You Make the Call
Nov. 21, 2024
Question: Sherri and Chris were talking about year-end tax savings when Chris mentioned that she has a Health Savings Account (HSA) in conjunction with the high deductible health plan (HDHP) offered by her employer. Of her 2024 $4,150 maximum allowable contribution, she has thus far only contributed $2,150 through payroll deductions. Now, in November, she has extra cash in hand and regrets her earlier annual election amount. Sherri says, “I have a remedy for that, Chris. You can contribute to the HSA from out-of-pocket, rather than through wages, and get a tax deduction if you contribute before April 15, 2025.” Is Sherri correct?
Answer: Yes, as an eligible individual for the entire tax year, Chris can contribute the additional $2,000 shortfall to reach the $4,150 maximum for 2024. Anyone can contribute to an eligible individual's HSA. For an employee's HSA, the employee, employer or both may contribute to the employee's HSA in the same year.
Using Part I of Form 8889, Health Savings Accounts (HSAs), to figure the deduction, Chris will ultimately realize the deduction amount on Schedule 1 (Form 1040), Part II Line 13, if contributed before April 15, 2025.
Nov. 14, 2024
Question: Mary's mother, Martha, lives in a nursing home with an annual cost of $72,000. Fortunately, Martha has a long-term care (LTC) insurance policy that covered $65,000 of those expenses for the 2023 tax year. Mary believes that Martha can deduct all nursing home costs that exceed 7.5% of the adjusted gross income (AGI) of $90,000 reported on Martha's I Schedule A. However, Martha's CPA, Sue, disagrees and believes that Martha's deductions will be limited to the amount not reimbursed through her LTC policy. Who is correct in this scenario and how much of a deduction is allowed by Martha?
Answer: Sue is right. When it comes to deducting medical expenses on your tax return, you can only include the amounts you personally paid out of pocket. Any amounts reimbursed by insurance must be subtracted from the total expenses before you calculate your deduction [§213(a)].
Since Martha's long-term care policy covered $65,000 of the nursing home costs, she can only use the remaining $7,000 ($72,000 total cost minus $65,000 reimbursement) to determine the deduction.
Martha's AGI is $90,000. Martha's filing status is single. She will not be able to deduct the first $6,750 ($90,000 multiplied by 7.5%) in medical and dental expenses on Schedule A. Based solely on the nursing home annual cost, Martha would only be able to include $250 in expenses on Schedule A.
In summary, while Mary might have thought Martha could deduct all her nursing home expenses that exceed 7.5% of her AGI, the rules are clear. The deduction is limited to the expenses Martha actually paid after accounting for any insurance reimbursements. So, Sue's guidance aligns with IRS regulations, ensuring Martha correctly navigates her tax deductions.
Nov. 7, 2024
Question: John is an unmarried taxpayer and has a dependent son, Billy. Billy passed away in May of 2023. Can John still claim head of household (HOH) status in the year Billy passed away, if Billy met all the other requirements to be a qualifying child (relationship, age, support and joint return) except the residency test (Billy did not live with John more than half the year)?
Answer: Yes, John can still file using the HOH filing status, even if Billy passed away in May according to both IRS Publication 17,
Your Federal Income Tax for Individuals, Page 27, and IRS Publication 501,
Dependents, Standard Deduction, and Filing Information, Page 9. These publications say a taxpayer may be eligible to file as head of household even if the person who qualifies you for this filing status is born or died during the year. To qualify for HOH filing status, the qualifying person must be a qualifying child or qualifying relative who lived with the taxpayer for more than half the part of the year they were alive. In addition, IRS Reg. §1.2-2(c)(1), Household, provides the taxpayer and such other person, must occupy the household for the entire taxable year of the taxpayer. However, the fact that such other person is born or dies within the taxable year will not prevent the taxpayer from qualifying as an HOH if the household constitutes the principal place of abode of such other person for the remaining or preceding part of such taxable year.
