Tax Implications Of A Divorce
Jun 24, 2016
Divorce can be stressful enough without discovering down the road the assets weren’t divided equitably even when spouses were in agreement about the division of their property. Failing to take taxes into account may be to blame when one spouse receives a smaller net share than expected.
Here are some issues to consider if divorce is on your horizon.
Taxable or Not Taxable?
Payments from one spouse to the other can have tax consequences for both spouses depending on how the payments are designated. Alimony generally is deductible by the spouse who pays it and is taxable to the recipient. Child support isn’t tax deductible by the person paying it nor is it taxable income to the recipient.
Who Claims the Exemptions?
The IRS has specific rules for determining which spouse is entitled to claim the dependency exemptions for the couple’s children. Who claims the exemption can also affect eligibility for certain tax credits, such as the child tax credit. Typically, the custodial parent claims the dependency exemption. However, parents can also choose to alternate claiming the exemption. And couples with more than one child may decide to split the exemptions.
The QDRO and Retirement Benefits
A qualified domestic relations order (QDRO) is a court order that specifies the property rights regarding qualified retirement plan assets of a spouse or dependent during a divorce. A QDRO allows the transfer of all or a portion of the assets in a qualified retirement plan from one spouse to the other without loss of the plan’s tax advantages. A QDRO should be carefully executed to avoid costly mistakes.
What’s Its Future Worth?
The value of assets that seem equal may no longer be equal once taxes come into play. Selling an asset in the future may create a tax liability. So spouses will need to consider more than current value when dividing investments and similar property.
Issues related to dividing assets during a divorce can be complex. Couples should seek professional advice.
Categories: Other Resources, Tax Compliance, Tax Planning
Independent Contractor or Employee?
Jun 16, 2016
This seems like such a simple question. However, many companies and employees never take the time to consider their position. This is one of the most important decisions in the tax world. In fact, it goes well beyond taxes as it involves workers’ compensation, unemployment insurance, state and federal wage and labor laws, pension laws, nondiscrimination laws and more.
From an employer’s perspective, it’s often preferable to hire freelancers and contractors instead of employees. An employer is not required to pay for all the benefits offered to regular employees, such as health insurance, bonuses, 401(k) plan contributions, and so on. As a result, employers experience considerable incentives when utilizing independent contractors. More often than not, such employment follows the regulations set forth by the law. Nevertheless, some employers have been accused of misclassifying workers who should be considered employees as contractors instead.
The IRS has issued guidelines on the matter, stating “if you have the right to control or direct not only what is to be done, but also how it is to be done, then your workers are most likely employees.” Meanwhile, “If you can direct or control only the result of the work done — and not the means and methods of accomplishing the result, then your workers are probably independent contractors.” The distinction is important because there are penalties for misclassification.
For businesses of all sizes, the fines are everywhere and they’re not cheap. Take a look:
- The Department of Labor ordered three construction companies to pay $491,100 in back wages and damages to 99 employees who were misclassified as independent contractors, in addition to another $108,900 in civil fines.
- A prominent shipping company settled a series of class action lawsuits alleging worker misclassification for a total of $27 million. Previously, the IRS had already ordered the company to pay $319 million in back taxes and penalties.
- The San Diego Union Tribune, owned by The Copley Press Inc., was ordered by a state court judge in California to pay $6.1 million in legal fees to the attorneys for a class of over 1,200 paper carriers to whom the court had earlier awarded $3.2 million in damages and another $1.75 million in interest. The final cost of the verdict against the newspaper for misclassification of the paper carriers as independent contractors totaled $11 million.
The IRS has given guidelines to its agents to determine worker status. In the past, a list of 20 factors compiled by the IRS had been used in court decisions to determine worker status. The list, sometimes called the “20-Factor Test” is still used as an analytical tool, although some of the factors are no longer as relevant as they once were.
Basically, the IRS’ 20-Point Checklist focuses on three main factors:
- How much control the employer has over the worker’s behavior and work results. (Who controls training, where and what time the person works, what equipment they use?)
- How much control the employer has over finances? (Does the employer have primary control over the person’s profit or loss?)
- What is the relationship between the parties? (Does the worker receive benefits? Is it a long-term relationship?) Estimates are that 20% of businesses misclassify workers, so make sure your business understands the difference.
By: Mark Dietrich, Accountant
Categories: Other Resources, Tax Planning
Donating Excess Inventory to Charity
May 24, 2016
Getting rid of excess or obsolete inventory can provide much needed warehouse space. Some businesses may choose to donate excess inventory to charity. However, it is important to be aware of the tax regulations involved in this type of charitable giving.
A donation of inventory to a qualified organization is potentially tax deductible as a charitable contribution. The amount that is deductible is the smaller of the donated inventory’s fair market value on the day it is contributed or its basis.
The basis of contributed inventory is any cost incurred for the inventory in an earlier year the business would otherwise include in its opening inventory for the year of the contribution. The business must remove the amount of the charitable deduction from its opening inventory. It is not part of the cost of goods sold.
If the donated inventory’s cost is not included in opening inventory, the inventory’s basis is zero and the business may not claim a charitable contribution deduction. In this scenario, the business treats the inventory’s cost as it would ordinarily be treated under its method of accounting.
Under a special rule, a C corporation that donates inventory to a qualified charity that will use the donated items for the care of the ill, the needy, or infants may qualify for an enhanced (above-basis) deduction. Similarly, any trade or business that donates food inventory meeting certain standards may qualify for an enhanced deduction.
Categories: Non-Profit, Tax Compliance, Tax Planning