2003 Income Tax Seminar Book - Part I
Table of Contents / Page No.
SALE OF RENTAL PROPERTY
OVERVIEW 1
FORM 4797 - REVIEW OF RELEVANT DEFINITIONS 1
Capital Assets/Noncapital Assets 1
§1231 Trade or Business Assets 2
Recapture of Net Ordinary §1231 Losses 3
§1245 Gain from Disposition of Certain Depreciable Property 3
§1250 Gain from Disposition of Certain Depreciable Realty 3
Depreciation Allowed or Allowable 4
Sale of Rental Property 4
Furnishings or Equipment Sold With Building 4
Buildings Comprised of §1245 and §1250 Components 4
RECAPTURE OF DEPRECIATION UNDER CODE SECTIONS 1245 AND 1250 5
MACRS 5
ACRS 5
Recapture of Depreciation or Amortization Under Code Section 1245 5
Sec. 1245 Recapture When Multiple Properties are Sold 6
Recapture Under Code Sec. 1250 6
Depreciation Concerns 6
Chart 1245, 1250, 1250 "With" 8
Unrecaptured Section 1250 Gain vs. Section 1250 Recapture as Ordinary Income 9
Comparative Example 9
Like-Kind Implications 9
Building for Land 10
How the Recapture Rule Works with Code Sec. 1250 Property 10
Code Sec. 1250 Recapture in a Swap 10
Unexpected Result 10
Effects of Installment Sale and Depreciation Unrecapture 11
SCHEDULE D - REVIEW OF RELEVANT DEFINITIONS 12
Reduction in Long Term Capital Gains Rates and Holding Period 12
Rate Structure 13
Adjusted Net Capital Gain 14
Reduced Rates for Post-2000 Qualified 5-Year Gain 15
Election to Recognize Gain on Assets Held on Jan. 1, 2001 16
COMPREHENSIVE EXAMPLE 16
TAX ASPECTS OF DIVORCE AND SEPARATION
OVERVIEW 37
ALIMONY AND SEPARATE MAINTENANCE PAYMENTS 38
Designation of Tax Treatment by the Taxpayers 38
Members of the Same Household 39
Requirement - No Liability for Payments after Death of Payee 39
Excessive Front-Loading 40
Alimony Recapture Worksheet Example 41
Treatment of Recaptured Alimony on a Return 42
Cash Payments to Third Parties 42
Payments to Maintain Property owned by Payer and Used by Payee 42
Life Insurance Premiums 42
Payments for Jointly-Owned Homes 42
Mortgage Payments 43
Taxes and Insurance 43
Alimony in Community Property States 43
Alimony Rules for Pre-1985 Agreements 44
DISREGARDING COMMUNITY INCOME 45
Spouses Living Apart 46
Example of Community Property Rules Disregarded 47
CHILD SUPPORT 47
Example of Combined Alimony/Child Support Underpayment 48
DEPENDENCY EXEMPTIONS 48
Waiver of the Exemption 48
New Concerns for Dependency Exemption 49
Multiple Support Agreements 49
Other Dependents 50
Medical Expense Deduction 50
Child Care Credit 50
Example of Child Care Credit 50
PROPERTY SETTLEMENTS 50
Example of Transfer of Property Incident to Divorce 51
Example of Property Transferred After 6-Year Deadline 51
Transfers to Third Parties 51
Transferee's Basis in the Property 52
Example of Basis in Transferred Property 52
Capital Gains on Subsequent Sale 52
DIVISION OF RETIREMENT BENEFITS 52
Qualified Domestic Relations Order 52
Before QDRO - Divorce and Retirement Accounts 52
Definition 53
Retirement Plans Identified (Defined Benefit / Defined Contribution) 53
What if the QDRO is Not Properly Drafted? 55
QDRO and SEP/IRA/SAR-SEP/SIMPLE Plans 56
TAXES ON DISTRIBUTIONS 57
Investment in the Contract 57
Rollovers 57
Premature Distributions 57
Six Percent Excise Tax on Excess Contributions 57
FILING STATUS 58
Considered Unmarried 58
Married Filing Separate 58
Head of Household 59
Year of Divorce - Wisconsin and Arizona Considerations 60
Wisconsin Divorce Example 61
Wisconsin Publication 113 - Comparison of Federal and Wisconsin Innocent Spouse Treatment 76
IRS Publication 555 (Spouses Living Apart All Year) 77
