NJ Real Estate Tax Rebate Filing Extended to October 31

Category: Tax Law and Planning

In NJ, the state with the most out of control property taxes in the Union, there is a plan known as "NJ FAIR" (I make no comments on the name). The purpose of the program is to give a property tax rebate to home-owners and tenants.

All NJ homeowners should have recently received an package in the mail with instructions for calling in to file for the rebate. The rebate can also be filed online. NJ tenants can file a Form TR-1040, FAIR tenant rebate application, either by paper or online. For more information, residents and tenants should go the the New Jersey Division of Taxation.

You can check the status of your rebate filing online as well.

What will all this filing get you? Anywhere between $200 and $350 if you are under 65, and don't have income greater than $200,000; and between $500 and $1200 if you are over 65, and again don't have income greater than $200,000. See Chart Here.

New NJ Tax on Purchase Commercial Real Estate

Tax Law and Planning

Starting August 1, purchasers of commercial real estate for more than $1,000,000 will have an additional tax, or "fee", to contend with. Chapter 33, Laws of 2006, calls for a 1% fee to buyers of commercial property purchased for over $1 million. This brings the fees for purchasing commercial real estate in line with the purchase of residential real estate, which for several years has been subject to a "mansion tax" of 1% to buyers of residential property valued at more than $1 million. Sellers of property will still need to contend with the Realty Transfer Tax, regardless of whether buyers are subject to the additional 1% fee.

There will be several exceptions to the 1% fee on transfer of commercial property:

* Where the real property transfer is incidental to a corporate merger or acquisition, if the real property value represents less than 20% of the total assets subject to the merger or acquisition.

* The purchaser is recognized by the IRS as exempt from income tax (ie: a public charity or private foundation).

The 1% fee also applies in certain non-deed transfers. For example, if a controlling interest in an entity that owns commercial real estate valued at more than $1 million is transferred, then the buyer will pay the 1% fee. This would apply, for example, if an LLC owned commercial real estate valued at more than $1 million, and the LLC itself was sold.

For more information, see the Division of Taxation Website.

Estate Tax Repeal Defeated Again (Who knew they were voting?)

Category: Estate and Inheritance Tax

Last night the US Senate again addressed the total repeal of the estate tax.

First question - why all the silence? Where was the press push and fanfare of the last vote attempt? Where was the opportunity for public debate and communication with representatives before the vote? I could not have been more surprised this morning that total repeal of the estate tax had been brouhght to a vote again.

Democrates in the Senate filibustered the vote to totally repeal the estate tax, in the Senate Republicans again fell shy of the 60 needed to break the filibuster. The vote was 57-41.

What's next? Putting Estate Tax Repeal/Reform into a revised Pensions Law. According to the Office of Senate Democratic Leader Harry Reid:

WASHINGTON, July 20 /U.S. Newswire/ -- With reports that Republicans are working to sneak billions of dollars in estate tax giveaways into the Pensions Conference Report, Senate Democratic Leader Harry Reid released the following statement:

"For over four months, American workers, retirees and businesses have been waiting patiently for the Republican Congress to deliver a pensions bill that will provide retirement security to millions of Americans. Now, instead of delivering those workers a clean bill, Republicans are desperately trying to satisfy a privileged few by providing them hundreds of billions in additional estate tax breaks. Fiscally irresponsible estate tax giveaways have been rejected by the Senate before and will be rejected again. We need a Congress that works for all Americans, not one that abuses the system to satisfy the special interests. I hope my Republican colleagues will move in a new direction by dropping the estate tax giveaway so we can quickly pass the pensions conference report. It is time to put American workers before special interests."

NJ 7% Sales Tax Effective 7.15.06

Category: Tax Law and Planning


As of 7.15.06, the New Jersey Sales Tax rate to be collected by local businesses is 7%. Sales tax violations have always been aggressively pursued by New Jersey, and claiming ignorance regarding the increase will likely not act to waive tax payment, penalties and fines. See the Department of Taxation Notice Here.

