LET'S GET RELATIVE: DOES OUR GOVERNMENT REALLY HAVE FAMILY VALUES?

by Eva Rosenberg

Published May 19, 1997

Back in February, I asked if anyone was interested in how the 1996 Tax Legislation affects families. The response was swift and gratifying. I was very impressed with the caliber of the Tripod membership that responded. So, due to popular demand, let's get relative!

In the January Families column, we talked about tax savings ideas for the family business. This time out, we'll talk about how the new tax laws, passed in 1996, affect your life in 1997 — and the 1996 tax returns you just filed.

Nasty Note from the IRS (or is it Congress?)

And the bad news is...

No more exemptions. No more credits. No nothing! Not without valid Social Security numbers.

According the Small Business Job Protection Act of 1996, taxpayers have lost the exemption for any dependent whose SSN does not match the name in the Social Security Administration files.

No more Earned Income Credit (EIC) on 1996 and future returns for folks without valid SSNs or those who are not legal residents in the United States. In case you're not aware, the Earned Income credit is a negative tax (money back to you from other U.S. taxpayers) for low-income people. It's yours as long as you're not claimed as someone else's dependent. The credit is up to $323 at earned income of $4,200 - $5,300 if you have no children. But, if you have two children, it's even higher — up to $3,556 at earned income of $8,850 - $11,650.

Incidentally, you cannot get the EIC if you are married and filing separately. (The IRS has caught on to those folks who filed his-and-hers returns as "single" and each took a child as a dependent.)

If you haven't gotten your refund yet, here's why:

The names that you wrote down for your children do not match the name on the SS Card
You've been using a transposed or otherwise distorted SSN for your child for years
The spouse (usually the wife) changed his/her name after marriage and did not report it to the Social Security Administration

Even if you otherwise qualify for the Earned Income Credit, you can lose it if you have $2,200 of disqualified income which now includes:

Interest and Dividends
Tax Exempt Interest (paid or accrued)
Rent and royalty income not earned in a trade or business (e.g. everything on Sched. E)
Net capital Gain
Net passive Income

Do you think Congress has finally gotten wise to the fact that millionaires with paper losses were collecting the EIC?

But there is good news, too...

Being sick of the system is questionable as a disease — and as a deduction.

Loose IRAs

Starting in 1997, for those who are ill (being sick of the system is questionable as a disease), there is a bit of IRA relief. You may now tap into your IRA for funds to cover medical expenses. You'll still pay taxes on the money you draw out, but not the 10% premature withdrawal penalty. (Does this sound like bad sex?)

If you are broke due to downsizing (read as — you are unemployed), you may use the IRA money to pay your medical premiums.

One bit of advice: When auditing, the IRS likes to follow the trail of the money. If they treat these draws the way they do interest expenses, etc., it might be wise to have the bank issue the checks directly to the insurance company or medical providers. Then, there can be no doubt how the money was used.

Why do I say this? Well, the IRS has a habit of looking at the order of deposits and checks. Suppose you deposited $2,000 from your IRA because you wanted to use it all to cover doctors' bills. The first checks you wrote after making the deposit were to your landlord, a grocery store, your phone bill and your auto lender. The IRS has been known to say that you used that $2,000 for personal expenses and not for the purpose you intended — doctor's bills. You may get hit with a penalty.

The Humanitarian Credit — Adoption Expense

Although it passed last year, this is one of the goodies that didn't go into effect until 1/1/97. Taxpayers may take a credit of up to $5,000 ($6,000 for special needs children) per child for approved adoption expenses. If your taxes aren't high enough to absorb the whole credit the first year, the unused portion of the credit may be carried forward for up to 5 years.

You may only take the credit in the year AFTER the expenses are paid or incurred — or in the year the adoption becomes final. For adoptions of foreign children, the credit may only be taken in the year the adoption becomes final. (In other words, no adoption, no credit — even if you spent $10,000 for nothing.)

You start losing tax credits as your adjusted gross income increases.

The credit is per child, not per year. When an unmarried couple adopts a child, each person does not get a credit of up to $5,000 — they split the credit. You start losing the credit as your AGI (adjusted gross income) increases from $75,000 to $115,000.

The credit isn't available if you adopt your spouse's child. So, if you are contemplating marriage to someone who has a child, adopt the child BEFORE the wedding.

Another option is an adoption exclusion. Your employer could pay the $5,000 ($6,000 if the child is disabled) on your behalf under a non-discriminatory adoption assistance plan. Or it could be offered to you as part of a cafeteria plan — you pay it, but with untaxed dollars, just like the medical, insurance, or educational expenses.

The only costs that count are expenses related to legally permissible adoptions. They include construction, renovations, and alterations required by the State in order to approve the adoption, particularly for special needs children.

Speaking of family values...

By now you've probably picked up on just how impressed I am with our legislators. Let me tell you about the affect of their laws on marriage. Did you know that....?

