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You make the callBy: NATP Research
May 26, 2022

Question: Joe and his two friends enjoy placing wagers on horse races. Joe has established an online betting account with one of the prominent gambling websites. For the Kentucky Derby, they pooled their funds and placed some bets, including the longshot that went off at 80 to 1 odds. Lo and behold, the following February, Joe received a Form 1099-K, Payment Card and Third Party Network Transactions, for $27,000. Because they had pooled their funds three ways and split the winnings evenly, how does Joe handle showing the income allocable to his two friends?

Answer: Generally, if you receive a Form 1099 for amounts that actually belong to another person, you are considered a nominee recipient. The nominee recipient, not the original payer, is responsible for filing the subsequent Forms 1099 to show the amount allocable to the other owners.

Furnish subsequent Forms 1099 by following these steps:

  • Prepare the same type of Form 1099 for each of the other owners, showing the amounts allocable to each. These forms will be sent to each owner and the IRS as well.

  • On each new Form 1099, list yourself as the “payer” and the other owner as the “recipient.” On Form 1096, Annual Summary and Transmittal of U.S. Information Returns, list yourself as the “Filer.”

  • Send the new Form 1099 along with Form 1096 to the IRS Submission Processing Center for your area. To find the address, reference the 2022 General Instructions for Certain Information Returns.

  • Mail each owner their Form 1099.

Note that a spouse is not required to file a nominee return to show amounts owned by the other spouse.

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Which topics did our members ask about most during the 2022 filing season? By: National Association of Tax Professionals
May 23, 2022

The 2022 tax filing season has come and gone, and our research services team once again answered numerous questions addressing a wide variety of tax topics. While the questions we received involved specific tax situations members were facing with their clients, a handful of topics kept popping up repeatedly.

The tax situations that seemed to elicit the most calls were often related to one or more of the following issues:

  • Section 1031 exchanges. Section 1031 allows a taxpayer to defer gains on the sale of real property used in a trade or business or for investment purposes. Commonly, this is done through a deferred exchange and certain requirements must be met for §1031 treatment. Members often contacted NATP’s researchers for assistance when their clients faced unexpected or unplanned issues that could prevent them from completing the exchange as anticipated.

  • Basis in real estate following the death of a spouse. Spouses usually own property as joint tenants with the rights of survivorship. In states without a community property statute, the surviving spouse may receive a step-up in basis for half of the property. Members regularly had questions regarding whether there was a full step-up in basis at death and how to establish that basis when time has passed and the property is later sold.

  • Applying the principal residence tax exclusion to homes converted to rental property. Section 121 of the Tax Code allows taxpayers who sell their primary residence to exclude a portion of the gains ($500,000 for MFJ, $250,000 for all others) as long as certain requirements are met. Our researchers frequently answered questions regarding whether clients could still take advantage of the exclusion when the property was used both as a primary residence and rental property at different times.

  • The tax impact of dissolving a partnership. When a partner leaves a business being operated as a partnership, it usually results in the termination of the partnership. Our members had questions regarding whether a short-year return is needed or whether new an Employer Identification Number is necessary if the sole owner continues the business activities.

  • S corporation election procedures. S corporations can elect to pass on their corporate income, losses, deductions and credits to their shareholders for federal tax purposes. NATP members often had questions regarding how the IRS’s rules for making the election might apply to specific client situations and whether an S corporation had fully complied.

  • Inherited IRAs and required minimum distribution rules for beneficiaries. Generally, the beneficiary of an IRA must liquidate the account by the end of the tenth year following the death of the IRA owner. However, there are exceptions for certain eligible beneficiaries. Our researchers received a few questions from members regarding how the rules and exceptions would apply to specific client situations.

Finally, when asked if there was one type of question, they received more often than others, our researchers responded, “Anything to do with basis. It’s never ending.” Whether it be for returns filed by individuals, businesses, estates or trusts, our researchers got questions from members regarding how they should calculate a client’s basis in all manner of assets.

If you have a federal tax question for our Research Services team, submit it online or call 800-558-3402, ext. 2. Fees may apply. For more information, visit Federal Tax Research Service. NATP also offers a variety of online education options to provide tax preparers with additional information on many of the topics discussed in the above-listed questions.

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You make the callBy: NATP Research
May 19, 2022

Question: Your client has 401(k) plans with two different employers and over-contributed to his plans. These were pre-tax deferrals. The return has been extended, and you have just discovered the excess contributions. How can this be fixed?

Answer: The excess pre-tax deferral is included on Line 1 of Form 1040, U.S. Individual Income Tax Return.

Whether a corrective distribution can be made depends on the timing. The regulations indicate “not later than the first April 15 (or such earlier date specified in the plan) following the close of the individual’s taxable year, the individual may notify each plan under which elective deferrals were made of the amount of the excess deferrals received by the plan” [Reg. §1.402(g)-1(e)(2)(i)].

After April 15 (or an earlier date if specified in the plan), the excess cannot be withdrawn and will be taxed again when it is allowed to be distributed (e.g., client retires) [Reg. §1.402(g)-1(e)(8)(iii)]. Regardless of whether the taxpayer can make a corrective distribution, the excess pre-tax deferral must be included in income for the year of deferral.

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About NATP

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As tax laws change, you can rely on NATP for professional advocacy within the government, guidance on how to apply updated federal tax code to your clients’ unique situations and relationships with communities of other tax professionals to help foster your career. Explore NATP.

If you’re a taxpayer looking for an expert to help you with your tax planning and preparation, look to the industry’s top preparers. Choose an NATP member.

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