New Parent? Here are Five Tax Benefits Children Bring to Your Life…Besides Diapers and Sleepless Nights.

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Children are a blessing and a curse (and not the least bit cheap!). It is nice to know that the Internal Revenue Code at least acknowledges your pain and provides some tax benefits to make raising a child more affordable. Now if only the IRS could make it easier to raise a child…

Here are five tax benefits that are available to newly minted parents:

  1. Exemptions. You are now + 1 on your tax return (maybe more?!) and so you are allowed an additional exemption on your tax return. For 2016, the exemption amount for a dependent is $4,050 per child. You qualify for the full amount no matter when the child is born during the year, even if it is 11:59 on the 31st of December.
  2. Child Tax Credit. As a parent you now qualify for a $1,000 refundable credit, so long as your child is under 17 by the year-end. If your income tax liability is less than the credit than you may be able to receive the excess of the credit over the as a refund – meaning additional money in your check.
  3. Child and Dependent Care Credit. If you have to leave your child at daycare or pay someone to watch your child to enable you to work (or look for work) than you may qualify for this credit. The key requirement is that your job (or search for a job) requires you to leave your child at daycare; if your spouse doesn’t work or you are placing your child in daycare merely for convenience than you will not qualify. For 2016, the credit may be up to $1,050 for one child or $2,100 for two or more children depending on your income. The credit is not refundable and if you cannot use it in the current year than it is lost.
  4. Adoption Credit. First, let me say that adopting a child is a wonderful thing but painfully expensive. To help parents who want to adopt, the Internal Revenue Code provides a credit for adoption related expenses, up to $13,460 for 2016. This credit is not refundable but if you cannot use the credit in the current year then you can carry it forward up to five years. The rules for this credit can be complicated so if you are considering adopting a child than you should seriously consider speaking with a tax professional to see if you qualify.
  5. Earned Income Tax Credit. For low-income parents the Earned Income Tax Credit or EITC provides additional money to families in need through the use of a refundable credit. Like the child tax credit, if the EITC exceeds your tax liability then you will receive the excess in the form of a refund. The credit amount depends on how many qualifying children you have. The IRS provides a EITC Assistant to help you determine your eligibility, you can click here to open the link. I have listed the refund limits for 2016 here: $6,269 with three or more qualifying children; $5,572 with two qualifying children; $3,373 with one qualifying child; and $506 with no qualifying children.

Children may be taxing but at least you have the consolation of knowing that the little bundles of joy can save you some taxes. This list is not exhaustive of all the various tax benefits out there for children so if you have any questions about how your child impacts your tax situation, please give my office a call. Best of luck to you and yours and happy parenting!

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Famous People Who’ve Filed Bankruptcy

Article I of the Constitution grants to Congress the power to establish uniform bankruptcy laws throughout the country. While initially a device for creditors to divide up a debtor’s assets, over time bankruptcy has become more debtor friendly and now it is means for debtors to obtain a fresh start free from burdensome debts. Unfortunately, while the purpose of bankruptcy has changed over time, the stigma of filing bankruptcy has still remained. While I don’t advocate intentionally or recklessly getting over your head in debt, I do certainly see the advantages to clients of being able to file bankruptcy when it’s in the clients best interest. Nothing can be more destructive to a family than to be crippled with overwhelming debt and no chance to save money for retirement. To help erase some of that stigma, I have listed famous people who have filed for bankruptcy. I do not list these names for purposes of ridicule but to point out that bankruptcy is there for both rich and poor, famous or infamous. Properly applied, bankruptcy can be a life preserver for those in need.

  • Rapper 50 Cent
  • Marvin Gaye
  • Kim Basinger
  • F. Lee Bailey
  • Meat Loaf, the singer.
  • Cyndi Lauper
  • MC Hammer
  • Francis Ford Coppola
  • Larry King
  • Curt Shilling
  • Larry King
  • Mike Tyson
  • Dave Ramsey
  • Walt Disney
  • P.T. Barnum
  • Mark Twain
  • Henry John Heinz, of Heinz Ketchup fame
  • Milton Hershey, of Hershey’s Chocolate fame
  • Henry Ford
  • J.C. Penney
  • Mickey Rooney
  • Debbie Reynolds

And there are many more that could be listed…

If you are over your head in debt and need help, please call my office for a free initial consultation. My firm is a debt relief agency, as provided under the Bankruptcy Code, and I assist debtors file for bankruptcy.

