ABLE Accounts

Recently my old roommate from our Rutgers days alerted me to the plight of special needs trusts in New Jersey. Apparently the state, on the lookout to make revenue somewhere, has written to trustees of these trusts advising them that they may no longer be in compliance with New Jersey law. These trusts were established for the benefit of persons with special needs providing payments on their behalf which would not void state Medicaid qualification. These trusts were not established as estate planning or tax avoidance tools. When used properly, these trusts simply made the life of persons with special needs more bearable. They also provided some relief for the family knowing that the needs of the person could be met during their lifetime. I am writing here outside my field as I have never been a draftsman of such a trust. However, I realize the importance of a new significant tax change that may benefit persons with special needs. This is the creation of the ABLE account. Similar to college savings plans is the tax-free ABLE savings account. Starting in 2015 states can set up these programs so families can set aside funds to help the long-term disabled maintain their health, independence and quality of life. Nondeductible contributions to ABLE accounts up to $14,000 a year will be allowed for those who became blind or disabled before age 26. Account owners would remain eligible for Medicaid and account balances of $100,000 or less would not affect SSI benefits. Withdrawal from these accounts will be tax-free if the funds are used for housing, education, transportation, job training and similar expenses. This includes payouts from account earnings. If  spent for nonqualified purposes such payments will be taxed and subject to a 10% penalty. Rollovers will be allowed to another ABLE account for that individual or a disabled sibling. Upon the death of the account beneficiary amounts left in the account would first go to the state to recover some of its Medicaid costs and the balance to a designated beneficiary. Such beneficiary would owe tax on the account earnings but would not be subject to any penalty.

Year End Tax Planning?

Buffalo got six feet of snow the other day. I understand Santa has put a change of address form in at his local post office deciding to move his operation to New York State. With all the snow flakes as a real reminder, it is time once again to begin receiving the “ things you absolutely must do to save taxes by year end”. I get those magazines, newsletters and articles too. Lots of them. The ideas range from the obvious to the bizarre. Most all of the strategies depend on tax rates staying about the same next year. That remains to be seen with both houses controlled by Republicans. With that said and not intending to become just another list of must do’s, here are some basic tax planning ideas that may actually work. If you are in control of your income it may make sense to simply put some off until next year. A tax deferred may be a tax saved. Even if the tax must be paid next year it simply feels good not paying it now. So for lawyers, skip billing your clients until next year. Of course, one must weigh whether delaying billing results in the client not paying. The tax rates don’t go to 100% so sometimes it makes more sense to just take the income and pay the tax. As to deductions, should you possess a reasonably accurate crystal ball, consider accelerating deductions into the current year. This obvious mismatch will come back to haunt you next year when those accelerated deductions will not be available on that tax return. Then comes the matter of state and local income tax. This one can be managed and manipulated by simply sending in any estimate of taxes for this year before the close of the tax year. This game can also be played with regard to mortgage interest again remembering any deduction you accelerate will be missing next year. Charitable deductions may be a fertile area for tax planning year end at least according to most of the newsletters that are written during this season. If in fact you are charitably minded, you can move deductions from one year to another depending upon when the gifts are made. It is also possible to give a gift of appreciated stock and deduct the fair market value and thereby walk away from any capital gain that would have been due had it been sold. Oh yes, there is one flaw in many of the plans. It's called the alternative minimum tax. Congress and the IRS got wise to the potential manipulation of deductions by creating this sneaky version of the tax rates. What happens is some of the deductions a person can claim are simply added back to calculate the AMT. A taxpayer pays either his regular tax or the AMT, whichever is greater. By the way, one suggestion I thought was bizarre, was deciding to move up your elective surgery so that medical expenses could be accelerated. Nothing like a hospital stay during the holidays. My advice is to take these “must do” planning ideas with a grain of salt and perhaps a hot toddy.

