Is there a form that attaches to the basic 1040 on which someone can place comments? Specifically, my 1040 line 4a will reflect adjustments for: QCDs, rollovers (multiple) and post tax contribution withdrawals. How do I do this while e-filing???
Line 4a has been the source of much controversy. Line 4a is supposedly the total of all distributions from IRAs, 401(k)s , pensions and annuities, etc. The problem is that some types of distributions are supposed to be reported here and others are not. Try reading the instructions for Line 4a to see what a confused situation it is.
But note that line 4a is not the taxable amount, line 4b is. So, in a sense, it does not matter what is being reported on 4a. Given the confused state of the instructions, I have trouble believing that the IRS will pay any attention.
And note that every distribution that was reported on a 1099-R to you was also reported to the IRS, so they have the information needed to construct what the number should be anyway.
So, in short, don't worry about justifying what the value for line 4a is.
A Participating Partner departed from the partnership on 12/31/2020 (end of year) because she could no longer participate. She passed away 17 days later. The Business software says I must explain why she departed from the partnership but does provide any kind of a form to write this explanation on, I guess a programmer error. Can some one tell me what form to use?
Technically, given that her departure was on 12/31/2020, she was still a partner for all of 2020 tax year. It is for 2021 tax year that you will report the death of the partner, and hence the departure - even though the dates are not the exact same.
Things to consider and follow for next year (not all-inclusive and should be reviewed for any/all changes to tax laws during 2021):
Determining the Effect on the Partnership Tax Year
The tax year of the partnership closes for a partner whose entire interest in the partnership is terminated for any reason, including death, sale, exchange, or liquidation (Sec. 706(c)(2)).
Allocating Distributive Shares of Partnership Income/Loss in the Year of Death
A decedent partner's distributive share of partnership income or loss will be reported on the decedent's final tax return, and the distributive share for the portion of the year during which the interest was owned by the decedent's successor(s) in interest would be reported by the successor(s) in the same manner as in the case of other transfers of partnership interests.
Death of a Partner in a Two-Person Partnership
The death of a partner in a two-person partnership will terminate the partnership for federal tax purposes if it results in the partnership's immediately winding up its business (Sec. 708(b)(1)(A)). If this occurs, the partnership's tax year closes on the partner's date of death. Similarly, the death of a partner in a two-person partnership generally will cause the technical termination of the partnership under Rev. Rul. 99-6. The regulations, however, provide two exceptions that prevent an immediate termination of the partnership of a two-person partnership upon a partner's death.
A two-person partnership does not terminate upon a partner's death if the deceased partner's successor in interest (usually the estate) continues to share in the partnership's profits or losses (Regs. Sec. 1.708-1(b)(1)(I)). The partnership's tax year does not close, and the partner's distributive share of partnership income from the date of death through the end of the partnership tax year is reported on the tax return of the successor in interest (Regs. Sec. 1.706-1(a)). Likewise, if a partnership begins or continues to make liquidating payments to a deceased partner's successor in interest under the provisions of Sec. 736, the successor in interest is treated as a partner until the deceased partner's interest in the partnership has been completely liquidated (Regs. Sec. 1.736-1(a)(1)(ii)). In a two-person partnership, the partnership does not terminate, nor does the partnership year end (other than the partnership's normal tax year), until the final liquidating payment is made to the successor in interest (Regs. Sec. 1.736-1(a)(6)).
If the clients wish to continue a two-partner partnership after a partner's death, the practitioner should consider making the following recommendations to ensure continuation:
- The operating agreement or the liquidation agreement should indicate the interest of the deceased partner is to be retired by a series of liquidating payments made by the partnership. Ideally, the agreement should state the payments are made under Sec. 736.
- When the interest is retired, the partnership books should reflect the elimination of the deceased partner's interest in capital and the establishment of a payable to the partner's successor in interest. All subsequent payments made to retire the interest should reduce the payable.
- Partnership tax returns should be filed as long as payments are being made to the deceased partner's successor in interest.
- All payments for the deceased partner's interest in the partnership should be made from the partnership's business account and not from the remaining partner's personal account.
