Frequently Asked Questions | WiseBeing Tax & Accounting

FAQs

Q: Is there an age limit on claiming my child as dependent?

A : To claim your child as your dependent, your child must meet either the qualifying child test or the qualifying relative test:

To meet the qualifying child test, your child must be younger than you or your spouse if filing jointly and either younger than 19 years old or be a “student” younger than 24 years old as of the end of the calendar year.
There’s no age limit if your child is “permanently and totally disabled” or meets the qualifying relative test.

In addition to meeting the qualifying child or qualifying relative test, you can claim that person as a dependent only if these three tests are met:

Dependent taxpayer test
Citizen or resident test, and
Joint return test

Q: Is interest paid on a home equity loan or a home equity line of credit (HELOC) deductible?

A : For tax years 2018 through 2025, if home equity loans or lines of credit secured by your main home or second home are used to buy, build, or substantially improve the residence, interest you pay on the borrowed funds is classified as home acquisition debt and may be deductible, subject to certain dollar limitations. However, interest on the same debt used to pay personal living expenses, such as credit card debts, is not deductible.

For tax years before 2018 and after 2025, for home equity loans or lines of credit secured by your main home or second home, interest you pay on the borrowed funds may be deductible, subject to certain dollar limitations, regardless of how you use the loan proceeds. For example, if you use a home equity loan or a line of credit to pay personal living expenses, such as credit card debts, you may be able to deduct the interest paid.

Q : Is the mortgage interest and real property tax paid on a second residence deductible?

A : Mortgage interest paid on a second residence used personally is deductible as long as the mortgage satisfies the same requirements for deductible interest as on a primary residence.

If the home was acquired on or before December 15, 2017, then the total amount you (or your spouse if married filing a joint return) can treat as home acquisition debt on your main and second home is $1,000,000; or $500,000 if married filing separately. If the home was acquired after December 15, 2017, the home acquisition debt limit is $750,000; or $375,000 if married filing separately.

State and local real property taxes are generally deductible.

Deductible real property taxes include any state or local taxes based on the value of the real property and levied for the public welfare.
Deductible real property taxes don’t include taxes charged for local benefits and improvements that directly increase the value of the real property, such as assessments for sidewalks, water mains, sewer lines, parking lots, and similar improvements.
Also, an itemized charge for services to specific property or people isn’t a real property tax, even if the charge is paid to the taxing authority. You can’t deduct the charge as a real property tax when it’s a unit fee for the delivery of a service (such as a $5 fee charged for every 1,000 gallons of water you use), a periodic charge for a residential service (such as a $20 per month or $240 annual fee charged for trash collection), or a flat fee charged for a single service provided by your local government (such as a $30 charge for mowing your lawn because it had grown higher than permitted under a local ordinance).
The total deduction allowed for all state and local taxes (for example, real property taxes, personal property taxes, and income taxes or sales taxes) is limited to $10,000; or $5,000 if married filing separately.

Renting out your second residence – If you do rent out your second residence, and you use it personally, additional rules may impact the deductibility of mortgage interest and real property taxes. Please see the publications listed below for additional information.

Q : What’s the difference between a Form W-2 and a Form 1099-MISC or Form 1099-NEC?

A : Although these forms are called information returns, they serve different functions.

Employers use Form W-2, Wage and Tax Statement to:

Report wages, tips, or other compensation paid to an employee.
Report the employee’s income, Social Security, and Medicare taxes withheld and other information.

Employers furnish the Form W-2 to the employee and the Social Security Administration (SSA). The SSA shares the information with the Internal Revenue Service.

Payers use Form 1099-MISC, Miscellaneous Information and/or Form 1099-NEC, Nonemployee Compensation to:

Report any amount of federal income tax withheld under the backup withholding rules (Form 1099-MISC or Form 1099-NEC).
Report payments of $10 or more made during a business in royalties or broker payments in lieu of dividends or tax-exempt interest (Form 1099-MISC).
Report payments of $600 or more made during a business in rents, prizes and awards, other income and for other specified purposes, including gross proceeds paid to an attorney (Form 1099-MISC).
Report payments of at least $600 during a business to a person who’s not an employee for services, including payments to an attorney (Form 1099-NEC).
Report sales totaling $5,000 or more of consumer products to a person on a buy-sell, a deposit-commission, or other commission basis for resale (Form 1099-MISC or Form 1099-NEC).

Payers file Forms 1099-MISC and 1099-NEC with the IRS and provide them to the person or business that received the payment.

Q: Is money received from the sale of inherited property considered taxable income?

A: To determine if the sale of inherited property is taxable, you must first determine your basis in the property. The basis of property inherited from a decedent is generally one of the following:

The fair market value (FMV) of the property on the date of the decedent’s death (whether the executor of the estate files an estate tax return.
The FMV of the property on the alternate valuation date, but only if the executor of the estate files an estate tax return (Form 706) and elects to use the alternate valuation on that return.

For information on the FMV of inherited property on the date of the decedent’s death, contact the executor of the decedent’s estate. In 2015, Congress passed a law that, in certain circumstances, requires the recipient’s basis in certain inherited property to be consistent with the value of the property as finally determined for Federal estate tax purposes. If you receive a Schedule A to Form 8971 from an executor of an estate or other person required to file an estate tax return, you may be required to report a basis consistent with the estate tax value of the property.

