Tax Information

You Make the Call

Please note that the question and answer provided does not take into account all options or circumstances possible.

This week's question is brought to you by Erin Koplitz, CPA, from our Tax Knowledge Center.

October 16, 2014

Question: Tucker, age 22, is a full-time college student. He paid for his tuition and fees, supplies and other living expenses with student loans and income from a part-time job. In 2014, he borrowed $40,000 in student loans and received $5,000 in wages and used all the money for his own support. His parents provided less than half of his support and as a result, cannot claim him as a dependent. Can Tucker claim the refundable portion of the American Opportunity Tax Credit (AOTC)?

Answer: No. A student cannot claim the refundable AOTC if they would be subject to the kiddie tax provisions [§25A(i)(5)]. A child is subject to the kiddie tax provisions if:

  1. The child has not attained age 18 as of the close of the tax year or has earned income that does not exceed half of his or her support and is either age 18 or a full-time student age 19-23;
  2. Either parent of the child is alive at the close of the tax year; and
  3. The child does not file a joint return for the taxable year.

Since Tucker’s earned income did not exceed half of his support, he is subject to the kiddie tax provisions. Thus, he does not qualify for the refundable portion of the AOTC.

October 9, 2014

Question: A taxpayer has an office in home in 2014 and elects to use the safe harbor method. Will any of this deduction be taxable when he later sells the home and qualifies for the §121 exclusion?

Answer: No. A taxpayer using the safe harbor method for determining expenses for a tax year can't deduct any depreciation (including any additional first-year depreciation) or §179 expense for the part of the home that's used in a qualified business use of the home for that tax year. The depreciation deduction allowable for that part of the home for that tax year is deemed to be zero (Rev. Proc. 2013-13).

October 2, 2014

Question: Your client has made only nondeductible contributions to his traditional IRA. He filed Form 8606 each year these nondeductible contributions were made to help establish basis. Your client’s father died and named him as the designated beneficiary of his father’s traditional IRA. The father made only deductible contributions to his IRA (i.e., no basis). If your client takes a distribution from his own IRA, does he take into account the value of the inherited IRA to determine how much of the distribution is taxable?

Answer: Based on IRS Publication 590, the answer is no. If you inherit a traditional IRA from a person who had a basis in the IRA because of nondeductible contributions, that basis remains with the IRA. Unless you are the decedent's spouse and choose to treat the IRA as your own, you cannot combine this basis with any basis you have in your own traditional IRA(s) or any basis in traditional IRA(s) you inherited from other decedents. If you take distributions from both an inherited IRA and your IRA, and each has basis, you must complete separate Forms 8606 to determine the taxable and nontaxable portions of each of those distributions.

September 25, 2014

Question: Jeff, age 45, and Gina, age 43, divorced in 2014. Gina had $200,000 in her employer-sponsored §401(k) plan at the time of divorce. The divorce decree indicated that Gina is required to transfer $100,000 of her §401(k) plan to Jeff under a qualified domestic relations order (QDRO). The transfer is completed and Jeff kept $60,000 in the account and took the remaining $40,000 as a cash distribution. Is the $40,000 Jeff opted to receive in cash subject to the 10% early distribution penalty under §72(t)?

Answer: No. The amount received under a QDRO is not subject to the 10% early distribution penalty. If Jeff chooses to keep all or part of the distribution (i.e., not roll it over), he is taxed on only the amount he keeps and is not subject to the 10% early distribution tax regardless of his age [IRC Sec. 72(t)(2)(C)]. Jeff will receive Form 1099-R reporting the $40,000 distribution.

September 18, 2014

Question: Auggie rents a building where he operates his Schedule C business. During tax year 2013, he made $175,000 of improvements to the building, which were considered qualified leasehold improvements. With his accountant, he made the decision to expense the total cost of the improvements under §179. In 2013, his Schedule C only generated a taxable income of $75,000; he had no other business income. Therefore, $100,000 of the §179 was not allowed and was carried forward to 2014. What happens with the taxpayer’s carryover of the §179 in 2014?

Answer: The election to expense qualified real property under §179 expired as of December 31, 2013. Qualified real property is defined as qualified leasehold improvements, qualified restaurant property and qualified retail improvement property. The cost of any qualified real property that was elected to be expensed under §179 that was disallowed due to an income tax limitation cannot be carried over to a tax year beginning after 2013. Any excess amount is treated as placed in service on the first day of 2013 for purposes of computing depreciation (Notice 2013-59). Thus, the $100,000 carryover is not available for 2014 and must be treated as placed in service in 2013 and depreciated.

Looking for past You Make the Call questions and answers? Archived questions are available to Members in the NATP Research Archives.

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