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Liberty Tax Service Online Basic Income Tax Course. Lesson 11. Chapter 10 Homework 1. HOMEWORK 1: Prepare the requested forms or worksheets for each of the following situations. 1. Social Security Benefits Worksheet.
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Liberty Tax Service Online Basic Income Tax Course.Lesson 11
Chapter 10 Homework 1 HOMEWORK 1: Prepare the requested forms or worksheets for each of the following situations. 1. Social Security Benefits Worksheet. Lex C. and Lana B. Turner are married and file a joint return. Lex is retired and in 2008 received a fully taxable pension of $14,500. Lana works for a dentist and her 2008 wages were $22,375. They also received $2,000 in taxable interest from various certificates of deposit and $1,400 in tax-exempt interest from municipal bonds. Lex received Form SSA-1099 for 2008, which is shown below.
Chapter 10 Homework 1 2. Form 8812. Peter S. and Tammy R. Piper are married and file a joint return. In 2008, their three children were all under age 17. Line 1 of their Child Tax Credit Worksheet is $3,000. The amount on line 52 of Form 1040 is $174 and they have no other credits except the earned income credit. Based on their AGI, they will receive an earned income credit of $2,426. Their only income is Peter’s W-2 which is shown below.
Chapter 10 Homework 2 HOMEWORK 2: Prepare a 2008 tax return using the information and forms provided. Lincoln J. (born 12/8/1963) and Theresa L. Bana (born 4/4/1965) live with their three children at 47 Clay Street, Seattle, WA 98174. Lincoln is a computer engineer and Theresa is a physician’s assistant. In 2008, their younger son Raul (SSN 364-86-4162, born 08/16/1992) was in high school. Their daughter Maria (SSN 399-23-0997, born 5/12/1990) started her freshman year in college in August 2008. Antonio, their older son (SSN 264-90-2662, born 10/15/1986), began his senior year in college in September 2008. Antonio works on weekends and during the summer and uses all the money he earns to pay his own school expenses. Both Maria and Antonio are full-time students who purchased their books from and/or paid fees to their school as a condition of enrollment.
Chapter 10 Homework 2 Maria’s school expenses were: Tuition Fall Semester of 2008 $1,400 Course related books 350 Student activity fees 200 Transportation 150 Antonio’s school expenses were: Tuition Fall Semester of 2008 $2,300 Tuition Spring Semester of 2009 (paid in December 2008) 2,700 Course related books 280
Chapter 10 Homework 2 For the purpose of this problem, use Form 8863 only. The tuition and fees deduction, line 34 of Form 1040 will be discussed in Chapter 16. In addition to the W-2 forms and 1099-DIV shown below, Lincoln and Theresa received $300 interest from a certificate of deposit at First National Bank.
Chapter 11: Basis of Property and CapitalGains (Including Sale of Home) Chapter Contents • Basis of Property • Cost Basis • Adjusted Basis • Other Basis • Sale of Property • Long-term and Short-term Capital Gains • Capital Losses • Capital Gains Tax Rates • Sale of Stocks • Sale of Home • Key Ideas Objectives • Learn About Basis of Property and How to Figure It • Learn About How to Handle Short-term and Long-term Capital Gains • Learn How to Complete Schedule D • Learn How to Report the Sale of Stocks • Learn How to Report the Sale of Your Home
Basis of Property and CapitalGains (Including Sale of Home) Basis • Basis is the amount of your investment in property for tax purposes. • Used to figure deductions for: depreciation, amortization, depletion, charitable gifts, casualty losses, gain or loss on sale or other disposition of property. • Basis of property you buy is usually its cost.
Basis of Property and CapitalGains (Including Sale of Home) • Original basis can be adjusted; improvements increase basis, depreciation or casualty loss decrease basis • Generally, the higher your basis is for an asset, the less gain is reported on its sale; the higher your basis is in the depreciable asset, the higher is your depreciation deduction.
COST BASIS Cost includes: • Sales tax (except if claimed on Schedule A) • Freight charges • Installation and testing charges • Excise taxes • Legal and accounting fees • Revenue stamps • Recording fees • Real estate taxes
COST BASIS Stocks and Bonds • Basis of stocks and bonds is purchase price plus any costs of purchase or sale such as commissions and recording and transfer fees. • May use average basis for mutual fund shares if acquired at different times and prices and shares left on deposit in account kept by agent.
COST BASIS Real Property Certain fees and other expenses are part of basis for real property (real estate); included are: taxes you agree to pay that were owed by seller, certain settlement fees and closing costs, and expenses you pay for construction of nonbusiness property. Allocate cost basis between land and improvements to figure basis for depreciation of improvements (land is NOT depreciable property)
ADJUSTED BASIS Before figuring gain or loss, etc., you must make certain increases or decreases to the basis with the result being the adjusted basis. Add the cost of improvements to your basis in the property if they increase the value of the property, lengthen its life, or adapt it to a different use.
