Heading into April, tax season is now in full swing. With the April 15th “Tax Day” due date quickly approaching, Americans filing their income taxes should be aware of increasingly-sophisticated scams. Geared towards taxpayers eager to secure a large refund, the scammers employ a wide range of tricks to prey on individuals. One practice that accounts for a significant portion of tax fraud incidence is identity theft. A crook will use stolen social security numbers to file fake tax returns for the refunds; this usually occurs early on in the season before people have time to file themselves. The IRS also warns taxpayers to use caution in regards to phone calls and emails from people claiming to be from the IRS or promising large refunds. Another scam to watch out for is return preparer fraud; tax preparers may claim inflated expenses, claim fake deductions, inflate deductions, or manipulate income figures. They, in turn, profit from the inflated returns. If a tax preparer encourages you to exaggerate figures or sign a blank return, he or she should most likely be avoided. Being informed about these tricks, in addition to using a trustworthy preparer, is the best defense against tax scam!
We Practice Law for Your Peace of Mind
On June 26, 2013, the U.S. Supreme Court decided United States v. Windsor, a case involving a same sex couple married in New York, where such marriages are authorized. One of the women died leaving a substantial estate. An estate tax return was filed and the surviving spouse, because of the Defense Of Marriage Act (DOMA), was not entitled to the unlimited spousal deduction that heterosexual couples could take advantage of generally reducing the estate tax on the first death to zero. The spouse filed the return, the IRS disallowed the spousal deduction, and the surviving spouse sued for a refund of taxes paid.
The Supreme Court decision, effectively, determined that DOMA was unconstitutional and that the taxpayer should be treated the same for federal tax purposes whether a traditional married couple or same sex married couple.
In response to the ruling, the Treasury Department (which runs the IRS) needed to change its rules about same sex marriages so that the income and estate taxes would now be the same for either couple.
One question not answered by the Supreme Court was “What if a same sex couple married in a state that allowed such marriage, but now resided in a state which did not?” As part of its rules to comply with Windsor, the IRS has ruled on this as well.
Revenue Rule 2013-17 was issued on August 29, 2013 (operational September 16, 2013). This Revenue Rule uses the prior rulings of the IRS regarding “common law marriage” to establish a blanket rule for all married couples. In 1958 the IRS determined that couples recognized as married in common law states – that is where no formality of marriage is required – but then moving to another state where a ceremony is required are still married for tax purposes. Now the same rationale is held for same sex married couples. The key is where you were married. If married and living in a state that recognizes same sex marriage, you are married for federal tax purposes. If you are married in state that recognizes the marriage and then move to a state that does not, for federal tax purposes you will be treated as married -entitled to all of the benefits (and costs) that are associated with the marriage – wherever you are. This rule does not affect the tax schemes of any individual states or localities.
Caveat- Under the Revenue Rule -Domestic Partnerships and Civil Unions are not marriage and so are not treated as such under the tax code.
For same sex couples the income and estate tax planning techniques long used are now available, but so are the marriage penalty and other tax negatives. So, be sure to see your tax advisor. We at HoganWillig can help you in your planning needs.
The American Taxpayer Relief Act of 2012
Well, here we are a new year and another new tax law. The American Taxpayer Relief Act of 2012 came to be on January 2, 2013. The law addresses the expiring “Bush Era Tax Cuts” previously addressed on this blog and many, many, other places. Here is what the new tax law does for individuals- note that the fixes are made permanent unless otherwise noted. An important note, “permanent” means there is no set expiration; it does not mean the law cannot be changed again. Finally, not every aspect is addressed here.
First, all wage/salary earners are having 2% more withheld from their paychecks. The law allows the expiration of the 2 year Social Security Payroll Tax “holiday”. This holiday allowed a wage earner to keep an extra 2% in their pay but receive credit in their Social Security account for the tax – meaning it would not reduce benefits later.
- Personal income tax rates remain the same as 2012 rates for individuals with taxable income below $400,000 ($450, 000 married filing joint, $425,000 for Head of Household, $225,000 married filing separately). A “new” marginal rate is added for those above the $400,000 threshold.
The personal income tax rates are now –
- 10%, 15%, 25%, 28%, 33%, 35% and 39.6%
(pre- “Bush Era” rates – 15%, 28%, 31%, 36%, and 39.6%)
The positive for the over $400,000 level is the lower rates for the income below that level.
- The brackets are now permanently adjusted for inflation
- Long Term Capital Gains (assets held a year or more) have a new, higher, top rate. Taxpayers in the 39.6% rate bracket will have Long Term Capital Gains taxed at 20%; while the lower tax brackets will continue to have those gains taxed at 15%, or 0%
|Long term gain (held longer than 1 year)||0%||0%||15%||15%||15%||15%||20%|
- Dividends: Qualified Dividends continue to be taxed at the applicable long term capital gains rate for the individual.
- Alternative Minimum Tax: Each year for some time the AMT has been “patched” to avoid a large slice of the American public being drawn in. The issue was that the AMT was never automatically adjusted for inflation, so as wages increased due to inflation, more taxpayers were ensnared in a low level AMT. With the 2012 Act, the base level of AMT exemption is increased and is then adjusted for inflation annually. This is particularly beneficial in states like New York where taxes are high. The deduction for such taxes is limited or lost if you exceed the AMT exemption amount.
- Marriage Penalty: “Married filing joint” taxpayers will continue to have a standard deduction double that of “single” filers.
- Limitations renewed: The 2012 Act did revive the so called “Pease Limitation” on itemized deductions and the phase-out on the personal exemption. For Married filing Joint above $300,000 ($150,000 single) these revived limitations kick in.
- Child Tax Credit: The $1000 per child tax credit continued.
