June 23, 2016
Question: Under the IRA one-rollover-per-year rule, if a taxpayer receives a check for the distribution from her IRA payable to the new financial institution and not the taxpayer, is this considered a rollover?
Answer: This would be considered a direct transfer. Direct transfers won’t affect her ability to transfer funds from one IRA trustee directly to another, because this type of transfer isn’t a rollover (Rev. Rul. 78-406). The one-rollover-per-year rule of §408(d)(3)(B) applies only to rollovers.
Under the one-rollover-per-year rule, individuals generally cannot make more than one rollover from the same IRA within a one-year period. They also cannot make a rollover during this one-year period from the IRA to which the distribution was rolled.
Beginning January 1, 2015, individuals can make only one rollover from an IRA to another (or the same) IRA in any 12-month period, regardless of the number of IRAs they own.
June 16, 2016
Question: A taxpayer owns shares in a cooperative housing corporation, which is converting to a condominium. The owner will receive legal title to a condominium unit in exchange for the stock in the cooperating housing corporation. Is this a taxable exchange?
Answer: Yes. Rev. Rul. 85-132 concludes that the exchange qualifies as a sale equal to the FMV of the condominium unit received and that the gain recognized is eligible for rollover under the old §1034 rules. Ruling Request #7 of PLR 100634-05 clarified that any gain would also be eligible for the §121 exclusion if the home sale gain exclusion requirements are met.
June 9, 2016
Question: Fran is attending the University of Wisconsin and is receiving her master’s degree in microbiology. She received a scholarship for $35,000 that is to be used to pay her tuition for the year. She also received a fellowship for $15,000 as payment for the research she is doing for the school. Is the entire $50,000 that she received excluded from income under §117(a)?
Answer: No. The $35,000 is excluded from income under §117(a) because Fran is required to use it to pay the tuition at an eligible education institution. However, the $15,000 that she received for her research services is reported as taxable compensation on Form 1040 Line 7, and is not excludable [Regulation §1.117-3(c)].
June 2, 2016
Question: Jerry and Elaine have a child who is two years old. The couple incurs $11,800 in child care expenses while they work. Jerry earned $55,000 and Elaine earned $16,750 during the year. Jerry’s employer has a dependent care FSA. Under the plan, Jerry had $3,500 set aside tax-free, for reimbursement of child care expenses, which shows in his W-2 box 10. Will Jerry and Elaine receive the dependent care credit on their tax return?
Answer: Jerry and Elaine will not receive the dependent care credit on their tax return because Jerry had more than $3,000 set aside pre-tax from his employer, which is the limit for taxpayers with one qualifying child. The taxpayer (Jerry) already received the tax benefit through his employer’s dependent care FSA. When an employee receives tax-free reimbursements of child care expenses from an employer-sponsored plan (including an FSA), he or she cannot claim the child and dependent care credit for those expenses if the amount is equal to or exceeds the limit for qualifying expenses. To maximize their dependent care savings, Jerry should set aside $5,000 pre-tax from his employer. However, if Jerry and Elaine had more than one child, the limit would’ve been $6,000, which would make them eligible for the credit.
May 26, 2016
Question: Justin had three different employers during the tax year. He had minimum essential coverage (MEC) from the beginning of the year through March 5, 2015 when he left his job. He secured another job right away but, his MEC was not effective until May 15, 2015. He worked there for a while, but was let go July 10, 2015, at which time his MEC terminated. Eventually, he found his current job and had MEC from October 1, 2015 through the end of the year. For the purposes of the individual shared responsibility penalty, which months is Justin subject to the penalty and how many months, if any, can he use the short-term (less than three months) gap exemption?
Answer: Without any exemption, Justin owes the penalty for three months: April, August and September. In this fact set, Justin can only use the short-term gap exemption for one month: April. Justin must pay the individual shared responsibility penalty for August and September on his 2015 tax return.
