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 end of the year is crunch time to finalize what your tax bill will look like come April 15, 2011.  Eisner Amper has just issued a terrific 2011 Year-End Tax Planning Goals Chapter of its upcoming 2012 Personal Tax Guide.  I urge you to peruse the tips and information to see if there are any actions you can take between now and December 31, 2011 to lower your 2011 tax bill.

Some ideas include:

• Setting tax planning goals - including deferring taxes, reducing taxes managing cash flow, retirement and education planning

• Year end tax planning tips - timing can be everything

• AMT Planning - if you are in the AMT for 2011 or 2012, you won't get any benefit from prepaying state and local taxes, real estate taxes or certain miscellaneous itemized deductions,so save your money

• Prepayment of Expenses - the most common deductible expenses that need to be incurred before December 31 to deduct this year are charitable contributions, state and local income taxes and real estate taxes (see AMT above), mortgage interest, margin interest, business equipment purchases.

• Timing of Income - look to defer income to future years if you believe you might be in a lower tax bracket at that time.

• Bunching miscellaneous deductions to get over the 2% floor - if you got over the floor this year, you may want to prepay some expenses that otherwise might not be deductible next year.

• Manage your refund/payment - adjust year end withholding or make and estimated payment to avoid underpayment penalties

• Manage Business losses and Passive Activity losses - discuss the ability to take tax free distributions or close out an investment with your accountant

• Review Incentive Stock Options  - the timing of exercise of an ISO can have a huge impact on its taxation, especially if you are in the AMT

• Estate Planning - consider year end annual gifts($13,000 per recipient)  to beneficiaries

See the Eisner Amper year end tax guide for more details and great Tax Tips.

Image: renjith krishnan / FreeDigitalPhotos.net

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"Plan for what we know, not for what we think might happen" Mitchell A. Drossman, national director of wealth planning strategies at U.S. Trust, advised in a recent New Your Times piece "Take Advantage of Tax Breaks Now, Experts Say". The reason?  That nasty little $1.3 trillion federal budget deficit, and competing proposals about how to address it.

Under legislation passed in December 2010, until the end of 2012, tax rates are predicted to be:

• 35% top marginal rate for individuals
• 15% on long-term capital gains and most dividends
• $5 Million exclusion gift, estate and generation skipping taxes

In 2013, the tax rates are supposed to change to:

 

• 39.6% top marginal rate for individuals (single taxpayers with income more than $200,000, and joint taxpayers with income more than $250,000)
• 20% on long-term capital gains
• dividends taxed at normal income tax rates
• 3.8% Medicare tax on investment income begins 
• $1 Million exclusion gift, estate and generation skipping taxes

While the current was scheduled to run through the end of 2012, it is conceivable that he could be changed to affect tax years beginning before 2013. As a result of this, thoughts by tax experts of actions to take now include:

Business Owners:

• Accelerate income in 2011, by arranging for payment in this tax year as opposed to 2012. Many times business owners don't actively collect receivables towards the end of the year in order to defer income, and thus the tax on that income, into the next year. However, it may be that pain tax in 2011 may give you a lower rate.
• Business owners may want pay dividends this year or give stock bonuses before year-end.
• If the business has accounts receivable that have become uncollectible, they can be written off as a bad debt deduction, which might balance out income accelerated into 2011 to take advantage of reduced income tax rates.
• Consider matching contributions to employees within a profit-sharing plan.
• Consider gifting a non-controlling interest in a family business to other family members to take advantage of the current $5 million gift tax and generation skipping tax exemption amounts.
• Review any life insurance policies used to fund buy-outs to determine their ongoing viability - due to changes in market conditions, the policies may need to be reduced, replaced or funded with additional dollars.

Induviduals:

 

 

• Investors may want to consider making trades before the end of the year to capture any gains at the 15% rate.
• Up to $3000 of capital losses can be deducted from ordinary income. 
• Individual taxpayers might want to take advantage of federal and state tax credits for making their homes more energy efficient.
• Consider large gifts to take advantage of the current $5 million gift tax exemption amount and generation skipping tax exemption amount.
• Actively review the cost basis reported on investment statements so that it will be correctly reported on any 1099 issued for any transactions during 2011. Beginning in 2011 the form 1099 must show the basis. Correcting any mistakes now can avoid significant headaches come April.
• Make gifts to grandchildren who have had summer or part time jobs (so that they have earned income) that they can put into a Roth IRA.
• Review life insurance policies to determine their ongoing viability.

 

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Hurricane Irene devastated parts of New Jersey last week.  You can see video of massive flooding in Denville, one town over from us.

