Making Work Pay Credit

/in , , /by

Making Work Pay Tax Credit is a refundable tax credit of available to many taxpayers in the tax year 2010.  The credit is up to $400 for individuals and up to $800 for married taxpayers filing joint returns.  Taxpayers who file Form 1040 and 1040A must use Schedule M to figure out their Making Work Pay Tax Credit (in particular, whether they have already received the full credit in their paychecks).  Taxpayers who file Form 1040-EZ should use the worksheet for Line 8 on the back of the 1040-EZ to figure their Making Work Pay Credit.

There is an income limitation on claiming the tax credit.  If a taxpayer’s modified adjusted gross income is or exceeds $95,000 (for individuals) or $190,000 (if married filing jointly), then he is not eligible to take the credit.

Additional limitations also exist.  In particular, the credit is not available for a taxpayer: who is claimed as a dependent on someone else’s tax return, has not a valid social security number, or who is a nonresident alien.

Contact Sherayzen Law Office to discuss your case with an experienced Minneapolis tax attorney!

Minneapolis Tax Lawyer | Tax Consequences of Selling a Structured Settlement

/in , , /by

Are your structured settlement payments taxable?

For federal income tax purposes, it is not relevant whether a plaintiff receives proceeds from a judgment or settlement. No matter how the result is reached, amounts received are characterized either as income, or are specifically excluded from income. Section 104 of the Internal Revenue Code generally excludes from gross income: amounts received as personal injury damage awards (to the extent that the damages are compensatory and not punitive); amounts received through accident or health insurance for personal injury or sickness; and amounts received as pension, annuity, or for personal injuries or sickness resulting from active service in the armed forces of any country. Punitive damages are almost always included in gross income. Essentially, judgments resulting from personal injury lawsuits and the like are meant to make a plaintiff whole and compensate them for something that they lost that was not income (e.g. loss of an arm), therefore any amount received in compensation of such an injury also must not be income.

If your settlement payments are not covered by Section 104, you need to determine if your structured settlement payments must be included in your income by considering the item that the settlement replaces. Business injury or non-personal injury judgments are generally regarded as gross income. Here are a few examples of judgments usually included in gross income: interest on any award; compensation for lost wages or lost profits in most cases; punitive damages (in most cases); pension rights (if you did not contribute to the plan); damages for patent or copyright infringement, breach of contract, or interference with business operations; and back pay and damages for emotional distress received to satisfy a claim under Title VII of the Civil Rights Act of 1964.

Structured periodic payments for business injury judgments or settlements should generally be included as income to the extent that the payments fit under the definition above. With respect to the personal injury plaintiffs, Section 104 explicitly excludes from gross income periodic payments that are otherwise excluded from gross income. Portions of periodic payments specifically labeled as interest may not be excluded from gross income. If properly structured, personal injury settlement payments can be tax free generally irrespective of the number of years the payments continue.

A note of caution, the analysis above is very general and simplistic, even with respect to the examples provided above. You should consult your tax attorney to determine whether your settlement should be included in gross income pursuant to Section 104.

What happens if you sell your right to structured settlement payments for a lump sum?

The information above is very important to an original beneficiary of a structured settlement who may be interested in selling their right to receive structured settlement payments. This is because Section 104 still controls characterization of any lump sum payment received in return for transferring the right to structured settlement payments. The end result is that any lump sum payment you receive from selling your structured settlement payments is likely to have the same tax treatment as the payments under the structured settlement.

Therefore, if the current structured settlement payments you receive are tax free, then the money you receive from selling your payments are likely to be tax free. Conversely, if the current structured settlement payments you receive are are likely to be included in your income, then the money you receive from selling your right to payments are also likely to be included in your income.

Again, the exact determination of whether the proceeds from the sale of a structured settlement need to be included in the gross income should be made by a tax attorney. Only a tax professional is likely to have the expertise necessary to take into account all factors of your particular tax situation and conduct correct legal analysis.

Are there tax consequences for the company purchasing the right to your structured settlement payments?

Section 5891 of the Internal Revenue Code was added in 2002 to protect structured settlement payees/recipients that decide to sell the right to their structured settlement payments. Section 5891 requires the sale of structured settlement payments must be approved by a qualified court order in accordance with the relevant state statute. In Minnesota, the applicable state statute is Minn. Stat. §549.31 (2010).