If you or your spouse gave the property to the decedent within one year before the decedent’s death, see Publication 551, Basis of Assets.

Report the sale on Schedule D (Form 1040), Capital Gains and Losses and on Form 8949, Sales and Other Dispositions of Capital Assets:

If you sell the property for more than your basis, you have a taxable gain.
For information on how to report the sale on Schedule D, see Publication 550, Investment Income and Expenses.

An accuracy-related penalty may apply if an individual reporting the sale of certain inherited property uses a basis more than that property’s final value for Federal estate tax purposes.

Q: Are child support payments or alimony payments considered taxable income?

A :

Child Support – No. Child support payments are not subject to tax.

Child support payments are not taxable to the recipient (and not deductible by the payer). When you calculate your gross income to see whether you’re required to file a tax return, don’t include child support payments received.

Alimony – Alimony (including separation or maintenance payments) may be subject to tax depending on several factors, including the execution date of the divorce or separation instrument. In general, the term, “divorce or separation instrument” means your divorce decree, separation agreement or decree, or order of temporary maintenance.

Except as provided below, under divorce or separation instruments executed before 2019, alimony payments are taxable to the recipient (and deductible by the payer). When you calculate your gross income to see whether you’re required to file a tax return, include these alimony payments.

However, under divorce or separation instruments executed: (1) after December 31, 2018, or (2) on or before December 31, 2018, but modified after this date, alimony payments are not taxable to the recipient (and not deductible by the payor) if the modification expressly provides that alimony payments are neither includable in, nor deductible from, income. When you calculate your gross income to see whether you’re required to file a tax return, don’t include these alimony payments.

Q : Do I report proceeds paid under a life insurance contract as taxable income?

Generally, life insurance proceeds you receive as a beneficiary due to the death of the insured person, aren’t includable in gross income and you don’t have to report them.
However, any interest you receive is taxable and you should report it as interest received.
If the policy was transferred to you for cash or other valuable consideration, the exclusion for the proceeds is limited to the sum of the consideration you paid, additional premiums you paid, and certain other amounts. There are some exceptions to this rule. Generally, you report the taxable amount based on the type of income document you receive, such as a Form 1099-INT or Form 1099-R.

Q : I retired last year and started receiving social security payments. Do I have to pay taxes on my social security benefits?

A : Social security benefits include monthly retirement, survivor and disability benefits. They don’t include supplemental security income (SSI) payments, which aren’t taxable. The net amount of social security benefits that you receive from the Social Security Administration is reported in Box 5 of Form SSA-1099, Social Security Benefit Statement, and you report that amount on line 6a of Form 1040, U.S. Individual Income Tax Return or Form 1040-SR, U.S. Tax Return for Seniors. The taxable portion of the benefits that’s included in your income and used to calculate your income tax liability depends on the total amount of your income and benefits for the taxable year. You report the taxable portion of your social security benefits on line 6b of Form 1040 or Form 1040-SR.

Your benefits may be taxable if the total of (1) one-half of your benefits, plus (2) all your other income, including tax-exempt interest, is greater than the base amount for your filing status.

The base amount for your filing status is:

$25,000 if you’re single, head of household, or qualifying surviving spouse,
$25,000 if you’re married filing separately and lived apart from your spouse for the entire year,
$32,000 if you’re married filing jointly,
$0 if you’re married filing separately and lived with your spouse at any time during the tax year.

If you’re married and file a joint return, you and your spouse must combine your incomes and social security benefits when figuring the taxable portion of your benefits. Even if your spouse didn’t receive any benefits, you must add your spouse’s income to yours when figuring on a joint return if any of your benefits are taxable.

Q : Are social security survivor benefits for children considered taxable income?

A : Yes, under certain circumstances, although a child generally won’t receive enough additional income to make the child’s Social Security benefits taxable.

The taxability of benefits must be determined using the income of the person entitled to receive the benefits.
If you and your child both receive benefits, you should calculate the taxability of your benefits separately from the taxability of your child’s benefits.
The amount of income tax that your child must pay on that part of the benefits that belongs to your child depends on the child’s total amount of income and benefits for the taxable year.

To find out whether any of the child’s benefits may be taxable, compare the base amount for the child’s filing status with the total of:

One-half of the child’s benefits; plus
All the child’s other income, including tax-exempt interest.

If the child is single, the base amount for the child’s filing status is $25,000. If the child is married, see Publication 915, Social Security and Equivalent Railroad Retirement Benefits for the applicable base amount and the other rules that apply to married individuals receiving Social Security benefits.

If the total of (1) one half of the child’s Social Security benefits and (2) all the child’s other income is greater than the base amount that applies to the child’s filing status, part of the child’s Social Security benefits may be taxable.

Q : May a noncustodial parent claim the child tax credit for his or her child?

A : Yes, a noncustodial parent may be eligible to claim the child tax credit for his or her child if he or she is allowed to claim the child as a dependent and otherwise qualifies to claim the child tax credit.