The key condition is that the HOH requirement must have been met until the date of death, not the entire taxable year. According to IRS Publication 17, Page 31, Residency Test. To meet this test the child must have lived with the taxpayer more than half the year,. There is an exception for children who were born or died during the tax year.
Oct. 31, 2024
Question: John is preparing to meet with two of his potential clients, Robert and Steve. Through their conversation on the phone, John learned that Robert owns a tax-exempt LLC and Steve is a minister who is responsible for the administration of his church and ensuring it complies with its reporting obligations. The two gentlemen are confused as to whether they need to file beneficial ownership information (BOI) reports with the Financial Crimes Enforcement Network (FinCEN). They heard that all tax-exempt entities were exempt from BOI reporting requirements. What should John tell them?
Answer: Not all tax-exempt entities are exempt from BOI filing. John, as a tax preparer, should provide the two clients with the following information.
Beginning Jan. 1, 2024, the federal
Corporate Transparency Act (CTA) requires certain types of entities to file a BOI report with FinCEN, a bureau of the U.S. Department of Treasury. The CTA does not distinguish between for-profit and nonprofit entities with regard to BOI reports. Generally, three types of tax-exempt entities qualify for the exemption; they are §501(c) organizations, §527 political organizations and §4947 trusts. If your tax-exempt organization is not one of the three types of exempt entities and meets the definition of a reporting company, you still need to file a BOI report.
Per CTA, every domestic corporation, LLC, or other entity set up in compliance with the secretary of state or any foreign entity formed under the law of a foreign country and registered with the state in the U.S. is required to file a BOI, unless they qualify for one of the 23 exemptions set forth in the CTA. [31 CFR 1010.380(C)(1)]
Given the scenario presented to John, if Robert has his own tax-exempt LLC (which is not one of the three types abovementioned), and was created by filing with a U.S. state, he will still need to file. For Steve's church, he likely does not need to file a BOI report as it is a §501(c) organization.
To confirm entity's exempt status, taxpayers should go through the questions and criteria for each type of exempt entity listed under
BOI Small Compliance Guide v1.1 (fincen.gov) and
Beneficial Ownership Information | FinCEN.gov.
Oct. 24, 2024
Question: Benny has been preparing for the World Series by oiling his catching glove, planning out his game day snacks and, of course, reviewing his tax situation. Due to the great seats he secured for the games, he anticipates catching a home-run baseball. Benny's personal tradition is to return the ball by immediately throwing it back onto the field. He fears that his catch and release of the valuable ball will generate income or gift tax consequences to him. Is that the case?
Answer: No, there will be no income nor gift tax consequences to Benny. The IRS has informed taxpayers that the catch and release of a home-run baseball will not create any taxable income [IRS News Release 98-56, 9/08/1998].
The IRS has likened the situation to a taxpayer's refusal to accept a prize or unsolicited merchandise awarded in all types of contests. Generally, prizes are included in the recipient's gross income for federal income tax purposes
unless the contest winner refuses to accept the prize [Rev. Rul. 57-374, 1957-2 C.B. 69].
Benny's return of the ball will also not constitute a taxable gift being made. For there to be a gift, the donor must have sufficient property or ownership interest in the transferred property.
Now armed with the facts, Benny can fearlessly execute his plan to throw back the World Series ball, knowing there are no income or gift tax consequences to him.
Oct. 17, 2024
Question: Ryan has a Schedule C business where he has a piece of 5-year class life equipment that he placed in service in 2022. The equipment is qualified property and eligible for bonus depreciation; however, when Ryan timely filed his 2022 tax return, he did not claim bonus depreciation and did not elect out of claiming bonus depreciation. He has also timely filed his 2023 return, continuing to claim depreciation on the asset. Realizing that he should have either claimed bonus depreciation or elected out, Ryan wants to amend his 2022 return to claim bonus depreciation since he is still within the statute of limitations. Can Ryan amend his 2022 tax return to claim the bonus depreciation he was eligible to take?
