Category: Personal Taxation

Get ready to pay back some money!

A new Internal Revenue Service (IRS) private debt collection program has been authorized by Congress to collect overdue federal tax debt as early as spring 2017. The mandate was to pursue these unpaid taxes that the IRS is not actively pursuing, while respecting taxpayer privacy and rights. Once again, Congress has approved using private debt collectors having tried  before with mixed results.  As a condition for being chosen, the four approved companies must follow the consumer protection provisions of the Fair Debt Collection Practices Act.

However, the new program creates an issue. “Tax collection is a basic function of government and should be carried out by government employees,” stated Chuck Marr, the Director of Federal Tax Policy at the Center on Budget and Policy Priorities. Critics/people including Chuck Marr and Senator Bob Menendez believe that the new program is a mistake and an awful idea because back in 1996-1997 and 2006-2009, when the IRS used private collectors, it was not that successful (i.e., did not generate revenue in 2006-09).  Others believe that the new program will open new doors for telephone scammers; tax scams are considered to be one of the fastest growing IRS problems. Taxpayers should know that the IRS contacts taxpayers by mail to notify them about unpaid tax debt.

So will this idea of hiring private tax collectors be more successful during this year? Will it fail again? Should the government find another way to solve this issue of people not paying their taxes?

Here are some key points to keep in mind:

1. Private collectors will first contact taxpayers by mail.
2. When the private collector identifies the correct address of the taxpayer, he/she will ask for a full payment by a telephone call. If the taxpayer cannot pay the full amount, the private collectors will offer of an installment plan.
3. Private collectors cannot accept payment – do not pay them directly.
4. The Fair Debt Collection Practices Act applies to these private collectors (Debt Collection Practices § 1692a- § 1692p).
5. If you have a large federal tax debt, you will have difficulties you’re your foreign travel because under the law the IRS has the power to revoke your passport.

By Phatryna Suon, Alfred University, B.S. Accounting 2017

There has been recent news on the divorce of Brad Pitt and Angelina Jolie. They are famous for their movie roles together and were seen as “the” power couple, but their divorce brings an extra dimension to their roles in that I now have more of an insight into how taxes work, especially from their celebrity lives.

Angelina Jolie has filed for divorce from Brad Pitt for irreconcilable differences, which basically means neither was at fault for ending their marriage.

Now, let’s get into tax!

You need to carefully use the correct filing status when filing for your income tax return. In Jolie’s and Pitt’s case, even though they were legally married for two years, they are considered unmarried under IRC §7703 which provides:

“. . .the taxpayer is unmarried or considered unmarried for the entire year. . . if by the last day of their tax year: (1) they are legally separated under a divorce or separate maintenance decree. . .[or] (2) they are divorced.”

Filing as unmarried taxpayers may be more tax advantageous to the couple than filing separately as a married couple.

Yay for Jolie, she gets to keep her engagement ring which was worth $250,000. Why? Because under most state laws the ring belongs to the bride if there was a successful wedding, which Jolie and Pitt did have. She also takes the original cost basis of her rind under IRC §1041, so if she sells her ring the first $250,000 is tax free, with any excess taxed at a favorable Long Term Capital Gain tax rate under IRC §1(h).

Jolie does not ask for alimony (i.e., spousal support) from Pitt; alimony is taxable as ordinary income under IRC §71.  And while the former couple also have a prenuptial agreement dividing their marital property, such property divisions are generally tax free if they meet the requirements of IRC §1041 or §2516.

And finally, Jolie has asked for full custody of their six children and will probably also ask for child support. Generally, child custody will allow her to claim her children as dependents under IRC §152 (a), and child support payments received are not taxable to Jolie under IRC §71.  Moreover, having custody of their children generally makes Jolie eligible for a filing status of Head of Household under IRC §2(b).

In the end, it doesn’t matter who you are, divorce triggers important tax and legal issues that should be addressed timely. It is good to have a tax attorney to help guide and give you advice when going through a divorce. Remember that the tax code does grant tax benefits that can reduce some stress through the divorce process.

By Phatryna Suon, Alfred University, B.S. Accounting 2017

 

This week I covered tax exclusions with students in my personal income tax class, and I think that concept is extraordinary given the broad mandate of §61 of the Internal Revenue Code:

. . .Except as otherwise provided in this subtitle, gross income means all income from whatever source derived. . . .

Exclusions speak to what this county holds dear, what it places a great value on over and above collecting revenue.  Exclusions are preferences that shifts the tax burden away from those who are the subject of that benefit onto the general taxpaying public.  The question becomes, whether that those who benefit are worthy, and if so then whether the mechanism is effective.

For example, §103 generally provides that interest received from state and local bonds are exempt from taxation, irrespective on the financing purpose.  Should sport stadium financing qualify?

For example, §121 provides that the first $250,000 of gain from the sale of the taxpayer’s principal residence ($500, 000 if Married Filing Jointly) is excluded from taxation (with any remainder generally taxed at capital gain rates), irrespective of the total gain from the sale or of the income of the taxpayer.  Should the first $250,000/$500,000 be exempt from the sale of a multi-million dollar home, or if the Adjusted Gross Income of the selling taxpayer is in a generally high tax bracket?

Maybe, these and other tax exclusions should be reconsidered, or at least fine tuned, especially if the remainder of the taxpaying public have to foot the bill for these preferences.  Insist that tax exempt municipal financing be limited to certain projects.  Insist that those able to pay additional amounts of capital gain do so, or that the exclusion amount is indexed to regional economics.

The additional amounts collected may well be de minimus in the grand scheme of things, but that’s not the point to those who have to foot the bill.  Let’s see the forest and the trees.

 

The Olympics should be a time for excitement and great honor. But for the US Olympians who win medals, it’s a time for major tax obligations.

For winning a gold, silver or bronze medal, the Olympians get paid $25,000, $15,000 and $10,000 respectively. This, of course, is income and will be taxed as such under §74 Prizes and Awards which provides:

“prizes and awards, other than certain types of fellowship grants and scholarships and limited employee achievement awards, are generally includible in gross income.”

The Olympians also get taxed on the fair market value of the medals as well. The medal is valued when it is earned, not after, so the Olympians were lucky this year in Rio since the value of medal is lower than recent years. The value of the medals is $564 for gold, $305 for silver and close to nothing for the bronze. Putting the Olympians in the top tax bracket would mean a 39.6% tax on their winnings:

• Gold = $9,900
• Silver = $5,940
• Bronze = $3,960

In recent months and with the Rio 2016 Olympics having just occurred, the Senate has passed a bill that was introduced by Senator Schumer to exempt the Olympian winners from taxation. However, since July, the House has not moved on the bill.

Nonetheless, most athletes can deduct the cost of training, travel and their equipment from their taxes, if they consider this job their business. Under §162 Trade or Business Expenses it states that deduction is allowed for necessary expenses paid during the tax year, which includes the training and travel that the athletes must endure in order to be successful. Athletes, like Simone Biles, who won four gold medals and a bronze, could face around a $44,000 tax bill. However, her endorsements and many other athletes like her such as Michael Phelps and Kevin Durant who are millionaires, can afford these taxes. Although this seems like a crazy concept to tax our Olympians on their accomplishments, it makes sense to since these are prizes and awards and the medals are worth actual money.

By: Rachel Winter, Alfred University, MBA Accounting 2017