A noncustodial parent must attach to his or her return a Form 8332, Release/Revocation of Release of Claim to Exemption for Child by Custodial Parent, or a substantially similar statement, signed by the custodial parent to claim the child as a dependent.

Q : May I claim the child tax credit/additional child tax credit or the credit for other dependents as well as the child and dependent care credit?

A : Yes, you may claim the child tax credit (CTC)/additional child tax credit (ACTC) or credit for other dependents (ODC) as well as the child and dependent care credit on your return if you qualify for those credits.

If you qualify for any of these credits, you may claim the credit(s) on Form 1040, U.S. Individual Income Tax Return, Form 1040-SR, U.S. Tax Return for Seniors or Form 1040-NR, U.S. Nonresident Alien Income Tax Return.
Complete Schedule 8812 (Form 1040), Credits for Qualifying Children and Other Dependents. Instructions for Schedule 8812 explain the qualifications for CTC, ACTC, and ODC; the requirements for taxpayer identification numbers (TINs); and how to calculate the credits.
To claim the child and dependent care credit, you must also complete and attach Form 2441, Child and Dependent Care Expenses. The Instructions for Form 2441 explain the qualifications for the child and dependent care credit and how to calculate it.
Attach the appropriate form or schedule to your Form 1040, Form 1040-SR, or Form 1040-NR.

Q : Do tuition and related expenses paid to attend a private high school qualify for an education credit?

A : No, expenses paid to attend a private high school don’t qualify for an education credit because a high school isn’t an eligible educational institution.

In general, an eligible educational institution is an accredited college, university, vocational school, or other postsecondary educational institution. To be eligible, the educational institution must also be eligible to participate in a federal financial student aid program administered by the Department of Education.

Q : What expenses qualify for an education credit?

A : Expenses that qualify for an education credit (whether the American Opportunity Tax Credit (AOTC) or the Lifetime Learning Credit) are qualified tuition and related expenses paid during the taxable year. Qualified tuition and related expenses are tuition and fees required for the enrollment or attendance of the taxpayer, the taxpayer’s spouse, or any dependent of the taxpayer at an eligible educational institution for courses of instruction. For the AOTC, the expenses must be paid in a program to acquire a postsecondary degree and may include required course materials. For the Lifetime Learning Credit, the expenses must be paid in a program to acquire a postsecondary degree or to acquire or improve job skills.

For the AOTC provisions, student activity fees are included in qualified education expenses only if the fees must be paid to the institution as a condition of enrollment or attendance. Expenses for books, supplies, and equipment that are required course materials are included in qualified education expenses whether or not the materials are purchased from the educational institution.

For the Lifetime Learning Credit, student activity fees and expenses for course-related books, supplies and equipment are included in qualified education expenses only if the fees and expenses must be paid to the institution for enrollment or attendance by an individual.

Qualified tuition and related expenses don’t include the following types of expenses:

Expenses related to any course of instruction or education involving sports, games or hobbies, or any noncredit course (unless the course or other education is part of the student’s degree program or, in the case of the Lifetime Learning Credit, the student takes the course to acquire or improve job skills),
Student activity fees (unless required for enrollment or attendance),
Athletic fees (unless required for enrollment or attendance),
Costs of room and board,
Insurance premiums or medical expenses (including student health fees),
Transportation expenses, and
Other personal, living, or family expenses.

An eligible educational institution means a college, university, vocational school, or other postsecondary educational institution that’s accredited and eligible to participate in the federal financial student aid programs administered by the Department of Education.

Q : Who can claim the American opportunity tax credit?

A : You can claim the American opportunity tax credit (AOTC), if:

You pay some or all qualified tuition and related expenses for any of the first 4 years of postsecondary education at an eligible educational institution.
You paid qualified expenses for an eligible student (defined below).
The eligible student is you, your spouse, or a dependent you claim on your tax return.
You show the name and taxpayer identification number (TIN) of you, your spouse, and the eligible student on the return.
Your modified adjusted gross income is below a certain dollar limitation.
You aren’t listed as dependent on another person’s tax return (such as your parents’).
In the case of a married taxpayer, your filing status is married filing jointly.
You don’t claim the lifetime learning credit for the same student in the same year.
In the case of a taxpayer who is a nonresident alien (or whose spouse is a nonresident alien) for any part of the tax year, the nonresident alien elects to be treated as a resident alien for tax purposes.
You provide the EIN of the eligible educational institution regardless of whether or not you receive a Form 1098-T.

The maximum amount of credit is $2,500, and 40% of the credit is generally refundable (up to $1,000).

An eligible student is a student who:

Was enrolled in a program leading to a degree, certificate or other recognized postsecondary educational credential for at least one academic period beginning in the tax year.
Carried at least half the normal full-time workload for the course of study.
Didn’t make an election to claim the AOTC for 4 earlier tax years.
Hasn’t completed the first 4 years of postsecondary education before the beginning of the tax year.
Doesn’t have a federal or state felony conviction for possessing or distributing a controlled substance as of the end of the tax year.

Note: You can’t claim the AOTC on either an original or an amended return if the student (you, your spouse or your dependent student claimed on the return) didn’t have a TIN by the due date of your return (including extensions), even if the student later gets one of those numbers.

