You Make the Call

​​You Make the Call

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

July 12​, 2018

Question: Your client Mike received a notice from the IRS. Concerned there is an issue, he made an appointment to see you. The notice is Letter 4464C from the IRS requesting more information. What is the best way to handle these requests?

Answer: First, respond to the letter in a timely manner with the supporting information being requested. If applicable, send copies of W-2s or 1099s along with any other information returns showing the taxpayer’s social security number (SSN) and withholdings. If identity theft is suspected, help your client complete and file Form 14039, Identity Theft Affidavit.

Letter 4464C, Questionable Refund 3rd Party Notification, is sent to inform taxpayers that the IRS has held their refund pending the review and verification of information. Typically, the taxpayer may have had withholding reported by a third-party such as the Social Security Administration or a retirement plan/IRA that could include voluntary withholding. The letter notifies your client that third party contacts could be made to verify employment information.

Why does this happen?

  • A tax return was filed with the client's SSN. Your client may have also filed a return.
  • Another taxpayer may have incorrectly recorded his or her SSN, or the client may be a victim of identity theft.
  • The IRS put a freeze on the refund to be issued, pending W-2 verification, and possible employer contact.
  • The IRS sent Letter 4464C to inform the taxpayer that the tax return(s) filed under his or her SSN are under review and the refund is being held. The IRS may contact them and/or their employer to verify employment and request a copy of the W-2 or other income documents shown on the return. If your client did not file a tax return, he or she should notify the IRS immediately.

July 5​, 2018

Question: Mary is a single parent with one daughter, Diane, age 23. Diane is a part-time college student who works part-time earning $5,000 a year.  Diane does not receive over half of her support from Mary.  Mary has a family high deductible health plan (HDHP) that provides coverage for both her and Diane. Mary also has a health savings account (HSA).  Are Diane’s medical expenses payable from Mary’s HSA?  If not, can Mary open a separate HSA for Diane and make contributions on Diane’s behalf?

Answer: Mary cannot pay Diane’s medical expenses from her HSA as she cannot claim Diane as a dependent [§223(d)(2)]. Therefore, there is opportunity for Diane to have her own HSA and for Mary to contribute to her HSA on her behalf. Under §223(c)(1)(A)(i), an eligible individual means any individual who is covered under an HDHP, not that the HDHP is in the individual’s own name. In general, the HSA maximum annual contribution is based on status, eligibility and health plan coverage. When the individual is covered under a family HDHP, the family coverage contribution level may be used ($6,900 for 2018) [§223(b)(2)(B)]. If Diane had been a full-time student so that she qualified as Mary’s dependent under §151, then Diane could not claim a deduction for an HSA contribution because she would provide an allowable deduction to her mom [§223(b)(6)]. Note: under §151(d)(5)(b), while the deduction for dependency has been reduced to $0 for 2018 through 2025, §151 and §152 (defining dependent) remain valid for determining whether a taxpayer qualifies for other tax benefits and filing status.

June 28​, 2018

Question: Jeff, age 60, is a retired police officer who receives a Form 1099-R for his pension distribution each year. On Form 1099-R, Box 2a and Box 2b are $38,000. Because Jeff is retired, he is not considered an employee for health insurance and is not eligible for Medicare due to his age. Each year Jeff pays $10,000 for health insurance for himself. He heard from another retired police officer that his accountant reduces his taxable pension by $3,000 because he is a retired public safety officer. Is this correct?

Answer: Yes. A retired public safety officer can choose to exclude from income the smaller of the amount of insurance premiums paid or $3,000 of a qualified retirement plan distribution for health insurance or long-term care insurance each year. For this exclusion, a qualified retirement plan is a governmental plan that is:

  • A qualified trust,
  • A §403(a) plan,
  • A §403(b) annuity, or
  • A §457(b) plan.

If Jeff chooses to make this election, he will reduce the otherwise taxable amount of his pension by the amount excluded. The amount that is shown on the Form 1099-R Box 2a will not reflect this exclusion. When Jeff reports the Form 1099-R on his Form 1040 he will report the entire distribution of $38,000 on Line 16a. However, on Line 16b he will reduce the distribution amount by the $3,000 he elected to exclude for the health insurance premiums paid and include the letters “PSO” on the dotted line next to Line 16a. The distribution must be made directly from the plan to the insurance provider [§402(l)(6)(A)].

June 21​, 2018

Question: Lylah, age 35, took out a loan from her pension account. She is now disabled and cannot repay the loan. The loan was treated as a distribution and she received a Form 1099-R. Can she use the Form 5329, Code 3, to get out of the penalty?