EARNED INCOME CREDIT (EIC) 78
EIC Considerations - Pre-Divorce 78
EIC Considerations - Post-Divorce 79
New Rules for Persons with Same Qualifying Child 80
Examples 81
Summary of EIC/Divorced Parent Tax Concerns 81
Penalty for Early Distribution from Qualified Plans 81
Self-Employment Tax 81
Estimated Taxes and Tax Withholding 82
Federal Treatment 82
Wisconsin Treatment 82
Joint Returns 83
Exception to the Joint Liability: Innocent Spouse Provision 83
Injured Spouse 84
Example of Injured Spouse Calculation 84
SALE OF THE MARITAL RESIDENCE 85
Exclusion of Gain of $250,000 to $500,000 85
Transfers Between Spouses or Transfers Incident to a Divorce 86
RECOMMENDATIONS TO CLIENTS 86
Beneficiary Designations 86
Will 86
Marital Property Agreement 86
Filing for an Extension 86
HOME OFFICE DEDUCTIONS
OVERVIEW 87
SECTION 280A 87
The Principal Place of Business Exception 88
Watch Out for Non-Exclusive Use 90
Publication 587 - Administrative or Management Activities 91
Used by Patients, Clients or Customers 94
Separate Structure 94
Day Care Facility 94
Publication 587 - Figuring the Deduction (with examples) 95
IRS Allows Standard Meal Rate 98
IS THE DEDUCTION REALLY HELPING MY CLIENT? 99
What are the Results? 100
Employee vs. Self-Employed 100
Examples 100
Mileage and Sundry Expenses 102
Direct / Indirect Expenses 102
Unrelated Expenses (Transportation Expense) 102
MEDICAL SAVINGS ACCOUNTS (ARCHER MSAs)
OVERVIEW 105
QUALIFYING FOR AN ARCHER MSA 105
Publication 969 - Qualifying for an Archer MSA 105
High Deductible Health Plan (HDHP) 106
MSA CONTRIBUTION LIMITATIONS 106
Annual Deductible of HDHP Contribution Limit 106
Income Contribution Limit 106
Earned Income Limitation Examples 108
Timing of Contributions 108
Reporting MSA Contributions 108
Employers and MSA Contributions 109
TAXES ON DISTRIBUTIONS 109
Types of Medical Expenses 109
Beneficiary Designations 110
MSA EXAMPLE 110
MSAs BY THE ENTITY 117
EARNED INCOME CREDIT
OVERVIEW 119
IMPORTANT CHANGES - 2002 119
New Definition of Earned Income 119
Elimination of Modified Adjusted Gross Income 119
New Rules for Persons with Same Qualifying Child 120
New Definition of Eligible Foster Child 120
Reduction of EIC by Alternative Minimum Tax Eliminated 120
Increased EIC on Certain Joint Returns 120
Important Reminders 120
Earned Income Credit Has No Effect on Certain Welfare Benefits 120
Disallowed EIC 120
Reporting Advance Payments of EIC Received in 2002 120
1. RULES FOR EVERYONE (RULES 1 THROUGH 6) 120
Rule 1. You Must Have a Valid Social Security Number (SSN) 120
Rule 2. Your Filing Status Cannot Be "Married Filing Separately" 121
Rule 3. You Must Be a U.S. Citizen or Resident Alien All Year 122
Rule 4. You Cannot File Form 2555 or Form 2555-EZ 122
Rule 5. Your Investment Income Must Be $2,550 or Less 122
Form 1040 Worksheet to Figure Investment Income 123
Rule 6. You Must Have Earned Income 124
Earned Income 124
Approved Form 4361 or Form 4029 (Applications for Exemption from SE Tax / Social Security and Medicare Taxes) 125
Disability Benefits 125
Income That Is Not Earned Income 125
2. RULES IF YOU HAVE A QUALIFYING CHILD (RULES 7 THROUGH 9) 126
Rule 7. Your Child Must Meet the Relationship, Age, and Residency Tests 126
Relationship Test 126
Age Test 127
Residency Test 127
Rule 8. Your Qualifying Child Cannot Be Used By More Than One Person to Claim the EIC 128
Rule 9. You Cannot Be a Qualifying Child of Another Person 129
3. RULES IF YOU DO NOT HAVE A QUALIFYING CHILD (RULES 10 THROUGH 13) 130
Rule 10. You Must Be at Least 25 but Under Age 65 130
