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The recent tax legislation, signed into law the first week of 2013, delayed the start of the tax-filing season based on the need for the IRS to update its forms and computers. So the IRS officially started the filing season last Wednesday. There may be further delays for taxpayers taking advantage of certain tax credits, but most of us should be able to start filing now.
If you need help with your return, be careful to not hire a Dumdum, as many people in Chicago did over the past five years. Ray Dumdum, owner of Richman Tax Solutions in Chicago, was sentenced last November to two years in prison for filing false tax returns.
Mr. Dumdum charged $100 to prepare an individual tax return, and saved the average client $1,400 by simply making up deductions. The judge warned Dumdum that he will likely be deported after he finishes his prison sentence.
We all need to feel some compassion for a man who had to spend his whole life as a Dumdum. But now that I’ve warned you what happens when you hire a Dumdum, also be wary of hiring a firm with the Marx Brothers’ name Dewey, Cheatam, and Howe.
Q: I recently withdrew money from my IRA account (December 2012; I am 61 years old) for a down payment on a house. Will I have to claim this money as income in 2012, or can I roll it over as a real estate IRA?
A: You will have to report the distribution as income. There is a first-time home purchase exception to the 10 percent penalty that applies when someone who has not reached age 59 1/2 takes a distribution, but since you are age 61 you have no penalty worries.
But there is no exception to the general rule that the distribution is part of your 2012 income. If your IRA had tax basis because you did not deduct some or all of the contributions, not all of the distribution would be taxable.
If you have had nondeductible IRA contributions, you would have filed Form 8606 with prior tax returns — if so, that form will tell you your tax basis.
Q: We have a family S corporation and last year I made stock gifts to my children. My accountant has tracked the basis of this stock over the years and it was about $20,000 per share when the gift was made, but the value of the stock was only $12,000 per share. We had losses last year that will be shown on the shareholders’ returns. We have been told that the tax basis of the kids’ shares is $12,000 if they later sell at a loss, and $20,000 if they sell at a gain. But we need to know what basis they use to determine if they can deduct the 2012 losses that will be allocated to their shares.
A: Generally when shares are transferred by gift, the donee takes the same tax basis as the donor. A special rule applies when the gifted property has a tax basis to the donor that is more than the fair value of the property.
This special rule exists so that stock with an unrealized loss cannot be used to shift that loss to the donee. So the donee ends up with two tax basis figures, one for gain and the other for loss.
So your children will only be able to report a loss from a sale of the stock if it declines in value below the $12,000 date-of-gift value. But if the stock value increases, they will be able to use your $20,000-per-share basis before any gain has to be reported.
The losses that you expect to allocate to the kids for 2012 are subject to the loss rule noted above. That means they can only use $12,000 of tax basis as the limit for currently allowed losses.
Any allocated losses that exceed their basis may be carried to future tax years and will be allowed when they do have sufficient tax basis. Also be aware that even if they have enough tax basis, the losses may be suspended if their involvement is passive in the business.
James R. Hamill is the director of Tax Practice at Reynolds, Hix & Co. in Albuquerque. He can be reached at jimhamill@rhcocpa.com.<br>