Answer: Yes. Because Lylah was considered disabled at the time of the deemed distribution of the loan, she is not liable for the penalty. When a plan loan is not repaid according to its terms, it is in default and is generally treated as a taxable distribution from the plan for the entire outstanding balance of the loan. This is a deemed distribution, which is treated as an actual distribution for purposes of determining the tax on the distribution, including any early distribution tax penalty. In addition, a deemed distribution cannot be rolled over into another eligible retirement plan [Reg. §1.72(p)-1, Q&A 11 and 12].

June 14, 2018

Question: A severe storm went through your client Patricia’s town in April 2018. The winds blew a tree onto her home causing significant damage to the roof and second floor. The storm, while significant for Patricia, did not occur in a federally declared disaster area. Even after spending insurance benefits, she will have a good deal of additional out-of-pocket costs to restore the property to its pre-storm condition. Patricia is in your office and wants to understand how this casualty loss will impact her 2018 tax return. What do you tell her?

Answer: You will need to tell Patricia that her out-of-pocket costs to restore her property will not give her any benefit on her tax return. The Tax Cuts and Jobs Act suspended deductions for theft and casualty losses occurring during tax years 2018 – 2025, except for those that occur in a federally declared disaster area.

June 7, 2018

Question: Weston would like to put solar panels on his principal residence and is trying to decide if he should lease them or purchase them. He can purchase them for $30,000, plus interest, and make payments over five years. He also wants the 30% credit for residential energy efficient property. How do you advise Weston so he is eligible to claim the maximum energy credit?

Answer: First, Weston must purchase the solar panels to claim the energy credit. He cannot claim the credit if he leases them. If he finances the purchase through the seller, he can claim the credit based on the full cost of the property ($30,000 in this case) if he is contractually obligated to pay that amount. However, interest expense and other miscellaneous costs such as an origination fee or an amount paid for an extended warranty do not qualify for the credit (Notice 2013-70, Q&A 13-15).

May 31, 2018

Question: An entity has a carryforward for business credits that have expired, such as the Indian Employment Credit. Now that the credit expired Dec. 31, 2017, will the entity lose the ability to carryforward any unused expired credit or will it still be able to use it?

Answer: The entity can still use the expired credit carryforward amount; the credit just cannot be increased anymore. Continue carrying the credit forward by reporting in on Form 3800, Part III. The credit will be listed on Form 3800, Part III with “carryforward only” in parentheses.

The taxpayer can continue to carry the credit forward for 20 years or until the business closes. At that time, the taxpayer may deduct any unused credit in the earlier of carryforward year 21 or the date the business (taxpayer) ceases to exist [§196].

May 24, 2018

Question: Mom owned a rental property for many years. Some years she had a profit and other years she reported losses. She has decided to gift the rental property to her daughter, Ann. At the time of the gift, her basis was $100,000, the FMV was $150,000 and she had $65,000 in suspended passive losses. What happens to those suspended losses when Mom gifts the rental property to Ann?

Answer: Suspended passive losses are treated differently for a gift transfer than when disposed of in a fully taxable transaction to an unrelated party. When Mom gifts her interest in the passive rental activity to Ann, her suspended passive losses are added to the basis in the rental property. Under §469(j)(6), this increase to basis is deemed to occur immediately before the gift. Therefore, Ann’s basis is $165,000.

May 17, 2018

Question: Is an employer required to make a SEP contribution on behalf of an eligible employee who died during the year?

Answer: Yes. Employers must contribute on behalf of all employees who met SEP eligibility requirements under §408(k)(2) during the year for which a contribution is made, including those individuals who are no longer employed by the employer on the SEP contribution date. Although the IRS recognizes that this may present difficulties under certain circumstances, employers must contribute on behalf of those employees, including deceased employees and employees whose whereabouts are unknown. If the individual either had not previously established an IRA or had established one but had closed it before the employer's SEP contribution date for a particular year, the employer must establish an IRA on behalf of that employee [Prop. Reg. § 1.408-7(d)(2)].

May 10, 2018

Question: Chelsea, age 30, lives with her parents. Chelsea earned $5,000 during the year but her parents provided more than half of her support. This past year Chelsea needed a medical procedure and her parents paid the out-of-pocket medical costs. Can they claim the medical expenses paid on behalf of Chelsea on their return?

Answer: Yes. While Chelsea is not a dependent under §152, the gross income test under §213(a) is disregarded when determining a medical dependent. Because Chelsea is a qualified relative and her parents provided over half of her support, they can claim the medical expenses they paid for Chelsea on their return.

May 3, 2018

Question: George owns and operates a manufacturing business. As a condition for obtaining a business loan, the lender requires George to take out an insurance policy on his life to cover the debt in the event of his death. Because this is a business debt, are the premiums deductible as a business expense?

Answer: No. Life insurance premiums are not deductible by the insured if he or she is directly or indirectly the beneficiary of the policy. When the lender is the beneficiary of a life insurance policy required as a condition of approving the loan, the debtor/business owner indirectly benefits and cannot deduct the premiums (Reg. §1.264-1).

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