November 19, 2015
Question: James is 57 years old and self-employed. He purchased a high-deductible health plan (HDHP) for himself and his family. He established a health savings account (HSA) to cover expenses that are not covered by the insurance. The balance in James’s HSA at the end of 2014 was $3,400. In 2015, James broke his leg, requiring outpatient surgery. Because of the surgery, James was unable to afford making contributions to the HSA in 2015. His medical bills came to $15,000 after insurance. He and his wife have an AGI of roughly $100,000, so there would be very little benefit from a medical expense deduction. James is thinking of taking a distribution from his IRA to pay for the medical expenses. What would be the best route for his situation if he does decide to invade his IRA?
Answer: First, since James is over age 55 with a family HDHP, the HSA should be utilized to the fullest. Since no HSA contributions have been made for the year, James should consider doing a direct rollover of his IRA funds to the HSA. This can be done once in his lifetime.
If he chooses the rollover option, the amount he can rollover tax-free equals the annual HSA limit for the year, less any other contributions made. James could rollover $7,650 ($6,650 regular contribution plus $1,000 catchup since he’s over age 55) from his IRA. This will save him tax on $7,650, plus the 10% penalty on early withdrawal. He won’t be able to deduct the medical expenses on Schedule A because the 10% of AGI floor will exceed the remaining medical expenses of $3,950 ($15,000 - $3,400 - $7,650). The additional IRA distribution of $3,950 needed to cover the expenses will be subject to tax and the early withdrawal penalty.
If James doesn’t do the direct rollover, his medical expenses will only exceed his AGI by $5,000, thus only $5,000 of the expenses will be deductible. The IRA distribution of $11,600 ($15,000 - $3,400 HSA balance) will be fully taxable. He will have a 10% penalty on $6,600 as he meets an exception for the rest. Doing this will cost him more in tax and will almost double the penalty on early withdrawal.
November 12, 2015
Question: In the summer of 2015, Gladys purchased a painting at a rummage sale for $15 and hung it in her home. A couple of weeks later her friend, George, who works in a §501(c)(3) art museum, stopped by and immediately recognized the painting. He informed her that it was a rare painting from a well-known artist and was very valuable. Gladys had the painting appraised and its estimated fair market value was $60,000. George, wanting to display the painting in the art museum, asked Gladys to donate the painting to the art museum. She agreed and in November 2015, donated the painting. What is Gladys’s deductible charitable contribution?
Answer: Unfortunately, Gladys’s charitable deduction is limited to $15, which is her basis in the painting. The deductible contribution for short-term capital gain property is limited to the taxpayer’s basis in the property [§170(e)(1)(A)]. Since Gladys held the painting for less than 12 months, it is short-term capital gain property. In order for Gladys to deduct a charitable contribution of $60,000, she would either have to wait a year before donating the painting or sell the painting and donate the cash received in the sale. If she sold the painting and donated the cash, she would have recognized a short-term capital gain of $59,985 ($60,000 - $15) and then taken a charitable deduction for the cash donated.
November 5, 2015
Question: Myron, age 55, works as an employee for AMC Company. AMC Company has a §403(b) plan where Myron designated $24,000 as a Roth contribution. Myron also works as an employee at BMS Company which has a §457 plan where he designated another $24,000 as a Roth contribution. Is Myron allowed to make $48,000 designated in Roth contributions for 2015?
Answer: Yes, because one of the plans is a §457 plan. Deferrals under other plans are not counted when determining the maximum allowed under a §457 plan. A §457 plan is not included in the definition of deferrals under §402(g)(3). Furthermore §402A does not prohibit the two plans from doing so. Therefore, Myron is allowed to put the maximum elective deferral into both his §403(b) plan and §457 plan as designated Roth contributions.
If his plans were instead a §403(b) plan and a §401(k) plan he would only be allowed a combined maximum contribution of $24,000.
October 29, 2015
Question: John owned and used his home as a principal residence for more than the last two years. John hired a structure relocation company to move his house to a new plot of land then sold the vacant lot where his former home stood. Can John exclude the gain from the sale of the vacant land?
Answer: No. By selling the land where the principal residence was previously located, but not selling the principal residence itself, the taxpayer may not exclude from gross income the gain realized from the sale of the land under §121 of the Code (Rev. Rul. 83-50).
October 22, 2015
Question: Connie donated $5,000 to her church in 2015. Her AGI for 2015 was $500. She does not have enough deductions to itemize so she claimed the standard deduction of $6,300. Can she carry the $5,000 donation to her 2016 return as a charitable contribution even though she did not itemize in 2015?
