You Make the Call
Please note that the question and answer provided does not take into account all options or circumstances possible.
September 12, 2019
Question: Isaac is an independent insurance agent who sells various insurance products to his clients. He doesn’t provide consulting services. His taxable income for 2019 is $450,000. Does he qualify for the qualified business income deduction (QBID)?
Answer: Yes, Isaac qualifies for QBID. An insurance agent is specifically excluded from the definition of a specialized service trade or business (SSTB) and is not subject to the phase out [§1.199A-5(b)(2)(x)]. The IRS noted that, while the term “broker” is sometimes used in a broad sense to include anyone who facilitates the purchase and sale of goods for a fee or commission, the term "brokerage services" is most commonly associated with services, such as those provided by brokerage firms, involving the facilitation of purchases and sales of stock and other securities [TD 9847, 2/8/2019].
September 5, 2019
Question: Aiden and Sophia, both under age 59-1/2, are a married couple who are short on cash. They both have IRAs. They were wondering if Aiden could take $50,000 out of his IRA in September and replenish it within the 60-day window. The money to replenish Aiden’s IRA would come from Sophia’s IRA. Sophia would replenish her IRA within a new 60-day window with a large settlement the couple is expected to receive in December. Is each spouse allowed to do the one rollover per 12-month period?
Answer: Yes, the single rollover in any 365-day period applies per individual. IRAs (but not qualified plans) are limited to a single rollover in any 365-day period [§408(d)(3)(B)]. This one-year prohibition applies from the date the first IRA withdrawal is made, and applies to all IRAs owned by an individual. Rollovers from a traditional IRA to a Roth IRA (Roth conversion) are not subject to the single rollover limit. However, rollovers from a Roth IRA to another Roth IRA do count towards the one-rollover-per-year limit.
August 29, 2019
Question: Your client Alice is age 67. She has several IRAs, each with a large balance and no basis. Her granddaughter, Jasmine is going to purchase her first home and grandma Alice wants to help with the down payment. Alice wants gift one of her IRAs to her granddaughter. What are the tax consequences on both sides of the transaction?
Answer: Alice cannot gift an IRA but is able to take a distribution and then gift that money to her granddaughter. Alice will include the distribution in taxable income and then file a gift tax return for the amount in excess of the annual gift exclusion amount. Gifts of cash or property are not taxable to the recipient.
August 22, 2019
Question: Breanna received Form 1065, Schedule K-1, from her IRA reporting $30,000 of unrelated business taxable income (UBTI) on Line 20, Code V. Prior year Schedule K-1s had a UBTI loss. Can the losses be carried over to this year to offset the $30,000?
Answer: Yes, if the custodian of the IRA files/filed Form 990-T for the years they had a loss then they can carry it forward to offset UBTI in a later year.
Form 990-T is required when an organization has gross unrelated business income (UBI) of $1,000 or more. When the organization has a net operating loss, it has an additional reason to file the Form 990-T to establish the loss and help to ensure that the organization can carry it forward to a year in which a taxable profit or gain is generated. Although it may be possible to file all prior loss year Forms 990-T in the year a profit occurs to establish the loss, this has several risks (substantiation problems), plus the cost and difficulty of filing old returns.
August 15, 2019
Question: When executors create a fiduciary relationship between themselves and the decedent’s estate, when and where will the Form 56, Notice Concerning Fiduciary Relationship, be filed?
Answer: Form 56 should be mailed to the service center where the decedent’s final Form 1040 is required to be filed as soon as the relationship has been established [Reg. 301.6903-1]. However, the form can be attached to the first Form 1041 for the estate (or final Form 1040) filed by the fiduciary and signed by the fiduciary in the space provided.
August 8, 2019
Question: Harry and Sally divorced. Pursuant to a court order in connection with the divorce, Sally was required to provide health insurance coverage for Harry. Sally made the required election under her employer’s §125 cafeteria plan. Harry died on Feb. 13 in the current year. When is Sally allowed to change her health insurance coverage to drop Harry due to his death?
Answer: Sally must wait until her annual open enrollment period before the beginning of the next plan year to make any changes to coverage. She is not eligible to change plan benefits in the middle of the plan year. Under Reg. §1.125-4(c), an employee cannot change the election during the plan year unless a "change in status" occurs. A change in the number of an employee’s dependents is considered a change of status [Reg. §1.125-4(c)(2)(ii)]. However, an ex-spouse is not a dependent as defined under §152. That code section does not extend to the death of an ex-spouse for which the death effectively terminates the court ordered requirement to provide the ex-spouse health insurance coverage.
