Masonry Magazine July 1974 Page. 18
TAXES
By MIRIAM McD. MILLER
VACATION PROPERTY
As the summer months get underway, interest in vacation homes increases. The House Ways & Means Committee is working on a bill that would allow for genuine business use of vacation homes but would eliminate them as tax shelters. Provided the taxpayer stayed in his vacation home more than a week or more than 5% of the time the home was occupied, he would be able to deduct expenses only up to the income from the property. Operating losses would not be deductible. Of course, future Congressional action can amend or fully defeat such a bill. But, the bill's journey is worth following.
In a recent case before the Tax Court, a taxpayer's effort to claim a casualty loss for his waterfront property was being examined. It seems that the taxpayer's stairway and a portion of a seawall at his beach-front residence were destroyed by high waves resulting from strong winds during a severe storm. On his tax return, the taxpayer claimed a casualty loss for the amount of the repairs and a $3,000 difference between the appraised fair market value of the property before the storm and such value after the storm. The $3,000 difference in appraised value was, the taxpayer contended, attributable to buyer resistence because of the fear of possible recurrence of similar storms.
The Tax Court disagreed with the taxpayer. Taxpayer's casualty loss must be limited to the actual loss resulting from damage to the property by the storm. Thus the cost of repair was the proper basis for determining the casualty loss deduction. (Ford v. Commissioner, T.C. Memo 1974-101.)
DEPENDENT CARE EXPENSES
Section 214 of the Code which provides for the deduction of certain employment-related expenses is referred to generally as the deduction for childcare expenses that allows a taxpayer to be gainfully employed. Even though this section permits certain taxpayer-employers to deduct the amount of the wages they pay for household services and for care of a dependent child, disabled dependent, or disabled spouse, such taxpayers must pay FICA taxes on the wages they pay. In the course of a year these taxes can seem rather steep.
Because FICA taxes are a Federal excise tax, they are specifically not deductible on an income tax return. Now the IRS has ruled that while the FICA taxes paid are not deductible as taxes, they may be included in the expenses incurred for household help. In other words, when a taxpayer makes an expenditure for household services and for the care of a dependent child, disabled dependent, or disabled spouse, that expenditure necessitates the payment of the employer's share of the FICA taxes. It is the amount of that tax that can be added to the total deductible expenses allowed under Section 214. (Rev.Rul. 74-176.)
EMPLOYEE EXPENSES?
Perhaps one of the nicest things about the tax world is the resourcefullness of taxpayers. No matter what the odds are against them, periodically a taxpayer challenges the system.
A taxpayer failed to pay his ex-wife money for the support of his two minor children, as ordered to do in his divorce decree. His ex-wife went to court and got her defaulting ex-spouse to be adjudged in contempt of court, for which he was ordered committed to a workhouse for 30 days. Rather than have this happen, the taxpayer gave his ex-wife a check to cover the amounts due and owing to her.
When tax payment time came around, the taxpayer deducted the amount he had paid his wife as employee expenses. It was his thought that these child support payments were employee business expenses because had he not paid them he would have been jailed and lost his job. Only by making such payments could he keep his job.
As might be expected, the Tax Court refused to accept the taxpayer's logic and ruled that the support payments were not business expenses but rather were nondeductible personal expenses of the taxpayer. (Clark v. Commissioner, 33 T.C. Memo 1974-7.)
PROPOSED NATIONAL HEALTH INSURANCE
If a national health insurance act becomes law, the task of being an employer will become even more complex. According to the provisions of H.R. 13,770, which was introduced by Congressman Wilbur Mills, national health insurance would be provided by new employment taxes. The proposed tax would be 2½% for self-employed, 3% for employers and 1% for the employees. The contribution base would not exceed $20,000.
DEFERRED COMPENSATION PLANS
In an increasing number deferred compensation plans are being created with the obvious intended outcome of permitting an employee to receive income in a better tax situation or time than when currently employed. One of the main dangers to be avoided in setting up a deferred compensation plan is having the salary that is deferred taxed currently, because the IRS says that the funds involved have been "constructively received."
It is the law that income though not actually in possession can be constructively received when it is credited to a taxpayer's account, set apart for him, or otherwise made available so that he may draw upon it at any time. This constructive receipt problem arises most often when a plan gives an employee the election of receiving his compensation currently or of having it deferred. This can be averted if the election to defer is made before the period during which the services are rendered.
Another problem area of deferred compensation plans can arise when an employer establishes a trust for his employee or purchases an annuity contract to facilitate such a plan. There is the chance that the IRS will attempt to tax currently the amounts so set aside on the theory that the employee has a current and immediate interest (Continued on page 28)
masonry • July, 1974