What Happens to Your Debts When You Die?

September 9, 2014 by

When you die, your executor has responsibility to pay all your remaining debts if your estate has enough probate assets to pay them. Probate assets are assets that were in your name alone and pass by your will. Before your executor pays any creditors he or she must first pay the estate administration expenses such as funeral costs, grave marker, probate fees, medical bills, attorney fees and rent for the previous six months prior to your death. After the administrative expenses are paid, the secured creditors are paid and any probate assets remaining will go to pay unsecured creditors.

If the estate is not solvent, and a creditor is paid more than he is entitled to receive, the executor can be held personally responsible to the extent of the overpayment. The executor also may be personally liable if he or she distributes estate property without having given proper notice to those having a claim against the estate.

As a general rule, debt collectors may not try to collect from your heirs. However, there are several exceptions. The first exception is if an heir was a co-signer of a particular debt in which case they would be responsible for that debt or if someone held property jointly with you, they would be responsible for any debts on the joint property. The third exception is if an heir inherits a car or a boat that had an outstanding loan, they would have to pay the loan off or the car or boat would be repossessed by the lender.

Creditors cannot be paid from any assets that pass directly to a beneficiary. Assets that pass directly to a beneficiary are called non-probate assets and include jointly owned bank accounts and any account or life insurance policy with a named beneficiary. Therefore a jointly held bank account would pass directly to the joint owner, and the funds in that account could not be used to pay creditors. Similarly, life insurance policies pass directly to the beneficiaries, so creditors do not have access to those funds. In addition creditors cannot access funds held in an irrevocable trust.

A debt collector may not contact your heirs or relatives to try to collect payment unless they were co-signers of the debt or the debt was a jointly owned debt. Debt collectors are allowed to contact the executor of your estate, or your spouse, or your parents if you were a minor, to discuss the debts but may not discuss the debts with anyone else.

Contact Gregory J. Spadea

If you have any questions or need help probating an estate please contact Gregory J. Spadea at 610-521-0604 of Spadea & Associates, LLC in Ridley Park, Pennsylvania.

Filed Under: Estate Planning, Family Law Tagged With: , , , , , , , , , , , ,

When Does an Estate Fiduciary Income Tax Return Need to be Filed

August 26, 2014 by

The estate must file a 1041 fiduciary income tax return if the estate has income or property sales over $600 during the tax year. So if the executor receives a 1099 under the Estate Tax Identification Number for over $600 of interest or dividend income, or real estate is sold in a subsequent year after death, a fiduciary income tax return will have to be filed. The federal estate fiduciary 1041 income tax return is due 3½ months after the close of the tax year.

Normally, estate fiduciary returns result in “excess deductions on termination”, which can be divided equally among all the beneficiaries, and used by them as itemized deductions on their personal federal income tax returns to increase their income tax refund.

There is no income tax on inheritances except to the extent that such items represent tax deferred items such as pension plans, annuities, IRA’s, and accrued E bonds or to the extent that they represent income earned after death, there is no inheritance tax on such post-death income. Income tax on such tax deferred items is due by the beneficiaries in the year they receive the income. A final federal income tax return for your loved one must be filed, assuming he met the filing threshold which for the 2014 tax year is $11,700, excluding social security for a decedent over the age of 65. In addition, if federal income tax was withheld, you would file to get the federal income tax refund regardless of the income earned.

There is never any Pennsylvania income tax due on inherited property including tax deferred property such as pension plans, IRA’s or annuities.

If there are U.S. Savings Bonds, the significant factors are: (a) the turnover date; and (b) income tax on accrued interest. The turnover date means that since bonds increase in value every six months, there is a loss of up to five months interest if cashing is not made in one of the two months in each year in which value increases. There are three choices with respect to reporting accrued interest on Savings Bonds: (1) Report it on the decedent’s final 1040 return; if he owes no tax, even with the interest included, this is the clear choice; (2) Report it on the estate’s fiduciary 1041 return, if this is done, ensure you have sufficient estate deductions to offset against the bond interest; or (3) Transferring the bonds without cashing, which makes sense if the beneficiary is in a low tax bracket.