In response to this, both the IRS and NJ Division of Taxation have extended tax filing and payment deadlines for New Jersey residents living in Bergen, Essex, Morris, Passaic and Somerset counties .  You should carefully consult the revised filing deadlines if you have any tax payment or tax return due between August 27, 2011 and October 31, 2011.

Details below courtesy of Marcum LLP: 

The New Jersey Division of Taxation is following the federal guidelines for tax relief related to Hurricane Irene Disaster Relief Areas as noted in recent Internal Revenue Service announcements and Marcum Tax Flashes. The five New Jersey counties designated as Presidential Disaster Relief Areas are Bergen, Essex, Morris, Passaic and Somerset (these may be extended based on future disaster area declarations by the President).

Taxpayers residing or that have a business in a designated Presidential Disaster Relief Area now have until October 31, 2011 to file New Jersey tax returns. Return filings covered under the NJ relief provisions will include:

• individual income tax
• corporation business tax
• sales tax and inheritance tax
• estate tax
• partnership
• and other business taxes administered by the Division of Taxation

The tax relief is also extended to payments for any return and/or payment, including estimated payments which have either an original or extended due date occurring on or after August 27, 2011 and on or before October 31, 2011.

The extended due date permits individuals and businesses that received a filing extension until October 17, 2011 to have until October 31, 2011 to file their returns. Businesses that previously obtained a filing extension to September 15, 2011 are also covered by this relief and have until October 31, 2011 to file their returns. Estimated tax payments for the third quarter of 2011 are now due October 31, 2011 instead of September 15, 2011.

In addition to the New Jersey counties, nonresident taxpayers with a filing requirement in New Jersey who are in Presidential Disaster areas in other states also have until October 31, 2011 to file any New Jersey nonresident tax returns that are due during the extension period.

In addition to the above filing and payment relief provisions, the State is providing relief to those taxpayers whose preparers were affected by Hurricane Irene by permitting a delayed filing deadline until September 22, 2011 to file returns normally due September 15, 2011. For this to apply, the taxpayer's preparer must be located in an area that was under an evacuation order or a severe weather warning because of Hurricane Irene (the preparer does not have to be located within a federally declared disaster area). This relief, which primarily applies to corporations, partnerships and trusts that previously obtained a tax filing extension, is available to taxpayers regardless of their location. This relief does not apply to any tax payment requirements.

If you have additional questions about New Jersey tax relief for Hurricane Irene, call the NJ State Hotline at 609-292-6400 or contact your Marcum Tax Advisor. 

 

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Who would have thought it, but the 1041 income tax return for an estate could make the beneficiaries money.  

Many times an estate may have deductions in excess of its income. An estate’s income would include any items of income earned by the estate from the time of the decedent’s death until the time that the estate is closed and a final income tax return is filed. These items of income are reflected on a United States Income Tax Return for Estates and Trusts (IRS Form 1041).

An Executor must file an income tax return for an estate (i.e. IRS Form 1041) each tax year for the estate where it has gross income of $600 or more or as a beneficiary who is a non-resident alien. The return is due April 15, like a personal income tax return.

There may be situations where an estate does not have significant income, but has significant deductions. The Executor has a choice of deducting certain estate administration expenses or losses on either the estate tax return (Form 706), or the estate’s income tax return (Form 1041). In a situation where it is not a taxable estate (for example, all assets are passing to the spouse, and there is an unlimited marital deduction) it doesn’t necessarily make sense to reflect the estate administration expenses on the estate tax return; there is more value to the beneficiaries of the estate than having those expenses reflected on the estates income tax return (Form 1041). By being reflected on the return, these expenses and losses can (1) be used to shelter any income earned by the estate during the time that the estate is open, and (2) potentially flow to the beneficiaries upon the filing of a final estate income tax return, Form 1041, in the final year for filing the return.

You cannot claim the estate administration and other expenses of loses on both returns – if a deduction is claimed for income tax purposes on the 1041, the Executor must file a statement that no estate tax deduction for those items has been allowed and waive any right to take an estate tax deduction for them.

When the estate is concluded, the estate may file a final income tax return marked as “final.”

The instructions to the Schedule K-1 for Form 1041 identify how a beneficiary filing a Form 1040 should report their share of income and deductions. Section 11 reflects final year deductions proportionate to each beneficiary and how it these deductions can be reflected on the beneficiary’s personal 1040. The 1041 instructions specifically provide “if the estate or trust has for its final year deductions (excluding the charitable deduction and exemption) in excess of its gross income, the excess is allowed as an itemized deduction to the beneficiary succeeding to the property of the estate or trust.”

