tax case compiled

8/18/2019 Tax Case Compiled

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• 5ot "e designated as "eing other than alimony 1e.g., child support

• e made "etween people who are living in separate households.

ccording to Internal "evenue Service *epartment o the Treasury

16ashington *4 7ection )81a o the 4ode provides that gross income includes

amounts received as alimony or separate maintenance payments. 7ection )81"18

deines the term 9alimony or separate maintenance payment: as any payment in cash

i/ 1 such payment is received "y 1or on "ehal o a spouse under a divorce or

separation instrument; 1 the divorce or separation instrument does not designate such

payment as a payment which is not includi"le in gross income under < )8 and not

allowa"le as a deduction under < 28=; 14 in the case o an individual legally separated

rom his spouse under a decree o divorce or o separate maintenance, the payee spouse

and the payor spouse are not mem"ers o the same household at the time such payment

is made; and 1* there is no lia"ility to make any such payment or any period ater the

death o the payee spouse and there is no lia"ility to make any payment 1in cash or

property as a su"stitute or such payments ater the death o the payee spouse.

payment must meet all o the actors to ualiy as alimony. 7ection )81"12 o the

4ode deines a 9divorce or separation instrument: as 1 a decree o divorce or

separate maintenance or a written instrument incident to such decree, 1 a written

separation agreement, or 14 a decree reuiring a spouse to make payments or the

support or maintenance o the other spouse.

Taxation 1

Tel 242-356-9090Fax 242-356-1010

Thompson Blvd,Nassau Bahamas N4912

[email protected]

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Analysis:

4hild support payments are not included in gross income. s cash payments

were designated as maintenance "y Jim, this characteri>ation is likely to "e ollowed.

The transer o the car is not taxa"le as income rom alimony as alimony rules reuire

that such payments made in the orm o cash. #t is clear that Jim is not entitled to

deduct any o the payments. # Linda is committed to writing, Jim may receive an

exemption rom dependency and child credit. The act that he was unemployed most

o the year, however, can mean that it owes little or no tax, and that would not "eneit

rom additional deductions or credits.

Linda cannot report any alimony income neither can Jim claim an alimony

deduction. Jim speciically paid $2000 that was designated as "eing a payment other

than alimony "ut indeed child support. 6hiles Jim has made an attempt to transer the

title o his three year old car which has a &'( ?& $%000 and a "asis o $)000 in

exchange or promise, it cannot "e recorded as alimony income or Linda neither

alimony deduction or Jim. #n essence, Linda doesn@t report any alimony income and

Jim does not report any alimony deduction.

!#ild Su$$ort and relative tax consequences

John and Linda@s divorce decree declared that payments "e made "y John to

Linda on a monthly or annual "asis. The payments were intended to "e or actually used

or child support. #n this case, John was ordered to pay $200 per month or $2%00 in

Taxation 1

Tel 242-356-9090Fax 242-356-1010


[email protected]

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child support per year. John has "een una"le to pay due to him "eing unemployed and

has paid Linda only $2000 o the $2%00 in child support. 4hild support payments are

not includi"le in the gross income o Linda, even though she is the parent receiving the

child support payments. dditionally, there is no tax deduction or Jim, even though he

has paid A3B o the child support payments.

Taxation 1

Tel 242-356-9090Fax 242-356-1010


[email protected]

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Memorandum to File

3-63- Brief Summary of Facts:

John and 'ary are our clients who have two small children and are looking or

ways to help und the children@s college education. They have heard that 7eries CC

"onds are a tax avored way o saving and have reuested your opinion on the tax

conseuences. They have asked your opinion regarding the relative advantages o

purchasing 7eries CC "onds in their names versus the children@s names. John and 'ary

have indicated that they expect to have a high level o income in the uture and that

their children may receive other income sources rom uture inheritances.Issue:

'aking recommendations a"out the taxation conseuences o 7eries CC "ond

investments or John and 'ary

Law and Analysis:

ccording to tax laws, Taxpayers may purchase and eventually redeem 7eries

CC "onds tax ree i they utili>e the takings to pay certain college expenses or

themselves, a partner, or dependents. To ualiy or the exclusion/

The "onds must "e purchased ater 8DAD "y an individual who is age 2% or

older at the time o the purchase.

