Go to Top

Duly Noted

Here Is Why You Might Need A Prescription For Aspirin. Effective this year, taxpayers cannot be reimbursed for over-the-counter medications through certain tax-favored arrangements, unless the patient has a doctor’s prescription for the non-prescription meds. The new rules were imposed by the Affordable Care Act that President Obama signed into law last March. The reimbursement restrictions apply to employer-sponsored Flexible Spending Arrangements and Health Reimbursement Arrangements, as well as to Health Savings Accounts and Archer Medical Savings Accounts established by individuals. Rev. Rul. 2010-23.

Just Keep Doing What You’re Doing. Confirming an interpretation many tax practitioners have followed for years, the Internal Revenue Service has determined that a taxpayer can deduct interest on up to $1.1 million of mortgage debt incurred to buy or build a home, even though the limit on deductible acquisition debt is $1 million. The extra $100,000 of deductible debt is treated as home equity debt, which is deductible regardless of whether it is incurred to acquire a residence. Many tax preparers have used this approach since the mortgage limits were enacted by the Tax Reform Act of 1986. But the issue arose after the Tax Court ruled against a taxpayer who sought to deduct interest on more than $1 million of debt without specifically citing the $100,000 allowance for home equity debt. Rev. Rul. 2010-25.

An Aggressive Audit Using ‘Passive’ Income. An IRS agent’s apparent attempt to attack years closed by the statute of limitations was rebuffed by the agency’s national office in a technical advice memorandum. The case involved taxpayers who operated a nursing home that experienced losses between 1990 and 1994. The taxpayers determined that they materially participated in operating the nursing home in those years, entitling them to deduct the losses against nonpassive income. The 1994 tax year was under audit when the case was referred to the national office in 2010. The auditor determined that the taxpayers did not materially participate in running the nursing home in 1994, which would limit deductions of the losses under the “passive loss” rules. The auditor then asserted that changing from nonpassive to passive is a change in accounting method, which would require the taxpayers to reverse deductions for losses they took between 1990 and 1993. Those years can no longer be audited directly if the taxpayers have not waived the limitations statute. But the national office ruled that the classification of an activity as passive or nonpassive, which depends upon facts that can vary from year to year, does not result in a change in accounting method that would allow adjustment of previous years’ tax treatment. TAM 201035016.

If you enjoyed this article, be sure to check out Palisades Hudson’s books, The High Achiever’s Guide To Wealth and Looking Ahead: Life, Family, Wealth and Business After 55. Both are available in paperback and as e-books.