In 2011, New York passed a law allowing same-sex marriage. In doing so, the state joined five other states and the District of Columbia in allowing such marriages. Legally married same-sex couples in Connecticut, Iowa, Massachusetts, and Vermont, DC, and now, New York, should file State tax returns as married couples. (New Hampshire also allows same-sex marriage but does not have a State income tax.) Three other states (California, Oregon and New Jersey) have civil union or domestic partnership laws which allow same-sex couples to file State tax returns together.

The Federal government, however, still does not allow same-sex marriage, so those couples must file Federal tax returns as if they were not married. What this means is that same-sex couples will be spending a bit more time preparing their tax returns this year. For New York taxpayers this affects, they must prepare separate Federal returns as single — or head of household, if they qualify — then prepare the Federal return as married filing jointly or married filing separately. Figures from the latter return, which are not filed with the government, then flow onto their State return and then the State tax liability is calculated by making adjustments to the Federal adjusted gross income they calculated as a married couple.

In New York State, which for 2011 has a progressive tax structure — that is, people at higher income levels are taxed at a higher rate than people at lower levels — couples may find themselves paying more tax as a couple than as two single persons, but it really depends on their income. When you have a couple where one person makes a lot of money and the other one has a very low income, there could be tax advantages to filing a joint return. On the other hand, two high-income earners will probably be paying more taxes when filing together. One thing to keep in mind, though, is that once you’ve tied the knot in New York State, there’s no going back. You need to file your State return as either married filing jointly or married filing separately.

If you have a same-sex couple with a child, for Federal purposes, one of the couple could file as head of household, while the other files as single. But for State purposes, the couple would file together, losing some of the tax advantage of the head of household filing status.

Last year I had a client who, after many years, married the father of her child, with whom she had lived for over a decade. She always filed as head of household, and because of her modest income, was able to claim the Earned Income Credit (EIC). But after they married, their incomes were combined and went well above the limit for the EIC. After I prepared their tax return, they faced a hefty tax bill!

So keep in mind, if you’re thinking of getting married, your marital status may affect your taxes, and this holds true regardless of your sexual orientation!

This tax season, I have had no fewer than three people ask me at what point do [fill in the blank: charitable deductions - or - self-employment expenses - or - losses from rental activities] trigger an IRS audit. Each time, the question took me by surprise. Now, maybe I’m naive, but it surprised me that people would think of their taxes in terms of how far can they push the envelope before the IRS starts asking questions. That’s not the way I think of taxes at all.

In my mind, I consider all legal tax deductions — and there are many — when preparing a client’s tax return. But dishonesty is not in my repertoire. Sure taxes are high (and living and owning a home in New York State, don’t I know that!) but that’s what we pay to live in our society. We get a lot back for it — good educations, good roads, police protection, welfare allowing us to keep beggars off the streets, health care for the elderly and indigent. It’s the price we pay to live here, and I don’t believe anyone should evade the responsibility of paying what they legitimately owe.

It must be awful to be a tax evader. They break out in a cold sweat when they see an IRS notice in the mail. Uh-oh, they think. But if you keep good, accurate records, and you are truthful on your tax return, you really have nothing to fear from the IRS.

Recently I had some down time, so I watched a 2006 movie I’d had on my list called “Stranger Than Fiction.” It stars Will Ferrell as an IRS agent named Harold who audits, and falls for Ana, a bakery owner, played by Maggie Gyllenhaal. Now, you don’t get a lot of movies with IRS agents in them, and even fewer where the agent is the lead character. But this was a mildly interesting diversion, which got even more interesting — from a tax standpoint, at least — at two specific places.

The first was where Harold is in the back room at the bakery. Ana brings in a box full of random receipts and envelopes, and drops them in front of Harold. The conversation goes like this:
Harold: What’s this?
Ana: My files.
H: What?
A: My tax files.
H: You keep your files like this?
A: No, actually I’m quite fastidious. I put them in this box just to screw with you.
I thought this was interesting, because if you’re going to be audited, it’s probably not a good idea to antagonize the auditor. That’s just common sense. But if an auditor can’t easily find documentation for an expense, he or she might be inclined to disallow it, throwing the burden of proof back on to you. So, first takeaway from this scene (and proof that a financial professional wasn’t involved in the screenplay) is: keep your records organized.

The second scene was at a tender moment between Harold and Ana, where Harold tells her that all the food she’s been giving away is tax deductible as a charitable contribution. I might have to qualify this if there’s a back story to this remark that wasn’t obvious, BUT we see Ana earlier in the film giving coffee and a Danish to a person who appears to be homeless. If that’s what they’re talking about, no, that is not deductible, for reasons I pointed out in the last post. Now, if she’s donating baked goods to a registered 501c(3) charity, it’s possible that she could donate the fair market value of the donations on her tax return. But not if it’s going to an individual instead of a charity.

The generosity of the American people is really quite amazing.  This past weekend, our local Rotary Club, of which I am a member, held a chicken barbecue to raise funds for the earthquake relief effort in Haiti, and we raised almost $1400.  Typical fundraising income from a BBQ like this runs about $800, but people were rounding up their purchases and asking us to donate the excess to the cause.   Other efforts in the local area have raised thousands of dollars.  It is truly heartwarming how generous we can be when we are called to action.  And now, this generosity is being rewarded by the government…

The IRS has come out with a new advisory, making the preparation of tax organizers — those forms you might use in preparing your tax information for your tax preparer — every more challenging.  Now, if you make a cash donation to an eligible organization for earthquake relief in Haiti, you can deduct this contribution on your 2009 tax return.  But be advised of these provisions:

• You must make the contribution between January 11 and March 1, 2010
• You must itemize deductions on Schedule A in order to take this deduction
• Donations made by text message are deductible (save your telephone bill!)
• Only donations made to organizations certified as 501(c)3 charitable organizations are eligible for this special tax treatment.  This means that foreign organizations, unless they have a USA branch, probably do not qualify.
• You may take the deduction on either your 2009 return, or your 2010 tax return, but not both.

It is this amazing spirit of Americans that make me proud to be a citizen of this country — and despite its many faults, we still know how to rally for a cause, and open our hearts to those in need.

Perhaps it’s the season, or a barometer of an improving economy, but I’ve received a few inquiries from clients lately on the topic of hiring employees.  There are a lot of steps to take — some might say “hoops to jump” — but as with most legal matters, it’s better not to skate on thin ice, especially when jumping through hoops.  (Please excuse my excessive metaphorization!)  I just discovered this website that provides information on each step, in an exceptionally clear manner.  So rather than reproduce what they have there, I thought I’d post a link to the website here, and you can check it out for yourself:  http://www.business.gov/business-law/employment/hiring/first-employee.html

Some people may think, well, instead of going through all that rigamarole, I’ll just pay this person as an independent contractor.  In years past, that was the tactic many potential employers took in order to avoid paying the 7.65% tax on employee wages, as well as the attendant insurance benefits.  But the IRS frowns on that, and has come up with a list of criteria that help to determine if a person should be considered an employee or a contractor.  The criteria address control and direction, with people who are controlled and directed being more on the employee end of the scale, and those who exhibit more independence being on the contractor end of the scale.  So, for instance, if you have your own tools, if you make your own hours (at least as far as the work you do for the employing entity goes), if you work for other people as well as this employer, if you have a contract to perform the work, then you might be considered an independent contractor.  If you, the employer are not sure if someone is an employee or a contractor, you can ask the IRS to make that determination for you, by filing Form SS-8, which is available here:  http://www.irs.gov/pub/irs-pdf/fss8.pdf But be forewarned, it may take several months to get a determination on a worker’s status!