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 Chris Novak, CPA, from our Tax Knowledge Center.
December 5, 2013
Question: Marty’s IRA invested in a Ponzi scheme. Marty made deductible and nondeductible contributions to this IRA. He doesn’t have any other IRAs. Can Marty claim a theft loss on his personal income tax return?
Answer: Unfortunately, Marty cannot claim a theft loss on his personal income tax return because he experienced an economic loss within a tax-deferred IRA. Marty cannot claim a loss for amounts he deducted or excluded from gross income. However, Marty can take a miscellaneous itemized deduction, subject to the 2% of AGI limit, to the extent he has unrecovered basis after the distribution of his entire interest in the IRA [INFO 2010-0234].
November 27, 2013
Question: Your client tells you she paid $20,000 for her daughter’s medical expenses and she is wondering if that amount is deductible. Her daughter is 27 years old and files a joint return with her spouse. She does not live with your client and is filing a return because she and her husband owe taxes. The daughter’s gross income is $9,000 and the son-in-law’s gross income is $60,000. The daughter and her spouse use both of their gross income to provide support for themselves and their four children. Paying these medical expenses constitutes greater than 50% of her daughter’s total support. Can your client claim these medical expenses?
Answer: Yes. A taxpayer is allowed a deduction for the expenses paid during the taxable year, not compensated for by insurance or otherwise, for medical care of the taxpayer, his spouse or a dependent [as defined in §152, determined without regard to subsections (b)(1), (b)(2) , and (d)(1)(B) thereof], to the extent that such expenses exceed 10 percent of adjusted gross income [§213(a)]. That means we can ignore the following rules when determining if someone is a dependent for the medical expense deduction:
- A dependent is ineligible to claim a dependent [§152(b)(1)].
- A married filing joint person cannot be treated as a dependent of another [§152(b)(2)].
- The person’s gross income must be less than the exemption amount [§152(d)(1)(B)].
We can ignore the fact that the daughter filed a joint return with her spouse and that her gross income was over the exemption amount. Since the parents provided over 50% of her support, she is treated as a dependent for the purposes of deducting the medical expenses.
November 21, 2013
Question: Karen purchased a rental property in January 2010 for $100,000. After making improvements, the basis in the rental was $125,000. She has rented the property out since the improvements were completed. In July 2013, Karen married Fred. By that time, the real estate market had recovered and the rental was now worth $200,000. In order to get cash out of the rental, Karen wants to sell the rental property to Fred for the FMV. How will this sale be treated?
Answer: Since Karen and Fred are married, §1041(a)(1) would prevent Karen from recognizing a gain on the sale of this property. This code section specifically states that no gain or loss shall be recognized on a transfer of property from an individual to a spouse. It makes no difference that the sale will be an arms-length transaction. The transfer will actually be treated in the same manner as a gift, and Karen’s adjusted basis will be Fred’s adjusted basis in the property.
November 14, 2013
Question: Patty O’Furniture, a U.S. citizen, received a distribution of 100,000 Euros from the estate of her late uncle Conan in Ireland. She estimates the distribution is equal to approximately $138,000 in U.S. dollars. Patty had no authority over the estate or any foreign financial accounts. Is this taxable income to her and what forms must she file?
Answer: Gifts and bequests, whether from U.S. or foreign persons or estates, are not taxable. The IRS does not impose a federal estate tax on inheritances received from a foreign country. Most states follow this guidance and do not assess an estate tax on property inherited from overseas.
The tax law of the foreign nation determines who must pay income taxes on income earned by the foreign estate prior to distribution. For example, under the tax law of the Republic of Ireland the estate’s personal representative is generally liable to pay the Irish income tax on income earned during the administration period.
However, since the distribution is coming from a foreign country, the IRS wants to make sure that Patty’s distribution is a actually a gift or inheritance. Patty should file a Form 3520,
Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts, to report the distribution. In the case of gifts from a nonresident alien or transfers by reason of death from a foreign estate, reporting is required only if the aggregate amount of gifts from that nonresident alien or foreign estate exceeds $100,000 during the tax year [Notice 97-34, Section VI, B, 1]. Once the $100,000 threshold is met, Form 3520 requires the donee to separately identify each gift in excess of $5,000, but does not require the identification of the donor.
If a United States person fails to file a Form 3520 with respect to any foreign gift (or bequest) by April 15 of the following year (plus extensions), the United States person is subject to a penalty equal to 5 percent of the amount of such foreign gift or bequest for each month for which the failure continues, not to exceed 25 percent in total [§6039F(c)].
December 5, 2013
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