When You Just Can't Pay IRS- Code 53

    Some IRS collection officers are part time magicians. With the wave of a ball point pen it is possible for a taxpayer’s tax debt to be placed in a category called “Currently Uncollectible”. The inside jargon for this designation is called “Code 53”. This code is placed on a taxpayer’s tax transcript and suspends IRS enforced collection action. Now here comes the magic: the IRS collection statute continues to run. The normal tax statute for tax collection is 10 years from the date a tax is assessed. Note this is not the date a tax return is due or filed but rather the date the IRS assesses the tax. Therefore, it is possible that a taxpayer will never pay a tax debt if the Code 53 status continues for the duration of the collection statute of limitations. When placed, parameters are usually set to tickle the IRS collection system if the taxpayer's income rises sufficiently to entertain payment of the tax debt. Now the bad news. IRS inspectors have determined that many IRS collection agents dealing with smaller tax debts have been writing off these debts without adequate research to determine if a taxpayer owns real or personal property from which tax payment can be made. What this means for all tax cases is that IRS will begin using this code 53 designation sparingly in the future thus making it more difficult to resolve tax cases of this nature.

The Tax Season Filing Mess

This coming tax filing season taxpayers will be going more nuts than usual. You can just hear the grinding and mashing of teeth as the population tries to figure out the penalties and taxes for having inadequate health insurance. If it means anything, the IRS itself will be stretching its resources to try to piece together the web created by health care reform. Let's start with the easy stuff. Tax filers with health coverage all year for themselves and their dependents simply have to check a box on their returns. For most people this will include employer provided health insurance so long as it meets minimum federal standards. Also included will be Medicare, Medicaid, Tricare and Veterans coverage. Done. But for those who go without health insurance dealing with potential penalties, taxes and exemptions is required. The exemptions include people who simply can't afford coverage. These are employees whose share of premiums exceeds 8% of the household’s  AGI ( Gross Income less certain deductions =Adjusted Gross Income) The same is true for people who are not eligible for employer coverage if the cost of the basic bronze level plan in an exchange, less any tax credit for buying insurance, exceeds 8% of household AGI. Another exemption is for persons whose household incomes are below the threshold for filing a tax return. For single taxpayers $10,150 for joint filers $20,300. Lastly are hardship exemptions which prevent coverage. Fourteen qualifying circumstances exist. They include natural disasters, filing for bankruptcy, major property damage, shut off notices from utilities, foreclosure or eviction. Taxpayers will be required to file form 8965 to claim their health coverage exemptions. A worksheet will be provided on form 8965 to calculate taxes and penalties. Tax return preparers will be spending a good deal of their time wading through the forms and responding to questions in this area.  

New Jersey Tax Amnesty

The mail these days both the old-fashioned kind that gets stuffed in your mailbox as well as the e-mail that fills your computer brings advertisements for 2% off on your groceries, 5% on your gas and 25% off your clothing, jewelry and the other stuff of life. It is the advertising and marketing people of the world who do their damnedest to create desires for things we really don't need. But the State of New Jersey knows well that people can't really resist a sale. So listen up. Your favorite New Jersey Division of Taxation at P.O. Box 286, Trenton, NJ or a regional office located nearby is putting tax liabilities on sale through November 17, 2014 . Like the local gas station that offers a discount for cash over credit card payment the state is attempting to raise as much hard cash as possible with its newest version of a tax amnesty. By the time you are reading this the state has most likely already sent letters to your clients, both businesses and individual, who owe back taxes informing them that the sale is going on. The details can be found at the New Jersey Division of Taxation website, but in essence it requires the filing of a “closing agreement” for open tax liabilities. A closing agreement is a contract that both the taxpayer and the Division sign which states the taxpayer will pay and the Division will accept an amount that reflects reduced or limited penalties with no cost of collection or recovery fees in full and final satisfaction of an outstanding tax liability. Also the tax liability will not be subject to further audit and no refund can be claimed by the taxpayer in the matter. The Division of Taxation will send schedules to taxpayers offering a reduced amount of tax liability, where penalties may be reduced to zero and costs of collection eliminated. Interest will be calculated only on the tax and any reduced penalties. In addition recovery fees may be waived. Now the catch is that the full amount due must be paid by November 17, 2014 in order to take advantage of the reduced penalties and removal of costs of collection and recovery fees. If taxpayers do not pay the balance due by November 17, the tax and all penalties and interest, cost of collection and recovery fees will remain due. Naturally, the Division threatens that it will then pursue further collection activity. This program may also apply to taxpayers who have not filed their tax returns. If a taxpayer believes they should be subject to this amnesty and have not received the reduced payment schedule contact should be made directly with the Division of Taxation, either by mail or at 609-943-5000. This sale is for a limited time only and only as long as supplies last. By the way it does not apply to federal tax returns. At least not yet.