Note that these deductions will be subject to any limitations and be applied to the beneficiary because of his or her taxpayer profile. Even where an estate has no income, a 1041 should be properly filed each year in order to record the deductions and/or losses of the estate, which may, in the estate’s final year be passed along, on a pro rated manner to the beneficiaries estate for utilization in their personal tax returns. 

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Non-profits are formed all the time to advance a purpose to better the world or support a cause.  While the philanthropic goals are wonderful. the record-keeping behind them is often spotty or non-existent. The result of bad record keeping?  The IRS has just revoked the tax exempt status of 275,000 charities nationwide, 7800 of which are here in New Jersey. (Look at the list here to see if your favorite non-profit no longer is one)

By way of background, it used to be that small charities didn't have to file a federal income tax return.  That was changed starting in 2007, when all charities became required to file a Form 990-N.  The deadline for all those filings was October 15, 2010.  For any non-profit that didn't file, their tax exempt status was just pulled by the IRS.

What does this mean to the charity?  If they aren't tax exempt, then they need to start paying state sales tax on purchases, and file/pay income tax on earnings.  The IRS does have a reinstatement procedure in place for small charities with annual gross receipts of $50,000 or less in 2010. Per the IRS website “The relief allows eligible small organizations to regain their tax-exempt status retroactive to the date of revocation and pay a reduced application fee of $100 rather than the typical $400 or $850 fee. Full details are available in Notice 2011-43, Notice 2011-44 and Revenue Procedure 2011-36, issued today”

What does this mean to you, a supporter of the charity? Well, any contributions that you make are no longer deductible on your income taxes. If you report the deduction, and then the IRS says that your non-profit isn’t a charity, you could owe additional income taxes, with interest and penalties.

 

 

 

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Trenton is offering expanded tax credits to New Jersey businesses who are hiring or expanding. NJ.com reports that N.J. firms snap up revamped tax break "Lured by more money and looser requirements, New Jersey businesses are lining up take advantage of a revamped tax incentive program aimed at keeping jobs in the state."

The numbers are impressive.  The article reports that:

So far this year, 16 companies have received a total of $44.1 million in tax breaks for retaining 6,000 jobs, and several others have won preliminary approval by the state's Economic Development Authority.
During the same period last year, five companies received $1.4 million in tax breaks for keeping about 1,400 jobs in the state.

Two key areas of change:

* Tax credits issued for retaining employees, not just hiring new ones

* Commercial tenants (as opposed to land owners) having a sales tax exemption on all equipment purchases and property improvements financed through a lease arrangement with the landlord.

 

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Identity theft is now hitting a new playing field - claiming and taking your tax refund.  Larry Margasak at the Associated Press reports today that:

The IRS is grappling with a nearly five-fold increase in taxpayer identity theft between 2008 and 2010, a Government Accountability Office [GAO} official plans to tell a House hearing Thursday. There were 248,357 incidents in 2010, compared to 51,702 in 2008.

Yikes - this is clearly not a minor problem. However, the GAO finds that most identity thieves get away with taking your refund.  The IRS Criminal Investigations Division only prosecutes around 4700 cases total a year for any criminal tax activity.  Note however that their success rate is in the high 90%, so if a revenue officer with a gun ever shows up to ask you questions, you are likely to be the guest of the state for some time.  

Think you might have been a victim of tax identity theft?  The article offers some advice:

Tax form 14039, the IRS Identity Theft Affidavit, allows the agency to mark an account to identify future questionable activity. A task force of the IRS and other agencies established a website, STOPFRAUD.gov, which tells taxpayers what to do if they suspect identity fraud.

 

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Flashback to 2009 - New Jersey households earning more than $1 million were subject to an additional tax, or amounts earned over that threshold were tax to 10.75%.  Right now, the maximum New Jersey income tax bracket is 8.97%.  That was a one-year tax proposed to close a budget gap.  NJ.com reports that the millionaires tax is back on the table:

"As the state’s top Democrats mull whether to attempt bring back the so-called “millionaires tax” in this year’s budget, one Senate Democrat has already proposed it.

State Sen. Shirley Turner has proposed a bill that would permanently raise the tax rate on households earning more than $1 million annually.

For every dollar earned exceeding $1 million, Turner’s bill would raise the tax rate from 8.97 percent to 10.75 percent. The revenue generated from the extra tax would be dedicated to property tax relief."