REMEMBER - SALES TAX LIABILITY IS A PERSONAL LIABILITY OF THE OWNER OF AN ENTITY. IN OTHER WORDS, YOUR CORPORATION OR LLC WILL NOT PROTECT YOU FROM PERSONAL LIABILITY IF YOU FAIL TO COLLECT AND REMIT THE PROPER TAX AMOUNT.

For more information, visit the NJ Department of Taxation. And keep going back, as new categories of goods and services that were previously exempt from sales tax will be subject to sales tax starting October 1, 2006.

Some Summertime Tax-Cutters to Consider

Category: Tax Law and Planning

From James A. Jimenez, CPA, partner at Fass & Co. in Parsippany, NJ:

"Take Advantage of Some Summertime Tax-cutters

Make your summertime fun even more enjoyable by adding tax savings. With some advance planning, you can make it happen. Here are some tax-saving ideas.

If you have summer travel plans and the primary purpose of your trip is business, you can deduct all the travel costs to and from your business destination and all other business-related costs even if you add on a few extra days for pleasure. You can’t deduct costs related to the pleasure portion.

Including a spouse or friend on your trip is permissible, but you can’t deduct the additional costs for that person. For example, the added cost of a double room over a single room won’t be deductible. Be sure to keep track of your itinerary, as well as your receipts, so you can clearly establish the business purpose of your trip and support your deductions.

If you own rental property, the expenses you incur to inspect your investment are deductible. These would include your travel expenses, lodging, and 50% of your meals.

If you itemize your deductions, you can deduct the mortgage interest and property taxes paid for your vacation home. A boat or RV can qualify as a vacation home if it has sleeping quarters, cooking facilities, and a bathroom. If a retreat also serves as rental property, you can control your tax deductions by changing the number of days you use it for vacation.

If you and your spouse work, the cost of sending your children to a summer day camp may qualify for the child care credit.

If you own a business, consider hiring your child for the summer. Your child can earn up to $5,150 tax-free this year, and your business is entitled to a deduction for the wages paid. You must pay your child a reasonable wage for the work performed. If your business isn’t incorporated, a child under 18 is not subject to FICA taxes. "

Tax Breaks - Roth IRA, 15% Capital Gains and Dividends, AMT

Category: Tax Law and Planning

From Wills, Trusts & Estates Prof Law Blog May 10, 2006:

Status of Tax Reconciliation Package
The United States Congress is in the final stages of its work on tax reconciliation legislation. Below are some of the highlights of the current version of the bill as reported in Jeanne Sahadi, Tax bill agreement reached, CNNMoney.com, May 9, 2006:

• IRA Conversion. The bill would allow traditional IRAs to be converted to
  Roth IRAs even if the taxpayer's adjusted gross income is over $100,000.
  This provision may actually raise revenue because IRA holders would be required
  to pay tax now, that is, at the time of the conversion.
  
• Long-term capital gains and dividends tax rate to remain at 15% for two more
  years (that is, through 2010).
  
• Enhanced relief from the alternate minimum tax.
  

And from May 12, 2006:

Yesterday, May 11, 2006, the Senate approved the [tax cut] bill 54 to 44. On Wednesday, May 10, 2006, it passed the House. Accordingly, it is now being sent to President Bush who is expected to sign the legislation.

See Edmund L. Andrews, Senate Approves 2-Year Extension of Bush Tax Cuts, NY Times, May 12, 2006.

What is the Surviving Spouses Taxable Gain on Sale of Home?

Category: Tax Law and Planning

A very common question is: If my spouse dies and I sell the house, what is my cost basis? Cost basis is important because Purchase Price - Basis = Gain (which is the Amount subject to Capital Gains Tax). The except below from This old house: cost-basis riddle -- Newsday.com is an excellent example of answers to that question.

However, cost basis is not the only issue. Once the Amount subject to Capital Gains Tax is determined, the next question is "What exclusions to Capital Gains Tax are there?" Under Internal Revenue Code Section 121, a single person can exempt the first $250,000 of Gain from the sale of his or her residence from tax (assuming the person has resided in the house for at least 2 years). This doubles to $500,000 for married couples.