Answer: No, she is not allowed to carry forward the full $5,000 charitable contribution. She can, however, carry over the charitable contributions that exceed the 50% AGI limitation. She will be able to carry forward $4,750 because she would have been able to deduct $250 which is 50% of her AGI for the year. If an individual's charitable gifts for a tax year exceed the percentage ceilings, the excess may generally be carried forward and deducted for up to five years (subject to the later year's ceiling) [Code Sec. 170(d)(1)]. The taxpayer must attach a statement to the return for the year the carryover is deducted. The carryforward is available even if the individual didn't itemize their deductions in the contribution year [Reg § 1.170A-10(a)(2)].
October 15, 2015
Question: Harlo made a $5,500 Roth IRA contribution in 2013 and 2014. Based on Harlo’s modified adjusted gross income for 2013 and 2014, she could only contribute $2,300 and $1,000, respectively. Harlo has not distributed either of these contributions based on her limitations. In preparing Harlo’s tax return, you notice she has excess contributions for 2013 and 2014. Will Harlo be subject to a 6% excise tax for 2014 if she distributes a total of $7,700 (there were no earnings on the contributions) in 2015 by the due date of her 2014 tax return, including extensions?
Answer: Yes. Harlo will be subject to a 6% excise tax in 2013 and 2014 on the 2013 excess contribution. A taxpayer is subject to the 6% excise tax for excess contributions to an IRA, until the taxpayer corrects it. There are four correction methods:
- Withdraw excess contribution plus related earnings by the due date, including extensions for filing the tax return for the year the excess contribution was made [§408(d)(4)]. This completely avoids the 6% excise tax if no deduction was allowed for the contribution [§4973(b)].
- Withdraw the excess contribution after the due date, including extensions, for filing the tax return [§408(d)(5)]. This stops the 6% excise tax from continuing to apply, beginning with the year of withdrawal [§4973(b)(2)(B)].
- Carry forward the excess contribution to a succeeding year. Treat an excess contribution as a current contribution for the succeeding year to the extent it is less than the amount allowed that year [§219(f)(6)]. This stops the 6% excise tax only for the year the excess contribution is applied as a current contribution [§4973(b)(2)(B)].
- Distribute funds from the IRA. To the extent that excess contributions remain, the distribution will reduce the excess contribution amount.
With that said, Harlo is subject to the 6% excise tax in 2013 and 2014 for the excess contribution made in 2013. Since Harlo distributed the 2014 excess contribution by the due date, including extensions, the 6% excise tax does not apply to the 2014 excess contributions. The 6% excise tax will stop in 2015 for the 2013 excess contribution because Harlo will distribute the excess amount in 2015.
October 8, 2015
Question: Rachel paid 2013 estimated income tax payments of $4,000 in four equal payments. She made the fourth payment in January 2014. Rachel had no other state income tax withheld during 2013. In 2014, she received a $400 tax refund on her 2013 state tax return. Rachel claimed itemized deductions each year on Schedule A. As a preparer, do you simply net the $1,000 estimated payment paid in 2014 with $400 refund recovered in 2014 for the purposes of determining her Schedule A deduction?
Answer: No. You must allocate the $400 refund between 2013 and 2014, the years in which Rachel paid the tax on which the refund is based. She paid 75% ($3,000 ÷ $4,000) of the estimated tax in 2013, so 75% of the $400 refund, or $300, is for amounts she paid in 2013 and is a recovery item. If all of the $300 is a taxable recovery item, you will include $300 on Form 1040, line 10, for 2014, and attach a copy of your computation showing why that amount is less than the amount shown on the Form 1099-G she received from the state.
The balance ($100) of the $400 refund is for her January 2014 estimated tax payment. When you figure Rachel’s deduction for state and local income taxes paid during 2014, you will reduce the $1,000 paid in January by $100. The deduction for state and local income taxes paid during 2014 will include the January net amount of $900 ($1,000 − $100), plus any estimated state income taxes paid in 2014 for 2014, and any state income tax withheld during 2014.
October 1, 2015
Question: Tim runs a business from his home in Florida throughout the year. He has been given an opportunity in Michigan to help a similar company get back on its feet. That company offered him a position as an employee for the next five years and has asked that he travel to their office in Michigan about 25% of the year. The balance of the year, Tim will be working from his home in Florida for his business.
Because his stay in Michigan could be as long as two or three weeks at one time, Tim found it cheaper to rent an economical apartment and lease a car instead of using hotels and rental cars. Can Tim deduct his travel and living expenses in Michigan?
When a taxpayer has two separate business locations where business is conducted at different times of the year with no permanent residence in either location, it is possible for a taxpayer to have two tax homes and never actually be “away from home.” In this situation the taxpayer is never away from home, so none of the living expenses are deductible. Instead, they are simply considered personal living expenses.