Answer: No, Ryan cannot amend his tax return to claim bonus depreciation. Instead, he must file Form 3115,
Change in Method of Accounting, to claim the missed bonus depreciation. The return is past the due date; therefore, Ryan cannot elect out of bonus depreciation. Because no affirmative election-out was made, Ryan is required to compute depreciation and basis of the equipment as if bonus depreciation was taken; therefore, he should file Form 3115 to claim the missed depreciation to receive the benefit of the deduction. In instances where a taxpayer timely files their tax return without affirmatively electing out of depreciation, they can go back and make the election-out on an amended tax return within six months of the due date of the original return, excluding extensions, and writing “filed pursuant to Section 301.9100-2” at the top of the return. Because Ryan's return is past the six-month mark, he should file Form 3115 to claim the missed bonus depreciation since no affirmative election-out was made.
Oct. 10, 2024
Question: David Diehl is a 90% shareholder in GDS, Inc., a closely held C corporation. The corporation received a bona fide shareholder loan from David and is repaying him with interest. In a difficult economic time, the C-corp became unable to pay David the interest. It plans to start paying interest in two years. Can GDS accrue the interest for the two-year period and deduct it as an expense before actually paying David?
Answer: No. Under the general rule of §267(a)(2), a shareholder and a corporation are considered related parties when the shareholder owns more than 50% in value of the corporation's stock.
Thus, it appears that David and the corporation are related.
Generally, in related party situations, an accrual-basis taxpayer is placed on the cash basis regarding the deductibility of items accrued, but not yet paid, to related cash-basis taxpayers. §267(a)(2) provides that the deduction is allowed on the day the amount is included in the recipient's income.
Therefore, GDS, Inc. may only recognize the expense at the time the interest is actually paid.
Oct. 3, 2024
Question: Tom, age 36, has a health savings account (HSA) qualified high deductible health plan that just covers him. He wishes to contribute the individual maximum for 2024, $4,150, to the account. Tom's wife Alice, who is also age 36, has her own HSA qualified high deductible health plan, which covers her and the couple's two children, Billy and Bobbie, but not Tom. She plans to contribute the family maximum of $8,300 to her HSA for 2024.
If the couple files jointly, are they entitled to a total 2024 HSA deduction of $12,450 ($4,150 + $8,300) for 2024?
Answer: No. If either an individual or the individual's spouse has family coverage, they are considered to have family coverage through that individual. Likewise, if one spouse has self-only coverage and the other has family coverage, the maximum contribution limit is the maximum for family coverage, and the amount each contributes to reach that limit, is divided between them by agreement (Notice 2008-59, Q&A 17). If the spouses have different family coverage plans, only the one with the lower deductible is counted for HSA eligibility purposes (Sec. 223(b)(5)).
The family contribution amount can be divided between eligible spouses any way they want but must be divided equally among the spouses if they do not agree on a different division. However, no HSA contribution is allowed for an ineligible spouse. The IRS has ruled that an eligible individual does not lose their eligibility when their spouse has non-HDHP family coverage and the spouse's non-HDHP plan does not cover the eligible individual. Consequently, that individual may contribute to an HSA (Rev. Rul. 2005-25).
Therefore, the maximum deductible contribution for Tom and Alice in tax year 2024 is $8,300, the family maximum. The expected excess contribution of $4,150 should be addressed and adjusted before the year end.
Sept. 26, 2024
Question: Robert and Suzanne were married. Robert is aged 71 and Suzanne was 74 when she died in 2023 following a long-term illness. They each had their own traditional individual retirement arrangements (IRAs), and Robert inherited Suzanne's IRA as the sole designated beneficiary. Prior to her death, Suzanne started taking her required minimum distributions (RMDs) from her IRA account. How should Robert treat this inherited account?
Answer: Robert may treat Suzanne's IRA account in one of two ways: (1) withdraw funds as if it was his own (2) withdraw funds as a beneficiary based on either of their life expectancies.
To treat the inherited IRA as if it were his own, Robert can roll over the inherited IRA assets into his own eligible retirement plan, including his IRA, and treat those assets as his own [§ 402(c)(8)(B)]. Since he is over the age of 59½, he can withdraw these assets anytime without a penalty. For RMD purposes, since Robert has not reached age 73, this option enables him to delay taking RMDs until he reaches age 73 rather than continuing Suzzane's RMDs.
