Don’t get trapped in the alimony gap
According to the Treasury Inspector General for Tax Administration (an IRS watchdog), there’s a big discrepancy between deductions claimed by ex-spouses paying alimony and the alimony income reported by recipients. Generally, alimony is deductible by the payer and taxable to the recipient. But property settlements and child support payments are neither deductible nor includable in income.
The IRS is looking at strategies for closing the alimony gap. If you’re uncertain whether payments you’re making or receiving constitute alimony — or if you’re not sure how your spouse is treating these payments for tax purposes — consult your tax advisor.
Year end bonus plans: Design with care
A popular year end tax-planning strategy for employers is to deduct bonuses in the year they’re earned but to defer payment to the following year. Many employers assume that they’re eligible for the IRS rule that permits this strategy if bonuses are paid within 2½ months after the end of the tax year in which they’re earned (by March 15 for a calendar-year taxpayer). But that’s not always the case.
First, the strategy is available only to accrual-basis taxpayers. Cash-basis taxpayers must deduct bonuses in the year paid. Second, even businesses using the accrual method of accounting must meet certain requirements to deduct bonuses in the year earned, including the "all events" test.
Under that test, an accrued bonus is deductible when 1) all events have occurred to establish liability for the bonus, and 2) the amount of the bonus can be determined with reasonable accuracy.
Certain bonus plan design features may cause bonuses to not be deductible until paid. For example, if an employee who leaves the company before the payment date forfeits his or her bonus, you won’t pass the all events test until the bonus is paid (unless forfeited bonuses are reallocated to other employees who remain with the company). Also, bonuses that are contingent on board approval or other events that take place after year end generally aren’t deductible until paid. Further, there are restrictions on deducting accrued bonuses to related parties.
How to collect your 2014 refund now
If you usually receive a large federal income tax refund, you’re essentially making an interest-free loan to the IRS. Rather than wait until 2015, why not enjoy your "refund" now by reducing your withholdings or estimated tax payments for the remainder of 2014? It’s particularly important to review your withholdings, and adjust them if necessary, when you experience a major life event, such as marriage, divorce, birth or adoption of a child, or if you or your spouse is laid off.
If you have any questions regarding this article, please contact Friedman LLP at email@example.com or 877-538-1670.