Decisions — Information please

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By Mistergsongs (Own work) [GFDL (http://www.gnu.org/copyleft/fdl.html) or CC BY-SA 3.0
(http://creativecommons.org/licenses/by-sa/3.0)], via Wikimedia Commons

The IRS may not be your first choice as a pen pal. But if you have a general question about tax law and you write the IRS or your congressional representative, you might get an answer. Generally, the answer is in the form of an “information letter,” furnished by the IRS National Office in response to this type of request.

Here’s a sample of what you can learn from information letters.

1.

What do you think it would cost a taxpayer to request a private letter ruling on the federal income tax treatment of costs to remove a dam on his property?

Make your selection, then hover your mouse
over the link beneath “The IRS Answer”

or

THE IRS ANSWER

For a full explanation, hover your mouse over the link

Source: Information letter number 2015-0031

2.

Do you know how the penalty for not having health insurance is calculated?

Make your selection, then hover your mouse
over the link beneath “The IRS Answer”

Is the penalty based on

or

THE IRS ANSWER

For a full explanation, hover your mouse over the link

Source: Information letter number 2015-0033

3.

Are nursing care benefits associated with Holocaust restitution payments subject to federal income tax?

Make your selection, then hover your mouse
over the link beneath “The IRS Answer”

or ?

THE IRS ANSWER

For a full explanation, hover your mouse over the link

Source: Information letter number 2015-0034

4.

How many rollovers can be made between Roth IRAs in any one-year period?

Make your selection, then hover your mouse
over the link beneath “The IRS Answer”

or

THE IRS ANSWER

For a full explanation, hover your mouse over the link

Source: Information letter number 2015-0035

5.

Do the tax rules for IRA prohibit a financial institution from limiting the investments available to IRA owners?

Make your selection, then hover your mouse
over the link beneath “The IRS Answer”

or ?

THE IRS ANSWER

For a full explanation, hover your mouse over the link

Source: Information letter number 2015-0042

6.

What’s the last date you can make an IRA contribution for the prior year (for example, making a 2015 contribution in 2016)?

Make your selection, then hover your mouse
over the link beneath “The IRS Answer”

or

THE IRS ANSWER

For a full explanation, hover your mouse over the link

Source: Information letter number 2015-0043

7.

After a taxpayer transfers United States Series I savings bonds to a revocable trust, is the taxpayer required to recognize and report interest earned on the bonds?

Make your selection, then hover your mouse
over the link beneath “The IRS Answer”

or ?

THE IRS ANSWER

For a full explanation, hover your mouse over the link

Source: Information letter number 2015-0044

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Note: Taxing Lessons provides a summarized version of sometimes lengthy court decisions. The full case may include facts and issues not presented here. Please use the link provided in the post to read the entire case.

This information should not be considered legal, investment or tax advice. Taxing Lessons and Top Drawer Ink Corp. do not provide legal, investment or tax advice. Always consult your legal, investment and/or tax advisor regarding your personal situation.

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In general, the user fee for a private letter ruling is:

• $2,200 for persons with income of less than $250,000

• $6,500 for persons with income of $250,000 or more but less than $1,000,000

• $28,300 for persons with income of $1,000,000 or more

However, the IRS generally does not issue private letter rulings on matters that are primarily factual.

In general, taxpayers must add the costs of improvements to real property to the basis of the real property (section 263 of the Internal Revenue Code). Publication 530, Tax Information for Homeowners, contains information about costs that taxpayers may or may not add to the basis of real property.

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Under section 5000A of the code, for each month beginning in January 2014, an individual must have qualifying health care coverage (known as minimum essential coverage), have an exemption, or make a shared responsibility payment with the individual’s federal income tax return.

For any tax year, the amount of the shared responsibility payment depends, in part, on the taxpayer’s household income. Under the applicable law, the household income is the sum of the taxpayer’s (and, if the taxpayer files a joint return with the spouse, the spouse’s) modified adjusted gross income and the modified adjusted gross income of every individual whom the taxpayer properly claims as a dependent and who is required to file his or her own federal income tax return. A dependent’s income is not included, if the dependent is not required to file a tax return but does so for other reasons such as to claim a refund.

If a taxpayer files a joint return, household income must include their modified adjusted gross income. In addition, household income must include the modified adjusted gross income of any dependent required to file their own tax return. Household income includes the modified adjusted gross income of all these individuals, regardless of whether they have minimum essential coverage. Legislation would be necessary to change this requirement. The IRS does not have authority to change the statutory requirement.

The applicable law provides exemptions for certain individuals without minimum essential coverage from the shared responsibility payment liability. We list and explain these exemptions, including the exemption for individuals for whom minimum essential coverage is considered unaffordable, on our website.

