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Archives for May 2013

The Tax Treatment of Alimony

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In divorce, the parties divide the marital property and enter into child and/or alimony agreements.   Property divisions among spouses pursuant to a divorce are not deductible to the transferring spouse and are tax-free to the receiving spouse.  Likewise, child support payments are not deductible to the paying spouse and are tax-free to the receiving spouse.  The tax treatment of such property transfers and child support are Tax treatment of alimony
locked in—the parties cannot change the tax treatment.

The tax law treats alimony payments differently.  Alimony is deductible to the paying spouse and is taxable to the receiving spouse.  When a party to divorce is required to make payments to the former spouse, from a tax perspective it is advantageous to have the payment treated as alimony.  This is due to the tax deduction that will be allowed to the paying spouse.  The receiving spouse would prefer child support or property division treatment since these receipts will be tax-free.

If the parties don’t find the tax treatment of alimony advantageous, they can elect out of alimony treatment so that the alimony payments are not deductible by the payor and are not taxable to the recipient.

To receive alimony treatment, the alimony payments must meet tax law requirements.  Regardless if the payments qualify as alimony under domestic relations law, they will not be taxed as alimony unless they meet tax law requirements.

Alimony Requirements

All of the following requirements must be met to receive alimony treatment:

Payments must be made under a written divorce or separation agreement.  Payments made before such an agreement is executed will not qualify as alimony.  Additionally, payments made under oral agreements will not be treated as alimony.

Spouses cannot live together after divorce.  After the divorce or legal separation is final, the spouses cannot be members of the same household when the payment is made.  However, payments made under a separation agreement (which is operative before the divorce or legal separation is final) will qualify as alimony if the parties continue to live together.  Once the divorce or legal separation is final, the payments will no longer qualify as alimony.

The payments must be made in cash or cash equivalents

The payment must be made to or on behalf of a spouse or former spouse.  Payments will be made to a spouse under a separation agreement and to a former spouse under a divorce decree.

The parties do not elect out of alimony treatment.

The parties must file separate returns.  Once the divorce is final, the parties will not be able to file a joint return.  However, under a separation agreement, the parties are still married, are eligible to file a joint return, and will qualify for alimony treatment.

The payments must not be child support.  If the payment is labeled child support in the agreement, the payments will not qualify as alimony.  Even if the payments are labeled alimony, they may be treated as child support if the payments are reduced or eliminated upon a child related contingency.  Examples of child related contingencies include the child reaching the age of majority, getting married, or dying.  Since the payments are related to events involving the child, the tax law treats these payments as child support.

The payments must terminate at the receiving spouse’s death.  The purpose of alimony is to maintain the receiving spouse’s standard of living.  If payments are made to the spouse after his/her death then the payments really aren’t to maintain the standard of living.  Payments that are required to be made after death tend to occur because the marital estate could not be easily divided and one spouse must make payments to the other spouse to equalize the division.  These payments are property divisions and will not qualify as alimony.

 

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Buzzkill Disclaimer:  This post contains general tax information that may or may not apply in your specific tax situation. Please consult a tax professional before relying on any information contained in this post.

How to Calculate Overtime for Tipped Employees

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Background on Minimum Wage Rules for Tipped Employees

The current minimum wage in Michigan is $7.40 per hour.  The Michigan Minimum Wage Law covers tipped employees age 16 and over.  Under Tipped Employeethis law, employers may pay tipped employees $2.65 per hour if tips received by the employee plus the $2.65 hourly rate equals the minimum wage of $7.40.  Thus, employers may pay tipped employees $2.65 per hour provided that reported tips per hour equal at least $4.75 (so the total hourly rate is $7.40).  This $4.75 reduction in the minimum wage is referred to as the Tip Credit.

How to Calculate Overtime for Tipped Employees

When calculating overtime for tipped employees it is important to note that the hourly rate being multiplied by 1.5 is the minimum wage of $7.40 and not the reduced wage of $2.65.  The tip credit then reduces the overtime pay rate.

