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 Sherri Huff, EA, from our Tax Knowledge Center.
January 22, 2015
Question: Your client has an HSA and asked if he could reimburse himself for miles going to and from doctor appointments. He will keep sufficient records of the location, date and time of the visit, the purpose of the visit, and how many miles he drives. Can he receive reimbursement from his HSA for these miles?
Answer: Yes. Section 223(d)(2) defines qualified medical expenses for HSA purposes that in large part are the same expenses allowed as an itemized deduction, with a few exceptions (e.g., a taxpayer cannot be reimbursed health insurance premiums unless they are for long-term care insurance, health care continuation coverage such as coverage under COBRA, health care coverage while receiving unemployment compensation under federal or state law, or for Medicare and other health care coverage, but not a Medicare supplement policy such as Medigap, if the taxpayer was 65 or older.)
Under §213(d)(1)(B), a deduction is allowed for transportation costs primarily for and essential to medical care. Therefore, if a taxpayer can substantiate the transportation expenses, either the standard mileage rate for medical purposes (23.5¢ for 2014 and 23¢ for 2015) or actual expenses, then they can be reimbursed from the HSA. In either case, whether the mileage rate or actual expense method is used, both parking fees and tolls for medical care are also reimbursable (Rev. Proc. 2010-51).
January 15, 2015
Question: John has been taking required minimum distributions (RMDs) from his IRA for several years. In the past, he made direct transfers of his RMD from the account to his local church. Because the qualified charitable distribution rules expired on December 31, 2013, John took his RMD on June 30, 2014, in cash and gave the funds to his church. Now he is wondering, since the law was retroactively reinstated, can he treat the distribution and subsequent contribution to his church as a qualified charitable distribution?
Tax Increase Prevention Act of 2014 retroactively reinstated the qualified charitable distribution rules for 2014. However, unlike the
American Taxpayer Relief Act of 2012, no concessions or transition relief was provided for situations like John’s. Since John did not properly perform a trustee-to-trustee transfer of the IRA money from his account to the church, he will have to recognize the income and report the contribution on Schedule A. Had he made the trustee-to-trustee transfer he would be eligible to treat this as a qualified charitable distribution.
January 8, 2015
Question: Benny participates in his employer’s SEP plan. He would like to contribute to a Roth IRA but cannot because his income is too high. His financial planner advised him to open a traditional IRA, make a nondeductible contribution to the newly opened IRA and then convert that IRA to a Roth IRA. His advisor explained that there would not be any taxable income upon the conversion of the traditional IRA. Is this true?
Answer: No. Although Benny may wish to convert only the nondeductible traditional IRA, all of his IRAs must be aggregated when computing income from the conversion. Thus, traditional, SEP and SIMPLE IRAs must all be aggregated for purposes of computing income from the conversion. As a result, Benny must aggregate his SEP IRA with his nondeductible traditional IRA to determine the taxable portion. Since his SEP IRA has only deductible contributions, he will recognize income upon the conversion of the nondeductible traditional IRA. He cannot simply choose to convert the nondeductible traditional IRA.
December 30, 2014
Question: You are preparing Form 2555 for a taxpayer who was in a foreign country from January 2, 2013, until he returned to the U.S. on December 21, 2013. He received his final paycheck for 2013 in 2014. The 2013 foreign pay of $6,400 was reported on a 2014 W-2. Can he exclude the 2013 foreign earned income on Form 2555 if he was not in the foreign country in 2014?
Answer: Yes, he can exclude this amount in 2014 if he did not already use the full exclusion amount in 2013.
For purposes of the foreign earned income exclusion limitation, income is treated as being earned in the tax year in which the services are performed, except for certain year-end payroll periods. Thus, if income is earned in one tax year and received in another, the individual must attribute the income to the tax year in which the services were performed in determining the foreign earned income exclusion. The attribution of income to the year when the services are performed applies only to determine the amount of excludable foreign earned income. It doesn't affect the year in which the income is reported. Thus, a cash basis taxpayer reports the entire amount of income, and claims the applicable exclusion, in the year he actually receives it.
Foreign earned income attributable to services performed in an earlier tax year is excludable from gross income in the year received only to the extent that amount could have been excluded had it been received in the earlier tax year. The tax year to which income is attributable is determined based on all the facts and circumstances.
No portion of amounts attributable to services performed in one year may be used in calculating the foreign earned income exclusion limitation for another year.
December 23, 2014
Question: Jason was injured and as a result suffered permanent blindness. His doctor recommended a service dog to help him with his daily needs. His doctor referred him to a breeder who specializes in training service dogs. He purchased a service dog for $10,000 and paid $1,500 per year in upkeep. He also paid $199 for registration and a vest for his dog. Can Jason deduct the cost to purchase his service dog, the dog’s upkeep, the registration and vest as a medical expense?
Answer: Yes, the cost to purchase the dog, its upkeep, the costs to register, and any necessary expenses of the dog are allowable as a medical expense deduction. Revenue Ruling 55-261 specifically provides that the cost of a “seeing-eye” dog and its maintenance are expenses paid primarily for the alleviation of the physical defect of blindness. Therefore, the expenses are deductible as a medical expense under §213.
December 18, 2014
Question: Your clients are the parents of a 27-year-old son who lived with them all year. The son has not been able to find a job after college, had no income for the year and was not covered by health insurance. Mom and dad provide more than half of his support. Can mom and dad avoid paying the individual shared responsibility payment (ISRP) penalty (i.e., individual mandate penalty) for their son by not claiming him as a dependent?
Answer: No. Simply not claiming an eligible dependent on a tax return will not avoid the penalty. Taxpayers are liable for the ISRP penalty for themselves and their dependents. An individual is a dependent of a taxpayer for a taxable year if the individual satisfies the definition of dependent under §152, regardless of whether the taxpayer claims the individual as a dependent on a Federal income tax return for the taxable year [Reg. §1.5000A-1(c)(2)].
December 11, 2014
Question: Isaac had $30,000 cancellation of debt income reported to him on Form 1099-C in 2013. He was able to exclude the entire amount due to insolvency. The only tax attributes Isaac had on January 1, 2014, were his house, car and household items. Each has a basis of $72,000, $6,000, and $2,000, respectively. The house has a mortgage of $63,000. Isaac also has $20,000 in credit card debt. How are Isaac’s tax attributes affected by the exclusion of the 2013 cancellation of debt?
Answer: Isaac’s tax attributes are not affected. According to §1017(b)(2) there is a special limitation to the reduction of a taxpayer’s basis in property. The aggregate basis of the taxpayer’s assets cannot be reduced below the aggregate of the taxpayer’s liabilities immediately after the discharge. Since the aggregate basis of Isaac’s property is $80,000 and total aggregate liabilities are $83,000, his basis in his assets are not reduced. The $30,000 of cancellation of debt income does not affect the basis of Isaac’s assets.
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