When Can I Deduct Alimony on my Federal Tax Return Ordered Prior to December 31, 2018

When divorce occurs, one ex-spouse is often obligated to make continuing payments to the other spouse. However, for the payments to be deducted by the payer, they must meet the tax-law definition of alimony. For any particular payment to qualify as deductible alimony for federal income tax purposes and meet the tax law definition of alimony, all the following requirements must be met:

  1. The payment must be made pursuant to a written divorce decree or separation agreement such as a temporary support order. Note that payments made in advance of signing a written divorce or separation agreement or before the effective date of a court order or decree cannot be deductible alimony. Such payments are considered voluntary and are therefore nondeductible. The same is true for payment of amounts in excess of what is required under a written divorce decree or separation agreement.
  2. The payment must be to or on behalf of a spouse or ex-spouse. Therefore, payments to third parties, such as attorneys and mortgage companies, are okay if made on behalf of a spouse or ex-spouse and pursuant to a divorce decree or separation agreement.
  3. The divorce decree or separation agreement must state the payments are alimony.
  4. After divorce or legal separation (meaning the couple is considered divorced for federal income tax purposes), the ex-spouses cannot live in the same household or file a joint return for the year they separated or thereafter.
  5. The payment must be made in cash or cash equivalent such as check or money order.
  6. The payment cannot be fixed or deemed child support in the divorce decree.
    Fixed child support simply refers to amounts designated as such in the divorce or separation agreement, so it’s easy to identify. Payments are considered to be deemed child support if they are terminated or reduced by any of the following so-called contingencies relating to a child: a. Attaining the age 18, or the local age of majority.
    b. Death.
    c. Marriage.
    d. Completion of schooling.
    e. Leaving the ex-spouse’s household.
    f. Attaining a specified income level.
  7. The payer’s return is required to include the recipient’s social security number.
  8. The obligation to make payments (other than payment of delinquent amounts) must cease if the recipient party dies. If the divorce decree is unclear about whether or not payments must continue, state law controls. If under state law, the payer must continue to make payments after the recipient’s death, the payments cannot be alimony. Therefore, to avoid problems, the divorce decree should always explicitly stipulate whether a payment obligation continues to exist after the death of the recipient party. Failing this test is probably the most common cause for lost alimony deductions.
  9. There is also an IRS rule that states if alimony payments decrease by more than
    $15,000 per year between years 1 and 2, or years 2 and 3, then part of the payments will not qualify for a tax deduction to the payor (and hence will not be taxable to the payee.) In other words, if alimony payments total more than $15,000 per year then they must last more than one year and cannot be reduced too quickly. The reason for this is because the IRS sees this as a property settlement, not alimony. Because of this rule replacing all monthly payments with a lump sum “alimony” payment that is paid all in one year will often cause a trigger of this recapture rule, since alimony will go down to $0 in year

Keep in mind the Tax Cuts Jobs Act repealed the deduction for alimony paid and the corresponding inclusion of alimony in income by the recipient. The provision is effective for any divorce or separation agreement executed after December 31, 2018, or for any divorce or separation agreement executed on or before December 31, 2018, and modified after that date, if the modification expressly provides that the amendments made by this provision apply to such modification. Thus, alimony paid under a separation agreement entered into prior to the effective date is generally grandfathered.

It is very important to consult a tax attorney like Gregory J. Spadea before signing the marital settlement agreement. You can reach him at the Law Offices of Spadea & Associates, LLC in Ridley Park at 610-521-0604.

What You Need to Know About IRS Late Filing and Late Paying Penalties

Late taxes legal action notice

April 15 was the tax day deadline for most people. If you are due a refund there is no penalty if you file a late tax return. But if you owe tax, and you failed to file and pay on time, you will owe interest and penalties on the tax you pay late. You should file your tax return and pay the tax as soon as possible to stop them. Here are eight facts that you should know about these penalties.

  1. Two penalties may apply. If you file your federal income tax return late and owe tax with the return, two penalties may apply. The first is a failure-to-file penalty for late filing. The second is a failure-to-pay penalty for paying late.
  2. Penalty for late filing. The failure-to-file penalty is normally 5 percent of the unpaid taxes for each month or part of a month that a tax return is late. It will not exceed 25 percent of your unpaid taxes. However if you requested a six month extension by filing form 4868 by April 15, and filed the return by October 15, you will not be penalized for late filing.
  3. Minimum late filing penalty. If you file your return more than 60 days after the due date or extended due date, the minimum penalty for late filing is the smaller of $135 or 100 percent of the unpaid tax.
  4. Penalty for late payment. The failure-to-pay penalty is generally 0.5 percent per month of your unpaid taxes. It applies for each month or part of a month your taxes remain unpaid and starts accruing the day after taxes are due. It can build up to as much as 25 percent of your unpaid taxes.
  5. Combined penalty per month. If the failure-to-file penalty and the failure-to-pay penalty both apply in any month, the maximum amount charged for those two penalties that month is 5 percent.
  6. File even if you can’t pay. In most cases, the failure-to-file penalty is 10 times more than the failure-to-pay penalty. So if you can’t pay in full, you should file your tax return and pay as much as you can. Use IRS Direct Pay to pay your tax directly from your checking or savings account. Most people can set up an installment agreement with the IRS using the Online Payment Agreement tool on IRS.gov or calling 1-800-829-1040 or filing form 9465.
  7. Late payment penalty may not apply if you filed an extension. If you requested a six month extension of time to file your federal income tax return by April 15 and paid at least 90 percent of the taxes you owe, you will not face a failure-to-pay penalty. However, you must pay the remaining balance by the October 15. You will owe interest on any taxes you pay after the April 15 due date.
  8. No penalty if reasonable cause. You will not have to pay a failure-to-file or failure-to-pay penalty if you can show reasonable cause for not filing or paying on time. There is also penalty relief available for repayment of excess advance payments of the premium tax credit for 2014. If you have any questions please contact Spadea & Associates, LLC online or at 610-521-0604.

