Internal Revenue Service in the United States - Research Paper Example

? Research Paper, Finance and Accounting Introduction Internal Revenue Service (IRS) Section 121 The Internal RevenueService is that agency set in the United States of America in charge of the process of collecting and enforcing taxes. The agency was founded in 1862 by the late President Lincoln who was operating under the US Department of Treasury Act. The agent is mainly involved in the entire process of collecting both the employment taxes and also the individual income taxes. It is also in charge of handling of the gifts, cooperates, estate taxes and finally excise taxes. The headquarters of the agency is in Washington DC. It is the role of the agency to ensure that it administers the laws related to revenue and asses and collect taxes. The agency has different sections guiding its operations. This paper in particular will explore at section 121. In its discussion, the paper will include the rules and exceptions which are involved in this paper. It will dig further to the presentation of real world examples of the section. (Yancey 2004) Section 121 offers the provision to every taxpayer filling the existing federal tax returns an entire exclusion on any kind of capital gains tax involved in selling their primary residence. The agency on an bi-annual basis provides $250,000 for persons filling single returns and also $500,000 for those married couples filing joint returns is given when the property in question represents their principal residence and when the taxpayer has been living in the home for a duration of at least two or five years. Capital Gains Tax The capital gain tax is imposed when one sells the primary residence at a price higher than the original purchase price. Section 121 excludes waives and eliminates the tax when the actual gain is not more than $250,000 and $500,000 for married couples and exclusion upon realization that the property has been used by the taxpayer as his/her principle residence for a duration of two or more years. This kind of exclusion is often available after every two years. EXCEPTIONS Gross income included shall exclude gains from the exchange of property or from sales if during a period of five years ending on the date of exchange or sale, and then such kind of a property has been used by the taxpayer and owned as his principal evidence for duration of 2 or more years. (Yancey 2004) Limitations 1. In General In general terms, the amount of the gains which is excluded from the gross income under section (a) subject to any sale or exchange of any kind of property in any sale shall not be more than $250,000. 2. Special Rules for Joint Ventures In the scenario when the couples making the joint return for the given taxable year of a sale or an exchange then- (A) $500,000 Limitations for certain Joint Returns. The first paragraph shall be adopted though the substitution of $500,000 for $250,000 if- i. Either one of the spouses satisfies the authorities requirements as adopted in subsections a with respect to that particular property. ii. When both the spouses satisfies the use requirements of the subsection (a) in conjunction to that property iii. When none of the spouses satisfies the requirements as lay in subsection (a) with respect to that particular property by a particular reason of the third paragraph. B. Other Joint Ventures. If the requirements of sub section A is not met by the spouses, then the limitations that exist in the first paragraph shall be the summation of the entire limitations under the first paragraph where each and every spouses shall be entitled of the spouses had in the pat been married. Therefore every spouse shall be regarded as owning the property during that time when either of the spouses owns the property. (Boortz & Linder 2005) 3. Application to Only a single Sale or an Exchange after every 2 years. A. General If there was no exchange sale by the taxpayer to whom subsection (a) applies during the two year period which ends on the day of the sale or exchange then the subsection shall not apply to any kind of sale to the tax payer. B. Pre-May 1997, Sale not taken to account The sub paragraph shall only be applied without taking into consideration any sale or other form of exchange before May, 7 1997. 4. 1 Special rule for certain sales by the surviving spouses In the scenarios of a sale of or an exchange of any property by unmarried person whose spouse is deceased on the same date when the sale was to take place then the first paragraph shall be applied through the substitution of $500,000 for $250,000 if such specific sales take place not later than 2 years after the date death of that particular spouse and that the expectations of second paragraph (A) were immediately met before such specific stated date of death. 