Example:  Jimmy’s Restaurant has a waiter who works 50 hours in a week.  The waiter’s pay rate is $2.65 per hour and the employee earns $250 in tips for the week.  The overtime pay rate is calculated as:

Minimum Wage:              $7.40

Times 1.5:                   $11.10

Less Tip Credit:            ($4.75)

Overtime Pay Rate          $6.35

The waiter’s gross pay is:

40 hours at $2.65 standard rate:               $106.00

10 hours at $6.35 overtime rate:                $63.50

Reported Tips:                                        $250.00

Total Gross Pay                                       $419.50

A common mistake is to simply take the $2.65 minimum tipped wages and multiply it by 1.5.

Calculating Overtime When Employees Have Different Pay Rates

When employees have different pay rates during a pay period (e.g., a waitress also works as a hostess), a weighted average pay rate must be calculated.  This average pay rate is then used to calculate the overtime rate.

Example:  Jimmy’s restaurant has a waitress who makes $2.65 per hour as a waitress and $8 per hour as a hostess.  She earned $200 in tips.

She has the following hours during a week:

Waitress:               40 hours at $2.65

Hostess:               30 hours at $8.00

 

Step 1: Calculate Weighted Average Pay Rate:

40 hours at $7.40                              $296.00

30 hours at $8.00                              $240.00

Total                                               $536.00

Divide by 70 hours                           $7.66 (this is the weighted average pay rate)

 

Step 2: Calculate Overtime Premium

Divide Average Rate in Half                     $3.83

Overtime Premium                             $114.90 (30 hours of overtime times $3.83                                                                    overtime premium)*

*The employee has already been paid 70 hours at the average standard rate of $7.66.  This calculation adds the overtime premium to gross pay.

 

Step 3: Reduce Gross Pay by the Tip Credit

Less Tip Credit                                 ($190.00) ($4.75 Tip Credit times 40 hours worked                                                                     as a waitress)

 

Step 4: Add Reported Tips

Reported Tips                                    $200.00

 

Her total gross pay is:

40 Hours at $7.40                             $296.00

30 Hours at $8.00                             $240.00

Overtime Premium                           $114.90

Reported Tips                                    $200.00

Less: Tip Credit                                ($190.00)

Total Gross Pay                                         $660.90

 

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Buzzkill Disclaimer:  This post contains general tax information that may or may not apply in your specific tax situation. Please consult a tax professional before relying on any information contained in this post.

 

Report Foreign Financial Accounts to IRS by June 30 or Face Penalties

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More and more attention is being paid to taxpayers hiding assets offshore to purposely evade taxation.  At the same time, many people don’t realize that U.S. citizens and permanent U.S. residents are taxed on their worldwide income.  These people inadvertently avoid paying tax on their foreign income.

Taxpayers must now comply with two separate reporting requirements for offshore assets.  The first requirement is the Foreign Bank and Financial Account Report (FBAR).  The second is the Foreign Account Tax Compliance Act (FATCA).  This post will focus on the FBAR requirements.

The Foreign Bank and Financial Accounts Report (FBAR)

If you have:

  • a financial interest in OR
  • signatory authority over

a foreign financial account, including a bank account, brokerage account, mutual fund, trust, or other type of foreign financial account, the Bank Secrecy Act may require you to report the account to the IRS annually by filing Form TD F 90-22.1.

When you have a domestic financial account, the domestic financial institution holding the funds will report interest, dividend, capital gain, and other taxable income to the IRS.  Because foreign financial institutions may not be subject to the same reporting requirements, the IRS requires taxpayers with foreign accounts to report their holdings of foreign financial accounts.

The FBAR is also a tool to help the U.S. Government identify people who may be using foreign financial accounts to circumvent U.S. law.  Investigators use FBARs to help identify or trace funds used for illegal purposes or to identify unreported income held or earned offshore.

YOU MUST FILE A FBAR IF YOU ARE A U.S. CITIZEN OR PERMANENT RESIDENT AND:

  • YOU HAD A FINANCIAL INTEREST IN OR SIGNATORY AUTHORITY OVER AT LEAST ONE FINANCIAL ACCOUNT LOCATED OUTSIDE OF THE U.S.; AND
  • THE TOTAL VALUE OF ALL FOREIGN ACCOUNTS EXCEEDED $10,000 AT ANY TIME DURING THE CALENDER YEAR TO BE REPORTED

The foreign account must be reported even if the account produces no taxable income.

The FBAR must be received by IRS on or before June 30 of each year.

