Category Archives: Tax Basics

IRS Tax Assessment Process Defined – Paul Gaulkin CPA

Keys spelling taxes

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

Health Savings Account Rules & Benefits – Paul Gaulkin CPA

couple looking at healthcare plans

The health savings account was created in 2003 and shares many characteristics of the Archer MSA program. Like MSAs, HSAs are trusts created solely to pay the qualified medical expenses of an account beneficiary and call for an individual to: 1. Buy a high deductible health insurance policy, and 2. Make tax deductible contributions to the trust Contributions made to the trust and any earnings are tax deferred for as long as they remain in the trust. HSA account holders … Read more

Dependent Care Credit Rules & Guidelines – Paul Gaulkin CPA

picture of coins and cash

A tax credit is available for taxpayers who have incurred employment related expenses for the care of a qualifying individual. The amount of credit available is equal to an applicable percentage of the expenses paid by the taxpayer during the taxable year. Credit Filing Requirements In order to qualify for the dependent care credit, a taxpayer must have incurred employment related expenses for the care of a qualifying individual who resides in the taxpayer’s household for more than one half … Read more

Statutory Requirements Regarding Alimony – Paul Gaulkin CPA

alimony judgment money

There are basically five statutory requirements for a taxpayer to claim money transferred to them as alimony payments. If divorce or separate instrument characterizes a payment as “alimony” but fails to satisfy the five requirements under Code Section 71, the payment will not be treated as alimony for federal income tax purposes, regardless of what it is considered under state law. These fix requirements include: 1. Payment must be made in cash 2. Paid to or on behalf of spouse … Read more

Separately Reportable Items on Partnership Return – Paul Gaulkin CPA

two people shaking hands

Any item that may have to be treated differently by each partner must be separately stated. For example, some partners may be able to deduct charitable contributions that flow through from the partnership, but those that have already met the 50 percent AGI limit for contributions will have to carry over those contributions. Each partner’s share of these items is identified on the partner’s separate Schedule K-1 tax return. The following items should be separately stated: 1. Short term capital … Read more

Assignment of Income Doctrine Definition & Guide – Paul Gaulkin CPA

Income drawn on chalkboard

The assignment of income doctrine basically is defined as income that is taxed to the individual who earned it, even if the right to the income has been transferred to another individual prior to recognition. This means that compensation, interest, rents, dividends, and other forms of income usually must be included in the gross income of the recipient even if the income was transferred to another individual. Assignment of Income Doctrine A tax problem arises when an individual attempts to … Read more

Amount Realized for Gain or Loss Determination – Paul Gaulkin CPA

person holding for sale sign

The amount realized from the sale or disposition of property is the sum of any money received plus the fair market value of other property received in the transaction. This does not include any amount received from the purchaser as reimbursement for real property taxes which are treated as imposed on the purchaser. However, it does include amounts representing real property taxes which are treated as imposed on the seller, if they are paid by the purchaser. The amount realized … Read more

IRS Material Participation Rules – Paul Gaulkin CPA

white clock with black numbers

A passive activity is defined as “any activity which involves the conduct of a trade or business, and in which the taxpayer does not materially participate” according to Code Section 469(c)(1). Also included in the definition are rental activities, without regard to the extent of taxpayer participation. This basically excludes trade or business activities in which a taxpayer does materially participate are not passive activities. In terms of real estate activities, these are generally considered to be passive no matter … Read more

Determine Passive Activity Loss Rental Property – Paul Gaulkin CPA

house with for rent sign

An activity is a rental activity is during the year: 1. Tangible property held in connection with the activity is used by customers or is held for use by customers; and 2. Gross income attributable to the conduct of the activity represents amounts paid principally for the use of the property. Generally speaking, any rental activity is a passive activity, without regard to material participation. This means that no matter the amount of hours you put into a rental activity, … Read more

Calculate Net Operating Loss – Paul Gaulkin CPA

chart showing losses

The term “net operating loss” is defined as the “excess of deductions over gross income”. This excess of deductions over gross income is subject to modifications which limit the net operating loss to only business losses. Reporting Loss A loss reported on a tax return by an individual taxpayer with business income is modified in the following ways in order to determine a net operating loss deduction: Start with taxable income or loss + Any NOL deduction from another year … Read more