With April 15 less than a month away, it may be easy for busy practitioners to overlook some of the tax benefits clients can elect to take.
To allow for thorough tax planning, here is a reminder of elections currently available for individuals, estates and partnerships:
Individuals- Election out of alimony treatment. Under Sec. 71(b)(1)(B), alimony does not include payments that would otherwise be treated as alimony (deductible to the payor, includible in income to the payee) if the spouses designate in a divorce or separation instrument that the payments not be treated as alimony. Electing to not treat payments as alimony would be beneficial in instances where the payor spouse’s income is primarily from nontaxable sources or where the payor spouse’s income is sheltered by other deductions and exemptions.
- Election to maximize the investment interest deduction. Individuals can make an election to include qualified dividends and net capital gains in the calculation of net investment income for purposes of maximizing the investment interest deduction. If the election is made, the taxpayer waives the right to the lower tax rate on long-term capital gains on the amount elected to be included in net investment income, and it is taxed as ordinary income. The election to include net capital gains is limited to the lesser of net capital gains from investment property or net gains from investment property.
- Request extension of time for making an election. A taxpayer who misses a filing deadline for a regulatory election may request a letter ruling from the IRS granting an extension of time to make the election under Regs. Sec. 301.9100-3. The IRS will grant relief only for failure to timely file a regulatory election, not a statutory election, under this provision. Relief will be granted if the taxpayer provides evidence that establishes to the satisfaction of the IRS that the taxpayer acted reasonably and in good faith, and the grant of relief will not prejudice the interests of the government.
Estates
- Election to treat a revocable trust as part of an estate. The advantages of making the election include: the estate and electing trust file a single Form 1041, U.S. Income Tax Return for Estates and Trusts; the electing trust can adopt a fiscal year; the electing trust is not subject to the active-participation requirement under the passive loss rules for two years; the electing trust can hold S corporation stock without terminating the corporation’s S election; and the electing trust will be allowed a charitable deduction under Sec. 642(c) for amounts permanently set aside for charitable purposes.
Partnerships
- Election out of partnership treatment by a spousal joint venture. If spouses co-own a business and the business is not incorporated, a partnership may exist, and a partnership return may need to be filed. However, if the business qualifies, the spouses can make a qualified joint venture (QJV) election under Sec. 761(f) as an alternative to being taxed as a partnership. A QJV is a trade or business in which only the husband and wife are partners, each spouse materially participates individually under the passive loss rules, and both spouses elect QJV status. This election avoids partnership taxation with its complexities and enhanced failure-to-file penalties. Tax return preparation may be simpler, and both spouses can earn Social Security and Medicare credits.
