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TOC for TDB

INTRODUCTORY MATERIAL

ABOUT THE AUTHORS . . .

LIST OF SUBSTANTIVE CHANGES AND ADDITIONS

FILING STATUS AND EXEMPTIONS

Chapter 1: Filing Status

Introduction

KEY ISSUE 1A Filing Status in Year of Spouse's Death.

Qualifications for a Joint Return

Advantages of Filing a Joint Return

Disadvantages of Filing Jointly

Filing as a Qualified Widow or Widower

KEY ISSUE 1B Tax Effects of Using Married Filing Separate Status.

Changing Filing Status after Return Is Filed

KEY ISSUE 1C Implications of Joint and Separate Filing Status for Married Taxpayers.

Implications of Filing a Joint Return

Implications of Filing Separate Returns

KEY ISSUE 1D Deciding on Filing Status in Community Property States.

KEY ISSUE 1E Eligibility for Head of Household Status.

Requirements for Head of Household Status

Married Persons Living Apart

KEY ISSUE 1F Claiming Head of Household Status in Divorce Situations.

KEY ISSUE 1G Filing Status for "Nontraditional" Couples.

Chapter 2: Personal Exemptions

Introduction

KEY ISSUE 2A Dependency Tests and Claiming a Personal Exemption.

General Rules for Dependent Status and Claiming a Personal Exemption

Qualifying Child

Qualifying Relative

KEY ISSUE 2B Parents Claiming an Exemption for a Married Child.

KEY ISSUE 2C Dependents of a Noncustodial Parent in Divorce and Separation Situations.

Custodial and Noncustodial Parent

Requirements for Noncustodial Parent to Claim Dependent

KEY ISSUE 2D Claiming the Exemption in Multiple Support Situations.

ILLUSTRATION 2-1: Completed Form 2120: Agreement Not to Claim Exemption

INCOME AND ADJUSTMENTS

Chapter 3: Wages and Salaries

Introduction

KEY ISSUE 3A Analyzing Selected Items Reported on Form W-2.

Item-by-item Analysis

KEY ISSUE 3B What to Do If Form W-2 Is Incorrect or Not Received.

ILLUSTRATION 3-1: Form W-2 Reporting for Value of Group-term Life Insurance

ILLUSTRATION 3-2: Form 1040 Reporting Payroll Taxes Due on the Value of Group-term Life Insurance

Chapter 4: Interest and Dividend Income

Introduction

KEY ISSUE 4A Qualified Dividends Taxed at Lower Rates.

What Is a Qualified Dividend?

How Qualified Dividends Are Taxed

KEY ISSUE 4B Avoiding IRS Matching Problems When Reporting Interest and Dividends.

KEY ISSUE 4C Securities Purchased at a Discount.

Original Issue Discount Bonds

Market Discount Bonds

Market Discount and OID

KEY ISSUE 4D Securities Purchased at a Premium.

General Rules for Premium Amortization

Amortizing Premium on Callable Bonds

KEY ISSUE 4E Offsetting Income for Purchased Interest.

KEY ISSUE 4F Electing to Accrue Interest from U.S. Savings Bonds.

General Rules

When to Consider Making the Election

Calculating the Annual Income Accrual

KEY ISSUE 4G Reporting Interest on Treasury Inflation-protection Securities.

How Security Holders Are Taxed

ILLUSTRATION 4-1: Schedule B Reporting Income Actually Received in the Following Year

ILLUSTRATION 4-2: Schedule B Reporting Nominee Distribution

ILLUSTRATION 4-3: Schedule B Reporting OID and Accrued Interest on Bond Purchased in Secondary Market

ILLUSTRATION 4-4: Schedule D Reporting Accrued Market Discount

Chapter 5: Pension and Retirement Income

Introduction

KEY ISSUE 5A Calculating Taxable Social Security Benefits.

General Rules

Lump-sum Social Security Payments

Repayment of Social Security Benefits

Interaction of Taxable Social Security Benefits with IRA Deduction

KEY ISSUE 5B Distributions of Nondeductible Contributions to Traditional IRAs.

KEY ISSUE 5C Distributions from Roth IRAs.

Taxation of Distributions

Application of Minimum Distribution Rule

Distributions Following Roth IRA Conversions

Roth IRA Rollovers

KEY ISSUE 5D Converting Traditional IRAs into Roth IRAs.

Conversion Requirements

Tax Consequences of Conversion

Reversing a Rollover or Conversion

KEY ISSUE 5E Simplified Methods for Taxing Annuity Payments from Qualified Plans.

KEY ISSUE 5F Rolling Over Qualified Retirement Plan and IRA Distributions.

Rolling Over Distributions from Qualified Retirement Plans

Rolling Over Distributions from IRAs

Inherited Retirement Accounts

Invalid Rollovers

KEY ISSUE 5G Reporting Income from Withdrawal of Excess IRA Contributions.

KEY ISSUE 5H Divorce-related Transfers of Retirement Plan Assets.

Qualified Retirement Plan Benefits

IRAs

KEY ISSUE 5I Distributions from a SIMPLE IRA Plan.

Two-year Period Rules

KEY ISSUE 5J Minimum Required Distribution Rules for Retirement Accounts.

Required Beginning Date

Calculating the Minimum Required Distribution (MRD)

MRDs during the Owner's Life

MRDs after the Owner's Death

Rollovers to Nonspouse Beneficiaries and the MRD Rules

IRA Distributions to Charities Qualify under the MRD Rules

KEY ISSUE 5K Distributions from Commercial Variable Annuities.

General Tax Considerations

Taxation of Annuity Payments

Taxation of Nonannuity Payments

Premature Distributions

Partial Annuity Exchange

Chapter 6: Other Items of Income

Introduction

KEY ISSUE 6A Recapture of Excess Alimony Payments.

When Does Recapture Occur?

Amount Recaptured

KEY ISSUE 6B Reporting Ministers' Housing Allowances.

Minister Receives Cash Housing Allowance

KEY ISSUE 6C Excluding Personal Injury Awards from Gross Income.

General Rules

Determining Whether Damages or Settlements Are Taxable

Reporting Contingent Attorney Fees Associated with Personal Injury Awards

KEY ISSUE 6D Reporting Refunds of Itemized Deductions under the Tax Benefit Rule.

What Is the Tax Benefit Rule?

Reporting Partially Taxable Refunds

Recoveries Related to Medical Expenses and Casualty Losses

Effect of the Prior-year Standard Deduction

Refunds Attributable to More Than One Year

Effect of Tax Credits in Year of Deduction

Alternative Minimum Tax in Prior Year

Itemized Deduction Phase-out in Prior Year

KEY ISSUE 6E Distributions from a Health Savings Account.

Rollovers from HSAs

Divorce-related Transfers of HSAs

Transfers at the Account Beneficiary's Death

KEY ISSUE 6F Life Insurance Proceeds Received before Death.

Accelerated Life Insurance Proceeds

Viatical Settlements

Surrender of Life Insurance Contract

Definitions

KEY ISSUE 6G Long-term Care Insurance Proceeds.

KEY ISSUE 6H Understanding Education Savings Accounts.

Contribution Limitations

Gift Tax Considerations

General Rules for Distributions

Rollovers of ESAs

Other Transfers of ESA Funds

KEY ISSUE 6I Using Qualified Tuition Programs.

Contributions and Distributions

Rollovers and Beneficiary Changes

KEY ISSUE 6J Selected Other Income Items.

Disability Income

Workers' Compensation

Bartering Income

Gambling and Lottery Winnings

Military Income and Related Issues

Gulf Oil Spill Payments

ILLUSTRATION 6-1: Calculating the Taxable Portion of a Refunded Itemized Deduction

ILLUSTRATION 6-2: Calculating Taxable Portion of Refunds of Itemized Deductions Subject to Phase-out

Chapter 7: Adjustments to Income

Introduction

KEY ISSUE 7A Contributions to Traditional IRAs.

Maximum Allowable Contributions

Deductible Amount of IRA Contribution

Nondeductible IRA Contributions

Deadline for Making Contributions

IRA Investments and Fees

Exposure of Assets Held in Traditional IRAs to Bankruptcy Creditors

Direct Deposit of Federal Income Tax Refunds

KEY ISSUE 7B Roth IRA Contributions.

Contribution Limitations

Other Roth IRA Contribution Considerations

Choosing between Roth IRAs and Traditional IRAs

Exposure of Assets Held in Roth IRAs to Bankruptcy Creditors

KEY ISSUE 7C Keogh and SEP Deductions for Self-employed Taxpayers.

Contribution Limits

Effect of the Compensation Limit

Calculating the Maximum Contribution Deduction

Adoption and Funding Deadlines

Earned Income from Directors' Fees

KEY ISSUE 7D Employer-sponsored SIMPLE IRAs.

Contribution and Eligibility Rules

Compensation

Special Rules for Self-employed Persons

When and Where Contributions Are Deductible

Establishing SIMPLE IRA Plans

KEY ISSUE 7E Deducting Moving Expenses.

Deductible Moving Expenses

Nondeductible Moving Expenses

Move Must Be Job-related

Employer Reimbursements of Moving Expenses

Reimbursement Received and Expenses Paid in Different Tax Years

KEY ISSUE 7F Self-employed Health Insurance Deduction.

