Parents Can Get Credit for Sending Kids to Day Camp
Here’s a tax break for the busy summer. Many working parents must arrange for care of their children under 13 years of age during the school vacation period. A popular solution — with a tax benefit — is a day camp program.
The cost of day camp can count as an expense towards the child and dependent care credit. Expenses for overnight camps do not qualify. If your childcare provider is a sitter at your home or a daycare facility outside the home, you'll get some tax benefit if you qualify for the credit.
The credit is generally 20% to 35% of non-reimbursed expenses; up to $3000 in expenses for one child and up to $6000 for two or more children. The actual credit is also based on your income. The 35% rate applies if your income is under $15,000; the 20% rate, if your income is over $43,000.
For more information, check out IRS Publication 503, Child and Dependent Care Expenses available on the IRS Web site, IRS.gov or by calling 800-TAX-FORM (800-829-3676).
Monday, July 14, 2008
Wednesday, July 2, 2008
Working Abroad, Paying Uncle Sam
Question:
I'm an American living in Poland (beautiful country!) where I work for a Polish import-export company. Do I have to pay income taxes on my earnings?
Answer:
I'm sorry to give you such an indefinite answer, but my response has to be, "It depends." The rule is that a U.S. citizen or permanent resident is generally subject to U.S. tax on total worldwide income. However, if you are a citizen or resident alien who lives and works abroad, you might qualify to exclude all or part of your foreign earned income. If you are a United States citizen with a tax home in a foreign country and you meet the bona fide residence test or physical presence test, you may exclude up to the maximum limit allowed for the taxable year. Resident aliens of the United States with a tax home in a foreign country may be eligible for the exclusion if they meet the physical presence test.
The physical presence test can be used by any United States citizen or resident alien. You must be physically present in a foreign country or countries for at least 330 full days during any period of 12 consecutive months. The 12–month period can begin with any day of any calendar month.
If you violate U.S. restrictions that prohibit travel to certain countries, you will not be able to count your presence or residence in those countries in meeting the bona fide residence test or the physical presence test.
Confused? Be sure to consult a professional tax consultant.
I'm an American living in Poland (beautiful country!) where I work for a Polish import-export company. Do I have to pay income taxes on my earnings?
Answer:
I'm sorry to give you such an indefinite answer, but my response has to be, "It depends." The rule is that a U.S. citizen or permanent resident is generally subject to U.S. tax on total worldwide income. However, if you are a citizen or resident alien who lives and works abroad, you might qualify to exclude all or part of your foreign earned income. If you are a United States citizen with a tax home in a foreign country and you meet the bona fide residence test or physical presence test, you may exclude up to the maximum limit allowed for the taxable year. Resident aliens of the United States with a tax home in a foreign country may be eligible for the exclusion if they meet the physical presence test.
The physical presence test can be used by any United States citizen or resident alien. You must be physically present in a foreign country or countries for at least 330 full days during any period of 12 consecutive months. The 12–month period can begin with any day of any calendar month.
If you violate U.S. restrictions that prohibit travel to certain countries, you will not be able to count your presence or residence in those countries in meeting the bona fide residence test or the physical presence test.
Confused? Be sure to consult a professional tax consultant.
Who's Responsible for Payroll Taxes Now?
Question: I was the secretary of a masonry company that defaulted on its payroll taxes. First, they didn't file, and when they finally got around to filing, they took forever in paying the payroll taxes. Last year, the company (a corporation) dissolved. Here's the problem: I just got a letter from the IRS saying that I'm responsible for $50,000 worth of payroll taxes through a Civil Trust Fund Penalty. How am I responsible?
Answer:
I'm sorry to hear about your situation. You were a secretary at the office, and I suspect that you had check-writing powers in your office. Even having check-writing authority might be enough to make you liable for the unpaid employment taxes.
The thing that makes a Civil Trust Fund Penalty so onerous is that it can be assessed not just against a company that fails to pay employment taxes, but also against individuals at the company. Anyone at the company who collects or pays withheld income and employment taxes can be liable if that person willfully fails to collect or pay them. That means a company officer, an employee with withholding authority, even individuals with authority to disburse funds.
In other words, if you have check signing authority, even if you were just a secretary, you can be as liable as the president of the company. If you don't pay or appeal in a timely fashion, the IRS can and will impose liens and levies against you in an effort to collect.
Answer:
I'm sorry to hear about your situation. You were a secretary at the office, and I suspect that you had check-writing powers in your office. Even having check-writing authority might be enough to make you liable for the unpaid employment taxes.
The thing that makes a Civil Trust Fund Penalty so onerous is that it can be assessed not just against a company that fails to pay employment taxes, but also against individuals at the company. Anyone at the company who collects or pays withheld income and employment taxes can be liable if that person willfully fails to collect or pay them. That means a company officer, an employee with withholding authority, even individuals with authority to disburse funds.
