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.
Saturday, December 3, 2011
Wednesday, November 30, 2011
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.
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.
Monday, October 24, 2011
Tax and Mortgage Deduction for Joint Property
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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.
Monday, October 17, 2011
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.
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.
Wednesday, September 28, 2011
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.
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.
Tuesday, September 27, 2011
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.
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.
Tuesday, August 23, 2011
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.
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.
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