The New York Times has a good article about the tax headaches faced by same-sex married couples in California, Nevada and Washington, where special "community property rules" apply. An IRS ruling in 2010 allows same-sex married couples in those states to calculate their federal taxes in the same was as opposite-sex couples. Most people considered the ruling a step forward for same-sex couples, but as the article points out, it is also a source of headaches and confusion.
I wrote two articles about the ruling in 2010. Those articles can be found here and here.
Showing posts with label IRS Rulings. Show all posts
Showing posts with label IRS Rulings. Show all posts
Saturday, January 15, 2011
Wednesday, January 5, 2011
Unlicensed Daycare Providers Part 2 - Tax Court Ruling
In this blog post, I talked about the tax consequences of being an unlicensed, in-home daycare provider. As mentioned in that post, the unlicensed provider may or may not be able to take the deduction for "business use of the home," depending on state law. If state law requires a provider to be licensed or registered but the provider is not licensed, then the deduction is not allowed. (In Iowa, an unlicensed provider can care for up to 5 children, and thus would be able to take the deduction. If the provider added a 6th child and did not register with the state, then the deduction would NOT be allowed.)
A provider from Illinois found out that the IRS does audit daycare providers, and the disallowance of the deduction for business use of the home can be costly. (Side note: the IRS has published an Audit Technique Guide for its auditors to use when auditing daycares - and yes, I have read that guide from cover-to-cover.)
The case involved an unlicensed provider in Illinois who took sizeable deductions relating to business use of her home as a daycare. Based on Illinois law, she was required to be licensed. Because she was unlicensed when she was supposed to be licensed, the deductions -- more than $20,000 for 2004, and $22,000 for 2005 -- were disallowed.
Last month, the case went to the Tax Court, where the provider tried to argue that she thought she was exempt from licensing requirements, and that because the state had not filed a complaint against her for being unlicensed, the IRS had no right to disallow the deductions. The Tax Court disagreed, saying that the IRS can disallow a deduction taken by a provider whether or not the state has taken any action against the provider.
The provider also tried to argue that because she had taken the deduction in other years without it being questioned by the IRS, the deduction should be upheld in the years in question. The Tax Court also disagreed with that, pointing out that each tax year is considered separately.
The total cost to the provider will be more than $16,000 in taxes, plus penalties.
As always, a daycare provider with any questions about the tax reporting for their operation should contact a tax professional.
A provider from Illinois found out that the IRS does audit daycare providers, and the disallowance of the deduction for business use of the home can be costly. (Side note: the IRS has published an Audit Technique Guide for its auditors to use when auditing daycares - and yes, I have read that guide from cover-to-cover.)
The case involved an unlicensed provider in Illinois who took sizeable deductions relating to business use of her home as a daycare. Based on Illinois law, she was required to be licensed. Because she was unlicensed when she was supposed to be licensed, the deductions -- more than $20,000 for 2004, and $22,000 for 2005 -- were disallowed.
Last month, the case went to the Tax Court, where the provider tried to argue that she thought she was exempt from licensing requirements, and that because the state had not filed a complaint against her for being unlicensed, the IRS had no right to disallow the deductions. The Tax Court disagreed, saying that the IRS can disallow a deduction taken by a provider whether or not the state has taken any action against the provider.
The provider also tried to argue that because she had taken the deduction in other years without it being questioned by the IRS, the deduction should be upheld in the years in question. The Tax Court also disagreed with that, pointing out that each tax year is considered separately.
The total cost to the provider will be more than $16,000 in taxes, plus penalties.
As always, a daycare provider with any questions about the tax reporting for their operation should contact a tax professional.
Friday, November 19, 2010
Payments to Exonerated Prisoners May Not Be Taxable
The IRS last week (November 12) issued a Chief Counsel Advice memorandum (CCA)* that says compensatory damages paid to people wrongly convicted of crimes may not be taxable – but only in very limited circumstances. According to the CCA, the payment must be for injuries, sickness or economic losses from “physical injuries or physical sickness” of people wrongly convicted and incarcerated.
Put another way, wrongful-imprisonment restitution is taxable unless the person can prove that they suffered physical injuries or illness while imprisoned. Someone who “just” receives a restitution payment as a form of state apology or make-good for being wrongfully imprisoned would have to pay taxes on the restitution. While this seems contrary to good law (and common sense), that is the way things currently are.
And I should also point out that the term “physical injury or illness” does NOT include psychological trauma unless the taxpayer can prove that the psychological trauma stems from a physical injury or illness. So someone who goes into depression for being wrongfully imprisoned and receives restitution would have to pay taxes on that restitution.
The same “logic” applies to court settlements – settlements for physical injuries are not taxable, but settlements for psychological trauma can be taxable, unless it can be proven that the psychological trauma was caused by physical injuries. So someone who receives psychological damages in a discrimination lawsuit will probably have to pay taxes on the settlement. But that’s another blog post for another day. (Note from Jason: this last paragraph is a vast simplification of the tax treatment of court settlements; like I said, another blog post for another day!)
