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.

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Rehabilitating Properties: Does your entity of choice protect you?

Author: Eric Townsend

First of all, if you’re saying to yourself, “this doesn’t apply to me, I never chose any entity”, you are exactly my target audience. More investors are returning to the business of buying properties to rehabilitate and resell (flip). These can be profitable endeavors as prices seem to have bottomed. Unfortunately, many of these investors are purchasing these properties with other investors and using agents (like contractors) to do some of the repairs and work without consideration of the entity in which they operate. This could leave these investors open to immense liabilities because they did not take a few simple steps to form an entity providing them limited liability.

In California the default entity when a person does business with another, without forming a recognized entity by the State, is a general partnership. This means that the person is generally liable to any creditor for the actions of any of the general partners or agents who are acting on behalf of the general partnership. If a partner or agent accepts credit from a lender, or is found liable in a civil action for injuries that arose from the actions of a partner/agent while acting on behalf of the general partnership, then those creditors may seek their damages generally from all partners.

A simple example, a General Partnership “GP”, made up of Partners A, B, and C, hired a contractor as their agent to install a new roof on a property they intended to rehabilitate. Partner A had only contributed $5,000 to the GP, which was used as the down payment to buy the investment property. B and C had contributed $10,000 each to hire a contractor to fix the roof. When installing the roof, the contractor did not fully latch the mechanism to secure the a-frame structure. Half-way to the desired location, it fell upon an unsuspecting victim V. The V was unable to work again and was awarded a judgment of $250,000 in damages. In this case the GP would be liable for these damages (i.e., the injured party can seek these damages from any and all of the general partners including judgment liens on their personal property). Partners B and C had no personal assets for the V to go after, but A had a property worth $250,000 that was owned free and clear. So a lien was placed on A’s property and then sold to pay off the judgment. A then sought contribution from B, C and the contractor for the $250,000 and prevailed in that action. Unfortunately, the following month B, C and the contractor declared Chapter 7 bankruptcy and the general partners’ claim against them as judgment creditors was liquidated. For a $5,000 investment A lost his home.

Could this have been avoided? The answer is absolutely! Anyone who registers a business with the Secretary of State of California in a recognized limited liability entity under California Code, and operates legally under that business name, is only liable for their own acts and the amount of money they contribute to that business. So had A instead decided to form a LLC or corporation, his maximum liability in the above example would have been the $5,000. Is it worth it to spend the time, cost, and effort to limit your liability? You be the judge.

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