Depreciation of Assets Acquired as a Gift

Special rules apply to property acquired as a gift. The determination of the basis for depreciation purposes and the amount of deductible loss on the eventual sale of the asset are treated differently for property received as a gift.

The first step in determining the depreciation deduction allowable for property received as a gift is to determine the donor’s adjusted basis, the FMV of the property at the time of the gift, and any gift tax paid by the donor on the gift.

The donor’s adjusted basis plus a portion of the gift tax paid by the donor is used by the taxpayer to establish their depreciable basis in the gift. However, unlike a related party transaction, the taxpayer does not “step into the shoes” of the donor. Instead, the taxpayer starts the depreciation recovery period as of the date of the gift, using the applicable convention and method.

Example: Grandpa decided it was time to abandon his summer home and move permanently to Florida. On April 30, 2015, he gave his house to his niece, Peggy. The FMV of the property at that time was $250,000. Grandpa’s basis in the home was $200,000. He filed Form 709, U.S. Gift (and Generation-Skipping Transfer) Tax Return, but did not owe any gift tax.

Peggy decides to use the house as rental property. On her 2015 return, she reports the acquisition date as April 30, 2015, and a beginning basis of $200,000. Residential real estate is depreciated over 27.5 years using the mid-month convention and the straight-line method.

For gifts received after 1976, a portion of the gift tax that was paid on the gift is added to the basis. This is calculated by multiplying the gift tax by a fraction. The numerator of the fraction is the net increase in value of the gift, and the denominator is the amount of the gift. The net increase in value of the gift is the FMV of the gift less the donor’s adjusted basis. The amount of the gift is its value for gift tax purposes after reduction for any annual exclusion and marital or charitable deduction that applies.

For an update on depreciation and other tax law changes affecting tax year 2015, get your tax updates today!

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Recent Tax Bills Passed in the House

Since January 2015, several bills have been passed by the House, including ones to make permanent a few of the 50-plus provisions that expired at the end of 2014. Described below is a sampling.

Permanent, higher Sec. 179 expensing: America’s Small Business Tax Relief Act of 2015, H.R. 636, passed on Feb. 13. This bill makes permanent the $500,000 expensing and $2 million threshold amounts for expensing business property, also indexing them for inflation. Software and qualified real property, as well as air conditioners and heaters, would now be Sec. 179 property, and taxpayers can revoke a Sec. 179 election without IRS consent.

Permanent sales tax deduction: State and Local Sales Tax Deduction Fairness Act of 2015, H.R. 622, passed on April 16 (272–152). This bill makes permanent the option to claim an itemized deduction for sales tax rather than state income tax, which has existed in temporary form since 2004.

Permanent research tax credit: American Research and Competitiveness Act of 2015, H.R. 880, passed on May 20 (274–145). H.R. 880 makes the credit permanent and increases the rate for the simplified credit from 14% to 20%. The traditional credit with the 1984–1988 base years would be terminated. This bill also allows small businesses (gross receipts of $50 million or less on average over a three-year period) to use the credit against either regular tax or alternative minimum tax.

Read the full article

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Roth IRA Contribution

This information is an excerpt from the 2014-2015 IRA and Individual Retirement Federal Tax Update course by Vern Hoven:

ROTH IRA PROVISIONS §408A

Roth IRAs

Contribution amount is $5,500. Individuals with AGI below certain levels may make nondeductible contributions to a Roth IRA. The maximum annual contribution that may be made to a Roth IRA is the lesser of $5,500 or the individual’s compensation for the year. The contribution limit is reduced to the extent an individual makes contributions to any other IRA for the same taxable year. As under the rules relating to IRAs generally, a contribution of up to $5,500 for each spouse may be made to a Roth IRA provided the
combined compensation of the spouses is at least equal to the contributed amount.