Making Federal Estimated Tax Payments

A picture of a tax return form

I often get phone calls from clients asking how to calculate estimated federal and state income tax payments. The payment for the first quarter estimate is due on April 15th.
In general, estimated taxes must be paid on any income which is not subject to withholding, including taxable income from self-employment, interest, dividends, alimony, gambling winnings, unemployment compensation, social security, rent, and gains from the sale of assets. You may also have to pay estimated tax if the amount of income tax being withheld from your salary, social security, pension or other income is not enough to cover your tax due. Estimated tax is used to pay income tax and self-employment tax, as well as other taxes reported on your personal income tax return. If you do not pay enough tax, either through withholding or estimated tax, or a combination of both, you may have to pay a penalty. You may be charged a penalty even if you are due a refund when you file your return. Estimated tax payments are made in four quarterly installments and can be based on a regular tax method or an annualized income installment method.

If you choose not to use the “Regular installment method”, the annualized installment method allows you to compute your estimated tax based on actual income earned in each of four specific periods. As a result, tax on income which is seasonally earned will not be paid until the period in which it is earned. For example, if a significant percentage of your income is earned in the last quarter of the year, then utilizing the annualized income installment method will allow you to defer the payment of tax on this income to the final quarter as opposed to paying the tax on this amount in equal installments throughout the year.

In general, under the regular installment method, the required annual payment which is paid quarterly through estimated taxes (if no tax is withheld) is the smaller of 1) 90% of the current year’s total expected tax or 2) 100% of the tax shown on the prior year return. Note that if your last year’s Adjusted Gross Income was over $150,000 ($75,000 for married filing separately); the safe harbor is 110%. Adjusted Gross Income refers to all taxable income less certain deductions such as your SEP/IRA/Other Retirement Plan contributions, alimony payments, deductible health insurance premiums paid for self-employed individuals, moving expense deductions, deductible tuition, student loan interest and fees and self-employment tax deductions.

Timing of Payments, Penalty for Underpayment

The year is divided into four payment periods for estimated tax purposes. Each period has a specific payment due date. Note that if you do not pay enough tax by the due date for each period, you may be charged a penalty through the date any underpayment remains outstanding even if you are due a refund upon filing your income tax return. The penalty is equal to the interest rate charged on tax deficiencies (3% per year as of January 20, 2015) on the amount of the installment underpayment from the date the installment is due until the earlier of the date the underpayment is made up for April 15th of the next year. Thus, generally the penalty for underpayment of an estimate is equivalent to paying the IRS non-deductible interest.

The specific due dates for estimated tax payments are as follows:

Period Due Date
January 1 – March 31 April 15
April 1 – May 31 June 15
June 1 – August 31 September 15
September 1 – December 31 January 15 of following year

Here are tips worth considering about estimated taxes and how to pay them.

  1. As a general rule, you must pay estimated taxes in 2015 if both of these statements apply: 1) You expect to owe at least $1,000 in tax after subtracting your tax withholding and tax credits, and 2) You expect your withholding and credits to be less than the smaller of 90% of your 2015 taxes or 100% of the tax on your 2014 return. There are special rules for farmers, fishermen, certain household employers and certain higher income taxpayers.
  2. For Sole Proprietors, LLC Members, Partners and S Corporation shareholders, you generally have to make estimated tax payments if you expect to owe $1,000 or more in tax when you file your return.
  3. To figure your estimated tax, include your expected gross income, taxable income, taxes, deductions and credits for the year. You can use the worksheet in Form 1040ES, Estimated Tax for Individuals for this, or just email me your year to date Profit and Loss and I will help you.