If you were named as a beneficiary of an Individual Retirement Account (IRA), then you should consider the possibility of electing to stretch the pay-out over your own life expectancy if the plan administrator permits it. If not then you can take distributions over 5 years or elect to withdraw the entire balance. However, you must pay federal income tax on any distributions you receive in the year received.

Real estate, like stock, takes a stepped up basis at death, so that original cost to the decedent is irrelevant for income tax purposes. If you decide to sell a house and do not need the aid of a real estate agent to find a buyer, we can handle all the paperwork from the agreement of sale to closing for an additional fee. Keep in mind if you do not sell the property within fifteen months after the date of death we must value the property using the common level ratio or based on an appraisal.

Contact Gregory J. Spadea of Spadea & Associates, LLC at 610-521-0604 if you need help administering an estate or find yourself being appointed as an Executor.

Filed Under: Estate Planning, Real Estate, Tax Law Tagged With: , , , , , , ,

Is My Property Exempt From Pennsylvania Real Estate Tax?

August 19, 2014 by

A house

If you own a property that is regularly used by a charity or falls into one of the 8 categories below you may be exempt from paying real estate tax. To qualify for an exemption your property must be:

  1. Zoned in your Current Municipality for a Real Estate Tax Exemption

  2. An actual place of regular religious worship;

  3. A non-profit burial place;

  4. Property used regularly for public purposes;

  5. Owned Occupied and used by any branch or post of honorably discharged service persons and regularly used for charitable or patriotic purposes;

  6. Actually and regularly used by an institution of purely public or private charity for the purpose of the institution;

  7. A Hospital or institution of learning (schools) or charity including fire and rescue station founded and maintained by public or private charity; or

  8. A Public Library, museum, art gallery or concert music hall provided and maintained by public or private charity.

If your organization falls into any one of the seven categories listed above you can apply for an exemption from real estate tax in the county you are located. If you have any questions call Spadea & Associates, LLC at 610-521-0604.

Filed Under: Real Estate Tagged With: , , , , , , , , , ,

Wrongful Death Proceeds Are Not Subject to Pennsylvania Inheritance Tax or Federal Income Tax

August 4, 2014 by

The Pennsylvania Wrongful Death statute allows the personal representative of an estate to bring an action for the benefit of a decedent’s spouse, children or parents to recover damages for the death of the decedent caused by the wrongful act, neglect, unlawful violence of another. The statute entitles a plaintiff to recover damages for pain and suffering, loss of earning power, medical and hospital bills, funeral expenses and certain estate administration expenses.

Wrongful death proceeds are not taxable for Pennsylvania Inheritance purposes or for federal income tax purposes. On the other hand survival action proceeds are subject to Pennsylvania inheritance tax. Since Pennsylvania taxes survival actions but not wrongful death actions, you, through your attorney want to maximize the wrongful death recovery amount. The court tends to allocate the proceeds of wrongful death actions and survival actions based upon the facts of the case and the evidence presented by your attorney.

Under the Pennsylvania Probate, Estate and Fiduciary code the Pennsylvania Department of Revenue is an interested party in any orphan’s court proceeding. Therefore your attorney must get written consent from the Pennsylvania Department of Revenue regarding the proposed allocation since its interests will be adversely affected by the amount allocated to the wrongful death action.

Survival Actions are valued at the decedent’s date of death for Pennsylvania Inheritance tax purposes. Any unpaid Inheritance tax is due within thirty days after the estate receives the proceeds. If there is any tax due beyond thirty days the Pennsylvania Department of Revenue begins charging interest on the unpaid balance which is currently 6%.

Contact Gregory J. Spadea

If you have a question about a wrongful death action or survival action please contact Spadea & Associates, LLC online or at 610-521-0604, located in Ridley Park, Pennsylvania.

Filed Under: Estate Planning, Tax Law Tagged With: , , , , , , , , , , ,

What Business Expenses Are Deductible?

