You Make the Call
Please note that the question and answer provided does not take into account all options or circumstances possible.
September 13, 2018
Question: The end of 2017 was a big year for tax professionals, in terms of what we now need to know about the Tax Cuts and Jobs Act (TCJA). There have been some major changes and our clients want to know how the new law affects college savings plans. Many clients are asking about the possibility of using these plans for private school tuition for their pre-college children. Did the new act include the increased definition of qualified education expenses to include tuition for elementary or secondary schools?
Answer: Yes. As we know, a §529 plan distribution is tax-free if it is used to pay “qualified higher education expenses” of the beneficiary (student). Tuition for elementary or secondary schools was not considered a “qualified higher education expense,” in years prior. With TCJA, qualified higher education expenses now include expenses for tuition relating to enrollment or attendance at an elementary or secondary public, private, or religious school. Thus, tax-free distributions from §529 plans can now be received by beneficiaries who pay these expenses, effective for distributions from §529 plans after 2017.
There is a limit on the distribution that can be taken from a §529 plan for these expenses. The amount of cash distributions from all §529 plans per single beneficiary during any tax year can't, when combined, include more than $10,000 for elementary school and secondary school tuition incurred during the tax year.
September 6, 2018
Question: John received Form 1099-SA, Box 3, Code 1. He took an HSA distribution and rolled it over to another HSA account. Is this taxable?
Answer: No, if John can prove he rolled it over into another HSA account, it is not taxable. Use Form 8889, Part II, Line 14(b), to record the rollover.
August 30, 2018
Question: Calista is the executor of her mother’s estate. She has given her preparer several expenses associated with the maintenance of her mother’s estate assets held for investment. The expenses she gives the preparer consist of:
- $1,000 for home owner’s insurance
- $3,500 for yard maintenance and snow removal
She elects to file the estate return using a calendar year ending December 31, 2018. All expenses were billed and paid during the 2018 tax year. The estate’s AGI is $45,800. What, amount if any, of the estate’s miscellaneous expenses are allowable on the estate return?
Answer: Calista can deduct $3,584, [$4,500 - $916 ($45,800 x.02)] of the miscellaneous itemized deductions on the Form 1041 Line 15c. Miscellaneous expenses are subject to 2% of the AGI of the estate. Notice 2018-61, indicates that the repeal of the miscellaneous itemized deductions associated with Form 1040, Schedule A does not apply to Form 1041 estate or nongrantor trust deduction for miscellaneous itemized deductions subject to the estate or trust’s 2% of AGI for the tax year.
August 23, 2018
Question: Henry purchased a new piece of equipment on Sept. 10, 2017, that he will eventually be used in a business he plans to start. The equipment qualifies for bonus depreciation. He placed the equipment into service March 1, 2018. Henry heard that the Tax Cuts and Jobs Act of 2017 increased bonus depreciation to 100%. Can Henry claim 100% depreciation on this equipment?
Answer: No. Eligibility for 100% bonus depreciation requires that the property be both purchased and placed in service after Sept. 27, 2017, and before Jan. 1, 2027. Property purchased before Sept. 28, 2017, is limited to 50% bonus depreciation and subject to the phase-out schedule from the PATH Act of 2015. Therefore, Henry can only claim 40% bonus depreciation on this equipment. For property purchased before Sept. 28, 2017, bonus depreciation is 50%if placed in service in 2017, 40% if placed in service in 2018, 30% if placed in service in 2019, and 0% if placed in service 2020 or later.
August 16, 2018
Question: Chip and Joanna are trying to decide if they should take out a home equity loan on their principal residence to pay for their son’s college tuition in 2018. They will claim their son as a dependent under the qualifying child rules, and would like to know if they can deduct the interest they pay on this loan in 2018. What do you tell them?
Answer: In general, under the
Tax Cuts and Jobs Act of 2017, interest on home equity debt is not deductible as an itemized deduction for 2018–2025, unless the proceeds are used to buy, build, or substantially improve the taxpayer’s home that secures the loan. However, interest on a qualified education loan (including a home equity loan secured by real property) is deductible as an adjustment to income if the borrower certifies that the debt proceeds are being used, or will be used,
solely to pay for qualified higher education expenses (Notice 98-54). Mixed-use loans do not qualify. Make the certification by giving the lender Form W-9S,
Request for Student's or Borrower's Taxpayer Identification Number and Certification. Thus, if Chip and Joanna only use the loan to pay for their son’s college tuition and make the certification, they can deduct up to $2,500 of student loan interest paid during the year, subject to phase-out based on their modified adjusted gross income.