Medicare Insurance Premiums

Who Is Self-employed?

What Counts as Earned Income?

KEY ISSUE 7G Distinguishing Alimony from Nondeductible Payments.

KEY ISSUE 7H Deducting Interest Paid on Education Loans.

Maximum Allowable Deduction

Other Considerations

KEY ISSUE 7I Tuition and Fees Deduction.

Qualified Tuition and Related Expenses

Limitations on AGI and Maximum Deduction

Adjustment for Refunds and Tax-free Education Benefits

No Double Benefit

No Deduction If the American Opportunity, Hope, or Lifetime Learning Credit Is Claimed

No Deduction for Amounts Excludable Due to ESA and Other Distributions

KEY ISSUE 7J Educator's Expense Deduction.

KEY ISSUE 7K Deducting Contributions to Health Savings Accounts.

What Is an HDHP?

Deducting Contributions to HSAs

KEY ISSUE 7L Domestic Production Activities Deduction.

General Rules

Domestic Production Gross Receipts (DPGR)

Computing W-2 Wages Paid by the Taxpayer

Calculating the DPAD

Reporting the DPAD

Alternative Minimum Tax Considerations

Additional DPAD Information

ILLUSTRATION 7-1: 2010 Adjusted Gross Income Limitations for IRA Contributions

ILLUSTRATION 7-2: Completed Worksheet for Calculating the DPAD for 2010

ILLUSTRATION 7-3: Form 8903 Calculating the Domestic Production Activities Deduction

BUSINESS, FARM, AND RENTAL

Chapter 8: Sole Proprietorships (Schedule C)

Introduction

KEY ISSUE 8A Distinguishing an Active Trade or Business from a Hobby.

Distinguishing between a Hobby and an Active Trade or Business

Reporting Hobby Income and Expenses When Activity Is Not Deemed to Be a Trade or Business

Safe Harbor Rule Helps Eliminate Uncertainty between a Hobby and an Active Trade or Business

KEY ISSUE 8B Oil and Gas Working Interests.

General Rules

Prepaid Drilling Costs

Intangible Drilling Costs

Depreciation

Depletion

KEY ISSUE 8C Home Office Deductions.

Regular and Exclusive Use

Principal Place of Business

Computing the Home Office Deduction

KEY ISSUE 8D Business Investigation and Start-up Costs.

Distinguishing Deductible and Amortizable Costs (Section 195) from Capitalized Costs [Section 263(a)]

Making the Election to Deduct Start-up Costs

Treatment of Costs after Disposition or Abandonment of Business

KEY ISSUE 8E Disposing of a Sole Proprietorship.

Gain or Loss upon Disposition

Covenants Not to Compete

Recapture Income

Short Tax Year Depreciation

ILLUSTRATION 8-1: Schedule C Reporting Oil and Gas Working Interest

ILLUSTRATION 8-2: Oil and Gas Depletion Schedule

ILLUSTRATION 8-3: Form 8829 Reporting Home Office Deductions

ILLUSTRATION 8-4: Form 8829 Including Gains from Business Property

Chapter 9: Farm Income and Expenses (Schedule F)

Introduction

KEY ISSUE 9A Reporting Cooperative Patronage Distributions.

Patronage Dividends

Losses on Co-op Equity

Per-unit Retains

Domestic Production Activities Deduction

KEY ISSUE 9B Tax Treatment of CCC Loans.

Market Gain

KEY ISSUE 9C Prepaid Farming Expenses.

General Rule

Exceptions to the 50% Rule

KEY ISSUE 9D Deferring Certain Crop and Livestock Income.

Crop Insurance Proceeds

Livestock Sold Because of Adverse Weather Conditions

KEY ISSUE 9E Depreciation of Farm Property.

KEY ISSUE 9F Uniform Capitalization Rules for Plants and Animals.

General Rule

Election Out of the UNICAP Rules

KEY ISSUE 9G Substantiation Requirements for Farm Vehicles.

KEY ISSUE 9H Commodity Hedging Transactions.

What Is a Hedging Transaction?

Identifying Hedging Transactions

KEY ISSUE 9I Crop-share Rental Reporting.

When Are Crop-share Rents SE Income?

Reporting Crop-share Rents

KEY ISSUE 9J Computing Tax on Farm Income Using Income Averaging.

Elected Farm Income

Making the Election

Calculating the Farm Income Averaging Tax

KEY ISSUE 9K Limitation on Deductibility of Farm Losses.

Calculating the Excess Farm Loss

Application to Partnerships and S Corporations

Coordination with Passive Activity Loss Rules

ILLUSTRATION 9-1: Calculation of Three-year Income Averaging for Farm Income

Chapter 10: Rental Property (Schedule E)

Introduction

KEY ISSUE 10A Rental of Residences and Vacation Homes.

Personal Residence with Very Limited Rental Use

Vacation Home with Both Rental and Personal Use

Rental Property with Very Limited Personal Use

Conversion from Vacation Home to Rental Property

Example of Sale of Residence Used as Both a Vacation Home and Rental Property

KEY ISSUE 10B Temporary Rental of Personal Residence Prior to Sale.

Effect of Residential Rental on the Exclusion of Gain

Reporting Income and Deductions of a Temporary Rental Activity

KEY ISSUE 10C Rental of a Portion of a Residence.

KEY ISSUE 10D Conversion of Residence to Rental Property.

Depreciating a Converted Residence

Reporting Gain or Loss on the Sale of a Converted Residence

KEY ISSUE 10E Property Rented to Related Parties.

Property Rented to a Family Member or Joint Owner

Property Rented to a Related Business

KEY ISSUE 10F Owning and Renting Timeshare Units.

Timeshare Unit Is Not Rented

Timeshare Unit Is Rented

ILLUSTRATION 10-1: Form 4797 Reporting Sale of Converted Property

Chapter 11: Tax Accounting Methods

Introduction

KEY ISSUE 11A Methods of Accounting.

Cash-basis Income

Cash-basis Expenses

Accrual Method of Accounting

KEY ISSUE 11B Implications of Maintaining Inventory.

Accrual Method of Accounting Generally Required

Special Rules for Certain Small Businesses

Valuing Inventory

KEY ISSUE 11C Changing Accounting Methods.

General Rules

Section 481(a) Adjustment

Automatic Changes in Accounting Methods

Nonautomatic Changes in Accounting Methods

Chapter 12: Travel and Entertainment

Introduction

KEY ISSUE 12A Substantiation of Travel and Entertainment Expenses.

Substantiation Requirements

Per Diem Method of Substantiating the Amount of Travel Costs

Business Requirement for Meals or Entertainment Expenses

Employee Reimbursements

KEY ISSUE 12B 50% Limitation on Meal and Entertainment Deductions.

Exceptions to 50% Disallowance Rule

Disallowance Rules Are Applicable to All Meals Not Specifically Excepted

KEY ISSUE 12C Entertainment Facilities and Club Dues.

Entertainment Facilities

Club Dues

KEY ISSUE 12D Accompanied Travel.

KEY ISSUE 12E Travel out of the Country.

Allocating Foreign Travel between Business and Personal Purposes

Attending Conventions outside North America

KEY ISSUE 12F Travel away from Home.

Determination of "Tax Home"

Temporary versus Indefinite Employment away from Home

Deducting a Saturday Night Stay

KEY ISSUE 12G Deducting Local Transportation Costs.

Commuting Expenses

Taxpayers with Home Offices

Temporary Work Locations

KEY ISSUE 12H Tickets to Athletic Events Treated as Entertainment or Gifts.

Tickets to Charitable Events

Deduction for Skybox Rental

Chapter 13: Net Operating Losses

Introduction

KEY ISSUE 13A Computing an NOL.

General Rules

Carryback Period

Carryforward Period

KEY ISSUE 13B Recomputations in NOL Carryback Years.

Recomputing Tax in the Carryback Year

Determining NOL Remaining after Carryback

KEY ISSUE 13C Application for Tentative Refund Based on an NOL Carryback.

Administrative Consequences of Filing Form 1045

General Filing Requirements

KEY ISSUE 13D Election to Forgo an NOL Carryback.

General Rules of the Election

When Should the Election Be Made?

KEY ISSUE 13E NOL Carryover and Carryback Rules When Filing Status Changes.

Carryback of a Postdivorce NOL to a Predivorce Tax Year

Carryback of a Joint Return NOL to a Premarital Tax Year

Carryover of a Joint Return NOL to a Nonmarital Tax Year

ILLUSTRATION 13-1: Computation of NOL in Year with Capital Losses

ILLUSTRATION 13-2: Form 1045--Carryback of an NOL

ILLUSTRATION 13-3: NOL Carryback Utilization

DEPRECIATION AND AUTOS

Chapter 14: Depreciation

Introduction

KEY ISSUE 14A Depreciation Methods, Recovery Periods, and Changes in Use.

Determining the Most Beneficial Depreciation Method

Determining Recovery Periods

Changes in Use of Depreciable Property

KEY ISSUE 14B Using the Section 179 Deduction.