So, if a surviving spouse is ever looking to sell the residence (no matter when the deceased spouse died) the questions are:

1 - What is the surviving spouse's Cost Basis in the house (see the examples below to calculate); and
2 - Is this Gain less then the Section 121 exemption available (if so, no tax).

"Imagine Fred and Ethel buy a house in 1982 for $135,000. In 2005, Fred dies and Ethel inherits the house, now worth $550,000. To calculate her profit when she sells it, she subtracts what the house cost - her 'cost basis' - from the $550,000 sale price. Current law says Fred and Ethel each had a 50 percent ownership stake in the house. Her cost basis on her own half is $67,500 - half of the original $135,000 purchase price. But her cost basis on Fred's half is its market value at the time of his death - $275,000 (half of $550,000). Her total cost basis: $342,500.

But before 1977, the law presumed that the spouse who died first owned 100 percent of the house, says Alan E. Weiner, senior tax partner at Holtz Rubenstein Reminick in Melville. Unless the surviving spouse could refute the presumption, the house was included in the deceased spouse's estate and the survivor inherited it at its market value. (The husband, usually the first to die, was also usually the only working spouse. 'It's unclear how the law would work if the first to die was a wife who hadn't contributed to the purchase of the house,' Weiner notes.)

Let's say Fred and Ethel bought their house in 1960 for $17,000. When Fred died in 2005, it was worth $450,000. Under the pre-1977 law, the entire $450,000 is included in his estate. No additional estate tax is due, however, because spouses inherit from each other tax-free. Ethel has inherited 100 percent of the house; her cost basis is $450,000.

The IRS says the old law still applies in cases involving marital joint property acquired before Jan. 1, 1977. It has said it will no longer litigate such cases. (For more details, go to www.irs.gov/pub/ir"

The Cost of Gifting Your Home

Category: Elder Law, Estate Planning, Tax Law and Planning

This brief article from mortgage101.com outlines why there may be a large cost of making a gift of your home to your children now, instead of continuing to live in it an bequeathing it to your children at your death.

"First and foremost, your child or friend's basis in the house will be what you paid for the property, plus major improvements. Because this cost you paid years ago is probably much lower than today's soaring home value, there's a chance tax will be owed on a subsequent sale.

For example, if you purchased your home in 1970 for $60,000 and it is now worth $450,000, your child's basis would be $60,000 if you chose to transfer the home to the child as a gift. If the married child sells the home 10 years down the road for $760,000, their tax liability would be on $200,000 ($760,000 minus the $60,000 basis, minus the $500,000 exclusion for married couples). Taxpayers in the 15 percent tax bracket would thus owe the Internal Revenue Service approximately $30,000 in capital gains tax."

BUT BE AWARE:

If the child did not live in the house, there would not be a "$500,000 exclusion for married couples" as outlined above. That only applies if the child and his or her spouse lived in the house for 2 years or more before sale. If you gifted the house to a child and you continued to live there, upon sale the child's basis would only be $60,000, leaving $700,000 subject to capital gain.

Also, while the federal capital gain tax rate is generally 15%, the state may have an additional capital gain rate. For example, in New Jersey, the capital gain rate is 7 1/2%, bringing the total combined capital gains tax rate to 22 1/2%, which on a $700,000 sale would be $157,500 - not chump change.

TWO ITEMS OF NOTE:

First, for Medicaid planning it may be worth the potential capital gains tax cost to remove the asset from your "available assets" so that the house does not have to be sold to provide for your long term care.

