You Make the Call
Please note that the question and answer provided does not take into account all options or circumstances possible.
March 15, 2018
Question: Harold receives a military pension. After seven years of marriage, he and his wife Wanda divorced. The court awarded 50 percent of Harold’s military pension to Wanda. The military will not pay the 50 percent directly to Wanda and issue her a Form 1099-R because Harold was in the military for less than 10 years. The military paid all of the pension to Harold and issued him a Form 1099-R for the full amount. What needs to be done in this situation? Should Harold gift the 50 percent to Wanda? Is the amount Harold issues to Wanda taxable to him?
Answer: Because Harold was in the military for less than 10 years, he did not meet the 10/10 rule (at least 10 years of military service and 10 years of marriage) of the Uniformed Services Former Spouses’ Protection Act (USFSPA), Title 10, United States Code, §1408. Therefore, the military does not have to issue pension proceeds directly to the ex-spouse under §1408(d)(2).
Harold reports both the full amount he received from the military and also the amount that he paid to Wanda on his Form 1040. The amount that he paid to Wanda is shown as a negative number on Line 21 with the description, “Distribution to Nominee [ex-spouse’s name], SSN [ex-spouse’s number].”
The reason for reporting in this manner is to prevent the IRS from issuing a deficiency notice to Harold for failure to report the entire military pension. Since only Harold’s SSN was reported by the military to the IRS, the IRS incurs a matching problem if the full amount is not reported by Harold. Proper handling, as explained above, should avoid time-consuming IRS correspondence.
March 8, 2018
Question: Henry died during 2018 and did not take his required minimum distribution (RMD) from his IRA for the year. The investment company will distribute the RMD to the IRA beneficiaries, and the beneficiaries will pay the tax. The attorney is claiming the RMD is paid to the estate. Does the RMD go to the IRA beneficiaries?
Answer: Yes. The RMD for the year of a taxpayer's death is not avoided because the account owner dies before actually taking it. Instead, the RMD is computed one last time using the RMD rules that apply before death and must be distributed to the account beneficiary before the end of the year of the owner's death. The income related to the RMD in the year of death is taxed to either the account owner or beneficiary, depending on who received it.
March 1, 2018
Question: Bill, a sole proprietor, stopped by your office this week to discuss the outcome of his 2017 taxes. During your meeting he asks if it would be better to become an S corporation in 2018 due to the new pass-through deduction under §199A enacted by the Tax Cuts Act. He heard from his neighbor that sole proprietors won’t get this tax benefit. If that’s the case, he would like to make an S election for this year to be eligible for §199A. Does Bill have to become an S corporation to be eligible for the deduction?
Answer: No. Bill does not have to make an S election in order to take advantage of the pass-through deduction. The deduction is available for a taxpayer other than a corporation and is based on his or her qualified business income. In other words, sole proprietors filing Schedule C could claim the deduction. As long as the other requirements are met, Bill is entitled to the deduction.
February 22, 2018
Question: Your client is the custodial parent of a child who lives with her for more than half the year. She wants to claim the child as a dependent. The child meets all the other tests to be claimed as a qualifying child (i.e., relationship test, age test, etc.), but you are concerned about the support test. What do you need to do to determine if this child can be claimed as a dependent?
Answer: For the support test of a qualifying child, the child cannot provide more than 50 percent of his or her own support [§152(c)(1)(D)]. This is often confused with the qualifying relative support test, which requires the person claiming the relative to provide more than 50 percent of his or her support [§152(d)(1)(C)]. This distinction becomes important when families are receiving government assistance or support from some other source, other than the person claiming the exemption.
February 15, 2018
Question: Your client recently returned from an overseas vacation and announced to you at tax time that he got married while vacationing in the foreign country. The taxpayer does not have a marriage license and stated the ceremony was performed by a religious leader admired and respected by the bride’s family. Is this taxpayer considered married for federal tax purposes?
Answer: The marriage must be recognized as a valid marriage under at least one U.S. state, regardless of where they live. Two individuals who enter into a relationship denominated as marriage under the laws of a foreign jurisdiction are recognized as married for federal tax purposes if the relationship would be recognized as marriage under the laws of at least one state, possession or territory of the United States, regardless of domicile. [Reg. 301.7701-18(b)(2)].