When a taxpayer has a permanent residence in one or both locations, and incurs duplicate living expenses, the taxpayer is not considered to have two tax homes. Considering a taxpayer to have two tax homes in this situation is inconsistent with a well-settled policy under §162(a)(2) that duplicated living expenses necessitated by business are deductible (Andrews).
In this example, because Tim spends the majority of his time in Florida, this residence would probably be considered his tax home. Additionally, because Tim has a permanent residence in each location, he would not be considered to have two tax homes. Therefore, to prevent him from incurring duplicate living expenses, for business purposes, expenses for business travel between Florida and Michigan, and living expenses in Michigan are deductible under §162. Meals are deductible at 50%. If any of his family accompanies him to Michigan, their expenses would not be deductible.
September 24, 2015
Question: A taxpayer has never filed the FinCen Form 114 (FBAR) to report his offshore accounts. In order to become compliant, the taxpayer hires a tax attorney to help him prepare and file the FBARs and mitigate the penalties. The taxpayer knows penalties are not deductible. However, are the attorney fees deductible?
Answer: It does not appear so. While there is neither a court ruling nor explanation from the IRS, §212(3) allows a deduction for the expenses incurred for the determination, collection or refund of any tax, which is governed by Title 26 of the U.S. Code. FBAR filings, however, are governed by Title 31 of the U.S. Code. In CCA 200603026, the IRS confirms that FBAR penalties are not a tax, nor are they governed by Title 26. Although FBAR is enforced by the IRS, it does not appear that these filings would be any determination of any “tax,” therefore, it would not appear to fall within the scope of §212(3).
September 17, 2015
Question: John Doe passed away on July 15, 2015. His estate paid a significant amount of deductible expenses in excess of its taxable income for its first year ending December 31, 2015. If John’s estate expects to receive a large taxable distribution from his IRA in 2016, can any of these excess deductions from 2015 be used against the 2016 income? If not, can these excess deductions pass through to the beneficiaries of the estate so they can deduct them on their own personal income tax return?
Answer: Unfortunately, excess deductions cannot be carried over to the following tax year. Furthermore, they can only be passed through to the beneficiaries in the final year of the estate. Thus, the excess deductions from 2015 are simply lost if the estate chooses a tax year ending December 31, 2015. No one benefits from these excess deductions. However, the estate could choose a fiscal year ending as late as June 30, 2016. In this situation, if the estate receives the IRA distribution within the first fiscal year, the expenses would offset such income.
September 10, 2015
Question: Fred became a heath care navigator. The Marketplace defines a navigator as an individual or organization trained to assist consumers, small businesses and their employees as they look for health coverage options through the Marketplace, including completing eligibility and enrollment forms. Health care navigator services are free to consumers and are required to be unbiased. As a tax professional, Fred thought this service would be helpful to his clients. He would like to look over the returns he filed for 2014 and check to see which of his clients could use his help. Can he contact them without having obtained their consent at the time he presented their return for signature?
Answer: No. Even if his intentions are to help his clients avoid problems they had in the previous year, the IRS has indicated that tax return preparers who use tax return information to solicit and facilitate health care enrollment services must first obtain taxpayer consent to do so. See Q3 at IRC §7216 Questions and Answers Related to the Affordable Care Act.
The IRS also explains the timing of obtaining the taxpayer’s consent. A taxpayer must provide written consent before a tax return preparer uses the taxpayer’s tax return information. Additionally, a tax return preparer may not request a taxpayer’s consent to use tax return information for purposes of solicitation after the tax return preparer provides a completed tax return to the taxpayer for signature. See Q11 at
Section 7216 Frequently Asked Questions.
September 3, 2015
Question: Armand, currently age 40, started a Roth IRA in 2009. He contributed $2,000 to the account and made no other contributions since then. In 2014, he converted his traditional IRA to a Roth by rolling it to his existing Roth account. He converted $45,000 and paid tax on this amount in 2014. In 2015, Armand took a distribution of $15,000 from his Roth account. Is the distribution amount subject to tax, penalty or both?
Answer: Armand is not subject to income tax on the distribution in 2015 because his Roth IRA basis ($47,000) is greater than the distribution amount. However, because part of the conversion basis was distributed and the conversion was within five years of the distribution, Armand falls victim to the 10% penalty on the converted amount. Under the ordering rules, the first $2,000 of the distribution is from the contributed amount. This amount is tax-free and penalty free. The remaining $13,000 is from the converted amount. The converted amount must be held in the Roth account for five years before it can be distributed penalty-free. As such, Armand will not pay tax on the $13,000 amount but will be subject to a $1,300 penalty unless an exception under §72(t)(2) applies (Reg. §1.408A-6, Q&A 5).
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