $494, Line 21: $443, Line 22: $51. IT-249, SCH H is used to say "how much of the credit do you want to use" and "how much, if any, will be carried over to following year." When this credit first came out, there was no SCH H. You had to attach a statement to the return and reiterate that same info. None of the info on SCH H flows to any form. I believe it's just "informational." Grace

Unless my info is outdated.... The regular monthly expense of a personal cell phone is never deductible, even if the personal cell phone is used partly for business Tax Court Summary Opinion TC2005-181 held that under a flat rate plan, the taxpayer incurred no additional expense to make buisness related cell phone calls; therefore no part of the flat rate was deductible. Additional charges above the flat rate, such as long distance charges for business related phone calls or the incremental cost of purchasing a plan with additional minutes for business use, are deductible business expenses. These expenses must be substantiated. Depreciation of Cell Phones. The business portion of cell phones is depreciated under MACRS; however, because cell phone are considered listed property, special procedures apply: Employees: If the taxpayer is an employee, expenses for cell phone use may be deducted if the use is for the employer's convenience AND the use is required as a condition of employment.

I noticed the same thing earlier in the season so I delved into it. I looked at all the lines that involved that credit on the IT-201, IT-201-ATT and IT-249 and they all flowed as required for what was being requested for that line...so I was satisfied. Now, with respect to IT-201-ATT, line 23, if you look at that form, line 23 falls under "Part 2- Other NYS taxes" and that Part only needs to be completed if you are subject to "other" NYS taxes. So line 23 doesn't get filled in. The one thing I don't like, is havings to remember to put in the amount of the credit you want applied against the tax in SCH H of IT-249. You get no diagnostics if that line is not filled in and if you change the return after you complete that SCH H and forget to change it, oh boy. Grace

I've been reading many reports from various mutual fund outfits about the huge percetages of shareholders converting their traditional IRAs to ROTHs and am thinking that next few tax seasons ought to be alot of fun. Should the income be reported and tax paid on the 2010 return? Should we roll the dice and report it and pay tax on the 2011 and 2012 returns? And, what about those who converted not knowing the "tax realty" of their actions, now we'll get to learn "recharacterization." And, those who paid the taxes from the conversion instead of a side account and can't understand why they owe more taxes than what was withheld? (And a penalty for the conversion income withholdings if they were under age 59 1/2). Etc........... I'm afraid these ROTH Conversions are being touted as the best thing since sliced bread and that many people are being "sold" on this concept. It's highly unlikely that these "1-800 # Do-It-Yourself Outfits" (i.e. Vanguard, Fidelity, etc.) are "advising" their shareholders...they just slap the disclaimer "Talk to your tax advisor" on everything and they are good to go. Lastly, the states' treatment is going to vary from state-to-state. For instance, as of October 30, I understand that Wisconsin didn't recognize/conform to the federal, making all conversions taxable in full in tax year 2010. Additionally, the state will also subject any conversion done in 2010 in which the income is in excess of $100,000 to the early-distribution penalty of 3.3% for anyone under age 59 1/2, as well as subjecting all high-income conversions to an excess-contribution penalty of 2% (which will stay in effect for the lifetime of the conversion). Grace

Anyone out there know, definitively, whether NY will be conforming to Federal law which allows a taxpayer to convert a traditional IRA to a ROTH in 2010 and recognize income over two years (2011 and 2012)? I have not been able to find anything on NYS website in regards to this except an old Memorandum (TSB-M-98(7)I dated 12-24-98) wherein NY followed the federal back when the conversion took place before 1-1-99 and the taxpayer elected to report conversion income over a 4 year period. Grace

I know real estate taxes are deductible for all property owned by a taxpayer. I have a client that deducts real estate taxes for his primary residence and 2 secondary residences (camp and condo). Last year it came to his attention that his daughter has not been paying the taxes on her own home and she was in jeopardy of losing it. He had his daughter transfer (deed) the property to him and he then paid the city all the taxes due...$27,000. My question is whether or not he can deduct these real estate taxes? I'm inclined to think not if this is analogous to the "Sale of Real Estate/Buyer-Paid Taxes" wherein the buyer can't deduct the delinquent taxes of the seller and those taxes must be added to the basis. ??? Grace

