Deduction for Roth IRA losses limited

Aug. 1, 2003
Several years ago, I purchased some stocks in my Roth IRA that have since dropped significantly in value. I have read that I can fully deduct these losses if I liquidate all of my Roth IRA account. Is this correct?

Several years ago, I purchased some stocks in my Roth IRA that have since dropped significantly in value. I have read that I can fully deduct these losses if I liquidate all of my Roth IRA account. Is this correct?

No. The IRS has ruled that a loss suffered in a Roth IRA is deductible only as a miscellaneous itemized deduction. As such, the total loss is deductible only to the extent that it exceeds 2 percent of your adjusted gross income (AGI).

My son and his wife could not qualify for a low-interest- rate mortgage. As a result, I decided to buy the house for them and have them actually pay the mortgage and taxes. My son claimed deductions on his return for the property taxes and mortgage interest paid, but the IRS disallowed them because he did not own the house. Is he entitled to take these deductions?

As a general rule, mortgage interest is deductible only by a person who is legally obligated to pay it. Furthermore, property taxes are deductible only by the legal owner of the property.

However, a tax court case with similar facts may be of help to you. In this case, "Uslu vs. Commissioner, TC Memo 1997-551," a house was bought for a couple by the husband's brother. But, the husband and wife acted as the home's owner in all ways, paying the mortgage insurance, property taxes, etc. In this case, the tax court ruled that the couple was the true "beneficial owners" of the home and permitted them to deduct the mortgage interest and property taxes on their return.

I have owned my office building for approximately 15 years, and I am now in the process of renovating it. I have read with interest that the new tax law allows 50 percent "bonus depreciation" with respect to leasehold improvements made to commercial real estate, but my CPA says this does not apply in my case. Why not?

You are correct in pointing out that the 50 percent "bonus depreciation" provisions generally do apply to leasehold improvements for commercial real estate. However, the law does not allow this "bonus depreciation" with respect to improvements made to property if leased to a related party. Therefore, the "bonus depreciation" would not apply in your specific situation.

I have read with interest that the new tax law reduces the maximum rate on dividends to only 15 percent. Even though interest rates are low, this will make my money market dividends more attractive on an after-tax basis. Alternatively, I may move my funds into a bond mutual fund in order to get slightly higher returns, rather than dealing with the risk in the stock market. What do you think?

From a tax standpoint, you should be aware that not all dividends qualify for the maximum 15 percent tax rate. In particular, dividends on money market funds and from bond mutual funds do not qualify, since they are, in reality, simply a pass-through of the interest income earned on the underlying assets of the fund. Accordingly, you will need to reconsider your strategy.

For several years, I have been funding Section 529 college-savings accounts for my children. What changes were made to these accounts under the new tax law?

None. However, the benefits of using a Section 529 account have been significantly reduced due to other changes in the tax law.

Many doctors are aware that the maximum tax rate on capital gains and dividends has been reduced to only 15 percent. However, many are not aware that the maximum tax rate on dividends and capital gains for those in the lowest tax bracket is only 5 percent.

As a result, doctors with children age 14 or older could gift appreciated stocks, bonds and/or real estate to their children, or to a family limited partnership (FLP), or a limited liability company (LLC) set up on their behalf. Following the gift, the appreciated property could be sold, with the resulting gain taxed at rates as low as 5 percent, as noted above.

In effect, this provides an almost tax-free way to accumulate college funds on behalf of a child for doctors with appreciated property, while avoiding the loss of control and investment fees and expenses charged by Section 529 accounts.

Because of this, we expect a significant decrease in the amount of funds contributed to Section 529 plans as a result of this tax law change.

Dr. Blair is a nationally known consultant and lecturer, and is a member of the American Academy of Dental Practice Administration. Mr. McGill is a tax attorney, CPA, and MBA, and is the editor of the Blair/McGill Advisory, a monthly newsletter helping dentists to maximize profitability, slash taxes, and protect assets. The newsletter ($195 a year) and consulting information are available from Blair/McGill and Company, 2810 Coliseum Centre Drive, Suite 360, Charlotte, NC 28217, or call (704) 424-9780.

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