New Jersey Estate Planning & Elder Law Blog : New Jersey Estate Planning Lawyer & Attorney : Deirdre Wheatley-Liss : Fein Such Kahn & Shepard Law Firm : Elder Law, Tax Planning

The State recently announced that Michael H. Bryan will be the new Acting Director of the New Jersey Division of Taxation. Per the press release, Bryan is to lead the Division of Taxation in the direction of enhanced communication and support with taxpayers.

The Division of Taxation could use an internal audit on practices and procedures to act more effectively.  While I don't usually find a problem with written communications, it takes several weeks for them to get from the mail room to the person's desk.  My other issue is on phone coverage - when  I call I am often left to a phone that rings and rings with no answer.  

As Bryan is coming from the private sector (Comcast to be precise) hopefully he will bring some ideas oriented at efficient customer service with him.

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Local IRS offices will be open on Saturday June 5 to help individuals and small business owners resolve tax issues at a time that is convenient for them.  

NJToday.net reports:

 

“In New Jersey, nine IRS offices will be open June 5 from 9 a.m. to 2 p.m.,” said New Jersey’s IRS Spokesperson Gregg Semanick.

The nine New Jersey IRS office locations are as follows:

Cherry Hill: 57 Haddonfield Rd. Cherry Hill, NJ 08002
Edison: 100 Dey Place, Edison, NJ 08817
Freehold: 4 Paragon Way, Freehold, NJ 07728
Jersey City: 30 Montgomery St., Jersey City, NJ 07302
Newark: 20 Washington Place, Newark, NJ 07102
Paramus: 1 Kalisa Way, Paramus, NJ 07652
Parsippany: 1719-C Route 10, Parsippany, NJ 07054
Paterson: 200 Federal Plaza, Paterson, NJ 07505
Trenton: 44 S. Clinton St., Trenton, NJ 08609
 

 

 

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Now that May of 2010 is upon us and there is still no federal estate tax finality, we can begin to look at the situations that families are facing where loved ones have passed since January 1.  A key issue is that their estate planning documents (wills or trusts) may not make sense in 2010 where there is no estate tax.

For example, a common provision in a Will if a person has a taxable estate is  "I leave my trust an amount equal to my applicable exclusion amount" - what does that mean?  Well, in 2009 "applicable exclusion amount" was loosely translated to $3.5 million. In 2011 "applicable exclusion amount" will loosely translate to $1 million.  In 2010 "applicable exclusion amount" has no meaning - it is a defined term under section 2010 of the Tax Code   which section does not exist this year (OK -  I am just now seeing the irony that a tax section that has no meaning in the year 2010 is section 2010).  The best was this was explained to me was "What if you had a Will that said it should be interpreted under the laws of the Soviet Union - there is no Soviet Union anymore, so what does that mean?"

Some states have come to the rescue and passed laws that say that where there is ambiguity in how to interpret a Will due to the 2010 repeal of the Federal Estate Tax, that the terms should be interpreted as if the person died on December 31, 2009 (when the estate tax was still in effect, so all the tax "terms of art" have meaning).    Julie Garber at About.com reports:

 

To date it appears that at least four states have actually passed laws designed to put the estate plans of people who die in 2010 in the same position as if they had died on December 31, 2009: Indiana, Maryland, Virginia, and Wisconsin. Note that all of these laws have been written to become void if Congress acts to bring the federal estate tax back in 2010.

For those of us in New Jersey where there is no legislative solution, a quick fix is to have an amendment done to your documents to address how they should be interpreted if there is a death in 2010.

 

 

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In doing some client research I came across a great resource "State Death Tax Chart" published by the law firm McGuire Woods.  State death tax can be relevant no matter where you live, because it could apply to:

• Real estate you own in another state
• The consequences for beneficiaries who reside in another state
• Where you may want to consider relocating your residence to
• Questions about a parents estate who lives somewhere else in the country

The chart is updated through March 2010.

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The new health care legislation is massive - over 2000 pages.  It will be years before many questions are answered, but has an immediate effect on all of us.  I got this summary of quick highlights from Steven Kaplan, CPA, JD, LL.M at Sax Macy, Fromm & Co. and thought it did a great job of boiling down to the key points:

Penalty for remaining uninsured.
After December 31, 2013, taxpayers would have to maintain minimum coverage or pay a penalty.

Employer responsibilities.
After December 31, 2013, an employer that employs at least 50 full-time employees and does not offer health insurance coverage would have to pay a penalty.

Excise tax on high-cost employer-sponsored health coverage.
After December 31, 2017, the bill would place a 40% nondeductible excise tax on insurance companies for any health coverage plan to the extent that the annual premium exceeds $10,200 for single coverage and $27,500 for family coverage.

New employer reporting responsibilities.
After December 31, 2010, employers would have to disclose the value of the benefit for insurance coverage on the employee's W-2.

Additional hospital insurance tax (HI) for high-wage workers.
After December 31, 2012, the HI tax rate would be increased by 0.9 percentage points on an individual taxpayer earning over $200,000 ($250,000 for married couples filing jointly); these figures are not indexed. The current rate is 1.45%.

Surtax on unearned income.
After December 31, 2012, a 3.8% surtax would be placed on net investment income of a taxpayer earning over $200,000 ($250,000 for a joint return). Net investment income would be interest, dividends, royalties, rents, gross income from a trade or business involving passive activities, and net gain from disposition of property (other than property held in a trade or business).

Limit on health FSA contributions.
After December 31, 2012, contributions to health flexible spending accounts would be limited to $2,500 per year.

