TOPIC 1: DEPENDENTS

Facts: Ed has provided the majority of support for his stepdaughter, Stacy (age 21), her husband, Duane (age 21), and their 1-year-old child, Bert, since his wife’s death one year ago. Stacy, Duane, and Bert are all U.S. citizens with valid Social Security numbers. Ed promised his late wife that he would support Stacy (who was his wife’s daughter from a former marriage) and Stacy’s husband, Duane, until they both finished college. They are full-time students attending college in another state, and each earned $5,000 per year in wage income in their part-time jobs. Ed’s home is their permanent residence as they return there on breaks and throughout the summer and have not received residency status in the state of their college, so they pay out-of-state tuition.

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Questions:

- Is Ed entitled to the dependency exemptions for Stacy, Duance, and Bert?
-  How should Ed give Stacy and Duance with regard to filing their own return?

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Authorities: Reg. 1.152-4

TOPIC 2: INVESTMENT EXPENSES

Facts: Joan O’Weary borrowed $20,000 in 2021. $19,000 was used on investments (none of the investments were passive investments) and $1,000 was used on her vacation (which included hotel and airfare). During 2021, Joan earned a total of $2,800: $700 of taxable interest, $600 of non-qualifying dividends, and $1,500 of qualifying dividends. Joan paid $2,000 of interest from the loan and had no other investment-related expenses. Her marginal tax rate bracket is 25% and she itemizes her deductions.

Questions:

- How much may Joan deduct as investment interest and what type of deduction is it?

- Can Loan have any other options to legally increase her investment interest deduction in 2021 and if Loan paid off the loan at the beginning of 2022 and still earned the same investment income, should Loan still exercise the same option?

Authorities: Code Sec. 163