August 1, 2019
Question: On Sept. 1, 2018, Mary (filing as single and itemizing deductions) made a $500 contribution to a qualified charitable organization in exchange for a dollar-for-dollar state income tax credit. Mary’s state income tax liability before this credit was more than $500, and Mary applies the entire $500 credit to her state income tax liability for 2018. Does Mary have to reduce her charitable contribution deduction for federal income tax purposes? If so, can she deduct this payment any other way, assuming no business purpose for the payment?
Answer: Under final regulations issued on June 11, 2019, Mary must reduce her charitable contribution deduction on Schedule A (Form 1040),
Itemized Deductions, by the amount of the state income tax credit that she received ($500). Thus, her charitable contribution deduction is zero (assuming no other contributions). However, she may be able to treat the disallowed charitable contribution deduction as a payment of state or local tax under §164 using a safe harbor provided in Notice 2019-12. Under this safe harbor, payments that are disallowed as charitable contribution deductions under the final regulations may be deducted as state or local taxes on Schedule A, provided they don’t exceed the $10,000 ($5,000 if MFS) deduction limit for state and local taxes (SALT limit).
The final regulations and Notice 2019-12 apply to charitable contributions made after Aug. 27, 2018.
July 25, 2019
Question: The taxpayers’ daughter is starting college in September. As a cost savings incentive, the college is offering the option to pay all four years of college tuition up front in the first semester. This freezes tuition costs at the current rate with no increases in future years. The taxpayers would like to take advantage of this payment option. Can they take a distribution from their daughter’s §529 qualified tuition plan (QTP) covering the entire four years in her first semester and not incur tax or penalties on the earnings?
Answer: No. Distributions from QTPs can only be taken for qualified higher education expenses applicable to courses taken during the same year or billed through March 31 of the following year.
Therefore, if the parents prepay all four years in the first semester, any QTP distributions in excess of the qualified higher education expenses for the current year or billed through March 31 of the following year, will be nonqualified distributions, and a portion of the earnings will be taxable and subject to the 10% penalty.
Currently §529 is silent as to whether distributions from a QTP must be made in the same tax year as the qualified higher education expenses are paid or incurred. However, the IRS says it intends to issue proposed regs providing that, for the QTP earnings to be excluded from income, any distribution during the calendar year must be used to pay for qualified higher education expenses during the same calendar year or through March 31 of the following year. To determine the portion subject to tax and penalty, multiply the earnings by the ratio of nonqualified distributions to total distributions.
July 18, 2019
Question: Can my client, Wilma’s Auto Body Shop, offer a 401(k) and a SEP plan to its employees?
Answer: Yes, the 401(k) plan and SEP plan are both defined contribution plans and if the §415 limits are met per employee, then both plans can be offered. For 2019, the maximum employee elective deferral for the 401(k) plan is $19,000. The $19,000 is included in the §415 limit of $56,000 total per employee for 2019. The 401(k) employee deferral plus 401(k) employer matching contribution plus employer SEP contribution equals $56,000 or less per employee for tax year 2019.
July 11, 2019
Question: Harry and Sally are divorcing after many years of marriage. As part of the divorce settlement, Harry is required to transfer some of his stock to Sally. She wants to sell the stock, but Harry is being difficult. Since he won’t provide information about the stock, how does Sally determine her basis for gain or loss on the sale?
Answer: Because the stock was transferred incident to divorce, Sally’s basis in the stock under §1041(b) is Harry’s basis on the date of the transfer. Even though Harry is being difficult, he is required under Reg. §1.1041-1T(e) to provide Sally the records necessary to determine the adjusted basis and holding period of the stock. If Harry cannot establish basis in the stock, then Sally has no carryover basis and must use $0 basis for the stock sold.
July 3, 2019
Question: Ethan died in 2018. Although he did not have a taxable federal estate (Form 706), he had a taxable state estate. The executor is also filing Form 1041 reporting the estate’s income. Can the state estate taxes paid be deducted on the federal Form 1041?
Answer: No, state estate taxes are not deducted on the federal Form 1041. The following taxes cannot be deducted on the Form 1041 by an estate or trust:
- Federal income, duties, and excise taxes.
- Federal estate and gift taxes.
- Generation-skipping transfer taxes (unless imposed on income distributions).
- State estate, inheritance, legacy, succession, or gift taxes.
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