July 31, 2014 by

Coffee cup and tax forms

If you are a self-employed sole proprietor or operate an LLC taxed as an S-corporation, any expense that your business incurs that is ordinary and necessary is deductible under Section 162 of the Internal Revenue Code. Therefore, list the total spent on each of the expense categories listed below:

  • Accounting, legal and professional fees;
  • Advertising;
  • Car expense – indicate total annual miles driven, then break out total annual business miles plus parking and tolls including business log with date, miles driven, business purpose and destination or
    total annual miles driven, actual fuel invoices, auto insurance, repairs and total miles driven and total annual business miles plus parking & tolls;
  • Fixed Assets – If you bought a vehicle, computer, equipment, office furniture or placed it in service during the tax year, even if you already owned it. Also provide a copy of the purchase invoice so the total cost can be expensed it under IRC Sec. 179;
  • W-3 – Salaries that your company paid to others. List officer and shareholder salary separately;
  • Employer share of employment taxes like FICA and FUTA;
  • Commissions or fees paid to other contractors. Have them fill in form W-9 if they were not incorporated so a 1099 can be issued by February 1;
  • If you already issued them a 1099, please provide the 1096 showing total independent contractors paid.
  • Professional Liability Insurance, Workmans Compensation Insurance and Health insurance;
  • Office Supplies;
  • Materials or Purchase of inventory for resale;
  • Travel, Hotel, Airfare and Car Rental;
  • Meals – keep track of date, place, person entertained and business purpose. If you do not have a digital calendar (such as Outlook or Google Calendar) then you need a receipt for everything If you have a digital calendar then you only need receipt if you pay more than $75.00;
  • Telephone including local, long distance, fax, land lines and mobile;
  • DSL, cable and internet charges;
  • Postage including shipping costs like Fed Ex and UPS;
  • Continuing education and business seminars and conferences;
  • Interest expense paid on business loans and provide year end balances;
  • Rent for office space or equipment;
  • Utilities like electricity, fuel oil, water or gas.
  • Prior year PA franchise (Capital Stock) tax from Page 2 of the PA RCT-101;
  • Prior Year Local Income Tax paid;
  • Total State sales tax paid if you included it in gross sales revenue.

Never pay any personal expenses from your business bank account. Instead take draws from your business account and transfer money to your personal account and pay the personal bills directly from your personal account. Contact Spadea & Associates, LLC at 610-521-0604, if you have any questions or need your tax returns prepared.

Filed Under: Tax Law Tagged With: , , , , , , ,

Your IRS Taxpayer Bill of Rights

July 11, 2014 by
Stop, pay your taxes!

Stop, pay your taxes!

The Internal Revenue Service announced on June 10, 2014, the adoption of a Taxpayer Bill of Rights that will become a cornerstone document to provide the nation’s taxpayers with a better understanding of their rights. The Taxpayer Bill of Rights takes the multiple existing rights embedded in the tax code and groups them into 10 key categories, making them more visible and easier for taxpayers to understand. The rights will be sent to millions of taxpayers this year when they receive IRS notices on issues ranging from audits to collection. The rights will also be publicly visible in all IRS facilities as well as online at IRS.gov.

The IRS released the Taxpayer Bill of Rights following extensive discussions with the Taxpayer Advocate Service, an independent office inside the IRS that represents the interests of U.S. taxpayers. I have given my opinion after each provision of the Taxpayer Bill of Rights on how I feel the IRS is doing with respect to each provision.

The Taxpayer Bill Of Rights are as follows:

