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TOP TAX QUESTIONS OF THE MONTH

This is a monthly reference source. By providing these samples of questions and answers, we hope to help you understand that we provide a superior service in our ability to get answers to your questions. There are some general caveats that go along with this presentation. Understand that tax law is fluid and always changing; the answer that is correct today may be incorrect tomorrow. Also be aware that changing one small fact may change the entire answer. We are not trying to give a complete outline of any particular subject. We are attempting to give a general direction that can be taken to resolve a problem or obtain an answer. We can call and talk over your particular situation with the Research Department before we try to answer the specific problem YOU may have. You may not rely on any answer given to avoid a penalty assessed by IRS.

1. I inherited some stamps and coins from my Uncle Vinnie about a year ago. I sold them a few months later in early 2007 for a few thousand dollars. Do I have to report the sale on my Form 1040 and is the gain a short-term gain since I did not hold the stamps or coins for a year?
   
   

   You are subject to reporting the sale of the collectibles. The holding period of the inherited stamps and coins is deemed to be more than one year (long term) by statute. Any gain on the sale of the collectibles (which includes stamps, coins, art, antiques, and gems) is, however, subject to tax at a 28% rate. You should determine the stamps and coins fair market value as of the date of death, as that value will determine your basis. It is possible that a sale so shortly after death will result in little or no reportable gain.

2. I own several rental properties that I report separately on my Schedule E. I sold one property during 2007 that had suspended passive losses. What happens to those losses?
   
   

   As long as each rental property was treated as a separate activity and the passive loss attributable to the properties was tracked separately, the disposition of any one of the rental properties will “free up” the suspended passive losses attributable to that property. The losses that are freed up may be used against other income. If there is a net gain on the disposition of the property, that net gain on the disposition of the passive activity is treated as passive income and can be used to offset passive losses.

3. My husband died last year and I am selling our long time home. The home has always been our home and it was never rented. After the step-up in basis for half of the home we owned jointly (in a non-community property state), I think that the gain will be about $300,000. Do I have to pay tax on the amount greater than $250,000?
   

   Under newly enacted tax law, as a surviving spouse selling a home after January 1, 2008 (the effective date), the sale of a jointly owned and occupied residence by the surviving spouse is entitled to an exclusion of up to $500,000 provided the sale occur no later than two years after the date of the spouse’s death. As you meet the requirements, should the sale result in $300,000 of gain you will be able to exclude it.

4. I am a sole proprietor and I have several employees that sell product in the area. I want to give them an allowance for travel expenses (e.g., gas). May I do this and exclude the payment from their income?
   
   

   Payments of an unrestricted allowance, as opposed to payments under an accountable plan, are treated as additional payroll, subject to income tax and payroll taxes. The employee would then claim any employee business expense as an itemized deduction subject to the 2% of AGI limitation. If you wish to avoid this consequence for the employees, establish an accountable plan under which the employees must provide invoices, receipts, or other records to prove the amount reimbursed, whether in advance or after-the-fact, within a reasonable time. It is possible to set up the plan to provide a maximum reimbursement (e.g.., the plan will reimburse up to $100 per month) upon submission of the required documentation. If you will reimburse meals under the plan, the meal expense is subject to the 50% limitation on deduction.
   

5. My mother had a revocable trust drafted before she died. After her death, we found out that the trust was never funded- no assets were ever transferred to the trust. What now?
   
   

   As the trust was never funded, it is ignored for now. If the estate earned gross income of more than $600, a Form 1041 for the estate must be filed. Obtain a federal ID number for the estate. The estate may use a fiscal year ending no more than 12 months following the date of death (e.g., if death was during July, the fiscal year may end no later than June 30 of the following year). In the year an estate is settled, there often is more expense than income. In an estate’s final year, that excess expense will pass to the beneficiary (or beneficiaries) and would be deductible by them as an itemized deduction. If the will calls for the trust to be the beneficiary of the estate, once the estate is settled, the trust may be funded. The trust will have a separate ID number and must use a calendar year.

6. I just received a condemnation award from the state for $1,000,000 for land and building that I operate my business from. I will relocate as soon as I find another place. What do I have to do to defer gain (I bought the place for $200,000 years ago)?
   
   

   You have three years from the end of the year in which you first receive proceeds to purchase replacement property. If you spend at least $1,000,000 on replacement property within the three-year time frame, you will have no gain on the award. Instead, your basis in the replacement property will be reduced by the amount of the gain deferred ($800,000). If you spend more than $200,000 within the three-year time frame, you will defer gain dollar-for-dollar in the amount of that excess up to $800,000. To completely defer gain, you must spend $1,000,000 on replacement property.