Question: Tom, age 36, has a health savings account (HSA) qualified high deductible health plan that just covers him. He wishes to contribute the individual maximum for 2024, $4,150, to the account. Tom’s wife Alice, who is also age 36, has her own HSA qualified high deductible health plan, which covers her and the couple’s two children, Billy and Bobbie, but not Tom. She plans to contribute the family maximum of $8,300 to her HSA for 2024.

If the couple files jointly, are they entitled to a total 2024 HSA deduction of $12,450 ($4,150 + $8,300) for 2024?

Answer: No. If either an individual or the individual’s spouse has family coverage, they are considered to have family coverage through that individual. Likewise, if one spouse has self-only coverage and the other has family coverage, the maximum contribution limit is the maximum for family coverage, and the amount each contributes to reach that limit, is divided between them by agreement (Notice 2008-59, Q&A 17). If the spouses have different family coverage plans, only the one with the lower deductible is counted for HSA eligibility purposes (Sec. 223(b)(5)).

The family contribution amount can be divided between eligible spouses any way they want but must be divided equally among the spouses if they do not agree on a different division. However, no HSA contribution is allowed for an ineligible spouse. The IRS has ruled that an eligible individual does not lose their eligibility when their spouse has non-HDHP family coverage and the spouse’s non-HDHP plan does not cover the eligible individual. Consequently, that individual may contribute to an HSA (Rev. Rul. 2005-25).

Therefore, the maximum deductible contribution for Tom and Alice in tax year 2024 is $8,300, the family maximum. The expected excess contribution of $4,150 should be addressed and adjusted before the year end.

Question: Robert and Suzanne were married. Robert is aged 71 and Suzanne was 74 when she died in 2023 following a long-term illness. They each had their own traditional individual retirement arrangements (IRAs), and Robert inherited Suzanne’s IRA as the sole designated beneficiary. Prior to her death, Suzanne started taking her required minimum distributions (RMDs) from her IRA account. How should Robert treat this inherited account?

Answer: Robert may treat Suzanne’s IRA account in one of two ways: (1) withdraw funds as if it was his own (2) withdraw funds as a beneficiary based on either of their life expectancies.

To treat the inherited IRA as if it were his own, Robert can roll over the inherited IRA assets into his own eligible retirement plan, including his IRA, and treat those assets as his own [§ 402(c)(8)(B)]. Since he is over the age of 59½, he can withdraw these assets anytime without a penalty. For RMD purposes, since Robert has not reached age 73, this option enables him to delay taking RMDs until he reaches age 73 rather than continuing Suzzane’s RMDs.

Since he is the sole designated beneficiary of the account, Robert has another option. He can remove the RMDs from Suzanne’ account based on his life expectancy. Since Suzanne died after the year 2020 and her required beginning date (RBD), the RMD is calculated based on the longer of Robert’s life expectancy or the distribution method used at her date of death.

Under the SECURE 2.0 Act, beginning in 2023, the RBD is April 1 of the year following the year in which the account owner reached age 73 for individuals who turn 72 after Dec. 31, 2022. It is age 75 for individuals who reach age 74 after Dec. 31, 2032.

The surviving spouse must withdraw funds over their life using Table 1 - Single Life Expectancy, Appendix B, Publication 590-B, based on their age at the end of the applicable distribution calendar year and recalculated annually. Or, if longer, they can use the deceased owner’s single life expectancy calculated in the year of death and reduced by one each year thereafter. (For aged 71, life expectancy factor as 18.0, for 2024, then use factor of 17.0).

Question: Neighbors Kim and Helen are eagerly anticipating the upcoming Fall Festival at their community church. Together they have been sewing stuffed pumpkins for the church to sell as a fundraiser at the event. They began by purchasing felt material, all of which is only being used for the festival pumpkins. The duo will receive no renumeration from the church for their efforts at all. In looking at potential charitable deductions for their individual Schedule A’s (Form 1040), Itemized Deductions, can Kim and Helen deduct the cost of the felt material being used to create the pumpkins?

Answer: Yes, each neighbor may use the amount they personally spent on the material for a charitable deduction, subject to the 60% AGI limitation. Unreimbursed out-of-pocket expenditures made in rendering gratuitous services to a charitable organization may be deductible [Reg. §1.170A-1(g)]. The expenses are treated as direct payments to the charity, rather than for the use of the organization (Rev. Rul. 84-61) so they are subject to the 60% of AGI limitation (30% if made to other than a 50% charity). The expenses must be nonpersonal, directly connected with and solely attributable to the rendering of such services (Rev. Rul. 69-473).

Question: Horizon Creative Studios, Inc. is a small graphic design business that began operations in 2000 as a C corporation. In 2021, the company generated a net operating loss (NOL) that it has been carrying forward each subsequent year. The company meets all the eligibility requirements to make the S election and timely files a Form 2553, Election by a Small Business Corporation, to be treated as an S corporation with an effective date of Jan. 1, 2023. As of December 31, 2022, its last day as a C corporation, the remaining NOL carryforward for Horizon was $10,000. During 2023, the business sold an asset for which they had to recognize built-in gain. Can the NOL carryforward be used to offset ordinary income or reduce the built-in gains of the S corporation in 2023?

Answer: The NOL cannot be used to offset ordinary income; however, it can be used to reduce built-in gains tax [IRC §1374(b)].

When Horizon Creative Studios, Inc. made the election to be treated as an S corporation, any NOL carryforwards were essentially paused. The NOL cannot be carried into a tax year that the C corporation elected S status. However, if Horizon reverts back to a C corporation, then the NOL could continue to be used for the remainder of the time allowed in the carryover period. An NOL generated by a C corporation can be used to reduce the built-in gains tax if the S corporation sells an asset and is subject to that tax.

Question: Walter and Steffie were married and in 1998 they purchased a primary residence together in Maine. In late 2020, the two divorced, but still owned the residence together. That year, they also converted the property to a Schedule E rental activity. The activity accrued suspended passive losses (PALs) through 2021.

When Walter remarried in June 2021, he decided to quitclaim deed the property to Steffie, who plans to sell the house eventually.

Does the transfer of the property release the suspended PALS?

Answer: No. Neither Walter nor Steffie will be allowed to immediately deduct the suspended passive activity losses associated with the house upon either transfer or sale although Steffie will be able to use her PAL in a different way.

When Walter transferred his ownership of the property to Steffie within one year of their divorce, under §1041(b), Steffie received a tax-free gift, with the carryover basis of the spouse who made the transfer. Therefore, Walter will not be able to deduct his portion of the suspended losses. Also, in this circumstance, when the transferred property involves passive activity income, for Steffie, the suspended losses are added to the tax basis of the asset being transferred. [§469(j)(6)]. Therefore, she will also not be able to deduct the suspended losses but may only use them to reduce her gain.

In official guidance from the IRS Market Segment Specialization Program (MSSP) Audit Technique Guide on Passive Activity Losses, the IRS states that transfers incident to divorce should be treated as gifts and the suspended losses of the donor spouse added to the basis passing to the receiving spouse. Thus, the recipient’s deduction of the suspended passive loss generally is deferred until the property is sold.