Increased tax on nonqualifying HSA or Archer MSA distributions.
After December 31, 2010, the additional tax for HSA withdrawals would be increased from 10% to 20% and for Archer MSA withdrawals would be increased from 15% to 20%. This applies to withdrawals for nonqualified medical expenses.

Modified threshold for claiming medical itemized deductions.
After December 31, 2012, the threshold for claiming an itemized deduction for medical expenses would be increased from 7.5% to 10% for those under age 65.

Image: m_bartosch / FreeDigitalPhotos.net

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 A lead story in my Yahoo news today is "Nearly half of US households escape fed income tax".  "This can't be right" I am thinking as I open the link, but boy was I wrong.

According to the Tax Policy Center "About 47 percent [of American Households] will pay no federal income taxes at all for 2009. Either their incomes were too low, or they qualified for enough credits, deductions and exemptions to eliminate their liability."

And if a person has enough tax credits so that they equal more than their tax liability, they get a check from the government for the difference.

Now, I am a proponent of a progressive tax system - those who earn less have less ability to pay because more of  their dollars go to necessities, but this is ridiculous.  (A progressive tax system is one where the more you earn the more you pay).  However, half of American households make no contribution whatsoever to the operation of our country?!?  A progressive tax system doesn't mean un-aggressive - it is supposed to recognize a fair share based on total earnings.  Why are 53% of American households paying 100% of personal income tax? Something is clearly wrong with this picture.

And a tax refund for tax credits being greater than taxable income?  That just doesn't make sense. Under a progressive tax system, if you don't earn as much you pay less or no taxes.  That should the sole benefit - you pay no taxes and don't have to share anything with the government.  To issue a refund is nonsensical - just the administrative cost of calculating and issuing refunds for money you didn't earn really doesn't make sense.  Tax credits should be available only to reduce tax to zero, and if there is excess, it can be carried forward to be used against other income, or the benefit lost.

Note everybody is every going to agree on the best tax policy, but we need the throw in some common sense.

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A silver lining has been offered by the IRS to some of us who have been battered by spring storms and flooding.  New Jersey taxpayers in 12 counties have an additional 4 weeks to file their taxes to address the severe flooding those counties have faced.

President Obama announced today that Atlantic, Bergen, Cape May, Essex, Gloucester, Mercer, Middlesex, Monmouth, Morris, Passaic, Somerset, and Union counties have been declared federal disaster areas qualifying for individual assistance.

 NJ taxpayers who reside in or have businesses in the effected counties now have until May 11 (instead of April 15) to file their 2009 Income Tax Returns, make payment, and make contributions to an individual retirement account (IRA).

In case you run into any problems with late filing, the IRS website advises that:

If an affected taxpayer receives a penalty notice from the IRS, the taxpayer should call the telephone number on the notice to have the IRS abate any interest and any late filing or late payment penalties that would otherwise apply. Penalties or interest will be abated only for taxpayers who have an original or extended filing, payment or deposit due date, including an extended filing or payment due date, that falls within the Postponement Period.

IRS computer systems automatically identify taxpayers located in the covered disaster area and apply automatic filing and payment relief.

See the IRS NJ Disaster site for more information.

 Image: Francesco Marino / FreeDigitalPhotos.net

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Middle-class taxpayers often ask the question - is there any tax benefit out there for me ... ever? Well, the White House has created a Tax Savings Tool on its website as a way to make sure you are getting all the tax benefits you are entitled to.  The tool not only asks you questions to see if you qualify for a credit, such as "Did you make improvements to your home last year that make it more energy efficient?" but it also explains how the credit works so that you might be able to take advantage of it next year.

The tool describes itself as:

Did you know that there are more than a dozen Recovery Act tax cuts working families can take advantage of this tax season? For some taxpayers, this could mean thousands of dollars in tax savings.

This tool is intended to be educational. Taxpayers should not rely on it for determinations about their eligibility for tax benefits, but should consult the relevant IRS forms and instructions or a qualified tax professional. The tool provides links to relevant irs.gov and other government resources to help taxpayers learn more about the benefits for which they may be eligible.

I learned this from Greg Herman-Giddens at North Carolina Estate Planning Blog.

 

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Real estate tax appeals for both commercial and residential property have been a hot topic.  As the real estate market sinks, many taxpayers find that they are paying taxes on real estate due to assessments made when the value of the property was 20-40% higher.

Up to now if you wanted to file a tax appeal and property assessed up to $750,000, you would have had to have filed in the County Board of Taxation.  Now, they have changed the law so that property assessed up to $1 million must also be filed at the County Board of Taxation. 

The fear is that self service taxpayers will be unaware of the change, file in Tax Court, and then miss the filing date on the county level.  There is no "oops" defense to  missing the filing deadlines.

The law change took place in an amendment to Rule 54:3-21 through Assembly Bill 4313.  The stated purpose of this change in law is to "decrease the overburdened Tax Court's caseload and allow these cases to be heard by county boards of taxation...".

Again, the critical issue is that if a person files a tax appeal in the wrong jurisdiction, you may be considered out of time to then re-file in the correct court of competent jurisdiction.

Specific questions on real estate tax appeals can be directed to my colleague Steve Loeb, Esq. in our Tax Department.

Image: Salvatore Vuono / FreeDigitalPhotos.net

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 Today former Arkansas Governor and Presidential Candidate Mike Huckabee spoke at the Morris County Chamber of Commerce Annual Meeting.  During a round-table session with Chamber's Board of Directors I had the opportunity to ask Governor Huckabee about his thoughts on our current tax system.   Now, I am a self-admitted tax junkie - I am totally fascinated by how the tax system influences the economy and behavior and how little critical thought politicians on both sides of the aisle seem to give to it.  So, I thought to myself, here is an opportunity to see what a former (?) politician would say about tax policy. 

