Question: Jim and Sarah are married and filing a joint tax return in 2024. Their modified adjusted gross income (MAGI) was $237,000. The couple finalized the adoption of a child with special needs in 2024 and have qualified adoption expenses (QAEs) of $10,000. Is their adoption credit limited to $10,000 in 2024?

Answer: No, Jim and Sarah can take the maximum adoption credit of $16,810 in 2024 for a child with special needs, regardless of the QAEs they paid. However, other specific criteria must be met to take the adoption credit. Married taxpayers must file a joint tax return. Their MAGI must also be below $252,150 in 2024 to receive the full adoption credit amount. Finally, the adoption must be final in the year the adoption credit is claimed.

The adoption credit is a non-refundable tax credit. Therefore, the amount of credit cannot exceed the taxpayer’s tax liability. Any unused adoption tax credits can be carried forward for up to five years.

The adoption tax credits are reported on Form 8839, Qualified Adoption Expenses, Part II, Adoption Credit, which flows to Schedule 3 (Form 1040), Additional Credits and Payments, Line 6c, Adoption Credit. Attach Form 8839.

Question: Fred is a minister who only receives a housing allowance as payment for his services. He heard he could request voluntary federal income tax withholding (FITW) from his pay to help offset the Self-Employed Contributions Act (SECA) tax he owes. He contacted his church and was told he could not take FITW from the housing allowance he received. Why was he not allowed FITW?

Answer: Fred was not allowed FITW because his housing allowance (sometimes called a parsonage allowance or a rental allowance) is not reported on Form W-2, Box 1.

Per IRS regulations, voluntary withholding agreements established under §3402(p)(3)(A) apply to amounts that must be included in an employee’s gross income under §61. If Fred only receives a housing allowance as income, it is excluded from gross income under §107(2) and does not qualify for voluntary FITW.

Because of these regulations, ministers cannot request voluntary FITW when they receive only a housing allowance. They must have some taxable income, including salary, wages or even an SECA equivalent. Fred would have been qualified if he had received other gross income, like health insurance premiums paid by the church on his behalf or reimbursement under a nonaccountable plan.

Question: John is a U.S. citizen who died on Nov. 17, 2024. His will names three beneficiaries to his estate, each of whom is a U.S. citizen. John’s final Form 1040, U.S. Individual Income Tax Return, will report all income attributable to him while he was alive, with the income received after death allocable to the estate. The estate’s only income for the year is $450 of taxable income from gross proceeds from the sale of stock and $200 of tax-exempt interest. Is the estate required to file Form 1041, Income Tax Return for Estates and Trusts, for its initial year?

Answer: Yes. An estate is required to file a tax return if any of the following conditions apply: (1) has gross income of $600 or more during the year; (2) has a beneficiary who is a nonresident alien; or (3) is a trust making a §645 election to be treated as part of the estate if the combined gross income of the trust and estate is $600 or more.

Although John’s estate had $450 of taxable income, its total gross income was $650 ($450 + $200), which pushes it over the $600 gross income threshold, requiring it to file Form 1041 for the year.

Question: Sandra, a partner in TRX, LLC, received a Schedule K-1 (Form 1065) with $45,000 in Box 19, Code C. The instructions for this current distribution indicate that this is the partnership’s adjusted basis of property immediately before it was distributed to Sandra. Besides the adjusted basis, what does her tax preparer need to know to complete the new Form 7217, Partner’s Report of Property Distributed by a Partnership, that should be filed with her Form 1040, U.S. Individual Income Tax Return?

Answer: Sandra and her preparer also need to know her outside basis in the partnership so it can be compared to the adjusted basis of the property reported on Schedule K-1. The fair market value of the property on the distribution date is also required to complete the form.

Form 7217, as it applies to current distributions, is a new form (2024) that reports the adjusted basis of property distributed from a partnership to a partner. Although a cash distribution in excess of outside basis may result in immediate gain recognition, current distributions of noncash property (such as real estate or equipment) generally do not cause either the partner or the partnership to recognize gain or loss on the distribution.

Instead, the partner’s basis in the distributed property cannot be more than the partner’s outside basis before the distribution (reduced by any cash distributions). Thus, the partnership’s adjusted basis in the property carries over to the partner to the extent of the partner’s outside basis so that recognition of gain or loss is deferred.

In other words, a partner’s basis in the distributed property is the smaller of:

• The partnership’s adjusted basis immediately before the distribution, or
• The adjusted basis of their partnership interest (outside basis) reduced by any cash distributed in the same transaction.

The partner may recognize gain or loss at a later time, such as when they dispose of the property [§732(a)].

Question: Katherine is a U.S. citizen living in El Salvador. She purchased a personal residence in that country over 12 years ago and has lived there as her primary residence ever since. Katherine sold her home in May of 2024. The home was originally purchased for $220,000; she made $50,000 in improvements and sold it for $300,000. The sale results in a small gain.

Katherine mentions that she has not yet received Form 1099-S, Proceeds from Real Estate Transactions, but she will receive one. Would Katherine be able to take advantage of the §121 exclusion and how would that be reported on her tax return since the home was in a foreign country?

Answer: Yes, if all the §121 requirements are met, the exclusion can be used on a foreign residence. Section 121 and Reg. §1.121-1 do not explicitly require the residence to be in the United States.

Therefore, as long as Katherine satisfies the ownership and use tests required under §121, she is eligible to exclude the gain from the sale of her principal residence, regardless of its location in a foreign country.

Katherine will report the sale of her foreign principal residence and the exclusion on Form 8949, Sale and Other Dispositions of Capital Assets, and Schedule D (Form 1040), Capital gains and Losses, just as if it was sold in the U.S.