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.
Friday, December 16, 2011
Wednesday, December 7, 2011
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.
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.
Saturday, December 3, 2011
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.
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.
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
.
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.
Subscribe to:
Posts (Atom)