Broker Check

May 31, 2017

Payments To A Woman For Being Faithful

          After dating for about a year, a couple pledged their fidelity to each other in writing.  The agreement required the boyfriend to pay his girlfriend $400,000.  Later, he accused her of cheating.  They broke up and he sued her.  He also filed a 1099-MISC reporting the payment.  A state court found that she defrauded him and required her to repay the $400,000.  The Tax Court said she owes taxes on the $400,000.  Blagaich, TC Memo. 2016-2.

Delaware To End Estate Tax

          Delaware has a reputation as a retirement friendly state.  It does not have a sales tax.  It has a low income tax and relatively mild weather because it abuts the ocean.  Now, it adds to its benefits by eliminating the estate tax, beginning with post 2017 deaths.

          Unlike its neighbors, Maryland, New Jersey, and Pennsylvania it does not have an inheritance tax.

Summertime Roth IRA

          Consider this opportunity if a child or grandchild is toiling at a summer job.  You can contribute to a Roth IRA for him or her up to $5,500 for 2017, but not more than the child’s earnings.  Inside the Roth, earnings grow tax-free.  The payin counts toward your $14,000 gift tax exclusion ($28,000, if married).

          This can provide a nice nest egg.  And there are key tax advantages to Roths.  All earnings on distributions made after age 59½ are non-taxable.  Contributions can be pulled out free of tax at anytime.

Tax Court Judged

          No leniency for a former Tax Court judge who personally flouted the tax laws.  Diane Kroupa, who was a judge for 11 years, and her husband pleaded guilty to fraudulently claiming personal expenses and obstructing two IRS audits.

          She is going to jail for 34 months plus 3 more years of supervised release.  Her husband got 2 years in prison.  They also must pay $457,000 in restitution.

Summer Day Camp Is Credited

          Keep this in mind if your school-age child is going to a summer day camp.  The cost qualifies for the dependent care credit.  If you send your child to any regular or special day camps such as those for sports, computers, math, or theatre, do not forget this break.  Also for camps to help with reading or study skills.

          But, the costs of summer school and tutoring programs do not qualify for the credit.  They are for education, not care.  And remember, the child must be under age 13 and the expenses must be incurred so the parents can work.

You Never Know

          My father used to have several sayings; one of them was, “You never know”.  This saying never was more appropriate in a Tax Court case that held a married individual filing separately could claim the Earned Income Credit.

          The Tax Court case Tsehay TC Memo 2016-200 involved a taxpayer who had separated from his wife when he was ready to file his 2013 tax return and asked his preparer to file for him as married filing separately.  The preparer erroneously filed his return as head of household.  The Tax Court held that since the taxpayer was married for 2013 he could not qualify for head of household status for that year, or for single status as determined by IRS in its notice of deficiency.  The Tax Court held that the taxpayer’s correct filing status for 2013 was married filing separately.  Among other holdings, the Tax Court also decided that because the taxpayer had qualifying children for year 2013, he was entitled to the earned income credit.

          IRC 32(d) specifically provides that if an individual is married the EITC applies ONLY if a JOINT return is filed for the tax year.  What’s more, the Tax Court itself has held that married filing separately does not qualify.  Harkless TC Memo 1999-58.

          The IRS has nonacquiescenced to the Tax Court decision and the nonacquiescence is restricted to the holding in Tsehay.

          As my father also said, “Things come out of left field.”  And did this ever!

          As always, if you have any questions about these or any other matters, do not hesitate to call us.

          Remember, We’re Here For You!