Recent Important IRS And Court Rulings

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1. If an employer offers both a FSA and a HSA, the IRS indicated that a participant covered by a health FSA during the year, solely as a result of a carryover, cannot make payments to a HSA during the year. This is the case even for months of the year after the balance of the FSA is fully liquidated.

2. Low income earners receive a refundable tax credit to purchase health insurance through an exchange. If the taxpayer is married, they must file a joint return to claim the credit. But the IRS said it will allow victims of domestic abuse to file separately if the victim is not living with his or her spouse at the time their return is filed.

3. To be able to deduct passive losses, the Tax Court previously ruled that real estate professionals must materially participate (spend over 50% of their working hours and 750 or more hours each year) in real estate as a developer, landlord, broker, etc. But a district court recently ruled that to meet the material participation rules on each separate rental unit, taxpayers may elect to group multiple rentals as a single activity. This makes it much easier to qualify to deduct passive losses under the material participation rules [Gragg, U.S. District Court, CA.].

The election can be made by attaching a statement to your form 1040 stating that you are treating all rentals as a single activity under Code Section 469(c)(7)(A).

4. Under the tax law in 2010, a credit was allowed for purchasing a new residence if the taxpayers resided in a previous principal residence for five out of eight years. If the couple were not married and then married and purchased a home jointly, each one had to meet the test. But the Tax Court, in 2012, ruled that a couple was allowed to take the credit because the wife owned and lived in her principal residence for five years. The credit was allowed even though the husband did not reside in his wife’s home in the past three years. The IRS appealed the Tax Court decision to the 11th Circuit Court of Appeals. This Court overturned the Tax Court decision stating the Tax Court’s decision was wrong because the husband had not owned and lived in a principal residence for the requisite time period [Packard,11th Cir.].

5. A Texas District Court ruled that the IRS can hold heirs responsible for unpaid estate taxes.

The Court said the IRS can collect $500,000 in unpaid taxes from the inheritance of the heirs and also from the executor who made the payout [Whisunhunt, D.C., Texas].

6. A corporation is allowed a deduction for donations of inventory to 501(c)(3) organizations providing services to the ill, needy, or infants. The deduction is equal to the lesser of twice the cost or cost plus half of the gross profit when sold. In a recent case, a corporation donated inventory that included nail polish, soap, hair restoration products, and perfumes. The IRS ruled that the deduction was limited to th lower of the items cost or market value because the goods were not solely for the ill, needy, or infants.

7. The IRS will soon issue a short form (1023-EZ) for small groups to apply for 501(c)(3) status.

It will be much simple than the present form 1023.

The IRS also said within a few months they will have a faster-within a few days- and more streamlined process for reviewing 501(c)(3) organizations exempt stratus.

{as reported in The Kiplinger Tax Letter April 11, 2014}

In accordance with Circular 230 Disclosure

Dr. Goedde is a former college professor who taught income tax, auditing, personal finance, and financial accounting and has 25 years of experience preparing income tax returns and consulting. He published many accounting and tax articles in professional journals. He is presently retired and does tax return preparation and consulting. He also writes articles on various aspects of taxation. During tax season he works as a volunteer income tax return preparer for seniors and low income persons in the IRS’s VITA program.

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