Rule 11. You Cannot Be the Dependent of Another Person 130
Rule 12. You Cannot Be a Qualifying Child of Another Person 131
Rule 13. You Must Have Lived in the United States More Than Half of the Year 131
4. FIGURING AND CLAIMING THE EIC (RULES 14 AND 15) 131
Rule 14. Your Adjusted Gross Income (AGI) Must Be Less Than 131
Rule 15. Your Earned Income Must Be Less Than 132
Special Instructions for Clergy, Prison Inmates, and Deferred Compensation Plans 132
Worksheet 2: Earned Income 133
Schedule EIC 134
5. DISALLOWANCE OF THE EIC 134
Form 8862 134
Are You Prohibited From Claiming the EIC for a Period of Years? 135
6. ADVANCE PAYMENT OF EIC IN 2003 (STEPS 1 AND 2) 135
Step 1. Find Out If You Are Eligible for Advance Payments of the EIC 135
Step 2. Complete Form W-5 and Give It to Your Employer 136
Frequently Asked Questions About Form W-5 137
How to Report Advance Payments of EIC 137
DETAILED EXAMPLES 137
Example 1. Cynthia and Jerry Grey (with Worksheet A and Schedule EIC) 137
Example 2. David and Judy Brown (with Worksheet B) 141
Example 3. Sharon Rose 144
Example 4. Steve and Linda Green (with Worksheet B) 144
2002 EARNED INCOME CREDIT (EIC) TABLE 147
WISCONSIN EARNED INCOME CREDIT 153
Example (including Federal Forms and Worksheets) 154
SOCIAL SECURITY
OVERVIEW 167
PLANNING FOR SOCIAL SECURITY BENEFITS 167
Decisions and Concerns That Lie Ahead 168
Social Security Basics 168
Reduction Chart 169
Four Separate Trust Funds 170
Qualifying for Retirement & Disability Benefits 170
Disability Quarters Needed 171
Survivor Benefits 171
SUMMARY OF BENEFITS 171
Current Wife or Husband 171
Divorced Spouse Entitlement 172
Dependent Parent 172
Government Pension Offset 172
COMPUTING THE BASIC BENEFIT 173
Average Indexed Monthly Earnings 174
PERSONAL EARNINGS AND BENEFIT ESTIMATE STATEMENT (PEBES) - FORM SSA-7004 174
Social Security Benefit Estimate Computer Program 175
CORRECTION OF WAGE AND EARNINGS RECORD 175
Conditions 175
Evidence of Earnings 176
Acceptable Forms of Evidence of Wage Earners Include 176
For Self-Employed Workers, Acceptable Forms of Evidence Include 176
LUMP SUM DEATH BENEFITS 176
Table: Summary of Lump Sum Death Benefits 177
APPLYING FOR BENEFITS 177
Recommendation (Information Needed - Filing Claim for Retirement Benefits) 178
Social Security Retirement Age 178
REDUCED RETIREMENT AGE 178
Benefit Reductions for Early Retirement 178
Old-Age Retirement Insurance Benefit 178
Amount of Benefits 178
Delayed Retirement Credit 178
Chart of Delayed Retirement Credit Rates 179
Recomputation of Benefits 180
How Working Can Cause Loss of Benefits 180
Table of Maximum Annual Earnings Allowed 181
When Retirement Benefits May Not Be Payable 182
Community Property States and Self-Employment Issues 182
SPLITTING A SCHEDULE C AND SCHEDULE SE 182
APPEALING A DETERMINATION BY SOCIAL SECURITY 183
Reconsideration 183
Hearing by an Administrative Law Judge 183
Appeals Council Review 184
Federal District Court 184
INCOME TAX TREATMENT OF SOCIAL SECURITY BENEFITS 184
Amount of Includible Social Security Benefits - 50% Rule 185
Increased Inclusion for Taxpayers With Higher Income-85% Rule 185
REPORTING RETROACTIVE LUMP SUM BENEFITS 186
Publication 915 - Example With Worksheets 187
TABLE: ANNUAL MAXIMUM TAXABLE EARNINGS AND ACTUAL CONTRIBUTION RATES 191
THE FUTURE OF SOCIAL SECURITY 192
SUMMARY OF JOBS AND GROWTH TAX RELIEF RECONCILIATION ACT OF 2003
Summary of Jobs and Growth Tax Relief Reconciliation Act of 2003 193
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