In other words, if you have check signing authority, even if you were just a secretary, you can be as liable as the president of the company. If you don't pay or appeal in a timely fashion, the IRS can and will impose liens and levies against you in an effort to collect.
The Civil Trust Fund Penalty
Every company with employees is required to withhold a portion of the employee's paycheck and to forward it to the IRS. The withheld portion is called employment or trust fund tax -- it's money withheld for income tax, social secuirty, and Medicare taxes which is held "in trust" by the employer until it's paid to the Treasury.
What happens when the company fails to withhold, account for or deposit the employment taxes? The IRS introduces a nightmare called the Civil Trust Fund Penalty. Also known as the 100 percent penalty or trust fund recovery penalty, the Civil Trust Fund Penalty is a mechanism which allows the IRS to impose penalties on the delayed payment.
What makes the Civil Trust Fund Penalty so onerous is that it can be assessed not only to the company, but to individual officers and employees of the company responsible for handling employment taxes. If you have employment tax issues, consult a professional as soon as possible.
What happens when the company fails to withhold, account for or deposit the employment taxes? The IRS introduces a nightmare called the Civil Trust Fund Penalty. Also known as the 100 percent penalty or trust fund recovery penalty, the Civil Trust Fund Penalty is a mechanism which allows the IRS to impose penalties on the delayed payment.
What makes the Civil Trust Fund Penalty so onerous is that it can be assessed not only to the company, but to individual officers and employees of the company responsible for handling employment taxes. If you have employment tax issues, consult a professional as soon as possible.
Tuesday, July 1, 2008
Bankruptcy and the Collections Statute of Limitations
Question:
I have a federal tax from 2004 ($15,000). In 2005, I declared Chapter 7 bankruptcy. Unfortunately, my federal tax debt wasn't discharged, and after I spent a year in bankruptcy, I came out and the IRS was first to ask for their money. How long does the IRS have to collect on my tax debt?
Answer:
It's a great question. As I indicated in another post, bankruptcy might seem like an attractive option for taxpayers, but it rarely solves the problem. Recent bankruptcy laws have made discharge of tax debt near impossible to achieve. What I've seen happen again and again is this: A taxpayer has a tax debt (along with other debt), and he asks an attorney for advice. The attorney means well and tells the taxpayer that his tax debt can be discharged. The taxpayer files Chapter 7 or Chapter 13 bankruptcy and learns -- too late -- that the tax debt doesn't qualify for discharge.
What happens then? The taxpayer comes out of bankruptcy, and the IRS is standing there with an empty plate, asking for money owed.
Your question goes to how long the IRS has to collect on that tax debt. The Internal Revenue Code is clear on this point: The IRS has 10 years from date of assessment to collect an outstanding tax debt. At the end of the 10 year period, the debt simply goes away. The IRS can no longer it.
Unfortunately, bankruptcy has an unfortunate effect on the collection statute of limitations. When a taxpayer files bankruptcy, the IRS just adds the time spent in bankruptcy PLUS SIX MONTHS to the collection statute of limitations. In other words, if your tax debt isn't discharged in bankruptcy, you've just given the IRS at least an extra six months to collect from you.
I have a federal tax from 2004 ($15,000). In 2005, I declared Chapter 7 bankruptcy. Unfortunately, my federal tax debt wasn't discharged, and after I spent a year in bankruptcy, I came out and the IRS was first to ask for their money. How long does the IRS have to collect on my tax debt?
Answer:
It's a great question. As I indicated in another post, bankruptcy might seem like an attractive option for taxpayers, but it rarely solves the problem. Recent bankruptcy laws have made discharge of tax debt near impossible to achieve. What I've seen happen again and again is this: A taxpayer has a tax debt (along with other debt), and he asks an attorney for advice. The attorney means well and tells the taxpayer that his tax debt can be discharged. The taxpayer files Chapter 7 or Chapter 13 bankruptcy and learns -- too late -- that the tax debt doesn't qualify for discharge.
What happens then? The taxpayer comes out of bankruptcy, and the IRS is standing there with an empty plate, asking for money owed.
Your question goes to how long the IRS has to collect on that tax debt. The Internal Revenue Code is clear on this point: The IRS has 10 years from date of assessment to collect an outstanding tax debt. At the end of the 10 year period, the debt simply goes away. The IRS can no longer it.
Unfortunately, bankruptcy has an unfortunate effect on the collection statute of limitations. When a taxpayer files bankruptcy, the IRS just adds the time spent in bankruptcy PLUS SIX MONTHS to the collection statute of limitations. In other words, if your tax debt isn't discharged in bankruptcy, you've just given the IRS at least an extra six months to collect from you.
