Tax Court Hammers Home the Need to Document Your Mortgage Interest Expense

 An individual who wishes to claim a home mortgage interest deduction has to be able to document his equitable ownership interest in the property, a U.S. Tax Court ruled earlier this year. The opinion, which was handed down in Dolorosa Luciano-Salas, Petitioner v. Commissioner Of Internal Revenue, Respondent appears to provide some useful guidance when it comes to claiming a mortgage interest and other deductions.

The Taxpayer’s Disputed Deductions

On her 2008 federal income tax return, California resident Luciano-Salas claimed a deduction for $24,144 of home mortgage interest on Schedule A, Itemized Deductions; and she also took a deduction for a rental real estate loss of $25,000 on Schedule E, Supplemental Income and Loss. 

But the IRS disallowed $24,144 of the $25,717 deduction for mortgage interest that she claimed on Schedule A, as well as the $25,000 deduction (rental real estate loss) that she claimed on Schedule E. The IRS said Luciano-Salas had failed to show that the duplex was used as a rental property or that she was otherwise entitled to the disallowed deductions. 

When is Interest Expense Deductible? 

Although personal interest expense cannot generally be deducted by an individual taxpayer, the tax code generally does allow a deduction for interest paid on a mortgage that is secured by a qualified residence. The mortgage, however, “must be the obligation of the taxpayer claiming the deduction, not the obligation of another,” although there is an exception if the individual paying the mortgage is the “legal or equitable owner,” even if he or she is not directly liable upon the bond or note secured by such mortgage, according to the Tax Court. 

There was no dispute that, at the time of her tax filing, Luciano-Salas lived in a Van Nuys duplex that had been purchased by her sister, who bought the property with a first and second mortgage. The sister later obtained a third-mortgage loan that was secured by a recorded “short form deed of trust” granting the lender a security interest in the duplex and the power to sell the property. 

Can You Legitimately Claim an Ownership Interest? 

Despite this, Luciano-Salas said that she was the true owner of the duplex—and was eligible to take the interest deduction and the loss on rental activity. Luciano-Salas said that her sister, who allegedly lived with her husband in Arizona, owned the property “in name only.” Luciano-Salas also said that her own credit rating was poor, so her sister agreed to help her out by acting as the purchaser of the property. 

There was a hitch, however. Luciano-Salas did not present a written agreement memorializing the supposed arrangement. Additionally, she was unable to present a reasonable paper trail showing that she, and not her sister, had made the mortgage payments. Adding to the confusion, she was unable to document the use of the duplex as a rental property. To top it off, in 2009 when Luciano-Salas’ sister declared bankruptcy, all the documents filed in connection with the matter indicated that she, not Luciano-Salas, was the legal and equitable owner of the duplex, according to Tax Court records. 

The Ruling 

“There is no objective evidence, however, that Ms. Hileman [the sister of Luciano-Salas], the legal owner of the duplex, entered into an agreement vesting petitioner with any ownership interest in the property. There is no evidence that petitioner had any duty or obligation to maintain or insure the property or that she was responsible for real estate taxes,” noted the Tax Court. “We have disallowed a deduction for mortgage interest where the taxpayer is unable to establish legal, equitable, or beneficial ownership of mortgaged property.”

 

Our recommendation: to reduce the likelihood of trouble, maintain adequate documentation for income and expense positions, and consult with your accountant.

Don’t Get Mixed Up Over Mixed-Wage Overtime

 

In a bid to stay profitable, many businesses are operating with a lean staff. But even with fewer employees, work still needs to get done in a timely manner, so it’s no surprise that some companies are increasingly asking employees to put in more hours. Calculating overtime pay for non-exempt, or hourly workers—who must generally be paid 1.5 times their base hourly pay once they work more than 40 hours in a week—is pretty simple.

An employee may do different tasks at different hourly rates

But what happens if an employee has two or more job titles at the same business, and receives a different base hourly pay for each job? Then things get a little more complicated, but it’s not too tough to determine the wages that are due.

Basically, the employer determines a “blended” overtime rate by using the “weighted averaged” method. The first step is to determine the total gross wages due on a straight-time basis (hours worked at job title “A” times hourly rate, plus hours worked at job title “B” times the “B” hourly rate, and so on). Then take that gross total and divide it by the total number of hours worked to obtain the “regular” blended hourly wage.

Now take that blended “regular” hourly wage and divide it in half to determine the additional “premium” (half-time) rate that’s due to the employee. Finally, add that “premium” rate to the “regular” blended rate, and multiply that by the number of hours worked in excess of 40 hours. Voila, you have the blended overtime premium that’s owed to the employee.

