Pregnancy and Taxes: When does your child qualify as a dependent?

Author: Dustin Wetton

Even though the government has pushed back the tax deadline from April 15th to April 18th this year due to a government shut-down, this article is still a bit late for this last year’s tax filing season. However, because the topic is about pregnancy, this article can apply to anyone who is pregnant now, or will be pregnant the rest of the year. Did you know that most middle-income families can save up to $1,300 per year on their federal taxes by having a child? With such savings, you have to ask just how can pregnancy affect your taxes. The answer is, it really doesn’t.

Pregnancy is a momentous occasion, bringing joy, much change, and of course, life into the world. With all such potential happiness, according to the US Department of Agriculture, the average, middle-income family will spend nearly $300,000 on each child. These expenses don’t start the day of your child’s birth, but instead, start to accrue the day you find out you are pregnant, or even before that if you are planning on having a child. Pregnancy expenses are not cheap either. They can range from healthcare costs and maternity clothing, to pregnancy classes and nursery preparation. Thus, how are taxes not affected by such a change?

Normally, there are many tax benefits to having a child. First, there is the Child Tax Credit, which is a flat tax credit based upon living status, age, and income. Further, there are many expenses that beneficially affect taxes, such as healthcare costs, day-care, and education costs. While these expenses are heavily related to those costs accrued during pregnancy, the IRS does not see it that way. To claim your baby for the tax year he/she would have to be born by 11:59:59 on December 31. The IRS has made this matter very simple compared to adoption legislation and case summaries, the children are not dependents until they are actually born.

While this law keeps things simple, it may be something that should be reanalyzed by our government, you.

If you have any questions or comments regarding this blog email us at blog@lauruslaw.com.

www.lauruslaw.com

New Bill Provides Temporary Relief for the Estate Tax

Author: Dustin Wetton

On December 17, 2010, President Obama signed into law H.R. 4853, The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010. This important tax extenders bill includes federal tax changes for individuals, businesses, and estates at all levels of income. One of the most important facets of the bill is the part concerning the estate and gift tax.

The deadline for revamping the estate and gift tax was the first of January, 2011. Thus, if no action was taken by Congress, the estate and gift tax laws would be restored to their 2001 levels. If that would occur, the amount that is exempt from estate taxes would be $1 million, and the tax on the rest would be 55 percent. Thankfully though, Congress took action. In this recent legislation signed into law only 13 days before the deadline, congress provided temporary estate tax relief and a modification of the gift and generation-skipping transfer taxes.

To sum up the recent changes that affect the estate tax, the new law has a higher exemption and a lower tax rate. The new legislation sets the estate tax exemption at $5 million per person and $10 million per couple. Thus, if you are an individual, you will not be taxed on up to $5 million of your assets upon your death. Therefore you are able to actually give out to others the inheritance that you had planned for them. Also, there is a top tax rate of 35 percent for the estate, gift, and generation-skipping transfer taxes for two years, through 2012. Thus, if you are an individual with more than $5 million in assets at your death, then anything over the exemption amount will be taxed at a top rate of 35%. Lastly, the proposal sets a $5 million generation-skipping transfer tax exemption and zero percent rate for the 2010 year.

A new tool is granted for estates of decedents dying after December 31, 2010. Under current law, couples have to do complicated estate planning to claim their entire exemption. Yet now, under this new legislation, a couple is allowed to transfer any unused exemption to the surviving spouse without any need for a planning instrument to dictate otherwise. Thus, the first spouse to die can use an estate plan that takes little to no taxes out of their estate, while also protecting the surviving spouse from heavy taxes upon their death.

Lastly, the new bill once again reunifies the estate and gift taxes. Prior to the 2001 Bush tax cuts, the estate and gift taxes were unified, creating a single rate schedule for both. This was subject to repeal if Congress took no action. Luckily though, the recent bill unifies the estate and gift tax once again. The bill is effective for gifts made after December 31, 2010.

With all of the new changes taking place, it is a good idea to use the inspiration of Congress’ action to take action yourself. Check your estate plans to ensure that you are in line with recent changes and that the language in your will or trust allows you to take advantage of the beneficial changes that have just come into affect.

If you have any questions or comments regarding this blog email us at blog@lauruslaw.com

www.lauruslaw.com

Income Taxes and Bankruptcy

Author: Dustin Wetton

Ben Franklin once said that “the only things certain in life are death and taxes.” This quote can have many innuendos, one of which is that there is no way of getting out of paying for your taxes. However, during Mr. Franklin’s life, the United States had not yet setup a bankruptcy court or bankruptcy code. Thus, he was unaware of the ability to discharge federal and state income taxes through the bankruptcy process.

The bankruptcy code was initiated to help ease the burden of over-encompassing debt on debtors and to help create and protect the flow of credit. While most creditors are often credit-card companies, health industries, and lawsuits, in many cases, the federal and state governments are also creditors. In these situations, for whatever reason, the debtor owes their respected governments taxes, and thus is established a creditor-debtor relationship between the taxpayer and the government.

This situation is very common in bankruptcy. Yet because the creditor is the government, they have a very high priority of distribution and a more difficult burden of discharging their debt than most unsecured debtors. Thus, if you owe money on taxes from previous years, you can have your debt discharged, that is “wiped clean”, however the following six steps must be fulfilled in order to do so:

1)The due date of filing the return is at least 3 years ago
2)The tax return was filed at least 2 years ago
3)A tax assessment occurred at least 240 days ago
4)The returns are not fraudulent
5)The debtor is not guilty of tax evasion, and
6)The debtor must prove the past four years of filings had been filed.

These six steps must be followed to a tee in order to get the past years taxes discharged. If there are problems in qualifying for any of the steps, an attorney, the trustee, and the IRS are all very helpful in figuring if the debts can be discharged or not. Also, it may be a good idea to get a tax transcript from the IRS and the State for the tax years that you are going to try to discharge to make sure that your numbers are correct.