Amending or Revoking the Section 179 Deduction

Annual Dollar Limitation

Qualifying Property

Qualified Real Property Expensing

Taxable Income Limitation

Carryover of the Section 179 Deduction

Recapture of the Section 179 Deduction

KEY ISSUE 14C Claiming Bonus Depreciation.

Eligible Property

Qualified Reuse and Recycling Property

Qualified Leasehold Improvement Property

AMT Implications

Coordination with the Section 179 Deduction

Electing out of Bonus Depreciation

KEY ISSUE 14D Applying the Midquarter Convention.

General Rules

Determining Which Property Is Subject to Midquarter Convention

Impact of Bonus Depreciation Deduction

Convention in Year of Disposition

Pass-through Entities

KEY ISSUE 14E Depreciating Leasehold Improvements and Certain Building Improvements.

Qualified Leasehold Improvement Property

Qualified Restaurant Property

Qualified Retail Improvement Property

KEY ISSUE 14F Computing Short-year Depreciation.

When Does the Tax Year Begin?

Computing Short-year Depreciation under the Half-year Convention

Computing Short-year Depreciation under the Midquarter Convention

Effect on Bonus Depreciation

Computing Depreciation in Years Subsequent to a Short Year

KEY ISSUE 14G Amortizing Section 197 Intangible Assets.

General Rule

What Is a Section 197 Intangible?

Disposing of a Section 197 Intangible

KEY ISSUE 14H Deducting the Cost of Computer Software.

Purchased Software

Developed Software

Software Implementation and Training Costs

Website Development Costs

KEY ISSUE 14I Depreciation Allowable in Year of Disposition.

KEY ISSUE 14J Depreciating Property Acquired in a Like-kind Exchange.

Key Terminology

General Application Rules

Depreciating Exchanged Basis

Depreciating Excess Basis

Transactions Involving Nondepreciable Property

Electing Out of the Regulations

Chapter 15: Automobiles and Other Listed Property

Introduction

KEY ISSUE 15A Reporting Vehicle Expenses.

KEY ISSUE 15B Reporting Personal Use of Employer-provided Vehicles.

General Rules

Special Accounting Period

FMV of Employer-provided Vehicles When the ALV Method Is Used

KEY ISSUE 15C Depreciation and Section 179 Limitations for Vehicles.

General Limitations for Luxury Autos

Bonus Depreciation and the Section 280F Limits

Interaction with Section 179 Deduction

Depreciation Limit Prorated for Personal Use

Vehicles Exempt from Auto Depreciation Limits

Section 179 Limitation for Certain Heavy Passenger Vehicles

Depreciating a Vehicle Acquired via a Trade-in

KEY ISSUE 15D Deductions for Leased Passenger Autos.

KEY ISSUE 15E Actual Cost versus Standard Mileage Rate Method.

KEY ISSUE 15F Partial Business Use of Autos.

Qualified Business Use

Adjusting Basis for Vehicles Acquired in Trade-ins

Yearly Basis Adjustments for Depreciation vs. Disposition

Reporting Gain or Loss on a Partial Business Use Vehicle

KEY ISSUE 15G Substantiating Vehicle Use.

General Rules

Qualified Nonpersonal-use Vehicles

Employer-provided Vehicles

Employee-provided Vehicles--Mileage Allowances

KEY ISSUE 15H Limitations for Other Listed Property.

General Limitations for Listed Property Other than Vehicles

Cellular Telephones

Computers

KEY ISSUE 15I Alternative Motor Vehicles and Electric Vehicles.

Claiming the Alternative Motor Vehicle Credit

Claiming the Qualified Plug-in Electric Drive Motor Vehicle Credit

Claiming the Credit for Certain Other Qualified Electric Plug-in Vehicles

ILLUSTRATION 15-1: Schedule C, Part IV, Reporting Use of Car by Sole Proprietor

ILLUSTRATION 15-2: Form 4562, Part V, Use of Car by Employee

ILLUSTRATION 15-3: Form 4562, Reporting Personal Use of Employer-provided Vehicles

ILLUSTRATION 15-4: Form 4797, Part IV, Recapture When Business Use Drops to 50% or Less

ILLUSTRATION 15-5: Form 4562, Part V, Reporting Partial Business Use of Other Listed Property

ILLUSTRATION 15-6: Form 8910, Alternative Motor Vehicle Credit

PASSIVE AND PASSTHROUGH

Chapter 16: Passive Activities

Introduction

KEY ISSUE 16A Definition of an Activity.

Significance of Determining an Activity

Grouping Multiple Activities

KEY ISSUE 16B Determining Material Participation.

Tests for Determining Material Participation

Exceptions to Material Participation Rules

KEY ISSUE 16C Allocating Suspended Losses to Multiple Passive Activities.

Reporting Requirements for Suspended Losses

Suspended Capital Losses

KEY ISSUE 16D Disposition of Passive Activities.

Types of Dispositions

Disposition of an Interest in a Pass-through Entity with Multiple Activities

KEY ISSUE 16E Rental Activities.

Six Exceptions to Treatment as Rental Activities

$25,000 Rental Real Estate Exception

Vacation Home Rentals

KEY ISSUE 16F Net Income from Self-rented Property.

General Treatment of Self-rented Property

Rental to C Corporations

Property Rented Incidental to a Development Activity

KEY ISSUE 16G Net Income from Rental of Nondepreciable Property.

KEY ISSUE 16H Real Estate Professionals.

Defining Real Property Trades or Businesses

Material Participation by Real Estate Professionals

Special Rule for Employees

Election to Combine Rental Real Estate Activities

Rental Real Estate Activities Held in Pass-through Entities

Coordination with $25,000 Allowance for Rental Real Estate

KEY ISSUE 16I Self-charged Interest.

Application of the Self-charged Interest Rules

Electing out of the Self-charged Interest Rules

Treatment of Other Self-charged Items

KEY ISSUE 16J Former Passive Activities.

General Impact of Former Passive Activities

Real Estate Professionals

ILLUSTRATION 16-1: Form 8582 Allocating Suspended Losses among Activities

ILLUSTRATION 16-2: Form 8582 Allocating Suspended Losses among Rental Activities

ILLUSTRATION 16-3: Form 8582 Allocating Suspended Losses among Different Capital Loss Rate Groups

ILLUSTRATION 16-4: Form 8582 Deducting Suspended Losses upon Disposition of Activity

Chapter 17: Pass-through Entities

Introduction

KEY ISSUE 17A Partner Basis and Loss Limitations.

Adjustments to Partner's Tax Basis for Partnership Items

Partner Distributions

Limitations on Losses Passed through to Partner

Effect of Domestic Production Activities Deduction (DPAD) on Partner's Basis in Partnership Interest

KEY ISSUE 17B At-risk Limitations and Carryforwards.

General Rules

Amounts Considered at Risk

Qualified Nonrecourse Financing

Limited Partners

Computing At-risk Amount

Recapture of Negative At-risk Amount

KEY ISSUE 17C S Shareholder Basis and Loss Limitations.

Computing Basis in Stock

Effect of Domestic Production Activities Deduction (DPAD) on Shareholder's Stock Basis

Establishing Debt Basis

Debt Basis and Open Account Debt

Claiming Losses and Reporting Distributions

KEY ISSUE 17D Correcting Schedule K-1 Data with Form 8082 Disclosure.

KEY ISSUE 17E Expenses Incurred by a Partner or S Corporation Shareholder.

Partners

S Corporation Shareholders

KEY ISSUE 17F Look-through Capital Gains and Losses on Sales or Exchanges of Partnership and S Corporation Interests.

Sale of an S Corporation Interest

Sale of a Partnership Interest

KEY ISSUE 17G Beneficiaries of Estates and Trusts.

Simple versus Complex Trust

Distributions from Complex Trusts and Estates within 65 Days after Year-end

Passive Activity Limitations

Trust and Estate Tax Years

Grantor Trusts

KEY ISSUE 17H Partner Guaranteed Payments.

Reporting Issues Associated with Guaranteed Payments

Payment of Health Insurance Premiums

Self-employment Tax

KEY ISSUE 17I Domestic Production Activities Deduction.

Pass-through Entities--General Rules

Reporting the Deduction

Additional DPAD Information

ILLUSTRATION 17-1: Determining Loss Limitations

ILLUSTRATION 17-2: Form 6198 Computing Amount at Risk

ILLUSTRATION 17-3: Using Form 1120S, Schedule K-1, to Determine Basis Changes

ILLUSTRATION 17-4: Form 8082 Reporting Amounts Different from K-1 Amounts

ILLUSTRATION 17-5: Schedule E Reporting Expenses Incurred by a Partner

ILLUSTRATION 17-6: Calculating the Domestic Production Activities Deduction

GAINS AND LOSSES

Chapter 18: Securities Transactions

Introduction

KEY ISSUE 18A Stock Holding Periods and Capital Gain Rates.

Stock Holding Periods

Capital Gain Tax Rates

Capital Losses

KEY ISSUE 18B Reporting Mutual Fund Income and Sales.

Reporting Shareholder Income

Determining Basis in Mutual Fund Shares

KEY ISSUE 18C Losses on Section 1244 Stock.