An example

Here’s an example. Let’s assume that William works as an hourly draftsman at $22.00 an hour; but is so talented that he also spends part of each week developing his employer’s Web site, for which he gets $39.00 an hour. Let’s further assume that in a single week, William works for 30 hours as a draftsman, but puts in another 15 hours developing the company’s Web site.

So in this week, William put in a total of 45 hours. He earned $660 (30 hours x $22.00 an hour) for his draftsman’s work, and $585 (15 hours x $39.00 an hour) for his Web development work. We would calculate William’s overtime rate as follows:

30 hours x $22.00 per hour = $660

15 hours x $39.00 per hour = $585

Total gross = $1,245

That total straight-time gross ($1,245.00) is then divided by the total hours worked (45) to calculate the “regular” (straight-time) blended hourly wage, which is equal to $27.67 per hour. Of course, William is still due the additional premium pay (half-time) for the five overtime hours he worked. So the average “blended” straight time hourly rate ($27.67) is divided in half, yielding a half-time rate of $13.83 (rounded to the nearest tenth) per hour.

The 5 overtime hours are multiplied by the “blended” overtime premium of $13.83, to yield a total “premium pay” of $69.17 (if you do the multiplication, the difference is due to rounding), which is added to the original gross amount of $1,245.00, giving us the new gross amount of $1,314.17, which is the amount that must be paid to William for the week.

Both the state and US Department of Labor are paying more attention to wage-and-hour calculations, and an increasing number of wage and hour lawsuits are being filed. To stay on the safe side, be sure to consult with your accounting and/or legal advisor if you have any employee classification, overtime or other questions.

Avoiding a Marriage Commitment? Pay NJ Estate Taxes Instead

People say that love conquers all, but a decision by the New Jersey Tax Court indicates that doesn’t always hold true.

The issue

In a ruling that’s sure to upset some cohabitating couples, the court earlier this year ruled that, for state tax purposes, the estate of a wealthy Alpine woman could not take a marital deduction for a multimillion-dollar payout to her longtime live-in companion—even though the deduction was permitted for federal purposes. The case presents a clear example of how state tax law does not always follow federal tax law, even though NJ tax positions are, for the most part, based on Federal ones.

Here’s the detail on the background

The decedent Lillian Garis Booth died testate on November 22, 2007 at age 92, leaving an estate worth some $200 million. Although fellow New Jersey resident Misha (Michael) Dabich and Booth cohabited together for approximately 51 years, he was not named as a beneficiary in her will. About two years later, however, the Estate reached a $9.9 million settlement with Dabich.

Trouble began brewing, however, when the Estate filed an amended NJ IT–Estate and a second amended IT–R in March 2010, seeking, among other changes, a net refund of previously paid taxes totaling $1.5 million. The amended items reflected, among other things, a deduction for the $9.9 million paid to Dabich, under the theory that their lengthy cohabitation period constituted a “common-law” marriage.

In April 2011, the NJ Dept. of Taxation issued a Notice of Assessment based on the amended IT–Estate. Among other adjustments, the Notice denied the $9.9 million marital deduction. The Court’s reasoning, according to the Notice, was that “[t]he common-law marriage claim of  Dabich is not recognized by” New Jersey, thus, the estate’s claim for marital deduction was being “disallowed for NJ estate tax and inheritance tax” purposes.

The Court added that it was “not bound by the IRS determination to recognize Misha Dabich as a common-law spouse” pursuant to a September 2008 settlement with Dabich and a subsequent 2009 amendment.

In July 2011, the Estate filed a timely administrative protest, maintaining that NJ Dept. of Taxation could not use the Inheritance Tax laws to disallow estate expenses, since the NJ estate tax is the federal “State death tax credit amount;” therefore, expenses allowed by the IRS must be allowed by NJ.

But after another denial, the Estate filed a lawsuit challenging, among other issues, the disallowance of the marital deduction.

In its response, the Tax Court noted that “The burden is upon the executor of an estate to prove facts establishing that “[t]he decedent was survived by a spouse” and “[t]he property interest passed from the decedent to the spouse.” For federal purposes, it reported, the IRS recognized “common-law” marriages “for over 50 years, despite the refusal of some states to give full faith and credit to common-law marriages established in other states” since “uniform nationwide rules are essential for efficient and fair tax administration.” Continue Reading »

Free Linked IN Seminar- Set Up Your Company Page!

Complimentary Seminar for Health Care Practices

Linking to Linked in

Tuesday, October 28, 2014 at 5:30 p.m.

At Provident Bank, 100 Wood Avenue South, Iselin, NJ 08830

LinkedIn is a powerful marketing tool which can bring more patients to your medical practice.

Even if your current website is deficient, LinkedIn can direct visitors via Google to your website!

Your competitors are doing this already! 

