In this issue, we address some topics the Tax Help Desk has encountered, including capital losses in estate property sales, and opportunities related to tax reform.
Q-1: Regarding the personal residence of a deceased individual that is inherited by family members as beneficiaries of the decedent’s estate…Can a loss be taken or deducted upon the sale of the decedent’s residence by the beneficiaries of the estate?
A-1: Yes, the sale of the personal residence of the decedent—which receives a stepped-up basis under IRC Sec 1014—can produce a deductible capital loss to the beneficiaries. The capital loss is the product of the closing costs and the capital improvements that are made, or incurred, by the beneficiaries.
The fair market value (FMV) at the date of death, and the stepped-up basis, becomes the basis of the asset—the former home of the decedent—to the beneficiaries. They then need to fix-up the residence prior to its sale, adding costs to the basis. The sale also produces some closing costs, which are part of the basis upon the sale of the residence. This may mean that the sales price (which is typically the FMV at date of death) is going to be less than the basis, thus producing a loss on the sale.
The key here is that the personal residence is considered a capital asset in the hands of the beneficiaries, as long as none of the beneficiaries move into the decedents’ residence, or fail to move out after the death of the taxpayer. So the old home of the decedent really needs to be vacant, be listed for sale, or in the process of being fixed-up and sold, to create this capital loss.
Q-2: Another issue or question that seems to be popular—which is also pertinent to the death of a taxpayer—is the whole estate tax issue. It was on the verge of repeal with this latest tax law change, but survived. The use of trusts, and the need for estate tax planning has become, or will become less necessary. The Tax Cuts and Jobs Act of 2017 (TCJA) literally doubles the basic estate tax exclusion under IRC Sec 2010.
A-2: This change in the tax law does not eliminate estate planning, it just changes the landscape a bit. What it does, is open an opportunity, to discuss estate planning with your clients. Tax practitioners and accountants have the perfect chance to review a client or taxpayer’s estate plan, including: trusts, wills, the possible need to modify or eliminate an irrevocable trust, or evaluate a taxpayer’s A/B trust plan.
Another key point is that we still need to be aware of estate planning as an issue, because State estate rules may not follow the Federal law changes.
The fact that this issue is addressed in the Tax Cuts and Jobs Act of 2017 simply gives us some opportunity for an additional engagement and some billings this summer.
Q-3: At the Tax Help Desk we have been receiving a lot of questions regarding S-Corporation shareholders’ health insurance premiums. This issue has had more “ups and downs” than a roller coaster ride.
A-3: The S-Corporation shareholder can still take a self-employement health insurance deduction under the provisions of IRS Notice 2008-1. This is the whole included in the W-2, but not subject the amount to FICA, and Medicare, withholding rule.
There are some new rules regarding medical reimbursement plans and one really needs to look at IRC Sec 9831(d). This code section covers the new qualified small employer health reimbursement arrangement (QSEHRA). There are also IRS Notices that tax practitioners really need to look at in the area of S-Corp health insurance. So before you talk to your S-Corp shareholder, look at the IRC Section mentioned above, as well as IRS Notice 2015-17, IRS Notice 2017-20 and 2017-67. This should provide you and your client with all you need for a “new” HRA.
Q-4: Is the Net Operating Loss (NOL) carryback really going away?
A-4: Yes, unfortunately, this is true and is effective for an NOL arising in tax years ending after December 31st of 2017. This is a part of the new Tax Cuts and Jobs Act of 2017. So for this filing season—right now, filing the 2017 tax return—will be the last year that tax practitioners will be able to take our clients’ NOL’s back two (2) years to claim refunds.
Beginning with the 2018 tax returns that we will file in calendar year 2019 taxpayers can only carry an NOL forward, but there will be no limit to the number of years that it can carry forward. In other words, the NOL carryforward will no longer be limited to 20 years.
There is one exception to this loss of a carryback, and that is regarding a farming loss. The farming loss ,or farming NOL, as defined within IRC Sec 263A(e)(4), will still be afforded a two (2) year carryback under the new law.
In conclusion, there are many tax rules and laws that we need to keep straight in our minds as we file our taxpayers’ 2017 Form 1040’s. At the same time we have to keep in mind all of the changes that this new tax act has brought to everyone’s attention. This will make for a rather trying tax season as two sets of tax laws will be playing on our minds, if not also in the minds of our clients.
We wish you success and profits in the upcoming tax season and do not hesitate to take advantage of your NSA Member benefits and use the Tax Help Desk. You have 5 free questions every year that you can submit to us, and we are here to help. Drop us an e-mail anytime.