You Make the Call
Please note that the question and answer provided does not take into account all options or circumstances possible.
November 16, 2017
Question: Amy, a sole proprietor, expensed the entire cost of a copier that she purchased and placed in service in 2016 using the $2,500 de minimis safe harbor. If Amy sells the copier in 2018, how is the gain on the sale taxed?
Answer: Property to which a taxpayer applies the de minimis safe harbor is not treated upon sale or other disposition as a capital asset under §1221 or as property used in the trade or business under §1231 [Reg. §1.263(a)-1(f)(3)(iii)]. Since the de minimis safe harbor applied to the copier, any proceeds from the sale result in ordinary income [Audit Techniques Guide, Capitalization of Tangible Property, Chapter 5, De Minimis Safe Harbor].
November 9, 2017
Question: Jack and Jill are married but in the process of divorcing. Jill, due to a medical condition, does not work and has incurred $150,000 of medical expenses during the year. Jack works. He paid all of Jill’s medical expenses for the year by September 30. On November 30, their divorce became final. Can Jack deduct Jill’s medical expenses on his tax return for the year even though he will no longer be married to her?
Answer: Yes. Jack may deduct Jill’s medical expenses as long as the medical expense were either incurred or paid while they were still married. Section 213 allows taxpayers a deduction for medical expenses paid during the tax year, not reimbursed by insurance, for the medical care of the taxpayer, spouse, or dependent, in excess of 10% of the adjusted gross income (AGI).
November 2, 2017
Question: Your clients, Judy and Bob, would like to take a distribution from Bob’s traditional IRA to pay off their child, Martha’s, student loans. Martha did not, and will not, incur qualified educational expenses during the tax year. Bob, who owns the IRA, has not obtained age of 59½ and took deductions for his IRA contributions in prior years. Can the parents take a distribution from Bob’s IRA to pay off Martha’s student loans and not incur the 10% early withdrawal penalty from Bob’s IRA?
Answer: No. Withdrawals from an IRA are penalty free to the extent the withdrawal does not exceed the qualified higher education expenses of the taxpayer, spouse or any child, stepchild or grandchild [§72(t)(2)(E)]. However, the qualified higher education expenses must have occurred in the same taxable year as the withdrawals [TC Memo 2005-162]. The taxpayer used the distribution to pay off the student loan that was taken for qualified education costs that were incurred in a prior year. Thus the 10% penalty exception for withdrawals used to pay for higher education expenses will not apply in this scenario.
October 26, 2017
Question: Your client brings you a Form 1099-S, Proceeds from Real Estate Transactions, showing 100% of the gross proceeds from the sale of a second home that he jointly owned with his sister. She did not receive a Form 1099-S. They are each 50% legal and equitable owners in the property. The property was sold at a gain. What should he do since the IRS is going to be expecting to see the entire amount of proceeds reported on Form 8949, Sales and Other Dispositions of Capital Assets?
Answer: He will file a nominee/middleman Form 1099-S for the amount allocable to his sister. Form 8949 includes special instructions for reporting amounts received on an information return as a nominee.
Page 2 of The General Instructions for Certain Information Returns (Forms 1097, 1098, 1099, 3921, 3922, 5498, and W-2G) indicates:
Nominee/middleman returns. Generally, if you receive a Form 1099 for amounts that actually belong to another person, you are considered a nominee recipient. You must file a Form 1099 with the IRS (the same type of Form 1099 you received) for each of the other owners showing the amounts allocable to each. You must also furnish a Form 1099 to each of the other owners. File the new Form 1099 with Form 1096 with the Internal Revenue Service Center for your area. On each new Form 1099, list yourself as the “payer” and the other owner as the “recipient.” On Form 1096, list yourself as the “Filer.” A spouse is not required to file a nominee return to show amounts owned by the other spouse. The nominee, not the original payer, is responsible for filing the subsequent Forms 1099 to show the amount allocable to each owner.
To report this on Form 8949, put the full amount reported on Form 1099-S as proceeds on Line 1 in Column (d) (either in Part I or II depending on whether it is short-term or long-term). The total cost or other basis in Column (e) is the full basis in the property (both the brother’s and sister’s basis). Put Code N in Column (f) . In Column (g) enter the gain attributable to the sister as a negative number so that Column (h) reflects the brother’s reportable gain.
October 19, 2017
Question: A client owns rental cottages and maintains a swimming lake on the property. During the last year, the taxpayer spent time and money creating a dam for the swimming lake, which will help attract new customers. Is the dam a depreciable and what is the class life?
Answer: Yes. The dam is depreciable property as a land improvement. A dam is generally considered a depreciable land improvement under MACRS with a 15-year recovery period under Asset Class 00.3 (Land Improvements) unless described in another asset class [e.g., dams are described in Asset Class 49.11 (Electric Utility Hydraulic Production Plant)]. An earthen dam used by a farmer may qualify as a currently deductible soil and water conservation expenditure.
October 12, 2017
Question: Pat and Betsy are married and have one son, Presley. Presley, age 19, is a full-time student at the local university, and received a non-compensatory taxable scholarship of $8,500. Is Presley’s taxable scholarship subject to kiddie tax?
Answer: Yes. A non-compensatory taxable scholarship is subject to kiddie tax. A non-compensatory taxable scholarship is unearned income and not reported on Form W-2. Scholarship and fellowship income reported on Form W-2 is earned income when the student provided services to earn the income.
