You Make the CallEach week the Tax Knowledge Center will pose a question to you. Please note that the question and answer provided does not take into account all options or circumstances possible. The feature is intended to create some interest and insights into the topic provided. The answer will appear here. This week's question is brought to you by Liza Corbisier, from NATP's Tax Knowledge Center. March 11, 2010Question:
Jane maintains an office in her home for her Schedule C business. She moved into a new home where she will also have a home office. Her deductions from the home office have been limited by her business income for several years and have created large home office deduction carryovers. Are the deductions that have been limited in the prior years deductible in the year that Jane sells her former residence? Answer:
No, Jane cannot deduct the carryover expenses that are related to other expenses and depreciation of the home office from Form 8829 in the year of the sale. The amounts will continue to carryover until she has sufficient business income to offset the expense. According to §280A(c)(5), the amount carried over remains subject to the gross income limitation in the later year, whether or not the dwelling unit is used as a residence in the later year, and whether or not the taxpayer lives in the same dwelling unit during that year. However, Jane's qualified mortgage interest and real estate taxes attributable to the home office will be deducted in the year of the sale because they are not limited to the amount of business income and can be deducted on the Jane's Schedule A Lines 6 and 10.
March 4, 2010Question:
Al established a health savings account (HSA) in 2007. In 2009, he received Form 1099-SA reporting a $2,000 distribution. He used the distribution to cover $2,500 of qualified medical expenses his wife incurred in 2008. The medical expenses were not reimbursed by insurance, and they did not itemize in 2008. How is this distribution reported on their 2009 joint tax return? What are the tax consequences? Answer:
The $2,000 distribution is reported in Part II of Form 8889 on Line 14a. Al's unreimbursed qualified medical expenses of $2,500 are reported on Line 15. This includes the medical expenses his wife incurred in 2008 [§223(d)(2)(A)]. The entire distribution is nontaxable because it is less than Al's unreimbursed qualified medical expenses. The 10% penalty does not apply because it only applies to the taxable portion of an HSA distribution [§223(f)(4)(A)]. Distributions from an HSA are excluded from income if made for any qualified medical expense of the account beneficiary, the account beneficiary's spouse and dependents (without regard to their status as eligible individuals). However, distributions made for expenses reimbursed by another health plan are not excludable from gross income, whether or not the other health plan is an HDHP. [Notice 2004-50, Q&A 36] In addition, a distribution from an HSA in the current year can be used to pay or reimburse expenses incurred in any prior year as long as the expenses were incurred after the HSA was established. Thus, there is no time limit on when the distribution must occur. However, to be excludable from the account beneficiary's gross income, he or she must keep records sufficient to later show that the distributions were exclusively to pay or reimburse qualified medical expenses, that the qualified medical expenses have not been previously paid or reimbursed from another source and that the medical expenses have not been taken as an itemized deduction in any prior taxable year [Notice 2004-50, Q&A 39].
February 25, 2010Question:
Your client's employee is an alien who does not have a green card or valid social security number. The employer has requested the employee provide a social security number to use on the employee's W-2, but the employee has failed to do so. What should the employer do? Answer:
Wages paid to an alien employee who has neither a social security number nor ITIN should still be reported in the normal manner on a Form W-2, without showing any TIN in the payee TIN block. Treas. Reg. §301.6109-1(c) authorizes a procedure whereby a withholding agent who cannot secure the TIN of a payee may attach an affidavit to the information returns he is filing with the IRS stating that the withholding agent has asked for the TIN of the payee (or a list of payees) and that the payee or payees have neglected or refused to provide a TIN. The attachment of such an affidavit to the information returns will be grounds for non-assertion of the penalties authorized by I.R.C. §§6721 and 6722 against the withholding agent for failure to supply a payee TIN on an information return or payee statement.
February 18, 2010Question:
John, age 20, is a full-time student attending college and has just completed his junior year. John paid $8,000 in tuition for 2009. His parents do not want to claim him as a dependent because they cannot take advantage of the education credits. John earned $12,000 in 2009 while working two jobs in the summer. John understands that a portion of the American Opportunity Credit is refundable and he could really use the money. Can John get the refundable portion of the credit? Answer:
It depends. Under §25A(i)(6), if John is subject to the "kiddie tax" rules, he would be ineligible for the refundable portion of the American Opportunity Credit. The "kiddie tax" rules apply to any child who meets the following tests [§1(g)]: - The child was:
- Under age 18 at the end of the tax year, or
- Age 18 at the end of the tax year and their earned income was less than 50% of his/her support, or
- A full-time student age 19 to 23 at the end of the year and earned income was less than 50% of his/her support.
- At least one parent was alive at the end of the tax year.
- The child is not filing a joint return.
So, under §1(g)(2)(A)(ii)(II), if John has earned income in excess of 50% of his support for 2009, the "kiddie tax" rules will not apply, and the refundable credit would be available. The preparer will need to help John determine the annual support amount, and compare 50% of it to his earned income of $12,000.
February 11, 2010Question: Jenny is a senior in high school. The local technical college offers a program where she can start taking classes while she is still a high school student. After Jenny graduates from high school, she needs to attend the technical school one more year to obtain her certificate for the program in which she is enrolled. Jenny received Form 1098-T for tuition. The half-time student box is checked. Are Jenny's parents eligible for any of the American Opportunity Tax Credit? Answer: As long as Jenny is enrolled in a degree (or certificate, etc.) program, is a half-time student, is within the required year of study, and has no felony drug convictions, she is an eligible student [Reg. §1.25A-3(d)(1)]. A high school student taking college level courses typically is not considered an eligible student for the education credits if the institution requires a high school degree or equivalent to be enrolled in a program leading toward a post-secondary degree, certificate, or other recognized postsecondary educational credential. See page 13 of Pub 970, example 3 and Reg. §1.25A-3(d)(2), example 5. If the educational institution allows enrollment in a degree or certificate program without requiring a high school diploma or equivalent, and Jenny is enrolled in a degree (or certificate) program, then other factors must be weighed as to whether her parents benefit greater from the American Opportunity Tax Credit, Hope Credit, or the Lifetime Learning Credit (i.e., the parents adjusted gross income, whether Jenny's school is in a Midwestern Disaster Area, etc.)
Looking for past "You Make the Call" questions and answers? An archive can be found in the Members Only section under Publications. | 