For the penalty, any month that Justin has coverage for at least one day of that month, he is considered to have MEC and is not subject to the penalty for that month. Therefore, between his first and second job, he is without MEC for only one month (April), despite the fact that his first gap (3/5/15 – 5/15/15) actually spanned two months and ten days on the calendar. For the next gap, August and September are the only two months Justin is without at least one day of MEC.
Each gap is less than three months; however, Justin is only able to use the short-term gap exemption for one gap per tax year. Furthermore, Justin is not able to choose which gap to utilize the exemption. Rather, the short-term gap exemption can only be used for the first gap, regardless of the fact that using the exemption for the second gap would have provided more relief from the penalty.
May 19, 2016
Question: When Pete passed away, his daughter Chris was the sole designated beneficiary of his traditional IRA account. However, there are five additional siblings that Chris would like to split the money with. Can this be structured so her siblings pay taxes on their own portions?
Answer: No. Taxpayers cannot assign income to others that is rightfully theirs. In this case, Chris is the designated beneficiary of the IRA, not the other siblings. Therefore the IRA distributions are taxable to Chris only and she cannot assign or nominee that responsibility to her siblings.
Neither can Chris add her siblings as additional beneficiaries on the IRA. Generally, in order to be a designated beneficiary, an individual must be a beneficiary as of the date of death. Therefore, since Chris was the only beneficiary listed on Pete’s IRA at his death, Chris cannot add her siblings as beneficiaries after his death.
However, Chris could consider either (1) making after-tax gifts to her siblings, or (2) disclaiming the IRA.
By making after-tax gifts, depending on the amount, Form 709,
United States Gift (and Generation-Skipping Transfer) Tax Return, may or may not need to be filed and the siblings are getting an amount net of the taxes paid by Chris.
By disclaiming the IRA, the IRA beneficiary will default to the estate if there are no secondary beneficiaries listed. If Chris and all her siblings are beneficiaries of the estate, then any IRA distributions that go to the estate will pass out to the estate beneficiaries. The beneficiaries will report and pay taxes on their personal tax return for any income distributed to them from the estate listed on their Form 1041, Schedule K-1s. However, if Chris is the only beneficiary of the estate, this would not solve her dilemma.
May 12, 2016
Question: A taxpayer reached age 54 in the current year and works for a company that sponsors a 401(k) plan, which he has an account worth $300,000. He is not a public safety employee. The company downsized and the taxpayer was laid off. The taxpayer waits until age 55 and withdraws the full $300,000. Is he subject to the 10% penalty?
Answer: Yes. There is a special exception to the 10% penalty if a taxpayer separates from his or her employer after age 55 [§72(t)(2)(A)(v)] (or at least in the calendar year in which he or she reaches age 55 (Notice 87-13, Q&A 20). Thus, the taxpayer does not qualify for the exception.
This exception also does not apply to IRAs, even if the IRA was funded by a rollover from the 401(k) which the taxpayer was age 55 when he or she separated [Kim, Young v. Comm., (2012, CA7) 109 AFTR 2d 2012-2067].
However, if the taxpayer obtains employment with a company that sponsors a 401(k) that accepts a rollover from his old plan and separates from the new employer after age 55, the exception can apply since the distribution is made from the plan sponsored by the employer from which the taxpayer separates (Notice 87-13, Q&A 20).
May 5, 2016
Question: You filed a 2015 income tax return for your client, Anthony, on April 15, 2016. He elected to apply all of his 2015 tax refund to his 2016 estimated tax by including the amount on Line 77 of Form 1040. A couple weeks later, Anthony calls you because he has changed his mind and would like his refund. Can you amend his 2015 tax return to get his refund?
Answer: No. Once made, the election cannot be changed or revoked at a later date. The election to apply a refund from one year to estimated tax for the following year is binding on the taxpayer and the IRS. The overpayment becomes an estimated tax payment that cannot be redesignated at the taxpayer’s request. Thus, Anthony cannot amend and get a refund of his 2015 overpayment that was applied to his 2016 estimated tax.
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