Tag Archives: tax law

Do You Compare To Professional Baseball Players?

baseballMaybe not so much when it comes to throwing, catching and hitting. However, you might when it comes to taxes. If you, or your company makes money in multiple states, you may have more in common than you think.

Most companies that do business in multiple states are aware that they are subject to pay state income taxes based on allocation. Some firms use sales percentages as their allocation base while others look for various options. For example, many trucking companies use number of miles as an allocation base.

Individual tax-payers should be aware that the same may apply to them. Their income may be taxed based on which state it is earned in. Employment in varying states within a given year may lead to the requirement of multiple state tax returns. A common allocation method for individuals is the number of days worked in each state as a percentage of the total days worked for the year.

Professional athletes are often targeted as those that fall victim to multiple states’ income taxes. Major league baseball players, in particular, are susceptible since they are highly compensated and spend so much time playing out of state. MLB teams play an average of over 80 road games every season. For those athletes who reside in states with low or even no taxes, this can result in a substantial addition to the athlete’s tax liability.

The two most common ways that ballplayers allocate their high earnings to different states are the Duty Days Method and the Games Played Method. The Duty Days method takes into account all the days spent in a state as a percentage of the total days of the season (from the beginning of spring training to the close of the season). The Games Played Method only takes into consideration the number of pre-season, post-season, and regular season games played, it doesn’t account for travel days or spring training.

The team and city that a major league ballplayer plays for can affect how much extra state income tax they will face. For example, the Cincinnati Reds who play in the National League, face more opponents from high-tax California, and do their spring training in Arizona. The Detroit Tigers on the other hand, play more frequently against their American League (AL) opponents in non-tax states, and do their spring training in Florida.
The 2013 Detroit Tigers’ AL schedule has them set to play 20 games in the states of Florida, Texas or Washington, all of which do not have state income taxes. In addition, they spend almost two months of spring training playing in the Grapefruit League in Florida. The smaller number of days spent by Tiger players earning income in non-tax states may give them a tax advantage over players on other teams.

The Cincinnati Reds’ 2013 road schedule only has them playing nine games in states without income taxes. In addition they are scheduled to play 13 games in California, which at up to 13.3%, has the highest state income tax of any state in the country. The Tigers will only spend six days of 2013 playing on the Golden Coast. Also, spring training for the Reds is spent in the Cactus League in Arizona, instead of non-tax Florida.

Moral of the story: whether it’s a company or individual, the state in which money is earned matters. Just like professional athletes, individuals or companies that do business in multiple states should be mindful of how they are allocating their earnings, and what states they may owe taxes to. Keep in mind that most states have reciprocity agreements with border states and an actual tax return is not needed. More importantly, if you make it to the big leagues, make sure you play for an AL team!

By: Anthony J. Mifsud, Staff Accountant

Are You In A State Where You Are Affected By Higher FUTA Rates?

Tax-pieEmployers pay FUTA tax of 6% on the first $7,000 of wages paid to each employee in a calendar year. This tax is offset by credits up to 5.4% (the normal credit) against the FUTA tax liability which makes the net FUTA tax rate for most employers 0.6% (6.0% – 5.4%). Employers in 17 states may not be eligible to claim the maximum state unemployment tax credit of 5.4% on their 2013 federal unemployment tax return due to their state having had outstanding federal unemployment insurance loans for at least two years. Under Title XII of the Social Security Act, states with financial difficulties can borrow funds from the government to pay unemployment benefits. When repayment of the loan fails to be made timely, the normal FUTA credit available is reduced. The FUTA tax rate increases 0.3% beginning with the second consecutive January 1st in which the loan isn’t repaid. The FUTA tax rate continues to rise 0.3% for each additional year that the loan remains unpaid.

Arizona, Arkansas, California, Connecticut, Delaware, Georgia, Indiana, Kentucky, Missouri, Nevada, New Jersey, New York, North Carolina, Ohio, Rhode Island, South Carolina, Wisconsin and the Virgin Islands will all be in credit reduction states in 2013 unless they repay their outstanding federal loans by November 10, 2013. Most of these, including Ohio, are slated for a 0.9% credit reduction on their 2013 FUTA tax return because of their failure to repay its outstanding loans for four consecutive years. This equates to a $63 per employee increase maximum.