Section 1244 Stock Requirements

Claiming a Section 1244 Loss

KEY ISSUE 18D Losses on Worthless Securities.

Abandoned Securities

KEY ISSUE 18E Publicly Traded Options and Futures Contracts.

Tax Rules for Option Writers

Tax Rules for Option Holders

Section 1256 Contracts

KEY ISSUE 18F Short Sales.

What Is a Short Sale?

General Tax Consequences

Applying the Constructive Sale Rules

Applying the Wash Sale Rules

Payments in Lieu of Dividends

KEY ISSUE 18G Employee Stock Options.

Incentive Stock Options

Nonqualified Stock Options (NQSOs)

KEY ISSUE 18H Anticonversion Rules: Ordinary Income or Capital Gain?

KEY ISSUE 18I Qualified Small Business Stock.

50% Gain Exclusion

Rollover of QSBS Gain

KEY ISSUE 18J Rollover of Publicly Traded Securities Gain.

KEY ISSUE 18K Wash Sale Losses.

KEY ISSUE 18L Constructive Sales of Appreciated Financial Positions.

General Rules

Definitions [IRC Sec. 1259(b) and (d)]

Exceptions to the Constructive Sale Rules

KEY ISSUE 18M Stock Trader versus Investor.

Taxation of Investors

Taxation of Traders

Summary of Taxation Rules for Traders and Investors

Distinguishing Traders from Investors

KEY ISSUE 18N Tax Treatment of Losses from Ponzi-type Investment Schemes.

IRS Guidance

Fraudulent Theft Loss Deduction Safe Harbor

Amended Returns

ILLUSTRATION 18-1: Partial Schedule D Reporting Disclosure of Use of Average Basis Method for Mutual Fund Shares

ILLUSTRATION 18-2: Form 1099-B and Partial Form 6781 Reflecting Marked-to-market Treatment of Section 1256 Contracts

Chapter 19: Installment Sales, Like-kind Exchanges, and Conversions of Property

Introduction

KEY ISSUE 19A Availability of Installment Method.

Property Eligible for Installment Reporting

KEY ISSUE 19B Installment Sales between Related Parties.

Sale of Depreciable Property between Related Parties

Two-year Disposition Rule

KEY ISSUE 19C Electing Out of the Installment Method.

Maximizing the Benefits of the Election Out

Mechanics of Making the Election Out

KEY ISSUE 19D Installment Sale Purchase Price Adjustments.

KEY ISSUE 19E Repossessing Real Estate Sold on Installment Basis.

KEY ISSUE 19F Installment Sales Using Wraparound Mortgages.

What Is a Wraparound Mortgage?

Effect of a Wraparound Mortgage on an Installment Sale

KEY ISSUE 19G Disposing of Installment Obligations.

Sale, Exchange, or Satisfaction at Other Than Face Value

Disposition Other Than by Sale

Transactions Not Considered Dispositions

KEY ISSUE 19H Like-kind Exchanges.

What Is Like-kind Property?

Purpose of Holding Property

Exchange Requirement Must Be Met

Computing Gain or Loss

Basis and Holding Period of Property Received

Depreciating Property Acquired in Like-kind Exchanges

Tax Reporting

Like-kind Property with Liabilities Attached

Related Person Exchanges

Like-kind Exchanges Involving Personal Residences or Rental Vacation Homes

Deferred Exchanges

KEY ISSUE 19I Involuntary Conversions.

Similar or Related in Service or Use

Replacement Period

Replacement Property Acquired from Related Person

Recognition of Gain

Special Rules for Property Damaged by Federally Declared Disasters

ILLUSTRATION 19-1: Form 6252 Reporting Gain Recognized on a Second Disposition by Related Party

ILLUSTRATION 19-2: Form 8824 Reporting a Like-kind Exchange

ILLUSTRATION 19-3: Form 4797 Reporting Several Like-kind Exchanges

ILLUSTRATION 19-4: Form 8824 Reporting a Like-kind Exchange with Boot

Chapter 20: Trade or Business Property Transactions

Introduction

KEY ISSUE 20A Business Property Abandonments.

Distinguishing Various Types of Abandonment Losses

Identifying an Abandonment Loss

KEY ISSUE 20B Nonrecaptured Section 1231 Loss Carryovers.

General Rules

Applying the Rules

KEY ISSUE 20C Purchase Price Allocations--Form 8594.

Reporting Requirements

Procedures for Allocating Purchase Price

Postsale Adjustments to Purchase Price

KEY ISSUE 20D Computing Depreciation Recapture.

KEY ISSUE 20E Losses on Related-party Sales.

General Rules

What Is a Related Party?

Applying the Related-party Rules

KEY ISSUE 20F Business Casualty Losses.

KEY ISSUE 20G Gains from the Sale of Depreciable Real Property.

Reporting Unrecaptured Section 1250 Gain

Installment Sales of Depreciable Real Property

ILLUSTRATION 20-1: Form 8594, Reporting Business Acquisition for Buyer

ILLUSTRATION 20-2: Form 4684, Reporting Combined Business and Personal Casualty Loss

ILLUSTRATION 20-3: Form 4797, Reporting Sale of Depreciable Real Property

Chapter 21: Bad Debt Losses, Debt Discharge Income, and Foreclosures

Introduction

KEY ISSUE 21A Deduction for Business and Nonbusiness Bad Debts.

Business Bad Debts

Nonbusiness Bad Debts

Intrafamily Loans

Loan Guarantees

Recoveries of Bad Debts

KEY ISSUE 21B Debt Discharge Income--Solvent Taxpayer.

Effect of Debt Modifications

Acquisition of Debt by Related Party

Special Rules for Farmers

Special Rules for Real Property Business Debt

Special Rules for Certain Student Loans

Special Rules for Principal Residence Debt

KEY ISSUE 21C Debt Discharge Income--Bankrupt or Insolvent Taxpayer.

Amount Excludable from Gross Income

Reduction of Tax Attributes

Basis Reduction Elections

Ordering Rules for Basis Reduction

Timing of Attribute Reduction

KEY ISSUE 21D Foreclosure by Lender--Recourse Debt.

KEY ISSUE 21E Foreclosure by Lender--Nonrecourse Debt.

KEY ISSUE 21F Reduction of Seller-financed Debt.

KEY ISSUE 21G Consumer Credit Card Debt Modification.

Applicable Exceptions to Income Recognition

The Measure of Income Recognition

ILLUSTRATION 21-1: Schedule D Reporting Nonbusiness Bad Debt Loss

ILLUSTRATION 21-2: Form 982 Reporting Attribute Reduction for Insolvent Taxpayer

ILLUSTRATION 21-3: Form 982 Electing to Reduce Basis of Insolvent Taxpayer's Depreciable Property

Chapter 22: Personal Residence Transactions

Introduction

KEY ISSUE 22A Costs Incurred to Purchase a Home.

KEY ISSUE 22B Excluding Gain on the Sale of a Residence.

Definition of Principal Residence

Gain Exclusion Requirements

Partial Gain Exclusion

Effect of Rental or Business Use on Exclusion of Gain

Election to Not Apply Gain Exclusion

Effect of Filing Status on the Exclusion

KEY ISSUE 22C Excluding Gain in Spousal Transfers.

Dividing the Residence between Spouses in Divorce Situations

Transfer of Residence Due to Death of Spouse

KEY ISSUE 22D Reporting Requirements When a Principal Residence Is Sold.

KEY ISSUE 22E Purchase of a Taxpayer's Home by an Employer or Relocation Service Company.

ILLUSTRATION 22-1: Analysis of a Closing Statement

ILLUSTRATION 22-2: Schedule D Reporting Partially Excluded Gain from the Sale of Personal Residence

BELOW-MARKET LOANS

Chapter 23: Below-market Loans

Introduction

KEY ISSUE 23A Types of Loans Subject to the Below-market Rules.

Types of Below-market Loans

Special Rules and Definitions of Demand and Term Loans

Forgiven Interest Payments

Three-step Process to Apply the Below-market Loan Rules

KEY ISSUE 23B Step 1--Determining If the Transaction Produces a Below-market Loan.

KEY ISSUE 23C Step 2--Calculating Forgone Interest on a Below-market Loan.

Demand Loans

Term Loans Conditioned on Future Services

Term Loans

Special Rules for Gift Loans between Individuals

KEY ISSUE 23D Step 3--Determining the Character and Timing of Deemed Transfers of a Below-market Loan.

General Rules

Summary

Reporting Requirements

Withholding Requirements

KEY ISSUE 23E Applying the Below-market Loan Rules.

Term Loan--Family Gift Loan

Demand Loan--Corporation/Shareholder Loan

ILLUSTRATION 23-1: Sample Borrower Tax Return Reporting Statement for Below-market Loans (IRC Sec. 7872)

PERSONAL DEDUCTIONS

Chapter 24: Standard Deduction

Introduction

KEY ISSUE 24A Additional Standard Deduction Items.

Elderly and Blind Taxpayers

Local Real Property Taxes

KEY ISSUE 24B Reduced Standard Deduction for Dependents.