Monday, June 30, 2008
Bankruptcy Isn't What It's Cracked Up to Be
Is it worth declaring bankruptcy to avoid a burdensome tax debt? For better or worse, the answer is: Probably not. In almost all cases, tax debt survives a Chapter 7 or Chapter 13 bankruptcy.
First a word about taxes and bankruptcy in general: Some tax debt can never be discharged through bankruptcy. Tax debt arising from unfiled tax returns cannot be discharged. So, for example, if you fail to file your 2005 return, and the IRS files a substitute for return on your behalf, any assessed taxes from 2005 cannot be discharged. The only way to avoid this situation is to file your return (even if you are filing over the SFR).
So is there any tax debt that can be discharged by bankruptcy? The general answer is yes. Chapter 7 provides for full discharge of allowable debt, and Chapter 13 provides a payment plan to repay some debts with the rest being discharged. That being said, tax debt will not be discharged unless the tax payer can demonstrate that they have met certain requirements. The requirements are these:
First a word about taxes and bankruptcy in general: Some tax debt can never be discharged through bankruptcy. Tax debt arising from unfiled tax returns cannot be discharged. So, for example, if you fail to file your 2005 return, and the IRS files a substitute for return on your behalf, any assessed taxes from 2005 cannot be discharged. The only way to avoid this situation is to file your return (even if you are filing over the SFR).
So is there any tax debt that can be discharged by bankruptcy? The general answer is yes. Chapter 7 provides for full discharge of allowable debt, and Chapter 13 provides a payment plan to repay some debts with the rest being discharged. That being said, tax debt will not be discharged unless the tax payer can demonstrate that they have met certain requirements. The requirements are these:
- The tax debt must be related to a tax return that was due at least three years before the tax payer files bankruptcy
- The tax debt must be related to a tax return that was filed at least two years before the tax payer files for bankruptcy
- The IRS must assess the tax at least 240 days before the tax payer files for bankruptcy
- The tax return cannot be returned for fraud
- The tax pay cannot be guilty of any intentional act of evading the tax laws
What are the effects of filing bankruptcy? Be warned -- it's been my experience that most people who file bankruptcy either cannot meet the requirements listed above (and so do not have their tax debts discharged) or just fail to complete the bankruptcy process . Instead of having their debts discharged, their bankruptcy is merely dismissed, and the tax payer is back to Square One.
It's true that filing for bankruptcy puts an automatic stay on IRS collection efforts against you. During bankruptcy, the IRS is prohibited from imposing a lien or levy. That's the good news. The bad news is that bankruptcy extends the Collections statute of limitations. That means if some of your tax debt survives bankruptcy, the IRS now has additional time to collect it.
If you're considering bankruptcy as a means to avoid tax debt, consult a professional before you do anything.
Friday, June 27, 2008
I Didn't File, but I Got Assessed Anyway -- Why?
From time to time even the best-intentioned tax payer can neglect to file an income tax return. When that happens, the IRS will often file a return on that tax payer's behalf -- it's called a Substitute for Return (SFR). And it's no favor.
Let's look at an example. Suppose Joe Smith failed to file his 2005 tax return. What happens? Typically, the IRS will file a return on Joe's behalf within 2.5 years (courtesy the Automated Substitute for Return System). The IRS calculates Joe's taxes by assessing his gross income for 2005, without regard to any specific deductions or exemptions for which he might qualify. The result is that Joe is assessed a tax much higher than he might have had if he prepared and filed the tax himself. Joe won't know about this until he receives a demand letter from the IRS.
The best solution, of course, is for a tax payer to prepare and file tax returns in a timely manner. But even where the IRS has filed a SFR, it's in the tax payer's best interest to file. By papering the SFR, a tax payer can take full advantage of the deductions and exemptions to which he is entitled, even if he's filing his return long after the return was actually due.
If you've received an assessment for a year you haven't filed, there's still time to make things right. Consult a tax professional and paper over the SFR.
Let's look at an example. Suppose Joe Smith failed to file his 2005 tax return. What happens? Typically, the IRS will file a return on Joe's behalf within 2.5 years (courtesy the Automated Substitute for Return System). The IRS calculates Joe's taxes by assessing his gross income for 2005, without regard to any specific deductions or exemptions for which he might qualify. The result is that Joe is assessed a tax much higher than he might have had if he prepared and filed the tax himself. Joe won't know about this until he receives a demand letter from the IRS.
The best solution, of course, is for a tax payer to prepare and file tax returns in a timely manner. But even where the IRS has filed a SFR, it's in the tax payer's best interest to file. By papering the SFR, a tax payer can take full advantage of the deductions and exemptions to which he is entitled, even if he's filing his return long after the return was actually due.
If you've received an assessment for a year you haven't filed, there's still time to make things right. Consult a tax professional and paper over the SFR.
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