To paraphrase my question:

Governor Huckabee, here in New Jersey we are in the most expensive state to live in and the most expensive state to do business in from a tax perspective.  How is it that the government's share in our work could be productive to our businesses instead of having a dampening effect?

Gov. Huckabee's first answer was to first invite me to move to Arkansas - apparently the tax environment is much friendlier.  But all joking aside, he made some very insightful comments, which I thought I would summarize here:

• Corporate Tax does not exist. He expressed amazement of the fundamental lack of understanding in the American populations that corporations do not pay tax, they collect tax.  Think about it - when there is a new tax on oil companies, gas prices go up; on food companies, food prices go up; on banks, bank fees go up.  Taxes are a cost of doing business that is passed along to the ultimate consumers of good and services - you and me.  
• A FAIR tax would jumpstart the economy.  Gov. Huckabee said that he used to advocate a flat tax, but now advocates a FAIR tax.  I have to say I am not a flat tax proponent (it is regressive - affects poorer people more as they must spend dollars on necessities - and anything to address the regressiveness takes away from from the simplicity of a flat tax) and I knew nothing about the FAIR tax until today.  Gov. Huckabee explained it as a tax on consumption - you buy gas, you pay tax; you buy oil to make gas, you pay tax.  It changes the tax from on productivity to one on consumption.  He inspired me to go out and learn more - so more posts will be had on this subject.  I will be visiting the FAIR Tax website today and reading The Fair Tax Book that Gov. Huckabee recommended.
• Eliminate tax penalties for bringing offshore dollars into the US as an immediate solution to our fiscal crisis.  Right now, if you make money outside the US, you are taxed when you bring it into the US and potentially subject to penalties of 50% or more if you haven't previously reported the dollars.  Gov. Huckabee estimated 130 billion in offshore dollars that US companies and taxpayers won't bring back into our economy because it costs too much.  Eliminate those taxes and billions will flow into the economy from sources other than the US taxpayers pocket.

Gov. Huckabee shared that when he discussed the fair tax with his accountant he thought the accountant would dismiss the idea because it would put him out of work.  The accountant replied that he would like the idea where he could spend his time helping companies build their businesses instead of figuring out what their fair share of tax is. I will read more on the subject and see if I agree.

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 Derek Jensen of Jensen Law Offices reminds us in his blog that the Estate Tax is not the only federal tax provision expiring on December 31 due to Congressional inaction this year.

The estate tax isn't the only tax provision expiring on Dec. 31. Due to congressional inaction 50 tax provisions will expire. Including the annual AMT patch, the deduction for state and local sales taxes, the $4,000 deduction for college tuition, a provision that allows taxpayers age 70-and-a-half or older to transfer up to $100,000 directly from an IRA to charity, the business R&D credit, and a biodiesel tax credit. Many of these provisions require action every year and they are likely to be extended again, but retroactively this year.

As a tax professional I find in mindboggling that Congress, whose constitutional mandate (Article 1, Section 7)is to make and pass tax laws "All bills for raising revenue shall originate in the House of Representatives; but the Senate may propose or concur with amendments as on other Bills" can't bring themselves to do their jobs.  

I know there is a lot going on in Washington, but these tax provisions all have a 1 year life, and Congress knows that they therefore must act on them every year.  It is not as if the tax code is a small deal - it is only the means by which the federal government makes the money they spend.  It is lazy to say "we'll do it next year and make it retroactive" because what if you don't?  How can a person or business plan how to allocate their dollars when the tax laws that share in those dollars are in limbo?  How can a business plan to invest in new research when they can't budget what it will cost them because they don't know if the Research and Development credits will exist? Why should 23 million more American's have to worry if the AMT may catch them this year (or just be surprised by it) because our elected representatives can't get around to passing the annual patch that resets the income levels?

All of us are working harder, doing more to meet our responsibilities - Congress should be held responsible to to make the time to meet their responsibilities and this nonchalance about doing their jobs should not be ignored (like they are doing to the tax code). 
 

 

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I love animals - I have 2 large and happy labs, and have had a host of cats, dogs, fish, rabbits, guinea pigs and mice over the years.  My dogs are truly family members and I am not sure they don't think they are children with furry coats.

Apparently U.S. Rep. Thaddeus McCotter, R-Mich., also loves pets, because he has sponsored the The Humanity and Pets Partnered through the Years (HAPPY) Act, which would permit an income tax deduction of up to $3500 a year.  Seriously - this legislation is being put before Congress.  As an opinion piece from the Press of Atlantic City points out "With 62 percent of American homes owning a pet, that bill could cost a lot of tax money at a time when the federal government can least afford it."

A pet owner who can't care for his or her pet is heartbreaking - the op-ed piece shares the story of an elderly couple who had to turn in their German Shepherd for adoption because they couldn't care for him.

Unfortunately our tax woes go beyond our pets. It saddens me that congressmen waste their time issuing legislation that has no chance of going anywhere instead of looking at the real fact that our government spends more money then it takes in.  As in small business owner will tell you, that is a recipe for disaster. 

So Congress, get real and spend your time on legislation that addresses the fact that the elderly couple above couldn't afford to feed themselves, much less their dogs.

And for you pet lovers out there like me, take a page from the Atlantic City Press and donate pet food to a local food bank - Fido, Fifi and their owners will thank you (woof).

