Understanding Child Custody in Pennsylvania

UNDERSTANDING CHILD CUSTODY IN PENNSYLVANIA

No issue is more important when parents separate than the custody and future of their children. Answering this question is also one of the most difficult and unwelcome decisions that a judge must make. The process is complex, the results uncertain, and often expensive. Multiple people, who are strangers to you, your spouse, and your children, can be involved, people such as court-appointed custody masters, psychiatrists, psychologists, social workers, and ultimately judges. All of them are looking out for the “best interests of the child.” None of them really know what that means.

To guide them all, Pennsylvania law requires that they answer a staggering number of invasive and uncomfortable questions – 16 in all! The Courts must answer difficult questions like:

  • Which parent is more likely to help foster contact the relationship between the child and the other parent;
  • Which parent is more likely to have a loving and stable relationship with the child; and
  • Which party is more likely to take care of the child’s daily physical, emotional, and educational needs.

They must also answer simpler questions like:

  • Which parent takes care of the child’s basic needs;
  • The availability of extended family;
  • The accessibility of child-care; and
  • The distance between the parents’ homes.

The Courts will even assess your own mental, emotional, and physical health.  If your child is old enough and mature enough, the Courts will take your child’s preferences into account. However, your child’s preferences are not supposed to be the controlling factor.

Custody masters and judges typically use these factors like a score card, ticking off boxes in favor of one parent or another. Then, they add up the score and make their decision. They do not simply give each factor the same weight and declare a winner, however. Moreover, the Courts may not make custody decisions based on gender.  They do, as a practical matter, though still prefer mothers of young children over fathers, which is hard for fathers to overcome. Some factors are more important than others. Some facts lean more heavily in favor of one parent or the other. Even with the factors, fundamentally no judge or custody master looks at the same facts in the same way. That is what makes it so difficult for a parent and their attorney to predict how a judge will decide a custody request.

Even if different judges may assess the factors the same way, at the end of the process they still must decide how to actually divide the custodial time. That decision will determine who gets weekdays, who gets weekends, who gets holidays and vacations, which school will they attend, and even possibly who drops the children off and picks them up. While there are some basic schedules used, different judges will establish different schedules.

For parents, who must leave their children’s home on short notice and do not have a second home for themselves and their children, securing custody of their children can be very hard financially. Courts will limit the out-of-home parent’s time, including overnights with their children, if that parent does not have enough bedrooms and beds for their children. But, setting up a second home on short notice is expensive and time-consuming, especially when, as is so often the case, displaced parents generally do not have much money for their own housing after paying child or spousal support. The amount of your custody time will also affect the amount of child support payments. To make matters more challenging, keeping up a good relationship with your child is particularly important just after separating for securing a good, long-term future with your child. So, displaced parents should try to make a suitable home for themselves and their children as soon as possible.

All of these considerations make the fight to protect your time and relationship with your children the most difficult and important aspect family separation.

If you need help establishing your right to custodial time with your children or have questions about child custody law in Pennsylvania, please contact Gregory J. Spadea at the Law Offices of Spadea & Associates, LLC at 610-521-0604 for free 20-minute consultation.

Why Common-Law Marriage in Pennsylvania is Not so Common After All

Common-law marriage remains a hot topic in Pennsylvania, particularly for long-time, same-sex couples.  In the frontier days of Pennsylvania, when ministers, pastors, and judges were hard to find and even more difficult to meet, common-law marriages were a regular feature of life. Such marriages did not require a marriage license and a formal ceremony before a pastor who had legal authority to marry. Pennsylvania courts have long struggled when deciding if you are married by common-law when you don’t have a marriage license and there was no officiant or ceremony. The court’s determination could mean the difference between inheriting property from your spouse’s estate or losing all of the property that you built up over your years together. Today, the issue of whether or not you are in a common-law marriage also affects newly established rights, like Social Security spousal benefits and even death benefits under Workers Compensation laws.

When deciding whether you and your partner have a common-law marriage, Pennsylvania’s courts are required to answer many questions. Did you say the magic words, ”I take you as my spouse” or simply say, “I will marry you”? Did someone witness you saying those words? Did you live as spouses, and if so, for how long? Do you own a house together? Do you introduce your partner as your spouse? Do you go by your spouse’s last name? Have you filed tax returns together as spouses? Have you applied for credit cards together? Even, did you get mail addressed to you as Mr. and/or Mrs.? The most important question, though, is always whether the judge simply believes you. Courts were so distrustful of claims of common-law marriage, especially when one spouse was dead, that they imposed the highest burden of proof in civil cases, known as “clear and convincing” evidence. Sometimes, the courts made the correct decisions. Sometimes, they did not. Generally speaking, virtually no court saw or heard or believed the same evidence in the same way with the same result. There simply was no certainty.