Income limitation for annual contributions (2014 Pension Plan Limitation, IR 2013-86). The maximum annual Roth IRA contribution is phased out as an individual’s AGI exceeds certain limits:

Year

2013

2014

2015

Single

$112,000 – $127,000

$114,000 – $129,000

$116,000 – $131,000

Married filing joint

$178,000 – $188,000

$181,000 – $191,000

$183,000 – $193,000

Married filing separate

$0 – $10,000

$0 – $10,000

$0 – $10,000

Distributions (§408A(d)). “Qualified distributions” of designated Roth contributions are excludable from gross income. A qualified distribution is one that occurs at least five years after the year of the participant’s first designated Roth contribution (counting such first year as part of the five) and is:

1. made on or after attainment of age 59½,
2. made on account of the participant’s disability,
3. made to a beneficiary or estate on or after the participant’s death, or
4. made for qualified first-time homebuyer expenses up to $10,000.

This information and more can be found in the 2014-2015 IRA and Individual Retirement Federal Tax Update.

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Same Sex Marriage Tax Law Changes

In the 2014-2015 Individual and Employee Federal Tax Update, Vern Hoven discusses the changes in same-sex marriage laws for the year 2013 and forward. Changes include legally married same sex couples in both a same sex marriage recognized state and those living outside of a marriage recognition state.

Legal Same-Sex Marriages Are Recognized for Federal Tax Purposes 

(Rev. Rul. 2013-17)

Joint or married separate filing required for years beginning in 2013. Legally married same sex couples are treated as married for all Federal tax purposes, including income, gift and estate taxes. Starting in 2013, legally-married same-sex couples generally must file their Federal income tax returns using either the “married filing jointly” or “married filing separately” filing status. For legally married couples living outside of a marriage recognition state, generally, the couple will use a married filing status for Federal purposes but their state may require that they continue to file as “single” or “head of household.”

Prior years. Under the terms of Rev. Rul. 2013-17 individuals who were in same-sex marriages may, but are not required to, file amended returns choosing to be treated as married for Federal tax purposes for one or more prior tax years still open under the statute of limitations.

Receive this information and more tax law updates in the 2014-2015 Individual and Employee Federal Tax Update.

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The 2014-2015 Federal Tax Updates Are Here!

The holidays are not the only thing quickly approaching! Tax season will be here before you know it; ensure you are prepared for those tricky tax changes with the 2014-2015 Federal Tax Updates! Offered in both Live Webcast and Self-Study versions, receive detailed and informative information you need-to-know from expert Vern Hoven.

Register for the Live Webcasts offered in November, December, and January and receive 16 hours of CPE test free, as well as gain access to Instructor Vern Hoven LIVE to ask questions.

2014-2015 Federal Tax Update: Part 1 (4 CPE hours)

  • Part 1 of this series focuses on changes to Individual Income Tax.

2014-2015 Federal Tax Update: Part 2 (4 CPE hours)

  • Part 2 takes a look at Real Estate Tax, Passive Loss, Individual Retirement Plan and Estate/Gift Taxation.

2014-2015 Federal Tax Update: Part 3 (4 CPE hours)

  • Part 3 of the series covers business tax changes and business retirement plans.

2014-2015 Federal Tax Update: Part 4 (4 CPE hours)

  • Part 4 takes a look at Federal Payroll changes, Corporate Tax changes, Partnership changes,and IRS Audit issues.

 

The 2014-2015 Federal Tax Updates are also available in Self-Study format, allowing you the ease of completing these courses on your own time and now on your iPad or Android Tablet. Gain instant access to video courses and bonus manuals and materials provided by Vern Hoven.

2014-2015 IRA & Individual Retirement Federal Tax Update (3 CPE hours)

  • In this course, Vern discusses the current Tax Codes, cases and rulings affecting IRA and individual retirement plans.

2014-2015 Real Estate & Investment Federal Tax Update (5 CPE hours)

  • In this course, Vern discusses the current Tax Codes, cases and rules affecting real estate taxation.

2014-2015 Estates, Trusts & Beneficiaries Federal Tax Update (2 CPE hours)

  • In this course, Vern discusses the current Tax Codes, cases and rules affecting gift, estate and trust taxation.