  1. The Right to Be Informed. The IRS tries really hard to keep taxpayers informed but sometimes stops communicating for various reasons. Therefore, it is very important for you to follow up if you do not hear back from the IRS after 90 days of responding to a notice.
  2. The Right to Quality Service. The IRS is not delivering quality customer service. Whenever I call the IRS on behalf of a client, I am on hold for 30 to 60 minutes due to budget constraints and poor management. The IRS funding and employee headcount has decreased significantly since 2010, while its workload has increased due to health care reform and foreign account reporting rules.
  3. The Right to Pay No More than the Correct Amount of Tax. The IRS does a good job with this right and gives refunds when taxpayers file amended returns as well as billing taxpayers who fail to pay the correct amount of tax.
  4. The Right to Challenge the IRS’s Position and Be Heard. and
  5. The Right to Appeal an IRS Decision in an Independent Forum. Both these rights can be read together. The IRS does a good job giving taxpayers several ways to challenge or appeal its position either through the Taxpayer Advocate service, Appeals including fast track mediation, US Tax Court and the Court for Federal Claims.
  6. The Right to Finality. The IRS does not always provide a written report at the conclusion of a correspondence audit. Therefore, I always request a written report or statement from the IRS at the conclusion of an audit or when payments are applied from different years.
  7. The Right to Privacy. The IRS does a good job of protecting taxpayer privacy.
  8. The Right to Confidentiality. The IRS does a good job keeping your information confidential although it does share information with other federal agencies and state governments.
  9. The Right to Retain Representation. This is your most important right as a taxpayer. I personally know several clients that were not represented at the audit stage and paid more tax than clients I have represented at the audit stage with the same issues. I would never recommend a client go to an IRS audit by themselves.
  10. The Right to a Fair and Just Tax System. I think this right is the responsibility of Congress since they pass all the tax laws which are not always fair.

If you receive an IRS Notice or have any questions about your taxpayer rights feel free to contact Gregory J. Spadea online or at 610-521-0604. Gregory J. Spadea is a tax attorney, former IRS Agent and founding member of the Law Offices of Spadea & Associates, LLC located in Ridley Park, Pennsylvania.

Filed Under: Tax Law Tagged With: , , , , , , ,

What Should I Do if I Receive an IRS CP2000 Notice Stating I have Unreported Income

June 18, 2014 by

Sign on IRS Building in Washington, DC, United States

After you file your tax return the Internal Revenue Service (IRS) will match your return information with third parties who issued you W-2’s or 1099’s. If a discrepancy occurs the IRS will issue you a CP2000 notice assessing you additional tax on any unreported income. I always tell my tax clients to email or fax me any IRS correspondence they receive immediately, because the IRS typically gives you 30 days to respond.

However, if you ignore the notice, you receive a 90 day letter to petition the tax court. I always recommend petitioning that tax court to preserve your appeal rights. However in the event you fail to petition the tax court within the 90 days, you can still apply for audit reconsideration.

The first thing I do when a client calls me is to review the CP2000 notice and make sure it is accurate because the IRS sends lots of inaccurate notices to taxpayers. In addition I verify that is actually from the IRS and not from an identity thief. I typically will file an amended return if my client has additional expenses relating to the unreported income or has basis in securities sold that generated the CP2000 in the first place. If the IRS is disallowing a deduction I will send in the documentation to substantiate it. I always try to get the accuracy related penalty abated and am successful most of the time, especially if only one year is involved.

If you receive a notice from the IRS under-reporter unit do not panic. Just contact Gregory J. Spadea at 610-521-0604 from Spadea & Associates, LLC in Ridley Park.

Filed Under: Tax Law Tagged With: , , , , , , ,

What Business Expenses Are Deductible?

April 14, 2014 by

If you are a self-employed sole proprietor or operate an LLC or S-corporation any expense that your business incurs that is ordinary and necessary is deductible under Section 162 of the Internal Revenue Code. Therefore, please list the total spent on the expense categories listed below:

Accounting, legal and professional fees;

Advertising;

Car expense need total miles driven, business miles plus parking and tolls including business log with date, miles driven, business purpose and destination or
total miles driven, actual fuel invoices, auto insurance, repairs and total miles driven and business miles plus parking & tolls;

Fixed Assets – If you bought a vehicle, computer, equipment, office furniture or placed it in service during the tax year, even if you already owned it, bring in the purchase invoice so we can expense it under IRC Sec. 179;

W-3 – Salaries that your company paid to others. List officer and shareholder salary separately;

Employer share of employment taxes like FICA and FUTA;

Commissions or fees paid to other contractors, Get them to fill in W-9 if not incorporated so we can issue them a 1099;

If you already issued them a 1099, bring in the 1096 – showing total independent contractors paid.

