Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: MONDAY, February 8, 1993 TAG: 9302060049
SECTION: BUSINESS PAGE: A-8 EDITION: METRO
SOURCE:
DATELINE: LENGTH: Long
HOW TO DECLARE INTEREST ON LIMITED PARTNERSHIP
EDITOR'S NOTE: The Roanoke chapter of the Virginia Society of Certified Public Accountants will answer tax-related questions from our readers in a special feature on the Monday Money Page. Send them in writing to Tax Questions, in care of Mag Poff, Roanoke Times & World-News, P.O. Box 2491, Roanoke, Va. 24010.Q: I desire assistance in declaring interest from a limited partnership investment. I receive a monthly check from this investment. Is all of it taxable, state as well as federal? Do I need special tax forms?
A: Income from a partnership will be reported to you on Form 1065 K-1. Various components of income or loss will be shown on Lines 1 to 7.
Each component of income will refer to the line or form where the item will be included on Form 1040. Interest income from a partnership will be reported to the taxpayer on Form 1065 K-1, Line 4a. This amount will then be entered on Form 1040, Schedule B, Part 1, Line 1 as interest income from K-1. Show the name of the partnership.
The monthly checks you receive may not be equal to the interest since the partnership may have other items of income or expense included or deducted from the interest received by the partnership.
Answered by Kenneth L. Prickitt of Young & Prickitt.
Q: I receive a spouse's Railroad Retirement benefit because of my deceased husband's former work. I was advised by the Railroad Retirement Board that $89.52 per month of my benefits is taxable. I have interest income of approximately $7,000 per year. Does my income require me to file income taxes?
A: The components of Railroad Retirement benefits are taxed differently, depending upon whether they are Tier 1 or Tier 2 benefits.
Tier 1 benefits are taxed in the same manner as Social Security benefits; that is, up to one-half of the benefit may be taxable if the taxpayer's income from other sources exceeds a specified base amount. Since the specified base amount for a single taxpayer is $25,000, it would certainly appear that none of the Tier I benefits would be taxable in this particular situation.
On the other hand, Tier 2 benefits are taxed in the same manner as benefits paid under private employer retirement plans. Under those rules, the portion of Tier 2 benefits that are attributable to the employee's investment (i.e., after-tax contributions to the plan) are excludable from income, but the portion attributable to employer contributions to the plan are fully taxable. The excludable portion of each monthly payment is a level dollar amount determined by dividing the employee's total investment by the total number of monthly annuity payments expected to be received.
In this particular situation, it appears that the taxpayer may be receiving both Tier 1 and Tier 2 benefits, of which the Tier 1 benefits are completely nontaxable and the Tier 2 benefits are either wholly or partially taxable. A more specific determination would require an inquiry to the Railroad Retirement Board.
Answered by James B. Taney of Anderson & Reed Q: While I was in military service I established some accounts for my child under the Virginia Uniform Gifts to Minors Act, registering myself as custodian, using the child's Social Security number, and having the mutual fund's bank or my broker hold the funds and zero coupon bonds. However, I never learned the rules of the game. Questions I have are:
When can the custodian begin spending the money to benefit the minor and for what purposes?
What are reporting requirements to the state and federal tax authorities?
What is a good source of information to read about these things?
A: As custodian of an account established under the Virginia Uniform Transfers to Minors Act, you are authorized to apply, whenever you feel it appropriate, income or principal for the benefit of the minor. If you want the income derived from the account to be taxable to the minor, the IRS holds that such income cannot be applied "in the discharge or satisfaction, in whole or in part, of a legal obligation of any person to support or maintain" the minor. Income used for that purpose is taxable to the parent or other person legally obligated to support or maintain the minor. It does not matter who made the gift or who is the custodian.
Expenditures for support and maintenance would include such items as food, clothing, lodging, medical and dental care and educational expenses. These types of expenditures should be avoided by the custodian until the minor becomes legally responsible for his or her support. According to Charles N. Dorsey, a Roanoke lawyer, this depends on the minor's particular situation, and the custodian should consult an attorney to determine when the minor "comes of age" under Virginia law.
Even if the custodian avoids the above described transactions, the ultimate tax effect may be the same. Prior to passage of the Tax Reform Act of 1986 , significant tax savings were sometimes available when income derived from gifted property was taxable to a minor donee. This was due to the fact that, generally, the minor donee benefitted from a lower marginal tax rate imposed on such income.
Beginning in 1987, however, TRA initiated the "kiddie tax" whereby dependent children under the age of 14 pay tax on their unearned income in excess of a minimum threshold at the parents' marginal tax rate. For 1992 and 1993, this threshold has been established at $1,200. Therefore, a minor with interest or dividend income in excess of $1,200 will pay tax on that excess just as if the minor's parents had reported the income themselves.
State and federal tax authorities place no specific reporting requirements on the custodian of gifts made under the Uniform Transfers to Minors Act. Interest and dividends earned, as well as security sales, will be reported to the IRS by the appropriate payer or brokerage firm handling the transaction. Single donor gifts to a minor in excess of $10,000 will require the filing of Federal Form 709, "United States Gift Tax Return," but this is the responsibility of the donor, who may or may not be the custodian.
For more information regarding these matters, you should discuss your situation with a qualified certified public accountant and review two IRS publications: 929, Tax Rules for Children and Dependents, and 448, Federal Estate and Gift Taxes.
Answered by David Lucas of Lucas & Boatwright.