Q:

Subject: Quick Question

I know the gifter doesn’t have to file, but does the recipient have to file on a gift that is less than the $11000 limit?  Thank you.

A:

Gifts received are one of the few types of income that are not taxable to the recipient, nor do they have to be reported anywhere.  That applies to gifts of any size, including millions of dollars.

For practical purposes, when a client has received a very large gift or inheritance (another tax free type of income) I have found it useful as a self defense measure to attach a statement explaining the receipt of the gift or inheritance so that IRS will understand why some deductions, such as charitable contributions, are so high compared to the taxable income being reported on that 1040.  To not disclose that fact up front is to invite an audit of the full 1040 when the IRS’s screening ratios kick out as suspicious.

FYI:  As of 1/1/06, the current maximum annual gifts before a Gift Tax return is required is $12,000.

I hope this helps.

Kerry Kerstetter

 

Q:

Subject: Can you help with a question

Hello Kerry:

 

I read your very informative section on rates on the web.  I personally am the executor to my dads estate that has a monetary distribution every year ($500/month) to my brother for the next 8 years. 

 

Today I am filing a 1041 – can you please tell me what is the maximum deduction I can take against the estate (and on what line of the return does it go)?  I have included the tax preparers fee from last year.   Thank you.

A:

If you’ve read many of my blog posts, you should know that I consider it too dangerous for amateurs to prepare their own tax returns, especially in areas where there are a variety of possible twists, such as with trust fiduciary returns.  It is far too easy to screw things up and get yourself into serious trouble with the IRS and State tax agencies.

You need to have an experienced professional tax preparer handle this.

Good luck.

Kerry Kerstetter

 

Q:

Subject: Multiple property sales

 

Tax guru,

 

This morning I thought I was a fairly savvy real estate investor…..until my accountant called.  

 

 My first home was purchased in the fall of 2000, I lived there two years and rented it for the last three when it was sold.  After moving out of that house I moved into a condo which I had lived in for two years refurbed and sold at the end of two years when I moved into my next house which I lived in exactly two years and sold. 

 

If you followed that you can see that I sold the condo first(in 2004) and paid no capital gains on my 2005 return.  I sold my first home next(in 2005) and wasn’t expecting to pay capital gains.  I sold my most recent primary residence this year Jan ’06 and didn’t expect to pay capital gains next year. 

I met all of the IRS conditions of a primary residence, and after purchasing nearly 25 properties in the last 5 years I had never hear anyone say that you could not sell a primary residence and use the exemption more than once every two years.  Is this true? Is there any way around this?  I feel betrayed…like I’m being penalized for keeping a property.

 

Please help!

A:

The current law for primary residence sales (Section 121) was enacted in 1997 and has always had a limit that the tax free exclusion couldn’t be used more than once during any two year period, unless the second sale was for an unforeseen circumstance. 

That limit has been well publicized and I am amazed that your tax advisor didn’t mention it to you earlier when you were considering selling the second home within the two year window.  If you didn’t ask your accountant’s advice before the second sale, you learned an expensive lesson.

We’ve all heard the maxim that “ignorance of the law is no excuse.”  There are tons of examples in the tax arena where things are so muddy that that rule doesn’t apply.  However, this allowance of the Section 121 exclusion for only one tax free home sale per two year period is not a gray area.

From IRS Pub 523:

“You cannot exclude gain on the sale of your home if, during the 2-year period ending on the date of the sale, you sold another home at a gain and excluded all or part of that gain. If you cannot exclude the gain, you must include it in your income.”

Depending on which sale had the higher profit, you should work with your personal tax advisor to see if amending the return with the earlier sale to have it taxed and allow the exclusion for the second sale would be a good move for you.

Good luck.

Kerry Kerstetter

 

Q:

Subject: Glossary Terms

 

I think you have to add :

 

C- company

 

S company

 

what does it mean?

 

Thanks

A:

Those terms aren’t used.

You probably mean C and S corporations, which are explained here.

Kerry Kerstetter

 

Q:

Subject: tax question – child care

 

Hello,

 

If possible, could you please answer the following question for me regarding paying someone for child care…

I would like to employ my Mom to take care of our future child; one benefit I saw from this I can maximize my employer’s child care spending account to $5000, which is tax deductible.  I am in a higher tax bracket and my Mom is in a lower tax bracket. What IRS relatated items would I have to do to pay someone for services, ie: would I have to get a tax number, or pay into Social Security for her, or pay into worker’s compensation, would I have to set up a company, etc

 

Thank you very much,

A:

The best thing would probably be if your mother set up her own child care business that could be paid for watching your kid, as well as others.  There are many different ways in which that business can be structured (sole proprietorship, C or S corporation); so your mother will need to consult with her personal professional tax advisor to determine the best strategy for her unique situation.  

Kerry Kerstetter

 

Q:

Subject: Exchange Question

Are there any special rules that pertain to a person who is not allowed to live in what they want to be their primary residence because they are required to rent government housing as part of the job.

We took a new job which does not have government housing, which means we have to buy a primary residence at the new location  with the money obtained from the sale of our house we were not allowed to live in.

there will be a profit from the house sale but all of it will be needed to purchase a house in the new location.

Seems that there should be some kind of exception as military people probably often fall into this category.

A:

There are some special rules for people in the military and Foreign Services, as mentioned here in IRS Publication 523.

You really need to work one on one with an experienced professional tax advisor to see if any of this applies to your unique situation.

Good luck.

Kerry Kerstetter

 

From one of the creative geniuses at
Worth1000

Q:

Subject: C Corp estimated tax

Hiii

Wonderful blog!

 

How do u calculate c corp estimated tax?

A:

Technically, you should estimate what the net taxable income will be for the year, calculate the tax and divide that by four to figure your quarterly payments.

Your professional corporate tax accountant can help you with this, as well as how to best utilize the safe harbor methods that are available to possibly justify lower quarterly payments.

As with all corporate tax matters, this is not something that you should be handling on your own, without professional assistance.

Kerry Kerstetter