2014-2015 Schedule C/F & General Business Federal Tax Update (9 CPE hours)

  • In this course, Vern discusses the current Tax Codes, cases and rules affecting business taxation.

2014-2015 Business Pension Plan & Issues Federal Tax Update (2 CPE hours)

  • In this course, Vern discusses the current Tax Codes, cases and rules affecting pension and IRA contributions and distributions.

2014-2015 Payroll & Self-Employment Tax Federal Tax Update (2 CPE hours)

  • In this course, Vern discusses the current Tax Codes, cases and rules affecting payroll and self-employment taxation.

2014-2015 C & S Corporate Federal Tax Update (3 CPE hours)

  • In this course, Vern discusses the current Tax Codes, cases and rules affecting corporate taxation.

2014-2015 Limited Liability Company (LLC) & Partnership Federal Tax Update (2 CPE hours)

  • In this course, Vern discusses the current Tax Codes, cases and rules affecting partnership and LLC taxation.

2014-2015 IRS Practice & Procedures Federal Tax Update (2 CPE hours)

  • In this course, Vern discusses the current cases and rules affecting the tax preparer’s relationship with the IRS.

2014-2015 Individual & Employee Federal Tax Update (9 CPE hours)

  • In this course, Vern discusses the current Tax Codes, cases and rulings affecting individual taxation.

Find all the information you need to register at cpelink.com or contact Customer Service and one of our knowledgeable Customer Service Representatives will be happy to assist you.

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Best for Spouses to Have a Meeting of the Minds Before Filing

Keeping up to date with the tax law is more than waiting for actual law changes. The numerous court cases issued each week often include reminders about due diligence, reminders for clients, and planning considerations. Of course, some of the court cases, such as regular Tax Court decisions, have new interpretations of the law. One recent case includes a reminder about the need for spouses to coordinate filing to optimize the combined tax result.

In Bruce, TC Summary Opinion 2014-46 (5/12/14), husband (H) and wife (W) were married in 2008. They had two children (including a child of W from a prior relationship). H worked for the Navy and sometimes worked away from home. In 2009, the couple mostly lived in Navy housing. W moved out in 2010, as did H and they sometimes lived with one of their parents. Divorce proceedings began in early 2010 and were complete in February 2011. H moved out of home where he lived with W in December 2010. H e-filed their MFJ 2010 return in February 2011 and told W he’d split the $4,581 refund with her. W provided H with her bank account information. W also told H she would talk to a friend of hers who did tax work. Before 4/15/11, W filed a return as head-of-household, claiming the children as dependents. H did not know.

The IRS sent a deficiency notice to H changing his filing status to MFS and denying him the child credit, dependency exemption and EITC. The Tax Court agreed with IRS. Per §1.6013-1(a)(1), it is permissible to change from joint to separate filing status if done before the due date of the return. W filed her HH return in March 2011.

The court held that W was entitled to the dependency exemptions because the children lived longer with her because H moved out in December 2010. The court also noted that the time H was away for military service does not affect this residency test. Once it was determined that W was entitled to claim the children, H did not qualify for the child credit, dependency exemption or EITC. The court did not uphold accuracy-related penalties against him though because it seemed reasonable for H to assume W was fine with the MFJ return and W even gave H her bank account information so he could give half of the refund to her.

Lesson learned – Most likely, the couple would have had a combined benefit from joint filing status… Joint income was low enough to qualify for the EITC. Also, since it does not appear that H lived out of the home for the last six months of 2010, W should have filed as MFS, not as HH (see IRC 7703(b)). With both H and W using MFS, no one can claim the EITC. Of course, divorcing spouses have additional factors to consider and to avoid joint liability, separate filing is sometimes warranted.

This and other updates of summer will be covered in the Quarterly Tax Update scheduled for August 26.

This post was written by CPE Link Instructor Annette Nellen for her upcoming Live Webcast on August 26, 2014 , Summer Quarterly Tax Update.

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Important IRA and 401(k) Developments

In the past few months there have been a few interesting and important tax developments involving IRA and 401(k) distributions.

