ROANOKE TIMES
Copyright (c) 1996, Roanoke Times
DATE: Monday, April 8, 1996 TAG: 9604090028
SECTION: MONEY PAGE: 6 EDITION: METRO
COLUMN: TAX QUESTIONS
Q: The Money Page had a question that asked if people have to pay taxes if they received a $10,000 gift. The answer was no.
The company I work for and our union decided to give us (the employees) a raise in one lump sum of $800 for one year. They agreed this would not be taxed. When it came time to get this check, we received less than $500. The company said the IRS made it tax us 41.4 percent because the IRS considered this a gift and not a raise.
If you don't have to pay tax on a $10,000 gift, why did we have to pay tax on an $800 gift?
A: A gift is not taxable income. However, the Internal Revenue code dictates that any amount transferred by or for an employer to or for the benefit of an employee is not a gift but taxable compensation.
There are a couple of exceptions to this rule for gifts of property, but not cash. The first exception is property with a nominal value, for example gifts of turkeys or hams given at Christmas or other holidays. The other exception is an employee achievement award of tangible personal property given in recognition of length of service or safety achievement, and this too is subject to limitations.
Note that the tax taken out of the lump sum consists of the following: FICA and Medicare, 7.65 percent; federal income tax, 28 percent; and Virginia income tax, 5.75 percent for a total of 41.4 percent.
The federal and state rates are determined by the rule that allows taxes on supplemental wages, such as bonuses, commissions, etc., to be withheld at a flat rate of 28 percent for federal and 5.75 percent for state. |-Answered by Wendy Funderburk of Spencer & Associates.
Q: My son is 25 and single. He joined the Marines last April and has been stationed in South Carolina, Tennessee, Florida and California. His home address is mine. What is his Virginia tax obligation?
A: According to The Soldiers and Sailors Civil Relief Act, a person shall not be deemed to have lost a residence or domicile in any state solely by reason of being absent in compliance with military orders.
Your son's active duty pay as a member of the armed forces is taxable only in the state of his legal domicile, regardless of where he may be stationed. If his legal residence was Virginia when he joined the military, he is still a resident of Virginia for state income tax purposes wherever he is stationed, unless he has voluntarily abandoned his Virginia domicile, established a new legal domicile in another state and taken the necessary actions to change his legal home of record with the armed forces.
If his legal domicile was not in Virginia at the time he entered the armed forces, his legal domicile is not transferred to Virginia solely because he is stationed here. If he was domiciled in another state and did not abandon his old legal domicile with the intention of establishing a new domicile here, he is still considered a resident of that state.
If members of the military are domiciled in Virginia, they are liable for income tax on their active duty military pay as well as on any other income received, regardless of whether or not the income was from Virginia sources. File Virginia Form 760 or 760S as a resident.
If they are not a domiciliary resident of Virginia, they are taxable in Virginia on income from Virginia sources the same as any other nonresident, except their pay as a member of the armed forces is not taxable. File Form 763, the Virginia nonresident individual income tax return.
Because a federal law prescribes this state income tax treatment, all four of the states you mentioned would tax your son in the same manner.
It is necessary to determine residency status for your son. Please refer to the Virginia State Tax form instructions for residency definitions. Also note that the law is different for a spouse of a member of the armed forces.
You may also refer to IRS Publication 3, Tax Information for Military Personnel. This publication will help define includable and excludable income, extensions for time of payment of tax and other tax-related issues for military personnel. |-Answered by F. Fulton Galer of McLeod & Co.
Q: My parents own a profitable S corporation. Early in 1996, I was given 20 percent ownership of the corporation. It was made clear that I would not be receiving 20 percent of the profits. However, my father informed me that, due to my legal ownership, I would be responsible for paying taxes on my share of the income generated. The arrangement we agreed upon would be that, after computing my year-end taxes, the corporation would write a check to me to cover my taxes on the "income" I did not receive. My questions are:
1. To avoid a tax underpayment penalty, do I need to pay quarterly taxes on my share of the corporation's income?
2. Is the once-a-year payment from the corporation to cover my taxes considered taxable income?
3. Is this arrangement legal? If it is legal, is it wise?
(Editor's note: A subchapter S corporation generally refers to a small company with 10 or fewer shareholders. Such companies have the option of being taxed liked a partnership, with the company passing all income directly to the owners and, therefore, paying no corporate income tax.)
A: As set forth in your letter, it would appear that you will have taxable income reported to you as income from an S corporation. That income will be reported on a Form k-1 and you should receive it by March 15 of each year as long as you are a shareholder.