Lesson from the Credit Suisse Fine

       Romeo Cerutti is a Swiss and Italian citizen who once practiced in California. Seems that when poor Credit Suisse got news that federal prosecutors were hot on their trail for their role in assisting Americans to evade US taxation in Switzerland they decided to send their general counsel to meet with the land sharks at the Justice Department. I am sure that Mr. Cerutti is a well-trained attorney and extremely effective as general counsel but going to Washington to meet with the Justice Department is not for the uninitiated. The New York Times reported quoting him as asking prosecutors to:  “Please don't do this.” Okay, I will admit that when the cell phone law first past I was an easy victim. I was driving. The phone rang. It was a client. I answered it. The county policemen parked at the roadside took note and then took chase. Lights flashing, the whole shebang. I finished my call as the officer sashayed up to my window. Certain that I would only receive a warning I inquired about the chief of the county police with whom I had gone to high school. The officer replied that he did in fact know him and that he was doing well. I felt more comfortable. But I did notice that he began writing in his ticket book. It's then that I recalled using the Cerutti defense: “Ah come on, please don't do this”. The ticket at the time was $130 I paid it promptly and billed the client for the telephone call. Having represented a number of clients charged with tax fraud and tax evasion  before both the Internal Revenue Service and Justice Department I would have told Mr. Cerutti, the “please don't do this defense” does not work. Credit Suisse was forced to plead guilty to one count of conspiring to aid tax evasion. It also admitted that its bankers enabled clients to easily evade the American taxes over many years. Eric Holder, Jr., the United States attorney gloating somewhat, said that “When a bank engages in misconduct this brazen it should expect that the Justice Department will pursue criminal prosecution to the fullest extent possible, as happened here”. The bank has agreed to pay fines of $2.6 billion for their role. At the moment, the bank has not been required to turn over the names of the unfortunate American account holders. Practitioners would be wise to advise clients that it may in fact be time to come clean and participate in the limited amnesty program the IRS now provides. For background on that program See a fine article on the subject: T. David and S Novak “The Undisclosed Foreign Bank Account, The Practical Tax Lawyer, ALI-CLE, April 2014.

The Key to Happiness

People are spending their lives chasing success often at any price. When all is said and done and the riches are amassed, they sit back and wonder why they are still unhappy. This is not a new phenomenon. Even our beloved constitution has got it wrong. " Pursuit of Happiness" sounds like chasing it is what we Americans are all about in 1790 as today. So where is this elusive happiness to be found.?The answer is in your own behavior and the activities you choose to undertake. Much has been written on the subject but people seem to refuse to believe that their happiness is within their own control. So what to do? Consider these happiness generators:

+      Cultivate Optimism

+     Express Gratitude

+      Avoid Over Thinking and Social Comparison

+      Practice Acts of Kindness

+      Nurture Social Relationships

+      Learn to Cope

+       Learn to Forgive

+       Increase Flow Experiences

+     Savor Life’s Joys

+      Commit to Your Goals

+      Take Care of Your Mind

+      Take Care of Your Body