Image: freedigitalphotos.net

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The IRS has announced that the mileage deductions are going down in 2010.  You may recall they were raised in response to the gas crises of recent years when we were hitting $4 a gallon - now that we are back in the $2 range, the deduction rate is going down:

The new rates effective 1/1/10 are:

Business  - $0.50 (down from $0.55)

Medical/Moving - $0.165 (down from $0.24)

Charitable - remains the same at $0.14

Interesting however that while gas price levels are definitely off their peak, Bloomberg.com reports:

The national unleaded average gasoline price rose to $2.633 per gallon yesterday, according to AAA. The cost of gasoline is 83 cents a gallon higher than at the same time last year.

Don't forget that if your employer does not reimburse you for mileage, and you itemize, you might be able to deduct mileage on your 1040.

 

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Ok - so my thoughts that enough was enough on the first time home buyers credit clearly did not sway Washington.  The credit has been extended, but due to all the fraud, the IRS wants clear limitations to be known - so here they are:

1. You must buy – or enter into a binding contract to buy a principal residence – on or before April 30, 2010.

2. If you enter into a binding contract by April 30, 2010 you must close on the home on or before June 30, 2010.

3. For qualifying purchases in 2010, you will have the option of claiming the credit on either your 2009 or 2010 return.

4. A long-time resident of the same home can now qualify for a reduced credit. You can qualify for the credit if you’ve lived in the same principal residence for any five-consecutive year period during the eight-year period that ended on the date the new home is purchased and the settlement date is after November 6, 2009. (This might be helpful for children looking to purchase an elderly parents home for a promissory note as part of asset protection planning).

5. The maximum credit for long-time residents is $6,500. However, married individuals filing separately are limited to $3,250.

6. People with higher incomes can now qualify for the credit. The new law raises the income limits for homes purchased after November 6, 2009. The full credit is available to taxpayers with modified adjusted gross incomes up to $125,000, or $225,000 for joint filers.

7. The IRS will issue a December 2009 revision of Form 5405 to claim this credit. The December 2009 form must be used for homes purchased after November 6, 2009 – whether the credit is claimed for 2008 or for 2009 – and for all home purchases that are claimed on 2009 returns.

8. No credit is available if the purchase price of the home exceeds $800,000.

9. The purchaser must be at least 18 years old on the date of purchase. For a married couple, only one spouse must meet this age requirement.

10. A dependent is not eligible to claim the credit.

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To extend the credit or kill the credit, that is the question.  And will killing the credit take the real estate market along with it?

Much has been written, blogged, and talked about the first time home buyers credit - a very popular program that gave purchasers of new homes from January 1, 2009 to November 30, 2009 an $8500 credit.  

Now, of course the program is popular - those who qualify get a check from the IRS for $8500 - what could be unpopular about that?   According to Yahoo News ("Congress Scrutinizes Problems in Home Buyers Credit"), about 1.5 million applications have been made, and $10 Billion in tax revenue  ($10,000,000,000.00 - wow, that's a big number) has been refunded to homebuyers.

But what about all the people who don't qualify and are also getting $8500 checks. According to Yahoo News today:

• Treasury Inspector General for Tax Administration identified more than 19,000 people that filed 2008 tax returns or amended returns claiming the credit for homes they had not yet purchased. The program didn't start until 2009.  The cost - $139 million ($139,000,000.00 - always write out the zeros in those numbers the government throws around).
• The Treasury Inspector General identified another $500 million ($500,000,000.00) in claims, by some 74,000 taxpayers, where there were indications of prior home ownership (mortgage interest deduction, real estate tax deductions, etc.).
• The Treasury Inspector General also found 580 taxpayers under the age of 18 who claimed $4 million ($4,000,000.00) in first-time home buyer credit. One was 4 years old.

Look, I believe in home ownership and the American Dream.  But this program was created a year ago in an entirely different economy when total bank failure was not out of the question, and the real estate market was frozen by the credit crunch.  Irrespective of the outright fraud (which deserves jail time in my opinion - the IRS does have criminal powers to address people stealing from us, the taxpayers), enough is enough.  If you can't afford the house, save until you can.  People buying houses they couldn't afford is part of what got us into this mess in the first place.  There are enough great deals out there without tax dollars being added to the pot.  The Great Spend needs to end, and closing out the first time home buyer credit is a good start.

What do you think?

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Sunday September 6 was a banner tax for New Jersey residents - you won't find it on your calendar, but day 249 of the year was the day New Jerseyians finally paid their tax bill for the year.  For the first 249 days of the year New Jersey residents were working to pay for government spending programs - federal, state, local.  For the remaining 116 days of  the year, you work for yourself  - to pay mortgage, utilities, food, clothes, car, vacation, and all the things you value.

Americans for Tax Reform reports that New Jersey has the second longest cost of government time span:

Today is the day on which New Jerseyians have finally paid off the burden imposed by state, local and federal spending and regulations. While the national average fell on August 12 in 2009, taxpayers in the Garden State had to work an astounding total of 249 days out of the year to pay for the cost of government. Only one state, Connecticut, has a later COGD [Cost of Government Day] than New Jersey. 

Note that this is different from Tax Freedom Day, which was April 29 for New Jersey in 2009 (again, the second latest in the country).  According to the Tax Foundation, Tax Freedom Day is "calculated by dividing the official government tally of all taxes collected in each year by the official government tally of all income earned in each year."  Cost of Government Day is different, and later, because it is calculated by the cost of spending, a much greater number than income these days.  For a full breakdown of each states Cost of Government Day, look to Americans for Tax Reform.

I love living in New Jersey, and taxes are necessary to run the government and pay for services, but 48 other states do a better job than we do - not something to be proud of.  

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 It is no secret that New Jersey is the most expensive state to die in. New Jersey has the lowest estate tax exemption threshold of the country at a mere $675,000. In contrast, Florida has no state-level estate tax, and the creation of an estate tax is specifically banned by its Constitution. in addition, Florida's state revenues are generated primarily from property tax and sales tax. Due to all of these things, Florida is a less expensive State to live and die in New Jersey.  For years we've been recommending to clients who have homes in both New Jersey and Florida to consider changing their residency of Florida.