Section 549.31 requires among other things that: the transfer is not unlawful; the transferee discloses certain facts to the payee in writing; the payee has established that the transfer is in the best interests of the payee and the payee’s dependents; the payee has received independent professional advice regarding the legal, tax, and financial implications of the transfer; the transferee has given written notice of the transferee’s name, address, and taxpayer identification number to the annuity issuer and the structured settlement obligor and has filed a copy of the notice with the court or responsible administrative authority; and that the transfer agreement provides that any disputes between the parties will be governed, interpreted, construed, and enforced in accordance with the laws of Minnesota and that the domicile state of the payee is the proper place of venue to bring any cause of action arising out of a breach of the agreement. The transfer agreement must also provide that the parties agree to the jurisdiction of any court of competent jurisdiction located in Minnesota.

If a sale of the right to payment under a structured settlement does not comply with Section 5891, then Section 5891 imposes on any person who acquires directly or indirectly structured settlement payment rights in a structured settlement factoring transaction a 40-percent excise tax.

Conclusion

Tax consequences of selling a structured settlement should be analyzed by a tax professional who will be able to conduct proper legal analysis based on the particular facts of your case. Sherayzen Law Office can help you analyze your case and provide an independent advice on the legal and tax consequences of the sale.  Call us to discuss your case with an experienced Minneapolis tax lawyer!

Depreciation Deductions: Passenger Cars & Light Trucks, Vans and SUVs

/in , , , , /by

Assuming that a taxpayer does not use the IRS standard mileage deduction, for qualifying vehicles used for business purposes and placed in service in 2009 or 2010, taxpayers may deduct various costs including depreciation, registration fees, insurance, and many others under the actual expense method. This article will examine depreciation deductions for certain categories of vehicles.

Passenger Cars

For purposes of calculating depreciation, a car is defined to be any four-wheeled vehicle for use on public roadways, with a gross vehicle weight of 6,000 pounds or less (subject to certain exceptions). Under the American Recovery and Reinvestment Act of 2009, taxpayers may generally take bonus depreciation of $8,000 for newly purchased cars placed in service for business use in 2009 (Congress has extended the bonus depreciation for 2010, as well). Taxpayers may take an additional $2,960 maximum depreciation deduction for 2009 ($3,060 for cars purchased and placed in service in 2010). The 2009 depreciation rates for subsequent years are as follows: $4,800 for the second year; $2,850 for the third year; and $1,775 for each tax year thereafter. Depreciation limits are periodically adjusted for inflation.

Note that the above depreciation amounts assume 100% business use. Depreciation amounts must be reduced proportionately by any personal use percentage that is less than 100% business use and more than 50%. If business use is less than 50%, straight-line depreciation must be used (also reduced proportionately by personal use percentages) and the bonus depreciation amount is not available. Bonus depreciation is also not available for purchases of used cars.

Light Trucks, Vans and SUVs

A light truck, van or SUV that has a gross vehicle weight of 6,000 pounds or less may also qualify for certain depreciation deductions. As with passenger cars, an $8,000 bonus depreciation allowance is available for newly purchased vehicles in this category placed in service in 2009 or 2010. For 100% business use, taxpayers may generally take an additional $3,060 maximum depreciation deduction for 2009 ($3,160 for 2010). 2009 Depreciation rates for vehicles in this category for subsequent years are as follows: $4,900 for the second tax year; $2,950 for the third tax year; and $1,775 for each tax year thereafter.

As with passenger cars, depreciation amounts must be reduced proportionately by any personal use percentage that is less than 100% business use and more than 50%. If business use is less than 50%, straight-line depreciation must be used (also reduced proportionately by personal use percentages) and the bonus depreciation amount is not available. Bonus depreciation is also not available for purchases of used vehicles in this category.

Do you have questions about maximizing your tax savings on newly purchased business vehicles or equipment? Sherayzen Law Office can assist you with your tax needs.

Call NOW  to discuss your case with an experienced tax attorney!

Capital Gains and Losses: Tax Implications for Individuals and C-Corporations

/in , , , , /by

Capital gains and losses defined

Capital gains and losses result from the taxable realized sale or exchange of capital assets. In general, capital assets include investments (such as stocks and real estate) and fixed assets, as opposed to personal-use property.

Capital gains result when the sale or exchange price is greater than the adjusted basis of the capital asset. Conversely, capital losses occur when the adjusted basis is higher than the sale or exchange price, and certain expenses associated with the sale may be added to the loss. The holding period of the capital asset being sold or exchanged will determine whether the capital gain or loss is long-term (held for more than a year) or short-term (held for less than a year).

