Erin Andrews recently was awarded a $55 million verdict in her peephole lawsuit, but unsurprisingly, the IRS may be the real winner in the case. The perpetrator, Michael Barrett is on the hook for $28 million whereas the Marriot franchisee and operator, West End Hotel Partners LLC and Windsor Capital Group Inc., face the remaining balance of $27 million. Though the verdict will likely face an appeal by the hotel franchisee and operator and the perpetrator will unlikely have the funds to pay up, taxes may be the biggest thing standing between her and a big pay day.
The IRS treats damages for physical injuries (e.g. broken bones from an auto accident) as tax-free. So are damages for physical sickness. But since 1996, your injury must be “physical” to be tax-free. The IRS says your injuries must be visible, so Ms. Andrews may have trouble treating the damages awarded to her as tax-free. She was understandably humiliated and clearly suffered emotional distress. But without being able to argue something considerably more ‘physical,’ it is all subject to tax.
Ms. Andrews may have more tax-mitigating options available by choosing to settle out of court. In a settlement both parties can attempt to iron out the tax issues and tax reporting, with varying amounts of success.
Attorney fees can be a tax trap, too. If you are the plaintiff and use a contingent fee lawyer, you’ll usually be treated (for tax purposes) as receiving 100% of the money recovered by you and your attorney, even if the defendant pays your lawyer directly.
Ms. Andrews did the right thing and showed an enormous amount of courage by standing up for herself in court. From a financial viewpoint, her case presents an excellent example of the significant tax implications revolving around settlements/judgments that not everyone is aware of.
04 Mar 2016
If you’re planning on doing estate planning for the first time in 2016, or want to make sure your current planning documents aren’t out of date, staying on top of the latest changes is important. Here are several updates to keep in mind if you need to establish or revisit your estate plan in 2016:
The estate-tax exemption. For 2016 you can leave bequests (gifts to other individuals upon your death) worth up to $5.45 million (up from $5.43M last year) free of any federal estate tax. If you’re married, both you and your spouse are entitled to separate $5.45 million exemptions. If one spouse dies and does not use up his or her full exemption, the leftover exemption amount can be transferred to the surviving spouse.
The gift-tax exemption. You can also give away a cumulative total of up to $5.45 million to whomever during your life without owing any federal gift tax. If you’re married, both you and your spouse are entitled to separate $5.45 million gift-tax exemptions. If one spouse dies and does not use up his or her full exemption, the leftover exemption amount can be transferred to the surviving spouse.
The $14,000 annual gift tax exclusion remains the same. For those with large estates, the $5.45 million estate-tax exemption isn’t enough. That’s where the $14,000 annual gift tax exclusion rule can help. Gifts made under the $14,000 annual gift tax exclusion rule (more on that below) will not trigger any federal gift taxes, nor will they reduce your federal gift-tax or estate-tax exemptions. However, gifts in excess of the $14,000 will reduce both your federal gift-tax or estate-tax exemptions dollar for dollar.
The benefit of making gifts up to the exclusion amount: they reduce your taxable estate, and they shift any taxable income generated by the gifted money to your kids, who are probably taxed at a lower rate than you. Gifts under the annual gift tax exclusion rule don’t cut into your $5.45 million gift-tax or estate-tax exemptions, but they chip away at your taxable estate. So your estate tax exposure can over time be reduced by taking advantage of the annual gift tax exclusion.
For a full list of the must-know facts that will affect estate planning in 2016, contact Talley & Company today.
26 Feb 2016
Last week the IRS warned that email and texting scams aiming to trick U.S. taxpayers into providing personal data have surged 400% in 2016 so far. The schemes involve phishing (“fishing” for information and “hooking” victims) messages designed to trick taxpayers into believing the emails and texts represent official communications from the IRS, tax software companies or others in the tax industry. Here’s what you need to know.
What to Look For in These Scams
You may receive an official-looking email or text message from what appears to be an official source, whether the IRS or someone in the tax industry. The messages typically ask for data related to tax refunds, filing status, or seek confirmation of personal information, including ordering IRS transcripts or verification of IRS Personal Identification Numbers.
When you click on the links (which you shouldn’t be doing), you are sent to what appear to be government websites that ask for Social Security numbers and other personal information that identity thieves can profit from filing false tax returns. The sites may also contain malware that infect taxpayers’ computers and enable cyber-thieves to gain access to files or track consumers’ keystrokes to get personal data.
It is important to keep in mind the IRS generally does not initiate contact with taxpayers by email to request personal or financial information. This includes any type of electronic communication, such as text messages and social media channels.
Also Note That the IRS Will Never:
- text/email you demanding immediate payment, nor will the agency call about taxes owed without first having mailed you a bill;
- demand that you pay taxes without giving you the opportunity to question or appeal the amount they say you owe;
- require you to use a specific payment method for your taxes, such as a prepaid debit card;
- ask for credit or debit card numbers over email/text/phone; or
- threaten to bring in local police or other law-enforcement groups to have you arrested for not paying.
Accounting Today recently released a summary of the IRS’ “Dirty Dozen” list of the top tax scams for 2016. You can view it here.
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