Bloomberg.com in Florida’s First Population Decline Since 1946 Squeezes Budget reports that Florida just experienced it's first population decline since 1946 -- that's over 50 years of growth -- and the last decline was apparently as a result of military personnel leaving Florida after World War II.  And the predictions are that this trend will continue:

 "Rising property taxes, increased homeowner insurance costs since the 2004-2005 hurricane season and competition for retirees from other states such as Georgia will damp population growth in coming years".

Additionally, "Sales-tax collections, which brought in 27 percent of revenue in 2008-2009 in a state without a personal-income tax, fell 10 percent last year."

From an estate planning perspective then, this raises the question of whether or not Florida will continue to be the "go to" state when recommending residency change from New Jersey as a way to reduce estate taxes.  Florida may need to change its revenue generation model, by raising sales tax, raising property tax, adding income tax, bringing back the intangibles tax, or some other manner that makes it more expensive to be a Florida resident.

 

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In reviewing the Obama administration's first 200 days, CNN Money correctly predicts that the next 200 days will bring and shift to taxes.  Regardless of where we end up on health care, where is all the money going to come from for all the hundreds of billions ($X00,000,000.00's) that have already been spent?
 

Some thoughts:

• New Health Care cost related taxes will be in the works - somebody will need to pay.  Could be reduction in itemized deductions for certain income earners, surcharge to income earners, additional taxes to insurers, or reduction of the tax free nature of employer provided benefits.
• Extend the estate tax for at least one year at the current levels of $3.5 million exemption per person and 45% maximum bracket.  They won't let the estate tax expire in 2010.  The question is if they will push one year, or just make it permanent at existing levels to not have to address again in 2010.
• Closing "Corporate Tax Loopholes" - This may be combined with a rate reduction.  The thought is the certain provisions make it less expensive to operate offshore.  The goal would be to make it more expensive to operate offshore, but create an incentive to operate, and thereby employ in the US, so the tax revenue effect may be flat.

 

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Courtesy of JH Cohn:

New Jersey Enacts Tax Amnesty Program

"New Jersey Governor Jon Corzine has signed a bill creating a 45-day New Jersey state tax amnesty period that will end no later than June 15, 2009. Presumably the program will begin on or about May 1, allowing the New Jersey Division of Taxation some time after the April 15 filing deadline to gear up for the program.

Under the program, taxpayers who pay outstanding state tax liabilities for tax returns due on or after January 1, 2002 and prior to February 1, 2009, plus one-half of interest owed as of May 1, 2009, will not have to pay the other half of the interest owed, nor will they be liable for collections costs or civil or criminal penalties. Taxpayers under criminal investigation for a state tax matter are ineligible for the program. On the other hand, taxpayers involved with civil tax audits are eligible.

Similar to the most recent New Jersey tax amnesty program conducted in 2002, a five percent "amnesty eligible" penalty will be imposed after the amnesty period concludes on any additional taxes found due by a taxpayer that were not paid during the amnesty period for a tax period falling under the amnesty program."

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Well, the behemoth stimulus package has passed - what now? And how will it affect you? A summary of the tax law changes in the bill courtesy of JH Cohn.

Economic Stimulus Bill Contains Numerous Tax Changes

On February 17, 2009 President Obama signed The American Recovery and Reinstatement Act of 2009 into law. The legislation commonly referred to as the economic stimulus bill is a close to $800 billion stimulus package that includes nearly $300 billion in tax relief. The major tax provisions are as follows:

• Making Work Pay Credit - a tax credit calculated at a rate of 6.2% of earned income up to $400 for individuals and $800 for joint filers applied retroactively to the start of 2009 continuing through 2010. The credit will be claimed either through a reduction in wage withholding or in a lump sum when filing one's tax return. The credit is phased out at a rate of 2% above adjusted gross income (AGI) of $75,000 ($150,000 in the case of joint filers). Employer FICA taxes are not changed.
• Economic Recovery Payment - a one-time payment of $250 to Social Security recipients, railroad retirees and disabled veterans (reduces any Making Work Pay credit that the individual is entitled to).
• AMT Patch - what has become an annual legislative exercise in recent years; the 2009 AMT exemption amounts have been raised slightly above their 2008 levels to insulate approximately 26 million middle-income taxpayers from the grasp of the AMT.
• First-Time Homebuyer Credit - for purchases of a principal residence between January 1, 2009 and November 30, 2009, the credit has been increased from $7,500 to $8,000 and does not need to be repaid unless the house is sold within three years of the purchase. The credit phase-out remains for taxpayers with AGI in excess of $75,000 ($150,000 for joint filers).
• New Car Deduction - individuals purchasing new vehicles in 2009 on or after the date of enactment can deduct sales taxes and excise taxes "above-the-line" attributable to the first $49,500 of the purchase price of any one vehicle. This deduction will be phased out once AGI reaches $125,000 ($250,000 for joint filers). Sales taxes paid on a lease agreement are not included.
• Unemployment Compensation - in addition to increasing and extending unemployment compensation benefits for various workers, the first $2,400 of unemployment compensation is excluded from income for 2009.
• Bonus Depreciation - extended through December 31, 2009 allowing for 50% first-year depreciation.
• Sec. 179 Expensing - the increased 2008 limits have been extended to 2009. The maximum Sec. 179 expense will continue at $250,000 and the phase-out will not begin until fixed asset additions exceed $800,000.
• Net Operating Loss (NOL) Carryback - this measure was scaled back significantly from earlier proposals. A 2008 NOL can be carried back up to five years (current law permits a two-year carryback) but only for qualified small businesses with average gross receipts of $15 million or less.
• Transit Benefits Parity - the current $120 per month income exclusion for transit passes and van pooling is increased to $230 per month starting in March 2009, thus equalizing it with the $230 per month permitted for parking.
• Qualified Tuition Programs - for 2009 and 2010 distributions from Sec. 529 plans will be tax-free when used to pay for computers and computer technology, including internet access.
• Residential Energy Property Credit - the new law increases the credit from 10% to 30%, raises the maximum cap to a $1,500 aggregate amount for 2009 and 2010 installations, and eliminates the $500 lifetime cap. There are other energy incentives including credits for electricity produced from renewable sources such as wind and for plug-in electric vehicles.
• COBRA Benefits - an individual who is involuntarily separated from employment between September 1, 2008 and January 1, 2010 can elect to pay 35 percent of his/her COBRA coverage with the former employer paying the remaining 65 percent. The former employer will receive a credit against income tax withholding and payroll taxes it is otherwise required to remit to the federal government.

