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

February 4, 2016

Question: Ole and Lena have two homes, one in Wisconsin and the other in Arizona. The home in Wisconsin has a mortgage of $300,000, which is all acquisition debt. The home in Arizona has no mortgage and is worth $500,000. Ole wants to refinance the Arizona home and pay off the Wisconsin home’s debt. Lena is not so sure this is the best tax move and asks for your advice. What do you tell her?

Answer: From a tax standpoint, Lena is correct. Since the Arizona home is paid off, any mortgage on the home would be considered home equity debt. As such, Ole and Lena would only be able to deduct the mortgage interest on up to $100,000 of the new debt. The interest on the excess $200,000 is traced to a personal expense of the taxpayer under Reg. §1.163-8T and is nondeductible. To be qualified mortgage interest, the debt must be secured by the residence [§163(h)(3)(B)(i)(II)]. Since the Wisconsin residence does not secure the debt, the interest on that debt is not qualified mortgage interest under §163(h)(3).

However, despite the inability to deduct the full amount of interest on their tax return, there may be financial gain by refinancing based on the interest rates and other non-tax factors.

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January 28, 2016

Question: In August 2015, Gwen (age 36) started a new job. On September 1, 2015, she began self-only coverage under a high deductible health plan (HDHP) and started making contributions to an HSA. For 2015, she contributed the maximum amount ($3,350) to the HSA because of the last-month rule. In May 2016, she left her employer and no longer had an HDHP. Is she required to recapture any of her contributions to the HSA?

Answer: Yes. When a taxpayer takes advantage of a higher contribution amount using the last-month rule, the taxpayer must remain an eligible individual during a testing period, unless the reason is death or disability. If the taxpayer is no longer an eligible individual at any time during the testing period, the taxpayer must include in gross income (recapture), and pay a 10% penalty on, the aggregate amount of contributions not otherwise allowable without the last-month rule. The testing period is December 1 of the first year until December 31 of the following year. The income is included in gross income in the tax year that includes the first month in the testing period that the taxpayer failed to be an eligible individual (including failure to maintain HDHP coverage) [§223(b)(8)]. Gwen would have been allowed to contribute $1,117 for 2015 based on four months of eligibility [4 x ($3,350 ÷ 12) = $1,117]. The amount of income included on her 2016 return is $2,233 ($3,350 - $1,117) and she pays a $223 penalty ($2,233 x 10%).

January 21, 2016

Question: What procedures should be followed when an employee loses his/her Form W-2?

Answer: An employer who provides a new Form W-2 to an employee who lost or destroyed his/her original form should mark the new Form W-2 "Reissued Statement." A copy of the reissued statement should not be filed with the Social Security Administration.

Per IRS Service Center Advice 1997-013, the employer is permitted to charge a fee for the replacement W-2.

It would be a good idea for the employee to make the request in writing and include:

  • Request for Duplicate W-2 as a header
  • Employee Name
  • Address to mail the new Form W-2
  • Employee Signature
  • Date of Request

January 14, 2016

Question: Can taxpayers file their individual tax return before making a post-year end IRA contribution and deduct it on the prior year's return as long as the IRA contribution is made before the due date (e.g., April 15)? For example, a taxpayer is filing a 2015 tax return and files his/her return on February 1, 2016. The taxpayer deducts a $3,000 IRA contribution on that return that has not yet been made, but is intended to be a 2015 contribution. Can the taxpayer file and deduct that $3,000 contribution on the 2015 tax return if the IRA is contributed by April 18, 2016?

Answer: Yes, as long as it is actually made by the unextended due date (Rev. Rul. 84-18). Of course, if the contribution is treated as made, but not actually made, the taxpayer must amend the return.

January 7, 2016

Question: Your client, Alvin, called your office first thing Monday, January 4, 2016, inquiring about the qualified charitable distribution (QCD) tax benefit that allows taxpayers to transfer up to $100,000 to qualifying charities. He read last week that the Protecting Americans from Tax Hikes Act (PATH) made this tax benefit permanent and he wants to know if he can elect to have a January 2016 distribution count as a 2015 QCD. He remembers that a few years back when the QCD was retroactively reinstated late in the year, taxpayers could make such an election. Did IRS include this provision in the PATH Act?