For my own two cents, I think that the property tax relief is very inefficient insofar as there are huge administrative costs where the taxpayers pay a tax, only to have it rebated and redistributed.   A "Millionaires tax" on income to provide property tax relief would seem to be equally inefficient, again because of the administrative costs of taking tax from one place just to put it somewhere else. Just have the people who are subject to the "relief" pay less property tax in the first place, and all those resources that go to collecting a tax just to turn around and rebate or refund it could be allocated to something else. Also, it would be nice if both Trenton and Washington would bear in mind that a tax rebate is akin to a profit distribution by a private company, and that you need to be taking in more than you are spending before you can declare a profit.

 

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 Valentine's Day usually puts one in the mind of hearts, flowers and candy. This year however, it's going to be a favorite day for the millions of taxpayers who itemize their returns, because it's the first day that those tax payers returns will be able to be filed into the IRS system.

 I previously advised to Hold your Horses on Filing those Income Tax Returns because the IRS needed to update its internal computer software to reflect the changes in the 2010 Tax Act.  The IRS issued an alert yesterday that:

Beginning Feb. 14, the IRS will start processing both paper and e-filed returns claiming itemized deductions on Schedule A, the higher education tuition and fees deduction on Form 8917 and the educator expenses deduction. Based on filings last year, about nine million tax returns claimed any of these deductions on returns received by the IRS before Feb. 14.

However, for those of you who e-file, you can go ahead and put all of your return information into the system. The filing software will hold your return until the February 14 "Go" date if yours is the type of return that cannot yet be filed.

The biggest impact itemize return filers – if they're only starting to process the returns on February 14, and by their own numbers they received 9 million such returns by February 14 of last year, you're likely not getting your tax refund happily direct deposited in a 10 day time frame that you been used to.

Looking who to blame for the interest free loan you're extending to the government by waiting to get your refund back? Point the finger at Congress and the President who waited until December of 2010 to create the income tax rules for income earned in 2010.

Image: graur razvan ionut / FreeDigitalPhotos.net

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Here's another problem with last minute or retroactive tax planning by Congress - the IRS needs to come up with forms that you can file to comply with teh new law.  Julie Garber reports today in Julies' Wills & Estate Planning Blog that the IRS is working on it:

• For the estates of people who died between January 1, 2010 and December 16, 2010, if they are filing a Form 706 Estate Tax Return, it will be due on September 19, 2011, so the IRS still has time to put the form together.
• For the estates of people who died between January 1, 2010 and December 16, 2010, if they are using the 1022 basis step up methodology, a form is being generated that again will be due on September 19, 2011, so the IRS still has time to put the form together
• For the estates of people who died between December 17, 2010 and December 31, 2010, the Form 706 Estate Tax Return will be due 9 months after the date of death.  Again, this gives the IRS lots of time for the IRS to update Form 706.
• On the other hand, the Gift Tax Return, Form 709, is due by April 18, 2011 reporting gifts made during 2010. Julie advises that "This leaves the IRS frantically working to revise Form 709 to comply with the 2010 gift tax rules, so expect the 2010 version of Form 709 and its instructions to be released by the end of January."

 

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Are you an early filer?  You know the one.  You get all your tax papers by February 3, you file on-line by February 4, and get your refund deposited by February 11?  Well, if you itemize, that quick time-line won't be happening this year.  Steven A. Loeb, Esq. of our Tax, Trust & Estates, and Elder Law Department brought to my attention that due to the tax compromise legislation, the IRS needs to reprogram its computers.  USA Today reports:

The delay is necessary because the IRS needs time to program its systems to accommodate tax breaks included in a compromise tax bill President Obama signed last week.

The delay means millions of taxpayers will have to wait longer to get their refunds next year. Taxpayers who will have to wait until mid- to late February to file include:

• Taxpayers who claim itemized deductions on Schedule A. Itemized deductions include mortgage interest, charitable deductions, medical and dental expenses, state and local taxes.

• Taxpayers who claim a deduction for tuition and fees. This is a so-called "above-the-line" deduction, which means taxpayers don't have to itemize to claim it.

Parents and students who claim other education credits, including the American Opportunity Tax Credit and Lifetime Learning Credit, will not have to wait to file, the IRS said, assuming they don't itemize.

• Taxpayers who claim the educator expense deduction. This deduction, which is also an above-the-line deduction, allows teachers to deduct up to $250 in out-of-pocket costs for classroom materials.

So for all of us who pay a mortgage, plus others who itemize, we will have to wait to file, which means those refunds will be coming a little later this year.

 

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I wouldn’t have taken bets on it, but Washington has hammered out how our federal tax laws are going to look for the next 2 years. On the plus side, we know what taxes are going to look like in January 2011, which is a far better place to be than Monday of last week. On the downside, this does not represent thoughtful tax reform – instead, it is knee-jerk politicking with the intent to dump the tax issues in the voters' laps at the next election so no politician is "responsible" for having taxes go up.