Q : To claim my child as my qualifying child for the earned income credit, must I be entitled to also claim that child as a dependent?

A : Generally, you don’t always have to be entitled to claim the child as a dependent to claim the earned income credit (EIC) when your child meets the rules to be a qualifying child for the EIC, although there are some restrictions.

You may still be eligible to claim the EIC on behalf of the child when the reason you’re not entitled to claim the child as a dependent is that you’ve released a claim to a dependency exemption for the child under the special rule for divorced or separated parents or parents who live apart. Form 8332 may assign the dependent exemption and the child tax credit to the other parent, but it does not apply for the EIC.

When there is no other taxpayer who also meets the tests to claim the child as their dependent, you may be eligible to claim the EIC with a qualifying child when you meet all the tests to claim the EIC with a qualifying child. Your qualifying child must also meet the age, residency, and joint return tests. You may be eligible to claim the EIC with a qualifying child even when the dependent tests for support have not been met.

However, if your child also met the qualifying child tests to be the dependent of more than one person, tiebreaker rules may apply.

If your qualifying child was married at the end of your tax year, generally he or she can’t be your qualifying child if they filed a joint return for the year unless that person and that person’s spouse file the joint return only to claim a refund of withholding or estimated tax paid.

Q : Is child support considered earned income when calculating the earned income credit?

A : No, for purposes of calculating the earned income credit, child support isn’t considered earned income.

Examples of items that aren’t earned income include interest and dividends, pensions and annuities, Social Security and railroad retirement benefits (including disability benefits), alimony and child support, welfare benefits, workers’ compensation benefits, unemployment compensation (insurance), nontaxable foster care payments, and veterans’ benefits, including VA rehabilitation payments. Don’t include any of these items in your earned income.

Q : If both parents who were never married want to claim the earned income credit, which parent is entitled to claim the credit as an eligible individual with a qualifying child?

A : If they otherwise meet all the requirements to claim the earned income credit (EIC), unmarried parents with a qualifying child may choose which parent will claim the qualifying child for the EIC.

If there are two qualifying children, each parent may claim the credit based on one child.
One parent may claim the credit based on both children.
If both parents claim the same qualifying child for the EIC, but don’t file a joint return together, the IRS will apply tie-breaker rules and treat the child as the qualifying child of the parent with whom the child lives for the longer amount of time in the tax year. If the child lives with each parent for the same amount of time, the IRS will treat the child as the qualifying child of the parent who has the higher adjusted gross income (AGI) for the tax year.

Although the parents may decide which of them will claim the qualifying child, in most cases they will not be able to divide all the tax benefits related to that qualifying child between them. These tax benefits include:

Child tax credit, credit for other dependents, or additional child credit.
Head of household filing status.
Credit for child and dependent care expenses.
Exclusion for dependent care benefits.
EIC.

If a child can be a qualifying child of more than one person, only one person can claim the child as a qualifying child to take each of these tax benefits, provided the person is eligible for it. The two parents cannot decide that either of them will claim the EIC separate from all the other benefits. The other parent usually can’t take any of these tax benefits unless that other parent has a different qualifying child.

There are instances where neither parent can claim the child as a qualifying child, and some other person is entitled to claim the child as a qualifying child for purposes of the EIC. In instances where a child is a qualifying child of two or more taxpayers, a taxpayer who is not the child’s parent may claim the child as a qualifying child for purposes of the EIC:

If no parent can claim the child as a qualifying child, the child is treated as the qualifying child of the non-parent taxpayer who has the highest AGI for the tax year.
If either or both parents can claim the child as a qualifying child but neither parent claims the child, the child is treated as the qualifying child of the nonparent taxpayer who has the highest AGI, but only if that non-parent taxpayer’s AGI is higher than the AGI of either of the child’s parents who can claim the child as a qualifying child.

Q : How do I know if I have to make quarterly individual estimated tax payments?

A : Generally, you must make estimated tax payments for the current tax year if both of the following apply:

You expect to owe at least $1,000 in tax for the current tax year after subtracting your withholding and refundable credits.
You expect your withholding and refundable credits to be less than the smaller of:
- 90% of the tax to be shown on your current year’s tax return, or
- 100% of the tax shown on your prior year’s tax return. (Your prior year tax return must cover all 12 months.)

There are special rules for:

Farmers and fishermen
Certain household employers
Certain higher income taxpayers
Nonresident aliens

Q : Should self-employment taxes be paid quarterly or yearly?

A : Generally, if you determine you need to make estimated tax payments for estimated income tax and estimated self-employment tax, you can make quarterly estimated tax payments or pay all the amount due on the first quarterly payment due date.

Special rules apply to farmers and fishermen. Farmers and fishermen make one required payment or pay in full of their tax return when filed by a certain date.

Q : Is the loss on the sale of my home deductible?

A : Maybe. A loss on the sale or exchange of personal use property, including a capital loss on the sale of your home used by you as your personal residence at the time of sale, or loss attributable to the sale of part of your home that is used for personal purposes, isn’t deductible. The only deductible losses associated with property (or a portion of property) are losses on property used in a trade or business, losses resulting from a transaction entered for profit (for example, a loss on the sale of stock), and certain casualty losses. Until 2025, the only deductible casualty losses are those resulting from federally declared disasters.