 

Tax Tips for Year-End Charitable Giving

Give and you shall receive, as the saying goes. If you are considering a year-end gift of money or property to a worthy charity, here are some tips on maximizing your charitable tax deduction:

  1. Keep good records! Regardless of the amount of money given, meaning from dollar $1 up, the taxpayer must maintain a record of the donation made at or near the time of the donation. You can meet this requirement with a bank statement, a cancelled check, a credit card statement or a statement from the charity. Regardless of the form of the record, such record needs to show the name of the charity, the date of the donation, and the amount of the donation.
  2. If you make a single donation, of money or property, and it is worth more than $250 then you must get a written acknowledgement from the charity to deduct this donation. The written acknowledgement needs to contain the name of organization; the amount of cash contribution, if applicable; a description of any non-cash contributions, if applicable; a statement that no quid pro quo goods or services were provided in return for the contribution or, if goods or services were provided, a description and good faith estimate of the value of goods or services provided to the donor.
  3. If you make a gift using a credit card before midnight on the 31st than it is deductible in 2016 even if you do not pay your credit card until 2017. Similarly, if you properly mail a check on the 31st than it will also count as deductible in 2016 even if the check clears in 2017.
  4. If you are 70 ½ or older and you hold an IRA account, you may be required to take what are called required minimum distributions from a traditional IRA account. You can make a donation, up to $100,000, directly from your IRA to an eligible charity tax free. While you will not get a tax deduction for the contribution, the distribution is not taxable to you and qualifies as a required minimum distribution.
  5. If you are going to make a gift of household goods or clothing than such items must be in good used or better condition to be deductible. Damaged or stained goods and clothing will not be acceptable and hence deductible. Household goods includes such things as furniture, furnishings, electronics, appliances and linens. Items worth over $500 do not have to meet this “good used or better condition” if a qualified appraisal is done.
  6. If you are making a gift of property with substantial worth than you may need to have an appraisal to provide a proper value to use for your charitable donation. There are some complicated rules in this area so I won’t go into detail but if you intend to donate artwork, antiques or collectibles than you may need to meet other requirements to get full advantage of your deduction.

I hope you and yours have a wonderful New Year’s Eve and best of wishes in 2017!

Move Over HAMP, Here Comes Flex Mod!

As of December 31, 2016, the  Home Affordable Modification Program or HAMP will end. HAMP was designed to help financially struggling homeowners avoid foreclosure by obtaining a loan modification that makes mortgage payments affordable through interest rate reductions, fixing the interest rate, principal reductions or through forbearance and term extensions. While other loan modification programs exist, HAMP provided loan modification guidelines that applied to most servicers along with some added financial incentives for borrowers, servicers and investors such as cash incentive payments. Now, at the stroke of midnight on the 31st, HAMP will end and servicers will fall back on other loan modification programs.

Enter the Flexible Modification foreclosure prevention program (a mouthful) or as I call it Flex Mod. Applicable to Freddie Mac and Fannie Mae loan, Flex Mod was developed by the Federal Housing Finance Authority (FHFA) and other interested parties based on feedback from homeowners, services, and consumer advocates. Flex Mod is designed to provide streamlined guidance for servicers regarding loan modification as well as cash incentive payments to reduce delinquencies. Here is what Freddie Mac and Fannie Mae are saying about the program:

  • Flex Mod will be applied to all mortgage loans that are determined to be in imminent default (according to guidelines set out in the program).
  • Payment relief will include allowing forbearance of principal to an 80% mark-to-market loan-to-value ratio for eligible borrowers (not to exceed 30% of the unpaid principal balance).
  • This forbearance of principal will be accomplished in two ways:
    • For borrowers less than 90 days delinquent, the program requires a complete loss mitigation application and targets a 20% payment reduction and 40% housing expense-to-income ratio.
    • For borrowers 90 or more days delinquent, the program targets a 20% payment reduction and requires no borrower documentation.
  • Servicers will receive cash incentive payments based on how long a loan is delinquent; the servicer will receive a larger payment the short the period of delinquency.

Flex Mod is set to launch on October 17th of 2017 and so it will be interesting to see how this program works for affected homeowners and if the program leads other servicers who are not under Freddie Mac or Fannie Mae’s umbrella to try and stream line their loan modification programs. I have to dig into the details but for now I am hopeful this program is a sign of things to come..

