ACCT 401 Replies

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Joshua Turner

ACCT 401-D01

Professor Bell

December 7, 2017

Section 121 Exclusion

As the problem stated the married couples first home qualifies as a Section 121 exclusion. Section 121, “permits a maximum gain exclusion of $250,000 ($500,000 for certain married taxpayers)” (Foran)  The problem does not state that they are selling their old residence, in say Baltimore, but in this case we can assume that they are planning on it.  This couple is only moving due to a change in job of the husband and will need to purchase a new residence to claim as a primary residence.  A year later the family decides that they need a bigger home to accommodate their growing family and decides to move across town.  The family will be able to exclude their house in Baltimore, because they are only selling the house due to a job change of the husband.  When they sell their new house in say Philadelphia and move into a bigger house across town they will not be able to exclude that gain because they have not met any requirements.  If the family, “disposes of more than one residence within two years or who otherwise fails to satisfy the requirements, for example due to a job change or health problem, may qualify for a reduced exclusion amount”  (Foran)  Now this would work for the first house in Baltimore, but does not work on the sale of the house in Philly.

Now if the family were to remain in the residence in Philly for another year before selling it they would be able to exclude the gain on the sale of that house and then move into their new house across town.  The IRC allows the homeowner to exclude the gain on disposal of a home, “…only if, during that five-year period, the taxpayer owns and uses the property as a principal residence for periods totaling two years or more” (Foran)

Now the family is selling their smaller house in Philly to move across town and buy a larger home, most likely due to a growing family.  They would be required to file forms, “such as Form 1099-S, Proceeds From Real Estate Transactions, you must report the sale of the home even if the gain from the sale is excludable. Additionally, you must report the sale of the home if you can't exclude all of your capital gain from income. Use Form 1040, Schedule D (PDF), Capital Gains and Losses, and Form 8949 (PDF), Sales and Other Dispositions of Capital Assets, when required to report the home sale. Refer to Publication 523 for the rules on reporting your sale on your income tax return.” (Topic)  These forms would also need to be filled out for the disposal of their first house in Baltimore even though they would be able to exclude the whole amount of disposal gain.  This is mainly so that the government can check to make sure you are not trying to exclude more than what you are allowed.  They couple could consult a CPA in order to help them get the max deduction possible, but the best deduction would most likely be for the house they are disposing of in Baltimore.

  

Reference:

Foran, N. J., & Bryant, J. J. (2002, October 01). The Home Sale Gain Exclusion. Retrieved December 07, 2017, from https://www.journalofaccountancy.com/issues/2002/oct/thehomesalegainexclusion.html

Topic No. 701 Sale of Your Home. (2017, September 21). Retrieved December 07, 2017, from https://www.irs.gov/taxtopics/tc701

8 hours ago 

Scherrie Davis 

RE: Question 4 ttachment

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Question 4----Often times, clients do not bring in all of the documentation on their returns. Assume a client you have had for years brings their information in for you to prepare their tax return.  You have never had a problem with missing information, but this year your client claims there are significant charitable contributions, the documentation for which is missing.  The client assures you they have the documentation at home and will bring it in when they come to pick up their return.  You leave a note on the tax return that the information is needed before release of the return.  When the client comes in, he says he accidentally left the documentation sitting on the kitchen counter.  Do you release the tax return, or hold on to the tax return until the documentation is provided?  Justify you answer.

       While being a tax preparer loyal clientele is essential to your business and it is important to help them to keep them happy.  But is never a wise decision to be flexible on requirements to appease a client if it is against rules and regulations that can cost your company in the long run.  Preparing taxes require that we adhere to the regulations set forth by the Internal Revenue Services.  They have policies for charitable donations and they also let you know the amount of charitable donations that do not require specific documentation.  For the tax preparer not to place liability on the office they will have to have documentation to prove the charitable donations that client is claiming, if they are considered significant charitable donations.  To be declared your charitable donations, they would have to be going to a nonprofit religious group, nonprofit educational group, or a nonprofit charitable group.   "Claim your charitable donations on Form 1040, Schedule A. Your donations must go to an organization that' s one of these: Nonprofit religious group, Nonprofit educational group, and Nonprofit charitable group", (hrblock.com).  

            The client is also obligated by the IRS to present the proof to the tax preparer, so they can have records on hand of the actual amount that was donated to be itemized.  They have specific guidelines on what is need if you donate money to a nonprofit organization and the information that is need.  Client can opt to donate the money by means of cash, check, credit card, or debit card etc., for this deduction to be used the client can not receive anything in return.  If there is a gift received in return for this deduction, then the FMV of item must be deduction from donation amount to reflect the receiving of a gift.   "If you accept something in return for your gift, you can't write off the full amount", (hrblock.com).  With cash donations you will need proof of donation, by means of written acknowledgment of donation.  The written acknowledgment showing the amount, organizations amount and the amount of the donation.  

            If the donation is considered noncash and less than $250, client would need a receipt with organization's name and address, date of location, and description of donated item.  If you are unable to receive a written acknowledgment, then the client is responsible for keeping accurate records of donation.   "However, you don't have to get a receipt if it's impossible or impractical. In these cases, you must keep a reliable written record for each donated item showing", (hrblock.com).  

      The IRS require that if a client is donating noncash items of $5000 or more you would need to have the item appraised.  These appraisals need to be written up by a reputable appraiser, appraisals are needed if the value is $5,000 or more.  Appraisals are also needed if item donated exceeds $500 or it is not in good condition.  "You're also required to get an appraisal for an item of clothing or a household item if either of these is: The item is valued at more than $500 or It isn't in good condition", (hrblock.com).  This appraisal is needed to provide the IRS with proof of the amount of the item in order to use it on the client's tax return. 

       If the client is unable to provide the tax preparer with proof of the charitable donations, then the tax return must be held until the client return to the office with the documentation needed to be placed in the file to alleviate any potential liability on the preparer or the office.  As a previous client of the office they are aware of the requirements and policies that are required in order for there return to be processed.  The repercussion from the penalties could be very costly, so the return has to be held or the preparer can suggest that the donations be removed due to the lack of documentation and the tax return can be reworked without them.  The client should also be made aware of the potential audit that could take place, and if the information is not on file it could cost the client to have to payback money.

      It is always a great deed to be charitable, and quick to help someone out that is less fortunate.   "And do not forget to do good and to share with others, for with such sacrifices God is pleased", (Hebrews 13:16).  The only thing to remember is that accurate record keeping is essential for proof of charitable deductions.  These deductions have to have proof to avoid a potential for an audit.  

References

Hrblock.com; Filing: Adjustments and Deductions. Charitable Donations.

Syswerda, Jean,. (2001). NIV Woman of Faith Study Bible, New International Version. International Bible Society, The Zondervan Corporation.


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