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

July 28, 2016

Question: Robert was age 23 when he graduated with his degree in 2015. His Form 1098-T only reflects $5,000 in Box 5, Scholarships and Grants. There is nothing in any other box; however, he attended college from January through May.

Is it possible that Robert (or his parents, if he’s claimed as a dependent), can claim an education credit for 2015 and/or exclude the scholarships from income?

Answer: Yes, however, more information is needed. If a university has been reporting tuition when billed (Form 1098-T, Box 2) and including the amounts billed for the next year (Form 1098-T, Box 7), there is a chance that only scholarships and grants disbursed in the current year will be reported on the final Form 1098-T without any corresponding tuition. In this case, you need to obtain information from Robert to prove what he paid for tuition.

Tuition paid determines whether a taxpayer qualifies for the education credits under §25A or is able to exclude scholarship income. Student loan and scholarship disbursements oftentimes occur in January, when the billed tuition becomes due.

Thus, if Robert paid for his tuition in January of 2015, whether through loans, scholarships, payment or combination of the three, then the amount paid can be used to exclude scholarship income or obtain an education credit under §25A, despite Form 1098-T not reflecting any amount paid.

Note: Under the PATH Act universities are required to report what is paid in tax years beginning in 2016 and later. However, the IRS has provided relief to allow universities to report what is billed for the 2016 tax year (Announcement 2016-17).

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July 21, 2016

Question: Tim is a 100% shareholder of an S corporation business. The S corporation’s other full time employees are his adult nondependent daughter and his sister-in-law. The S corporation has a group health plan that pays 100% of the insurance cost for Tim, his daughter, and his sister-in-law. At the end of the year, Tim’s W-2 wages are increased to reflect his share of the health insurance paid by the company. Do the wages of his daughter and sister-in-law need to be increased as well due to attribution rules?

Answer: Yes for his daughter; no for his sister-in-law.

Under the family attribution rules of §318, an individual is considered as owning the stock owned, directly or indirectly, by or for his or her spouse (unless legally separated under a decree of divorce or separate maintenance), children, grandchildren and parents.

In this case, not only will Tim’s wages be increased to reflect the health insurance paid by the company, so will his daughter’s. However, his sister-in-law is not considered an owner for purposes of §318, therefore, her wages will not be increased for the health insurance paid for her by the company.

Tim and his daughter will be eligible for the self-employed health insurance deduction on the front of Form 1040 to the extent of their Medicare wages.

Had Tim’s daughter been a minor and still a dependent on his return, the same rules would apply if the company had paid for a separate health insurance policy for her. There seems to be no distinction between dependent and nondependent children or grandchildren.

July 14, 2016

Question: Your client purchased solar property that is eligible for a state tax credit on his state income tax return as well as a federal tax credit on Form 5695, Residential Energy Credits. The company that sells the solar property told the client he must reduce the basis by the state credit before calculating the federal credit. Is that true?

Answer: No. In Notice 2013-70, Q&A 12, the IRS indicated that the taxpayer does not reduce the amount of the qualified expenditure by the amount of the state tax credit claimed in calculating the federal credit.

July 7, 2016

Question: A new client, who is a small business owner, received a Form 941 Employment Tax Liability levy notice and wants to know why. After reading the notice, you realize that the client did not have the funds available when you scheduled the Form 941, Employer’s Quarterly Federal Tax Return, payment for the prior quarter and the deposit reversed. The report was filed with all payments shown as deposited. Should the report be amended? Is the employer subject to the penalty and interest stated on the notice?

Answer: First, find out why the payment was denied. The employer may have changed bank accounts or perhaps not enough money was available for the scheduled payment. If the employer changed banks, all agencies associated with the old account need to be updated and any prior scheduled payments need to be resubmitted from the new account. If the employer did not have the available funds, the payment should be made as soon as possible to stop the accumulating interest. Make sure the client is aware of the serious stance the IRS takes on Employer Trust Fund Penalties, which is up to 100% of the payment. The Form 941 should not be amended but the client is subject to the interest on the late deposit. A letter in response to the notice could request abatement of the penalty if the taxpayer has reasonable cause [§6656(a)].

June 30, 2016

Question: Your client, Anne Marie, has lived in the U.S. for the past 12 years. Prior to living in the U.S., she lived in Canada. Every year, Anne Marie comes to you on the due date to file her tax return. She maintains a savings account, financial investments and pension fund in Canada. Anne Marie comes to your office on June 30, 2016 to have you help her complete Form FinCEN114 (FBAR), which is required to report foreign financial accounts of $10,000 or more. Upon leaving the appointment and after filing the report, Anne Marie says, “See you again next year this time.” What is your response?

Answer: Before Anne Marie leaves, you should tell her the due date of filing Form FinCEN114 FBAR) is changing from June 30 to April 15 with an extension available to October 15, beginning in 2017 (Surface Transportation and Veterans Health Care Choice Improvement Act of 2015, Sec. 2006(b)(11)). Therefore, Anne Marie must file FinCEN114 (FBAR) with her tax return on April 15, unless she files an extension. It may also be a good idea to remind Anne Marie of the penalty for failing to report the required information. Failure to file FinCEN114 (FBAR) by the due date may be subject to a penalty of up to $10,000.

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.

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