The cost of this package? $858,000,000,000.00 added to the federal deficit- yeah, that's a big number. Oh, and "added to the federal deficit” really just means that we spent $858,000,000,000.00 that we don't have. What I'd like to see happen in the new year – an actual bi-partisan examination of how tax policy affects the economy, and a roadmap to create a balance between the amount that we are spending, and the amount of revenue being generated.

To get back to the new law, the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 ("TRA") extends many tax cuts that were going to expire on December 31, 2010, as well as throws in some new tax laws. Some highlights:

• The maximum federal income tax rate will remain at 35%. New Jersey income taxes are an additional maximum 8.97%
• Married couples will continue to benefit from the 200% standard deduction
• High income taxpayers will not be subject to phase-out of itemized deductions and personal exemptions for high-income taxpayers
• Most key - "Patch" of alternative minimum tax exemption to keep rate with inflation (this is a law they should really make permanent)
• Capital gains and dividends will continue to be taxed at 15%. New Jersey income taxes are an additional maximum 8.97%
• The federal estate tax returns with a portable exemption of $5 million per person and a maximum tax rate of 35% (more to follow). New Jersey’s exemption rate continues to be $675,000 per person and is not portable.
• The greatest opportunity is created in the increase of the gift tax exemption and generation skipping tax exemption to $5 million per person at a 35% maximum rate. New Jersey does not have a gift tax.
• Extension of unemployment benefits for 13 months
• Employees will benefit from a 2% reduction in Social Security withholding
• Business owners can depreciate 100% of new business assets placed in service before January 1, 2012

My thanks to Sobel & Co for their excellent TRA summary, which I used as a resource.

 

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Well, we now know one thing about taxes for 2011 - the rates you can use to deduct for mileage and what your employer may reimburse you for mileage starting January 1:

• 51 cents per mile for business miles driven
• 19 cents per mile for medical or moving miles driven
• 14 cents per mile for miles driven in service of charitable organizations

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So Dem and GOP appear to all agree to extend this years income tax rates to next year - avoiding a jump in income and capital gains taxes when the ball falls on New Years Eve.  This has been greeted with great fanfare in the press and an apparent sigh of relief and an attitude of  "well, that's done now, on with Holiday shopping!". Whoa there - wait a minute - y'all ain't done yet.

Yes - the income tax effects everyone who earns or invests money, so agreement on that is the biggie.  But there are lots of other tax issues that need to be addressed before year end.

The AMT (Alternative Minimum Tax) is a second way to calculate taxes.  If you fall into the AMT, you pay the higher of the normal tax calculation or the AMT.  The AMT was designed to more effectively tax income of very high earners back in the days of tax shelters,etc. The problem is that the level at which a person "qualifies" for the AMT is not indexed for inflation - so each year more and more families fall into the AMT not because they necessarily earned more, but because their earnings increased by a natural costs of living amount and the AMT did not.  The result?  Each year in December Congress traditionally passes an AMT "patch" which effectively adjusts the AMT limit for inflation (why they don't just pass the law one time to index for inflation automatically each year I don't know - maybe so lawmakers can create press being seen as Robin Hood each year "we staved off the AMT for another year - Merry Christmas").

Even the IRS has implored Congress to patch the AMT.  According to Reuters "The U.S. tax chief told lawmakers on Wednesday the Internal Revenue Service needs clarity on the fate of the alternative minimum tax, which could ensnare 21 million unintended taxpayers if a law is not amended before year-end."  In fact, the IRS computers are already programmed as if the AMT was patched - if its not, they need to reprogram all their computers, which could delay refund processing as people being to file their 2010 income tax returns.

The Estate Tax is coming back to life next year too - anyone want to talk about that? Just like the income taxes were scheduled to rise, the estate tax is scheduled to come back at a $1million exemption per person next year.  Congress keeps talking about increasing the exemption to $3.5 million, but nothing concrete so far.  People want to be able to plan their estates, and this complete uncertainty of what to do next is paralyzing.

Image: renjith krishnan / FreeDigitalPhotos.net

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The people have spoken and the end is drawing near. The people are all of us who exercised our right to vote earlier this month and the end is the end of the tax cuts passed in 2001.  

If Congress does nothing, here is what happens to Income Taxes come January 1, 2011 (courtesy of savingtoinvest.com) :

And Income Taxes are just the beginning:

We have all been enjoying a federal capital gain rate of 15%.  This will go up to 20%.