- Earned Income Tax Credit: This credit continued through 2017.
- Adoption Credit: made permanent at its higher level and now to be inflation adjusted.
- Dependent Care Credit: Eligible expenses cap remains $3,000 ($6,000 for more than one qualifying individual); also maximum credit remains 35% of the qualifying expense.
- Education incentives:
- American Opportunity Tax Credit – extended to 2017 – per eligible student:
- 100 % of first $2,000 in qualified tuition and related expenses
- 25% next $2,000 (making max credit $2,500)
- Applies to first 4 years of higher education
- Qualified tuition and expenses deduction: to end of 2013
- So called above the line since it reduces AGI
- Cannot use in year taking American Opportunity credit or Lifetime Learning Credit
- Energy Incentives – the 2012 Act extends the $500 lifetime credit for energy efficiency improvements to your home ($200 for windows/skylights) – expires at the end of 2013.
- American Opportunity Tax Credit – extended to 2017 – per eligible student:
- Estate/Gift Tax:Exemption/Credit Shelter remains $5 million per person and is adjusted for inflation annually (2013 $5.25 Million). The new law retains the unified credit as well. This means that you may pass the credits shelter amount during life or after death.
Annual exclusion amount – no change here. Continues to be inflation adjusted – $14,000 per donee in 2013.
Estate Tax rates increase with the maximum marginal rate to 40%.
State Death Tax Deduction – maintained (not a credit).
Portability – retained
Generation Skipping Transfer Tax – the GSTT changes also continues without sunset.
- Affordable care Act Taxes: While not part of the 2012 Act, there are several taxes that will be payable beginning in 2013. These taxes start at lower income thresholds than those under the 2012 Act.
- 0.9% tax on earned income:
- Employee tax – Employer not taxed but must withhold
- Wages/Self-employed income in excess of
- $250,000 married filing jointly
- $125,000 married filing separately
- $200,000 single (and other tax filing statuses)
- 3.8% tax on “Net Investment Income”:
- things like interest, dividends, net gains
- Same income thresholds for 0.9% tax
- Not indexed for inflation.
- 0.9% tax on earned income:
There are many more continuations and revisions in the American Taxpayer Relief Act of 2012. This summary is only some more popular concerns.
As always, consult with your personal tax and legal professionals to see how these changes and others may apply to you.
The issue of a person’s legal place of residence has significance in matrimonial proceedings and other legal matters affecting where you can sue or be sued or where you must pay taxes among others. Legal residence is primarily a function of intent. To put it simply, your place of residence is where you intend it to be. When an issue arises such as residence for legal purposes, there are various factors that courts or other governmental agencies look at to determine your place of residence. Included in these factors are: where do you vote; what jurisdiction issued your driver’s license; where are your bank accounts; where do you or your children attend school; where do you own property; how much time do you spend in one state or another; where is your investment advisor; your doctor; your dentist?
The above tests help determine if your actual residence matches your declared intention. In some situations in New York, a bright line test is used. In determining if you are a NY residence for income or estate tax purposes , the Dept. of Taxation and Finance looks at the above factors, but if you spend too much time in the state, these factors make no difference. The same holds true for New York City income taxes.
Duration of residence is also important. In New York, a minimum of one years residence is necessary before commencing an action for divorce. For active duty military and their families, the state of legal residence is their declared “home of record.” This can be the state from which the serving member entered the service, or any other state in which they were, for a time, stationed. The home of record remains their state of legal residence until they declare an intention to establish legal residence elsewhere. This is true even if they are absent fro the state of declared residence for months or even years.
Back in December 2010 there was a much reported flurry of work done on changes to the US Tax laws. One of the big changes was to increase the amount an individuals could pass free of estate or gift (“transfer”) taxes. The changes made it possible to pass during $5,000,000 you life or at death (or combination thereof) without paying either of the transfer taxes. This “exemption amount” was substantially more than in prior years. (The amount is adjusted for inflation and is $5,120,000 for 2012.) Additionally, the then new law made it possible for spouses to share this amount so that a surviving spouse could use any unused portion of a predeceased spouses $5,000,000.
This new exemption equivalent, along with the continued annual $13,000 annual exclusion, now made it possible for business owners and families with highly appreciated assets or businesses to pass substantial wealth to their families transfer tax free. That is not to say only people with more than $10,000,000 can benefit, but everyone with more than $1,000,000 in estate taxable items may find advantages.
As April 17, 2012 approaches; tax day for the 2011 Individual Income Tax, the question becomes, “file or don’t file my return?” Setting aside tax protest issues – sternly addressed by courts, this question often arises when a taxpayer does not have the money to pay their tax bill. This inability to pay is never acceptable to the IRS as “reasonable cause” not to file your return.
Failing to file your return on time results in some serious penalties and interest on any tax due. The “failure to file penalty” is 5% per month on the tax due, capped at 25% of the tax due. There is also interest charged each month on the tax due – and the penalty. Additionally, the interest never caps and continues to accrue until full payment is made.
The news is full of talk about President Obama wanting to repeal “The Bush Tax Cuts” for the wealthy. Also, the compromise tax law that passed at the end of 2010 is scheduled to expire or “sunset” on December 31 of this year – sort of automatically repealing the tax cuts for everyone. But what are the tax cuts? How will the changes look basically? That is the key.
1. Income Tax:
The personal income tax rates would revert to 2001 levels, so:
- Current rates – 10%, 15%, 25%, 28%, 33%, and 35%
- Revert to old rates – 15%, 28%, 31%, 36%, and 39.6%
Capital gains rates would also revert to 2001 levels as well. Short term capital gains (assets held less than one year) would continue to be taxed the same as the ordinary rate. Long term gains (assets held a year or more) would see higher capital gains taxes.