Q : I own stock that became worthless last year. Is this a bad debt? How do I report my loss?

A : If you own securities, including stocks, and they become totally worthless, you have a capital loss but not a deduction for bad debt. Worthless securities also include securities that you abandon. To abandon security, you must permanently surrender and relinquish all rights in the security and receive no consideration in exchange for it.

Treat worthless securities as though they were capital assets sold or exchanged on the last day of the tax year.
You must determine the holding period to determine if the capital loss is short term (one year or less) or long term (more than one year).
Report losses due to worthless securities on Schedule D of Form 1040 and fill out Part I or Part II of Form 8949.

Q : I received a 1099-DIV showing a capital gain. Why do I have to report capital gains from my mutual funds if I never sold any shares of that mutual fund?

A : A mutual fund is a regulated investment company that pools the funds of investors allowing them to take advantage of a diversity of investments and professional asset management.

You own shares in the mutual fund, but the fund owns capital assets, such as shares of stock, corporate bonds, government obligations, etc. One of the ways the fund makes money for you is to sell these assets at a gain.

If the mutual fund held the capital asset for more than one year, the nature of the income from a sale of the capital asset is capital gain, and the mutual fund passes it on to you as a capital gain distribution. These capital gain distributions are usually paid to you or credited to your mutual fund account and are considered income to you. Form 1099-DIV, Dividends and Distributions distinguishes capital gain distributions from other types of income, such as ordinary dividends.

Consider capital gain distributions as long-term capital gains no matter how long you’ve owned shares in the mutual fund.

Report the amount shown in box 2a of Form 1099-DIV on line 13 of Schedule D (Form 1040), Capital Gains and Losses. If you have no requirement to use Schedule D (Form 1040), report this amount on line 7 of Form 1040, U.S. Individual Tax Return or Form 1040-SR, U.S. Tax Return for Seniors and check the box.

Q : I purchased stock from my employer under a § 423 employee stock purchase plan and received a Form 1099-B for selling it. How do I report this?

A : Under a § 423 employee stock purchase plan, you have taxable income or a deductible loss when you sell the stock. Your income or loss is the difference between the amount you paid for the stock (the purchase price) and the amount you receive when you sell it. You generally treat this amount as capital gain or loss, but you may also have ordinary income to report.

You must account for and report this sale on your tax return. You have indicated that you received a Form 1099-B, Proceeds From Broker and Barter Exchange Transactions. You must report all 1099-B transactions on Schedule D (Form 1040), Capital Gains and Losses and you may need to use Form 8949, Sales and Other Dispositions of Capital Assets. This is true even if there’s no net capital gain subject to tax.

You must first determine if you meet the holding period. You meet the holding period requirement if you don’t sell the stock until the end of the later of:

The 1-year period after the stock was transferred to you, or
The 2-year period after the option was granted.

If you meet the holding period requirement:

You can generally treat the sale of stock as giving rise to capital gain or loss. You may have an ordinary income if the option price was below the stock’s fair market value (FMV) at the time the option was granted.

If you don’t meet the holding period requirement:

The ordinary income that you should report in the year of the sale is the amount by which the FMV of the stock at the time of purchase (or vesting, if later) exceeds the purchase price. Treat any additional gain or loss as capital gain or loss.

If you meet the holding period requirement and the option price was below (but not less than 85% of) the FMV of the stock at the time the option was granted:

You report as ordinary income (wages) on line 1a of Form 1040, U.S. Individual Income Tax Return or Form 1040-SR, U.S. Tax Return for Seniors the lesser of (1) the amount by which the stock’s FMV on the date of grant exceeds the option price or (2) the amount by which the stock’s FMV on the date of sale or other disposition exceeds the purchase price. Your employer should report the ordinary income to you as wages in box 1 of Form W-2, Wage and Tax Statement. If your employer (or former employer) doesn’t provide you with a Form W-2, or if the Form W-2 doesn’t include the income in box 1, report the income on line 8k of Schedule 1 (Form 1040) for the year of sale or other disposition.
If your gain is more than the amount you report as ordinary income, the remainder is a capital gain reported on Schedule D (Form 1040) and, if required, on Form 8949.

If you don’t satisfy the holding period requirement and sell the stock for less than the purchase price, your loss is a capital loss, but you still may have ordinary income.

You should receive a Form 3922, Transfer of Stock Acquired Through an Employee Stock Purchase Plan Under Section 423(c) from your employer when the employer has recorded the first transfer of legal title of stock you acquired pursuant to your exercise of the option. This form will assist you in tracking your holding period and figuring your cost basis for the stock purchased through your qualifying plan.

Q : How do I figure the cost of basis when the shares I’m selling were purchased at various times and at different prices?

A : The basis of stocks or bonds you own generally is the purchase price plus the costs of purchase, such as commissions and recording or transfer fees. When selling securities, you should be able to identify the specific shares you are selling.

If you can identify which shares of stock you sold, your basis generally is:

What you paid for the shares sold plus any costs of purchase.

If you can’t adequately identify the shares you sold and you bought the shares at various times for different prices, the basis of the stock sold is:

The basis of the shares you acquired first, then the basis of the stock later acquired, and so forth (first-in first-out). Except for certain mutual fund shares and certain dividend reinvestment plans, you can’t use the average basis per share to figure gain or loss on the sale of stock.