Taxation 1

Tel 242-356-9090Fax 242-356-1010


[email protected]

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o

John and 'ary

From

Lyniueka . Johnson

echea *elancy

leisha 4ooper

!!

Terrance ichards

"e

The tax conseuences

7eries CC "ond

investments


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The "onds must "e purchased "y the owner and cannot "e a git to the

possessor.

• The gross rom the "ond redemption must "e utili>ed or tuition and ees, which

are irst reduced "y taxree scholarships, veteran@s "eneits, Eope and Lietime

Learning credits, and other similar measures. 'arried couples living together

must ile a Foint return to o"tain the exclusion.

Taxation 1

Tel 242-356-9090Fax 242-356-1010


[email protected]

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"ecommendation Analysis:

The primary advantage o purchasing "onds rom 7eries CC in the names o the

parents is that it may "e a"le to exclude the income interests that inally receive. They

must it the "asic reuirements that the unds will "e used or educational purposes and

comply with the limitation o income. s the limitation is indexed to inlation and

their uture incomes are unknown, parents cannot "e decided i they are entitled to the

exception. # "onds are purchased in the names o the children and are under 2% years

o age, the interest may "e su"Fect to the GchildG tax. Eowever, i the annual interest is

less than $8,D00 per child and children choose to report each year there will "e ewer

taxes even i the children are under age 2% and no tax i the income is less than $D=0.The act that parents expect highincome means that the leverage o the "onds

along the names o the children may "e more worthy. This is lawul i the annual

income is not less $8,A00 per kid or children are more than 23 years previous.The act that children can take in other income in the uture means that minors

can ace signiicant uture taxes i the "onds are purchased in their names. This is

particularly a pro"lem i the children are under age 2% "ecause they tax parents at all

income interest. # it is the case o the children pro"a"ly would "eneit rom waiting to

report the interest when the "onds are redeemed.

7eries CC "onds are deinitely a great way to help John and 'ary und their

children@s education. 7eries CC onds is a taxavored way o saving and are very

advantageous. The ull amount o interest is excluded, however, only i the com"ined

Taxation 1

Tel 242-356-9090Fax 242-356-1010


[email protected]

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amount o principal and interest received during the year does not exceed the net

ualiied educational expenses 1tuition and ees reduced "y exempt scholarships , and

the taxpayers 208% modiied H# is not over $)!000.

Eowever, "ecause John and 'ary intend on making more money in the uture

they may want to consider putting the "onds in their children@s names "ecause i their

modiied H# exceeds $)!000 or $883D=0 i they ile Fointly. The exclusion is also

ully phased out i H# exceeds $8%3, D=0 which is not seemingly "eneicial as it

deeats the purpose o the initial reason or acuiring the 7eries CC onds.

Taxation 1

Tel 242-356-9090Fax 242-356-1010


[email protected]

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Memorandum to File

%-6&- Summary of Facts :

"le 4orporation is a closely held company engaged in the manuacture and

retail sales o automotive parts. "le maintains a ualiied pension plan or its

employees, "ut has not oered nontaxa"le ringe "eneits. Iou are a tax consultant or

the company who has "een asked to prepare suggestions or the adoption o an

employee ringe "eneit plan.

Issue:

repare a recommendation or the adoption o an employee ringe "eneit plan.

The recommendations should discuss the pros and cons o dierent types o nontaxa"le

ringe "eneits.

Taxation 1

Tel 242-356-9090Fax 242-356-1010


[email protected]

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o

"le 4orporation

From

leshia 4ooper

!!

