Qualified Transportation Fringe Benefits

Generally when an employer pays the personal expenses of an employee, the recipient must include the amount paid in his or her taxable income. However, a number of exceptions exist under the Internal Revenue Code.

Commuting costs are considered a personal expense, and are not deductible on an individual’s tax return. The tax law though allows the employer to aid the employee with his or her commuting costs by providing certain tax free benefits.

The following employee payments known as qualified transportation fringe benefits will thus be tax free to the employee:

1) Payments toward the cost of van pools for employees in a commuter highway vehicle, which has a seating capacity of at least six adults and on which at least 80% of the mileage is due to commuting trips in which the van is at least half full.

2) Qualified parking at the employer’s place of business or at a spot from which the employee takes public transportation for the balance of his commute.

3) Transit passes for use on a mass transit facility.

4) Qualified bicycle commuting reimbursements for up to $20 a month for the purchase, improvement, repair or storage of a bicycle regularly used by the employee in his or her commute.

One might note that while these reimbursements are excluded for taxes, they are included as income in the means test under the bankruptcy law to determine if an individual qualifies for a Chapter 7 Bankruptcy.

Simplified Retirement Plans For Small Businesses

     The Internal Revenue Code encourages people to plan for their retirement by providing tax incentives for both employers and employees to establish and participate in qualified pension and profit sharing plans. The rules are rather complex however and can be quite challenging for a small business such as a divorce lawyer
with only a few employees and no human resource professionals on staff.

     Congress recognized the reality of this obstacle though, and the law allows small businesses to drop some of the formal requirements for a plan by setting up either a Simple Employee Pension also known as a "SEP" or a Simple Retirement Plan.

     In a Simple Retirement Plan the employees, who elect to participate, can contribute toward the pension plan with the employer making additional contributions for the employees’ benefit. The employers contribution can be either a matching contribution of up to 3% of the employee’s compensation, or 2% of the compensation of every employee eligible to participate in the plan whether he or she elects to make contributions or not.


     Under a SEP on the other hand the contributions are made by the employer.

     Either a Simple Retirement Plan or a SEP may be funded by the purchase of an IRA.

Use of Spousal IRAS

The general rule is that you may only contribute to an individual retirement account, if you have earned income from either a job or from self employment. However, there is an exception for a now working taxpayer who files a joint tax return with a working spouse. In this situation both the employed and the unemployed taxpayer may take the IRA deduction.

The maximum deduction for an IRA contribution in 2011 is $5,000 per taxpayer, with an additional $1,000 available if the taxpayer is over age 50. No deduction is available for taxpayers over the age of 70 ½. Thus in the case of married taxpayers where only the husband or the wife works a total of $10,000 is available as an IRA deduction ($12,000 if both spouses are over the age of 50).

As an estate planning attorney I often see cases, where this presents a great planning opportunity, if one spouse is retired and the other continues to work. Since either the husband or wife is still working, a $12.000 deduction is available, and if one of them can afford to retire before the age of 70 ½ they often have some savings that could painlessly be transferred to an IRA.

Age Limits on Dependency Exemptions

      As any tax lawyer will tell you, there is no age limit for claiming an exemption on your tax return for your child, whom you support. However, the rules for taking the exemption changes as a child gets older.

     When a child is under the age of 19 at the end of the year she is considered a qualifying child under the tax law. This age limit rises to 24, if she is a full time student.  If a child is over the age limits she will no longer be a qualifying child and must meet the definition of a qualifying relative for the parent to claim the exemption.

     The difference is that a parent may take the deduction for a qualifying child as long as the taxpayer provides more than half the child’s support. For a taxpayer to claim a qualifying relative however, there is an additional requirement that the child’s own income is less than the amount of the personal exemption ($3,700.00 for 2011; $3,800.00 for 2012).

Example: Joe College is a 23 year old full time university student with a double major in nuclear physics and basket weaving. He makes $5,000.00 a year from a part time job plucking chickens. His father, Tom Trusting, contributes $7,000.00 a year toward the young man’s support, and claims an exemption for Joe on his annual tax return. Next year however Joe will be too old to be a qualifying child, and since he earns more than $3,800.00 his father will no longer enjoy the tax break.