Each security you buy is considered a covered security. The broker is required to provide you basis information on Form 1099-B, Proceeds From Broker and Barter Exchange Transactions. For each sale of a covered security for which you receive a Form 1099-B, the broker will provide you the following information: the date of acquisition (box 1b), whether the gain or loss is short-term or long-term (box 2), cost or other basis (box 1e), and the loss disallowed due to a wash sale (box 1g) or the amount of accrued market discount (box 1f).

The law requires you to keep and maintain records that identify the basis of all capital assets.

Q : What is the basis of property received as a gift?

A : To figure out the basis of property received as a gift, you must know three amounts:

The donor’s adjusted basis just before the donor made the gift.
The fair market value (FMV) of the property at the time the donor made the gift.
The amount of any gift tax paid on the gift (Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return).

If the FMV of the property at the time the donor made the gift is less than the donor’s adjusted basis, your adjusted basis depends on whether you have a gain or loss when you dispose of the property.

Your adjusted basis for figuring a gain is the donor’s adjusted basis just before the donor made the gift, increased or decreased by any required adjustments to basis while you held the property.
Your adjusted basis for figuring a loss is the FMV of the property at the time the donor made the gift, increased or decreased by any required adjustments to basis while you held the property.
Note: If you use the donor’s adjusted basis for figuring a gain and get a loss, and then use the FMV for figuring a loss and get a gain, you have neither a gain nor loss on the sale or disposition of the property.

If the FMV of the property at the time the donor made the gift is equal to or greater than the donor’s adjusted basis, your adjusted basis is the donor’s adjusted basis just before the donor made the gift, increased or decreased by any required adjustments to basis while you held the property.

If the donor paid a gift tax on the gift and made the gift after 1976, increase your basis by the gift tax paid on the net increase in value. To figure out the net increase in value or for other information on gifts received before 1977, see Publication 551, Basis of Assets.

Q : I purchased a rental property last year. What closing costs can I deduct?

A : Generally, deductible closing costs are those for interest, certain mortgage points and deductible real estate taxes.

Many other settlement fees and closing costs for buying the property become additions to your basis in the property and part of your depreciation deduction, including:

Abstract fees
Charges for installing utility services
Legal fees
Recording fees
Surveys
Transfer taxes
Title insurance
Any amounts the seller owes that you agree to pay (such as back taxes or interest, recording or mortgage fees, sales commissions and charges for improvements or repairs).

Q : I have a home office. Can I deduct expenses like mortgage, utilities, etc., but not deduct depreciation so that when I sell this house the basis won’t be affected?

Regular Method – No. The greater of allowed (claimed on your return) or allowable (what is required under the Code) depreciation must be considered at the time of sale. You can generally figure depreciation on the business use portion of your home up to the gross income limitation, over a 39-year recovery period and using the mid-month convention and the straight-line method of depreciation. Regardless of whether you determine actual expenses and the correct amount of depreciation, you must reduce your basis in your home by the greater of the allowed or allowable depreciation.

Simplified Method – There’s a simpler option where qualifying taxpayers may use a prescribed rate ($5 per square foot limited to 300 square feet) to compute the business-use-of-the-home deduction. This option, used instead of determining actual expenses, has the advantage of reducing your recordkeeping burden. Under this option, depreciation is treated as zero and the basis of your home won’t be reduced. In addition, under this optional method, you can still deduct business expenses unrelated to qualified business use of the home for that taxable year, such as advertising, wages and supplies.

Q : I’ve heard that I can sell my rental property and use the proceeds to purchase rental property of equal or greater value and the transaction is viewed just like an exchange in that the tax is deferred until the new property is sold. Is this true?

A : Yes. What you’ve heard about is a transaction commonly known as a nontaxable exchange or like-kind exchange. A like-kind exchange, when properly executed, can postpone the recognition of gain (and resulting current tax) by shifting the basis of property sold to like-kind replacement property. You do this by acquiring a like-kind property, which may be of lesser or greater value. If the replacement property is of a lesser value than the value of the property you transfer, you may also receive non-like property such as cash, equal to the difference in values, when you receive your replacement property. If so, you must recognize the gain on the transfer of your rental property, but only to the extent of the non-like-kind property you receive.

To successfully defer gain in a like-kind exchange, you must comply with certain requirements under section 1031 of the Internal Revenue Code and the Income Tax Regulations thereunder. For example, when you sell your rental property, you can’t take an actual or constructive receipt of the sale proceeds. You can avoid actual or constructive receipt of the proceeds if you comply with one of the safe harbors, such as using a qualified intermediary or a qualified trust to hold and use the sale proceeds to acquire the replacement property, as set forth in the Income Tax Regulations or certain other publications of the IRS.

The basis of the property you acquire in a like-kind exchange is generally the same as the basis of the property you transferred. However, if you transfer money or other property (not like-kind) in addition to like-kind property, your basis in the property acquired is the basis of the property given up, increased by the amount of money or other property transferred. Also, if you recognize gain on the exchange because you received cash or other non-like-kind property in the exchange, your basis in the property acquired is the basis of the property given up, reduced by the amount of cash and fair market value of any property received, and increased by gain you recognized.