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Category: Elder Law, Tax Law and Planning

As many of us who work with seniors blogged about when the tax stimulus package came to pass , while great in theory, the need to file a tax return to get the stimulus payment had a big hole from an action plan standpoint. Many seniors don't need to file tax returns, and haven't done so in years. This small fact is easy to forget about because for working folks the tax stimulus payment came as a matter of course from filing the return.

The result? PressofAtlanticCity.com reports that: "About 156,800 New Jersey retirees and disabled veterans, including about 1,300 in Atlantic City alone, have not yet submitted paperwork to claim their stimulus payments, according to the IRS. The IRS is asking the public for help in reaching this population with information on how to file. While 74 percent of eligible members of the group have filed, a substantial minority have yet to be contacted. The IRS this week announced a new summer campaign to reach them."

So, for those who have seniors as neighbors, clients, congregation members, or otherwise, see if they got their tax stimulus payment. It is up t0 $600 for singles and $1200 for couples. For details see prior posting: Economic Stimulus Package Now Law.

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Category: Estate and Inheritance Tax, Tax Law and Planning

Now that the candidates are known, what is that next question? What they propose to do with your taxes of course. A quick summary rundown courtesy of National Center for Policy Analysis - YOUR TAX BILL: HOW MCCAIN, OBAMA DIFFER:

Income taxes:

• McCain wants to make permanent the current federal income-tax rates.


• McCain opposes Sen. Obama's plan to lift the earnings cap on the Social Security payroll tax, saying such a move would be bad news for the economy.


• Obama wants to raise the top ordinary income-tax rate from 35 percent to 39.6 percent on families making more than $250,000 a year.


• Obama's plan includes increased taxes not only on ordinary income such as salary but also on capital gains and most corporate dividends.


• Obama also plans to impose higher Social Security taxes on workers making over $250,000.

Investment income:

• McCain wants to keep the current structure of tax rates on capital gains and
  dividends.


• Obama wants to raise the long-term capital-gains rate for families making more than $250,000 from its current rate of 15 percent to around 20 percent, or even higher.

Estate taxes:

• Neither candidate wants to kill the estate tax permanently, as President
  Bush has proposed.


• Under current law, the federal estate-tax exemption this year is $2 million, and the top rate is 45 percent; in 2009 that exclusion is set to rise to $3.5 million, with the rate remaining at 45 percent.


• McCain proposes raising the exclusion to $5 million and cutting the tax rate to 15 percent.


• Obama proposes a $3.5 million exclusion while keeping the top rate at 45 percent.

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Category: Tax Law and Planning


Actor Wesley Snipes has been given the maximum jail sentence of 3 years in federal prison for his failure to pay over $15 million in taxes. Snipes legal team essentially relied on the age old excuse of "but he said it was OK" in trying to sway the judge that he shouldn't be held responsible for following some one's advise to just stop filing tax returns. The "he" in this were a group of "tax protesters" who sold a system to thousands under the auspices of "taxes are illegal and you don't have to pay". There are more details in the Orlando Sentinel. Well, life is tough ladies and gentlemen, and just because you don't want to do something doesn't mean that you don't have to do it anyway (think of kids who have to eat their vegetables).

It is hard to say what is most offensive about the Snipes case. It could be that we all pay our taxes, and who are other people to simply choose not to participate? If you want the tax laws change, that is what the elective process and democracy (and hiring lobbyists) is all about. Or, it could be that some people (look at any recent story from Entertainment Tonight for a list) believe that because they have wealth, they don't have to play by the same rules. Well, let me clue you in on one of Benjamin Franklin's most lasting adages "Certainty? In this world nothing is certain but death and taxes" (and there wasn't even an income tax back then). Or maybe it is that the role of a tax professional is and should be to make sure a person pays their fair share under the law - not more, and not less. Here, "tax protesters" bilked thousands of people that they had the secret of getting rich quick - no more taxes. And I am sure they made millions by selling this idea to people with a lot less resources then Mr. Snipes, whose suffering for their bad decisions will never make the front page (not that there should really be any sympathy for those who bought into the system - but what about their spouses and families?).

Well, we will just have to see how Mr. Snipes looks in his orange jumpsuit what it is not coming from a Hollywood costume trailer.

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Category: Tax Law and Planning

President Bush signed the new Economic Stimulus Package into law today. For an excellent and detailed summary look to CCH 2008 Tax Alert.

Some quick hallmarks:

Tax Rebates for induvidual taxpayers with incomes less than $87,000/$174,000: At least $300 to almost everyone earning a paycheck, including low-income earners. Social Security recipients and disabled veterans making too little to pay income taxes would receive $300 checks as well, as long as they have at least $3,000 in income from various sources in 2007.

