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The Tax Tips Blog – Answers to your Federal tax – globe tax

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The Tax Tips Blog – Answers to your Federal tax questions The required minimum distributions...

The Tax Tips Blog – Answers to your Federal tax questions

The required minimum distributions rules for Individual Retirement Accounts (IRAs) rely on IRS provided tables that use standardized life expectancies based upon your age. When using their tables (IRS tables) you use your age as of the end of the year to which the distribution applies, and the Fair Market Value of all your IRAs as of the beginning of the year.

CCH has an easy to use calculator here:  RMD   When using their calculator, you should enter your beneficiaries age if you have one. Because of the distribution rules that cover what to do when you don’t have beneficiary, I recommend that you do have a beneficiary.

Stimulus Rebate and Dependents

People claimed on another’s return do not qualify for the Stimulus Rebate. When deciding if parents should claim their child for one last year, the Stimulus Rebate should be considered. There are no age limits on the Rebate that I am aware of. We often compare the total tax a family would pay two ways. With them claiming their child and without them claiming the child. This often occurs when children are of college age. The potential $600 that they could get, if they have enough income, should be considered when figuring who should claim the child, MAYBE.

Part of my uncertainty here is caused by what I call the 2008 Make Up filing. I expect that those who missed out on this May’s payment will still have chance at getting it later. According to the IRS, “If you’re not eligible this year but you become eligible next year, you can claim the economic stimulus payment next year on your 2008 tax return.” 

So, if a child aged 18 is claimed by their parents for 2007, can they next year when filing their 2008 return, in effect claim that they are entitled to their $600, because they actually claimed themselves on their 2008 return, the period to which the Stimulus Rebate is tied to? If this is allowed, the parents can benefit from claiming them for one more year, and they can get the rebate. This is different than the rule that says, dependents can’t get the rebate. I am not offering an opinion about whether this will be possible? I am asking for my readers comments on it.

Lease with Option to Buy Real Estate

I have a client who is renting out their former residence and giving the renter a $1000 credit per month towards the purchase of the house at the end of a 2 year lease. The question is, did my client really sell his house or is he leasing it out? There doesn’t seem to be a hybrid answer where the $1000/month is treated differently from the rent payment. The IRS has I think in this case said that you have one or the other and that the total monthly payments are either all rent or all payments on the sale of the house. We ended up here, treating all the payments as rent income, based on the circumstances. I good description of the rules is available from CIRE Magazine:   Lease Option

Unrecovered costs at death in annuities and retirement plans

There’s a question of what to do with the remaining basis of an annuity upon the death of its owner? In Minnesota many people receive Public Employee Retirement Association (PERA) when they retire. I expect to see on their 1099-Rs a slightly larger Gross distribution than Taxable distribution. The difference represents a part of their unrecovered basis in the plan (of their after tax money). Where does this untaxed money go upon their death? I think it goes to their beneficiary when there is one. 

I noticed a surviving spouse taking over the payments recently. The spouses 1099-R didn’t show basis because the Gross distribution equaled the Taxable distribution. It seems we should either convince PERA to change how it does things, or find out what the remaining basis is and figure the basis recovered each your ourselves.

In looking into this issue if found this clear as mud support for my position:   Basis    Cornell who has this information is thanked. The problem with trying to understand it is with the IRS, who wrote what Cornall reproduces, who often fails to write in simple terms for normal people. I can also write that carrying forward and using this uncovered basis makes sense to an accountant because it balances the books. Because the money that was once taxed, is not taxed again.

“the deduction…   …shall be allowed to the person entitled to such payments for the taxable year in which such payments are received.” – The IRS

Reporting Sales of Covered Calls

Selling Covered Calls is when you own a stock and sell the right for someone else to “Call” it away from you and make it theirs, at an agreed upon price. If your stock is trading for $100/share, you might sell a call for sometime to buy it at $105/share. So, if the stock rises above $105 before the call expires, this other person will most likely buy it. If the stock prices rises to $110, they can buy it from you for $105 and turn around and sell it for $110, making a quick profit. So what would sell such an option for? The market will determine this. I’d say all calls have an expiration date.

It to me is similar to selling an option on land. You can sell an option for someone to buy your land at an agreed upon price for a certain amount of time. The question de jour is, how to report the money from covered call sales on your 1040? 

If the Call expires worthless, that means it isn’t exercised, you report the income as capital gain. If the stock is called away from you, you add it to your Gross Proceeds when you report the sale of the stock, you just had to sell, because it was called away from you.

Most Covered Calls are written for less than a year. So the next question is, is the income from an expired call Long or Short term gain? It has some attributes of both long and short term. If the stock is called, this money is treated the same as the underlying stock, so it would be long term if the stock has been held for more than a year. But in the case of an expired call, it seems a short term bet was made that the stock wouldn’t rise much. That’s a question this CPA wishes to look into another day, and I’d appreciated your comments hopefully with links that support your position.

Brokers are getting good about providing Realized Gain and Loss Summaries. If you receive one of these from your Broker to help you with your income taxes, and you have Covered Call Sales, ask the broker if they correctly treated the Sales by adding them to any stock that was Called? And then ask them to prove it to you, by showing how they came up with the basis numbers related to covered calls sales?



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