TOPICS:

  • Various Goals of LinkedIn –Attract New Patients

  • Setting Up Your Company Page

  • Importance of Your Settings

  • Promoting Your Specialties

  • Communicating With Your Patients

  • Significance of Public Profile

  • Promoting your practice via LinkedIN Groups

     Please RSVP to Pamela at pma@ua-cpas.com or 732-777-1158

Provide for Your Loved Ones with Prudent Estate Planning

The recent, tragic passing of Robin Williams reminds us of just how fleeting life can be. The void in his loved ones’ hearts may never be filled, but the popular entertainer did take steps to care for them financially by engaging in effective estate planning. Among other acts, Williams reportedly created a revocable trust before he died. 

Revocable Trusts

Sometimes known as “living trusts,” a revocable trust refers to a fiduciary arrangement that you (the grantor) create during your lifetime. A living trust can help a grantor manage his or her assets, and protect the individual if he becomes ill, disabled or challenged as he ages.  

During your lifetime, you (the grantor) may transfer property to the “living trust,” which will be administered by a trustee you have selected; and during that time he or she is generally responsible for managing the property as you direct, for your benefit.  

Once you pass away, the trustee is generally obligated to distribute the trust property to your beneficiaries, or to continue to hold it and manage it for the benefit of the beneficiaries.  

How Do Wills and Trusts Differ?

Although both a will and a revocable trust can provide for the distribution of property upon your demise, a revocable trust can also provide you with a way to manage your property during your lifetime. A revocable,

or “living” trust may also enable the trustee to manage the property and use it for your benefit, and your family’s benefit, if you become incapacitated. Of course, the trust must be adequately funded when you are mentally competent to be useful. If the revocable trust is properly funded and structured, it can help avoid the need for a court-appointed guardian, if you become mentally incapacitated.

Most revocable trusts will not help a grantor avoid estate tax, but they may help you avoid probate, which is generally not expensive in New Jersey but may still expose the will to public scrutiny.

Talk To Your Trusted Advisor First

In some circumstances, particularly when a special needs individual is involved, it may be advisable to establish a kind of irrevocable trust called a “Special Needs Trust.” An SNT may enable the grantor to ensure that his or her assets will enhance the lifestyle of the special needs person without impairing his or her ability to receive government benefits. 

There are many issues to consider regarding the establishment of a trust, so before making a decision about setting up either a living trust, a will or another approach, it may be advisable to consult with your account and/or attorney, who can help you to consider the tax and other implications and the costs and benefits.  

Resolve Your NJ Tax Debt, No Penalties!

Businesses and individuals facing unpaid New Jersey tax liabilities may be able to get a break on penalties—although not on interest—according to a recent NJ Division of Taxation announcement. But you have to act quickly. From now until November 17, businesses and individuals with liabilities from tax periods 2005 through 2013 may be able to enter into a “closing agreement” with the Division.

And why should I do this now? Because under this limited-time offer (remember, the clock runs out on November 17) the Division of Taxation will accept—in full and final satisfaction of the outstanding tax liability—an amount that reflects reduced or eliminated penalties, with no charge for collection or recovery fees. Better yet, the tax liability will not be subject to further audit.

Not so good: no refund can be claimed by the taxpayer on this matter. You win some, you lose some.

Here are some more details

• Most penalties can be reduced to zero. But an Amnesty Penalty on taxes due on or after 1/1/2002 and before 2/1/2009 will still apply.

• Interest will not be waived, but it will only be calculated on the tax and reduced penalties (and the penalties may drop to zero, anyway).

• Recovery Fees—a 10% fee on each tax liability that was previously forwarded to the Division’s authorized collection agency—may be waived.

• Also, costs of collection may be eliminated. Normally, if the Division has to collect a tax debt by filing a Certificate of Debt (judgment,) a 10% fee is applied to cover legal and collection costs.

Is there a hitch? Sort of. If you don’t pay the balance due by November 17, 2014 or provide sufficient proof that you or your businesses do not owe it, then any and all penalties, interest, costs of collection, and/or recovery fees will remain due. The state may also pursue further collection activity. You may pay the balance due in one lump sum or you may make several payments to satisfy the amount due. But the full amount must be paid by November 17, 2014 in order to take advantage of the reduced penalties, and eliminated costs of collection, and recovery fees.

For assistance please contact our Tax Manager, Steven Citron. You may also visit the NJ Division of Taxation website for more information at Resolve Your Tax Debt – Fall 2014

Click Here

 

Special Needs Trusts Win Big in NJ Supreme Court

A recent NJ Supreme Court decision could have a major impact on firefighters and police officers who are concerned about providing for their special-needs children.

The Case, Saccone v. Board of Trustees, was filed on behalf of Thomas Saccone, a retired Newark firefighter whose son, Anthony, suffers from a “severe mental disability.” The elder Saccone receives pension payments from the NJ Police & Firemen’s Retirement System (PFRS); and his wife and son are entitled to receive pension death benefits if Saccone predeceases them.