A regular Tax Court decision at the end of 2013 involved a wife forging her husband’s signature to withdraw about $37,000 from his IRA account. She used the funds for her personal benefit. Husband did not learn about it until the next year when he received the 1099-R – too late to roll it over. The court found that he was not the distributee as he received no direct or indirect benefit from the withdrawal. The court also excused him from the early distribution penalty. [Roberts, 141 TC No. 19 (12/30/13)]

Another IRA distribution case exposed an error in IRS Publication 590. The Tax Court held that an individual may have only one nontaxable rollover per year regardless of how many IRAs they have. [Bobrow, TC Memo 2014-21] The IRS subsequently issued Announcement 2014-15 providing relief, but only through 2014. The case also presents reminders of the value of an IRS publication in answering tax questions (not much) and whether status as a tax attorney is enough to waive a penalty for reasonable cause (no).

And a decision in late April involving a 401(k) distribution and divorce serves as a reminder that source of funds often matter for tax purposes. As part of a Qualified Domestic Relations Order (QDRO), wife was named an alternative payee of her husband’s 401(k) plan. Husband owed money to the wife and the 401(k) was used to repay her. Wife did not report the distribution on her return (for which she did receive a 1099-R) because it was money husband owed her. No surprise with the court’s conclusion – it’s taxable. Even with application of §1041, husband had no basis in the 401(k) funds and the debt owed to wife did not create any. [Weaver-Adams, TC Memo 2014-73]

Lesson learned – source of funds does matter. Husband should have taken the distribution and used the funds to repay his wife. Wife tried to get the understatement penalty waived saying she relied on her tax professional, that did not work. That also leaves a lesson for tax professionals. Remind clients that 1099s are also reported to the IRS and when they show them to you, you may want to make a copy for your file if you don’t already do so.

These and other tax updates of the past few months will be covered in the spring quarterly update on May 13 (repeated on June 4).

This post was written by CPE Link Instructor Annette Nellen for her upcoming Live Webcast on May 13, Spring Quarterly Tax Update.

 

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New Laws in Gift Planning

Gift & Estate Tax
The American Taxpayer Relief Act (ATRA) of 2012 prevents steep increases in estate, gift and generation-skipping transfer (GST) taxes that were slated to occur for individuals dying and gifts made after 2012. The Act does this by permanently keeping the exemption level at $5,000,000 as indexed for inflation after 2010 (2013 exemption estimated to $5.25 Million at press time). However, the Act also permanently increases the top estate and gift tax rate from 35% to 40%.

Gift & Estate Exemption Reunification
Prior to the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), the estate and gift taxes were unified, creating a single graduated rate schedule for both. That single lifetime exemption could be used for gifts and/or bequests. The EGTRRA decoupled these systems. The Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 (TRUIRJCA) reunified the estate and gift taxes. The ATRA permanently extends unification and is effective for gifts made after December 31, 2012.

Portability of Unused Estate Tax Exemption Made Permanent

The TRUIRJCA allowed the executor of a deceased spouse’s estate to transfer any unused exemption to the surviving spouse for estates of decedents dying after December 31, 2010 and before January 1, 2013. The ATRA makes permanent this provision and is effective for estates of decedents dying after December 31, 2012.

CAUTION – A Form 706 (Estate Tax Return) must be timely filed to obtain the portability.

The basic exclusion amount is $5.12 million for deaths in 2012 and $5 million (subject to an inflation adjustment) for individuals dying in 2013. (Code Sec. 2010(c)(3))

The “deceased spousal unused exclusion amount” is the lesser of:

(1) the basic exclusion amount, or

(2) the excess of the applicable exclusion amount of the last deceased spouse dying after Dec. 31, 2010, of the surviving spouse, over the amount on which the tentative tax on the estate of the deceased spouse is determined. (Code Sec. 2010(c)(4))

A surviving spouse (for convenience we’ll assume it is the wife in this discussion) may use the deceased spousal unused exclusion amount in addition to her own basic exclusion for taxable transfers made during life or her estate may use it on the estate tax return at her death.

