Ready for Tax Season? How about a warm up???

[Pacun]

Can we warm up with this scenario? Please post your refund or tax due answer without explaining. Later we will see how we came to the answer. Participation is voluntarily and without remuneration or incentive. You can use 2008 or 2009 software or BOTH years but please specify which one on your answer(s) but don’t forget to adjust the scenario and change 2008 to 2007 where appropriated.

TP owns a house its cost is $300,000 which includes land. 1/3 of cost was assigned to land. Up to December 2008, the house was rented and $26,000 of residential depreciation had been taken. Tax payer is a tenant in an apartment building.

In January 2009, TP decided to start a new day care center using the house. The FMV of the house in December was $220,000 including land. House FMV on May 1, 2009 (after repairs and windows change) was $180,000 which included land.

Starting cost for the business $15,000. Wall modification costs on the house to accommodate day care was $10,000 (paid in March 2009) for which TP issued a 1099misc to the contractor. She also issued a 1099misc to another contractor for $6,000 to have the windows replaced. The new windows qualify for the new energy credit and were installed in April 2009. Day care was ready to open its doors on May 1, 2009. Because TP will make much more money starting next year, regular depreciation should be used whenever possible.

10 children paid a total of $25,000 and expenses on food and entertainment for the children were $4,000 and utilities cost from June to December was $,3179.00

1098 shows that TP paid $6,000 in interest (only 1 loan) and Real Estate taxes $2,400.

Tax preparation will cost $1,200 of which $200 is for personal return.

Tax payer worked for a company and her W-2 showed $18,500 income with $800 withheld for Fed and $400 for state.

For her daycare business, tax payer paid $1,000 in estimated taxes for federal and $500 for state.

Tax payer is single and has 10 year old child who is her qualified child and not the qualified child of anyone else. She paid $2,500 in day care expenses for his child who lived with her the whole year. Both TP and child are US citizens. Tax payer deposited $4,000 in an IRA on April 16th 2009.

Personal donation to church $500. (She went to church 25 times and gave $20 each time). Medical expenses $2,000 for her and child.

She made 3 trips to the casinos.

The first one she lost $4,000. On the second trip she got a W-2G showing $8,000.00 in gains with $450.00 withheld for federal. Documented losses on this trip were $1,400. On the third trip she lost $3000.00

Her bank paid her $2,514 in interest and she collected $3,500 unemployment compensation. She had $350 withheld for federal and $175 for state from her unemployment.

Tax payer is 41 years old and high school graduate. Besides working on the day care she is trying to get her bachelors degree and paid $1,500 on tuition and related course materials. This is her first year at the local qualified university.

She got $5,000 from the government when she changed her car during the Cash for Clunkers program.

CLARIFICATION:

TP went full time to a local qualified university. When she was employed doesn't matter, but let's say she was employed from January to April 2009 (she could even have a part time job, it doesn't matter). For clarification, TP was employed Jan to April, then TP worked at daycare and went full time to school.

When TP bought the house, she got one loan and that's why she is paying mortgage interest Remember the house was purchased a while ago and was rented out. Tenant moved out on December 31, 2008. After TP welcomed the new year and still with the Champaign glass raised, TP decided to open a daycare center. Starting cost were costs paid to the lawyers and to the government so that TP could have a license for the child care center. Child care center opened on May 1, 2009.

Remember this a scenario so the tax preparation fee is part of that scenario which needs to be taken as an expense. Also, TP paid her own daily expenses and paid for TP's child. If you think this TP didn't make enough money this year, please see how much interest income this person had.

How much will you charge for a return like this?

[Kimberly K]

Pacun,

Is the start up costs of 15000 is an addition to the 16000 contractor modification costs?

Love a good warm up thanks.

Kim

[Pacun]

Pacun,

Is the start up costs of 15000 is an addition to the 16000 contractor modification costs?

Love a good warm up thanks.

Kim

Yes, it is in addition to the to the house modification cost.

To make it more interesting and see how the new education credit plays, I added:

Tax payer is 41 years old and high school graduate. Besides working on the day care she is trying to get her bachelors degree and paid $1,500 on tuition and related course materials. This is her first year at the local qualified university.

[jainen]

>>The new windows qualify for the new energy credit<<

Which credit would that be exactly?