Second, it is possible to gift part of the house now, and keep enough of it to get a "step-up in basis" at your death. For example, if you give away the house, but retain the right to live there during your lifetime (a "life estate"), then the house will be part of your taxable estate. This means that your children's basis in the house upon your death would be the date of death value, $760,000 in the above example. Thus, if the children sold the house for $760,000, there would be no capital gain. But beware of the trap that keeping the asset in your taxable estate may cause an estate tax issue (New Jersey's estate tax exemption is only $675,000) just to avoid a capital gains tax issue. (A last point that here the NJ estate tax rates, which range up to 16% on amounts over $675,000 would be far less then the combined federal and state capital gains rates of 22.5% on $700,000 of gain.)

Can't Pay Your Taxes? Ignoring it is NOT the Answer

Category: Tax Law and Planning

We talked about what happens if you aren't ready to file by April 15th (17th this year), but what if you can't pay your taxes?

Don't ignore your tax obligation - it won't go away. In fact, it will just get larger, with the addition of interest and penalties.

The penalties for failure to file are seperate from the penalties for failure to pay. So even if you can't pay, you should file your return (or an extension as discussed earlier this week in _---) and address the payment issues seperately.

From Rubin on Tax: WHAT IF YOU CAN'T PAY YOUR INCOME TAXES BY APRIL 17?: "Here are some ideas to avoid the penalties (and interest, if the tax can be paid):

a. Borrow the tax payment from friends or family.

b. Bank loans (including home equity loans).

c. Credit card payment (where allowable by the credit card issuer). However, these providers charge a 2.49% fee, plus their usual interest.

d. Request an installment payment agreement from the IRS (using Form 9465). There is a $43 fee for these agreements. Interest is still charged on the unpaid tax, but the late payment penalty is reduced by 50% if the return is filed by the due date (including extensions).

e. Possible qualification for a 120 day extension to pay, or a payroll deduction installment agreement with the IRS. "

Extension of Time to File Your Tax Return (You Still Have to Pay

Category: Tax Law and Planning

The clock is ticking towards April 15th (actually, April 17th this year). If you haven't filed your tax return by now, you may want to consider the reality that you won't be able to file it on-time at all. To avoid the stress and headaches of last minute filing (and the long lines at the post-office) you may want to consider filing an Extension of Time to File. You can get an automatic 6-month Extension of Time to File by completing a Form 4868.

This is NOT a reprieve from paying your taxes - those must still be paid on or before April 17 to avoid interest and penalties.

For more information look at Extension of Time to File Your Tax Return from www.irs.gov:



Extension of Time to File Your Tax Return

Need more time to prepare your federal tax return? This page provides information on how to apply for an extension of time to file.

Please be aware that an extension of time to file your return does not grant you any extension of time to pay your tax liability.

Extensions for Individuals
If you are not able to file your federal individual income tax return by the due date, you may be able to get an automatic 6-month extension of time to file. To do so, you must file Form 4868, Application for Automatic Extension of Time To File U.S. Income Tax Return (51K) Adobe PDF, by the due date for filing your calendar year return (usually April 15) or fiscal year return. This form is also available en español.


Special rules may apply if you are:
living outside the United States
out of the country when your 6-month extension expires, or
serving in a combat zone or a qualified hazardous duty area.


You can also go to Filing Information in Publication 17, Your Federal Income Tax (HTML page), for more information regarding the rules for automatic extensions and filing federal individual income tax returns."

Don't Overlook Valuable Tax Credits

Category: Tax Law and Planning

Courtesy of James Jimenez, CPA of Fass and Associates in Parsippany, New Jersey:

DON'T OVERLOOK VALUABLE TAX CREDITS

Tax credits are one of the most powerful ways to lower your income tax bill. A tax credit reduces your taxes dollar for dollar. A tax deduction, on the other hand, only reduces your taxable income, so your benefit is determined by your tax bracket. For example, a tax deduction of $1,000 will lower your tax bill by $280 if you are in the 28% tax bracket. A $1,000 tax credit will lower your tax bill by $1,000. Here are some of the most common tax credits; most are subject to income limits.

Child credit. Taxpayers who have dependent children under age 17 may be eligible for a child tax credit of $1,000 per child.

Dependent care credit. Expenses paid for the care of dependent children under 13 and certain other dependents may qualify for a tax credit.