By: Amy Slates, CPA

Tax Aspects of Supreme Court Decision on DOMA

1370303807000-SUPREMECOURT-1306031959_4_3_rx404_c534x401Last week the Supreme Court narrowly ruled that the Defense of Marriage Act (DOMA) is an unconstitutional deprivation of equal protection. For tax purposes, under DOMA, same- sex marriages were not recognized by the federal government for any purposes including Social Security benefits, filing joint tax returns and claiming the unlimited marital exemption on estate tax returns. Whether the resident state recognized the marriage or the union made no difference. 

DOMA was signed into law in 1996 by President Clinton. The first state to recognize same-sex marriages was Massachusetts in 2004. Since then, 12 more states have followed in allowing some form of same-sex union including California. Neither Ohio nor Michigan currently recognizes same-sex marriages or civil unions.

While DOMA is not a tax law, this decision has major tax effects for same-sex couples. In fact, the case which brought this issue to the Supreme Court is an estate tax case where the estate was denied the marital deduction and required to pay estate tax of $363,053 which otherwise would not have been owed.

As a result of the Supreme Court’s decision, there are a myriad of tax related options and benefits now available to same-sex couples. Legally married same-sex couples are now entitled to file joint tax returns which MAY produce a lower total tax bill. They are now eligible to get tax-free employer health coverage for their spouse. From a gift tax perspective, they can now make unlimited tax-free transfers between spouses as well as elect to “split” gifts made to others as made one-half by each to utilize a higher annual exclusion amount. From an estate tax standpoint, they are now eligible for the first spouse to die to get an unlimited marital deduction for amounts transferred to the surviving spouse. And the surviving spouse is eligible to take advantage of the portability of the unused estate tax exemption of the first spouse to die. There are also more beneficial options available for surviving spouses for distributions from qualified retirement plans and IRAs after the death of the first spouse. These are just a few of the many provisions in the tax code related to married couples.

Couples who are affected by this law should consider amending their tax returns for any open years and consider updating their estate planning documents.

The rules and regulation of marriages has long been controlled by the states. While this decision struck down the provisions of DOMA, a federal law, the Court stated that this opinion and holding are confined to “lawful marriages”. At this point, it is unclear how this ruling affects states which recognize domestic partnership or civil unions as opposed to same-sex marriages.

By: Sandi Towns, CPA/PFS, CFP®

Hire Your Child This Summer

Hire-Your-KidsAre you a small business owner? Did you know your child can be a great tax savings device? Putting your child to work in your business is not only is a great way to teach responsibility and some valuable workplace skills, but also an excellent strategy to minimize tax liability.

What You Need to Know

1. A Tax Deduction for You. If you hire your child as an employee, you can deduct wages paid to him or her just as you would deduct wages paid to any other employee. The wages must be reasonable and must be for bona fide work done in connection with your trade or business. The wage deduction, in effect, lowers both your income and self-employment tax. And, as a bonus, if your child is younger than 18 and your business is conducted as a sole proprietorship or as a husband-wife partnership, your child’s wages generally will not be subject to Social Security and Medicare (FICA) taxes.

2. Tax-free Income for Your Child. The wages will represent taxable income to your child. But, in 2013, a dependent child can earn as much as $6,100 and pay no federal income taxes on the earnings because of the standard deduction. Your child would not even have to file a federal tax return if the $6,100 was his or her only income.

3. Less for the IRS. Any earnings in excess of $6,100 generally would be taxed to your child. However, single taxpayers pay federal income tax of just 10% on the first $8,925 of taxable income in 2013. Most taxpayers marginal tax bracket is probably much higher than 10% so the deduction for your child’s wages is likely worth much more than the amount of tax your child may owe.

4. Retirement Plan Savings. Additional savings are possible if the child is paid more and deposits the extra earnings into a traditional IRA. For 2013, as much as $5,500 of the child’s earnings could be contributed. Another retirement plan savings opportunity is having your child contribute to a Roth IRA. With a Roth IRA, your child can potentially accumulate lots of tax-free dollars by retirement age and will be able to withdraw all or part of the annual Roth contributions – without any federal income tax or penalty – to pay for college.