Here is the link to the FHFA’s news release on the program, which also contains links to Freddie Mac and Fannie Mae press releases: https://www.fhfa.gov/Media/PublicAffairs/Pages/Statement-of-FHFA-Deputy-Director-Sandra-Thompson-on-New-Loan-Mod-Offering-for-Delinquent-Borrowers.aspx

 

Gifts Can Be Taxing: Tax Consequences of Making a Gift

Gifts are a part of everyday life. Birthdays, holidays and special occasions. Who doesn’t love getting gifts! This includes Uncle Sam. You may not be aware of this but when you make a gift you are engaging in a taxable transaction. This gift tax is an excise tax assessed on individuals who make a gift and it is based on the fair market value of the property transferred. Now just because you make a gift and it is taxable does not mean you will owe anything to Uncle Sam. I intend to give you the broad strokes of how the gift tax works so you know before you make a gift the potential tax consequences of your actions.

First things first. What is a gift? A gift is a transfer of property or an interest in property for less than fair market value. Simple enough. The gift tax applies to lifetime gifts, whereas the estate tax only applies to gifts made after death. While I am only discussing the gift tax today, it is important to point out that both types of gifts share what is called an applicable exclusion amount. The idea is that even though a gift may be subject to tax, the tax should only be paid if the total gifts, during life and post-mortem, exceed the exclusion amount, currently $5.45 million in 2016. If the total gifts exceed the applicable exclusion amount then it will be subject to tax. Right now the tax rates range from 18% to 40%, with the 40% bracket starting when taxable gifts made during life equal to or exceed $1 million dollars.

Before you start worrying that every gift you make is a hidden tax trap, not all gifts are treated as taxable gifts. For example, gifts to political organizations, gifts made directly to an education institution for tuition, gifts made to medical institutions on behalf of another and gifts that qualify for the annual exclusion are excluded from the IRS definition of gift and there is no requirement to report such gifts. Similarly, gifts to charity and gifts to spouses are allowed a deduction equal to the fair market value of the transfer (though there are some small exceptions) so while they are treated as taxable, in essence these gifts will not reduce the applicable exclusion amount.

Let me focus in a bit on the annual exclusion (this is different than the applicable exclusion) because it comes up quite frequently. When an individual makes a gift of a present interest, the gift will be treated as non-taxable up to the annual exclusion amount, currently $14,000 per recipient. Theoretically, this means an individual can gift an unlimited number of people $14,000 and he or she would never use a penny of their applicable exclusion. Now the rub here is that the gift must be of a present interest, which means the recipient has the right to use, possess and enjoy the property or income generated by the property without restriction (think gifts of cash or tangible property like a car or home).

Closely related to the annual exclusion is gift splitting. Married individuals can double up the annual exclusion by agreeing to treat a gift as being made by both individuals. So let’s use an example. Joan and her husband Earl are well off but Earl wasn’t as thrifty as Joan and as such most of the wealth is owned by her personally. Their son David has just graduated from school and they would like to give him a gift of some stocks Joan has bought over the years (worth $20,000). Now if the gift-splitting rules did not apply, if Joan makes a gift of the stock, her gift would be treated as part taxable and part non-taxable. The first $14,000 of the gift would be covered by the annual exclusion, leaving $6,000 to be treated as a taxable gift. Now if Earl consents to gift-splitting, the gift can be treated as if made equally by both parents (even though Joan owns 100% of the stock) which means that none of the gift will be taxable because the combined annual exclusion amount of $28,000 exceeds the fair market value of the stock. Used wisely, gift-splitting can be a very powerful tool in estate planning. Imagine if Joan and Earl want to move assets to their son over time; over the course of five years, the couple can gift David $140,000 worth of assets without incurring any gift tax consequences.

One of the big caveats of making a gift is that individuals need to consider the potential future income tax consequences of making a gift. The recipient receives the same basis in the gift as it had in the hands of the gift giver. So returning to our earlier example, if Janet gives her son, David, stock worth $20,000, which she purchased 15 years ago for $5,000, then if David later sells the stock his gain will be calculated using a basis of $5,000. Now if Janet had died, David’s basis would be $20,000 rather than $5,000 because assets received from an estate get a step up in basis. So with highly appreciated assets there may be a good reason to keep the asset in the estate rather than gifting it during life but that really depends on an individual’s circumstances.

So in summary, a gift tax is assessed on the fair market value of taxable gifts made during a person’s life. No tax will be due unless the taxable gifts, in total, exceed the applicable exclusion amount, currently $5.45 million. Not all gifts are taxable and so you need to check if certain exclusions apply, such as gifts that qualify for the annual exclusion. You also need to see if the gift qualifies for a deduction such as gifts to charity or to a spouse. Finally, remember that the applicable exclusion amount is shared with the estate tax and so taxable gifts will reduce the applicable exclusion amount available to the individual’s estate when he or she passes.