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For federal income tax purposes, excludable restitution payments received by an eligible individual are not included in gross income (Economic Growth and Tax Relief Reconciliation Act of 2001, Pub. L. No. 107-16, section 803; Holocaust Restitution Tax Fairness Act of 2002, Pub. L. No. 107-358.

A letter from the Austrian Consulate General establishes that this taxpayer is a Holocaust victim of the Nazi regime, thereby qualifying him as an eligible individual. The letter also explains that the pension is paid by the Republic of Austria and constitutes restitution for harm done to the taxpayer.

In a previous letter, the IRS concluded that the pension payments received by the taxpayer are Holocaust restitution payments and are therefore not subject to federal income tax. Thus, the nursing care benefits associated with the pension he receives would also qualify as Holocaust restitution payments excludable from income under federal income tax law.

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The limit on the number of IRA rollovers, including Roth IRA rollovers, is in section 408(d)(3)(B) of the internal revenue code. This section provides that an individual may make only one IRA rollover in any 1-year period.

The IRS had interpreted this limitation to apply on an IRA-by-IRA basis, so that if an individual had rolled over a distribution from one IRA to another IRA, no more rollovers of distributions from these IRAs could be made for a year. Nonetheless, rollovers of distributions from the individual’s other IRAs would not be affected.

However, in 2014, the US Tax Court ruled, in Bobrow v. Commissioner, T.C. Memo. 2014-21, that the IRS’s interpretation was incorrect and that the limitation applied on an aggregate basis, meaning that a rollover could not be made if the individual had made an IRA rollover involving any of the individual’s IRAs in the prior 12 months. In Announcement 2014-32, we said we would apply the tax court’s ruling to IRA distributions that occur on or after January 1, 2015.

Section 408(d)(3)(B) only applies to rollovers and does not affect the number of trustee-to-trustee transfers an individual can make between IRAs. A trustee-to-trustee transfer can be accomplished not only by transferring funds directly from one trustee to another, but also by giving the IRA owner a check made out to the new IRA trustee.

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Right answer!

The taxpayer owns a rollover IRA and a Roth IRA, both maintained with a financial institution in the United States. Beginning in 2013, the financial institution sent several letters informing her of the institution’s decision to place certain restrictions on the investments available for her two IRAs. Specifically, customers of the financial institution who reside outside the United States will have very limited investment choices for their accounts.

Section 408 of the Internal Revenue Code contains the rules for IRAs, and the only restricted investments are collectibles (section 408(m)) and life insurance (section 408(a)(3)). The IRA rules do not prohibit a financial institution from limiting the investments available to IRA owners. Generally, an IRA owner can roll over or transfer funds from one IRA to another to get better investment choices from a different financial institution.

Please note a distribution from an IRA before age 59½ could subject the recipient to a 10% additional tax.

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As soon as a traditional IRA is opened, contributions can be made to it through the chosen sponsor (trustee or other administrator). Contributions can be made to an IRA for a year at any time during the year or by the due date for filing your return for that year, not including extensions (which would be by April 15th for most taxpayers).

If you designate your deposit to be for 2014, you must verify that the deposit was actually made to the account by the due date of the return (without regard to extensions). If the deposit is not made by that date, the deposit is not an IRA contribution for 2014.

If an IRA contribution is made for a year, the taxpayer can change his or her mind and withdraw the contribution by the due date of the taxpayer’s return for that year if (1) the taxpayer did not take a deduction for the IRA contribution, and (2) the taxpayer withdraws any interest or other income earned (or losses incurred) on the contribution.

For example, if a contribution is made for 2015, a taxpayer could withdraw the contribution before the taxpayer’s April 15, 2016, due date for the taxpayer’s tax return.

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In general, the owner of Series I bonds may defer reporting the accrued interest on the bonds on the owner’s federal income tax return until the bonds mature or are disposed of.

If the bonds are issued in the names of co-owners, the identity of the owner who must report the interest income is determined by the source of the funds used to purchase the bonds, not by the names or Social Security numbers on the bonds. Therefore, if one of you contributed all of the money used to purchase the bonds, the interest income would be taxable to the contributor.

If the owner of Series I bonds transfers them to a trust, and the transferor is considered the owner of the trust (i.e., a “grantor trust”) for federal income tax purposes, the transferor may continue to defer reporting interest accrued each year. For example, a transferor is treated as the owner of a trust if the transferor can revoke the trust. The transferor must include the total interest accrued in his or her income when the bonds are redeemed or finally mature, whichever is earlier.

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