October 5, 2017
Question: In 2017, Larry, lost his job and obtained COBRA health insurance in order to maintain his families’ health insurance coverage until he obtained another job. After several months and not obtaining another position as an employee, Larry decided to start his own Schedule C business. Can Larry treat the COBRA premiums paid as self-employed health insurance starting with the creation of his Schedule C business until the end of the tax year?
Answer: Yes. According to FSA 3402, COBRA continuation coverage obtained after a taxpayer leaves employment and paid during the time they are self-employed will not be considered subsidized health insurance and thus is deemed eligible self-employed health insurance deduction on Form 1040, Line 29.
September 28, 2017
Question: Jeremy, a U.S. citizen, accepted a three-year assignment at a research post on Antarctica. Jeremy is single and has no children. He does not own his current residence or any other real property in the U.S. He is giving up the townhouse that he rents and plans to sell any personal property that he does not need before relocating to Antarctica. He will keep virtually no ties to the U.S. and does not intend to come back to the U.S. for more than 14 days each year. Jeremy comes to you for confirmation that he will be able to use the foreign-earned income exclusion to exclude the earned income while stationed in Antarctic. What do you tell him?
Answer: Jeremy's earned income is not eligible for the foreign earned income exclusion. Income eligible for the exclusion must be earned in a foreign country, as defined in Reg. §1.911-2(h). The term "foreign" country includes any territory under the sovereignty of a government other than that of the United States. It includes the territorial waters of the foreign country (determined in accordance with the laws of the United States), the air space over the foreign country, and the seabed and subsoil of those submarine areas that are adjacent to the territorial waters of the foreign country and over which the foreign country has exclusive rights, in accordance with international law, with respect to the exploration and exploitation of natural resources.
Antarctica is not a foreign country because it is not under the sovereignty of any foreign nation. This means that even though Jeremy will be earning income outside the U.S., the earnings are not foreign-earned income for the purposes of the exclusion.
September 21, 2017
Question: During 2016, Elliott and Olivia paid joint estimates. A joint extension, with a payment, was also filed. The 2016 tax returns were filed as married filing separate (MFS). Elliott and Olivia do not have an amicable relationship. On Olivia’s 2016 return, the preparer took half of the extension and estimates payments. Olivia received a notice from the IRS showing no payments were made for 2016. How does the preparer respond?
Answer: The answer is in Reg. §1.6015(b)-1(b), which provides that when a joint declaration of estimated tax is made, but a joint return is not filed for the same tax year, the payments may be treated as being made by either spouse, or may be divided between them in any manner agreeable to them.
However, if the spouses do not agree to a division, the payments are to be allocated to each of them in the ratio of each spouse’s separate tax to the aggregate tax imposed.
Example 1. Elliott’s 2016 tax bill, using MFS filing status, is $16,000; Olivia’s 2016 tax bill, using the same filing status, is $24,000. Their total 2016 estimated tax payments were made jointly and totaled $22,000. They agree to divide the payments evenly. Thus, Elliott and Olivia can each apply $11,000 of the payments to their 2016 tax bills.
Example 2. The facts are the same as in Example 1, except that Elliott and Olivia do not agree on an allocation ratio. Thus, under Reg. §1.6015(b)-1(b), 40% ($16,000/$40,000) of the $22,000 total payment, or $8,800, applies to Elliott; 60% ($24,000/$40,000), or $13,200, applies to Olivia.
September 14, 2017
Question: Samantha received a Form 1099-A,
Acquisition or Abandonment of Secured Property, in 2017 reporting the foreclosure of her principal residence. The debt outstanding was $130,000, the FMV was only $110,000, and her adjusted basis in the home was $150,000 at the time of foreclosure. She was personally liable for the debt, but didn’t receive a Form 1099-C,
Cancellation of Debt, for 2017. Does Samantha have to report anything on her 2017 Form 1040,
U.S. Individual Income Tax Return?
Answer: Yes. Samantha must report the deemed sale of her principal residence on Form 8949,
Sales and Other Dispositions of Capital Assets. Her basis is $150,000 (obtained from client’s records, not Form 1099-A since the lender is not responsible to keep track of basis) and the sales price is $110,000 (the lesser of the debt outstanding or the FMV because she was personally liable). Thus, she has a $40,000 (110,000 – 150,000) nondeductible loss on sale because it was personal use property. Samantha still owes $20,000 (130,000 – 110,000) of the debt outstanding since $110,000 was satisfied when the bank took the home. However, she does not have any cancellation of debt income to report on her 2017 return since the remaining debt was not canceled in 2017.
September 7, 2017
Question: The taxpayers have been funding a §529 qualified tuition plan (QTP) for their child. Recently they learned the child has autism and severe learning disabilities that will prevent attendance at any post-secondary educational facility. The taxpayers have established an ABLE account for the child. They would like to rollover the money from the §529 QTP to the ABLE account. Can this be done tax-free within the 60-day rollover period?
Answer: No, the §529 QTP cannot be rolled over to an ABLE account tax-free. The reason is because the distribution from the §529 QTP would not be for qualified higher education costs as required [Preamble to Prop Reg., 6/19/2015].
The earnings portion of the distribution from the §529 plan is taxable, to the extent not used for qualified higher education expenses to the taxpayer who receives the Form 1099-Q. Who receives the Form 1099-Q depends on how the funds are distributed from the §529 plan. When funds are paid directly to the educational facility, the beneficiary will receive the Form 1099-Q and will be liable for reporting the taxable portion. However, if the account owner takes a distribution directly, he or she will receive the Form 1099-Q and will be liable for reporting the taxable portion.
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