Families with children would receive an additional $300 per child. The full rebate would be limited to individuals earning $75,000 or less and couples with incomes of $150,000 or less, but a partial rebate would go to individuals earning up to $87,000 and couples earning up to $174,000. The caps are higher for people with children. Illegal immigrants are disqualified.

_Business tax write-offs: So-called bonus depreciation and more generous expensing rules to spur investment.

_Housing rescue: Allow more subprime mortgage holders to refinance into federally insured loans by raising the limit on Federal Housing Administration loans from $362,790 to as high as $729,750 in expensive areas. Increase the availability of mortgages by providing a one-year boost to the cap on loans Fannie Mae and Freddie Mac can buy, from $417,000 up to $729,750 in high-cost markets.

Information Courtesy of:
Assocaited Press

The package amounts to about 1% of U.S. gross domestic product.

Taxpayers will not have to apply for the rebate; it would come automatically based on their 2007 tax return.

Economists who have analyzed the numbers say it will give the economy a much-needed boost in the middle of the year. But almost every economist agrees that the business tax breaks will have very little impact on the economy this year. See Capitol Report.

Surveys show most consumers say they'll save the tax-rebate money, or use it to pay down debts. Only a minority of consumers say they'll spend it. To be an effective short-term stimulus to the economy this year, the money would have to be spent.

Information Coutesy of:
marketwatch.com

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Category: Tax Law and Planning



Op Ed pieces about taxation are usually so "Opinion" and so "Editorial" that they might better be called infomercials for a better tax system. So, when I stumble on a piece that is equally critical of all of the candidates vying for the Oval Office in 08, I stop to take a look.



What's missing in tax talk - Opinion - USATODAY.com: "Set aside for a moment the biggest issue of all, which is uncontrolled spending. Tax revenues, even without further cuts, are nowhere near the level necessary to cover the massive increase in costs that will come with the retirement of the baby boomers and relentless health care inflation. Every candidate knows this, but fiscal responsibility is painful, so the campaign debate is focused mostly on tinkering."



The author goes on to tout simplification as the goal all the candidates are missing, and points out very valid items of "the other side" to all their tax plans. But to the author's main point, while having a "simplified" tax code is a wonderful goal, the idea that reducing the size of the tax code would solve all tax problems is, in a word, and "oversimplification." The tax code is the main means by which government can influence behavior - and whether you think they should be or not, government is in the business of behavior modification. Want to smoke? It will cost you more. Want to get a mortgage instead of a loan for your car? It will cost you less. So maybe the candidates need to better address the role of "governance" then use the tax code to take from one hand and give to the other.

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Category: Tax Law and Planning

As with all things dealing with tax law, when the government giveth, it also takes away. Per USATODAY.com - Tax change may mean delay in refunds : "More than 20 million taxpayers will escape the alternative minimum tax this year, thanks to a stopgap measure Congress approved Wednesday. But lawmakers waited so late in the year to vote that many early filers could have to wait until March to get their refunds."

The article contains a good explanation of the AMT or Alternative Minimum Tax - a tax originally designed to prevent very wealthy taxpayers from essentially "deducting" their tax returns down to a zero tax. The AMT is a parallel calculation of tax, that does not incorporate certain deductions. While the theory behind the AMT is sound, the problem is that the income levels that AMT impact were not legislated to be adjusted for inflation. As such, as income grows through inflation, such that salary is higher, but wealth is not necessarily greater, the AMT captures more and more taxpayers, but not necessarily those taxpayer the law was intended to address.

If you were counting on that refund any time soon, this is another example of why you should try to minimize your refund instead of giving the government an interest free loan.

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Category: Tax Law and Planning

A recent New York Time article "After Foreclosure, a Big Tax Bill From the I.R.S." highlights a not well publicized fact of income tax law - discharge or forgiveness of debt is income to the taxpayer.

A simple fact pattern - You have a house with a mortgage of $100,000. You can't make your mortgage payments, and the house is foreclosed for $80,000 and total forgiveness of the mortgage. You now have no house and no debt obligation. However, you originally borrowed an additional $20,000 that the bank did not receive from the sale, and that you no longer have to pay back. Under Internal Revenue Code Sec. 61(a) (12), you have earned $20,000 dollars of income that you now owe tax on. The problem? You never got $20,000 in hand - instead, it is "phantom income" to you, upon which you need to pay tax in real cash ($4000 of tax at a 20% tax bracket).

Why are you deemed to have earned $20,000? Because your total net worth has increased as a result of not have to pay back the $20,000 (assets - liabilities = total net worth; if liabilities go down, total net worth goes up).

This fact pattern also applies where credit card or other debts are forgiven - ie: the creditor accepts as full payment less than the total amount borrowed.

IRC §61 - Gross Income Defined
61(a) GENERAL DEFINITION. --Except as otherwise provided in this subtitle, gross income means all income from whatever source derived, including (but not limited to) the following items:

61(a)(12) Income from discharge of indebtedness;

Where a debt is forgiven, is discharge of indebtedness income always the case? No. Where you have (1) filed bankruptcy under Chapter 11 (IRC Sec. 108 (a)(1)(A)), or (2) are insolvent at the time of the discharge (IRC Sec. 108(a) (1) (B)), then IRC Sec. 61(a)(12) does not apply.

The first exemption is easy - you either filed Chapter 11 or you haven't. The second is not so easy - you may feel you have no assets but not be insolvent under the Code.

To avoid a nasty surprise, make sure when paying off a debt for less than full value that you get in writing what they will be supplying to the IRS about the transaction.

