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Old 04-29-2015, 08:01 AM
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Wis Income tax disparity

Hi All, So here is the problem. I am equal partners in a small closed corporation. We customarily take distributions from the corporation at tax time to pay the taxes and estimates. Usually my partner and I have similar tax bills as we draw the same salary and benefits. He is single, no dependents, although from payroll records I found he has been claiming one dependent which his ex-wife is entitled to. I am married, wife does not work. When we came to pay the 2014 Taxes our federal taxes were similar but his state taxes were almost 60 times what mine were. Mine were 10 dollars due, his were 6000 dollars due. I questioned our accounting firm on how that could have happened and they refused to answer me, claiming privacy rights. We were both making estimate payments through out 2014. The only thing I can figure is that, because he was claiming a deduction for a dependent while drawing salary he paid less into the system for taxes, and therefor increased his take home pay. Then when it came time to actually file his taxes he filed single no deductions. Then because of our policy to take distributions to pay taxes the corporation was left on the hook to pay the difference. He has since left the company BTW....Any thought on how this could have played out to leave such a large discrepancy in Wisconsin taxes owed for 2014?



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Old 04-29-2015, 03:04 PM
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The only thing I can figure is that, because he was claiming a deduction for a dependent while drawing salary he paid less into the system for taxes, and therefor increased his take home pay.=======possibly; he can adjust his W4 with the corp to decide number of his withholding allowances. but Transactions between a closely held corporation and its stockholder-owners will be closely examined by IRS agents. I am not sure how he could claim his ex as his dependent on his return. if he receives a final divorce decree by the last day of the tax filing year, his filing status is single for the entire year. In a finalized divorce, he cannot claim an ex-wife as a dependent on his tax return. she is responsible for filing her own taxes and, therefore, he cannot claim her as well.however, he can claim his ex, as an unrelated person as a dependent, under the Qualifying Relative rule only if the ex lived in his home for the entire tax year;the ex received more than 50% of her total support from himfor the entire year;the ex does not file a joint return with another taxpayer.

Then when it came time to actually file his taxes he filed single no deductions. Then because of our policy to take distributions to pay taxes the corporation was left on the hook to pay the difference. He has since left the company BTW....Any thought on how this could have played out to leave such a large discrepancy in Wisconsin taxes owed for 2014?=====>>>>I am not pretty sure on the situation; but I guess he can claim anything he wants on his W-4; his personal tax return is an entirely different story, however.

He can't claim his ex UNLESS She makes less than $3,950. The income limit for a "qualifying relative" is $3,950 for 2014.



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Old 05-04-2015, 10:31 AM
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The dependent he was claiming on payroll was for a minor child, which the judge had given the deduction for her to his ex wife as part of the divorce decree. So my theory is that by claiming a deduction for a child he was not intitled to when determaining his take home pay from payroll, then by filing corectly as single no deductions on his income tax he recieved more weekly pay and created a larger than normal tax bill at the end of 2014. Knowing that the corporation takes distributions to the highest tax bill, he in effect recieved more pay, payed less in tax and stuck the corporation for the 6000. Does this make sense......



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Old 05-04-2015, 04:43 PM
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The dependent he was claiming on payroll was for a minor child, which the judge had given the deduction for her to his ex wife as part of the divorce decree.====>>I should say it depends; under some circumstances,he, as a noncustodial parent, can claim the child as a dependent for tax purposes on W4; there are 2 ways in which a noncustodial parent can claim a child as a dependent: the custodial parent signs a Form 8332 which the noncustodial parent attaches to his tax return or the divorce decree, separate maintenance or written separation agreement states that the noncustodial parent shall be entitled to claim a child as a dependent.None of the two ways applies to him, then no he can not claim the child as his dependent; however, on his W4, he can claim as many as he'd like if he doesn't mind paying a big tax bill at the end of the year, including penalties for under-withholding. The best option for him is always to follow the instructions on the W-4 carefully, to the letter, and put down the result he gets.

So my theory is that by claiming a deduction for a child he was not intitled to when determaining his take home pay from payroll, then by filing corectly as single no deductions on his income tax he recieved more weekly pay and created a larger than normal tax bill at the end of 2014.=====>Correct; allowances roughly correspond to the exemptions he claims on his annual tax return. As of tax year 2014, each allowance shelters $3.95K of your annual income from the employer's withholding calculation.

Knowing that the corporation takes distributions to the highest tax bill, he in effect recieved more pay, payed less in tax and stuck the corporation for the 6000. Does this make sense......=====>>he in effect received more take home pay by claiming the child as his allowance on his W4 and this means that he may need to pay a big tax bill at the end of the year, including penalties for under-withholding. If he has too little tax withheld on the job, or has income from sources where no tax is withheld, he could be hit with penalties and interest charges for underwithholding.There is no penalty to the employer if they are complying with the law.



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