Q : How do you determine if a worker is an employee or an independent contractor?

A : The determination can be complex and depends on the facts and circumstances of each case. The determination is based on whether the person for whom the services are performed has the right to control how the worker performs the services. It’s not based merely on how the worker is paid, how often the worker is paid, or whether the work is part-time or full-time.

There are three basic categories of factors that are relevant to determining a worker’s classification:

Behavioral control (whether there’s a right to direct or control how the worker does the work),
Financial control (whether there’s a right to direct or control the business part of the work), and
Relationship of the parties (how the business and worker perceive the relationship).

For more information on employer-employee relationships, refer to Publication 15 (Circular E), Employer’s Tax Guide and Publication 15-A, Employer’s Supplemental Tax Guide. Also, refer to Publication 1779, Independent Contractor or Employee and Publication 5520, How Businesses Determine if a Worker is an Employee or Independent Contractor.

If you would like the IRS to determine whether services are performed as an employee or independent contractor, you may submit Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding.

Generally, if you’re an independent contractor you’re considered self-employed and should report your income (nonemployee compensation) on Schedule C (Form 1040), Profit or Loss From Business (Sole Proprietorship). Most self-employed individuals will need to pay self-employment tax (comprised of Social Security and Medicare taxes) if their income (net earnings from self-employment) is $400 or more. Use Schedule SE (Form 1040), Self-Employment Tax to figure the tax due.

Generally, there’s no tax withholding on income you receive as a self-employed individual if you provide your taxpayer identification number (TIN) to the payer. However, you may be subject to the requirement to make quarterly estimated tax payments. If you are required to but do not make timely estimated tax payments, the IRS may assess a penalty for an underpayment of estimated tax. Unlike independent contractors, employees generally pay income tax and their share of Social Security and Medicare taxes through payroll deductions (withholding).

Q : Are business gifts deductible?

A : If you give business gifts during your trade or business, you can deduct all or part of the costs subject to the following limitations:

You deduct no more than $25 of the cost of business gifts you give directly or indirectly to each person during your tax year.
- If you and your spouse both give gifts to the same person, both of you are treated as one taxpayer.
- Incidental costs such as engraving, packing or shipping aren’t included in the $25 limit if they don’t add substantial value to the gift.
- For purposes of the $25 per person limit, don’t consider gifts costing $4 or less that have your business name permanently engraved on the item and which you distribute on a regular basis.
Any item that could be considered either a gift or as entertainment is generally considered entertainment and cannot be deducted.
You need to have timely kept records that prove the business purpose of the gift as well as the details of the amount spent and date of the gift.

Q : I use my home for business. Can I deduct the expenses?

A : To deduct expenses related to the part of your home used for business, you must meet specific requirements. Even then, your deduction may be limited.

You must use part of your home:

Exclusively on a regular basis as your principal place of business,
Exclusively on a regular basis as a place where you meet or deal with patients, clients, or customers in the normal course of your trade or business,
In the case of a separate structure which isn’t attached to your home, exclusively on a regular basis in connection with your trade or business
On a regular basis for storage of inventory or product samples for use in your trade or business of selling products if your home is the only fixed location of the trade or business,
For rental use, or
As a daycare facility.

Note: You don’t have to meet the exclusive use test if you satisfy the rules that apply to storage, rental, or daycare use.

The simplified method is available to qualifying taxpayers. They can claim a prescribed rate of $5 per square foot (up to a maximum of 300 square feet) directly on Schedule C (Form 1040), Profit or Loss From Business (Sole Proprietorship), by entering the square footage of the home and square footage of the office in the applicable boxes to indicate their election to use the simplified method.

Note: You may not use the simplified method for rental use of your home.

Taxpayers who don’t choose the simplified method, will continue to use Form 8829, Expenses for Business Use of Your Home to compute the expense allowable as a deduction on Schedule C (Form 1040).

If you use your home in your farming business, report your expenses on Schedule F (Form 1040). Partners report their unreimbursed partnership expenses on Schedule E (Form 1040). If you are a statutory employee (box 13 of Form W-2 checked), report your expenses using the same rules as self-employed persons on Schedule C (Form 1040).

Q : Can a married couple operate a business as a sole proprietorship, or do they need to be a partnership?

A : Unless a business meets the requirements listed below to be a qualified joint venture, sole proprietorship must be solely owned by one spouse, and the other spouse can work in the business as an employee. A business jointly owned and operated by a married couple is a partnership (and should file Form 1065, U.S. Return of Partnership Income) unless the spouses qualify and elect to have the business be treated as a qualified joint venture, or they operate their business in one of the nine community property states.

