Northern California Bankruptcy Lawyer

On The Bankruptcy Soapbox

The Soap Box

Bail Yourself Out Of Payroll Tax Trouble

By

parachute-851318_640 (1)

Business owners with unpaid payroll taxes are in deep trouble.

There’s no corporate shield when it comes to payroll taxes. Even if the employer is a corporation, the corporation’s managers are personally liable for the trust fund portion of unpaid payroll taxes.

The trust fund portion of the tax (the amount withheld from employees’ checks) can be assessed against anyone  who could have paid that money  to the IRS.

You are in the IRS’s cross hairs, personally, if the business hands out “net” checks to employees with sending the withheld money in.  A bankruptcy discharge is no help here. [Read more…]

Free Tax Preparation Offered In Bay Area

By

Households with an annual income of $54,000 or less can have their tax returns prepared for free through the United Way’s Earn It, Keep It, Save It program.

Too many Californians – far too many here in the Bay Area – work hard yet find themselves unable to meet their most basic needs. Furthermore, tax season can be stressful time for many people, as they round up tax documents and receipts, and make sense of confusing tax forms. Those of us who can afford it may pay for tax software that walks us through the process, or we may pay a tax preparer to file on our behalf. But the cost for paid preparers can be costly, and tax software varies widely in price. For low-income families who may not be able to afford these services, tax time can be a significant source of stress, and securing a full refund is not assured. Additionally, many of these families face additional challenges in doing their own taxes –English may not be their primary language or they may have limited computer skills. This is why EKS is so important in our community.

Find a location near you.

Interactive map

Print list of locations

Earned Income Tax Credit

The Earn It, Keep It, Save It campaign is particularly focused on enabling qualifying individuals and families to access this tax credit that stands to put real money in the pockets of working families.

Too many families miss claiming the EITC.  Something like 20% of the families that are eligible fail to take advantage of this support for low and moderate income folks.

Even if you owe no taxes, you can claim the tax credit and receive a check.

Generally, the lower your income and the more children you have, the larger the payment you’re entitled to.

California puts money in pockets, too

California has a state version of the Earned Income Tax Credit.  The California rules are set out in this fact sheet from the Franchise Tax Board.

Last Minute Tax Break For Distressed Homeowners

By

tax break

 

Days before the end of the tax year, the massive tax bill changed the rules retroactively.  And for once, the change benefited individual taxpayers.

The tax bill revived, for tax year 2017, the exclusion from income accorded to phantom income upon foreclosure, short sale, or loan modification.

The provision that created an exception protecting struggling homeowners from a tax hit for debt canceled upon foreclosure of their principal residence. It expired with tax year 2016.

So, for instance, if you got a loan modification in 2017  that reduced the principal on your home loan, that reduction was once again going to be treated as income, and subject to tax.

But Congress restored for one more year the qualified principal residence indebtedness exclusion.  (That’s a mouthful).

The details are beyond me.  NCLC reported the change here.   Kenneth Harney of the WashingtonPost talked about the exclusion in the middle of his look at real estate and tax issues.

A Google search for the IRS publication on cancellation of debt tax issues seems to be wrong, now that the tax bill is law.  It treats canceled mortgage debt as if the exclusion wasn’t available in 2017.

Confusion seems to be inevitable.

 

 

IRS Shakedown Happening In Bankruptcy Court

By

The latest IRS scam is happening in bankruptcy, out in the open.

Now usually when I write about IRS scams, I’m talking about genuine bad guys either pretending to be the IRS to hijack your money or pretending to be you to the IRS, to hijack your money.

But nobody is pretending in the trick I first saw last week.  The IRS is simply trying to collect the Affordable Care Act penalty twice.

What the IRS did

My client filed Chapter 13, owing income taxes.  The most recent of those taxes must be paid in full to get a Chapter 13 discharge.  So, the amount that must be paid is critical to the success of the plan.

The IRS filed a proof of claim for the unpaid income taxes.

But then, weeks later, the IRS amended their claim to add an “excise tax”, for the penalty under the Affordable Care Act, for not having health insurance.

The IRS conveniently “overlooked” the fact that the filed tax return already included the penalty on line 61 of the 1040.

So, they wanted to get paid twice by putting a benign label, “excise tax”, on the form, and hoping that you didn’t dig deeper.

No right to double payment

The tax law for the years in question, 2015 and 2016, imposed a penalty for not having insurance, to be collected by the IRS.

