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 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.
November 1, 2018
Question: Your client Mike has multiple sclerosis and deals with intense pain and spasms. His physician prescribed medical cannabis transdermal patches. Can Mike deduct the cost of the patches as a medical expense?
Answer: No, because it is in violation of federal law. Payments for illegal operations or treatments aren't deductible [Reg. §1.213-1(e)(1)(ii)]. No medical expense deduction is allowed for an operation or treatment that's in violation of federal law, even if state or local law permits the procedure or drug to be used (Rev Rul 97-9, 1997-1 CB 77).
December 14, 2017
Question: John, age 67, inherited an IRA from his mother who was age 80 when she died. He receives annual required minimum distributions from his mother's IRA, which he reports on his tax return. Is John eligible to treat the distributions as qualified charitable distributions (QCD)?
Answer: No, the beneficiary must attain age 70½ to make a QCD. The exclusion for qualified charitable distributions is available for distributions from an IRA maintained for a beneficiary if the beneficiary has attained age 70½ before the distribution is made [Notice 2007-7, Q-37].
December 7, 2017
Question: Bruce, a single taxpayer, decided that he would like to help children whose parents are not able to care for them, so he applied to become a foster parent. In July 2017, he received notice from the courts that they are placing Richard in his home for the remainder of the year. Richard is 12 years old. In order to assist Bruce with Richard’s care, Social Services paid Bruce each month. He received a Form W-2 for the amount received from July–December. Bruce read somewhere that the amount received from Social Services may be nontaxable to him. Is this correct?
Answer: Bruce is correct. The amount received may be nontaxable under §131, as qualified foster care payments, which are tax free to the recipient as long as the foster child meets certain requirements. In order for the payments to be nontaxable, an individual provider of foster care must receive the payments during the tax year. The payments must be made by a state or political subdivision of a state Code Sec. 131(b)(1)(A)(i), or a qualified foster care placement agency Code Sec. 131(b)(1)(ii), and the payment must be either a difficulty of care payment or paid to the foster care provider for caring for a qualifying individual who is under the age of 19 and in the foster care provider’s home. However, the foster care provider must include in income payments received for more than five qualified foster individuals who are 19 or older and difficulty-of-care payments received for more than ten qualified foster individuals under age 19 or more than five age 19 or older.
November 30, 2017
Question: A father took $20,000 from his HSA to pay the medical expenses of his 26-year old daughter. The daughter lives with her father, who paid more than 50% of her support. The daughter earned $10,000. Is the distribution from the father’s HSA qualified, despite the fact that he cannot claim the daughter as a dependent on his return?
Answer: Yes. A qualified distribution must be used to pay medical expenses for a HSA beneficiary, who is the individual for whom the account is set up. In addition, distributions used to pay unreimbursed medical expenses for the account’s beneficiary, spouse, and dependents that would be deductible as itemized medical expenses are also qualified [§§223(f)(1) and (d)(2)].
In this fact set, the father would be able to deduct the daughter's medical expenses under §213 because she qualifies as a medical dependent, even though he cannot claim her as a dependent on his tax return because she fails the gross income test. A taxpayer's medical expenses include expenses paid for a person who meets the §152 definition of a dependent with some modifications. The daughter is neither a qualifying child nor a qualifying relative because of her gross income. However, §213(a) expands the definition of dependent to also include:
- A dependent child who filed a joint return with a spouse,
- A relative who would have qualified except for exceeding the gross income level, or
- Anyone who would have qualified as the taxpayer's dependent but was claimed as a dependent on another person's return. Medical expenses paid for a dependent claimed under a multiple support agreement are also deductible [Reg. §1.213-1(a)(3)].
November 16, 2017
Question: Amy, a sole proprietor, expensed the entire cost of a copier that she purchased and placed in service in 2016 using the $2,500 de minimis safe harbor. If Amy sells the copier in 2018, how is the gain on the sale taxed?
Answer: Property to which a taxpayer applies the de minimis safe harbor is not treated upon sale or other disposition as a capital asset under §1221 or as property used in the trade or business under §1231 [Reg. §1.263(a)-1(f)(3)(iii)]. Since the de minimis safe harbor applied to the copier, any proceeds from the sale result in ordinary income [Audit Techniques Guide, Capitalization of Tangible Property, Chapter 5, De Minimis Safe Harbor].
November 2, 2017
Question: Your clients, Judy and Bob, would like to take a distribution from Bob’s traditional IRA to pay off their child, Martha’s, student loans. Martha did not, and will not, incur qualified educational expenses during the tax year. Bob, who owns the IRA, has not obtained age of 59½ and took deductions for his IRA contributions in prior years. Can the parents take a distribution from Bob’s IRA to pay off Martha’s student loans and not incur the 10% early withdrawal penalty from Bob’s IRA?
Answer: No. Withdrawals from an IRA are penalty free to the extent the withdrawal does not exceed the qualified higher education expenses of the taxpayer, spouse or any child, stepchild or grandchild [§72(t)(2)(E)]. However, the qualified higher education expenses must have occurred in the same taxable year as the withdrawals [TC Memo 2005-162]. The taxpayer used the distribution to pay off the student loan that was taken for qualified education costs that were incurred in a prior year. Thus the 10% penalty exception for withdrawals used to pay for higher education expenses will not apply in this scenario.