Professional Liability Insurance, Workmans Compensation Insurance and Health insurance;

Office Supplies;

Materials or Purchase of inventory for resale;

Travel, Hotel, Airfare and Car Rental;

Meals (need date, place, person entertained and business purpose) Only need receipt if you pay more than $75.00 and have a day timer, If you do not have a day timer or digital calendar (such as Outlook or Google Calendar) then you need a receipt for everything;

Telephone include local, long distance, fax, land lines and mobile;

DSL, cable and internet charges;

Postage;

Continuing education and business seminars and conferences;

Interest expense paid on business loans and provide year end balances;

Rent for office space or equipment;

Utilities like electricity, fuel oil, water or gas.

Prior year PA franchise (Capital Stock) tax from Page 2 of the PA RCT-101;

Prior Year Local Income Tax paid;

Total state sales tax paid if you included it in gross sales receipts.

Remember to never pay any personal expenses from your business bank account but instead transfer them to your personal account. Feel free to contact Gregory J. Spadea of Spadea & Associates, LLC at 610-521-0604, if you have any questions or need your tax returns prepared.

Filed Under: Business Law, Tax Law Tagged With: , , , , , , ,

IRS Audit Red Flags And How To Avoid Them

February 5, 2014 by

A waving red flag
I just read the January 17, Kiplinger Tax Letter which stated the 2013 individual audit rate was one out of every 104 1040 tax returns and they expect this amount to decrease as the IRS examination resources continue to shrink due to budget cuts. Millionaires seemed to get the most scrutiny, 1 out of every 9, and those with taxable incomes between $200,000 to $1,000,000 had an audit rate of 1 out of 37 and those with taxable incomes under $200,000 were audited 1 out of every 113.

I tried to create a list of obvious red flags that can increase your chances of being audited and possible solutions.

1. Claiming 100% business use of your car especially if there is no other car available for personal use which is an actual question on the return.

2. Deducting disproportionate or large amounts of business travel, meals and entertainment on schedule C of form 1040. I typically form an LLC for my sole proprietor clients and have them file 1120S corporate returns to reduce their chances of being audited.

3. Writing off a large hobby loss from horse or car racing or dog breeding on your schedule C which offsets your other income and decreases your taxes.

4. Deducting rental losses on schedule E of form 1040 by claiming to be a real estate professional where you must show you spend more than 50% of your working time and over 750 hours materially participating in real estate activities. However if you have more than one rental property you should make an election to have all your rental properties treated as one activity.

5. Running a cash business. The IRS is keenly aware of cash businesses such as taxis, restaurants, bars, lawn care, hair salons or car washes. The IRS even has guides for Revenue Agents to use when auditing cash-intensive businesses, telling how to interview owners and noting various indicators of unreported income, which is why you should always hire a tax professional like Gregory J. Spadea to represent you if you are audited.

6. Failing to report foreign bank accounts. This is a huge area of focus with significant penalties possible especially since the IRS has had success getting foreign banks to disclose account owner information.

7. Taking higher than average deductions. The IRS may pull a return for review if the deductions are disproportionately high when compared with the reported income. This is why I always consider the category averages of filed returns with similar income when preparing returns for my clients.

8. Unsupported cash or property charitable contributions deducted on Schedule A of form 1040. I always recommend my clients get a letter from their church or charity if they give more than $250.00 during the tax year.

9. Improper matching of income reported by 1099-B, 1099-C, 1099-INT, 1099-DIV, 1099-K, W-2 or K-1 which is how most correspondence audits are triggered. I normally file an amended return to report the income and deduct the appropriate expenses.

10. Math mistakes on the return, although these can be avoided if you electronically file your return.

11. Claiming a dependency exemption also claimed by another taxpayer such as an ex-spouse, or the dependent themselves. If you do not have physical custody you should ensure the custodial parent signs Form 8332 to release the exemption to you.

12. Not filing your returns which may result in the IRS filing a Substitute for Return based on third party information and not allowing any deductions. I normally file the delinquent returns to take the appropriate deductions and apply for an installment agreement if necessary.

