Question: Jason regularly gambles at the local casino. He is not considered engaged in the trade or business of gambling but does spend a large amount of money pursuing the activity of gambling at one specific casino.

The casino gives Jason perks such as vouchers for free meals or drinks, complimentary overnight stays and tickets to attend shows at the local comedy club to encourage him to continue spending money at their casino rather than going to the larger casino in the next town. The total value of all the perks Jason received from the casino is $2,500.

During the year, Jason’s gambling pursuits have resulted in gambling winnings of $10,000, which he will report on his Form 1040, U.S. Individual Income Tax Return, as taxable income. He also keeps a log of all his wagers and has allowable documented gambling losses of $20,000. Assuming Jason is able to itemize his deductions on Schedule A (Form 1040), Itemized Deductions, what amount of gambling losses may he deduct?

Answer: Jason may deduct $12,500 of his gambling losses. He would report $12,500 in winnings and be allowed to offset that income with a deduction for an equal amount. The remaining $7,500 in losses are not deductible and can’t be carried forward.

Gambling losses are deductible on Schedule A as an itemized deduction up to the amount of the taxpayer’s gains from gambling (wagering) transactions. The perks, sometimes referred to as “comps,” Jason received from the casino are treated as gambling winnings for tax purposes because they are closely related to his gambling activity, and he would not have received them had he not gambled exclusively at that casino.

Therefore, the comps are considered gains from the gambling activity and must be treated as gambling winnings for purposes of reporting the income and determining how much of the gambling losses will be allowed as a deduction on Schedule A.

Question: Sandra has a publicly traded partnership (PTP) Schedule K-1 (Form 1065) with multiple PTP activities reported. One of the activities, Energy Partners LLP (a PTP), has a $5,000 loss in Box 1. Another activity, Blackstone Group (a PTP), has $6,000 of income in Box 1. Sandra is hopeful the loss from one activity can offset the gain from the other. Can the passive income from Blackstone Group offset the passive losses from Energy Partners, LLP?

Answer: No. Each PTP activity is treated on a stand-alone basis for passive activity loss purposes. This means that losses from one activity, including carryforwards, can only offset income from the same specific PTP. In other words, losses from Energy Partners LLP cannot offset the passive income from Blackstone Group, even though they are reported on the same Schedule K-1 (1065). Sandra will report $6,000 of passive income separately and a $5,000 suspended passive loss, currently non-deductible, which can only be used against future income from Energy Partners LLP.

Question: Jane earns $35,000 a year and receives non-taxable alimony and child support. She shares custody of their 2-year-old son with Mark. Their son lives with Jane Monday through Friday and stays with Mark on weekends. Jane and Mark, however, cannot agree on who should claim their son on their income tax returns. Which parent is entitled to claim their son – Jane or Mark?

Answer: According to §152(e), the parent the child spends the most time with – also known as the custodial parent – generally has the right to claim the child as a dependent. In Jane’s case, since their son lives with her during the week, she is considered the custodial parent. This means Jane is the parent entitled to claim their son as a dependent on her Form 1040, U.S. Individual Income Tax Return, as long as she meets the other requirements (§152). Mark, on the other hand, could only claim their son if Jane agrees in writing to release her dependency claim (Form 8332, Release/Revocation of Release of Claim to Exemption for Child by Custodial Parent, is usually used for such purpose).

It should be noted that even if Jane does agree in writing to allow Mark to claim their son as a dependent for tax purposes, Jane retains the right to file as head of household under §2(b), to claim the child and dependent care credit under §21 and earned income credit (EIC) under §32. More information can be found on the IRS’s website.

Question: Jim and Sarah are U.S. citizens who reside in the United States and file a joint federal income tax return. They have $5,000 in foreign bank accounts. Jim and Sarah also have $200,000 in foreign stocks issued by a foreign corporation, which is directly held be the couple and is not in a U.S. financial institution.

Could Jim and Sarah have a Form 8938, Statement of Specified Foreign Financial Assets, reporting requirement, but not a Report of Foreign Bank and Financial Accounts (FBAR) filing requirement using FinCEN Form 114?

Answer: Yes, a taxpayer could have a Form 8938, filing requirement but not an FBAR filing requirement. This is due to differences in the threshold requirements and types of reportable assets for each form. A taxpayer might have foreign assets that meet the Form 8938 filing thresholds (e.g., foreign stock held directly) but do not qualify as foreign financial accounts. Since FBAR only covers foreign financial accounts, these types of foreign assets would not trigger an FBAR filing.

1. Types of reportable assets:

   a. Form 8938: Covers a broader range of foreign financial assets, including interests in foreign entities and certain foreign non-account assets like foreign stocks held directly.

   b. FinCEN 114 (FBAR): Limited to foreign financial accounts, such as bank accounts, brokerage accounts and similar types of accounts with a financial institution.

   2. Threshold differences:

      a. Form 8938: For specified individuals, the thresholds are as follows: If an unmarried or married filing separate (MFS) taxpayer living in the U.S. has assets over $50,000 on the last day of the tax year, or $75,000 at any time during the tax year, they must file. For married taxpayers filing jointly (MFJ), these limits are $100,000 on the last day of the tax year or $150,000 at any time during the tax year. These amounts increase for U.S. citizens/resident aliens living abroad. For unmarried or MFS taxpayers, the threshold is $200,000 on the last day of the tax year or $300,000 at any time during the tax year. For MFJ taxpayers, the thresholds are $400,000 on the last day of the tax year and $600,000 at any time during the tax year.

      b. FinCEN Form 114 (FBAR): Required if the aggregate value of foreign financial accounts exceeds $10,000 at any point during the calendar year. There are no differences in thresholds whether the taxpayer is married filing a joint return, married filing a separate return or an unmarried taxpayer.

Question: Edgar runs a small technology company that uses the services of two foreign contractors; one lives in Guatemala and the other in Costa Rica. They will be paid $5,500 and $8,500 respectively. Edgar needs to know if he has a compliance obligation to issue them a Form 1099-NEC, Nonemployee Compensation?

Answer: No, Form 1099-NEC is not required to be issued to foreign contractors. First, the employer verifies the contractors are not U.S. citizens working outside the country. The foreign contractors will sign Form W-8BEN, Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding and Reporting (Individuals). By completing Part I and signing Form W-8BEN, the foreign contractors are certifying they are not U.S. persons. The foreign contractors do not need ITINs. Form 1099-NEC does not need to be filed [Reg.§1.6041-4(a)]. The Form W-8BEN is not filed with the IRS, however, the employer must keep it in the files just in the event of an audit.