Since he is the sole designated beneficiary of the account, Robert has another option. He can remove the RMDs from Suzanne' account based on his life expectancy. Since Suzanne died after the year 2020 and her required beginning date (RBD), the RMD is calculated based on the longer of Robert's life expectancy or the distribution method used at her date of death.
Under the SECURE 2.0 Act, beginning in 2023, the RBD is April 1 of the year following the year in which the account owner reached age 73 for individuals who turn 72 after Dec. 31, 2022. It is age 75 for individuals who reach age 74 after Dec. 31, 2032.
The surviving spouse must withdraw funds over their life using Table 1 - Single Life Expectancy, Appendix B,
Publication 590-B, based on their age at the end of the applicable distribution calendar year and recalculated annually. Or, if longer, they can use the deceased owner's single life expectancy calculated in the year of death and reduced by one each year thereafter. (For aged 71, life expectancy factor as 18.0, for 2024, then use factor of 17.0).
Sept. 19, 2024
Question: Neighbors Kim and Helen are eagerly anticipating the upcoming Fall Festival at their community church. Together they have been sewing stuffed pumpkins for the church to sell as a fundraiser at the event. They began by purchasing felt material, all of which is only being used for the festival pumpkins. The duo will receive no renumeration from the church for their efforts at all. In looking at potential charitable deductions for their individual Schedule A's (Form 1040),
Itemized Deductions, can Kim and Helen deduct the cost of the felt material being used to create the pumpkins?
Answer: Yes, each neighbor may use the amount they personally spent on the material for a charitable deduction, subject to the 60% AGI limitation. Unreimbursed out-of-pocket expenditures made in rendering gratuitous services to a charitable organization may be deductible [Reg. §1.170A-1(g)]. The expenses are treated as direct payments to the charity, rather than for the use of the organization (Rev. Rul. 84-61) so they are subject to the 60% of AGI limitation (30% if made to other than a 50% charity). The expenses must be nonpersonal, directly connected with and solely attributable to the rendering of such services (Rev. Rul. 69-473).
Sept. 12, 2024
Question: Horizon Creative Studios, Inc. is a small graphic design business that began operations in 2000 as a C corporation. In 2021, the company generated a net operating loss (NOL) that it has been carrying forward each subsequent year. The company meets all the eligibility requirements to make the S election and timely files a Form 2553,
Election by a Small Business Corporation, to be treated as an S corporation with an effective date of Jan. 1, 2023. As of December 31, 2022, its last day as a C corporation, the remaining NOL carryforward for Horizon was $10,000. During 2023, the business sold an asset for which they had to recognize built-in gain. Can the NOL carryforward be used to offset ordinary income or reduce the built-in gains of the S corporation in 2023?
Answer: The NOL cannot be used to offset ordinary income; however, it can be used to reduce built-in gains tax [IRC §1374(b)].
When Horizon Creative Studios, Inc. made the election to be treated as an S corporation, any NOL carryforwards were essentially paused. The NOL cannot be carried into a tax year that the C corporation elected S status. However, if Horizon reverts back to a C corporation, then the NOL could continue to be used for the remainder of the time allowed in the carryover period. An NOL generated by a C corporation can be used to reduce the built-in gains tax if the S corporation sells an asset and is subject to that tax.
Sept. 5, 2024
Question: Walter and Steffie were married and in 1998 they purchased a primary residence together in Maine. In late 2020, the two divorced, but still owned the residence together. That year, they also converted the property to a Schedule E rental activity. The activity accrued suspended passive losses (PALs) through 2021.
When Walter remarried in June 2021, he decided to quitclaim deed the property to Steffie, who plans to sell the house eventually.
Does the transfer of the property release the suspended PALS?
Answer: No. Neither Walter nor Steffie will be allowed to immediately deduct the suspended passive activity losses associated with the house upon either transfer or sale although Steffie will be able to use her PAL in a different way.
