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Enrolled Agents – The First Tax Professionals, established by an Act of Congress, 1884
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Do you think you know the tax code? We ask, because some believe that their tax software can handle every single situation that arises. For the most part, that’s true, but knowing the tax code, as Enrolled Agents do, must be a part of the discussion. Even the Secretary of the Treasury used a popular tax software and made errors. There is just no way you can expect a software program to know everything and to apply your circumstances to tax law. Maybe if all you had was a W-2 that might be the case, but for the vast majority of taxpayers, that is not true.
So, in the hopes of proving my point, I here below give you some scenarios (courtesy of the National Association of Tax Professionals) to test your Tax I. Q. How many will know the answers? If you are stumped, call us and we’ll give you the answer to your toughest question.
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Sam determines that he has 35 days of unreimbursed business expenses for travel away from home. He stayed in a hotel each night and packed a cooler with food. Can he claim a per diem for lodging and meals if he can substantiate the time, place, and business purpose of the travel?
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Allen purchased a principal residence in March 2008. He acquired the home by taking out a 30-year mortgage. At closing, he was required to pay $2,000 for private mortgage insurance. This payment was for 2008 through 2012. What amount can Allen deduct for 2008 on Schedule A, Line 13, for his prepaid qualified mortgage insurance?
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Bob made pre-tax contributions to an HSA through a cafeteria plan. How is this reported on Bob’s Form W-2? Where is this contribution reported on Bob’s tax return?
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Charles and Clara Cozy are comfortably retired. They have income from Charles’ pension, interest, dividends, and social security. Their home mortgage is paid off, but they do pay real estate taxes on their principle residence, their winter home in Florida, and their condo in the Swiss Alps. However, they do not have enough to itemize their deductions. Do they qualify for the additional standard deduction for real estate taxes and if so, do all of their real estate taxes qualify?
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Thelma opened the doors to her new driving school on October 1, 2008. During the last two weeks of September 2008, she incurred $6,500 in start-up expenses. She prepared her own income tax return for 2008, and deducted $5,000 of the start-up expenses on her driving school Schedule C. She is amortizing the remainder of the start-up expenditures over 180 months beginning with the month of October 2008. Thelma’s cross-town driving school competitor, Louise, mentioned that an election should have been attached to the return in order to deduct start-up costs. How should this be handled?
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John has a Form 1099-C, Cancellation of Debt. The question is, was John insolvent immediately before the cancellation of debt? He would be insolvent if his §401(k) balance was not taken into account on the asset side. Does the taxpayer have to add a pension plan to the assets when determining insolvency under §108(d)(3)?
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John is 12 years old. His parents put money into a brokerage account for him when he was very young. Each year the account generated interest and dividends that were well under the threshold for filing a return. However, in 2008, the dividends reported on Form 1099-DIV were $1,000. He also had a stock sale reported on Form 1099-B, which showed gross proceeds of $3,000. The basis in the stock was $4,500. Can the parents use Form 8814 to claim the child’s dividends and capital losses?
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John exercised nonqualified stock options on February 27, 2009. The option was for 100 shares of XYZ stock at a cost of $25 per share. On February 27, 2009, the FMV of the shares was $95 per share. John sold the stock upon exercise under the cashless option. He received a Form 1099-B for gross proceeds of $9,500. He paid a commission on the sale of $95. What is John’s basis in the stock to report on the Schedule D?
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Bill and Darlene own an LLC, taxed as a partnership. The partnership currently has a SEP plan. Darlene also has a Schedule C business and would like to start a SEP plan in this business. Will Darlene’s contributions to the Schedule C’s SEP plan be limited by her contributions made to the partnership’s SEP plan?
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Allen received a Form 1099-C for the cancellation of debt associated with credit card debt. The credit card was partly used to purchase supplies used in his trade or business and partly to purchase items associated with his rental property. Allen reports his trade or business income on Schedule C and his rental income on Schedule E. Using the worksheet in IRS Publication 4681, page 6, it is determined that Allen is not insolvent. Furthermore, he does not qualify for any of exception that would exclude the cancelled debt from income. Where is this cancelled debt reported?
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Jacey owns a vacation/rental property with suspended passive losses. She wants to sell the entire interest in her property so she can take all the suspended losses in 2009. She found a buyer and is selling the property on October 1, 2009, as an installment sale. How and when are the suspended losses deducted?
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In 2009, Tom (single) would like to sell some land held for investment, which would result in a long-term capital gain of $100,000. Tom does not have any other taxable income in 2009, so he thinks it is the perfect time to sell because the entire gain will be taxed at the 0% capital gains rate. Is Tom correct? If Tom claims the standard deduction and one personal exemption, how will the gain be taxed?