Dividends have been being taxed at a flat 15% for years now.  In January, dividends will be taxed at earned income rates (see chart above).

The federal estate tax has been absent this year. It returns in 2011 with a $1 million exemption amount per person and a 55% maximum rate.

What will Washington do?  Who knows.  Maybe nothing, maybe something.  My first concern is today in November 15.  With a lame duck Congress, Thanksgiving recess and holiday celebrations on the horizon, how much time is there to do something thoughtful and good?  Tax policy effects everyone and everything.  Its great if you pay less, but the fact is that our government needs money to run, and if it's not coming out of your pocket, it's probably coming out of your other pocket.

Time.com has "The Coming Tax Cut Showdown". Quick summary - everybody wants tax cuts, but they just can't agree who and how.  My fear, the status quo will continue, not because it is good tax policy, but because each side can point to the other and say "I wanted to do something, but he didn't".  Any takers on our elected representatives as a whole stepping outside of politics to just get it done?

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You've been injured in a car accident. Thank goodness you're OK, but you broke your arm in addition to other bangs, cuts and scrapes and your back still feels out of wack.  You were out of work to recover and then find work to be more difficult.  You settle the case and all the damages you suffered are reduced a an amount of money.  Question - Does the government share in the damages award in the form of taxes?  Well, as with all good lawyers answers, it starts with "it depends".  In short, it depends on if the award you are getting are for the injury you suffered and not loss of economic benefit - such as lost wages when you were out of work that you would have had to pay taxes on had you been there.   Steven Loeb, Esq. of our Tax Department explore that question in detail as a guest blogger.

Under Section 104 of the Internal Revenue Code, certain payments for physical personal injuries are excludable from gross income. In Schleier v. Commissioner, 515 U.S. 323, the United States Supreme Court adopted a two step approach which mandates that: (1) the cause of action must be based upon a tort-type action; and (2) the proceeds must be received on account of personal physical injuries or sickness.

What is difficult is that neither the IRS nor any regulations provide guidance on the term "physical injuries or physical sickness". (Don't you love the law - they give you a rule without a definition)  Even in "proposed" regulations under Section 104 of the Code (IRS proposed these in 2009), there was no specific definition of "physical injury" or "sickness". The case law under Section 104 type matters is being kind "all over the place". What is interesting is that the IRS as well as taken a stand on Section 104. In LTR 200041022, the IRS ruled that damages received by a couple in a settlement with wife's employer for unwanted physical contacts without "any observable bodily harm" were not received on account of physical injuries and were included in gross income. There are additional Memorandums provided by the IRS which address this area of the law including ILM 2008-09001.

The case law is likewise unhelpful in many circumstances. What is important is for any attorney drafting the complaint for damages based out of a Section 104 type case where one is looking for damages resulting from bodily injury to speak with a competent tax attorney well versed in the Section 104 area of the law.

Additionally, taxes are not the only source of deduction to a personal injury award.  It might be appropriate to have the award paid into a Special Needs Trust so as to not be eviscerated by lifetime medical costs.

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Calling all non-profits - Act NOW or lose your tax exempt status.  

The bad news - any non-profit that has not filed its income tax return Form 990-N by October 15, 2010 will lose its tax exempt status and need to reapply.

The good news - you still have time to fix the problem.  You can file the Form 990-N electronically for tax years 2007, 2008 and 2009 on or before October 15, 2010 and keep your tax exempt status.  You must file for all 3 years if you have been in existence that long and this offer expires on the 15th.

Our colleagues at Sax Macy Fromm & Co., CPA's have sent around a newsletter describing the issue for non-profits.  

The scariest part - over 9000 New Jersey non-profits are at risk.  Click here to see if you are on the list.

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I blog because I enjoy talking to people about things that interest me - including how how tax policy drives individual behavior (everyone has to have their passions after all).  The best feedback is to get a dialog from another person who not only reads the blog (thank you very much) but is generous enough with their time to respond to a post with their own analysis.  Such a compliment happened recently on my post "Playing the State Income Tax Game". Gregory A. Viggiano, Senior Director of Taxes, Corporate Finance, at Maersk Inc. in Madison was kind enough to send me some thoughts about points that I overlooked in my "35,000 view" of the issues raised. 

I came across your blog while surfing the net and found it very interesting.

I did have one comment on the post of August 10 on the state income tax considerations LeBron James might have had in choosing the Miami Heat over NBA teams. You mention (or quote another blog) that LeBron's state income tax bill will be "zero, nothing, nada," as a result of this choice.