When Walter transferred his ownership of the property to Steffie within one year of their divorce, under §1041(b), Steffie received a tax-free gift, with the carryover basis of the spouse who made the transfer. Therefore, Walter will not be able to deduct his portion of the suspended losses. Also, in this circumstance, when the transferred property involves passive activity income, for Steffie, the suspended losses are added to the tax basis of the asset being transferred. [§469(j)(6)]. Therefore, she will also not be able to
deduct the suspended losses but may only use them to reduce her gain.
In official guidance from the IRS Market Segment Specialization Program (MSSP) Audit Technique Guide on Passive Activity Losses, the IRS states that transfers incident to divorce should be treated as gifts and the suspended losses of the donor spouse added to the basis passing to the receiving spouse. Thus, the recipient's deduction of the suspended passive loss generally is deferred until the property is sold.
Aug. 29, 2024
Question: Albert owns a small business and has two employees, Tim and Sam, who only have Individual Taxpayer Identification Numbers (ITIN) but no Social Security number (SSN). Tim and Sam have been living and working in the U.S. and are treated as U.S. residents for tax purposes. Are they subject to FICA taxes?
Answer: If Tim and Sam are U.S. residents, they are subject to FICA (Social Security and Medicare tax) They should also have SSNs if they are legally present in the U.S. If they are unlawfully authorized in the U.S., even with the ITIN, Albert should not hire them. He should also not hire anyone who does not have an SSN.
An ITIN is issued only for tax purposes but not for identification intent or immigration status. If taxpayers are eligible to obtain an SSN, the IRS will not issue them an ITIN unless they can document that the Social Security Administration denied their request for an SSN.
Technically, ITIN taxpayers should not be issued a Form W-2 and pay FICA taxes. Only those taxpayers with SSNs should receive Form W-2 and pay FICA taxes. If Tim and Sam are U.S. residents, they should have an SSN and withheld Social Security and Medicare taxes. They should not need an ITIN. Albert is advised to be cautious about their legal status and reconsider their employment.
By law, non-student U.S. citizens, lawful permanent residents and U.S. resident aliens are subject to FICA taxes on salary and wages earned as an employee. Legally, employers should not hire someone who does not have an SSN, and they should not have someone acting as an employee but being treated as a Form 1099 independent contractor either.
According to the Social Security Administration, SSNs are used to report a person's wages to the government and to determine that person's eligibility for Social Security benefits. Taxpayers need an SSN to work, collect Social Security benefits and receive other government services. For taxpayers have ITINs but no SSNs, they will not likely receive Socials Security benefits until they obtain their SSNs.
Aug. 22, 2024
Question: In April 2024, Albert died at the age of 40. He left behind a 401(k) plan with his estate as the designated beneficiary. He was not married and did not have any children. His parents are the beneficiaries of his estate. When must the funds from the 401(k) be distributed to his estate?
Answer: As Albert died before his required beginning date (RBD), the distributions must be totally distributed by Dec. 31 of the fifth year following the year of his death.
When an estate is named as the beneficiary, the distribution rules normally depend on whether the participant dies before or after their RBD, which marks the date when the participant must start taking the required minimum distributions (RMDs) from their 401(k) or IRA.
Generally, taxpayers must start taking RMDs when they reach age 72. Due to the SECURE 2.0 Act, beginning in 2023, the RBD is now April 1 of the year following the year the account owner turned 73 for individuals who turn 72 after Dec. 31, 2022. It is 75 for individuals who turn 74 after Dec. 31, 2032.
If the participant or owner of the account dies before their RBD, distributions must be totally distributed by Dec. 31 of the fifth year following the year of their death. The beneficiary is allowed, but not required, to take distributions before that date. Given the situation, Albert meets this criterion. Therefore, the distribution must be made to the estate by Dec. 31, 2029.
If Albert had died after his RBD, the RMDs would be required to continue at least as rapidly as during his lifetime. Therefore, RMDs must be calculated using Albert's remaining single life expectancy.