Whether or not planned gifting can benefit your estate depends on your particular circumstances, so if you have questions you should speak with an estate planning attorney or tax planner.

Getting Divorced? Here are Some Tax Traps to Avoid.

Divorce is tough. No doubt about it. So avoiding more bad news is probably a good idea. While I can’t make divorce any easier here are some tips on avoiding tax troubles in your divorce:

1. Filing a joint return in your final year of marriage.

The instinct that often prevails during divorce is to file as married filing jointly one last time. The reason is that most separating couples want to take advantage of the lower tax liability and the availability of certain credits one last time. There is a downside, however. Filing a joint return makes you liable, jointly and severally, with your soon-to-be ex-spouse. That means the IRS can come after you for the full amount of the tax liability shown on the return or if additional taxes are assessed after a later audit.

By filing a joint return, the IRS now has the right to collect all of the tax debt from both of you, even if the source of the liability was your ex-spouse. For example, you have a regular job but your husband is self-employed and he took deductions he shouldn’t have. The IRS later audits the return and assesses additional taxes. Now you are on the hook for those additional taxes. What’s worse is that even if the divorce judgment allocates a tax debt between you and your ex-spouse the IRS does not need to honor it because Federal law trumps state law. The better course of action may be to file married filing separately in certain cases. The takeaway here is don’t just assume that filing jointly is the way to go merely because it means you have to pay less taxes overall. Speak with your accountant first.

2. Alimony recapture.

The IRS has a quirky rule regarding alimony. If you are required to pay alimony to your ex-spouse and your payments decrease within the first three years following your divorce than you might run into some tax trouble. Normally, alimony payments are taxable to the recipient and deductible by the payer but where the alimony recapture rules apply than the payer may have to report some portion of those alimony payments as income in the third year.

The rules for alimony recapture are a bit complicated to explain in a blog post but watch out for the following situations which may indicate you have an alimony recapture problem: (1) there is a change in your divorce judgment, reducing payments; (2) you fail to make your alimony payments timely; (3) there is a reduction in either your ability to pay the alimony or in your ex-spouse’s need for alimony payments. If you find yourself in one of these situations you may want to talk with your accountant to determine if you may have to pay some unexpected taxes to Uncle Sam.

3. Dividing an individual retirement account.

Many marital estates contain a retirement plan that has to be divided, usually in the form of individual retirement accounts or IRAs. Unlike 401ks or a military pensions, IRAs do not require a special order from the court (called a qualified domestic relations order or QDRO) for the IRA to divided between the parties. This ease of transfer is, of course, a trap for the unwary. While no court order is required to divide your IRA it does not mean that you can simply write a check to your ex-spouse from your IRA and the matter is done. No, nothing is quite that easy in life or taxes. The IRS has specific guidance on how the IRA is to be divided.

To accomplish the transfer, the IRA must be divided among the divorcing couple under a divorce or separation instrument, which means the IRA should be divided in the divorce judgment or through a written agreement between the parties. Once that is done then the IRA must be transferred by a direct trustee-to-trustee transfer. If you take the money out of the account and transfer it then transfer is treated as a taxable distribution. Which means that the recipient spouse must set up his or her own IRA and provide instructions to the IRA trustee to make a proper transfer. If 100% of the IRA is going to be transferred than the owner merely needs to have the name changed.

Failure to follow these procedures may mean you may be facing additional income taxes and an early withdrawal penalties (10%) on the amount transferred.

4. Not considering the tax consequences of a property division.

Property divided in a divorce does not trigger a taxable event and so property can be freely transferred between divorcing spouses. Again, while this all sounds good, this is a trap for the unwary. Just because you can transfer property among divorcing spouses tax free does not mean that it is without tax consequences.

Consider the following. A couple has two jointly assets to divide: stocks worth $100,000 (with a tax basis of $50,000) and $100,000 in cash. The husband wants the stocks while the wife wants the cash. After the divorce is finalized, the husband changes his mind about keeping the stock and sells the whole lot for $100,000. Come tax time the husband gets a surprise when he has to pay taxes on the gain from the sale of the stock ($100,000 less $50,000 basis equals a gain of $50,000). So while his wife got $100,000 in cash, he will only receive whatever is left over after paying taxes (which is certainly less than $100,000). Laughing all the way to the bank, the ex-wife owes no taxes on her $100,000 in cash because cash has a basis equal to its face value ($100,000) while other property may have a basis that is less than fair market value, especially where you purchase appreciating property like stocks and collectibles. Changing hands does not increase the basis to fair market value because it was a tax free transfer.