Perhaps you did not want to confuse your readership, but while LeBron will reap considerable state income tax benefits from living and playing in Miami, he will not entirely escape state income tax since the other states with income taxes in which he plays will tax him. Since half of his games and all or most of his practice time will be in Florida, this means that the majority of LeBron's salary will not be taxed, but a substantial portion will. Of course, he will save a lot more money when endorsements, which can dwarf the salary of a superstar like LeBron, are considered as well.

Moreover, I thought the tax figure for New York was low. You mention that it is only for New York State income tax, but you must be aware that New York City imposes its own hefty income tax that, in combination with the state levy, give the total for New Jersey a run for its money.
 

Greg, you are correct on all points.  A key point relevant even for non-superstar basketball players is that when you earn money in another state, those earnings are subject to the tax laws of other states.  And if that money is earned in New York City, the income taxes are even higher.

Thank you for the feedback!

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Will your taxes change if you make a gift of real estate subject to a life estate over a straight gift of real estate? Guest blogger  Stacey Crowell Maiden, Esq., Of Counsel to our Trusts and Estates and Elder Law Practice Group provides an explanation of this common, but non-intuitive planning technique.

In our estate planning and elder law practice, we sometimes incorporate the use of a “Life Estate Deed” to transfer real property.. Under a Life Estate Deed, the “life tenant” retains 100% of the present interest of the property. The future interest (which is defined as the full interest after your death) would be transferred to the “remainder persons.” When retaining a Life Estate in the property, you are not transferring or giving the entire interest in the property away. Instead, the remainder persons are given today the right to own the property after you pass away.

The life tenant is responsible for the payment of real estate taxes on the property. However, the Municipal Tax Office - on receiving a copy of the recorded Life Estate Deed from the County Clerk – will update its records, listing the remainder persons as the owners, which means the tax bills are then sent in the names of the remainder persons. This can be a source of confusion and concern for our clients, particularly as to whether they will lose any tax benefits related to ownership.

Guidance is found in the Internal Revenue Code and Regulations, New Jersey Statutes and the New Jersey Administrative Code to assure our clients that as life tenants, they continue to receive certain tax benefits provided to owners in New Jersey.

For example, life tenants retain the Income Tax Deduction for Real Estate Taxes. As the owner of the property by virtue of the life estate, a life tenant may continue to deduct the real estate taxes he pays on his federal income tax return. (I.R.C. §164(a); Reg. §1.164-1(a).

And, by reserving a Life Estate and paying the real estate taxes, the life tenant is entitled to continue to receive the New Jersey Homestead/New Jersey Saver Rebate (N.J.S.A. 54:4-8.58; 54:4-8.58a; 54:8.59); the Senior Citizen's Deduction (N.J.A.C. 18:14-1.1 and N.J.A.C. 18:14-2.8); and the Veteran's Deduction (N.J.A.C. 18:27-2.10).

Of course, there are other potential taxes (e.g. capital gains taxes) to be concerned with when transferring property pursuant to a Life Estate Deed, but the above tax benefits related to present ownership of the property remain in place for a life tenant who pays the real estate taxes.

Image: Simon Howden / FreeDigitalPhotos.net

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Clearly your parents can be dependent on you (an issue beyond the scope of any article) , but can you claim them  as dependents and get a tax deduction?

The answer - maybe (a lawyers stock in trade).  There is a 5 (possibly 6)  step test if you can claim a parent as a dependent and get a tax deduction.  You can find more details on the deduction in IRS Publication 501, although not necessarily more clearly explained.

What do you get if you can claim a parent as a dependent?  You receive an additional dependent exemption valued at $3650 and 2010.  This is the same standard deduction that you can claim for a dependent child, although with children there is not normally an analysis that you need to go through to see whether or not they qualify as dependents.

The 5 Step Test:

(1)  The person you're claiming as a dependent must be related to you or living with you.  This is generally going to include parents, grandparents, great grandparents, stepmother or stepfather, and an aunt or uncle.  Alternatively, the person must live with you all year as a member of your household. A person can be related to you and your dependent but not live with you   -- this is very important when a mother or father might still live in their own household, or reside in assisted living or nursing home.

(2) There are citizenship requirements.  The person must be a United States citizen, United States resident, or a citizen of Canada or Mexico.

(3)  The dependent person cannot file a joint return with any other person.  For example, if your mother is married to your stepfather, and they're filing a joint return, and you won't be able to claim your mother as a dependent.