Penalties for Not Filing FBAR:

A person who is required to file an FBAR and fails to properly file may be subject to a civil penalty not to exceed $10,000 per violation.  If there is reasonable cause for the failure and the balance in the account is properly reported, no penalty will be imposed. A person who willfully fails to report an account or account identifying information may be subject to a civil monetary penalty equal to the greater of $100,000 or 50 percent of the balance in the account at the time of the violation. Willful violations may also be subject to criminal penalties

 

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Buzzkill Disclaimer:  This post contains general tax information that may or may not apply in your specific tax situation. Please consult a tax professional before relying on any information contained in this post.

Which NEW Employees Must be Offered Health Care?

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The Affordable Care Act requires certain employers to provide affordable health insurance coverage to their full time employees.  The Act defines full time as 30 hours per week.  The 30 hours per week standard is more complex than you would think because several different types of employees work varying hours per week.

The IRS has written 80 pages of regulations to “help” employers determine which of their employees are full time.  There are separate rules for existing employees and for newly hired employees.  This post will address the rules for determining the full time status of newly hired employees.

Newly Hired Employee Reasonably Expected to Work Full Time

If a new employee is reasonably expected to work at least 30 hours per week, the employer must provide that employee with health insurance coverage by the end of the employee’s initial three full calendar months of employment.  The employer will not be subject to a penalty for not providing health insurance coverage during the initial three months of employment.  However, if the employer does not provide health insurance coverage after the initial three months of employment, the employer will be subject to a penalty not only for subsequent months, but also for the initial three month period.

Newly Hired Employees Working Varying Hours per Week

If an employer cannot determine if a newly hired employee will work at least 30 hours per week at the hire date, the employer must examine the employee’s total hours worked during an initial measurement period.  The initial measurement period must begin on any date between the employee’s start date and the first day of the first calendar month following the employee’s start date.

The initial measurement period must last at least three months.  The employer determines the employee’s average hours worked per week during this measurement period.

Employee is Full Time

If the employee averages at least 30 hours per week, the employer must provide the employee health insurance coverage for a subsequent stability period.  The stability period must be at least six months long, must at least be as long as the initial measurement period, and must be as long as the stability period offered to existing employees

In addition to the initial measurement period (where the employer examines the average hours per week of the employee) and the stability period (where the employer provides health insurance coverage to the employee), the employer can have an administrative period in which the employer actually examines the hours worked during the measurement period, notifies employees of their eligibility, and enrolls employees in coverage.  The administrative period cannot exceed 90 days.

Employee is Not Full Time

If the employee does not average at least 30 hours per week during the initial measurement period, the employer does not have to provide health insurance coverage to the employee during the stability period.  The stability period for a non-full time employee can be no more than one month longer than the initial measurement period, and cannot exceed the remainder of the standard measurement period used for existing employees.

Examples

The following examples have the following facts:  ABC Corp has a measurement period of November 1 to October 31 each year to test existing employees.  It has an administrative period of November 1 to December 31 to conduct testing and enroll eligible employees.  The stability period during which it provides health insurance coverage is January 1 to December 31.

For newly hired employees, ABC Corp uses an eight month initial measurement period, 60 day administrative period, and a one year stability period.

Example 1:  ABC Corp hires Joan on May 1, 2013.  Joan’s initial measurement period runs from May 1, 2013 to December 31, 2013.  During the administrative period from January 1, 2014 to February 28, 2014, it is determined that Joan averaged less than 30 hours per week during the initial measurement period and ABC Corp does not have to provide her with health coverage during the stability period.  Here, the initial stability period must end before the earlier of:

  • November 30, 2014 (the stability period for non-full time employees cannot exceed the length of the initial measurement period plus one month.  Here the initial measurement period is eight months, so the stability period cannot exceed nine months.  The stability period begins after the sixty day administrative period ends on February 28, 2014
  • October 31, 2014 (the end of the standard measurement period for existing employees). 

Example 2:  Same facts as example 1 except that Joan averages more than 30 hours per week during the initial measurement period.  ABC Corp must offer health insurance coverage to Joan for the one year stability period beginning March 1, 2014 and ending February 28, 2015.

