| Q.1 |
I have contributed to a Roth IRA over several years. The investments held by the IRA have “tanked” this year and presently there is less in the account than I contributed. If I close the account and receive the funds, as I am under age 59 ½ is it true I am subject to recognizing income and a penalty?
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| A.1 |
In general, for distributions from a Roth IRA to be tax free, the distribution must be made after the five year period beginning on the first day of the tax year for which a taxpayer first contributed into the Roth IRA. However, where a plan is terminated and the taxpayer receives a terminating distribution less than basis (less than the amount contributed), the taxpayer does not recognize income and is not subject to a penalty. In fact, a deduction to the extent of the loss may be claimed as an itemized deduction subject to the 2% of AGI limitation. |
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| Q.2 |
I am the executor of my Aunt’s estate. She has no children, but was part of a large family and has divided her estate between 12 nieces and nephews. A retirement plan is part of her estate as she did not designate a beneficiary. I do not want to have the estate pay the tax on the distribution – the estate would pay significantly more than would be paid by the individuals. May I just give the beneficiaries their share along with a Form 1099-R?
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| A.2 |
If you distribute the proceeds of the retirement plan to the beneficiaries, the income will effectively be distributed and reported on the Forms K-1 issued the beneficiaries. The distributable net income of the estate (generally, ordinary income including interest, dividends, net rental income or retirement distributions less deductible expenses (such as taxes, attorney fees, accounting fees and other administrative costs) may be less than the distribution actually paid, meaning the lesser amount is the amount reported on the Forms K-1. For tax estimating purposes, however, I would recommend using the actual cash distribution as the “worst case” taxable income.
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| Q.3 |
My mother passed away last year (2010) at age 93. She has not been required to file an income tax return for many years. She received Social Security benefits and $75 of interest income for 2010. I am the executor of her estate. Do I have to file a Form 1040 for her?
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| A.3 |
As no income tax was withheld and your mother did not meet the minimum gross income threshold (in her case, $10,750), there is no requirement that a federal income tax return be filed. Social Security benefits are only included in gross income if they are taxable.
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| Q.4 |
I formed a single member LLC to operate a retail store. I intended to have the store open before the end of December 2010, but it got held up until the beginning of this year. May I deduct the expenses I incurred during 2010 since I formed an LLC?
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| A.4 |
The costs you incurred in getting the business started before business operations began are considered start-up costs. Those costs must be capitalized until the year the business begins. At that time up to $10,000 of the start-up costs may be deducted (the $10,000 amount is reduced to the extent start up costs exceed $60,000). Any start-up costs in excess of $10,000 are then amortized over 180 months (15 years) beginning with the month the business begins. The purchase of equipment and other depreciable assets is not considered a start-up cost and the amount spent for such property does not count toward the $60,000 limit.
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| Q.5 |
I looked into starting a new business. I got as far as negotiating to buy a franchise. I spent about $2,000 on attorney’s fees and accounting fees before concluding that it was not for me. Do these costs qualify as an itemized deduction?
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| A.5 |
I looked into starting a new business. I got as far as negotiating to buy a franchise. I spent about $2,000 on attorney’s fees and accounting fees before concluding that it was not for me. Do these costs qualify as an itemized deduction?
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| Q.6 |
Assets are being held in a marital trust (my spouse is deceased) under which I am given the right to income and principal held in the trust at any time. Does a Form 1041 have to be filed for the trust?
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| A.6 |
I would like to review the document, but from what you have stated the answer would be “No”. If you have unfettered rights to all income and trust principal the trust would be considered a grantor-type trust. A grantor trust is disregarded for tax purposes. All items of income, loss and deduction associated with the trust are reported on your individual return (Form 1040).
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| Q.7 |
My rental home is going into foreclosure. The mortgage on the home is non-recourse; the property is the sole security for the debt. At this point, about $350,000 of principal is owed on the mortgage and the property is only worth about $250,000. I bought the property for $365,000 three years ago. My basis is about $350,000. Do I have to recognize forgiveness of debt income?
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| A.7 |
As the debt is non-recourse, on foreclosure you are considered to have sold the property for the full principal amount due on the mortgage as of the foreclosure date regardless of its fair market value. You do not recognize debt forgiveness income. If the amount of mortgage principal is $350,000, for tax purposes you are treated as if you sold the property for $350,000. If your basis is also $350,000, you have no gain or loss when you report the sale. If it is determined that your mortgage principal exceeded your basis you will have Section 1250 gain (taxed at a maximum rate of 25%) to the extent of depreciation taken. If your basis exceeds your mortgage principal, you have a Section 1231 ordinary loss.
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| Q.8 |
My ex-wife and I divorced several years ago. We have been arguing over my business, which is held in a corporation. I am going to give her $75,000 and she is going to agree that I own 100% of the stock of my C corporation (she is listed as a 51% shareholder). The agreement specifically states the payment is not alimony. Does the payment to her increase my stock basis?
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| A.8 |
If the agreement with your ex-wife is that you will give her $75,000 for her interest in the C corporation, you have made a property settlement with her. Your basis in the stock acquired from her will be the same as her basis (not what you pay for it). A property settlement is not considered a taxable transaction but is effectively considered an exchange between spouses (or ex-spouses). A property settlement is also not considered alimony (as your agreement specifically states) and is not deductible.
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