​​​​​​​​​​​​​​You Make the Call

Dec. 19, 2024

Question: Jim and Sarah are U.S. citizens who reside in the United States and file a joint federal income tax return. They have $5,000 in foreign bank accounts. Jim and Sarah also have $200,000 in foreign stocks issued by a foreign corporation, which is directly held be the couple and is not in a U.S. financial institution.

Could Jim and Sarah have a Form 8938, Statement of Specified Foreign Financial Assets, reporting requirement, but not a Report of Foreign Bank and Financial Accounts (FBAR) filing requirement using FinCEN Form 114?

Answer: Yes, a taxpayer could have a Form 8938, filing requirement but not an FBAR filing requirement. This is due to differences in the threshold requirements and types of reportable assets for each form. A taxpayer might have foreign assets that meet the Form 8938 filing thresholds (e.g., foreign stock held directly) but do not qualify as foreign financial accounts. Since FBAR only covers foreign financial accounts, these types of foreign assets would not trigger an FBAR filing.

1. Types of reportable assets:
   1. Form 8938: Covers a broader range of foreign financial assets, including interests in foreign entities and certain foreign non-account assets like foreign stocks held directly.
   2. FinCEN 114 (FBAR): Limited to foreign financial accounts, such as bank accounts, brokerage accounts, and similar types of accounts with a financial institution.
2. Threshold differences:
   1. Form 8938: For specified individuals, the thresholds are as follows: If an unmarried or married filing separately (MFS) taxpayer living in the U.S. has assets over $50,000 on the last day of the tax year, or $75,000 at any time during the tax year, they must file. For married taxpayers filing jointly (MFJ), these limits are $100,000 on the last day of the tax year or $150,000 at any time during the tax year. These amounts increase for U.S. citizens/resident aliens living abroad: For unmarried or MFS taxpayers, the threshold is $200,000 on the last day of the tax year or $300,000 at any time during the tax year. For MFJ taxpayers, the thresholds are $400,000 on the last day of the tax year and $600,000 at any time during the tax year.
   2. FinCEN Form 114 (FBAR): Required if the aggregate value of foreign financial accounts exceeds $10,000 at any point during the calendar year. There are no differences in thresholds whether the taxpayer is married filing a joint return, married filing a separate return, or an unmarried taxpayer.​

Dec. 12, 2024

Question: Edgar runs a small technology company that uses the services of two foreign contractors; one lives in Guatemala and the other in Costa Rica. They will be paid $5,500 and $8,500 respectively. Edgar needs to know if he has a compliance obligation to issue them a Form 1099-NEC, Nonemployee Compensation?

Answer: No, Form 1099-NEC is not required to be issued to foreign contractors. First, the employer verifies the contractors are not U.S. citizens working outside the country. The foreign contractors will sign Form W-8BEN, Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding and Reporting (Individuals). By completing Part I and signing Form W-8BEN, the foreign contractors are certifying they are not U.S. persons. The foreign contractors do not need ITINs. Form 1099-NEC does not need to be filed [Reg.§1.6041-4(a)]. The Form W-8BEN is not filed with the IRS, however, the employer must keep it in the files just in the event of an audit.​

Dec. 5, 2024

Question: Maeve is marking National Pearl Harbor Remembrance Day by donating her family's World War II artifacts to the city of Honolulu, Hawaii, for public display. Will this gift be eligible for a charitable deduction on Maeve's tax return?

Answer: Yes. Property donations to local governments may be tax-deductible. To qualify, the charitable gift must be used for a public purpose. The fact Maeve's artifacts will be on public display likely qualifies as a public purpose, so long as she didn't retain control over the property and received nothing of value from the city in return.

IRC §170(c)(1) states that a donation is tax deductible when it is to a state, a possession of the United States, or any political subdivision of any of the foregoing, or the United States or the District of Columbia, but only if the contribution or gift is made for exclusively public purposes. In this case, the city of Honolulu qualifies as a political subdivision of a state.​

Nov. 27, 2024

Question: Susan pays her neighbor Alli to babysit her 5-year-old son and perform light housework two days a week. Alli will turn 18 on Dec. and is a full-time high school student. Alli meets the definition of being a household employee and Susan pays Alli in cash for the hourly work performed. Susan consistently pays Alli $240 per month, meaning that by the end of the year she will have paid Alli $2,880 for her services. Susan is trying to determine if she has an obligation to pay Social Security, Medicare or federal unemployment taxes. As a household employer, is Susan required to pay FICA and FUTA taxes for the wages paid to Alli?

Answer: No. Although Alli is considered Susan's household employee and household employers are subject to FICA taxes if they pay the employee at least $2,700 during the year ($2,600 for 2023), Susan is not subject to FICA taxes on Alli's wages because Alli was under age 18 during the year. IRC Sec. 3121(b)(21) and Notice 95-18 state that if an individual is under age 18 at any time during the year, their wages are exempt from FICA taxes as long as the household services are not their principal occupation. Because Alli is a full-time high school student, her job working for Susan is not considered her principal occupation, therefore, her wages are not subject to FICA taxes.

Susan also does not have to pay FUTA taxes for the wages she pays to Alli because she paid her less than $1,000 for each quarter.​

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, Resid​ency 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.​​

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