Treatment of Suspended Losses Upon Partner's Death
A taxpayer holding a partnership interest on his or her date of death may have been allocated partnership losses in prior years that were not deductible because of a limitation imposed by the tax laws. Losses may have been disallowed under the at-risk rules, the passive loss rules, or because the partner had insufficient basis in the partnership interest to deduct the loss. Such losses are generally carried over by the partner to subsequent tax years until some event triggers their deductibility. Upon the death of the partner, however, the treatment of those losses is not always as clear.
Losses Suspended Due to Basis Limitation
If a partner has suspended partnership losses at his or her date of death due to the basis limitation rule of Sec. 704(d), those losses should be deductible on the decedent's final return to the extent the partner's tax basis in the partnership interest increased before his or her death (e.g., if the partner made capital contributions). It appears, however, that any remaining losses suspended under these rules disappear. Although not specifically addressed in the Code or regulations, the treatment of those suspended losses upon a partner's death should be similar to their treatment upon a taxable disposition of the partnership interest. A taxable disposition does not enable the transferring member to deduct losses suspended due to lack of basis. Also, there is no carryover of the suspended loss to the transferee partner.
Because the partner's basis has not been reduced by the suspended losses, the loss is essentially recognized in the form of a decrease in the amount of gain (or increase in the amount of loss) recognized on the transaction. Upon the partner's death, the basis of the partner's interest is stepped up to FMV on the date of death (or alternate valuation date, if elected). Based on the rationale that applies to suspended losses upon a taxable disposition, it appears there is no carryover of the suspended loss to the estate or other successor in interest.
Losses Suspended Due to At-Risk Limitations
When a partner dies owning an at-risk activity with suspended losses through a partnership, the treatment of the suspended losses is not clearly spelled out in the regulations. As with losses suspended under the basis limitation rules, at-risk suspended losses should be deductible on the decedent's final return to the extent the partner's amount at risk increased during the portion of the tax year preceding his or her death. However, since at-risk losses are treated as personal to the transferor under Prop. Regs. Sec. 1.465-67(b), it appears that any remaining suspended at-risk losses "disappear" upon the partner's death.
The regulations do, however, address the calculation of the successor partner's amount at risk (Prop. Regs. Sec. 1.465-69). A partner who inherits an interest in an at-risk activity receives an increase in at-risk basis for the positive at-risk basis of the decedent. In addition, the successor in interest receives a step-up in at-risk basis equal to the amount of the step-up to FMV (if any) at the date of death (or alternate valuation date) under Sec. 1014.
Losses Suspended Due to Passive Loss Rules
If partnership losses have not been deducted solely by reason of the passive activity limitations, a casual glance at the rules might suggest that the complete disposition of the partner's interest at death would cause the suspended losses to be deductible on the partner's final Form 1040, U.S. Individual Income Tax Return. If the decedent has passive income on his or her final Form 1040, suspended losses can be used to offset that income. However, any remaining suspended passive activity losses are deductible only to the extent they exceed the difference between the stepped-up basis of the partnership interest in the hands of the successor in interest and the basis of the partnership interest in the hands of the deceased partner (Sec. 469(g)(2)). To the extent the suspended losses do not exceed this difference, they are never allowed as a deduction. In essence, they simply disappear.
Sec. 754 Election to Step Up Basis of Partnership Assets
Sec. 754 provides an election to adjust the inside bases of partnership assets pursuant to Sec. 743(b) upon the transfer of a partnership interest caused by a partner's death. A Sec. 754 election can also be made when a member's interest is sold or upon certain distributions of partnership assets. A basis adjustment is made to eliminate the discrepancy between the outside basis of the partnership interest after its step-up (or step-down) to FMV and the successor in interest's share of the partnership's inside basis in its assets. (A partner's interest in a partnership's inside basis is based on a calculation of "previously taxed capital.") The adjustment benefits only the deceased partner's successor in interest.
To adjust the bases of the underlying assets under Sec. 743(b), the partnership must have a Sec. 754 election in effect or must make the election for the year that includes the deceased partner's date of death. A basis adjustment is required for a transferred partnership interest (including transfers upon the death of a partner) if the partnership has a substantial built-in loss immediately after the transfer (unless the partnership is an electing investment partnership or a securitization partnership). A partnership has a substantial built-in loss if the partnership's adjusted basis in partnership property exceeds the FMV of that property by more than $250,000 (Secs. 743(a) and (d)).