ADJUSTED BASIS Table 11-1. Examples of Improvements
ADJUSTED BASIS In January 2004, David paid $80,000 for real property to be used as a factory. He also paid commissions of $2,000 and title research and legal fees of $600. He allocated the total cost of $82,600 between the land and the building- $10,325 for the land and $72,275 for the building. Immediately, he spent $20,000 in remodeling the building before he placed it in service. He was allowed depreciation of $11,735 for the years 2004 through 2008. In 2005 Dave had a casualty loss of $5,000 on the building from a fire that was not covered by insurance. This loss was claimed as a deduction. He spent $5,500 to repair the fire damages. The adjusted basis of the building on January 1, 2009, is figured as follows:
ADJUSTED BASIS Original cost of building, including fees and commissions $72,275 Adjustments to basis: Add: Improvements $20,000 Repair of fire damage 5,500 Subtract: Depreciation 11,735 Casualty loss 5,000 Adjusted basis on January 1, 2009 81,040 The basis of the land, $10,325, remains unchanged. It is not affected by any of the above adjustments, which affect only the basis of the building.
OTHER BASIS Cost cannot be used as basis • Main factor used in determining basis is how you acquired the property 2. Fair market value (FMV) is used as adjusted basis FMV: • Price at which property would change hands between a buyer and a seller, • Neither having to buy or sell, • Both having reasonable knowledge of all necessary facts.
OTHER BASIS 3. For property received for your services, include FMV of property in income with the amount you include in income being your basis. 4. For property inherited from decedent, basis is generally one of the following: a. FMV at time of death b. FMV on alternate valuation date
OTHER BASIS Example: John’s father died on February 10, 2008 and left him 100 shares of XYZ stock for which his father paid $6,000 in 2000. The $6,000 is not the basis of John’s stock. On the date of his father’s death, XYZ was trading at $105 per share. Since the alternate valuation date was not chosen, the basis of the stock is $10,500 (100 shares x $105).
OTHER BASIS 5. For property you receive as a gift, if at time of gift the FMV is more than donor’s basis, use donor’s basis to figure gain or loss; if at time of gift the FMV is less than donor’s basis, use donor’s basis for gain and FMV for loss.
OTHER BASIS – Problem 1 Jim received an acre of land as a gift. At the time of the gift, the land had a FMV of $8,000. The donor’s adjusted basis was $10,000. After Jim received the property, no events occurred to increase or decrease his basis in it. If he sells the property for $12,000, how much of a gain will Jim realize? a. $2,000 b. $4,000 c. $0
OTHER BASIS – Problem 1 Jim received an acre of land as a gift. At the time of the gift, the land had a FMV of $8,000. The donor’s adjusted basis was $10,000. After Jim received the property, no events occurred to increase or decrease his basis in it. If he sells the property for $12,000, how much of a gain will Jim realize? a. $2,000 He must use the donor’s adjusted basis ($10,000) at the time of the gift as his basis to figure gain. If he sells the property for $7,000, he will have a $1,000 loss because he must use the FMV ($8,000) at the time of the gift to figure loss. If the sales price is between $8,000 and $10,000, he has neither gain nor loss.
OTHER BASIS 6. For property for personal use and then changed to business or rental, basis for depreciation is the lesser of: FMV of property on date of change or adjusted basis on date of change.
OTHER BASIS Example: Several years ago Craig paid $160,000 to have his home built on a lot that cost him $20,000. Before changing the property to rental use last year, he paid $20,000 for permanent improvements to the house and claimed a $2,000 casualty loss deduction for damage to the house. Because land is not depreciable, he can only include the cost of the house when figuring the basis for depreciation. His adjusted basis in the house when he changes its use is $178,000 ($160,000+ $20,000 - $2,000). On the date of change in use, his property has an FMV of $180,000 of which $15,000 is for the land and $165,000 is for the house. The basis of depreciation on the house is the FMV on the date of change ($165,000), because it is less than his adjusted basis ($178,000).
SALE OF PROPERTY A sale is transfer of property for money or a mortgage, note, or other promise to pay money. 1. A trade is transfer of property for other property or services and may be taxed in same way as a sale.
SALE OF PROPERTY Gain or Loss Gain or loss on sale or trade of property is figured by comparing amount realized with the adjusted basis of the property.
SALE OF PROPERTY Capital or Ordinary Gain or Loss A capital gain may be taxed at a lower tax rate than ordinary income. 1. You have a capital gain or loss if you sell or exchange a capital asset. 2. Examples of capital assets include: stocks and bonds; home owned and occupied by you and your family; household furnishings; car used for pleasure or commuting; gems and jewelry; coin or stamp.
SALE OF PROPERTY Reporting Gains and Losses If you sold stocks, bonds, commodities, etc., you should receive Form 1099-B or Form 1099-S for certain real estate transactions. Table 11-3 shows information you will need from Form 1099-B. You must report all taxable sales of stocks, bonds, commodities, etc. on Schedule D.
SALE OF PROPERTY Table 11-3. Information You Will Need From Form 1099-B
SALE OF PROPERTY Schedule D Report gains and losses on Schedule D. 1. Before completing Schedule D, you may have to complete other forms. • Form 4797, Sales of Business Property - for a sale, exchange, or involuntary conversion of business property • Form 8824, Like-Kind Exchanges - for a like-kind exchange • Form 6252, Installment Sale Income - for an installment sale • Form 4684, Casualties and Thefts - for an involuntary conversion due to casualty or theft • Form 6781, Gains and Losses From Section 1256 Contracts and Straddles – for reporting sale or exchange of options and future contracts.