Lyniueka Johnson;

echea *elancy

"e

The tax adoption oan employee ringe

"eneit program


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"ecommendation Analysis:

&ringe or employee "eneits are compensations made to an employee "eyond

regular wages or salaries. #t is important to note that tax law encourages certain types

o ridge "eneits "y allowing the employer to deduct the cost o "eneits and the

employee to exclude such "eneits rom gross income ultimately, lowering tax

lia"ilities or "oth parties. The adoption o ridge "eneits may also "oost employee

morale and make new Fo"s more appealing to potential employees. elow outlines "oth

pros and cons o the tax conseuences on nontaxa"le ridge "eneits that can "e

adopted "y your company/

Taxation 1

Tel 242-356-9090Fax 242-356-1010


[email protected]

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Employer-paid Insurance:

Cmployees currently pay their own premiums or medical and health insurance.

# "le 4orporation provides a group insurance plan, the company will "e a"le to

deduct the cost o premiums paid or lie, health, accident, and disa"ility insurance.

Cmployees may exclude "eneits rom medical health and group term lie insurance

rom gross income "ut "eneits received rom disa"ility are normally taxa"le. Eowever

i "le 4orporation discriminates against lower income employees #.e. provides

"eneits or only highly compensated employees, these employees must include

medical reim"ursements received in gross income. Eighly compensated employees

include the ive highest paid oicers, greater than 80B shareholders and highest paid

2=B o other employees.

dditionally, Lie insurance premiums paid "y "le 4orporation on the

employee@s "ehal are deducti"le or the employer "ut included in gross income "y the

employee on any amount over the irst $=0,000 o the group term lie insurance

coverage.

'ar(in):

"le 4orporation owns a vacant "uilding that can "e converted to a parking

garage or its employees. # this is done, the company will "e oering its employees

Taxation 1

Tel 242-356-9090Fax 242-356-1010


[email protected]

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section 832 ringe "eneits. Cmployee inanced parking up to $2=0 is excluded rom

the employees gross income.

*iscounts:

The allowance or employees to receive discounts on goods and services is also

a ridge "eneit under section 832. 4urrently, your employer does not allow discounts

on the purchase o automo"ile parts. # this "eneit is adopted, in the case o services,

the discount is limited to 20B o the price charged to regular customers. #n the case o

property, the discount is limited to the companyKs gross proit percent "ut no discount

must "e given to real property or investments. dditionally, the discount must "e rom

the same line o "usiness in which the employer works.

*e$endent care:

The president o your company expressed interest in a dependent care

assistance program. These programs are employerinanced programs that provide care

or an employeeKs children or other dependents. 6hat this means or you is that you can

exclude up to $=,000 o assistance each year 12,=00 or married a married employee

iling separate returns on your income taxes. Eowever, it is important to note that i

the program is adopted, the program cannot discriminate in avor o high income

employees and their dependents.

Taxation 1

Tel 242-356-9090Fax 242-356-1010


[email protected]

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#t may "e useul to evoke that the "eneit program should "e integrated with the

operation o determining annual salary adFustments. *ierently, a signiicant program

may "e prohi"itive in terms o its cost to the society.

Taxation 1

Tel 242-356-9090Fax 242-356-1010


[email protected]

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%-62-

The employer completes 62 orms on "ehal on the employee. #n general, i a

ringe "eneit is nontaxa"le, employers do not withhold rom the "eneit, nor do they

report the "eneit on the employees 62 orms at yearend. The corporation is "ound to

"oth reports the value o the vacations on the 62s and withhold. The veil o secrecy

would, o course, have to "e rom the other compensation paid to the recipients. # the

"eneits are taxa"le in the case o Jay 4orporation, it is su"Fect to withholding and is

reported on the employees 62 orm at year end. . 7imulating the "ehavior is not

viewed as criminal, who could result in incarceration, the president will "e held lia"le

or the 800B penalty under 7ec. !!)2. That is, the president would "e personally lia"le

or a punishment eual to the taxes not withheld. #n summation, the corporation could

"e punished or iling an incorrect 62, 1$=0 per incorrect 62 under 7ec. !)28,

providing the employee with an incorrect 62 1$=0 per incorrect 62 under 7ec

!!)%, and ailure to collect and remit taxes 1800B o the amount, see 7ec. !!)2.

Taxation 1

Tel 242-356-9090Fax 242-356-1010


[email protected]

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tax case compiled

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