[Pacun]

>>The new windows qualify for the new energy credit<<

Which credit would that be exactly?

lol, I should have rephrased my statement. The idea is that we do the research before we are faced with a client. Remember she is a tenant. I should have said, provided that other conditions are met, the windows physically and by design qualify for the new energy credit.

[jainen]

>>I should have rephrased my statement.<<

Well, if we could assume that all the facts are true as given, I would have to answer your closing question with "$1,200 of which $200 is for personal return." I mean, that IS one of the facts given. But in my opinion we already see that the return can not be completed with the facts as given, so I suppose my fee would be zero.

In my opinion, there are a dozen or more incomplete or inconsistent facts that require a full interview. Was the property taken out of service when the tenant moved out, since it was another month before the decision was made? What in the world constitute "starting costs"? What was the purpose of the real estate loan? Who paid the taxpayer's support and housing costs? I'll assume "qualified child" and "his child" are typos, but at least tell us what months she was working and/or in school.

[Pacun]

>>I should have rephrased my statement.<<

Well, if we could assume that all the facts are true as given, I would have to answer your closing question with "$1,200 of which $200 is for personal return." I mean, that IS one of the facts given. But we already see that the return can not be completed with the facts as given, so I suppose my fee would be zero.

In my opinion, there are a dozen or more incomplete or inconsistent facts that require a full interview. Was the property taken out of service when the tenant moved out, since it was another month before the decision was made? What in the world constitute "starting costs"? What was the purpose of the real estate loan? Who paid the taxpayer's support and housing costs? I'll assume "qualified child" and "his child" are typos, but at least tell us what months she was working and/or in school.

Almost everybody will come with different answers as Johnh pointed out that tax preparation is not pure math. It is the understanding of the rules and exceptions.

I wish my clients would give me as much information as the scenario provides.

I am going to readjust the original posting to include:

TP went full time to a local qualified university. When she was employed doesn't matter, but let's say she was employed from January to April 2009 (she could even have a part time job, it doesn't matter). For clarification, TP was employed Jan to April, then TP work at daycare and went full time to school.

When TP bought the house, she got one loan and that's why she is paying mortgage interest Remember the house was purchased a while ago and was rented out. Tenant moved out on December 31, 2008. After TP welcomed the new year and still with the Champaign glass raised, TP decided to open a daycare center. Starting cost were costs paid to the lawyers and to the government so that TP could have a license for the child care center. Child care center opened on May 1, 2009.

Remember this a scenario so the tax preparation fee is part of that scenario which needs to be taken as an expense. Also, TP paid her own daily expenses and paid for TP's child. If you think this TP didn't make enough money this year, please see how much interest income this person had.

[jainen]

>>When she was employed doesn't matter<<

In my opinion, it certainly DOES matter, because if (and only if) she incurred the $2500 of child care expenses during months when she was employed or in school she is probably eligible for the Child and Dependent Care Credit. Now it might seem from your revised scenario that she was continuously employed either in her W-2 job or her day care, but in my opinion that fact is inconsistent with the fact that she was drawing unemployment insurance benefits (the most likely but perhaps not the only meaning of "unemployment compensation"). As a full-time student and/or with full time employment or self employment she could not be eligible for that, so in my opinion further inquiry is required to see whether she received it as, for example, a lump-sum settlement on a prior claim. Or maybe she was lying to the UIB office, in which case I would wonder if she were lying to the tax preparer too.

[Pacun]

You can collect unemployment benefits even if employed. To satisfy your question, let me say that TP was a successful banker making a couple of millions up to halloween 2008. She was laid off and started collecting unemployment compensation. She didn't work Nov and Dec 2008 and start collecting unemployment compensation. Since she didn't make enough money, she continued collecting unemployment in January and February 2009.

Trust me, if someone comes to my office to have their taxes prepared with a W-2 and a 1099-G(unemployment compensation), I do not CARE how and when they collected unemployment compensation. Neither will I ask them if they collected unemployment correctly. I will limit my practice to prepare their taxes with forms they brought me. This will be the extent of my conversation regarding unemployment: "I see you got a W-2G form, did you collect unemployment?" If the answer is yes. I will add that income to the return, period.