The IRS form includes a line where you add the penalty to your taxes if you didn’t have appropriate insurance.  So when my client filed his return, he’d already added the penalty to what he owed.

And the IRS dutifully used his return to claim payment for the unpaid amount.

OK.

But it’s not OK to double dip and add a duplicate penalty with another name.

When I challenged the IRS agent who filed the claim, his response suggests that he’d not looked at the client’s tax return;  he’d just added the penalty to the claim by rote.

Conversations with fellow bankruptcy specialist William Brownstein suggests the IRS confusion runs more broadly on this issue.  He reports the IRS assessing non-bankrupt tax payers with penalties for not including form 1095-B with their returns, even though the form itself says “don’t file with your return”.

So, the first step is to eliminate the duplicate claim.

But there’s more.

Is the ACA penalty entitled to priority payment

Recent taxes are given a priority for payment under the Bankruptcy Code.  If the ACA penalty is a “tax” within the meaning of the Bankruptcy Code, it must be paid in full in Chapter 13.

But, is this exaction a tax?

A Louisiana bankruptcy court recently said no in a case called Chesteen.  It’s not a tax, it’s a penalty.  And as a penalty, it isn’t entitled to payment in full, and as a penalty, it is dischargeable at the completion of the plan.  Great work by NACBA member Rachel Thyre Anderson, who reports that the decision has been appealed.

Where do we stand on ACA penalty

While the issue of whether the penalty is a tax or not may not yet be settled by the Chesteen decision, it is clear that the IRS, at best, only gets to collect the penalty once.

If the penalty is properly included on the tax return as filed, then any additional “excise tax” that claims priority status should be challenged.

Taxes: Building Block of Financial Literacy

By

financial literacy building blocks
You’re a first time employee.  Congratulations.

Welcome to the world of tax forms, withholding, and tax deadlines.  

Taxes are the price we pay for civilization, according to Oliver Wendell Holmes.

In fact, the first day on your new job you’ll be presented with an IRS form w-4. It’s like a rite of passage into adulthood.

Even families that talk openly about money don’t often discuss the arcane details of the W-4.

My sons certainly hadn’t prepared their own returns when they left home. They were daunted by the 207 pages of instructions for the IRS 1040, the standard income tax form.

So here, in more than 140 characters, and less than 207 pages, is my guide to income taxes for the beginning taxpayer.

You pay a portion of your income for taxes

Wages, commissions, interest paid to you on your money, and gain on the sale of assets are all forms of income.

The starting proposition is that income is taxable.

Gifts and loans are not income. Gifts might be taxable to the person who gave you the money, but not to you, if you’re lucky enough to be the recipient of the gift.

Not all  income is taxable

You get to deduct from your gross income certain exemptions and deductions.

The balance after subtracting those amounts is your taxable income.

That creates the appeal of “write offs” and “deductions”.  Those items reduce the total on which you figure your tax.

As income increases so do taxes

The range of income subject to a given tax rate is a “bracket”,

Each successive bracket applies a higher rate to the income that falls in that bracket.

There were 7 tax brackets for 2017.

Here are the brackets for a single taxpayer.

  • Up to $9,325: 10%
  • $9,326 to $37,950: 15%
  • $37,951 to $91,900: 25%
  • $91,900 to $191,650: 28%
  • $191,650 to $416,7004: 33%
  • $416,700 to $418,400 : 35%
  • $418,400 or more: 39.6%

If you are lucky enough to have more than $418,400 in annual taxable income, you don’t pay 39,6% on all of that income.

Each tier of your income is taxed at the rate for that tier, or bracket.

So, your first $9,325  in taxable income triggers a tax at 10% , or $932

If you actually had a total of $25,000 in taxable income, you pay tax of 15% on all the income over the $9,325.  You would have $16,075 of taxable income subject to the 15% rate, for a tax of $2411 on the excess over the first tax bracket.

Your total tax on $25,000 in taxable income would be $3343 ($932 + $2411).

Understand the marginal tax rate

We often speak of our marginal tax rate. That’s the percentage of the last dollar you make that’s owed as tax.

Looking at the tax table, a single tax payer who had $37,950  in taxable income was in the 15% bracket.  If he had earned one dollar more, tipping into the next bracket, he’d pay a tax of 25% on that extra dollar that falls in the higher bracket.

His marginal rate is 25%.  That doesn’t mean he pays 25%  of his income in tax.

He pays the higher rate on just the income that exceeds the top of the lower tax bracket.