Whether you need to pay estimated taxes on that income is not clear from the information you have provided. Estimated tax payments are required to avoid an underpayment penalty. The tax rules for avoiding the underpayment penalty are complex. A very simple explanation of them is that a taxpayer must pay taxes in a timely fashion and on an "as you go" basis. This can be done through withholding, payment of estimated taxes, or a combination of both.
If you have sufficient taxes withheld throughout the year, estimated tax payments are not necessary. "Sufficient taxes" are determined by such factors as your current-year tax, prior-year adjusted gross income and prior-year total tax liability.
You may meet one of the exceptions to avoid the underpayment of estimated tax penalty. A CPA or other qualified professional tax adviser will be able to review your particular circumstances and determine how much, if any, your quarterly estimated taxes should be.
The once-a-year payment from the corporation to cover your taxes would be considered a distribution of the profits previously taxed to you. As such it is not, in itself, taxable.
There are other aspects of your situation that are interesting. You state that you were given a 20 percent ownership of the corporation. Since you also state that the corporation is profitable, it is possible that the value of the corporation is not inconsequential. The 20 percent interest may be of sufficient value that your parents may have incurred a gift tax liability. They may be aware of this and, in fact, may have been motivated to do this for estate tax planning purposes.
You have acquired a basis in the corporation determined by their basis at the time of the gift. Conversely, if you had purchased the 20 percent interest, your original basis would be the amount you paid for it. When you dispose of your interest in the corporation, your tax situation will be impacted by this original basis acquired from your parents as well as by future profits and losses and distributions to you.
Another aspect which is somewhat disturbing concerns the tax treatment of passive losses. Unless you actively participate in the S corporation, any loss the corporation might incur will not provide you with a current tax write-off but may be available to you in future years. Therefore, you must declare the income if the corporation is profitable but cannot take immediate advantage of the loss if it is not. The passive activity tax rules are highly complex, and you would benefit from obtaining a more thorough understanding of them as they relate to you and possible future corporate losses.
As to whether this arrangement is legal, you should consult with an attorney who is familiar with corporate law and taxation.
As to whether it is wise, I can comment. Assuming from the clarity of your letter and the intelligent questions you have posed, you appear to be a competent adult. As such, you should have more control over your own tax situation. To do this, you must understand the ramifications of your own actions and those taken by others, even if they are your parents, and be able to make your own decisions about the acceptability of financial circumstances of any situation, particularly this one.
It sounds to me as if the three of you would benefit from an open discussion of the many issues raised in your letter and in my response. You would also benefit from establishing relationships with an attorney and a CPA to consult with on these matters. |-Answered by Valerie Kowalski of Kowalski & Associates
Q: I've redone my taxes three times this year as the result of receiving "corrected 1099s." Is there a date after which one might assume that the information on 1099s is correct so one could prepare a tax return without the need to revise it?
A: During January, businesses are under extreme time constraints to meet all of their filing responsibilities of W-2s, 1099s, payroll taxes, business licenses, property taxes, etc. While efforts to send correct information are made, it's often not until the business closes its books for its own income tax preparation that errors are discovered. This may be in March, April or even September. Upon finding errors, the business is obligated to furnish you a corrected 1099. Generally, errors found by the business would be correction for up to three years from the original filing date. Only in special circumstances would 1099s be filed or changed after that time.
I know a three-year period for correction is not the answer you were looking for, and there is a solution for you.
Information appearing on your tax return is your responsibility. Whether the 1099s are correct or incorrect does not limit your liability for a correct tax return.
You should check the 1099s against your records before filing and, if they are incorrect, first inquire of the company as to why there is a difference and ask for a corrected 1099. Then file your return using the correct amounts and enter an explanation as to the difference in the 1099 and the amounts you used on the return. Also note in the return that you have asked the business to furnish you a corrected 1099. |-Answered by Richard J. Beason of Richard J. Beason CPA
Q: I have a small, part-time photography business. This past year, in order to improve my ability to photograph large groups, I attended a photography seminar which cost approximately $100 plus some travel expenses.
Is the cost deductible on my Schedule C? Where do I show it on Schedule C and how do I describe the expense?
A: The $100 cost of the photography seminar would be deductible on Schedule C. I would list this expense under Part V of Schedule C, "Other Expenses," as a training or seminar expense.
The travel expense for the seminar would also be deductible. It would go either under Part II, Line 10, "Car and Truck Expense," or Line 24, "Travel, Meals and Entertainment," based on the type of travel expense that was incurred.
- Answered by David Wright of Anderson and Reed
LENGTH: Long : 184 linesby CNB