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Getting Divorced? Avoid These Common Tax Pitfalls

Just as getting married brings a variety of tax implications and changes, getting divorced has its own repercussions. If you’re going through a divorce, you should be aware of those implications as you prepare to file your tax return.

A few main items to note are:Melinda Mergelsberg of Kaufman Rossin

  • Your filing status may change prior to your divorce becoming final.
  • When a joint return is filed, any tax, interest and/or penalties due are the joint and individual responsibility of both parties.
  • If there is a joint liability, there are three ways to find relief.  We will explore these briefly.

Which filing status should you choose?

If your divorce decree has not been finalized, you may either file your return as married filing jointly, married filing separately or, in certain situations, you may be considered unmarried and may file as head of household.  You’re considered unmarried on the last day of the tax year if you meet the following tests:

  • You file a separate return.
  • You paid more than half the cost of keeping up your home for the year.
  • Your spouse did not live in your home during the last 6 months of the year.
  • Your home was the main home of your child and you can claim an exemption for the child.

If you don’t meet the tests listed above and your final decree of divorce has not been issued by the last day of the tax year, you will need to file as either married filing separately or married filing jointly.

What is each spouse responsible for?

While you continue to file a joint return, both you and your spouse may be held responsible, jointly and individually, for the tax and any interest or penalties due on your joint return. Even if all income is earned by one spouse or taxpayer, the other spouse or taxpayer may be held liable for all the tax due. Even if your divorce decree states that your former spouse will be responsible for any amounts due on previously filed joint returns, you are still not absolved from your liability with the IRS.

How can you find relief for joint liability?

There are three ways to find relief for joint liability, and they are available no matter the extent of the liability. Those three types of relief are innocent spouse relief, separation of liability and equitable relief. Each kind of relief has different requirements, and you must file Form 8857, Request for Innocent Spouse Relief, to request relief under any of the three categories.

  • Innocent spouse relief may be granted if your spouse or former spouse made errors on a previously filed joint return and you owe additional tax as a result of those errors.
  • Separation of liability relief may be granted if you are now divorced, legally separated or have lived apart at all times during the 12-month period prior to the date you file Form 8857.
  • Equitable relief is the only type of relief available for unpaid tax. In this situation, the IRS would determine that it would be unfair to hold you responsible for the liability.

These few items just scrape the surface of the myriad of tax issues arising from a divorce. Please contact someone in our Family Law Services practice to learn more about how we can help you navigate through your tax issues during divorce proceedings.

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Melinda Mergelsberg, EA, is a tax professional in the Forensic, Advisory and Valuation Services department in Kaufman Rossin’s Ft. Lauderdale office. Kaufman Rossin is the fastest growing CPA firm in the U.S. Melinda can be reached at mmergelsberg@kaufmanrossin.com.

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How Tax Law Changes Will Affect You and Your Construction Company This Year

With all the talk about the many tax law changes for the 2013 tax year, hopefully you have already met with your tax advisor to do some tax planning for yourself and your construction company.  While before you probably heard “accelerate income” or “defer deductions,” this tax year we are back to more traditional strategies, such as delaying income and accelerating deductions.  Hopefully you got some good advice at the end of 2012, and you were prepared for the tax increases in 2013.

Did you say tax increases? 
Terri Richards, CPA

Yes – here they are in a nutshell:

Single taxpayers with taxable income over $400,000 (married over $450,000) will see a 4.6% marginal tax increase over last year (from 35% to 39.6%).  The long-term capital gains tax rate for taxpayers with income over those thresholds jumps from 15% to 20%.  And then there’s more –  a surtax on net investment income has been added, which translates to taxpayers paying an additional 3.8% on the lesser of net investment income or modified adjusted gross income over $200,000 for individuals ($250,000 for married filers).  The combination of these last two increases results in an 8.8% tax increase on long-term capital gains. Taxpayers with earned income over the same thresholds can expect to pay an additional 0.9% Medicare tax.

So what can you do?

  • If you are a cash basis taxpayer, hopefully you paid as many bills as you could without damaging your cash flow.
  • If you are an accrual basis taxpayer, make sure you record all of your bills and accrue for any expenses related to 2013, paid in 2014.
  • If you file your taxes using the completed contract method, be mindful that jobs that are 95% complete are considered complete for tax purposes so review your contract schedules carefully to ensure proper reporting.
  • If you use the percentage of completion method, you will want to review your contract schedule to confirm your estimates and cost allocations are correct and all approved change orders are included.

Additionally, be sure to tell your tax advisor if you bought new equipment in 2013. If qualifying property placed in service does not exceed $2 million, you can fully deduct up to $500,000 of qualifying purchases.  Additionally, for qualifying purchases through December 31, 2013, the 50% bonus depreciation is available.  Each of these tax advantages are currently set to expire or be drastically reduced in 2014.

Other considerations might be making a retirement plan contribution or giving bonuses to reward employees for exceptional performance.

The most important thing you can do is meet with your tax advisor as soon as possible to discuss strategies to minimize the tax burden for yourself and your construction company.