Dependent Children

Dependent Parents

Chapter 25: Medical Expenses

Introduction

KEY ISSUE 25A Identifying Deductible Medical Expenses of a Dependent.

General Rules for Dependent's Medical Deduction

Private School Tuition for Special School

KEY ISSUE 25B Claiming Medical Deductions for Capital Expenditures.

Residential Expenditures

Personal Property Expenditures

KEY ISSUE 25C Deducting Long-term Care Expenses and Payments to Long-term Care Institutions.

General Guidelines for Long-term Care Expenses

Costs of Nursing Homes, Assisted Living, and Other Long-term Care Facilities

KEY ISSUE 25D Deducting In-home Health Care Costs.

KEY ISSUE 25E Deducting Retirement Community Fees (Lifetime Care).

Deducting Fees as Medical Expenses

Avoiding Imputed Interest Income on Entrance Fees

KEY ISSUE 25F Deducting Medical Expenses of a Deceased Taxpayer.

KEY ISSUE 25G Deducting Medical Care Insurance and Long-term Care Insurance.

Medical Care Insurance

Long-term Care Insurance

Chapter 26: Charitable Contributions

Introduction

KEY ISSUE 26A Applying AGI Percentage Limitations.

The 50% Limitations

The 30% Limitations

The 20% Limitation

Applying the Limitations

KEY ISSUE 26B Using Contribution Carryovers.

KEY ISSUE 26C Substantiating Contributions.

Cash Contributions of Any Amount

Property Contributions of Less Than $250

Cash and Property Contributions of $250 or More

Property Contributions of More Than $500

Property Contributions of More Than $5,000

Written Notification Requirement for Gifts of Certain Intellectual Property

KEY ISSUE 26D Charitable Contribution Deduction for Gifts of Certain Property.

Determining the Deductible Amount for Gifts of Appreciated Property

Valuing Noncash Contributions

Gift of Property That Has Decreased in Value

Stock Gifts to a Private Foundation

Gifting Nonstatutory Stock Options

Motor Vehicles, Boats, and Airplanes (Qualified Vehicles)

Conservation Contributions

Bargain Sale Rules

KEY ISSUE 26E Deducting Payments Entitling Taxpayer to Receive Goods or Services in Return (Quid Pro Quo Contributions).

Exceptions for Insubstantial Benefits

Reporting Requirements

Determining the Deductible Amount of Quid Pro Quo Contributions

KEY ISSUE 26F Claiming a Contribution Deduction Using Life Insurance.

Naming the Charity as Beneficiary

Transferring Policy Ownership to Charity

KEY ISSUE 26G Determining When a Contribution Is Made and Is Deductible.

General Rules

Credit Card Rebates

Gifts of Stock

KEY ISSUE 26H Deducting Out-of-pocket Expenses.

KEY ISSUE 26I Making a Tax-free IRA Distribution to Charity.

KEY ISSUE 26J Cash Donations for Haiti Earthquake Relief.

ILLUSTRATION 26-1: Computation of AGI Limitations

ILLUSTRATION 26-2: Form 8283 Reporting Contribution of Capital Gain Property

Chapter 27: Deductible Taxes

Introduction

KEY ISSUE 27A Distinguishing between Deductible and Nondeductible Taxes.

Income Taxes

Real Estate Taxes

Personal Property Taxes

Sales Taxes

Other Taxes

Reporting Deductible Taxes

Electing to Capitalize Real or Personal Property Taxes

KEY ISSUE 27B Deducting Year-end Tax Payments.

KEY ISSUE 27C Apportioning Real Property Taxes between Buyer and Seller.

Chapter 28: Other Itemized Deductions

Introduction

KEY ISSUE 28A Deducting Personal Casualty Losses.

Determining the Nature and Amount of a Casualty Loss

Effect of Insurance Proceeds and Certain Disaster Relief Payments

Limitations on Personal Casualty Loss Deductions

When to Report Personal Casualty and Disaster Losses

KEY ISSUE 28B Deducting Job Search Expenses.

Qualifications for Deductible Expenses

Deductible Expenses and Where to Deduct Them

KEY ISSUE 28C Deducting Employee Business Expenses.

Employer Expense Reimbursement Arrangements

Auto Allowances and Employer-provided Vehicles

When Is Form 2106 Required for Employee T&E and Auto Expenses?

KEY ISSUE 28D Deducting Work-related Educational Expenses.

General Rules

Active Trade or Business or Current Employment Is Required

Educational Expenses Not Deductible

KEY ISSUE 28E Deducting Federal Estate Tax on Income in Respect of a Decedent.

KEY ISSUE 28F Allocating Expenses to Tax-exempt Income.

Methods of Allocation

Reporting and Recordkeeping Requirements

KEY ISSUE 28G Deducting Gambling Losses.

Reporting Gambling Losses

Gambling Loss Deduction Limited

Documenting Gambling Losses

KEY ISSUE 28H Selected Other Miscellaneous Itemized Deductions.

Deducting IRA Losses

Deducting 529 Plan and Coverdell ESA Losses

Wrap and Broker Fees

Claim of Right Adjustments

ILLUSTRATION 28-1: Form 4684 Reporting Personal Casualty Loss

ILLUSTRATION 28-2: Form 2106 Reporting Unreimbursed Meal and Entertainment Expenses Incurred by an Employee

Chapter 29: Interest Expense

Introduction

KEY ISSUE 29A Applying the Interest Tracing Rules.

General Rules

The 30-day Rule

Special 90-day Rules for Expenditures on a Residence

Using New Debt to Pay Accrued Interest

Repayment Ordering Rules for Multiple-use Debt

Installment Sale Dispositions

KEY ISSUE 29B Interest Expense Attributable to Pass-through Entities.

Debt-financed Capital Contributions or Purchase Paid to a Pass-through Entity

Debt-financed Acquisition of a Pass-through Entity Interest from Another Owner

Business Interest Expense Treatment for Debt Related to a Pass-through Entity

Entity Financing Distributions to Owners

Debt Attributable to Former Pass-through Entities

Capitalized Interest Expense via Pass-through Entity

KEY ISSUE 29C Personal Interest Expense.

Categories of Personal Interest

Interest Paid on a Tax Deficiency

KEY ISSUE 29D Qualified Residence Interest Expense.

What Is a Qualified Residence?

Acquisition Indebtedness

Home Equity Indebtedness

Secured Debt

Interest on Home Mortgage Not Meeting Qualified Residence Interest Definition

Electing Out of Treatment as Qualified Residence Debt to Maximize Interest Deductions

Deducting Mortgage Loan Points

Reverse Mortgage Loans

Mortgage Insurance Premiums

KEY ISSUE 29E Passive Activity Interest Expense.

Debt to Acquire Interest in S Corporation or Partnership

Incidental Rental of Property and Other Recharacterization Rules

Where to Report Passive Activity Interest Expense

Oil and Gas Working Interest

$25,000 Rental Real Estate Loss Allowance

KEY ISSUE 29F Investment Interest Expense.

General Definition

Net Investment Income

Electing to Include Net Capital Gain and Qualified Dividends in Investment Income

Where to Report Deductible Investment Interest Expense

Passive Activities Are Not Considered for Investment Interest Purposes

Disallowed Investment Interest Expense

KEY ISSUE 29G Interest Expense Following Termination or Change in Business.

Operating Debt of a Former Business

Debt Allocated to Capital Expenditures

KEY ISSUE 29H Interest Expense on Qualified Retirement Plan Loans.

ILLUSTRATION 29-1: Schedule E Reporting Interest Expense Allocable to S Corporation Investment

ILLUSTRATION 29-2: Schedule E Reporting Interest Expense Allocable to General Partnership Investment

ILLUSTRATION 29-3: Schedule E Reporting Interest Expense Allocable to Oil and Gas Working Interest General Partnership Investment

TAX CALCULATIONS

Chapter 30: Self-employment (SE) Tax

Introduction

KEY ISSUE 30A Net Earnings from Self-employment Defined.

Trade or Business Requirement

What Is Earned Income?

Income from Partnerships, Limited Liability Companies (LLCs), and Other Pass-through Entities

Computing SE Tax

KEY ISSUE 30B Pass-through Income and Distributions from S Corporations.

Pass-through Income (or Loss)

Salaries, Distributions, and Nontaxable Draws

KEY ISSUE 30C SE Income for Ministers with Housing Allowance Income.

KEY ISSUE 30D Minister's Election of Exemption from SE Tax.

KEY ISSUE 30E Exemptions from SE and FICA Taxes.

Termination Payments of Former Insurance Salesmen

Other Income Excludable from SE Tax

KEY ISSUE 30F Spouses Working in a Family Business.

Reporting Income Properly between Spouses

Community Property Issues

Spouse Is Employee

ILLUSTRATION 30-1: Schedule SE Reporting Minister's SE Income and Reconciliation to Schedule C

ILLUSTRATION 30-2: Schedule SE Reflecting Net Earnings from Self-employment

ILLUSTRATION 30-3: Schedule SE Reflecting Net Earnings from Self-employment

Chapter 31: Alternative Minimum Tax

Introduction

KEY ISSUE 31A Computing Alternative Minimum Tax (AMT).