Now let’s say the couple gets cute and decides to have the wife “sell” her interest in the stock to her husband in exchange for cash. Sadly, that will not work either as transfers, to include sales, are not taxable between spouses for a period of time after the divorce (while this presumption doesn’t go on forever, it goes for a number of years after divorce). So pay attention to the potential tax consequences of dividing up your marital property, there may be hidden taxes due!

5. Marital status.

Finally, the issue of marital status comes up quite frequently. Many divorcing couples believe that if they are separated (but not divorced) at the end of the tax year than they can choose the tax status that provides the most benefit, usually head of household. The reason for this is obvious: married filing separately has restrictions on the credits that can be taken, such as the child care credit, education credits and earned income credit. All of which can have a big impact on your taxes.

Your tax status is determined by your married status as of December 31. If you are still married at year-end than you cannot file single and there are restrictions on filing head of household. For the most part, you must file married filing joint or married filing separate. To be able to claim head of household the taxpayer must meet the strict requirements of the statute. Again, if you are not divorced at year end, speak with your accountant to determine what filing status’ are available to you.

Portability in Estate Planning

Portability is a rather new concept in the world of estate planning, specifically regarding the Federal estate transfer tax. Before explaining what portability is and how it fits into your estate plan, let me explain a few things about the Federal estate and gift transfer tax system. A tax may be assessed on the transfer of property either by gift or by testamentary transfer. The tax is calculated on the value of the transfer, either on the date a gift is made or on the date of death. A tax is due and payable only when the combined value of the gifts and testamentary transfers exceed what is called the applicable exclusion amount. In 2016, the applicable exclusion amount for an individual is $5.45 million. The only wrinkle with the applicable exclusion is that it is personal to the individual taxpayer. Before 2012, this could present a problem where you have a married couple where one spouse holds most if not all of the assets – if the poorer spouse died first the richer spouse lost the ability to use the deceased spouse’s unused applicable exclusion when he or she passed. Enter portability.

 
Portability allows a surviving spouse to preserve any unused portion of a deceased spouse’s applicable exclusion for estate and gift transfer tax purposes (called the deceased spousal unused exclusion or DSUE by the Code). Individually, a taxpayer’s taxable estate must exceed the applicable exclusion amount of $5.45 million to be taxable. With portability, a married couple can shield a combined taxable estate exceeding $10.9 million for the estate or gift transfer tax purposes. For most people, their estate will not get within a mile of exceeding $5.45 million but even so portability still has legs. Consider the following example.

 
Let’s say a couple has an estate valued at less than the exclusion amount – we will use $4 million – with most of the assets held by the husband. The wife unfortunately passes away before the husband, leaving him holding a $4 million dollar estate. If he lives long enough, his estate might substantially increase in value, he may win the lottery or secure a large court judgment potentially pushing his estate over the $5.45 million threshold. Without portability, he would only have his individual $5.45 million with which to shield his estate from tax. With portability, however, he can combine his applicable exclusion amount with his wife’s unused exclusion amount to potentially shield up to $10.9 million from the estate transfer tax. Portability is only one of many tools to reduce an individual’s potential estate transfer tax liability but but it is comforting to know that portability is available to provide wiggle room.

 
Portability is not automatic, however. The deceased’s personal representative must timely file a complete and accurate Form 706, which is due 9 months after the date of death (though an extension to file may be requested), and make an irrevocable election regarding portability. Once that’s done, whenever the surviving spouse makes a gift or testamentary transfer, the deceased spouse’s unused exclusion will be used up first before dipping into the surviving spouse’s applicable exclusion amount.
Care must be taken in situations where the surviving spouse remarries. The unused exclusion amount that can be tapped into is for the last deceased spouse, per the IRS regulations. This means that if the surviving spouse remarries and the second spouse dies then any remaining unused applicable exclusion amount from the first spouse is lost. Thereafter, the surviving spouse can only tap into any unused applicable exclusion amount from the second to die spouse, if any (assuming a proper election is made by the personal representative).

 
This is a simple explanation regarding portability and there is a lot more that can be said on the subject. If you think portability may apply to your situation, please speak with your tax adviser to ensure you qualify.