Tax and Mortgage Deduction for Joint Property

As a divorce lawyer I frequently deal with couples, who own their home jointly, and sometimes one of the parties will decide that the income tax deductions for mortgage interest expense and real estate taxes are assets that should be divided along with the other marital property. Often one will suggest that the deductions should be split evenly
.
The people, who raise this point are sometimes correct, that the potential tax savings are valuable; however, frequently by dividing the tax deduction they will destroy the benefit. This is because the total mortgage interest and real estate taxes might be high enough to create a benefit for a spouse, who itemizes her deduction. However, if they split the deduction in half, both of them may end up claiming the standard deduction and the benefit is lost.

In addition the right to claim these tax deduction is not something that can be assigned. The taxpayer must actually pay an expense to take a tax deduction, and if one spouse makes all the mortgage payments, there is no provision in the Internal Revenue Code, which allows the other to claim part of the tax deduction. Furthermore, the taxpayer must have a legal obligation to pay the expense. This can be a factor with property held in tenancy in common rather than joint tenancy, if each spouse is individually liable for one half of the property tax.

Non Dischargeable Taxes in Chapter 13 Bankruptcy

Many people assume that taxes are not dischargeable in bankruptcy, and while there are provisions in the Bankruptcy Code that deny a debtor a discharge for taxes, they do not apply to all situations.
Individual income taxes will generally not receive a discharge if the bankruptcy petition is filed less than three years after the due date of the tax return, or less than two years after the date the tax return is actually filed. Income taxes will also not receive a discharge, if the debtor made a fraudulent return or willfully attempted to evade or defeat such tax.

If an individual files a Chapter 7 bankruptcy he or she will have to deal with the IRS on these nondischargeable taxes after the discharge is received. In a Chapter 13 bankruptcy these non dischargeable taxes will receive a discharge, although if the taxes are a priority debt the plan will need to provide for payment of 100% of the tax.

The key word here though is priority debt rather than nondischargeable taxes. For income tax returns that were due less than three years before the bankruptcy filing the taxes are a priority debt and the Chapter 13 bankruptcy plan will have to pay the entire tax. For taxes that are dischargeable merely because the return is filed late though the debt is not a priority debt and the Chapter 13 plan can call for the same percentage payment on these taxes as it provides for other unsecured debts.

Income Tax Rates for Trusts

A trust or a decedent’s estate is a separate legal entity, which must file its own income tax returns and pay tax on any income it generates such as interest and dividend. There are some exceptions to this rule. A person who sets up a so called living trust, in which she controls the trust funds during her life time will treat the income as her own, and the trust will not have to pay separate income tax. After the settlor’s death though the trust will become irrevocable, and it will assume the role of a separate taxpayer filing returns and paying taxes on its annual income.

Many of the income tax rules that apply to individuals also apply to trusts and estates, but there are notable differences. One variation that can have a substantial affect is tax rates. A single individual will only pay the top 35% income tax rate on income over $373,650.00 a year. However, a trust or a decedent’s estate will pay the 35% rate on all of its income over $11,200.00 a year. Obviously you need to maximize the amount of income that is taxed to related individuals rather than to the estate or trust, and you should consult an estate planning  attorney who understands the tax implications of maintaining income producing property in the trust or estate.

Legal Separation:

A legal separation is a legal procedure that allows a family court judge to settle certain matters for couples who are not living together, but who have not obtained a divorce. An individual asking the court for a legal separation cannot be at fault in causing the separation.

In a legal separation a court can order one party to pay child support or alimony. It can also award child custody or set a visitation schedule for children. Court orders in a separation can always be revised though, if circumstances change, and a judge can not make a final settlement of the property division in this procedure.


Legal separations are not very common, and as a divorce attorney  I find that the majority of people who initially ask about legal separations ultimately decide that it is not right for them. I would explain this by the fact that if the parties are eventually going to get divorced, they will end up going through two court procedures instead of one, if they first file for a legal separation.

Legal separations are sometimes necessary though, if the parties are not planning to divorce and they need the intervention of the courts to determine issues concerning children or support.

Donation of Qualified Vehicle to Charity

As a  bankruptcy lawyer I deal with a lot of people, who have not been able to purchase a new car in quite a while, and I know that an old car can sometimes be a burden to dispose of. For this reason people sometimes feel that it is easier to donate the vehicle to a charity, who can use the help, and the donors are often intrigued with the idea of taking a tax deduction for the value of the vehicle.

While the tax deduction is available, the tax law contains strict rules for vehicle donations, which apply to trucks, boats and aircraft as well as cars.
In the first place the donor is required to obtain a form 1098-C from the charity and attach the form to his or her tax return. The 1098-C needs to identify the taxpayer, the taxpayer’s identification number and the vehicle’s identification number. The charity must also disclose any goods or services the donor received in exchange for the vehicle.