General Rules

Itemize Deductions for AMT Savings

Computing AMT When Maximum Capital Gain Rates Apply

KEY ISSUE 31B Elections to Minimize AMT.

Elections to Minimize Depreciation AMT Adjustment

Summary of Elections to Minimize AMT

KEY ISSUE 31C Passive Activity Loss Adjustments.

KEY ISSUE 31D Calculating the AMT Adjustment for Interest Expense.

Residential Interest Expense

Investment Interest Expense

KEY ISSUE 31E Alternative Minimum Tax Net Operating Loss (AMT NOL).

KEY ISSUE 31F Minimum Tax Credit (MTC).

Computing the MTC

Refundable Minimum Tax Credit

KEY ISSUE 31G Incentive Stock Options.

Overview of ISO Tax Rules

ISO-related AMT Adjustment

Using Stock to Exercise ISOs

KEY ISSUE 31H Recomputing Deductions Based on a Percentage of AMT, AGI, or AMTI.

Chapter 32: Kiddie Tax

Introduction

KEY ISSUE 32A Mechanics of the Kiddie Tax.

General Rules

Definition of Support

Alternative Minimum Tax

KEY ISSUE 32B Multiple Children Subject to the Kiddie Tax.

KEY ISSUE 32C Determining Whose Income to Use When Parents Do Not File Jointly.

KEY ISSUE 32D Reporting Children's Income on Parents' Return.

ILLUSTRATION 32-1: Form 8615 Computing Kiddie Tax When Family Has Two Children

ILLUSTRATION 32-2: Form 8814 Electing to Report a Child's Income on Parents' Return

Chapter 33: Tax on Lump-sum Distributions

Introduction

KEY ISSUE 33A Lump-sum Distribution Qualifications.

KEY ISSUE 33B Distribution of Employer Securities.

General Rules

Rolling over Appreciated Employer Stock

Electing to Be Taxed on the Full Fair Market Value

Recognizing Losses in Connection with Distributions of Employer Securities

KEY ISSUE 33C Rolling Over a Lump-sum Distribution.

Chapter 34: Excise Taxes

Introduction

KEY ISSUE 34A The 6% Excess Contribution Tax on IRAs, ESAs, MSAs, and HSAs.

Excess Contributions to Traditional and Roth IRAs

Excess Contributions to Education Savings Accounts (ESAs)

Excess MSA and HSA Contributions

KEY ISSUE 34B The 10% and 25% Early (Premature) Distributions Tax on Qualified Retirement Plans.

General Rules and Exceptions to Penalty Tax

Nonqualified Distributions Following Roth IRA Conversions

25% Penalty Applicable to SIMPLE IRAs

Substantially Equal Periodic Payment Exception

10% Penalty and Withdrawals of Excess Contributions

KEY ISSUE 34C The 10% Excise Tax on Premature Distributions from Tax-deferred Annuities.

KEY ISSUE 34D The 50% Excise Tax on Failure to Make Minimum Required Distributions.

ILLUSTRATION 34-1: Partial Form 5329 Reporting 6% Tax on Excess IRA Contributions

ILLUSTRATION 34-2: Partial Form 5329 Reporting 25% Tax on SIMPLE IRA Distribution

TAX CREDITS

Chapter 35: Personal Credits

Introduction

KEY ISSUE 35A Child and Dependent Care Credit.

General Rules

Earned Income Requirement

Child Care Inside versus Outside the Home

Employer-sponsored Child Care Plans

KEY ISSUE 35B Adoption Credit and Income Exclusion.

Adoption Credit

Excluding Employer-provided Adoption Expenses

Coordination of Credit and Exclusion

KEY ISSUE 35C Child Tax Credits.

Nonrefundable Child Tax Credit

Refundable Additional Child Tax Credit

KEY ISSUE 35D American Opportunity, Hope, and Lifetime Learning Education Credits.

Common Provisions for the American Opportunity, Hope, and Lifetime Learning Credits

Provisions Unique to the American Opportunity Tax Credit

Provisions Unique to the Lifetime Learning Credit

KEY ISSUE 35E Retirement Savings Contributions Credit.

Distributions That Reduce the Eligible Contributions

KEY ISSUE 35F Claiming the Earned Income Credit.

Consequences of Improperly Claiming the Credit

General EIC Requirements

Computing the Credit

Determining Earned Income

Optional Method for Computing SE Earnings

Who Is a Qualifying Child?

KEY ISSUE 35G Residential Energy Efficient Property and Nonbusiness Energy Property Credits.

Residential Energy Efficient Property Credit

Nonbusiness Energy Property Credit

KEY ISSUE 35H Claiming Personal Credits When Alternative Minimum Tax Applies.

KEY ISSUE 35I First-time Homebuyer Tax Credit.

Timing and Eligibility for the Credit

Recapture of the Credit

KEY ISSUE 35J Making Work Pay Credit.

Eligibility for the Credit

Claiming the Credit

ILLUSTRATION 35-1: Form 2441 Claiming Child and Dependent Care Credit When Spouse Is a Full-time Student

ILLUSTRATION 35-2: Form 8839 Reporting Adoption Credit

ILLUSTRATION 35-3: Computing the Additional Child Tax Credit

Chapter 36: Business Credits

Introduction

KEY ISSUE 36A Commonly Encountered Business Credits.

KEY ISSUE 36B How AMT Adjustments and Preferences Affect Business Credits.

KEY ISSUE 36C Passive Activity Credits.

ILLUSTRATION 36-1: Form 8582-CR Claiming Special Allowance for Rehabilitation Credit

Chapter 37: Foreign Tax Credit

Introduction

KEY ISSUE 37A Foreign Tax Credit versus Deduction.

KEY ISSUE 37B Limitation on the Foreign Tax Credit.

General Rules for the Limitation

Computation of Foreign-source Taxable Income

Restrictions on Income from Foreign Sources

KEY ISSUE 37C Treatment of Earned and Unearned Income.

KEY ISSUE 37D Foreign Tax Credit Used against Alternative Minimum Tax.

ILLUSTRATION 37-1: Form 1116 Claiming Foreign Tax Credit on Foreign Earned Income

ILLUSTRATION 37-2: Form 1116 Calculating Foreign Tax Credit Limitations for AMT

ILLUSTRATION 37-3: Form 6251 Claiming Foreign Tax Credit for AMT

FILING MATTERS

Chapter 38: Tax Payments

Introduction

KEY ISSUE 38A Estimated Tax Payments and the Underpayment Penalty.

Avoiding the Underpayment Penalty

Prior-year Safe Harbor

Annualization

Pass-through Entities

Switching from the Annualization Method

Late Estimated Tax Payments

KEY ISSUE 38B Estimated Tax--Farmers and Fishermen.

KEY ISSUE 38C Estimated Payments and Change in Marital Status.

Allocating Joint Payments

Determining Prior-year Tax Safe Harbor When Marital Status Changes

KEY ISSUE 38D Optional Tax Payment Methods.

General Payment Options

Paying Taxes via the Internet

Paying Taxes with a Credit Card

Installment Agreements

Online Payment Agreement (OPA) for Delinquent Taxes

KEY ISSUE 38E Tax Payments and Reporting for Household Employees ("Nanny Tax").

General Rules

Who Is a Household Employee?

Wages Subject to FICA Taxes

Wages Subject to FUTA

FIT Withholding

Due Date for Reporting and Payment on Schedule H

KEY ISSUE 38F Irrevocable Election to Credit Overpayment to Succeeding Year.

ILLUSTRATION 38-1: Worksheet Determining Qualified Farmer Status

ILLUSTRATION 38-2: Form 9465 Requesting Installment Agreement

ILLUSTRATION 38-3: Schedule H and Form W-2 for Household Employee

Chapter 39: Filing Returns

Introduction

KEY ISSUE 39A Filing a Return for a Deceased Taxpayer.

Claiming Income and Deductions in Year of Death

Claiming a Refund Due

Request for Prompt Assessment of Tax

KEY ISSUE 39B Mailing Returns and Other Tax Documents.

Private Delivery Services

U.S. Postal Service

Electronically Filed Returns

KEY ISSUE 39C Filing Returns in Divorce Situations.

When Is a Marriage Terminated for Tax Purposes?

Implications of Filing Joint Returns on the Joint Tax Liability

Allocating Tax Carryforwards in Divorce

Deducting Legal and Professional Fees Paid in Connection with a Divorce

KEY ISSUE 39D Divorce--Residents of Community Property States.

Splitting Income and Deductions in the Year Divorce Is Final

Splitting Income and Deductions When Divorce Is Not Final before Year-end

Special Community Income Provisions to Consider for Divorced or Separated Taxpayers

KEY ISSUE 39E Divorce--Residents of Equitable Distribution States.

Dividing Income

Dividing Deductions

KEY ISSUE 39F Extensions.

Automatic Six-month Extension

Properly Estimating the Tax Liability

Extending the Return without Paying the Tax

Taxpayers Living Abroad

Relief for Taxpayers in Certain Disaster Areas

Taxpayers Serving in a Combat Zone or Contingency Operation

KEY ISSUE 39G Taxpayer and Preparer Signatures.

