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

January 12, 2017

Question: Jerome is a tax professional who electronically files tax returns. He has a long-time client who is divorced. Per the divorce decree, the taxpayer is allowed to claim his son as a dependent every other year. However, for many years, his ex-spouse filed her tax return first and claimed their son, despite the divorce decree or signing Form 8332, Release/Revocation of Release of Claim to Exemption for Child by Custodial Parent. Jerome’s client simply never challenged it because he didn’t want to deal with the hassle of filing a paper tax return or going to family court again. This year, once again, it’s the taxpayer’s turn to claim the child. He approaches Jerome on January 3 and asks, “Can I file my tax return without waiting for my Form W-2, Wage and Tax Statement, in order to claim my son before my ex-spouse does?” What can Jerome say?

Answer: Since Jerome participates in the IRS’ electronic filing program as an electronic return originator (ERO), he cannot file the tax return before receiving Form W-2 (Pub. 1345, page 24). Jerome should make this clear to his client and suggest that they wait to file until they receive Form W-2, electronically file the tax return without claiming his son if the ex-spouse claims the child and then file an amended tax return immediately providing additional documentation to state that he is allowed to claim his son for the current tax year. While the IRS may not process the amended return as fast as an original tax return, he will at least receive the refund he is otherwise entitled to in the meantime without claiming the son and obtain the remaining amount at a later date.

January 5, 2017

Question: Janice (age 75) owns a traditional IRA. She should have taken a $10,000 required minimum distribution (RMD) from her IRA for 2016. However, she forgot and failed to take anything. Is Janice subject to a penalty for failing to take her RMD by December 31, 2016?

Answer: In general, she is subject to a 50% penalty on the amount she failed to withdraw. However, she can ask the IRS to waive the penalty if she takes steps to remedy the shortfall, as the shortfall was due to reasonable error. She must file Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts, and attach a statement of explanation. File Form 5329 as follows:

  1. Complete Lines 52 and 53 as instructed.
  2. Enter “RC” and the amount she wants waived in parentheses on the dotted line next to Line 54. Subtract this amount from the total shortfall she figured without regard to the waiver, and enter the result on Line 54.
  3. Complete Line 55 as instructed.

December 29, 2016

Question: Taxpayer’s operate an S corporation and are interested in purchasing equipment for their construction business. The equipment qualifies as Section 179 property. They ask you, as their accountant, what is the best way to purchase it, via a loan through the bank, the vendor’s offer of finance or cash? They had a good year in business and feel they need to lower their taxable income.

Answer: As a tax professional, we often hear these types of questions at year end, but we know it does not matter if the purchase was financed or bought out right with cash. The business is able to claim §179 for the qualifying property and reduce taxable income, which is the ultimate goal. To claim a §179 deduction, the taxpayer must specify the items of §179 property to which the election applies and the portion of the cost of these assets that is to be taken into account [IRC Sec. 179(c)]. This election is made by completing Part I of Form 4562 (Depreciation and Amortization).

December 22, 2016

Question: Is a limited partner (or LLC member who is not a managing member) subject to self-employment taxes on the trade or business income from the partnership?

Answer: It depends. Section 1402(a)(13) excludes the distributive share of any item of income or loss of a limited partner, as such, other than guaranteed payments described in §707(c) to that partner for services actually rendered to or on behalf of the partnership to the extent that those payments are established to be in the nature of remuneration for those services.

The 1997 Prop. Reg. §1.1402-2 defines a limited partner, which includes similarly situated LLC members. Prop. Reg. §1.1402-2(h)(2) states that an individual is treated as a limited partner, and therefore won’t be subject to SE tax, unless he or she does any one of the following:

  1. Has personal liability as defined in Reg. §301.7701-3(b)(2)(ii) for the debts of or claims against the partnership by reason of being a partner.
  2. Has authority under the law of the jurisdiction in which the partnership is formed to contract on behalf of the partnership.
  3. Participates in the partnership's trade or business for more than 500 hours during the partnership's taxable year.

Furthermore, a service partner in a service partnership may not be a limited partner. A partner is not considered to be a service partner if that partner only provides a de minimis amount of services to or on behalf of the partnership. A service partnership is a partnership that substantially all the activities of which involve the performance of services in the fields of health, law, engineering, architecture, accounting, actuarial science or consulting [Prop. Reg. §1.1402-2(h)(5) and (6)].

There was opposition to these proposed regulations in the Taxpayer Relief Act of 1997, Congress provided that the IRS cannot issue any final or temporary regulations in this area until July 1, 1998. The IRS and Congress still have not issued any further guidance. However, taxpayers following these proposed regulations can use them as substantial authority in the case they are questioned by the IRS.