If a surviving spouse is predeceased by more than one spouse, the amount of unused exclusion that is available for use by the surviving spouse is limited to the lesser of the applicable exclusion amount (for example, $5.12 million if the spouse died in 2012) or the unused exclusion of the last deceased spouse. (Code Sec. 2010(c)(4))

For the surviving spouse or her estate to use the deceased spouse’s unused exclusion amount, the predeceased spouse’s estate must make an election – referred to as the portability election – on a timely filed estate tax return (Form 706) that includes a computation of the unused exclusion amount. To make the portability election, Form 706 must be filed even if the value of the gross estate is not enough to otherwise require filing an estate tax return. See temporary regulations § 20.2010-22T for detailed rules and guidance on the portability election.

This excerpt is pulled from the Big Book of Taxes 2012 courtesy of Lee T. Reams, Sr.

 

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The Tax Update Adventures, Episode III

[youtube=http://youtu.be/5dv_FktVC7E?hd=1]

The 2010-11 is a tax season to beat all tax seasons. “This year has brought us some of the most interesting tax changes we’ve seen in years—at least interesting to us tax accountants,” says Vern Hoven, CPA, EA and CPE Link instructor, who specializes in demystifying tax legislation.

Who can keep up with all the changes? In the continuing saga of Tax Update Adventures, our hero, Super Tax Preparer, takes on general business updates.

A teashop owner also collects and sells vintage teapots. Is her collecting activity a business or a hobby? Is she engaged in a unified business enterprise? Super Tax Preparer figures it out.

A film writer, director, and producer amasses an extensive collection of materials, including books, magazines, and photos related to the life a famous person, about whom he plans to make a movie. Since these items deteriorate over time, he wants to depreciate them. Super sets him straight.

Leonard wants to buy an SUV for his Ski Lodge business. Should he do it now or wait until January 2012? He’s thinking of a GMC Yukon or a Ford Excursion. Super Tax Preparer has tax-saving information about expensing and depreciation rules that could help him decide.

Mary, a self-employed architect, and her husband Joe each paid $1,200 of Medicare B premiums in 2011. In addition they each paid $3,000 of Medigap insurance premiums to AARP in 2011. Can Mary deduct $8,400 as self-employed health insurance? Super knows the answer.

These and millions more tax adventures await the special powers of our hero.

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Your Annual Tax Update: A Laughing Matter?

AccountingWEB Blogger, Brian Strahle recently posted a piece entitled “Tax Seminars: Are We Having Fun Yet?” where he asks this question in regard to tax seminars: Why do they have to be boring? I contend that tax training does NOT need to be boring and I have proof!


Federal Tax Updates
At CPE Link, we are so pleased to work with Vern Hoven, the guru of Federal Tax Updates, to offer interactive, engaging and entertaining education covering changes in the tax code. This program is really premium stuff. Vern is the consummate professional speaker. First of all, he puts a tremendous amount of work into updating his tax manual each year—ensuring attendees get the most up-to-date information. Next, he carefully scripts his presentation, intentionally plugging in funny “comments” that offer some needed comic relief from the in-depth coverage of the tax code.

In 2009, Vern’s 16-hour Federal Tax Update program, delivered in four 4-hour webcast sessions received excellent ratings from participants. These scores reflected the quality of Vern’s top-notch tax information, but the attendees also loved the entertaining delivery! Don’t take my word for it. Here are some comments from the evaluations:

• “Vern’s humor makes the course enjoyable as well an educational.”
• “Vern’s goofy humor kept me going at times.”
• “Guy was hilarious!!!!”
• “The course was relevant, very informative, and entertaining. Mr. Hoven and Mr. Roos are excellent instructors.”
• “Great presentation on a dry topic.”

The advertising for this course describes Vern’s program as taught in a “high-tech and often humorous” manner, so attendees are tipped off to expect something a little different from this tax program even before it begins. Due to the popularity of last year’s webcasts, in 2010 more sessions will be offered.

The 2010 Federal Tax Updates start in November. I can’t wait to hear the new jokes!

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