The easiest way to pay estimated taxes is electronically through the Electronic Federal Tax Payment System or EFTPS. You can also pay estimated taxes by check or money order using 1040ES – Estimated Tax Payment Voucher or by credit or debit card, but I do not advise using your credit card due to the expensive service charge. If you have any questions please email or call Gregory J. Spadea at 610-521-0604 of Spadea & Associates, LLC in Ridley park, Pennsylvania

2015 Retirement Plan Contribution Limits

Jar with label Retirement Plan

The Internal Revenue Service announced cost of living adjustments affecting dollar limitations for pension plans and other retirement-related items for Tax Year 2015. In general, many of the pension plan limitations will change for 2015 because the increase in the cost-of-living index met the statutory thresholds that trigger their adjustment. Here are the highlights:

  • The elective deferral (contribution) limit for employees who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan is increased from $17,500 to $18,000.
  • The catch-up contribution limit for employees age 50 and over who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan is increased from $5,500 to $6,000.
  • The limit on annual contributions to an Individual Retirement Arrangement (IRA) remains unchanged at $5,500. The additional catch-up contribution limit amount for individuals aged 50 and over is not subject to an annual cost-of-living adjustment and remains $1,000.
  • Contribution limits for SIMPLE retirement accounts is increased from $12,000 to $12,500. The additional catch-up contribution limit amount for individuals aged 50 and over is increased from $2,500 to $3,000.
  • The deduction for taxpayers making contributions to a traditional IRA is phased out for singles and heads of household who are covered by a workplace retirement plan and have modified adjusted gross incomes (AGI) between $61,000 and $71,000, up from $60,000 and $70,000 in 2014. For married couples filing jointly, in which the spouse who makes the IRA contribution is covered by a workplace retirement plan, the income phase-out range is $98,000 to $118,000, up from $96,000 to $116,000 in 2014. For an IRA contributor who is not covered by a workplace retirement plan and is married to someone who is covered, the deduction is phased out if the couple’s income is between $183,000 and $193,000, up from $181,000 and $191,000 in 2014. For a married individual filing a separate return who is covered by a workplace retirement plan, the phase-out range is not subject to an annual cost-of-living adjustment and remains $0 to $10,000. Keep in mind there is no income limit for taxpayers who are not covered by a qualified retirement plan.
  • The AGI phase-out range for taxpayers making contributions to a Roth IRA is $183,000 to $193,000 for married couples filing jointly, up from $181,000 to $191,000 in 2014. For singles and heads of household, the income phase-out range is $116,000 to $131,000, up from $114,000 to $129,000. For a married individual filing a separate return, the phase-out range is not subject to an annual cost-of-living adjustment and remains $0 to $10,000.
  • The deductible contribution for Simplified Employee Pension Plans (SEPs) is $53,000, up from $52,000 in 2014.
  • The AGI limit for the saver’s credit, which also known as the retirement savings contribution credit, is $61,000 for married couples filing jointly, up from $60,000 in 2014; $45,750 for heads of household, up from $45,000 in 2014; and $30,500 for married individuals filing separately and for singles, up from $30,000 in 2014.

Spadea & Associates, LLC

Contact us online or at (610) 521-0604 to schedule a free consulation. At the law offices of Spadea & Associates, LLC, in Ridley Park, Pennsylvania, we represent individuals and businesses throughout southeastern Pennsylvania, including Delaware County, Montgomery County and Camden County. We also work with clients in Philadelphia and Burlington Counties.

12 Tips to Help Landords Audit Proof Their Tax Return

Tax return paper

The IRS does not audit too many returns due to inadequate staffing and poor management. However, to truly audit proof your return, I would advise you and all my landlord clients to:

  1. Make the election under Treasury Regulation 1.469-9(g) to aggregate all real estate activities as one activity for passive loss rules if you have more than one rental property. This makes meeting the 750 hour rule for all you rental properties much easier than having to meet it for each individual rental property.
  2. Keep a log on Microsoft Outlook or Google Calendars of the work you do as a Landlord to meet the 750 hour test such as:
    1. working or improving the property;
    2. researching and bidding on properties;
    3. finding and screening tenants;
    4. collecting rent;
    5. performing maintenance.
  3. Never use round numbers on your return because it looks like you are estimating your expenses.
  4. If you pay a contractor or any unincorporated person more than $600 during the year you must issue them a 1099. Therefore you should have them fill in a W-9, before you pay them so you will have their information and can prepare a 1099.
  5. Reconcile the mortgage interest and real estate taxes reported on your 1098 to the amount deducted on your return to ensure the numbers match.
  6. Do not deduct capital improvements under repairs but instead depreciate them or use Internal Revenue Code Section 179 to expense them in the tax year they are placed in service.
  7. Use Quickbooks if you have multiple properties to track rental income and expenses for each property. Deposit all your rental income into a separate bank account.
  8. Never deposit rental income into your personal account and never pay personal expenses from your rental account. Transfer money from your rental account to your personal account and then pay personal expenses from your personal account.
  9. Have a separate credit card that you use only for your rental properties and pay the monthly bill from your rental bank account. At the end of the year the credit card company will give you a summary of all your expenses making your record keeping that much easier.
  10. Make sure all your deposits into your rental bank accounts reconcile to the amount of rental income reported on your tax return.
  11. Keep your leases current and make sure the monthly rent that you deposit is the amount listed on the lease.
  12. Keep security deposits in a separate trust account and only disburse those funds when the tenant moves out.

If you have any questions about audit proofing your return or need help preparing your tax return call Gregory J. Spadea at 610-521-0604 or contact him online, of Spadea & Associates, LLC in Ridley Park, Pennsylvania.

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