December 15, 2016

Question: Monica owns a tax preparation business and is preparing for the annual preparer update meeting. Monica is particularly concerned about the expanded due diligence requirements associated with the Earned Income Credit, the American Opportunity Credit, and the Child Tax Credit (regular and additional). Monica plans to explain to the staff that failure to file Form 8867, Paid Preparer’s Earned Income Credit Checklist, with a 2016 tax return claiming these tax benefits puts the preparer at risk for a maximum assessment of $510 penalty per tax return filed. Is Monica correct?

Answer: No. The consequence for failing to file Form 8867 could be much worse per return. For preparers who do not exercise due diligence in preparing a claim for the Earned Income Credit, the American Opportunity Credit and the regular and additional Child Tax Credit, the IRS can impose a $510 (for 2016) penalty per failure. Since there are three credits, this penalty applies to each failure, thus it is possible to be penalized up to $1,530 per return for multiple failures on one tax return.

December 8, 2016

Question: Heidi made charitable contributions for the last five years. She used the standard deduction every year because it was higher than her itemized deductions, which included the charitable contributions. In 2016, her itemized deductions are greater than her standard deduction. Can she carry over those charitable contributions made in the last five years because she did not itemize and deduct them in the prior years?

Answer: Not unless the charitable deductions exceeded 50% of Heidi’s AGI. The charitable contribution carryover is only allowed when the contributions exceed 50% of the taxpayer's AGI [§170(d)(1)]. This typically does not occur for most taxpayers. However, if Heidi’s charitable deductions did, in fact, exceed 50% of her AGI, she would be able to carry that portion over to 2016 when she itemizes, despite the fact that she used the standard deduction in prior years [Reg. §1.170A-10(a)(2)].

December 1, 2016

Question: With the holidays coming, Bruce a single taxpayer, decides that he wants to give his children, Josh and Richard, some money to spend however they want. He wants to gift each child $20,000 by giving them a check on Christmas Day in a card. However, Bruce is concerned that Josh and Richard will have to include this as income on their tax returns for 2016. What advice will you give to Bruce about his gift?

Answer: Bruce, not his children, is responsible for reporting the gift in 2016. Bruce must file a Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return, no later than April 17, 2017[§6075(b)]. He is required to file the Form 709, because he gifted each of his children an amount greater than the annual exclusion of $14,000 for 2016 [§6019]. When he files this return he will report the $20,000 gifted and the child’s name and social security number for each son. The $40,000 that is reduced by the $28,000 ($14,000 x 2) annual exclusion. The remaining $12,000 is reported as a taxable gift, but no gift tax return is due to the extent Bruce has not used his allowable lifetime exclusion of $5,450,000 for 2016 [§2503]. The Form 709 is an informational return for the IRS, which is filed by the taxpayer who gifts assets or cash. Josh and Richard will not have a filing requirement for the amount received and it is nontaxable to them.

November 23, 2016

Question: The wife is age 60 and has a family high deductible health plan (HDHP) that covers herself and her husband, who is age 65. She is not on Medicare, but her husband is. Can she still contribute the maximum family plan amount to her HSA even though her husband is ineligible to contribute because he is on Medicare?

Answer: Yes. The eligible individual may contribute the §223(b)(2)(B) statutory maximum for family coverage. Therefore, the wife can contribute the maximum family plan amount to her HSA account, plus the extra $1,000 for being over age 55. However, because HSAs are individual and not joint, and the husband is on Medicare, he may neither contribute to his own HSA nor contribute the extra $1,000 for being over 55. [Notice 2008-59, Q&A 16]

November 17, 2016

Question: A small retailer (Schedule C filer) chooses to donate 100 turkeys to a local food pantry that is a 501(c)(3) organization in 2016. The retailer has a basis of $5 per turkey, but sells the turkeys for $17.50 each. The taxpayer’s taxable income is $100,000. What is the charitable donation deduction?

Answer: $1,000. Normally, contributing property that produces ordinary income practically limits the taxpayer to deducting the basis in the property. However, due to the PATH Act, certain contributions of wholesome food receives an enhanced deduction [§170(e)(3)]. Prior to the PATH Act, this was only available for C corporations. The deduction is calculated as the lesser of basis, plus the lesser of half the profit that would be realized had the inventory been sold at FMV, or twice the basis.

The retailer’s basis is $500 ($5 X 100 turkeys). Had the retailer sold the turkeys, the gross proceeds would’ve been $1,750 ($17.50 X 100 turkeys). The profit would’ve been $1,250. Half of this, plus basis, is $1,125 ($500 + $1,250 ÷ 2). However, the taxpayer may not exceed twice the basis, or $1,000. This amount is less than the overall limitation of $15,000 (15% X $100,000 taxable income).

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