Transitioning from a New Employee to an Existing Employee

A new employee generally starts working after a standard measurement period begins.  This is why an initial measurement period that begins on the employee’s start date applies for new employees.  After a new employee has been working for a while, they will be employed at the beginning of a standard measurement period and will be tested under the rules for existing employees.  However, if the employee qualified as a full time employee during the initial measurement period, her health insurance coverage cannot be terminated before the end of the initial stability period.

Example:  Same facts as Example 2 above—Joan is a full time employee during the initial measurement period.  ABC Corp must provide Joan with health insurance during a one year stability period beginning March 1, 2014 and ending February 28, 2015.

Joan is now employed during the standard measurement period beginning November 1, 2013 and ending October 31, 2014.  If Joan does not average 30 hours per week during this standard measurement period, ABC Corp would not have to provide her with health insurance coverage for the one year stability period beginning January 1, 2015.  However, because Joan average at least 30 hours per week during her initial measurement period, ABC Corp must continue to offer health insurance coverage to Joan during her one year initial stability period ending February 28, 2015.   ABC Corp may discontinue her health insurance coverage on March 1, 2015.

If Joan averaged at least 30 hours per week during the standard measurement period, she would qualify for health insurance coverage during the one year standard stability period beginning January 1, 2015 and December 31, 2015.  Here, her coverage would be extended from February 28, 2015 through December 31, 2015.

 

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Buzzkill Disclaimer:  This post contains general tax information that may or may not apply in your specific tax situation. Please consult a tax professional before relying on any information contained in this post.

Extended & Expanded: Tax Credit for Employers Hiring Certain Employees

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The Work Opportunity Tax Credit is available for a portion of first-year wages paid to certain qualifying employees who begin work during 2013.  The credit is available for employers who hire members of the following targeted groups:

  • Veterans
  • Ex-felons
  • Long term family assistance recipients
  • Vocational rehabilitation referrals
  • Summer youth employees
  • Nutrition assistance recipients
  • Social security income recipients
  • Designated community residents
  • Qualified IV-A recipients

This tax credit existed during 2012, but it was only available to employers hiring veterans (although in prior years it was available for all of the above targeted employees).  The American Taxpayer Relief Act of 2012 extended the tax credit for the all of the above employees who begin work during 2013.

The credit is 40% of qualified first-year wages for certified workers who work at least 400 hours, and 25% for certified workers who work at least 120 hours, but less than 400 hours.  These employees must be certified by designated local agencies, either in advance or immediately after employment begins.  IRS Form 8850 guides employers through the certification process.

Qualified first-year wages are limited to:

  • $6,000 for any targeted employee
  • $14,000 for a veteran who was unemployed for at least six months within one year prior to the hire date
  • $12,000 for a veteran entitled to compensation for a service-connected disability with a hire date within one year after having been discharged or released from active duty in the U.S Armed Forces
  • $24,000 for a veteran entitled to compensation for a service-connected disability who is unemployed for at least six months within one year prior to the hire date
  • $3,000 for a summer youth employee for wages paid during any 90 day period between May 1 and September 15

Each of the targeted employee groups above must meet eligibility requirements.

In the following examples, assume the employee worked at least 400 hours during the year and the employer is therefore eligible for the full 40% credit.

Example:  ABC Corp hires Joan, a qualifying ex-felon on October 1, 2013.  Joan earns $25,000 in wages during her first year of work.  ABC Corp is eligible for a tax credit of $2,400 (40% times the maximum qualifying wages of $6,000).

Example 2: XYZ Corp hires Jane, a qualifying veteran who has been unemployed for six months immediately prior to the hire date.  Jane earns $20,000 during her first year.  XYZ Corp is eligible for a tax credit of $5,600 (40% times the maximum qualifying wages of $14,000 for a veteran who was unemployed for at least 6 months during the year prior to the hire date).

Example 3: Tim is a qualifying veteran who is receiving compensation for a service-related disability.  Tim is hired by MNO Corp and is paid $30,000 in wages.  Tim had been unemployed for 8 months immediately prior to the hire date.  MNO Corp is eligible for a $9,600 credit (40% times the maximum qualifying wages of $24,000 for a veteran who is disabled and unemployed for at least 6 months during the year prior to the hire date.)

 

 

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Buzzkill Disclaimer:  This post contains general tax information that may or may not apply in your specific tax situation. Please consult a tax professional before relying on any information contained in this post.