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Category: Estate Planning, Estate and Inheritance Tax,

The U.S. Court of Appeals for the Third Circuit (which controls District Court decisions in New Jersey) finds that the Internal Revenue Code prohibits an estate from claiming a charitable deduction when the proceeds of a single trust are distributed to both charitable and non-charitable beneficiaries. Galloway v. U.S. (3rd Cir. 6-21-2007), No. 06-3007.

James Galloway created a single trust under which the beneficiaries -- his two children and two charitable entities -- would receive an equal, one-quarter share in the proceeds. Upon Mr. Galloway's death, the Pennsylvania Department of Revenue determined that $399,079.33 would be distributed to charitable entities.

Before reading on, some better solutions to meet Mr. Galloway's goals might have been have been:

• Flat amount bequest to chartity
• Percentage bequest to charity before transferign the balance to a trust (ie - make the division to the charities and then directe that the amoun to the children go in a trust)
• Set up a Charitable Remainder Trust or Charitable Lead Trust, which are statuorially authortized divisions of bequests between a charity and one or more induviduals
• Name the charity as a beneficiary on a non-probate asset such as an IRA or other retirement plan

The trustee of the estate, Edmond Galloway, then claimed a charitable deduction in that amount on the federal estate tax return. Based on Internal Revenue Code § 2055(e), the IRS disallowed this charitable deduction and computed the estate's liability to be $306,604.57. Mr. Galloway paid the additional tax due and then filed a refund claim, which was denied by the IRS.

Mr. Galloway filed a complaint in the U.S. District Court for the Western District of Pennsylvania claiming that the trust did not fall under the purview of IRC § 2055(e). Mr. Galloway argued that the only kind of such "split-interest" trusts that Congress intended § 2055(e) to cover are trusts in which a non-charitable beneficiary has a life interest and the charitable beneficiary has a remainder interest. The complaint was denied and Mr. Galloway appealed.
The U.S. Court of Appeals, Third Circuit, affirms and holds that the clear, unambiguous language of IRC § 2055(e) disallows any charitable deduction where an interest in the same property passes to both charitable and non-charitable beneficiaries.

To download the full text of this decision in PDF format, go to: http://www.ca3.uscourts.gov/opinarch/063007p.pdf .

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Category: Elder Law, Estate Planning, Estate and Inheritance Tax, Business Law and Planning, Tax Law and Planning, Probate and Estate Administration, Financial Planning, Miscellaneous Musings

I am excited to be speaking at the Garden State Women Magazine 6th Annual Financial Conference & Networking Event on May 12 at the Park Avenue Club in Florham Park. This is an exciting day where New Jersey's top insurance, real estate, legal and financial professionals will provide women with the information and guidance needed to take charge of their financial future. Click here for more details.

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Category: Tax Law and Planning

Recently, the IRS has been auditing and suspending Registered e-filers who are not in compliance with the regulations and publications promulgated by the IRS. Fein, Such, Kahn & Shepard, P.C. has become involved in defending tax preparers suspended from e-filing tax returns.

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Category: Tax Law and Planning

If you have income producing intellectual property, it turn out that the Netherlands may be the place to own it. Previously thought of only in terms of tulips and windmills, Dutch Tax Law is incredibly favorable to royalties (produced from licensing copyrights and patents) - so favorable in fact, that royalties are not taxed there.

The article The Netherlands, the New Tax Shelter Hot Spot from the New York Times describes how the Rolling Stones and others who derive huge amounts of revenue from licensing have significantly reduced taxation by taking advantage of Dutch Laws designed to attract royalty producing assets. The most impressive statistic from the article (and making it a worthwhile read): "Over the last 20 years, according to Dutch documents, the [three of the members of the Rolling Stones] have paid just $7.2 million in taxes on earnings of $450 million that they have channeled through Amsterdam -- a tax rate of about 1.5 percent, well below the British rate of 40 percent." Wow.

LAST spring, Keith Richards, the craggy-faced and hard-partying lead guitarist for the Rolling Stones, fell from a tree at a beach resort in Fiji, slamming his head against the trunk on his way down. Mr. Richards was flown to New Zealand, where a surgeon provided emergency care to treat swelling in his brain. While the accident forced the Rolling Stones to cancel part of their summer tour, Mr. Richards, 62, handily survived his plunge.

"It's not the first brush with death I've had," Mr. Richards later told Rolling Stone magazine. "I guess what I learned is, don't sit in trees anymore."

What two of the other three Rolling Stones apparently learned, including Mick
Jagger and Charlie Watts, was that Mr. Richards's near-death experience meant that it was time to think about their heirs. For that, the aging rockers turned to a reclusive Dutch accountant, Johannes Favie, whose company, Promogroup, has helped them minimize their tax bills for more than 30 years. (The fourth Rolling Stone, Ron Wood, handles his finances apart from Promogroup.)

And so, last August, according to details disclosed in documents maintained by the Handelsregister, the trade registry of the Netherlands, Promogroup helped the three performers set up a pair of private Dutch foundations that will allow them to transfer assets tax-free to heirs when they die. Other Dutch shelters that Promogroup has arranged for the three have already paid off handsomely; over the last 20 years, according to Dutch documents, the three musicians have paid just $7.2 million in taxes on earnings of $450 million that they have channeled through Amsterdam -- a tax rate of about 1.5 percent, well below the British rate of 40 percent.

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Category: Tax Law and Planning

The IRS announced today that taxpayers will have until Tuesday, April 17, to file their taxes this year. This is because "April 15 falls on a Sunday in 2007, and the following day, Monday, April 16, is Emancipation Day, a legal holiday in the District of Columbia."

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