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topten April, 2011

This is a monthly reference source. By providing samples of questions and answers, we hope to help you understand that we provide a superior service in our ability to get answers to your questions. There are some general caveats that go along with this presentation. Understand that tax law is fluid and always changing; the answer that is correct today may be incorrect tomorrow. Also be aware that changing one small fact may change the entire answer. We are not trying to give a complete outline of any particular subject. We are attempting to give a general direction that can be taken to resolve a problem or obtain an answer. You should discuss your particular situation with your Fiducial Business Advisor to answer your specific problem or concerns. (You may not rely on any answer given to avoid a penalty.)


Q.1 I inherited a Roth-IRA account from my grandmother. She funded the account in the late 1990s. Do I have to pay tax on the earnings in that account when it is distributed to me?

A.1 As long as the contributions to the Roth have been held in the Roth account for more than five years from the time they were made until the death of the account holder, the distributions from the Roth-IRA are not subject to tax (nor penalty). This is true even if subsequent contributions to that Roth-IRA were made within five years of the date of death.  
Q.2 I inherited real property from my great-uncle that was valued at $250,000 ($200,000 home/ $50,000 land). That was several years ago. I am now getting ready to rent that property for the first time and its value is currently $190,000 ($150,000 home/$40,000 land). What is the basis of the property for depreciation?

A.2 When property is placed in service, its depreciable basis is generally the lower of cost or market value. As your property has declined in value from the time you inherited it, the basis for depreciation would be $190,000 (you still must allocate the basis between the non-depreciable land for $40,000 and depreciable building for $150,000).

Q.3 I was getting ready to have the return prepared for my S corporation (that I formed late last year) when I realized that my attorney had not filed an S election. When I asked my attorney, he thought I would
file the election. Is there anything we can do now?
I have filed an extension for the S corporation return.

A.3 As you have not yet filed a return for the corporation, you may file a Form 2553 with the return under Rev. Proc. 2007-62. You must include a reasonable cause statement with the Form 2553 that outlines the confusion between you and your attorney as to who was going to file the Form 2553. Make sure the return as soon as possible as the relief for the late election must be requested within six months of the original due date for the first S corporation return.
Q.4 I have heard that last year was the final year for the American Opportunity Credit and that now only the Hope/Lifetime Learning Credit will apply for 2011. Is that true?

A.4 The American Opportunity Credit was extended for 2011 and 2012 and therefore, the maximum education credit for those years will be $2,500 for each eligible student.

Q.5 I am a sole proprietor and provide non-discriminatory health coverage for my two employees (unrelated). I understand that this year I can count my self-employed health insurance deduction for both income tax and self employment tax purposes?

A.5 What you heard is true. For 2010 only you may claim your self employed health insurance deduction for both income tax (page 1 of Form 1040) and self-employment tax (Schedule SE) purposes.  
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