Aug. 15, 2024
Question: Freddy recently made a career switch after retiring from his long-time position as a prison guard. He now enjoys running his waterfront residential rental property as his sole profession. He has substantial first-year losses from his rental property and knows that if he materially participates in the rental activity as a real estate professional, he can utilize the losses against nonpassive income on his tax return. Though he worked on the rental more than 750 hours in the year, Freddy spent the bulk of his time renovating the property, including gutting and remodeling the home's bathrooms and kitchen. Does the renovation work count toward the 750 hours needed to qualify for material participation assuming he meets the other qualifications for a real estate professional?
Answer: Yes. The renovation work is considered material participation and counts toward the 750-hour requirement. Regulation §1.469-5(f) provides that material participation is
any work done by an individual in an activity in which the individual owns an interest at the time the work is done. That work is treated as participation by the individual in the activity, without regard to the capacity in which the individual does such work. Therefore, assuming he meets all other real estate professional qualifications, Freddy will be treated as materially participating in the rental business for the tax year, allowing him to deduct his losses against nonpassive income.
Aug. 8, 2024
Question: Luke owns a rental house two miles from his home. He decided to move and decided it would be best to sell the rental property and buy a different rental house closer to his new home. He found another property and all of the requirements to qualify for a like-kind exchange under §1031 were met as part of the transaction. There were no related parties involved in the transaction. However, after doing some tax planning, Luke has realized that he will be in a lower tax bracket during the year of the transaction than when he eventually sells the newly acquired rental home. Therefore, he does not want to defer the gain so he can pay the tax while he is still in a lower tax bracket. Can Luke opt to treat this sale of the property as fully taxable even though he meets all the requirements for treating the transaction as a like-kind exchange?
Answer: No. If the §1031 like-kind exchange requirements are satisfied, then the nontaxable exchange treatment is mandatory. All of the following requirements must be met in order to require the §1031 treatment:
- The transaction is in the form of a sale or exchange
- The property transferred and the property received are both held for productive use in the taxpayer's trade or business or are for investment
- The properties transferred and received meet the definition of like-kind property
If Luke did not want the §1031 like-kind exchange provisions to apply, then he would have needed to structure the transaction in a way that failed to meet the like-kind exchange requirements.
Aug. 1, 2024
Question: James has found himself with both a business and a nonbusiness bad debt. His business bad debt was from his guitar repair business, where credit he extended to Brian in 2018 became uncollectible in 2022. When James tells his accountant, Quinn, about his bad debt, Quinn remembers §6511, the code section explaining the statute of limitations for amending returns. Can this code section help James remedy his bad debt?
Answer: Yes, it can. In §6511(d), Quinn notes that because of the difficulties in pinpointing the year a loan becomes wholly worthless, the normal three-year statute of limitations for filing amended returns does not apply to bad debt losses. Instead, a seven-year statute of limitations generally applies for refunds due to such losses.
This special seven-year statute applies only to bad debts (business and nonbusiness) and worthless securities [§6511(d)]. Any other items on an affected prior-year return will be subject to the normal three-year statute of limitations.
Quinn can therefore amend James' returns in respect to the bad debts, even though the standard statute of limitations timeframe is passed.
July 25, 2024
Question: Bobby and Jinger lived together all year with their child, Olivia age 6. They are not married and are trying to determine who should claim Olivia. Can Jinger claim Olivia for the earned income tax credit (EIC) and Bobby claim head of household (HOH) status for Olivia assuming they would otherwise qualify?
Answer: No, they cannot split the tax benefits for the child between them. They are both considered custodial parents for tax purposes. If Jinger claims Olivia, then, if eligible, she claims the child for everything (dependency, HOH, EIC, CTC, dependent and child care credit). Bobby must file as single because he is not claiming Olivia.
Additional information: For unmarried parents who live together where they are both the custodial parents, only one parent can claim the tax benefits for each child each year; the benefits cannot be split up. If they cannot agree on who can claim the child, then the tie-breaker rule states the parent with the higher AGI can claim the child for all the benefits if they otherwise qualify.
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