Taxpayer Signatures

Preparer Signatures

KEY ISSUE 39H Direct Deposit of Tax Refunds.

KEY ISSUE 39I Preparer Registration and Oversight.

Registration Requirements

Oversight and Competency Standards

ILLUSTRATION 39-1:

This component should be backspaced into the head:ill.Form 1040 Taxpayer Name and Address Section for Deceased Taxpayer

ILLUSTRATION 39-2:

This component should be backspaced into the head:ill.Form 1040 Signature Section for Deceased Taxpayer

ILLUSTRATION 39-3:

This component should be backspaced into the head:ill.Form 1310--Refund Claimed by Person Other Than Surviving Spouse or Personal Representative

QUICK REFERENCE TABLES

TABLE T101: Federal Tax Data Sheet--2009-2011

TABLE T102: 2010 Phase-out Ranges for Various Tax Items

TABLE T201: 2010 Tax Tables

TABLE T202: 2010 Tax Rate Schedules

TABLE T301: 2010 Filing Requirements (for Other Than Dependents)

TABLE T302: 2010 Filing Requirements (for Dependents)

TABLE T401: Summary of Selected Taxpayer and Practitioner Penalties

TABLE T501: Summary of IRS Filing Addresses for 2010 Returns (2011 Filing Season)

TABLE T601: IRS Forms for Individual Income Taxation (Not All-inclusive)

TABLE T602: IRS Publications for Individual Income Taxation

TABLE T701: Interest Rates on Overpayments and Underpayments (2005-2010)

TABLE T702: 2010 Imputed Interest AFR Tables

TABLE T703: Blended Annual Rates (2001-2010)

TABLE T704: Determination of Applicable Federal Rate--Summary

TABLE T801: Depreciation Recapture

TABLE T802: Employee Treatment of Employer Reimbursements or Allowances

TABLE T803: Summary of Reductions to Personal Casualty Losses

TABLE T804: Documentation Guide for Charitable Contributions for 2010

TABLE T805: Capital Gains, Holding Periods, and Maximum Rates for 2010

TABLE T806: Tax Treatment for Computer Software

TABLE T807: Taxation of Publicly-traded Option Transactions

TABLE T808: Comparison of Series EE, Series I, and Series HH Bonds

TABLE T809: Summary of Tax Rules for Children (for 2010, based on single filing status and taxable income of $34,000 or less)

TABLE T810: T&E Substantiation Requirements

TABLE T811: Deductible Travel Expenses

TABLE T901: Taxable Social Security Benefit Levels

TABLE T1001: Qualified Retirement Plans--Selected Inflation-adjusted Data

TABLE T1002: Life Expectancy Table (Single Life)

TABLE T1003: Life Expectancy Table (Joint Life and Last Survivor)

TABLE T1004: Uniform Lifetime Table for Determining Applicable Divisor

TABLE T1005: Contributions to Keogh, SEP, IRA, and SIMPLE IRA Plans (2010)

TABLE T1006: Excess Contributions to Traditional IRAs: Tax Consequences of Corrective Methods (for 2010)

TABLE T1101: Nonconventional Source Fuel Credit

TABLE T1102: Work Opportunity Tax Credit

TABLE T1103: Investment Credit for Rehabilitation Expenditures

TABLE T1104: Disabled Access Credit

TABLE T1105: Employer Social Security Credit for Employee Tips

TABLE T1106: Employer-provided Child Care Credit

TABLE T1107: Credit for Small Employer Pension Plan Start-up Costs

TABLE T1108: Small Employer Health Insurance Credit

TABLE T1201: Alternative Minimum Tax Adjustments and Preferences

DEPRECIATION TABLES

TABLE D101: Recovery Periods for Common Assets

TABLE D201: Summary of Regular Tax Depreciation Rules Assets Placed in Service after 12/31/86 (or 7/31/86, if Election Made)

TABLE D202: Summary of AMT Depreciation Rules Assets Placed in Service after 12/31/86

TABLE D203: Summary of Depreciation Allowable in Year of Disposition

TABLE D204: Recap of Required and Elective Depreciation Methods for Both Regular Tax and AMT

TABLE D301: MACRS Personal Property, Half-year Convention

TABLE D401: MACRS Personal Property, Midquarter Convention--1st Quarter

TABLE D402: MACRS Personal Property, Midquarter Convention--2nd Quarter

TABLE D403: MACRS Personal Property, Midquarter Convention--3rd Quarter

TABLE D404: MACRS Personal Property, Midquarter Convention--4th Quarter

TABLE D501: MACRS Residential Rental Property and AMT Residential Rental Property (27.5-year Property)

TABLE D601: MACRS Nonresidential Real Property (31.5-year Property)

TABLE D701: MACRS Nonresidential Real Property and AMT Nonresidential Property (39-year Property)

AUTO TABLES

TABLE A101: Standard Mileage Rate Method for Deductions (2010)

TABLE A102: Actual Cost Method for Deductions

TABLE A103: Deductions for Leased Automobiles

TABLE A104: Deductions for Employer-provided Vehicles

TABLE A105: Vehicle Deductions for Self-employed Persons

TABLE A106: Reporting for Employer-provided Vehicles

TABLE A107: Valuing Personal Use of Employer-provided Business Autos

TABLE A108: Annual Lease Value Table for Employer-provided Autos

TABLE A201: Luxury Auto Depreciation Dollar Limits

TABLE A202: MACRS Depreciation Rates for Autos

TABLE A301: Autos Leased in 2010--Price-based Income Inclusions

TABLE A302: Autos Leased in 2009--Price-based Income Inclusions

TABLE A303: Autos Leased in 2008--Price-based Income Inclusions

TABLE A401: Hybrid Vehicles Approved for Alternative Motor Vehicle Credit under IRC Sec. 30B(d)

TABLE A402: Vehicles Qualifying for Advanced Lean Burn Technology Motor Vehicle Credit

ELECTIONS

ELECTION E101: Deferring Income from Crop Insurance Proceeds or Disaster Payments

ELECTION E102: Deferring Income on Livestock Sold because of Drought, Floods, or Other Weather-related Conditions

ELECTION E103: Electing out of the Uniform Capitalization Rules for Plants

ELECTION E201: Section 59(e) Optional Amortization for Certain AMT Preferences

ELECTION E301: Rollover of Securities Capital Gain into Specialized Small Business Investment Company (SSBIC)

ELECTION E302: Electing to Capitalize Carrying Charges

ELECTION E303: Electing Out of the Installment Method

ELECTION E304: Accruing Interest on U.S. Savings Bonds

ELECTION E305: Deferring Gain from Involuntary Conversions

ELECTION E306: Using an Average Basis Method to Determine Basis in Regulated Investment Company Shares

ELECTION E307: Revoking Income Accrual Election on U.S. Savings Bonds

ELECTION E308: Request for Additional Time for Replacing Converted Property

ELECTION E309: Qualified Small Business Stock (QSBS) Capital Gain Rollover

ELECTION E310: Including Accrued Bond Market Discount in Current Income

ELECTION E311: Bond Market Discount Accrued Using the "Constant Interest Rate" Method

ELECTION E401: Electing the Alternative Minimum Tax (AMT) Depreciation Method for Regular Tax

ELECTION E402: Using Straight-line in Lieu of MACRS Depreciation

ELECTION E403: Electing Out of MACRS Depreciation

ELECTION E404: Adopting the Alternative Depreciation System (ADS) for Regular Tax

ELECTION E405: Expensing Depreciable Property (Section 179)

ELECTION E406: Electing out of Bonus Depreciation

ELECTION E407: Electing Not to Apply Regulations for MACRS Property Involved in a Like-kind Exchange

ELECTION E501: Electing Out of Treatment as Debt Secured by Qualified Residence

ELECTION E502: Including Net Capital Gain and Qualified Dividend Income in Investment Income

ELECTION E601: Electing to Adjust Basis for Unused Passive Activity Credits

ELECTION E602: Treating All Interests in Rental Real Estate Activities as a Single Activity

ELECTION E603: Electing Out of the Self-charged Interest Rules

ELECTION E701: Rolling Over a Qualified Plan or IRA Distribution

ELECTION E702: Treating Surviving Spouse as Owner of Decedent's IRA

ELECTION E703: Currently Recognizing Unrealized Appreciation in Employer Securities

ELECTION E704: Recomputing Variable Annuity Exclusion When Payment Is Less Than Exclusion Amount

ELECTION E705: Recharacterizing IRA Contributions

ELECTION E706: Retirement Plan Rollover to a Nonspouse Beneficiary

ELECTION E801: Deducting Intangible Drilling Costs

ELECTION E802: Deducting Intangible Drilling Costs on Nonproductive Wells

ELECTION E901: Receipt of Restricted Property Treated as Current Compensation

ELECTION E902: Postponing Hobby Loss Determination

ELECTION E903: Limiting Taxable Amount of Lump Sum Social Security Benefit Payment

ELECTION E904: Excluding Discharge of Indebtedness Income with Respect to Qualified Real Property Business Indebtedness

ELECTION E905: Claiming Foreign Taxes as a Credit or Deduction

ELECTION E906: Reducing Depreciable Asset Basis First for Excluded Debt Discharge Income