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Tom and Ann Taxpayer were divorced in 2001. Their divorce decree states their son, Jacob, is to live with Ann, but Tom is entitled to claim Jacob as a dependent. In 2001, Ann provided Tom with Form 8332,Release/Revocation of Release of Claim to Exemption for Child by Custodial Parent, indicating he could claim Jacob from 2001 through 2015. However, Tom lost his job in 2008 and stopped paying child support. Their divorce decree states that if Tom falls behind on child support, he is not entitled to claim Jacob. Tom is seven months behind on his child support. What does Ann need to do to cancel Form 8332 so she can claim Jacob on her 2009 tax return.
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Poor Uncle Ned passed away on December 12, 2008, when he was only 68 years old. His relatives were quite shocked to learn that Uncle Ned was actually a millionaire. Over the years Ned had become very eccentric and appeared impoverished, and while many of his relatives had turned their backs on him, several had made it a point to keep in touch and include him in family functions. Poor Uncle Ned included these kind relatives and their children in his will. He had a $2,000,000 IRA account that named twelve beneficiaries. The oldest beneficiary was Ned’s 76 year-old brother, Buck, with a 25% portion. The remaining 75% of the IRA was to be split equally among the other 11 beneficiaries. The youngest beneficiary was little baby Kevin, who was only 6 months old. The entire clan were told by a friend that the balance in the IRA would have to be distributed over Buck’s life expectancy, since he is the beneficiary with the shortest life expectancy, and if a beneficiary is under age 59½, his or her distribution is subject to a 10% penalty. Is this true?
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Robert sold his personal residence via land contract in November 2006, and excluded the realized gain in accordance with §121. In 2008, Carrie Anne, the buyer, stopped making payments and is looking for a way out of the deal. Upon repossession of the property does Robert lose the homeowner exclusion?
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Molly & Ricky had two children living at home, Ben and Ted. Ben, age 20 was employed full-time and was neither a qualifying child nor qualifying relative. Ted, age 22 was a full-time student with minimal income. The parent’s AGI was so high that it was more beneficial for Ben to claim Ted as a qualifying child. The largest benefit was the earned income credit Ben received by claiming Ted as a qualifying child. If everything is the same for 2009, will Ben be able to claim Ted as a qualifying child?
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Fred and Sylvia have twins that are juniors in college. The couple claims the twins as dependents on their tax return and paid $10,000 each for tuition and fees. Their AGI for 2009 will be $145,000. Fred and Sylvia know that if their AGI was over $135,000, the Lifetime Learning credit and tuition and fees deduction would be phased out. Is there any other credit or deduction available to them for 2009?
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Olivia (single) bought a residential rental on January 1, 2009, for $400,000. She is going to rent it out for two years through December 31, 2010, and will claim $20,000 of depreciation. After that, she is going to use it as her principal residence. If she sells it on January 1, 2014, for $700,000, she thinks she can exclude $250,000 of the gain from her gross income under §121. Is she correct?
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Nolan owns a principal residence and a rental property that was once used as his principal residence. In March 2009, Nolan sold the rental property for a gain of $110,000. He met the two-out-of-five-year test for ownership and use of the rental property under §121. He elects to treat the sale as a sale of residence under §121 and can exclude the gain on the sale except for the depreciation taken on the rental. In July 2009, Nolan sells his principal residence for a $95,000 gain. Can Nolan also take the §121 exclusion on the sale of his principal residence?
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Aaron deducted $11,000 for state income taxes instead of deducting $10,000 for general sales tax. In 2009, he received a $2,500 state income tax refund. What is the maximum amount of the refund that may be taxable?
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Rather than purchase a new business car in 2009, Tom Thrifty is thinking about buying the vehicle he has been leasing for the last six months. It is an attractive 2009 model with all-wheel drive, handles nicely, gets good gas mileage, and fits Tom’s needs perfectly. Since he has been the only person to have used this vehicle, Does he qualify for the 50% bonus depreciation.?
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In April, Tom Schmidt was downsized from his job of nearly 20 years. He remains unemployed and his wife Debbie has never worked outside of the home. They have two dependent children who are teenagers. The oldest child Mark, who is 15, has been hanging out with the bad crowd at school and in May was arrested for stealing a car. In June, he was sentenced to six months of detention in a juvenile facility. With everything that has happened and their bleak financial situation, Tom needs any tax break he can get. But now with Mark away at the juvenile detention facility for the next six months, will they lose him as a dependent and will this affect the child tax credit?
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Stan is thinking of buying new equipment that costs $50,000 for his Schedule C business at the end of 2009. It is five-year MACRS property that qualifies for 50% bonus depreciation, and the remaining basis will be depreciated using the 200% declining balance method. However, Stan is subject to AMT and wonders if he will be allowed any depreciation for AMT purposes. What is Stan’s AMT adjustment for depreciation?
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John won a car worth $40,000 at a casino while gambling. He explains to you that the more he gambled the more chances (tickets) he received to win the vehicle. However, John figured he lost $35,000 during the year at the same casino. Can he take a deduction for his gambling losses?
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