13. Engaging in cash transactions. The IRS gets many reports of cash transactions in excess of $10,000 on form 8300 from banks, casinos, car dealers and other businesses, plus suspicious-activity reports from banks and disclosures of foreign accounts. Understand that the IRS looks at “step transactions” that occur with a short period to build upon transactions that are less than the $10,000 threshold.

14. Telling everyone how you put one over on the IRS. The IRS will look at your Facebook page and your other social media sites or pay whistle-blowers such as your ex-spouse, a disgruntled employee or a competitor, rewards of 15% to 30% of the additional tax collected, including fines, penalties and interest after they audit you.

15. Filing late after the extension period has expired, which also means late filing penalties.

16. Employee Job Expenses. The IRS generally starts with the assumption that if an employer doesn’t reimburse a specific expense made by the employee, that expense may not be a true job expense. So, if you are a W-2 employee, you must meet the following three guidelines: 1) total of all expenses exceeds two percent of your adjusted gross income; 2) the expenses are deemed “ordinary and necessary”; and 3) the expenses were not reimbursed.

17. Too many round numbers on a return, because the IRS thinks you just estimated or made up the amounts deducted.

18. Alimony deductions that don’t agree to alimony income of the recipient. In these cases the IRS requests the divorce decree or settlement agreement that specifies the amount of alimony.

The endless social engineering by Congress with tax deductions, credits, capital gains taxes and income tax rates makes it essential to have your tax return reviewed by your tax professional to determine whether such deductions are permitted and what tax strategies should be employed. Please call Gregory J. Spadea at 610-521-0604 of Spadea & Associates, LLC in Ridley Park, Pennsylvania if you get an audit letter or want help preparing your tax returns.

Filed Under: Tax Law Tagged With: , , , ,

When Do I Need To Take Required Minimum Distributions (RMD)

December 27, 2013 by

Sad businessman pushing hand truck with taxes.
If you are age 70-1/2 or older by the end of the year (December 31), the IRS requires you to take a required minimum distribution (RMD) from your tax-deferred retirement accounts such as traditional IRAs, SEP IRAs and 401(k) plans no later than New Year’s Eve. If you turned age 70-1/2 this year, you have the option to delay your first RMD until April 1 of the following year, but if you decide to do that, you will have to take two RMD’s in the same year which could increase your income taxes substantially.

If you inherit an IRA from your spouse you can wait until you reach 70-1/2 before taking required minimum distributions.

However, if you inherit an IRA from someone other than your spouse you must determine whether the account owner died before, on, or after his or her required beginning date (RBD):

• If the account owner died before the RBD, you may choose between two ways of calculating the RMDs—the life expectancy method or the five-year method.
• If the account owner died on or after the RBD, you must use the life-expectancy method.

The life-expectancy method requires that you withdraw certain minimum amounts annually according to calculations set forth by the IRS. You can always withdraw more than the required amount if you wish.

The five-year method requires that you receive all assets in the account no later than the end of the fifth year following the year of the account owner’s death. There are no minimum withdrawal requirements. You may withdraw assets at any time, as long you redeem the entire account by the end of the fifth year following the owner’s year of death. This option is only available if the IRA owner passed away before the RBD.

Your RMD is calculated using a “life expectancy” factor taken from IRS life expectancy tables. Non-spouse beneficiaries use the Single Life Expectancy Table, found in IRS Publication 590. If you are one of a group of beneficiaries, your RMD may be calculated using the life expectancy factor of the oldest beneficiary of the group.

If you withdraw less than the required minimum distribution, you will be subject to a federal penalty, which is an excise tax equal to 50% of the amount you should have withdrawn. This penalty is in addition to paying ordinary income tax on the amount you should have withdrawn.

Therefore you should keep a paper trail of all of your RMD distributions. Also keep a copy of any notice your brokerage firm sends you about the RMD for this year. This paper trail will be extremely helpful if you are audited or if you determine in the future that you did not withdraw enough money this year to satisfy the RMD requirement.

If you need any help calculating the RMD or have questions about how you can reduce your tax on the RMD, please call Gregory J. Spadea of Spadea & Associates, LLC at 610-521-0604, located in Ridley Park, Pennsylvania.

Filed Under: Tax Law Tagged With: , , , , , , ,

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