February 8, 2018
Question: Nolan rents a retail store space and made improvements that he depreciated over 39 years. Upon termination of his lease he moved to another space and left the improvements behind. Can he write off the remaining basis in the improvements?
Answer: Yes. The abandonment of leasehold improvements is reported as a sale on Form 4797, Part II with $0 as the gross sales price. The remaining basis is deducted as an ordinary loss. An abandonment loss deductible under §165 must be evidenced by a completed transaction that is established as an identifiable event [Reg. §1.165-1(b)]. Nolan met this requirement when the lease terminated and he left the leasehold improvements behind in the lessor’s retail store space.
February 1, 2018
Question: Jesse is the trustee of an irrevocable trust. The trust invested in several mutual funds and securities, which are managed by a large investment firm. The trust pays $50,000 a year to the investment firm to manage these trust assets. Jesse brings you the income and expenses of the trust including a receipt for the investment fees. He asks you to prepare the Form 1041 return for the trust and asks you to claim the investment fees as a deduction against the trust income. Are these management fees an allowable expense of the trust?
Answer: Yes. However, they could be limited to 2% of the AGI of the trust. Investment advisory fees usually fall under the expenses to administer trust assets, which are subject to 2% of the trust’s adjusted gross income. However, if advisory fees would not have been a common occurrence outside of the trust, the expenses are not subject to the 2% floor. This determination is hard for the trust to prove because most administrative expenses would apply to investments held outside of the trust [§67(e)(1)]. Estates and nongrantor trusts are subject to the 2% limit if the cost is a miscellaneous itemized deduction under §67(b) that would be commonly or customarily incurred by a hypothetical individual holding the same property [Reg. 1.67-4(a)].
January 25, 2018
Question: Bob has been doing some reading about the tax reform act and is concerned about whether he will be able to claim his 26-year-old son in 2018 as a qualifying relative. He knows that, among other things, his son cannot have gross income in excess of the personal exemption amount for the tax year. Personal exemption amounts are $0 for tax years 2018–2025. Bob wants to know if this means his son cannot have any gross income in 2018 to meet the gross income test for qualifying relative. What do you tell him?
Answer: The fact that the actual deduction for the personal exemption is suspended or $0 for years 2018–2025 did not impact the gross income test. Therefore, even though the 2018 personal exemption amount of $4,150 is suspended, the gross income test is still met as long as Bob’s son does not have gross income in excess of $4,150 [§151(d)(5)(B)].
January 18, 2018
Question: In June 2017, Laila, a U.S. citizen, inherited her grandmother’s house, which is located in Greece. Her grandmother was a nonresident alien so the property was not included in her grandmother’s estate for U.S. estate tax purposes. What is Laila’s basis in the house?
Answer: Laila’s basis in the foreign real property is the FMV of the house on her grandmother’s date of death. Since the property was acquired by bequest, devise, or inheritance under §1014(b)(1), it’s treated as property acquired from a decedent. Thus, its basis is FMV on the date of death (generally a stepped-up basis) under §1014(a)(1) even though the property was not included in her grandmother’s estate for U.S. estate tax purposes [Rev. Rul. 84-139].
January 11, 2018
Question: The taxpayer owned farmland that he leased to others. The city condemned the land through eminent domain for a new highway. The taxpayer’s basis in the land is $5,000. The city gave him $100,000 resulting in a gain of $95,000.
Under §1033 Involuntary Conversions, taxpayers can defer the gain providing the replacement property is similar or related in service or use.
In this case, the taxpayer found a commercial rental property to purchase with the proceeds. Does the exchange of unimproved real estate for improved real estate qualify for the gain deferral under §1033?
Answer: Yes. Section 1033(g) contains a special rule for condemned real estate, which allows real property used in a trade or business, or for investment purposes, to be deemed converted into similar-use property under §1031 like-kind exchanges rules. Under the §1031 like-kind exchange rules, unimproved land can be exchanged for improved land.
Normally under §1033 the unimproved land would need to be replaced with similar-use property such as other unimproved land.
January 4, 2018
Question: Phil, a new client, has decided to fulfill his dream of becoming his own boss. As of the first of the year, he decided to take his stock trading activities to a new level and become a “Day Trader.” He will be paying medical insurance out of his own pocket. Can he take a deduction for self-employed health insurance assuming his only earnings are from his day trading activities?