Effective tax rate vs. marginal rate

Our fictional single tax payer with taxable income of $36,251 had a marginal tax rate of 25%.  That tells you how much of any increase in taxable income he’ll get to keep.

His effective tax rate is the percentage of his total income that is paid in tax.  That’s a far lower percentage.

It’s lower because there are adjustments “above the line” that reduce the income on which you pay tax, and then there are deductions and exemptions that further reduce the amount of income that is subject to tax.

Our examples here look at the taxable income so we could understand tax brackets and tax rates.

Tax withholding

Tax law requires that we pay this year’s taxes in advance, even though the final tax return for this tax year isn’t due til next spring.

Employers are required to withhold your estimated taxes from your paycheck.  You, however, get to tell them how much tax you expect to owe.

Whoa! How can you know how much you’ll owe next spring if you’re a new taxpayer.  Don’t worry, there’s a form for that.

IRS form w-4 includes a worksheet where you calculate how many tax allowances match your situation. It’s 8 lines and produces an approximation of what you’ll owe.

Your employer uses the number of allowances you claim to figure how much tax to withhold from each check.

The approximating your taxes is tricky:  withhold too little, and you pay a penalty with your return for having paid too little in advance:  withhold too much, and you get a refund with your return, for having made an interest free loan to the feds.

You can change your w-4 if your circumstances change during the year or you get a better estimate on what you are likely to owe.

Taxes for the do-it-yourselfer

If you are new to the tax paying world, your financial life is probably fairly simple. Take the time to learn how to prepare your own tax returns while things aren’t too complicated.

There is free tax software available through the IRS, as well as the commercial tax software.  My experience is that the big tax preparation services don’t always do a good job.  You’ll probably get a  better product and save some money preparing your own return.

Another time, we’ll look at exemptions and deductions and other tax mysteries.

Tax Refund & Bankruptcy

By

The prospect of a tax refund makes most of us light up  even when we haven’t even calculated what the refund might be.

But if you’re thinking of filing bankruptcy before you actually see Uncle Sam’s check, take a minute to plan.

Your right to that refund is property of your bankruptcy estate even if you haven’t filed the return. 

The right to a refund exists as of the end of the tax year.

And unless you have an exemption available to protect the refund, you could end up having to sign the check over to a Chapter 7 trustee.

California’s bankruptcy exemptions can protect $28,000 in any kind of property.

I’m seldom an advocate for spending, but here I go:  collect the refund and spend it before you file.

Tax refund is just money

Once you receive your refund and deposit it, it no longer has any special character in bankruptcy.  It’s just cash. [Read more…]

Long Term Tax Savings When You File Bankruptcy Rather Than Settle Debts

By

tax biteSettle your debts outside of bankruptcy and you may be bitten by taxes you didn’t expect years later.

Everyone I talk to would rather cut a deal with their creditors than file bankruptcy.  It’s universal.

But here’s the killer reason why bankruptcy alone protects homeowners from a unexpected  tax consequence down the road.

Debt forgiven outside of bankruptcy gets deducted from the basis of your home.   Result:  more potentially taxable capital gains on sale.

It works like this.

Tax treatment of cancelled debt

Debt forgiven in bankruptcy or while insolvent gets an exception from the standard tax rule that cancelled debt is taxable as income.  IRC 108.

But that tax benefit comes with a delayed cost.  The amount of the debt forgiven is deducted from the basis of your assets.

So if the tax basis in your home was $200,000 and the debt that was discharged or settled was $200,000, you end up with a house with zero basis.

Sell that house and every dollar you receive is capital gain.  Ouch!

Special tax rule for homes in bankruptcy

But wait! Wait!  There’s an exception to the reduction of basis rule that shields your principal residence from reduction in basis.  But that exemption applies only if  your debt was cancelled in bankruptcy and you claimed your home as exempt.

So, the basis in your home is not reduced if the debt was forgiven in bankruptcy, rather than an out-of-court settlement, and you claimed an exemption.   IRC 1017(c),

So, when you consider your alternatives for getting yourself out of debt, homeowners need to look beyond this year’s tax return to the point at which they may sell their house.  Every dollar in basis excludes that dollar from being taxed as capital gain.

More

How tax exception for forgiven debt works

The ugly truth about debt settlement

How bankruptcy deals with taxes

The Unexpected Loss When Tax Returns Filed Late

By

length Chapter 13 plan

File your tax returns really late and you may lose out on credit for toward your Social Security.

