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Why are divorced parents only allowed to claim one-half of the college savings subtraction if filing single?
Answer: Section 71.05(6)(b)32.a., Wis. Stats., provides that the college savings account subtraction per beneficiary by a formerly married couple may not exceed $3,000 and the maximum amount that may be deducted by each former spouse is $1,500, unless the divorce judgment specifies a different division of the $3,000 maximum that may be claimed by each former spouse.
Note: The amounts are adjusted for inflation each tax year.
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In 2015, Individual received a $5,000 distribution from a college savings account that was used for nonqualified expenses. Contributions to the college savings account that were subtracted on prior Wisconsin income tax returns were as follows:
| Date Contributed | Amount |
|---|
| December 31, 2012 | $3,000 |
| December 31, 2013 | $3,000 |
| December 31, 2014 | $3,050 |
No contributions were made in 2015.Does Individual have to addback any portion of the distribution to income for 2015?
Answer: Yes. In addition to any earnings includable in federal adjusted gross income, nonqualified distributions must be added to Wisconsin income for amounts contributed to a college savings account since January 1, 2014. Contributions last contributed to the account are considered distributed first (LIFO). Individual must add back to income $3,050 on his 2015 Wisconsin individual income tax return.
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The balance in Individual's Edvest account on January 1, 2014, was $2,500 (plus earnings). Individual contributed $3,050 to the account on September 1, 2014. On August 1, 2015, Individual withdrew $4,000 (plus earnings) from the account. Since contributions were made within 365 days of the distribution, does any portion of the distribution have to be added back to income for 2015?
Answer: Yes. Using the first-in, first-out method (FIFO), $1,500 ($4,000 - $2,500 = $1,500) is required to be added to income since that portion of the withdrawal occurred within 365 days of the contribution.
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Beginning January of 2001, Individual contributed $100 each month to an Edvest account for his child. On January 1, 2014, the account included $15,600 of contributions plus earnings. Individual continued to contribute $100 a month through 2014 and 2015. In August 2015, Individual withdrew $8,000 from the account to pay tuition for his child to attend college. Since contributions were made within 365 days of the distribution, does any of the distribution have to be added back to income?
Answer: No. Even though a portion of the distribution was within 365 days of the date of some contributions, using the FIFO method, the first contributions to the account (contributions first made in 2001 and thereafter) are the first amounts withdrawn and were not within 365 days of the distribution.
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A contributor to a college savings account is required to reduce his or her carryover for a nonqualified distribution. However, if the owner of the account who received the distribution is not the contributor, how does the contributor know there was a distribution used for nonqualified expenses?
Answer: It is expected that the owner of the account who received a distribution and used it for nonqualified expenses would notify the contributor.
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Will the Form 1099-Q, Payments From Qualified Education Programs Under Sections 529 and 530, always be sent to the owner of the 529 college saving account even if the distribution check is written to the beneficiary?
Answer: Annually, the Plan will issue a Form 1099-Q to each distributee for any withdrawal(s) made from an account in the previous calendar year. The Form 1099-Q recipient is deemed by Edvest to be the Account Owner unless the withdrawal is paid to the Beneficiary or an Eligible Educational Institution on behalf of the Beneficiary, in which case the Beneficiary is the recipient.
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Is DOR requiring additional certifications for taxpayers to claim farmland preservation credit?
Answer: No. The Department of Agriculture, Trade and Consumer Protection (DATCP) is working with the counties to issue new numbers for each certificate of compliance. The department may be requesting the new numbers be entered on the 2016 Schedule FC-A. Additional information will be provided by DATCP and DOR as this process develops.
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A farmer buys beef cattle at $900 per head. These cattle are castrated and raised for meat. The farmer raises corn and feeds it to the cattle. The land where the corn is grown and the cattle are raised is assessed as agriculture property under sec. 70.32(2)(a)4., Wis. Stats. The farmer meets all other requirements for the agriculture tax credit. After four months, the farmer sells the beef cattle for $1,500 per head. Does the gain from the short-term sale of these beef cattle (holding period of less than one year) qualify as production gross receipts?
Answer: Yes. If the animals were raised by the claimant on property that is assessed as agricultural property under sec. 70.32(2)(a)4., Wis. Stats., the sale of the animals qualifies as production gross receipts. The department considers an animal "raised" if it was held by the claimant for more than one year. However, certain exceptions may apply. For example, a feedlot that is used for controlled feeding of animals to fatten them up prior to sale to a slaughterhouse is "agriculture use" property under sec. 70.32(2)(a)4., Wis. Stats., even if the animals are held for less than one year.
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Does the rate reduction to 5.025% from 5.526% apply to both the manufacturing and agricultural portions of the credit?
Answer: Yes.
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In calculating the 2014 agriculture tax credit, the premiums expense for crop damage insurance was an indirect expense. In
Wisconsin Tax Bulletin 189 (July 2015), page 11, the definitions for "direct cost" and "indirect cost" were revised. Do these new definitions change the category for crop damage insurance premiums expense?
Answer: No. Premiums expense for crop damage insurance is an indirect expense of the farming operation. The change in definitions only addressed how reference to the Internal Revenue Code was made.
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Taxpayer has personal property that is assessed as manufacturing under sec. 70.995, Wis. Stats., and files Form M-P for personal property. The taxpayer is a tenant in a mixed use building that is not assessed as manufacturing. The landlord doesn't file an M-R for the real estate. Must both the personal and real property be assessed as manufacturing to claim the manufacturing tax credit?