August 9, 2018
Question: The taxpayer passed away in 2014. The fiduciary properly filed the decedent’s final Form 1040 in 2014. For 2015 and 2016, the fiduciary properly accounted for all estate income and expenses, distributed all estate assets to the beneficiaries, and filed Form 1041 for each year. Form 1041 for 2016 was marked as final.
In 2018, the estate received a check and Form 1099-B for $50,000 for an investment the decedent owned that the fiduciary and beneficiaries did not know about. Even with the step-up in basis at death, the capital gain on the investment when liquidated was $10,000. The funds were immediately distributed to the beneficiaries.
Who reports Form 1099-B, the estate or the beneficiaries?
Answer: The estate does not need to file another “final” Form 1041 nor does it need to open a new estate with a new EIN to issue K-1s to the beneficiaries. Instead, the beneficiaries will report the activity directly on their returns.
Determining when an estate’s administration ends is a question of facts and circumstances. The administration of the estate cannot be unduly prolonged. The IRS considers an estate to be terminated after a reasonable period for the fiduciary to complete its administration; generally, two years is acceptable. Consequently, any income, deductions and credits arising after the termination of the estate are considered the income, deductions and credits of the taxpayer succeeding to the property of the estate, or the beneficiary [Reg. 1.641(b)-3(d)].
Therefore, any income, deductions and credits for the estate that arise after the estate is closed are reported directly by the beneficiaries.
August 2, 2018
Question: Sofia owns a successful business and has recently hired an au pair, Madelynn, to care for her two children. Can Sofia take the child and dependent care credit for the wages she pays Madelynn to care for her two children? Are the fees that Sofia paid the employment agency to hire Madelynn eligible for the credit as well?
Answer: Sofia is the host family for Madelynn and she reports the payments to Madelynn on Form W-2 at the end of the year. The wages paid are eligible for the child care credit assuming all other qualifications under Reg. §1.21-1 are met, expenses for household and dependent care services necessary for gainful employment. Employment agency fees may qualify as indirect expenses for the credit under Reg. §1.21-1(d)(11) if Sofia was required to pay the fees to obtain the child care. Reg §1.21-1(d)(12), Ex 7 reads: “Q pays a fee to an agency to obtain the services of an au pair to care for Q's children, qualifying individuals, to enable Q to be gainfully employed. An au pair from the agency subsequently provides care for Q's children. Under paragraph (d)(11) of this section, the fee may be an employment-related expense.”
July 26, 2018
Question: Dan’s son, Bill, defaulted on a student loan that Dan guaranteed as required by the bank. Both Dan and Bill receive Form 1099-C in the amount of $35,000 (total amount of default). Bill is insolvent and will exclude the entire $35,000 on his tax return. Is the cancelation of debt (COD) taxable income to Dan? How should the Form 1099-C be reported on Dan’s return?
Answer: No, if the facts and circumstances show the intention was for Bill to pay the debt. Dan did not have a primary obligation so the COD income would not be taxable. The loan agreement should state who the primary obligator was. Guarantors don't realize cancellation of debt income (CODI) when the debt they guaranteed is discharged or forgiven. Without an intention for Dan to repay the debt, there was no primary obligation between Dan and the lender.
On Dan’s return, the Form 1099-C is reported as other income Line 21 and a subtraction is entered for the same amount as nominee income reported by Bill along with Bill’s Social Security number. Dan is not required to issue a Form 1099-C to Bill as Dan is not listed in the type of taxpayer required to issue a Form 1099.
July 19, 2018
Question: Beth, a longtime client, is a general partner in a partnership. Over the years, the partnership incurred losses that Beth could not deduct due to basis limitations. This year, the partnership turned a profit. Can she deduct the prior year unallowed losses this year?
Answer: Yes, Beth can deduct the unallowed prior year losses to the extent of her outside basis. The income from the partnership results in an increase to her outside basis in her partnership interest, thus allowing some of the prior year unallowed losses. The prior year unallowed losses are deducted on Schedule E, Line 28, by entering the amount of allowed losses as a negative number in column (h) with a notation of “PYA” in column (a).
Keep in mind that unallowed prior year losses because of basis are different from suspended passive losses. Suspended passive losses are allowed, but because of passive activity loss rules, they are not allowed yet. Thus, losses disallowed because of basis limitations are not reflected on Form 8582,
Passive Activity Loss Limitations.
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.
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).
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