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 Erik Lammert, JD, from our Tax Knowledge Center.
May 23, 2013
Question: The Addams Family Trust expects it will have $17,000 of undistributed income at the close of its current tax year. The trust paid $1,972 in federal income tax last year on $8,500 of taxable income. Assuming the trust has no tax withheld, what is the minimum amount the trust should pay in estimated taxes to avoid an underpayment penalty?
Answer: The trust should make total estimated tax payments for the current year of at least $1,972.
Estates and trusts are subject to the same estimated tax rules as individuals [§6654(l)]. Estimated tax payments must be made if the estate or trust owes at least $1,000 in tax [§6654(e)(1)]. No estimated payments are required if the tax liability (after subtracting any tax credits and tax withheld under the backup withholding rules for interest and dividends) is less than $1,000. Also, no estimated tax payments are required for the current year if the preceding year was a period of 12 months and the estate or trust had no tax liability for that year.
An underpayment penalty applies if the estimated tax payments plus tax credits and tax withheld under the backup withholding rules for interest and dividends are less than 90% of the current year tax liability, unless:
- The estimated tax payments equal or exceed 100% of the tax shown on Form 1041 for the prior tax year, provided the prior year was a tax year of 12 months [§6654(d)(1)].
- The prior tax year was for a period of 12 months and there was no tax liability for that year [§6654(e)(2)].
- The tax liability for the current tax year is less than $1,000 [§6654(e)(1)].
May 16, 2013
Question: Don, age 68, is doing some estate planning. His estate consists primarily of funds in retirement accounts, but he does own one rental property that has appreciated considerably since he purchased it in May 1999. The property was purchased for $95,000 and has accumulated depreciation of $41,000. The current FMV of the property is $175,000. Don has not been able to deduct the rental losses over the years because his income was too high. His suspended rental losses total $35,000. If he gifts this rental property to his son, what happens to the suspended losses?
Answer: When a passive activity is disposed of by gift, the suspended losses are not deducted by the taxpayer who incurred them. Instead, the passive losses are added to the adjusted basis of the property immediately before the date of the gift under §469(j)(6). This provides the recipient of the gift with a higher basis for future sale. Since the adjusted basis and the accumulated suspended passive losses ($89,000) were less than the FMV ($175,000), $89,000 will be the basis of the property for both gain and loss purposes for Don’s son [§1015(a)].
May 9, 2013
Question: Jeff is single and has an AGI of $75,950 for 2012. Jeff’s employer offers a 401(k) plan to all qualified employees. Many years ago, Jeff elected to contribute to the plan but in recent years has not made any contributions. The employer’s contributions are based on a percentage of the employee’s contribution. Since Jeff did not make any current year contributions, the employer has not allocated any employer contributions or forfeitures to Jeff’s account for year ending December 31, 2012. The only change in Jeff’s account was due to earnings. Jeff made a contribution of $5,000 to a traditional IRA on December 15, 2012. Can Jeff deduct the $5,000 contribution on his individual income tax return for 2012?
Answer: Yes. If an individual (and their spouse) is not an active participant in an employer sponsored plan, there is no AGI limitation for IRA contributions. However, if the individual is an active participant in an employer sponsored plan the amount they can deduct for contributions to a traditional IRA is limited. For 2012, the deduction begins to phase-out for a single taxpayer with a modified AGI of $58,000 and is completely phased out once modified AGI is $68,000 or more.
For defined contribution plans, an individual is considered an active participant only if amounts have been allocated to the individual’s account that are attributable to employer contributions, employee contributions or forfeitures. An individual is not considered an active participant merely because earnings are allocated to such individual’s account [Notice 87-16, Q&A 19]. Since the only allocations to Jeff’s account were attributable to earnings and not attributable to employer contributions, employee contributions or forfeitures, Jeff is not considered an active participant in the 401(k) plan for IRA contribution purposes. Thus, there is no AGI limitation for IRA contribution purposes and Jeff can deduct the $5,000 contribution into a traditional IRA on his individual income tax return.
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