*-Like “Private Letter Rulings,” CCA’s are not precedent-setting and apply only to the taxpayer who requested the ruling, but they do give us some insight into how the IRS views certain issues.
Put another way, wrongful-imprisonment restitution is taxable unless the person can prove that they suffered physical injuries or illness while imprisoned. Someone who “just” receives a restitution payment as a form of state apology or make-good for being wrongfully imprisoned would have to pay taxes on the restitution. While this seems contrary to good law (and common sense), that is the way things currently are.
And I should also point out that the term “physical injury or illness” does NOT include psychological trauma unless the taxpayer can prove that the psychological trauma stems from a physical injury or illness. So someone who goes into depression for being wrongfully imprisoned and receives restitution would have to pay taxes on that restitution.
The same “logic” applies to court settlements – settlements for physical injuries are not taxable, but settlements for psychological trauma can be taxable, unless it can be proven that the psychological trauma was caused by physical injuries. So someone who receives psychological damages in a discrimination lawsuit will probably have to pay taxes on the settlement. But that’s another blog post for another day. (Note from Jason: this last paragraph is a vast simplification of the tax treatment of court settlements; like I said, another blog post for another day!)
*-Like “Private Letter Rulings,” CCA’s are not precedent-setting and apply only to the taxpayer who requested the ruling, but they do give us some insight into how the IRS views certain issues.
Wednesday, June 9, 2010
IRS Ruling -- What Does it Mean for Iowa Same-Sex Couples?
As I posted earlier, the IRS recently issued three rulings – a “private letter ruling” and two “CCAs” (CCA = Chief Counsel Advice) that give same-sex couples in California somewhat equal treatment to opposite-sex married couples when filing federal tax returns. You may be wondering how this will affect same-sex married couples in Iowa. Here are the basics, followed by more detail:
- The rulings allow Registered Domestic Partners (RDPs) in California to calculate their income in the same manner as opposite-sex married couples under “community property” rules (California is a “community property” state).
- The rulings do NOT allow RDPs to file federal returns with a filing status of “married filing jointly” or “married filing separately.”
- The rulings do not change the federal tax situation of Iowa same-sex couples because Iowa is not a community property state.
Here are some specifics about the ruling:
What the Heck are “Private Letter Rulings” and "CCAs"?
“CCA” stands for “Chief Counsel Advice” and refers to advice given by the IRS’s chief legal advisor (the “Chief Counsel”).
Private letter rulings are issued by the IRS in response to a taxpayer’s request for guidance. Technically, the ruling is only binding between the IRS and the taxpayer who requested the ruling. Meaning, private letter rulings are not precedent-setting. However, this particular private letter ruling, combined with the two memos from Chief Counsel, do seem to set precedent for RDPs in California.
What are “Community Property” laws?
For federal tax purposes, if a married couple in a community property state files “married filing separately” on their federal returns, each spouse must share equally in the other’s income and deductions. There are 9 states that follow community property laws: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin.
Example:
Ronnie and Johnnie, an opposite-sex married couple, live in a community property state. Ronnie earns $60,000 in wages while Johnnie earns $40,000 in wages. They decide to file separate federal returns. On their separate returns, each will report $50,000 of income.
In the past, the IRS has said that community property rules did not apply to RDPs for federal tax purposes. So in the “Ronnie and Johnnie” example, if they were an RDP, they would each only report their own income on their individual returns, rather than splitting it between them.
What These IRS Rulings Do:
These rulings extend community property rules to RDPs for purposes of calculating federal income and deductions. So if “Ronnie and Johnnie” are an RDP, they can now calculate their income based on community property rules. In our example, they would each report $50,000 in income.
What the Rulings Do NOT Do:
It is very important to note that the rulings still do NOT allow RDPs to file as “married filing jointly” or “married filing separately. The only allowable filing statuses are “single” or “head of household.”
Affect on Iowa Same-Sex Married Couples:
Iowa is not a community property state, and the rulings do not deal with the issue of filing statuses. Therefore, it really has no affect on same-sex couples in Iowa. However, the rulings can be seen as a positive step toward tax equality for same-sex couples.
Tuesday, June 8, 2010
IRS Private Letter Ruling on Same-Sex Couples in California
The IRS recently issued a "private letter ruling" that affects same-sex married couples in California. Read more here: http://online.wsj.com/article/SB10001424052748704080104575286931017169308.html.
What affect does this have on same-sex married couples in Iowa? It really won't have much of an affect, because this ruling deals with "community property" rules. Iowa is not a community property state. I'll post a more thorough analysis of the ruling soon.
What affect does this have on same-sex married couples in Iowa? It really won't have much of an affect, because this ruling deals with "community property" rules. Iowa is not a community property state. I'll post a more thorough analysis of the ruling soon.
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