A married couple who jointly own and operate a trade or business may choose for each spouse to be treated as a sole proprietor by electing to file as a qualified joint venture. Requirements for a qualified joint venture:

The only members in the joint venture are a married couple who file a joint tax return,
The spouses own and operate the trade or business as co-owners (and not in the name of a state law entity such as an LLC or LLP),
Both spouses materially participate in the trade or business, or maintain a farm as a rental business without materially participating (for self-employment tax purposes) in the operation or management of the farm, and
Both spouses must elect qualified joint venture status on Form 1040, U.S. Individual Income Tax Return or Form 1040-SR, U.S. Tax Return for Seniors by dividing the items of income, gain, loss, deduction, credit, and expenses in accordance with their respective interests in such venture. Each spouse files with the Form 1040 or Form 1040-SR a separate Schedule C (Form 1040), Profit or Loss From Business (Sole Proprietorship), Schedule F (Form 1040), Profit or Loss From Farming, or Form 4835, Farm Rental Income and Expenses, accordingly, and if required, a separate Schedule SE (Form 1040), Self-Employment Tax to pay self-employment tax.

Married couple businesses in community property states may sometimes qualify to be treated similarly to a sole proprietorship. For Special Rules for Spouses in Community States, see Revenue Procedure 2002-69 and the Instructions for Schedule C.

Q : I must start receiving distributions from my IRA & 401(k) accounts. How do I determine the amount I must withdraw each year to avoid a penalty?

A : Generally, the required minimum distribution (RMD) must be figured separately for each account. You can calculate the RMD for each account by dividing the prior December 31 balance of that IRA or retirement plan account by a life expectancy factor that the IRS publishes in tables in Publication 590-B, Distributions from Individual Retirement Arrangements (IRAs). Use the:

Uniform Lifetime Table (Table III) if you’re an unmarried owner, an owner whose spouse isn’t the sole beneficiary, or an owner whose spouse isn’t more than 10 years younger;
Joint Life and Last Survivor Table (Table II) if you’re a married owner whose spouse is both more than 10 years younger and the sole beneficiary of the account; and
Single Life Expectancy Table (Table I) if you’re a beneficiary of an account.

You can use “Worksheet 1-1. Figuring the Taxable Part of Your IRA Distribution” in Publication 590-B.

Note: If you have more than one IRA, you can total the required distributions for all the IRA accounts and then satisfy the requirement by taking distributions from any one (or more) of the IRA accounts.

Q : I’m a sole proprietor and pay personal expenses out of my business bank account. Should I include the money used for personal expenses as part of my business income? Can I write these expenses off?

A :

You would include the money used to pay personal expenses in your business income when your business earned it.
You wouldn’t write off these expenses as business expenses because they’re not ordinary and necessary costs of carrying on your trade or business.
Personal, living, or family expenses are generally not deductible.
It’s a good idea to keep separate business and personal accounts as this makes it easier to keep records.

Q : For business travel, are there limits on the amounts deductible for meals?

A :

Generally, reimbursed non-entertainment-related meal expenses are deductible if your business trip is overnight or long enough that you need to stop for substantial sleep or rest to properly perform your duties. You can figure all your travel meal expenses using either of the following methods:
- Actual cost. If you use this method, you must keep records of your actual cost.
- The standard meal allowance, which is the federal meals and incidental expense (M&IE) per diem rate. The GSA website lists these rates by location. Note that lower rates apply for the first and last days of travel.
The deduction for unreimbursed non-entertainment-related business meals is generally subject to a 50% limitation. You generally can’t deduct meal expenses unless you (or your employee) are present at the furnishing of the food or beverages and such expense is not lavish or extravagant under the circumstances.

Q : If I lease a vehicle, can I deduct the cost of the lease payments plus the standard mileage rate?

A : If you lease a car you use in business, you may not deduct both lease costs and the standard mileage rate. You may either:

Deduct the standard mileage rate for the business miles driven. If you choose this method, you must use the standard mileage rate method for the entire lease period (including renewals).
Claim actual expenses, which would include lease payments. If you choose this method, only the business-related portion of the lease payment is deductible.

An income inclusion amount reduces both of these deductions.

Q : If you acquire a piece of equipment for use in a trade or business, like a forklift or truck, are the payments you make deductible lease payments or do you instead depreciate the cost of the equipment?

A : You must first determine whether your agreement is a lease or a conditional sales contract. If the agreement is a lease, you may deduct the payments as rent. If the agreement is a conditional sales contract, you consider yourself as the outright purchaser of the equipment. You may generally recover the cost of such property used in a trade or business through depreciation deductions.

Whether the agreement is a lease or a conditional sales contract depends on the intent of the parties as evidenced by their agreement, which is read considering the facts and circumstances when it was entered into. Determine the parties’ intent based on the facts and circumstances that exist when you enter into the agreement. No single test, or special combination of tests, always applies.

However, in general, you may consider an agreement as a conditional sales contract (Rev. Rul. 55-540, 1955-2 C.B. 39) rather than a lease if one or more of the following conditions apply:

The agreement designates part of each payment towards an equity interest that you’ll receive in the property.
You get title to the property upon the payment of a stated amount of “rental” payments required under the agreement.
The amount you must pay to use the property for a short time is an inordinately large part of the amount you would pay to get title to the property.
You pay much more than the current fair rental value for the property.
You have an option to buy the property at a nominal price compared to the value of the property when you may exercise the option. Determine this value when you enter into the agreement.
You have an option to buy the property for a small amount compared to the total amount you have to pay under the agreement.
The agreement designates some parts of the payments as interest, or parts of the payments are easy to recognize as interest.