Netting Capital Gains and Losses (Individual taxpayers)

Each taxable year, capital gains and losses are aggregated or “netted” on Schedule D. First, long-term capital gains and losses are netted. Second, short-term capital gains and losses are netted. Four possible scenarios will result from this two-step process:

Scenario A: A long-term gain and short-term gain
Scenario B: A long-term gain and short-term loss
Scenario C: A long-term loss and short-term gain
Scenario D: A long-term loss and short-term loss

In scenario A, the short-term gain will be taxed with the taxpayer’s ordinary income at his or her marginal rate. For the long-term capital gain, the favorable long-term capital gains tax rate will apply, depending upon the taxpayer’s tax bracket.

In scenario B, there are two possible outcomes depending upon which result is larger, the loss or the gain. If the short-term loss is greater than the long-term gain, a net short-term loss will result, and up to $3,000 can be used to offset other income, with additional amounts can be carried forward to subsequent tax years. Alternatively, if the long-term gain is larger than the short-term loss, then a net long-term gain will result, and the favorable long-term capital gains tax rates will apply.

In scenario C, there are two possible outcomes depending upon which result is larger, the loss or the gain. If the long-term loss is larger than the short-term gain, then a net long-term loss will result, and (as with scenario B) up to $3,000 can be used to offset ordinary income. Any unused amount above $3,000 can be carried forward to subsequent years as long-term loss. Alternatively, if the short-term gain is larger than the long-term loss, then a net short-term gain will result, and it will be taxed at the taxpayer’s marginal rate.

In scenario D, there are several possible outcomes. First, if the total long-term and short-term losses combined total $3,000 or less, then the amount may be used to offset ordinary income. However, if the total amount of short-term losses exceed $3,000, then the first $3,000 of short-term loss will be applied to offset other income, and any remainder will be carried forward to subsequent years as a long-term loss. If the short-term loss is less than $3,000, then that amount will be applied to offset ordinary income, and any amount of available long-term loss making up the difference between the short-term loss applied and $3,000 will also be used to offset ordinary income (with the additional, unused amounts carried forward).

Capital Gains and Losses (C Corporations)
C corporations, unlike individuals, do not receive favorable tax rate on capital gains. Capital gains must be included as part of ordinary income, in their entirety.

Further, capital losses must be used only to offset capital gains, and are non-deductible against ordinary income for C corporations. Net capital losses can be carried back to the three preceding years (and are applied in chronological order, beginning with the earliest tax year) provided the corporation has capital gains to offset. Additionally, corporate taxpayers may carry forward the capital loss five years from the year of loss, again provided that there are capital gains to offset. Carryforwards expire after the fifth year. Importantly, all losses carried back or forward are considered to be short-term.

Offsetting Capital Gains and Losses
Are you a taxpayer interested in benefiting from the capital gains and losses tax rules? Do you have questions about selling capital assets such as stocks or real estate for tax purposes, and how to best time your transactions in order to pay less taxes? Are you concerned about how new capital gains and loss tax changes may affect your situation?

Sherayzen Law Office can guide you with all of your capital gains and losses questions, and help you plan ahead so that you pay less taxes.

Call NOW to discuss your case with an experienced tax attorney!

Innocent Spouse Relief

/in , /by

In general, a husband and wife are jointly and separately liable for any tax, penalty and interest owed for a year in which they have filed a joint tax return. This means that the IRS can collect the entire amount of tax owed from either spouse alone, regardless of who reported income, or who may have been responsible for errors, omissions, or fraud on a tax return. Joint and several liability thus can potentially result in a situation where substantial amounts of taxes, penalty and interest are owed by one spouse due to the errors, omissions, or fraud committed by the other spouse.

Difficulties involving joint and several liability tend to arise especially when spouses have divorced or separated, and are no longer living together after they have filed a joint tax return. A spouse who is responsible for the errors, omissions, or fraud in a tax return may have an incentive to not cooperate with the former spouse, and may be difficult to even locate. However, due to the fact that a joint return was filed, the IRS could collect the entire amount of tax, penalties, and interest owed from the spouse who was not at fault for the problematic tax return.