Answer: No. Even though the enactment occurred in late December, a 2015 QCD needed to be made in 2015. Alvin is recalling the American Taxpayer Relief Act (ATRA) of 2012 that was enacted January 3, 2013, which allowed taxpayers to elect to consider QCDs made in January 2013 as having been made in 2012. The PATH Act contains no such extension election.

December 31, 2015

Question: Clifford is a sole proprietor. At the beginning of the year, he had to purchase a new truck for his construction business. He purchased a Chevy Silverado for $62,000 that is used 100% for business. The loaded gross vehicle weight for the truck is approximately 10,000 pounds and has a truck bed length of eight feet. He as an unusually high income this year and is wondering if he can take §179 for the total cost of the truck. Can he?

Answer: Yes, Clifford can choose to expense the total cost of the truck under §179, assuming he is under the $500,000 limit. Prior to the enactment of the Protecting Americans from Tax Hikes Act of 2015 (PATH Act), Clifford would have been limited to $25,000. The PATH Act permanently extended the higher $500,000 limit for §179. The truck is not subject to the depreciation limits under §280F because the truck has a loaded gross vehicle weight greater than 6,000 pounds. Furthermore, the truck is not subject to the $25,000 limit for heavy passenger vehicles between 6,000 and 14,000 pounds because this limit does not apply to a heavy passenger vehicle that:

  • Is designed to seat more than nine passengers behind the driver’s seat,
  • Has an open cargo area or covered box not readily accessible from the passenger compartment of at least six feet in length, or
  • Has an integral enclosure that fully encloses the driver compartment and load carrying device, does not have seating behind the driver’s seat, and has no body section protruding more than 30 inches ahead of the leading edge of the windshield.

December 23, 2015

Question: Andrea's son, Josh, is eight years old. His grandparents established a brokerage account for him when he was born. On November 1, 2015, the trustee of the brokerage account sold 1,000 shares from his account resulting in a gain of $9,500. Can Andrea elect to treat the sale of stock as her own instead of Josh reporting it on his own return using Form 8814, Parent's Election to Report Child's Interest and Dividends?

Answer: No. Section 1(g)(2) does not allow for a parent to treat capital gain that is reported in their child's name as their own. This treatment is only allowed for interest, dividends and capital gain distributions reported in the child's name that are under $10,500. Josh is not only responsible for reporting the capital gain on his Form 8949/Schedule D but he is also required to file Form 8615, Tax for Certain Children Who Have Unearned Income, to report the "Kiddie Tax" that is associated with Josh's unearned income that is over $2,100 for 2015.

December 17, 2015

Question: Mary Kay and Tom purchased and installed solar panels for their personal residence. They spent $15,000 and are eligible for the §25D residential energy efficient property (REEP) credit of 30% or $4,500 ($15,000 x 30%).Their current year tax liability is $2,000. Will the excess $2,500 be refunded, lost or carried forward?

Answer: The §25D REEP credit is nonrefundable. Any excess credit may be carried forward as long as the credit remains in effect [§25D(c)]. Currently the credits under §25D expire on December 31, 2016. Therefore, Mary Kay and Tom can carry the excess credit forward through 2016. Any amount not used to reduce their tax liability by then will be lost.

December 10, 2015

Question: Your taxpayer is an insurance agent who travels around the United States. This year, most of his trips will be in several cities that are “concerning.” He asks you if he can buy a handgun to protect himself and any client of his. He declares he will only “use it for business purposes.” Is this a valid business deduction?

Answer: No. In order for an expense to be deductible, it must be an ordinary and necessary expense. When determining what’s ordinary and necessary, it’s important to observe what kind of expenses are normal based on the business a taxpayer is in. The tax court has not allowed a handgun to be a valid business deduction. It ruled that the expenditure was “extraordinary” and not “necessary” in the development of an insurance agent. The court stated:

“A handgun simply does not qualify as an ordinary and necessary business expense for an insurance agent, even a bold and brave Wyatt Earp type with a fast draw who is willing to risk injury or death in the service of his clients.” (Francis Samp, TC Memo 1981-706)

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