(4) The dependent parent cannot earn more than  $3650 of includable income.  A great post from the New York Times "Ask an Elder Law Attorney: Claiming a Parent as a Dependent" explains this further:

Now, here come the tricky parts. The parent’s gross taxable income can’t exceed the I.R.S.’s personal exemption, which is set each year. It’s $3,650 for 2010. Social Security income, however, isn’t taxable unless someone receives more than $25,000 in total income. So if your mother’s only income is $6,000 of Social Security, then she meets this test.

(5) You, the child, and must provide at least 50% of the dependent parents support.  An example from the New York Times article.:

Let’s say your mother’s expenses for the year amount to $12,500 for food, lodging, clothing, medical and dental care, transportation and recreation — anything spent on her behalf. Your mother will collect $6,000 in Social Security benefits this year, so you have to spend more than that, at least $6,001, to claim her as a dependent.

This last point can be the most challenging to determine.  If you are paying all of your mother's bills directly, then it can be pretty easy to say if what you paid is greater than what she earned.  However, if your dad lives with you and you are buying your dad stuff (food, clothes, furniture) it can be more difficult to determine if you meet the 50% test.  You will need to look back to Publication 501 to determine the "fair rental value" of what you are providing.  There is a great article at Bankrate.com "Tax Help in Caring for an Aging Parents" that has more examples of how you can look at the support test.

Oh, and one last point.  If you are a "high income earner" the amount that you can take as a dependent deduction is reduced, and possibly eliminated.  If your Adjusted Gross Income (AGI) is more than $250,200 for joint filers, $166,800 for single filers, or $208,500 for heads of household (using 2009 figures), then the $3650 starts to reduce.  

Regardless of the complexities, the dependent parent deduction can put money in your pocket, so it is worth exploring if you are caring for older relatives.

Image: graur razvan ionut / FreeDigitalPhotos.net

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Why did LeBron James cross to the Miami Heat? Because his tax adviser said so of course! At least, that is what is posited in a very interesting article "Play The State Income Tax Strategies Game Like LeBron James" by Trace Mayer at Citizen Economists.

As a free agent, LeBron had options. He could go wherever he thought he could win a title, get the most money in endorsements, where he could enjoy the best Cuban food and beach lifestyle, and maybe all three. After being courted by half a dozen teams, he had some really nice offers and some potentially lucrative deals. The biggest players were Cleveland, the New Jersey Nets, New York Knicks, maybe even the Bulls or the Clippers and of course Miami. LeBron finally picked Miami. Miami could arguably offer a lot, but I wouldn’t doubt that his state income tax attorney whispered a few sweet words into his ear about income tax strategies, like “$2-5 million a year,” that may have influenced his Decision."

The math really makes a difference when you are earning $44 million a year.  What was LeBron looking at with the other teams wooing him:

• Cleveland Cavaliers (Ohio) - state income tax bill - $2.6 million
• Chicago Bulls (Illinois) -- state income tax bill -- $1.65 million
• New York Knicks (New York) -- state income tax bill -- $3 million
• LA Clippers (California) --state income tax bill  -- $4.6 million
• New Jersey Nets (New Jersey) -- the winner!, with a state income tax bill of over $4.8 million

And the state income tax bill for the Miami Heat  (Florida) - zero, nothing, nada.  Hmmm, so maybe there is something to the concept of people don't want to come to  New Jersey because of the taxes.

This does illustrate an interesting tax planning concept regarding gifting. Many times we  will recommend to clients that they create a trust with situs in a state other than New Jersey. The trust's income would then be taxed by the state income tax rates, or not taxed all, in a state like Florida where there's no income tax.  This is done by having a trustee who is resident in the state that has no income tax.

 

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Mark Macaluso of Masters in Accounting - Guide to Online Masters in Accounting Degrees has prepared a comprehensive guide to 101 Top Tax Policy Blogs.  He looks at know and newer site for those interested in stepping back from rhetoric and looking at how tax policy is shaped by politics and economics and how society is shaped by tax policy:

What’s better for the economy? What’s better for the general welfare? What’s more important, financial security for all or individual freedom? How do the government’s tax policies affect us as individual taxpayers and as business owners? These questions are all addressed in this list of the top 101 tax policy blogs.

For those already interested in tax policy, this list may introduce you to some new blogs you may not have heard of before. For those new to the world of tax policy, this list, which was culled from the hundreds of sites examined, includes the best of the best and will provide you with unique perspectives on tax policy.

For full disclosure Mark was kind enough to include this blog on his list under State and Local Tax Policy Blogs - thank you very much!  But beyond my appreciation of his recognition, this is a great resource for examining the options of how you fund the business of operating a government.

Photo courtesy of Piotr Bizior - www.bizior.com

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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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