Answer: No. A manufacturing tax credit claimant must generate receipts from the lease, rental, license, sale, exchange, or other disposition from tangible personal property manufactured in whole or in part on property that is assessed as manufacturing under sec. 70.995, Wis. Stats. In sec. 70.995, Wis. Stats., "manufacturing property" includes both real and personal property.
The credit does not require the claimant to have both real and personal property assessed as manufacturing. Assuming the claimant meets all other requirements for the credit, Schedule MA-M, line A, should include the personal property account number and line B should be blank for the real property account number.
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Can a federal election for asset class life be different for Wisconsin?
Answer: No. The IRS does allow an election for a different asset class life for certain types of property. However, a taxpayer must use the same method of accounting for federal and Wisconsin tax purposes (sec. 71.30(1), Wis. Stats.). Using a different asset class life for depreciation is a different method of accounting.
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If I have a trust set up for a disabled person, can I withdraw from the trust and contribute it to an ABLE account to claim the subtraction? Are there tax implications to the trust?
Answer: Whether a person can withdraw funds from a trust is dependent upon the trust instrument. Whether a trust is eligible to contribute to an ABLE account will depend on administrative rules and/or policies implemented by the Department of Administration or applicable federal agencies. We cannot provide any other specific tax guidance regarding trusts at this time.
Caution: Although a subtraction for a contribution to an ABLE account is available for tax year 2015, ABLE accounts are not likely to be available for Wisconsin residents until the middle of the 2016 calendar year.
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Individual failed to carry over Wisconsin long-term capital losses from 2009 to 2010 and subsequent tax years. Individual had other business losses in 2010, 2011 and 2012 that offset all income. The 2010 tax year is closed under the statute of limitations. Can amended returns be filed for 2010 to 2014 to claim the long-term capital loss carryforward from 2009?
Answer: Amended returns can only be filed for years that are open to adjustment under the statute of limitations.
Section 71.05(10)(c), Wis. Stats, provides an addition or subtraction for "The amount required so that the net capital loss, after netting capital gains and capital losses to arrive at total capital gain or loss, is offset against ordinary income only to the extent of $500. Losses in excess of $500 shall be carried forward to the next taxable year and offset against ordinary income up to the limit under this paragraph. Losses shall be used in the order in which they accrue."
Under this paragraph, there is no election whether or not to use a capital loss carryover in a particular year. The loss must be carried forward to the next taxable year and offset against ordinary income (unless there is no ordinary income) for each succeeding year. Therefore, if someone computed their income for a closed year without deducting an allowable capital loss, they computed their income incorrectly. As a result, the capital loss deduction that should have been deducted for that closed year is lost (see exception below) and the capital loss carryforward must be reduced.
Exception: If a capital loss deduction creates or increases an NOL for the closed year, the taxpayer is allowed to recompute their NOL for the closed year and carry forward the NOL to an open year.
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At last year's fall practitioner's presentation, it was stated that, with respect to the five-year basis modification, if a taxpayer dies before the five-year period is complete, report the 20% modification on the final year return and the balance is lost. What happens if the property was in a trust?
Answer: The tax treatment of the five-year basis modification depends on how the trust is classified for federal income tax purposes.
Business Trusts
If a trust is classified as a corporation and the death of an owner causes a liquidation, the treatment of the five-year basis modification would follow that of a corporate liquidation as described in
Question and Answer 7 of our Basis Modifications
Common Questions.
If a trust is classified as a disregarded entity of an individual (e.g., sole proprietorship), the treatment of the five-year basis modification would follow that of an individual as described in
Question and Answer 9 of our
Common Questions.
Ordinary Trusts
An ordinary trust does not operate a business so it would be unlikely it would hold assets subject to depreciation and the five-year basis modification. However, if the ordinary trust did own depreciable property on December 31, 2013, the tax treatment of the five-year basis modification depends on whether the trust is required to file a separate return from its beneficial owner.
- If a trust is required to file an income tax return, the five-year basis modification is used in determining the trust's Wisconsin net income.
- Income distributed to the beneficiaries, which may include the basis modification, is used in computing the beneficiaries' Wisconsin net income.
- Income not distributed to the beneficiaries, which may include the basis modification, remains taxable at the trust level.
- If a trust is not required to file an income tax return (e.g., revocable grantor trust), the five-year basis modification is calculated on the grantor/beneficiary's income tax return without regard to the trust.
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How does the basis adjustment apply when a sole proprietor forms a partnership with his son as of January 1, 2015? Would the sole proprietor still receive 100% of the basis adjustment over the five-year period even for the assets he contributed to the partnership?
Answer: The treatment of the basis adjustment when a sole proprietorship reorganizes to a partnership is the same as when a sole proprietor reorganizes to a C corporation. The sole proprietor is entitled to the subtraction from income for the 2014 through 2018 tax years.
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An LLC taxed as partnership was owned by father (70%) and son (30%). As of January 1, 2015, the partnership became a single member LLC owed by another partnership in which that same father and son own an equal share of the partnership. Would the basis adjustment still be split 70/30 between the father and son because that is how it was figured as of 12/31/13?
Answer: The change in ownership on January 1, 2015, is similar to the facts in Situation 2 of
IRS Revenue Ruling 99-6. The partnership is deemed to have made a liquidating distribution to its partners. Therefore, the treatment would follow that in Example 2 of Question and Answer 6 of the
Common Questions. On the 70/30 partnership's 2015 final tax return, the partnership must report to the father and son the 70/30 proportionate shares of the unamortized balance and the remaining amortization period. The father and son may claim a subtraction from income for the 2015 through 2018 tax years. No basis modification is transferred to the 50/50 partnership that is owned by the father and son.