[jainen]

>>I will limit my practice to prepare their taxes with forms they brought me.<<

If you asked her to verify, for example, her legal expenses--you might conceivably find that they actually related to her employment termination rather than setting up the new business. But I would not find that because I would not ask that, because her explanation is plausible and the amount is reasonable and there is no apparent contradiction with other facts. Nor would I question getting a W-2 and a W-2G in the same year; like you I am not concerned with whether the payment was right or wrong, just with how to report it on the tax return.

But when she claims a credit based on certain rules about school and employment, while showing evidence that she was not in school or working, in my opinion that is an inconsistency which (according to Circular 230) must be resolved. I already suggested some possible resolutions, and you suggest another, but personally I would not simply guess at what the facts are.

Obviously, if we do simply guess at what the facts are, "almost everybody will come with different answers." In my opinion, guesses are derived from the way we think, and obviously you and I don't think the same way.

[Pacun]

You are right and since I know the rules, I am just making up answers to fit our excercise so that we have a nice end product with a little of understanding of some of the new and old rules. Maybe if you question a regular TP, which you are required to do so when inconsistencies are apparent, you might get a different answer and take out some credits. This is not an ordinary case and to complete a 1040 will require the most experienced preparer to recheck the rules. This is not a case that you will finish in 1 hour as H and R block tries to do. Please do not question "how was she a sucessful banker making millions without a bachelor degree", again this is for practice and hopefully we will get at least 5 different answers and we will discuss them. I have tried to cover a lot entries on the 1040 so that we test the software and our abilities too.

[kcjenkins]

But you do understand the point that you can only take child care expenses for the time that the TP was either employed or in school, right? So there is no question that you MUST question her about the time that she was getting Unemployment.

Let's face it, this is what is so hard about writing tax problems, there are just so many different factors that must be covered before you can finish the question.

[Pacun]

But you do understand the point that you can only take child care expenses for the time that the TP was either employed or in school, right? So there is no question that you MUST question her about the time that she was getting Unemployment.

Let's face it, this is what is so hard about writing tax problems, there are just so many different factors that must be covered before you can finish the question.

Actually, TP was working while collecting unemployment as I explained before.

[GeneInAlabama]

How could TP legally be drawing unemployment while working?

[Pacun]

How could TP legally be drawing unemployment while working?

TP was a successful banker making a couple of millions up to halloween 2008. She was laid off and started collecting unemployment compensation. She didn't work Nov and Dec 2008 and start collecting unemployment compensation. Since she didn't make enough money, she continued collecting unemployment in January and February 2009.

[GeneInAlabama]

So TP WASN'T working while drawing unemployment!

[Pacun]

Any takers? I will post my answer within 48 hours.

[Chowdahead]

Now it might seem from your revised scenario that she was continuously employed either in her W-2 job or her day care, but that fact is inconsistent with the fact that she was drawing unemployment insurance benefits (the most likely but perhaps not the only meaning of "unemployment compensation"). As a full-time student and/or with full time employment or self employment she could not be eligible for that, so further inquiry is required to see whether she received it as, for example, a lump-sum settlement on a prior claim.

Actually, given the current state of the economy, I know quite a few people who are collecting Unemployment Benefits and going to school (usually junior college or tech school), which is all being funded by the Recovery Act.

So I expect to see alot of 1099-Gs from clients from situations that will not be the norm from past years. Wait till I have to break the news to them that Unemployment Benefits don't generate anything under the Earned Income Credit, and their refund will be little to nothing. "Call your congressman!" I'll say.

[Pacun]

I guess this was the worst idea posted on this forum.

[Catherine]

I guess this was the worst idea posted on this forum.

Not at all, and I was interested to see what folks would come up with. But I was in the middle of getting my tax letters to clients out and having my older girl home from college and chose not to try it myself.

But I really liked the concept.

[Gail in Virginia]

I think it was a good idea, but like Catherine I have been too busy to do it myself.

[Pacun]

I think the FMV on Dec 31, 2009 and May 1, 2010 scared everybody. I thought the warm up problem was going to be a breeze for those with more than 20 years of experience and the CPAs but I was wrong.

[Pacun]

The lady who opened the daycare center on May 1, 2009 will get a refund of $4,423.00 for tax year 2009.

If you have a different answer, please post all the entries on lines 47 though 67 and I will tell you what I have and we can start a nice exchange.