By: Katie Mokry, Staff Accountant

Charitable Gifts of Property: Follow Stringent Rules to Ensure Deductions

The tax law imposes stringent requirements for deducting charitable gifts of property. These rules are especially tough when you donate appreciated property. If you do not observe all the rules, your deduction may be reduced, or even eliminated. One recent Tax Court case dramatically illustrates this point. The taxpayer donated property worth tens of millions of dollars — which the IRS readily acknowledged — yet his final deduction was zero because he failed to obtain an independent appraisal!

Basic Rules for Gifts of Property

If you donate property to a qualified charitable organization that would have qualified for long-term capital gain if you had sold it rather than donating it — in other words, you’ve owned the property for more than one year — you’re allowed to deduct an amount equal to the property’s fair market value (FMV). Conversely, if you’ve held the property for a year or less, the deduction is limited to your basis (generally, your original cost of the property).

This provides a unique planning opportunity for some taxpayers. Notably, you can contribute property like real estate or securities that has significantly appreciated in value and then claim a large deduction based on the FMV. The appreciation in value in the property remains untaxed forever.

Generally, your current charitable deduction for appreciated property can reach up to 30 percent of your adjusted gross income (AGI). There is an overall limit of 50 percent of AGI for all charitable deductions. Any remainder above these limits may be carried over for up to five years.

However, the tax law imposes several other special requirements when you give property to charity. For instance, if you donate property that is not used to further the charity’s tax-exempt function, your deduction is limited to your basis in the property. In addition, the IRS requires a written description of property valued at more than $500. And, if you claim a deduction exceeding $5,000 for donated property, you must obtain an independent written appraisal. That was the taxpayer’s undoing in the new case.

Facts of the Case

Joseph Mohamed was a real estate broker and entrepreneur in Sacramento, California. He was also a certified real estate appraiser. Along with his wife, he set up a charitable remainder trust (CRT). Over a two-year period in 2004 and 2005, the couple contributed five properties and a shopping center to the CRT.

Mohamed appraised the properties himself and used the values established in the appraisals to claim deductions on IRS Form 8283, Noncash Charitable Contributions. But he later admitted in court that he never read the accompanying instructions to the form. Instead, he thought a self-appraisal would suffice.

Besides failing to obtain an independent appraisal, Mohamed omitted information required on Form 8283, such as the basis of the properties he had donated to the CRT. For four of the five donated real estate properties, he claimed a combined FMV of slightly more than $1 million. He claimed a FMV of $14.8 million for the fifth property, which he said that he undervalued because he didn’t want to risk an inflated deduction. For the shopping center, he used a FMV of $2 million. Mohamed also left the “Declaration of Appraiser” on Form 8283 blank.

Because of the AGI parameters for charitable contributions (see above), the couple’s deduction for 2003 was limited to $3.8 million. They carried over the excess deduction.

After the IRS audited Mohamed and questioned the self-appraisals, he hired independent appraisers to do the job right. Their appraisals resulted in FMVs similar to the ones established by Mohamed. Furthermore, subsequent sales by the CRT provided prices close to the values used by Mohamed. But the IRS continued to object that the values were excessive, so the taxpayer appealed the case to the Tax Court.

This is where the IRS laid down the law. It disallowed any deduction because Mohamed failed to obtain a written independent appraisal and omitted other required information. The Tax Court spoke sympathetically about the situation and even opined that Mohamed had probably undervalued the donations. What’s more, it acknowledged that Form 8283 could be misleading. But the rules are the rules: The independent appraisals obtained by Mohamed while he was being audited came too little, too late. Despite the harsh outcome, the Tax Court sided with the IRS and denied Mohamed any deduction. (Mohamed, TC Memo 2012-83)

Lessons to Be Learned

The stakes in this area are simply too high for any missteps. Stick to the strict letter of the law and make sure that all the proper information is entered on Form 8283. Remember that an independent appraisal is needed for a gift valued at more than $5,000. We can provide the necessary assistance to ensure that you walk away with top-dollar deductions for your charitable gifts of property.

The IRS conceded that Mohamed donated properties worth millions, yet he could not deduct a single penny. Don’t let this happen to you!