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Terri Richards, CPA, is an entrepreneurial services manager in Kaufman Rossin’s Boca Raton, Florida, office, and a Certified QuickBooks ProAdvisor. Kaufman Rossin offers QuickBooks consulting services for a variety of industries, including construction. Terri can be reached at trichards@kaufmanrossin.com.

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How Your Tax Bill May Change in 2014

Nearly two dozen tax provisions are set to expire or change in 2014. As always, there’s chatter in Washington about re-instating or modifying some of these provisions, and the election year timing means those discussions may grow louder.  But at the moment, it’s wise to become familiar with the scheduled changes that may affect you or your business this tax season.

Here are the top five tax changes that you should be aware of:

  1. Evan Morgan, CPA, of Kaufman RossinCancellation of Debt (COD) provision for mortgage debt is expiring. In 2013, you could exclude up to $2 million ($1 million if your status is married filing singly) of COD income from qualified principal residence debt that is forgiven due to your financial condition or decline in the value of the home.  This exclusion expired at the end of 2013, with no provision for extension into 2014.
  2. Qualified Charitable Distribution exclusion is expiring.  In the 2013 tax year, taxpayers over age 70 ½ could make tax-free transfers directly from their IRAs to charities and count them toward required minimum distributions.  This exclusion expired at the end of 2013, with no provision for extension into 2014.
  3. Section 179 deductions and bonus depreciation are changing or expiring.  Using the Section 179 deduction, you can elect to recover all or part of the cost of certain qualifying property, up to a limit, by deducting it in the year you place the property in service.   In 2013, the Section 179 deduction and qualifying property limits were $500,000 and $2,000,000; certain software qualified and so did some qualified real property.  In 2014, the deduction and qualifying property limits are decreased to $25,000 and $200,000 respectively. Software and real property no longer qualify for Section 179 expensing.  In addition, bonus depreciation for qualified property additions will now be limited to long production-period property and certain aircraft.
  4. The research credit is expiring.  The current credit for the cost of increasing research activity, IRS Sections 41(f) and (h)(1),  expired at the end of 2013, with no provision for extension into 2014.  Other tax benefits for research remain in effect.
  5. Built-in gains provisions for S-Corps changes.   C-corporations electing to be taxed as S-Corps are subject to tax at the highest corporate rate on gains that were built-in at the time of the election and recognized during the recognition period, which was five years in 2013.  For 2014 and future years, the recognition period increases to 10 years. 

If you have questions about how these tax changes could affect your tax planning for 2014, please contact me or another Kaufman Rossin tax specialist.

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Evan S. Morgan, CPA, is a tax associate principal in Kaufman Rossin’s Miami office. Kaufman Rossin is one of the top CPA firms in the U.S. Evan can be reached at emorgan@kaufmanrossin.com.


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How Will New Tax Changes Affect Your Business?

Dennis Fitzpatrick of Kaufman, Rossin & Co.With the recent passage of the American Taxpayer Relief Act of 2012, many of our clients are asking us what tax changes they should be aware of and how these changes will affect them. While we recently shared an overview of the 2013 tax changes affecting individuals, Congress also extended several popular business tax benefits that were set to expire. Here’s a look at some of the new tax provisions affecting businesses:

Business Asset Expensing

  • Section 179 Deduction. The Act extends Section 179 small business asset expensing through 2013. The Section 179 deduction is available for most new and used capital equipment and also includes certain software. For tax years 2012 and 2013, businesses can expense up to $500,000 of qualifying purchases with a $2 million investment limit. In addition, the Act includes a two-year extension of Section 179 expensing of up to $250,000 for qualifying leasehold improvements, restaurant property, and retail improvement property through 2013.
  • Bonus Depreciation. The 50% bonus depreciation is extended through 2013; some transportation and longer production property is eligible through 2014. Qualifying property includes most new equipment that is depreciable under the Modified Accelerated Cost Recovery System (MACRS) with a depreciation period of 20 years or less. Original use of the property must begin with the taxpayer claiming the bonus depreciation, and the property must be placed into service during the tax year.
  • Cost Recovery Periods. The Act extends through 2013 the 15-year cost recovery period for qualified leasehold improvements, restaurant property and retail improvement property.

R&D Tax Credit

Congress extended the research and development tax credit retroactive to January 1, 2012. Businesses can claim the incremental credit for increases in business-related, qualified research expenditures. Companies developing new or improved products or outsourcing product testing may be eligible.

Work Opportunity Tax Credit

The Work Opportunity Tax Credit (WOTC) is extended through 2013. Employers who hire veterans and other individuals from certain target groups who face barriers to employment are eligible for a credit with a maximum range from $2,400 to $9,600, depending on the employee hired.

Other Business Tax Benefits

Congress also extended the following business tax provisions through 2013:

  • The 100% exclusion for gains on a sale of small business stock
  • Special tax incentives for businesses located in empowerment zones
  • Rules on S corporations making charitable donations of property

If you have questions about the American Tax Relief Act of 2012 or want to learn more about how your business may be affected by these tax changes, please contact us.

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Dennis Fitzpatrick, J.D., is a tax principal at Kaufman, Rossin’s Miami office. Kaufman, Rossin & Co. is one of the top CPA firms in the country. Dennis can be reached at dfitzpatrick@kaufmanrossin.com.