1 Exclusion of a gain allocated to a non qualified use (A) In general The sub section A shall not apply to any gain from the sales of property during the sales or exchange of the property for non qualified use during such periods. (Bragg 2005) B) Gains Allocated for the durations of non-qualified use The gains shall only be allocated for the periods of a non-qualified based on the use whereby i. The entire period of the non qualified use during that time, was owned by the taxpayer and holds to ii. The time duration when such property was controlled by taxpayer C) Period of Non Qualified Use i. For duration for non qualified use means any time duration when the property is not being used as the sole principal residence of the person paying taxes or the spouses. ii. The exception is that the term period of non-qualified use does not include; I. Any section of the five year period which is explained in section (a) which refers to the last date when the property was used as the principal residence. II. Any time duration when the taxpayer or his spouse is working on a qualified official duty. III. Any other duration of temporary absence as a result of poor health conditions or employment among other factors. D) Coordination with the recognition of gain attributable to depreciation For the purposes of this section i. The subparagraph (a) is only relevant after the application of the subsection (d)(6) ii. The application of the sub paragraph (B) shall be without regard to any gain from the sub sections of (d)(6). (Bragg 2005) C. Exclusion for Taxpayers failing to meet some requirements I. In General In the event of a sale under which this subsection applies, the use requirements and the ownership of particular subsection (a) and section (b)(3) shall not be relevant though the limitation of the dollar under the 1st and the 2nd paragraph of subsection b when applicable will be similar to a) An amount bearing similar ratios to such limitations b) The shorter of 1. The total periods when the five year period ends on the date of such sale or an exchange, such kind of a property has been under the control of the tax payer. 2. That time of the most recent sale by the taxpayer when the subsection (a) is applicable. 2 . Sales and exchanges when the sub section is applicable The subsection shall be applicable if: A. The subsection shall not be applicable to such an exchange or sale for the reason of subsection 3 or failing to meet the owners. B. Such sales are as a result of employment, poor health or other unavoidable factors. d). Special rules Joint returns 1. If couples make joint returns for the taxable year for the exchange of a property then subsection (c) and (a) shall be applicable if either of the spouses meets the expectations of the ownership and requirements of subsection a. 2. Property of deceased spouse When the spouse is deceased on the day of sale then the duration of the period of owned property includes the duration of the deceased spouse using property before death. 3. Property owned by the spouse a. Property transferred to an individual to a spouse. The period of an individual owning such property will include the period of transfer owned property. b. Property used by a former spouse pursuant to divorce An individual shall be considered to be using the property as his principal residence during that time of ownership as the spouse will be granted the ownership after divorce and separation. 4. Tenant-stockholder in cooperative housing corporation If any taxpayer holds stock as a tenant in cooperative housing cooperation then the holding expectations shall be applied to the holding stock and also the application of the use of the requirements of subsection a shall be adopted. 5. Involuntary Conversions The section adopts the application of section 1033, acquisition of a property after involuntary conversion. 6. Recognition of gain attributable to depreciation The first sub section does not apply much of the gain from selling a property is does not exceed for the depreciation. 7. Determination of the use during the period of out-of-residence care Becoming physically incapable of self care and also the ownership of property as the individual paying tax’s residence 8) Sales of Remainder Interests For the records of this section (A) At the election of the individual paying taxes, the section shall not fail to adopt the exchange or sale of interest in a given principal residence through an excuse of being the remainder of an interest in that residence. Example An example Jack and Ellen who were married and have owned their specific home for a duration of minimum of two years. The home was brought at $175,000 and made $25,000 worth of improvements and also repairs. They contacted a buyer to sell to $325,000. The tax consequences were calculated to be as follows; Original Purchase Price $175,000 Improvements $25,000 Equals Adjustment Basis $200,000 Sales Price $325,000 Less Adjusted Basis $200,000 Less Selling Expenses $15,000 Less Realized Gain $110,000 Reference Boortz, N., & Linder, J. (2005). The FairTax book: saying goodbye to the income tax and the IRS. New York: Regan Books. Bragg, S. M. (2005). The ultimate accountants' reference including GAAP, IRS & SEC regulations, leases, and more. Hoboken, N.J.: John Wiley. Yancey, R. (2004). Confessions of a tax collector: one man's tour of duty inside the IRS. New York, NY: HarperCollins. Read More