Education credits. Qualified college and vocational school expenses for eligible students may qualify for a credit. Under the Hope credit, up to $1,650 per student can be claimed for tuition and fees paid during the first two years of post-secondary education. Under the lifetime learning credit, up to $2,000 per family is available for post-secondary education expenses and for education expenses to acquire or improve job skills.

Earned income credit. This credit is intended for low-income taxpayers. The size of the credit depends on the amount of your earned income (wages and self-employment income), investment income, and your filing status.

Adoption credit. A credit of up to $10,960 per child is available for qualified adoption expenses.

Business credits. There are a number of credits that are specifically available to businesses.

Tax Deductions Not to be Forgotten About - Look here before you file

Category: Tax Law and Planning

Courtesy of James Jimenez, CPA of Fass and Associates in Parsippany, New Jersey:

Don’t Miss These Often Overlooked Deductions

If you itemize deductions on your tax return, every additional deduction you find will save you money. Here’s a sampling of often-missed deductions. As you review the list, be aware that certain miscellaneous deductions are deductible only to the extent they exceed 2% of your adjusted gross income (AGI), and medical expenses are deductible only to the extent they exceed 7.5% of your AGI. Also, itemized deductions are limited for higher-income taxpayers.


Often-missed deductions:

• Disaster losses not reimbursed by insurance.
• Job-hunting travel and telephone expenses.
• Employment agency and job counseling fees.
• Costs for resume preparation.
• Union or professional association dues.
• Specialized work clothing or small tools used at work.
• Points paid by you on a new home loan.
• Points paid by a seller on your behalf.
• Points paid on refinancing your home mortgage (deductible pro rata over the life of the loan).
• Remaining undeducted points on a prior refinancing when you refinance again.
• Your actual expenses or 14¢ a mile for driving in doing charitable work (larger deduction if driving is in conjunction with 2005 hurricane charity work).
• Gambling losses, but only to the extent of your winnings.
• Fees paid for the preparation of your tax return. "

And an extra from me, certian legal fees.

Waiting for your Refund?- IRS to Review Anti-Fraud Program the Freezes Refunds

Category: Tax Law and Planning

From Yahoo News: IRS to Review Anti-Fraud Program - "WASHINGTON - IRS Commissioner Mark Everson ordered a review Tuesday of a tax fraud detection program criticized for freezing thousands of refunds without notifying taxpayers.

Everson said the tax agency will soon announce new procedures to advise taxpayers when a refund has been frozen. The agency will also revise its fraud screening procedures so that it withholds fewer refunds owed to innocent taxpayers."

Of course, why are you expecting such a large refund in the first place? One way to look at a refund is an interest free loan to the government. After all - all a refund is is a return of your own money that you haven't been able to spend because you voluntarily gave too much to the government in taxes. See my prior post Review your withholding - A Tax Refund is an Interest Free Loan to the IRS about adjusting your withholding to maximize your paycheck.

The article goes on to claim that: "Refunds claimed on tax returns determined to be fraudulent remain frozen for a number of years until the IRS sees the taxpayer file a number of legitimate returns.

The tax agency said it's fighting a rising tide of refund fraud, which it now estimates to be more than $500 million a year. A significant portion involves false earned income tax credit claims, which can amount to $4,400 on a tax return, the IRS said.

Nearly 75 percent of the pool of frozen refunds studied by the taxpayer advocate were low-income families claiming the earned income tax credit, designed to reduce poverty among the working poor.

The IRS issues more than 100 million refunds each year, and the Questionable Refund Program withholds less than 1 percent for further scrutiny. The IRS said about 200,000 refunds are held longer than a week, but many of those can be held for months or years."

The IRS admits is does not normally inform taxpayers they are suspected of fraud during the time they are investigating the return - with the result that unless you keep pushing for where your refund is, you may not know why you don't have it.

Having said that, statistics show that the frozen refunds are only a drop in the refund bucket: "The IRS issues more than 100 million refunds each year, and the Questionable Refund Program withholds less than 1 percent for further scrutiny."

