Taxation

1 Business and Management – Tax Accounting Introduction Taxes are a compulsory part of life; to legally reduce one’s tax burden especially where large sums are involved, it is essential to seek the services of a tax accountant. This paper examines the case of an individual who has inherited $300,000 from their father and received $75,000 as compensation in a sexual discrimination case. It discusses the best strategies that can be used to reduce the taxes on these funds, as well as the money earned from their investment.

Advice on the Money Received from Inheritance In the United States, inheritance is not considered to be a taxable income in a majority of states. However, the earnings accrued from investing inheritance money is taxable. In the states where there is an inheritance tax in place, the beneficiary of the inheritance pays the tax on the value of the assets received as an inheritance from the deceased. The income generated from investing money received from inheritance is subject to taxation.

Typically, the worth of a deceased person’s estate is calculated as its value on the date of their death. However, in some cases, to reduce the amount taxed from the proceeds of the inheritance, the accountant may use a different valuation date, which is six months from the death of the owner of the estate. The alternative is only used if the value of the property is lower six months after the date of their passing. The proceeds earned from inheriting the inheritance are subject to taxation. The tax liability can, however, be reduced in a number of ways. The first method is to invest the money in an investment that is expected to earn the least gross income (Wheelwright, 2013). The second method of reducing the tax bill is to contribute the proceeds of the investment to IRA or 401(k). Both of these accounts are taxfree. Therefore, for instance, if the client contributes $3,000 to the account and the tax rate is

2 30%, they will automatically save $900 in taxes. There is a contribution limit for both the IRA and 401(k). For IRA the limit is $5,500 for individuals under the age of 50, and $6,500 for people who are older than 50 (Murray, 2012). For 401(k), the contribution limit is $18,500 for people under the age of 50, and $24,500 for people who are older than 50 (Murray, 2012). The second method of reducing the tax liability on the investment is deducting the mortgage interest from the total tax liability. The tax bill can be reduced even further by adding an extra amount to the 12 monthly mortgage payments that are typically made in a year (Maloney, Hoffman, Raabe & Young, 2018). The third method of reducing the tax liability is by donating a proportion of the money earned to charity. This money is deducted from the total tax bill charged on the investment proceeds. The fourth legal method of paying less taxes is by keeping a record of one’s vehicle mileage; this is applicable if the individual is self-employed and uses their car for work; the amount of money used as fuel can be deducted from the total tax bill. When investing money, it is essential to manage the tax liability by selecting investments that have a lower tax burden and also selecting investments whose tax liability can be deferred. This can be achieved through purchasing long-term investments as opposed to short-term ones and also selecting tax-free bonds and money market investments.

As a CPA I would advise the client to keep their new wealth private by not making any drastic lifestyle changes which might draw attention to themselves, and may subsequently trigger tax audits. I would advise my client not to invest the inheritance on an investment that earns the least gross income because there are several ways of avoiding a high tax bill.

Tax evasion is the use of unlawful methods to reduce or completely fail to pay taxes.

The client is not evading taxes because they are seeking legal methods of reducing the tax burden through methods provided in the Internal Revenue Code (IRC) (Murray, 2012).

3 Advice on the Money Received from Sexual Discrimination Settlement The Internal Revenue Code (IRC) states that all income received by an individual is taxable unless it is specifically not regarded as gross income. The Code also states that the income earned from a settlement is not taxable if there is evidence of physical evidence as a result of the sexual discrimination or if the settlement is subject to a non-disclosure clause.

However, if there is no non-disclosure agreement and no physical injury as a result of the sexual discrimination, the settlement income is by law considered taxable as ordinary income.

In case there is no non-disclosure agreement attached to the settlement, to reduce the amount of tax paid, the client is allowed to deduct the attorney’s fees from the total settlement received, and therefore only pay tax on the net income (Shilling, 2018). However, most organizations have a non-disclosure clause on settlements because it is in their best interests to keep the settlement mount confidential to prevent public scrutiny or more people coming forward claiming sexual discrimination.

To legally qualify for tax liability reduction, it is essential for the client to attach any document that can be used to minimize their tax burden. This includes the receipts for their investment in 401(k) and IRA, vehicle mileage documents, documents showing proof of donation to a charitable organization and bank statements.

Taking advantage of exemptions and loopholes in the Internal Revenue Code is a legal method of enjoying tax savings. These measures are a part of tax planning which is essential for the client to learn how to conduct business and personal transactions to reduce their tax liability.

4 Reference Maloney, D., Hoffman, W., Raabe, W., & Young, J. (2018). South-western federal taxation 2019. Cengage Learning.

Murray, R. (2012). Tax avoidance. Sweet & Maxwell.

Shilling. (2018). Complete Guide to Human Resources and the Law, 2019 Edition. Wolters Kluwer Law & Business.

Wheelwright, T. (2013). Tax-Free Wealth: How to Build Massive Wealth by Permanently Lowering Your Taxes. RDA Press, LLC.