If you were married, successful and you each earned $79,750 per year, your Federal income taxes would have been around $37,700. But if you got divorced and filed as single, your combined Federal income taxes would only be around $35,700 — you would save $2,000!
If you were married, both over 55, and sold your home, you could exclude $125,000 of the profits from income tax. But, if you got divorced first, then sold the same house, you could each exclude $125,000, for a total untaxed income of $250,000. That's worth between $38,000 and $50,000!
Using the scenario above, if one of you sold a house and took advantage of this $125,000 exclusion before the marriage, the other spouse would lose the right to it. However, if you get divorced, and the spouse who never used the exclusion before gets the house — s/he can take full advantage of the $125,000 exclusion. See above for what it's worth.

Know any bizarre laws?

Send me your notes and comments to giftsurf@mywishlist.com with BIZARRE in the subject line. Please be specific about the law, so we can verify it. You never know, your bizarre laws may show up in Tax Bytes!

This is our money, our future, our safety, and our resources the government is wasting.

Speaking of bizarre laws: Did you know that... if you worked hard all your life and were not able to build up any savings (or lost it all with the help of the Keatings of this world) — if you then could not live on the meager amount of social security you received and had to get a job, then...if you earned more than certain limits, you would start losing (or having to pay back) social security benefits. (This silliness stops if you are over 70 years of age.)

But, if you have lots of savings, investments, and pension or annuity income, you may earn unlimited sums of money — millions, even, without having to pay back one thin dime. (Now let me see, whose profile does this fit? Hmmm, could it be....politicians!?)

WEB RESOURCES:

The Official IRS Site
Government-run source for forms and information.

The Digital Daily
A surprisingly cool news page from the IRS.

1040.com
One stop source for tax information and forms.

Tax Software
Comprehensive list of links to available programs.

The Tax Prophet
Columns by attorney Robert L. Sommers from the San Francisco Examiner.

More Professional Tax Articles

Just a little side note. In case you think this month's article is a little angry or sarcastic, it is. Clinton is spending billions of dollars irresponsibly. Government contracts still permit people to submit phony bids and get rewarded by being paid for outrageous cost overruns. The City of Los Angeles just decided to pay the about-to-be-former police chief $300,000 to NOT RENEW his contract. (Why can't they just let it expire and let him walk away?) Members of the prestigious FBI crime lab have been exposed as presenting false evidence in capital cases — so convicted, violent criminals may be out of jail soon....

And intelligent, educated people are telling me proudly that they don't bother to vote! Well folks, it's time to get involved and speak up. This is our money, our future, our safety, and our resources the government is wasting. None of these can be replaced.

Tripod members are bright, active and well-connected. Let's work to improve our world. The Internet is a powerful tool. Let's use it — and wisely.

One of the primary reasons for the recent crackdown in tax laws is that a handful of clever folks ripped off the system in 1995 by filing thousands of phony returns to collect about $3,000 in refunds. By the time the IRS realized what hit them, millions of our tax dollars had been released. It could have been easily prevented by cross-referencing all SSNs on all tax returns against the master database maintained by the Social Security Administration. Someone must have realized that this cross-check was not being done. Once the information hit the streets, the rip-off artists hit the quickie preparers who offered RALs (refund anticipation loans) — like the H&R Blocks, Jackson Hewitts and other well-advertised chains. It was the managers of these offices that started to see the pattern emerge — clients coming in with simple returns that all showed about $3,000 refunds. The banks backing these loans, the tax preparation chains, and the IRS had to sort out the losses. And that's why, today, it's harder and more expensive to get a refund anticipation loan, too. Crooks cost us!

Mark These Dates

July 15, 1997 — Partnership Returns due or you must get another extension (use Form 8800)
July 31, 1997 — Payroll and Sales Tax Returns Due
Aug. 15, 1997 — Personal (1040) Returns Due (a second extension is available; use Form 2688)
Sept. 15, 1997 — Corporate Returns due; NO MORE EXTENSIONS!
Sept. 15, 1997 — 3rd Estimated Tax Payment (use Form 1040-ES, Voucher 3)

Where to Go

Eva Rosenberg, EA, MBA, has been preparing taxes long enough to remember income averaging and interest deductions. Her Encino, CA, tax practice focuses on non-filers and the self-employed. The Tax Tips columnist for Self-Employed America, Eva is also the resident tax expert for several organizations on the Internet, the author or co-author of several books and articles. She has taught at UCLA, USC, UCI, CSUF and is a sought-after speaker at conventions, tax seminars, workshops, radio and television. She does a "stand-up tax" routine that is both informative and funny. Eva is frequently consulted by EAs, CPAs, attorneys and her former students regarding audits and Tax Court petitions. A Member of NAEA for over a decade, Eva has served on the CSEA state board and the San Fernando Valley Chapter's board.

Eva has also created a fanciful gift registry on the Internet at URL: http://www.mywishlist.com and can be reached by e-mail at taxwriter@taxmama.com

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