Skipped distribution can affect RMD in 2021
Q: I am 73 years old and took advantage of the ability to avoid a required minimum distribution (RMD) from my IRA in 2020. I just want to clarify that the 2021 RMD will not have to be larger to make up for the waived 2020 distribution.
A: You will not have to take two distributions in 2021 to compensate for the waived 2020 distribution. So in that sense the 2020 waiver will not increase your 2021 RMD.
However by not taking a 2020 distribution your account balance will be larger at Dec. 31, 2020, relative to what it would have been with a 2020 distribution. The account balance at the end of 2020 will be used to determine the 2021 RMD.
You may also be aware that beginning in 2022 the RMD will be determined using revised life expectancy tables. These new tables assume a longer life expectancy and will therefore reduce the RMD amount relative to the current tables.
Q: I have a capital loss carryover of more than $200,000 from 2019. In 2020 a partnership in which I am a partner sold a retail shopping center at a large gain and I received a preliminary determination of my share, which is $83,677.
I was expecting that this would be tax free because it would be a capital gain that could offset my prior losses. The letter I received classifies this as “Section 1231 gain.” The letter states this is good because the gain is taxed at the rates that apply to long-term capital gains unless some exceptions, which do not apply to me, apply. But what it does not say is if I can use my capital losses to offset the gain and pay no 2020 tax. Do you know if I can offset capital losses with Section 1231 gains?
A: Yes you can. The partnership properly classified this as Section 1231 gain because the property sold was used in a trade or business. Investment property produces capital gain, business property can produce Section 1231 gain.
Section 1231 classification is often called “the best of both worlds” because, as you note, gains are taxed at the favorable rates applicable to net capital gains. But losses, if there are any, are allowed without limitation. Capital losses are limited to a net $3,000 each year.
With a net Section 1231 gain for 2020 you will be able to treat it like a capital gain. There are exceptions, most commonly when you had Section 1231 losses in prior years, but you seem confident the exceptions do not apply.
The gain will be reported on IRS Form 4797, which is used for dispositions of business property. With a net gain, the form’s mechanics will then also report the gain on Schedule D, which is the form for reporting capital gain or loss.
In the end, Schedule D will allow you to use the Section 1231 gain as a long-term capital gain (Section 1231 assets must have a more than one-year hold). This gain will then be offset (on Schedule D) by the carryforward capital losses.
Q: I work as an administrative assistant at an office with about 15 employees. The other workers took up a collection and gave me a Christmas gift certificate for $400. I asked my boss if I had to report this as income and he said he never even considered that but I should ask a tax person. I don’t have a tax person so can you tell me?
A: I do not think you have any income. There are several arguments that could be made in different fact patterns, but your situation seems to me to be a gift. Gifts are not income.
When an employer gives you something of value it is very difficult to argue it is a gift. The transfer is more likely in exchange for the services that you provided.
Your gift comes from all of the employees. They do not employ you. Your employer may have also contributed, but the overall flavor of this seems to be a gift from all of the employees. A gift means it is given with “detached and disinterested generosity.” That’s what this seems to be.