In order to provide a remedy for this unjust outcome, in certain circumstances, the IRS allows a spouse, who lacked knowledge of a tax understatement and did not engage in activity giving rise to the understatement, to claim “Innocent Spouse Relief” resulting in full or partial relief from the payments and penalties associated with an understatement of tax made by another spouse.

Legal Test for Innocent Spouse Relief

In order to qualify for Innocent Spouse Relief, all five of the following conditions must be met:

1. A taxpayer must have filed a joint return for a taxable year.

2. On the tax return, there was an understatement of tax attributable to “erroneous items” (see definition below) of a spouse (or former spouse).

3. A taxpayer must establish that when he/she signed the joint return he/she did not know (“actual knowledge”) and “had no reason to know”, that there was an understatement of tax.

4. Taking into account all the facts and circumstances, it would be unfair to hold the taxpayer liable for the deficiency in tax for such taxable year attributable to the tax understatement; and

5. A request for innocent spouse relief will not be granted if the IRS can prove that the taxpayer requesting Innocent Spouse Relief and the taxpayer’s spouse (or former spouse) transferred property to one another as part of a fraudulent scheme. (A fraudulent scheme includes a scheme to defraud the IRS or another third party, such as a creditor, ex-spouse, or business partner.)

Definitions

a) Erroneous Items: an “item” for the Innocent Spouse Relief purposes generally means anything that is required to be reported separately on a tax return or its attachments. There are two types of erroneous items. The first is unreported income, which is any gross income item received by a spouse (or former spouse) that is not reported. The second is an any improper deduction, credit, or property basis claimed by a spouse (or former spouse).

b) Actual Knowledge: if taxpayer requesting Innocent Spouse Relief actually knew about an
erroneous item that belongs to his/her spouse (or former spouse), then the taxpayer will not qualify for Innocent Spouse Relief, and will remain jointly liable for that part of the understatement.

c) Reason To Know: If a reasonable person in similar circumstances would have known of the
understatement, then the taxpayer will not qualify for Innocent Spouse Relief, and will remain jointly liable for that part of the understatement. The IRS will consider a number of facts and circumstances in determining whether a taxpayer had reason to know of an understatement of tax due to an erroneous item, including the taxpayer’s educational background and business experience, the financial situation of both spouses, the nature of the erroneous item and the amount of the erroneous item in relation to other items, the extent of the taxpayer’s participation in the activity that resulted in the erroneous item, whether a reasonable person would have inquired at the time the tax return was signed about the erroneous items, omitted items on the return, and whether the erroneous item represented a departure from a recurring pattern reflected in prior years’ returns.

d) Indications of Unfairness: The IRS will examine a number of factors including, whether the taxpayer’s spouse (or former spouse) deserted him/her, whether the taxpayer and his/her spouse have divorced or separated, whether the taxpayer benefitted from the understatement on the return, and whether the taxpayer received a “significant benefit” (any benefit in excess of normal support), including transfers of property or rights to property, and transfers that are received several years after the year of the understatement.

Types of Innocent Spouse Relief

There are three types of Innocent Spouse Relief available:

1. Full Relief from tax liability (including penalties and interest) for a taxable year to the extent that the liability is attributable to the tax understatement on the joint return. There are certain requirements which must be met in order to qualify.

2. Apportionment of Relief from tax liability (including penalties and interest) for a taxable year. Under this type of innocent spouse relief, the understatement of tax is apportioned between the taxpayer and his/her (or former spouse). In order to meet this type of relief, a taxpayer must show that he or she did not know, and had no reason to know, the extent of understatement on a tax return. If granted, the taxpayer will be relieved of a tax liability to the extent that such liability is attributable to the portion of the understatement that the taxpayer did not know, or did not have reason to know that was in error or omitted.

3. Equitable Relief may be granted if an individual does not meet the requirements for the first two types of relief, but, after taking all the facts and circumstances into consideration, the IRS determines it would be inequitable to hold the taxpayer liable for the unpaid tax.

How Sherayzen Law Office can Assist You

Requesting Innocent Spouse Relief may require legal expertise because of the specificity of the requirements involved, and the necessity of persuading the IRS that you qualify for this relief. Moreover, in some cases, the Tax Code regulations governing the Innocent Spouse Relief process may themselves be challenged in courts. Sherayzen Law Office can help you understand and comply with the required regulations, draft the necessary documents and represent you in your negotiations with the IRS in order to help you limit your tax liability.

Call NOW to discuss your case with an experienced tax attorney!