Betcha didn’t know there was a connection between income taxes and your Social Security benefits.  This was a new one for me.

I’ve written often about the negative consequences of putting off filing tax returns. But Harvard Law professor Keith Fogg pointed out another “gotcha”:

 A self employed tax payer does not get credit for contributing to Social Security  for the four quarters of the tax year if the self tax return if filed more than three years after it was originally due

Ouch!  You owe the tax and even if you pay the tax, it does not count toward your eligibility for Social Security.

So you may come up short, not because you didn’t work, or pay the tax, but because you didn’t file a timely return.

Filing counts

The self employed pay both the employee and the employer’s share of Social Security contributions on their income tax return.

In order to draw Social Security based on age, you need to have contributed to the system for 40 quarters.  To qualify for Social Security disability, you need 32 quarters of contributions.

Defenses & exceptions to the rule from Procedurally Taxing 

If you’re self employed and your  tax returns are filed more than 3 years late, the quarters in that tax year don’t count for either eligibility nor for lifetime contributions.

No refund for the tardy

Your tax refund is another benefit you lose out on when a return is first filed more than three years after it was due.

This rule applies to all taxpayers, not just the self-employed.  No matter the size of the refund you would have otherwise received, miss the three year statute, and you can kiss the refund goodbye.

Tax delinquencies drive bankruptcy filings

I’m a crusader for filing tax returns because most taxes for which a tax return is filed are ultimately dischargeable in bankruptcy.  It’s a myth that you can’t discharge taxes in bankruptcy.

There are timing issues, but the central premise is that only taxes for which an honest return has been filed are dischargeable.

So, for all these reasons, file the return, even if you can’t pay the tax right now.

Keep Your Tax Refund Through Your Bankruptcy

By

5642525578_b521dedaab_bFor most of us, finding out that we are getting a sizable tax refund is great news.

But if you’ve recently filed a Chapter 7 bankruptcy, hold your celebration.

That refund may not be yours.

You have a bankruptcy estate

When you file bankruptcy, all of your assets become a “bankruptcy estate”.  The estate includes your real estate; tangible things like cars and household goods; bank accounts; and legal rights.

Those legal rights might include the right to file a lawsuit;  your share of a class action suit; an interest in the estate of someone who has died; or your right to get back money you overpaid in taxes.

It’s not possession of the asset on the day your bankruptcy case that counts.  It’s whether the facts that entitle you to money have taken place.

So the refund is part of the estate even if you don’t receive it for months after your bankruptcy case is filed.

Tax refunds for closed tax years

If the tax year has ended when you file a bankruptcy case, any refund that follows from filing the tax return is property of the bankruptcy estate.

You may be able to claim an exemption in the refund.  An exemption removes the exempt asset from the estate and thus from the control of the bankruptcy trustee.

You get to keep your exempt assets. [Read more…]

Cut Tax Liens Down to Size

By

Tax liens are no match for Chapter 13 when it comes to cutting the lien down to its real value.

On paper, a tax lien can quickly become huge.

In bankruptcy however, a lien is no bigger than the value of the assets it attaches to.

While in Chapter 7, liens pass through bankruptcy without change, in Chapter 13, liens are valued, then dealt with under the Chapter 13 plan.

The secured portion of the lien, that part of the lien for which there is collateral, is paid through the plan.  The unsecured portion is treated according to the standard rule for taxes.

Any unsecured portion of the lien that is a priority tax is paid according to its priority.  If the tax year for the unsecured portion of the lien is not priority, it’s paid (or not paid) just like any other general unsecured claim.

Understanding tax liens

Tax liens attach to all the assets  the taxpayer owns when the lien is filed, and to all assets acquired while the underlying tax is collectible.

Exemptions, either in bankruptcy, or under state law, don’t save assets from a tax lien.  The lien trumps the exemption.

The recorded lien reflects that amounts due on the tax years in question at the time the lien was recorded.  The actual amount due for the liened tax year depends on how much interest runs after recordation and whether payments are made to reduce the tax due.

Tax liens remain valid only as long as the tax that they secure remains collectible.  Taxes aren’t forever:  they can be discharged in bankruptcy or they can die of old age by reaching the IRS 10 year statute of limitations.

Valuing a tax lien

So, how does Chapter 13 treat tax liens? [Read more…]

643 Bair Island Road
Suite 403
Redwood City, CA 94063
Phone: (650) 694-4700

Categories