Be careful with the "buys." Some brokerage firms list all the client's "buys" during the year and they may NOT necessarily be the same investments that were sold. But, it could happen if the client is just buying and selling constantly and not holding an investment for very long. The dollar amount that you need to be concerned is the 1099B line 2 amount of $142,249.84. That's the number the IRS is going to look to match on the taxpayer's return. Hopefully the brokerage statement contains a listing of the investments that were sold and the dollar amounts of the sales and that totals to the $142,249.84. Now, you need to match those up with the corresponding purchases ("buys") which may or may not be listed in the clients tax document statement. You may need to look at prior statements or the year end statement may list all activity for the year. Sometimes you'll have to go back to prior years if the purchase took place in an earlier year. This whole process can be very time consuming and messy. I'll often advise a client upfront about the additional work and the estimated additional cost. If they balk, I tell them that they can go through the sales and match them with the purchases in the same format as a schedule D (i.e. description, date acquired, date sold, sales price, and purchase price), then all I need to do is input the info into the SCH D. The messy part comes with the determination and inputing when there are "wash sales" involved. If this account should happen to be a "managed" account wherein the broker is rebalancing (selling and buying) and it involves mutual funds, I cheat. I don't have the time or inclination to input a gizzillion transactions. I group by short and long term, add up all the shares, sale price and cost basis which belong to that particular fund and input on SCH D. It comes out with the correct bottom line, but I know that's not the way the IRS wants it. I have the back-up documentation to support the numbers on the return and that's all that matters to me. Grace

Thanks for comments on "appraised value" or "sales price" as begining basis. What about the seller's concession for $8,500? A reduction or an addition to basis or has no bearing? Grace

Personal "primary" residence (No rental activity. No buisness-use). Grace

I'm thinking maybe there is someone out there who has set up a "dependent care" benefit program for an employer might be able to shed some light on this or a tax preparer who has seen these types of situations can comment on these cases in terms of how they should be handled on the tax return. Both involve "taxpayers who work at the facility where the child care is provided." I know these are "wordy," but I wanted to make sure I included as much detail as possible. I used round numbers to keep the math simple. I just can't seem to get a handle on these and would appreciate any helpful input.... (1) Taxpayer paid her child care expenses with pre-tax monies. For example, taxpayer grossed $825 and had $325 deducted as "child care" under her deductions and was taxed on $500. I know this only from looking at the paystub. On the W-2, it shows Wages of $13,000 in Box 1 ($500 x 26 weeks), and the same $13,000 in Boxes 3 and 5 (social security and medicare wages, respectively). There were no amounts in Box 10 or any other box. I don't know, and neither does the taxpayer, whether or not this is a bonafide dependent care flexible spending arrangement (FSA). The W-2 reporting for Box 1, 3 and 5 would be correct if there was an FSA involved (FSA contributions reduce amounts reported in Box 1, 3 and 5). This was a "new" client for me this year and when she gave me the amount of "child care" expenses she paid for her 2 children, it just didn't make sense from just looking at the W-2..how could someone make only $13,000 and pay $5,000 in "child care" expenses? That's when I asked for the year-end pay stub and saw what was going on. She had a total of $8,450 in pre-tax "child care" deductions ($325 x 26 weeks = $8,450). And, the taxpayer claims that the money went directly from her paycheck to the child care facility. It just doesn't make sense to me. (1) I thought that there was a $5,000 limit on "dependent care benefits" via a fringe benefit program at work? (2) Shouldn't Box 10 or Box 14 be filled in if there is a "dependent care" fringe benefit that the taxpayer is participating in? (3) I believe that this should be handled by reporting the excess deferral $3,450 ($8,450 - $5,000) as income on line 7 labeled "DCB" and there is no "child care" credit 'cuz she got the benefit with pre-tax deductions? (2) Taxpayer's employer provides a 50% discount on "child care." The facility charges $250 a week for child care. Employer (facility) discounts it $125 and the taxpayer(employee) pays $125 via payroll deduction (NOT pre-tax. So, based on these numbers, over a 20 week period, the facility has charged $5000, the employer has provided a discount in the maount of $2,500 and the taxpayer(employee) has paid $2,500. According to the "employer," "the so-called IRS formula is as follows: the "discount" is $2,500 ($5,000 x 50%), the "tax free fringe benefit" is $1,000 ($5,000 x 20%) and the amount taxable to the employee is $1,500 ($5,000 x 30%)." When I look at the taxpayers' (employees') records, I see $2,500 of payments made to the child care facility and when I look at the paystubs, I see inputed income in the amount of $1,500 which has been taxed accordingly. On the W-2, the $1,500 of inputed income appears in Box 14 and nothing in Box 10. The taxpayer(employee) has 1 child being cared for. Am I correct in computing the Form 2441 credit based only on the $1,500 (the amount taxed to her)? Thanks in advance for your input... Grace