Is the AMT Coming to get You??

Category: Tax Law and Planning

Much has been written about how the Alternative Minimum Tax (AMT) - including my prior post: AMT - What is it and Why Should You Care?. This parallel tax to the income tax was originally designed to capture very-high income taxpayers and ensure that they pay their fair share by limiting their deductions. Unfortunately, it has been creeping down the tax brackets over the years, until it is now a tax faced by more and more taxpayers.

Don't laugh, but the IRS is coming to your assistance in answering the question "Do I owe AMT?". At the IRS Website at http://apps.irs.gov/app/amt/ there is an "AMT Assistant" - a tool designed to determine whether or not you might be subject to the AMT. The instructions claim: "Most people using the AMT Assistant can complete the AMT worksheet using this tool in 5-10 minutes."

The US tax system is self-reporting, so you the taxpayer need to know not only what taxes you are subject to, but the liability generated by those taxes.

One Trust, Two Trusts, Can you Merge Trusts?

Category: Estate Planning, Tax Law and Planning, Probate and Estate Administration

From the blog Rubin on Tax, a summary of PLR 200552009, issued December 30, 2005, discussing the tax consequences of two trusts with similar trust merging for administrative reasons (who wants to administer and pay administration expenses on 3 trusts when you can do it for just one?):

"In a recent Private Letter Ruling, the IRS provided that where several identical trusts combined into one trust with similar terms, and all the trusts held similar assets, the merger would not generate gain or loss to the trusts or their beneficiaries. The IRS further went on to provide that the tax attributes of the trusts merged into the new trust, such as net operating loss carryforwards and tax basis, would carry over to the new trust."

Note that a private letter ruling or PLR is only authority for that taxpayer, and cannot be relied upon by any other taxpayer. However, it is an example of the IRS's analysis of certain issues.

In doing estate planning, consider how well the distributive terms of any irrevocable trust you create, such as a life insurance trust or ILIT, match the distributive terms of your Will, or other testamentary document. To the extent that the trust terms for your children match, for example, then the Trustee may be able to combine the insurance trust with the trust created under your Will and only administer one trust per child. The key to being able to match these terms over time is to give someone a power over your irrevocable trusts to modify the distribution terms to the beneficiaries, so that as you modify your will over time, the trust terms can follow.

Key 2005 Tax Filing / 2006 Tax Payment Deadlines

Category: Tax Law and Planning

From James Jimenez, CPA, of Fass and Associates:

"Mark These Tax Deadlines in Red

Circle these dates on your 2006 calendar if any of the following upcoming tax deadlines apply to you or your business.

January 17 – Due date for the fourth and final installment of 2005 estimated tax (unless you file your 2005 return and pay any balance due by January 31).

January 31 – Employers must furnish 2005 W-2 statements to employees. 1099 information statements must be furnished to payees by banks, brokers, and other payors.

January 31 – Employers must generally file 2005 federal unemployment tax returns and pay any tax due.

February 28 – Payors must file information returns (such as 1099s) with the IRS. (March 31 is the deadline if filing electronically.)

February 28 – Employers must send W-2 copies to the Social Security Administration. (March 31 is the deadline if filing electronically.)

March 1 – Farmers and fishermen who did not make 2005 estimated tax payments must file 2005 tax returns and pay taxes in full.

March 15 – 2005 calendar-year corporation income tax returns are due.

April 17 – Individual income tax returns for 2005 are due unless you file for an automatic extension. Taxes owed are due regardless of extension.

April 17 – 2005 partnership returns are due.

April 17 – 2005 annual gift tax returns are due.

April 17 – Deadline for making your 2005 IRA and education savings account contributions.

April 17 – First installment of 2006 individual estimated tax is due.

June 15 – Second installment of 2006 individual estimated tax is due.

September 15 – Third installment of 2006 individual estimated tax is due.

October 16 – Deadline for filing your 2005 individual tax return if you filed for an extension of the April 17 deadline. "