Answer: No, he would not be eligible to take a deduction for self-employed health insurance. The deduction for self-employed health insurance is limited to net-earnings from self-employment, which is defined under §1402(a). Capital gains and losses are specifically excluded from the definition of net earnings from self-employment [§1402(a)(3)(A)].
December 28, 2017
Question: Under §267(a)(1), related party rules, losses on sales to family members are not allowed. Does that include in-laws?
Answer: No, it does not include in-laws. Section 267(c)(4) defines family members as, “the family of an individual shall include only his brothers and sisters (whether by the whole or half-blood), spouse, ancestors, and lineal descendants.” In
Stern v. CIR, 215 F2d 701, the sale to a taxpayer's daughter and son-in-law as tenants by entirety was treated as sale to the son-in-law, who furnished the consideration; therefore, loss was not disallowed by §267(a)(1). In
Saul v. CIR, 6 TCM (CCH) 734 (1947), the sale to the brother's sons-in-law allowed the loss even though there was a gift of funds by the brother to the daughters who then deposited the funds into joint accounts with their spouses to finance purchase; it was not treated as a sale to the brother followed by gifts from him to his sons-in-law.
December 21, 2017
Question: U.S. citizens are purchasing a house located in the U.S. that they plan to use as their primary residence. The purchase price is $250,000 but is being paid to a foreign individual. Is there a withholding requirement on the payment to the foreign individual?
Answer: No. There is an exception to the usual withholding requirements on payments to foreign individuals for the purchase of a residence. Withholding is not required on the disposition of a USRPI (U.S. Real Property Interest) if it is acquired by the transferee (buyer) for use as his residence, (not necessarily the primary residence) and the amount realized does not exceed $300,000 [§ 1445(b)(5)].
NOTE: Withholding amounts are imposed on sales proceeds in excess of $300,000. Withholding is required on the full amount, not just the excess of $300,000. For sales in excess of $300,000 but not over $1,000,000, the withholding rate is reduced to 10 percent instead of 15 percent [§1445(c)(4); Reg § 1.1445-1(b)(2)].
PRIOR LAW: For dispositions before February 17, 2016, the decreased FIRPTA withholding rate for the disposition of a residence for $1,000,000 or less did not apply. Sec. 324(c)DivQ, PL 114-113, 12/18/2015; Reg §1.1445-1(h); Code Sec. 1445(c) before AMEND by Sec. 324(b)DivQ, PL 114-113, 12/18/2015; Former Reg. §1.1445-1(b) before amend by TD 9751, 2/19/16.
December 14, 2017
Question: John, age 67, inherited an IRA from his mother who was age 95 when she died. He receives annual required minimum distributions from his mother's IRA, which he reports on his tax return. Is John eligible to treat the distributions as qualified charitable distributions (QCD)?
Answer: No, the beneficiary must attain age 70½ to make a QCD. The exclusion for qualified charitable distributions is available for distributions from an IRA maintained for a beneficiary if the beneficiary has attained age 70½ before the distribution is made [Notice 2007-7, Q-37].
December 7, 2017
Question: Bruce, a single taxpayer, decided that he would like to help children whose parents are not able to care for them, so he applied to become a foster parent. In July 2017, he received notice from the courts that they are placing Richard in his home for the remainder of the year. Richard is 12 years old. In order to assist Bruce with Richard’s care, Social Services paid Bruce each month. He received a Form W-2 for the amount received from July–December. Bruce read somewhere that the amount received from Social Services may be nontaxable to him. Is this correct?
Answer: Bruce is correct. The amount received may be nontaxable under §131, as qualified foster care payments, which are tax free to the recipient as long as the foster child meets certain requirements. In order for the payments to be nontaxable, an individual provider of foster care must receive the payments during the tax year. The payments must be made by a state or political subdivision of a state Code Sec. 131(b)(1)(A)(i), or a qualified foster care placement agency Code Sec. 131(b)(1)(ii), and the payment must be either a difficulty of care payment or paid to the foster care provider for caring for a qualifying individual who is under the age of 19 and in the foster care provider’s home. However, the foster care provider must include in income payments received for more than five qualified foster individuals who are 19 or older and difficulty-of-care payments received for more than ten qualified foster individuals under age 19 or more than five age 19 or older.
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