But Anthony receives public assistance, such as Supplemental Security Income and Medicaid, that are subject to income limitations. The survivors’ benefits could put Anthony over the income cap, possibly eliminating his eligibility for public assistance.

Thomas wanted to name a special needs trust (SNT) as the beneficiary of Anthony’s PFRS benefits. The trust funds would supplement Anthony’s needs, but would be shielded from the income test, and he would continue to be eligible for public assistance benefits. The PFRS rules did not permit Thomas Saccone to change the individual he originally named as beneficiary and the retirement fund’s board rejected Thomas’ request to name the SNT as the beneficiary. The NJ Appellate Division upheld the board’s decision.

The Court’s decision:Finally, in mid-September, the NJ Supreme Court ruled that the disabled child of a retired member of the PFRS may have his survivors’ benefits paid into a first-party SNT created for him. The Court cited strong public policy favoring special needs trusts..[1]


[1] As reflected in NJ Statutes 3B:11-36 & 37, which were authored by Lawrence Friedman on behalf of the NJ State Bar Association.

 

The Court’s ruling makes it easier for certain individuals to ensure that their special-needs children continue to receive public assistance with a SNT. But to qualify a special needs trust should be carefully structured by a competent attorney. 

Three amici, among them, the Guardianship Association of NJ (GANJI), argued in support of Saccone.  Urbach & Avraham Partner, Pamela Avraham, has been on the Board of GANJI for many years. We commend the tremendous work of GANJI, and of three GANJI members; Daniel Jurkovic who argued the cause for GANJI, Donald Vanarelli, Saccone’s attorney and Shirley Whitenack who was counsel for amicus Special Needs Alliance.

  

NJ Alimony Reform Bill Signed Into Law by Governor Christie

Major changes are here for those currently going through a divorce. On September 10, 2014 Governor Christie signed the NJ Alimony Reform Bill, bill A845, into law.

What does the new law accomplish?

• For marriages less than 20 years, the length of alimony payments cannot exceed the length of the marriage unless a judge determines that there are “exceptional circumstances”.

• Judges would be able to end alimony payments if the recipient cohabits with a partner, even if they don’t get married.

• Judges would have the authority to modify alimony payments if the payer has been unemployed for more than 90 days.

• The term “permanent alimony” would be replaced with the language “open duration alimony”.

While the new law applies primarily to future divorces, it does allow for a “rebuttable presumption” that alimony payments will end once the ex-spouse making the payments reaches the full retirement age for Social Security.

Jeff Urbach, Partner at Urbach and Avraham, CPAs spearheads our litigation support department which specializes in matrimonial accounting. Jeff and his team of valuation analysts and fraud examiners guide couples and their attorneys through the myriad of financial and tax issues of divorce. Please call our office if you or someone you know is going through a divorce to see how we can assist and what effect the new law could have on your situation.

Free Seminar: Learn What Harms and Helps your Credit Score

Complimentary Seminar at Urbach & Avraham, CPAs

How to Understand and Improve Your Credit Score

Presented by Kevin Kerzner of Credit Distinction LLC

Tuesday, September 30, 2014, 8:15 – 9:30AM

 At Our Office: 1581 Route 27, Suite 201, Edison, NJ

 Learn What Harms and Helps your Credit Score.

Learn Your Rights and the Real World Effect of Your Credit Score

Please RSVP to Pamela at pma@ua-cpas.com or 732-777-1158

 

NJ Employers-Reduce Your Unemployment Tax Rates-August Deadline

Did you check your NJ SUI rates?
In July all New Jersey employers received a Notice of Employer Contribution Rates. This is not a bill, but rather a summary of the manner

in which the NJ Department of Labor calculates your employer contribution rate for unemployment and  disability. This form enables you

to determine whether a voluntary  contribution would save you money in the subsequent year.

Can I reduce the NJ SUI rate?
A voluntary contribution increases the reserve balance and may reduce your contribution rate. Each employer should calculate the amount

of the voluntary contribution required to reduce the rate. The required voluntary payment should be compared to the savings realized from a lower rate.

The unemployment expense is a substantial component of the labor cost of staffing agencies. You should give it careful attention. If you wish to make a

voluntary contribution to your reserve balance you have 30 days from the date of your notice to do so. We recommend that you verify all the NJ DOL

calculations including the amount of the employer contributions and the benefits charged to your account. Report any discrepancies to the NJ Dept. of Labor.

By making a voluntary payment, employers may reduce the NJ SUI rate for the coming year. Please be aware that this payment increases your reserve

balance and helps reduce the NJ SUI rate in future years as well.

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