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 Casey Ashman, CPA, from our Tax Knowledge Center.
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.
December 4, 2014
Question: Your client has three children. Two are under the age of 18 while the other is a 22-year-old college student. In your planning meeting for the current year, you found out that the 22-year-old child dropped out of college in March and earned about $7,000 in wages. Your client strongly urges you to claim the 22-year-old as a dependent because he feels that he supported this child throughout the year. He also states that his child will receive Form 1098-T; therefore, the child is clearly his dependent. Can you do this for your client?
Answer: No. The child is not considered a “qualifying child” or “qualifying relative.” A qualifying child must pass the age test of being under age 19 or under age 24 and a student. A student is defined as someone who is a full-time student for five calendar months during the year [§152(f)(2)]. The child fails this test. In analyzing the qualifying relative test, a qualifying relative cannot have gross income in excess of the exemption amount for the year. Since the child does not meet the requirements of a qualifying child or a qualifying relative, the child cannot be claimed by the parent, even if the child receives a Form 1098-T.
November 26, 2014
Question: Delaney owns a business where she uses the services of several independent contractors. In addition to paying the contractors for their services, she also reimburses them for travel and meals while working. Her company has an accountable plan and the contractors submit expense reports with receipts and documentation for their reimbursable expenses. Does she have to include the reimbursed expenses on Form 1099-MISC at the end of the year?
Answer: No. Provided there is an accountable plan in place and the contractors adequately account to the company for business expenses, the company should not report the expense reimbursements on Form 1099-MISC. Delaney will be able to deduct the reimbursements as business expenses with meals and entertainment being subject to the 50% limitations [Reg. 1.274-2(f)(2)(iv)(C)(2)].
However, if the contractors are not required to adequately account to the company, the company has a nonaccountable and plan the reimbursements would be included on Form 1099-MISC. In this case the company deducts the expense reimbursements and the fees paid for services in full as non-employee compensation. The company’s reimbursements for meals and entertainment would not be subject to the 50% limitations. All record keeping responsibilities fall to the contractor in this case and he or she is subject to the 50% limitation on meals and entertainment deductions [Reg. 1.274-2(f)(2)(iv)(C)(1)].
November 20, 2014
Question: The client has been hearing information about the 2014 individual shared responsibility penalty for those who do not have health insurance coverage all year. He’s heard that for 2014 the maximum penalty is $95 per month. Has the client received the correct information?
Answer: No. The $95 penalty is per year but only if that amount is less than 1% of household income. For 2014, the annual penalty payment amount is the greater of:
- One percent of your household income that is above the tax return filing threshold for your filing status; or
- Your family’s flat dollar amount, which is $95 per adult and $47.50 per child, limited to a family maximum of $285, but capped at the cost of the national average premium for a bronze-level health plan available through the Marketplace in 2014.
For 2014, the annual national average premium for a bronze-level health plan available through the Marketplace is $2,448 per individual ($204 per month per individual), but $12,240 for a family with five or more members ($1,020 per month for a family with five or more members).
A worksheet to determine the penalty can be found in the instructions for Form 8965,
Health Coverage Exemptions.
November 13, 2014
Question: Amanda walks into your office and asks you if a person over age 70½ who’s taking required minimum distributions (RMDs) from an IRA can have it paid directly to her church and completely avoid paying federal income taxes on the withdrawal for 2014. What do you tell her?
Answer: Before 2014, eligible taxpayers (70½ and older) could donate up to $100,000 to qualified charities and exclude such amount from gross income. This was called a qualified charitable distribution, which counted as a distribution for purposes of the taxpayer’s required minimum distribution. Unfortunately, the provision for qualified charitable distributions expired at the end of 2013. Unless this provision is extended, taxpayers can no longer make qualified charitable distributions for 2014 and beyond.
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