If the car is sold, which is what many charities do with donated vehicles, the form must also disclose what the proceeds of the sale were, and the tax deduction is limited to the amount of those proceeds. Only when the vehicle is used in the charitable purpose of the organization will the taxpayer be allowed to use an estimated fair market value as a tax deduction.

Tenancy By The Entirety in Bankruptcy

When a married couple holds title to property in a tenancy by the entirety, the property will pass automatically to the survivor upon the death of one owner. This is the same treatment that applies to property held in joint tenancy. However, a tenancy by the entirety has a special advantage when it comes to protecting assets. If a joint tenant is sued the judgment creditor may have the property severed and apply the debtor’s share of the property to the debt. If a tenant by the entirety is sued though, the judgment creditor must wait until the owners decide to sell the property on their own. What can be put in this type of ownership varies from state to state. Under Illinois law tenancy by the entirety, is limited to a married couple’s principal residence.

The tenancy by the entirety protection can also come into play, when one of the tenants by the entirety files bankruptcy. This is because the bankruptcy code provides for exemptions of property that are exempt from creditors under state law. While the married couple filing a joint bankruptcy would not get the benefit of this exemption it will be available when a spouse files an individual bankruptcy provided only the filing tenant is liable for the debts.

Are Inherited IRAs Protected From Creditors

      Besides the tax benefits which provide the incentive to save for retirement, Individual Retirement Accounts contain another valuable quality that is less well known and often not appreciated until the owner needs it. Individual Retirement Accounts, as well as other qualified retirement plans, are not subject to claims by creditors. Both Illinois law and the Federal Bankruptcy Law prevents creditors from attaching the IRAs to collect debts, and considering that modern Americans live in the most litigation happy society in history this is no small benefit.

      Now that IRAs have been around for almost 40 years and many deceased owners have passed their IRAs on to their heirs, some lawsuits have raised the questions whether the creditor exemption applies to the heirs or merely to the original purchasers. Unfortunately, the law is not yet settled on this point. In 2010 there were two reported cases of a bankruptcy trustee challenging whether a debtor can protect his inherited IRAs, and two bankruptcy courts came down with contradictory decisions.

      This spit by the courts makes it hard for a bankruptcy lawyer to give a definite answer to the holder of the inherited IRA, but my advice would be to keep the inherited IRA in place. For one thing the view in favor of the exemption might ultimately prevail. Furthermore, one of the principals of asset protection is that creditors often will leave an asset alone that is difficult to collect on even if it is not impossible, and the fact that the creditors do not have a definite answer either will probably convince them to let the inherited IRA alone in many cases.

Supreme Court Limits Allowance for Car Ownership Expense in Bankruptcy

This week the Supreme Court handed down its long awaited decision in the case of Ransom v. FIA Card Services N.A. which dealt with the expense allowance a bankrupt individual can claim on the means test for ownership of a vehicle.

The means test came into the law in 2005 and applies a formula to determine, if an individual has monthly disposable income, which is high enough to enable him or to pay back part of his or her unsecured debt. Basically the means test takes the debtor’s average income for the last six months, and then subtracts out allowances for various expenses. Most of the allowances such as food, clothing, utilities and transportation are standard amounts used by all debtors. Some of the allowances however, such as taxes, medical, and child support are based on the debtor’s actual expenses.

If the means test shows the debtor has enough disposable income the law requires him or her to file a Chapter 13 Bankruptcy in which the individual will make monthly payments for five years toward the debts. If the means test shows the income is not high enough the debtor may file a Chapter 7 bankruptcy and receive a discharge in about three months. The means test is also important when the individual files a Chapter 13, because the courts will look to the means test to calculate how much the debtor’s plan must pay toward his or her unsecured debts.

The means test includes a vehicle ownership expense for up to two vehicles owned by a household. It also includes a vehicle operating expense. The ownership allowance varies by locality and debtors living in Northern Illinois can currently claim an allowance for $496 for each car every month. In the five years since Congress enacted the means test, the courts have split on whether every individual owning a car may claim the car allowance or whether it is only available to debtors making car payments. The question can often make or break a bankruptcy plan, since at $496 a month the amount the debtor will have to pay over the life of his Chapter 13 plan will come to $29,760.

On January 11, 2011 with Justice Kagan rendering her first opinion, the Supreme Court decided in the case of , Ransom v. FIA Card Services N.A, that the ownership allowance is only available to debtors making loan or lease payments on the car. The decision now becomes the law of the land.