ELECTION E907: Mark-to-market for Traders in Securities or Commodities

ELECTION E908: Consent to Treating a Partnership Interest as Depreciable Property

ELECTION E909: Spousal Joint Venture Election Out of Partnership Treatment

ELECTION E1001: Deducting Disaster Losses in Previous Tax Year

ELECTION E1002: Reducing a Charitable Contribution of Capital Gain Property

ELECTION E1003: Bond Premium Amortization

ELECTION E1004: Forgoing the NOL Carryback Period

ELECTION E1005: Deducting and Amortizing Start-up Expenditures

ELECTION E1006: Deducting Medical Expenses on Decedent's Income Tax Return

ELECTION E1007: Capitalizing Prepaid Expenses That Qualify for Deduction under the 12-month Rule

ELECTION E1008: Reducing Basis by Items of Loss or Deduction before Nondeductible Expenses and Certain Oil and Gas Depletion

ELECTION E1009: Dependency Exemption for a Child Placed with the Taxpayer for Adoption

ELECTION E1010: Electing to Capitalize Start-up Expenses

ELECTION E1101: To Request Extension of Time for Making an Election (Reg. 301.9100 Relief)

CHECKLISTS

CHECKLIST C101: Checklist for Due Diligence Review for Preparing Form 1040

CHECKLIST C102: 2010 Form 1040 Preparation Checklist (Long Form)

CHECKLIST C103: 2010 Form 1040 Preparation Checklist (Short Form)

CHECKLIST C104: Factors in Establishing a Profit Motive

CHECKLIST C105: Determining Whether a Taxpayer Is an Active Participant for the IRA Deduction Limitation

CHECKLIST C106: Due Diligence Requirements for Return Preparers Reporting the Earned Income Credit

CHECKLIST C107: Avoiding a Section 6694 Return Preparer Penalty

WORKSHEETS

WORKSHEET W101: Cost of Maintaining a Household

WORKSHEET W102: Allocation of Income between Spouses in Community Property State

WORKSHEET W201: Excludable Housing Allowance for Minister of the Gospel

WORKSHEET W202: Refunds of Amounts Claimed as Itemized Deductions

WORKSHEET W203: Refunds of 2009 Itemized Deductions Subject to Phase-out

WORKSHEET W204: Taxable Social Security Benefits

WORKSHEET W205: Taxable Social Security Benefits with IRA Deduction Phase-out

WORKSHEET W206: Installment Sale Deferred Gain

WORKSHEET W207: Gain on Repossession of Real Property and Basis of Repossessed Real Property

WORKSHEET W208: Computational Worksheet for Like-kind Exchanges

WORKSHEET W209: Recapture of Net Section 1231 Losses

WORKSHEET W210: Mutual Fund Share Basis

WORKSHEET W211: Fringe Benefit Compensation Value for Employer-provided Vehicle

WORKSHEET W212: Computing Taxable Part of IRA Distribution When Contribution Made in the Same Year

WORKSHEET W213: Simplified General Rule for Calculating Return of Basis in an Annuity Starting before November 19, 1996

WORKSHEET W214: Simplified Method for Calculating Return of Basis in an Annuity Starting after November 18, 1996

WORKSHEET W301: 2010 Traditional IRA Deduction Computation

WORKSHEET W302: Support Test for Dependency Deduction

WORKSHEET W303: Computation of NOL (2010)

WORKSHEET W304: Utilization of NOL Carryforward or Carryback

WORKSHEET W305: NOL Carryback Following a Divorce or the Death of a Spouse

WORKSHEET W306: Interest Expense Allocation Schedule

WORKSHEET W307: Carryforward Schedule for Home Mortgage Points

WORKSHEET W308: Investment Interest Expense Carryover Schedule

WORKSHEET W309: Carryover Schedule for Charitable Contributions (2010)

WORKSHEET W310: Section 179 Carryover Schedule

WORKSHEET W311: Vehicle Mileage Log

WORKSHEET W312: Maximum Deductible SEP or Keogh Contribution for a Self-employed Individual

WORKSHEET W313: Oil and Gas Depletion Schedule

WORKSHEET W314: Cost Depletion Schedule

WORKSHEET W315: Recapture of Alimony

WORKSHEET W316: Partner's Tax Basis Calculation

WORKSHEET W317: Carryforward Worksheet for Computing Partner's Amount at Risk

WORKSHEET W318: S Corporation Shareholder's Calculation of Basis in Stock and Debt

WORKSHEET W319: Components of Suspended Loss Carryover

WORKSHEET W320: Calculating the Domestic Production Activities Deduction for 2010

WORKSHEET W321: Carryforward Schedule for Prepaid Mortgage Insurance Premiums

WORKSHEET W322: Limit on Rental Deductions for a Dwelling Unit Used as a Home (Interest and Taxes Allocated Using IRS Method)

WORKSHEET W323: Limit on Rental Deductions for a Dwelling Unit Used as a Home (Interest and Taxes Allocated Using Tax Court Method)

WORKSHEET W324: Depreciation and Basis--Vehicle Trade-in: Replacement Vehicle Depreciated under Reg. 1.168(i)-6

WORKSHEET W325: Depreciation and Basis--Vehicle Trade-in: New Asset Treatment Election Made

WORKSHEET W326: Appendix A: Statement by Taxpayer Using the Procedures in Rev. Proc. 2009-20 to Determine a Theft Loss Deduction Related to a Fraudulent Investment Arrangement

WORKSHEET W401: Alternative Minimum Tax NOL Computation

WORKSHEET W402: Qualified Farmer Determination (for Estimated Tax Exception)

WORKSHEET W403: Credit Claimed under IRC Sec. 1341 (Claim of Right)

WORKSHEET W404: Foreign Tax Credit--Income Allocation Schedule

OTHER PRACTICE AIDS

PRACTICE AID O101: Client Data Sheet

PRACTICE AID O102: Sample Tax Engagement Letter for Individual Clients

PRACTICE AID O103: Transmittal Letter for Tax Summary (Form 1040)

PRACTICE AID O104: Tax Summary--Direct Sellers

PRACTICE AID O105: Tax Summary--Airline Personnel

PRACTICE AID O106: Tax Summary--Realtor

PRACTICE AID O107: Tax Summary--Farmers

PRACTICE AID O108: Sample Consent to Disclosure of Form 1040 Tax Return Information

PRACTICE AID O109: Sample Disclosure for Use of Form 1040 Tax Return Information

PRACTICE AID O201: Items Constituting Support of Dependent

PRACTICE AID O202: Dependent Status for Children of Divorced or Separated Parents

PRACTICE AID O203: Flowchart to Determine Qualification for Head of Household Status

PRACTICE AID O301: Reporting Sales of Business Property

PRACTICE AID O302: Tests for Determining Material Participation (IRC Sec. 469)

PRACTICE AID O303: Tests for Determining Application of Self-charged Interest Rules

PRACTICE AID O401: Inherited Qualified Plan and IRA Decision Tree--Death before Required Beginning Date

PRACTICE AID O402: Inherited Qualified Plan and Traditional IRA Decision Tree--Death after Required Beginning Date

PRACTICE AID O501: Determining When Transportation Costs Are Deductible

PRACTICE AID O502: Deductible and Nondeductible Medical Expenses

PRACTICE AID O503: Deductible and Nondeductible Miscellaneous Itemized Deductions

PRACTICE AID O504: Section 179 Attributes

PRACTICE AID O601: Income Items Not Subject to Self-employment (SE) Tax

PRACTICE AID O701: Flowchart to Determine Tax Treatment of Home with Rental and Personal Use

PRACTICE AID O702: Documentation of Below-market Loan

ROADMAP RM: Roadmap to Individual Tax Planning

ROADMAP RM-1: Introduction

ROADMAP RM-2: Form 1040 Roadmap--Client Summary Worksheet

ROADMAP RM-3: Roadmap--Using Form 1040 as a Tax Planning Tool

ROADMAP RM-4: Roadmap Guidance

ROADMAP RM-4a: Section 1: Label

ROADMAP RM-4b: Section 2: Filing Status

ROADMAP RM-4c: Section 3: Exemptions

ROADMAP RM-4d: Section 4: Income

ROADMAP RM-4e: Section 5: Adjustments to Income

ROADMAP RM-4f: Section 6: Tax and Credits

ROADMAP RM-4g: Section 7: Other Taxes

ROADMAP RM-4h: Section 8: Payments

ROADMAP RM-4i: Section 9: Itemized Deductions (Form 1040, Schedule A)

ROADMAP RM-4j: Section 10: Profit or Loss from Business

ROADMAP RM-5: Roadmap--Using Form 1040 as a Tax Planning Tool, Addendum

Continuing Professional Education

CPE & Training Solutions

INDEX

INTRODUCTORY MATERIAL ABOUT THE AUTHORS . . . LIST OF SUBSTANTIVE CHANGES AND ADDITIONS

Continuing Professional Education

CPE & Training Solutions

INDEX

INTRODUCTORY MATERIAL

ABOUT THE AUTHORS . . .

LIST OF SUBSTANTIVE CHANGES AND ADDITIONS