If a dependent child is subject to the kiddie tax and has more than $1,900 of net unearned (investment) income for the year, his or her net unearned income is taxed to the child at the additional rate of tax that the parent would be required to pay if the child’s net unearned income were included in the parents’ taxable income. This applies regardless of the source of the assets creating the child’s unearned income as long as the child … Read more
The step transaction doctrine means that two or more transactions are mutually dependent so that only the overall end result is significant for tax purposes. This means that, two or more steps, significant in themselves, if view in isolation, may be disregarded altogether or consolidated into one transaction. The Supreme Court has stated that “if one transaction is to be characterized as a ‘first step’, there must be a binding commitment to take the later steps.” The step transaction doctrine … Read more
A tax exclusion is provided for interest earned on U.S. savings bonds used to finance the higher education of the taxpayer, the taxpayer’s spouse, or dependents according to Code section 135. Timing of Purchase The bonds must have been purchased after December 31, 1989, and the exclusion is available only to the individual who purchased the bonds. The purchaser of the bonds must have reached the age of 24 and be the sole owner of the bonds. The bonds must … Read more
There are three types of ways the IRS will generally check a tax return for proper accuracy and accounting. These three include the survey method, compliance check and examination. Survey Method Returns can be surveyed by the IRS without the taxpayer ever being notified. Agents can survey a return if they believe an examination would result in no material change in tax liability. This procedure is available only if the agent has not contacted the taxpayer or the taxpayer’s representative, … Read more
Area Directors have the authority to immediately assess tax due on a properly filed tax return without issuing a Notice of Deficiency. However, the mere act of the taxpayer filing or the IRS receiving the tax return does not constitute an assessment of tax. The IRS must follow the appropriate assessment procedures before the tax will be considered to be assessed against the taxpayer. Common Assessment Procedure For most taxpayer, the assessment process begins when a tax return is filed … Read more
Below we are going to discuss two tax credits that are available against the federal estate tax. Foreign Death Taxes A foreign death tax credit is provided for United States citizens and residents. The credit applies to property that is subject to both federal and foreign death taxes in order to prevent double taxation. Taxes paid to possessions of the United States are regarded as foreign death taxes according to Code Section 2014. The foreign estate tax credit allowed against … Read more
Losses sustained during the year on gambling transactions are allowed as an itemized deduction but only to the extent of the gains during the year from gambling. In the case of a husband and wife filing a joint return, the combined gambling losses of the spouses are allowed to the extent of the combined gambling gains. Professional Gambler The Supreme Court has ruled that a professional gambler is entitled to deduct gambling losses as a trade or business expense. The … Read more
A charitable remainder annuity trust is a trust from which a specified sum or percentage (not less than five percent of the initial fair market value of all assets actually placed in trust) is to be paid annually to one or more named individuals as income beneficiaries. Timing of Trust For transfers in trust occurring after June 18, 1997, the annual payout cannot exceed 50 percent of the initial fair market value of the trust’s assets. For transfers in trust … Read more
Special rules limit the amount of rental expense deductions that may be taken by an investor taxpayer on a residence that is rented out for part of a year and used for personal purposes during other parts of the year according to Code Section 280A. Number of Days in Use If a personal residence is rented out for less than 15 days during the year, any rental income received is excluded from gross income and no rental expense deductions are … Read more
Although earnings and profits (E&P) have a significant impact in determining the tax status of dividend distributions, the term is not defined inside the Internal Revenue Code. Code Section 312 does provide an indication of how certain transactions will affect E&P, but it does not specifically define what E&P actually is. Defining Earnings and Profits Earnings and profits is basically a tax term. It has some similarities to retained earnings, but it is not equal to it. E&P is a … Read more
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