South-Western Federal Taxation: Individual Income Taxes 2015 Edition

Hoffman/Smith

South-Western Federal Taxation: Individual Income Taxes 2015 Edition

ISBN: 9781285438849

ERRATA SHEET

Chapter 5

Page 5-7

The Code, however, provides five exceptions to the rule illustrated in the preceding example. These exceptions permit exclusion treatment for transfers to the following:

1. The insured under the policy.
2. A partner of the insured.
3. A partnership in which the insured is a partner.
4. A corporation in which the insured is an officer or a shareholder.
5. A transferee whose basis in the policy is determined by reference to the transferor’s basis.

Chapter 6

Page 6-34

1. LO.1 Nanette is a first-grade teacher. Potential deductions are charitable contributions of $800, personal property taxes on her car of $240, and various supplies purchased for use in her classroom of $225 (none reimbursed by her school). How will these items affect Nanette’s Federal income tax return for 2014?

Chapter 10

Page 10-29

10-7 Comprehensive Example of Schedule A

Harry and Jean Brown (ages 66 and 67, respectively), married filing jointly, had the following transactions for 2013:

Chapter 12

Page 12-17 and 12-18

Example 17

Tom had $20,000 interest income from corporate bonds and $5,000 dividends from preferred stock. He reported the following amounts of investment income for regular income tax and AMT purposes:

Regular Income Tax / AMT
Corporate bond interest / $20,000 / $20,000
Preferred stock dividends / 5,000 / 5,000
Net investment income / $25,000 / $25,000

Tom incurred investment interest expense of $10,000 to the corporate bonds. He also incurred $4,000 interest on a home equity loan and used the proceeds of the loan to purchase preferred stock. For regular income tax purposes, this $4,000 is deductible as qualified residence interest. His investment interest expense for regular income tax and AMT purposes is computed below.

Regular Income Tax / AMT
To carry corporate bonds / $10,000 / $10,000
On home equity loans to carry preferred stock / 4,000 / -0-
Total investment interest expense / $14,000 / $10,000

Investment interest expense is deductible to the extent of net investment income. Because the amount deductive for regular income tax purposes ($14,000) differs from the amount deductive for AMT purposes ($10,000), an AMT adjustment is required.

AMT deduction for investment interest expense / $14,000
Regular income tax deduction for investment interest expense / (10,000)
Negative AMT adjustment / $4,000

Chapter 18

Page 18-14

Special Rules for Small Farmers

The general tax accounting rules contain several exceptions specifically addressed to farmers. Although inventories are material to farming operations and the accrual method would appear to be required, the IRS long ago created an exception to the general rule that allows small farmers to use the cash method of accounting.39

Chapter 19

Page 19-28 and 19-29

Rollovers and Conversions: Roth IRAs

A Roth IRA may be rolled over tax-free into another Roth IRA.

A traditional IRA may be rolled over or converted to a Roth IRA. A conversion occurs when the taxpayer notifies the IRA trustee that the IRA is now a Roth IRA. 70Once the taxpayer has the funds in a Roth IRA, the rules for Roth IRAs apply.71

Unlike a traditional IRA, which requires withdrawals at age 70 ½, there are no required withdrawals from a Roth IRA. Thus, money can be accumulated over the taxpayer’s lifetime and then passed to heirs without tax penalties.

When a traditional IRA is rolled over or converted to a Roth IRA, the tax consequences depend on whether the traditional IRA was deductible or nondeductible. If deductible, the basis for the IRA is zero. Thus, the entire amount of the rollover or conversion is included in gross income. If nondeductible, the basis for the IRA is equal to the sum of the contributions. Thus, only the IRA earnings included in the rollover or conversion are included in gross income. The 10 percent penalty tax will not apply in either case. 72

Whether or not to convert a traditional IRA to a Roth IRA is a tax planning consideration. It can be considered for purposes of planning for current year tax consequences, retirement planning, estate planning and general asset planning.

Distributions from qualified retirement plans, § 403(b) annuities, and governmental § 457 plans also can be rolled over into a Roth IRA.73

70§ 408A(c)(6) and (e)

71 Additional details on traditional and Roth IRAs can be found in IRS Publication 590, Individual Retirement Accounts (IRAs).