To bring predictability to the legal status of marriage in Pennsylvania, its legislature passed a law that simply invalidates any common-law marriage that occurred after January 1, 2005. In other words, if you were not part of a common-law marriage on or before January 1, 2005, you are not married to your spouse under Pennsylvania law.  Common law marriages begun before that date could not be invalidated without violating the partners’ due process rights. Knowing your rights in common-law marriages is still important today, especially for same sex spouses.

Older same sex couples should be the most concerned because until 2014 Pennsylvania did not recognize the right to same sex marriage at all. Many of those marriages could still be valid in Pennsylvania. Each person in those marriages may have previously unknown rights to divorce, divide marital property, get or pay alimony, receive child support, share custody of children, and even inherit property that were not apparent before 2014.

Even if Pennsylvanians no longer can have valid common-law marriages after 2014, Pennsylvania courts must also still recognize out-of-state common-law marriages even today. However, Pennsylvania judges do not like deciding whether an out-of-state common law marriage is valid. It puts the Pennsylvania courts in the unwelcome situation of making decisions about a person’s rights under another state’s laws. Those legal rights judgments are particularly difficult for Pennsylvania judges to make because some states still do not recognize the right to same-sex marriage and many have different standards for common-law marriages. The few that still do recognize common-law marriages are considering legislation to invalidate them.

In the end, if you were in a common-law marriage in Pennsylvania on or before January 1, 2005, or are now in a common-law marriage that began in another state that recognizes common-law marriages, you may still be entitled to all of the rights of a spouse. Even if a court in your home state never decided whether you are in a common-law marriage, you may still be entitled to ask a Pennsylvania court to decide whether your out-of-state common-law marriage is valid under your home state’s laws and your marital rights protected.

If you think that you are a spouse in a valid, common-law marriage or have any questions about common-law marriage, please contact Gregory J. Spadea,, Esquire, at the Law offices of Spadea & Associates, LLC for free 20-minute consultation at 610-521-0604.

What is Considered a Marital Asset in Pennsylvania

Knowing what is and what is not “marital property” is vital to a satisfactory outcome when filing for divorce in Pennsylvania.  Pennsylvania’s statutes define “marital property.”  While the statute excludes specifically certain types of property, most divorces concern two kinds of marital property:

  •  property that you acquired during your marriage as an individual or jointly with your spouse; and
  •  the increase in the value of property that you had when you got married and continued to own during your marriage.

An example of the first kind of property is a car that you bought in your own name after you got married.  Even if you titled the car only in your name or you used your own money from your individual bank account to pay for it, the car is marital property.  An example of the second kind of property is a car that you owned when you got married.  In that case, only the increase in the value of the car during your marriage above the value of car before you got married is considered marital property.

Marital property means more than just a physical object, like your house or your car.  It can also mean things like your right to money damages because of a car or work accident or a broken contract.  If the accident occurred when you were married but before the date of your final separation, the right to that money is marital property.  It does not matter whether you were paid a settlement on that claim after your divorce.  The settlement money is still marital property.

Not every piece of property that you acquired after you were married is considered marital.  Any kind of property that you acquire after your “final separation” using your own funds is not marital.  So, if you bought that car after you separated from your spouse with money that you earned after you separated, then the car is yours.  Your spouse has no claim to it.  On the other hand, if you bought that car after you separated and you used joint funds, then the car is marital property.

Marital property is more than just what you own.  It also is what you owe to creditors, like banks and credit card companies.  Debts like those are considered marital debts, even if your spouse ran up charges on his or her personal credit card during your marriage and before final separation without your knowledge or consent.  While, you may not be liable to the bank for those kind of debts, those debts are considered marital obligations.  Responsibility for those debts will be divided between you and your spouse.  The key in all of these situations clearly is figuring out the date of final separation.

Since Pennsylvania does not recognize the idea of “legal separation,” the date of your final separation may be as late as the date when you or your spouse filed for divorce.  It may also be as early as the date when you stopped living under the same roof.  However, when you and your spouse continue to live under the same roof, the courts will have to decide the date of your final separation.  In those situations, there are several facts that Pennsylvania courts will consider when figuring out the date of your final separation.  Whether and when you and your spouse stopped presenting yourselves as a married couple is significant.  The date when you separated your finances, if you held joint bank accounts during your marriage, is also relevant.  The date when you stopped sharing a bedroom or having sexual relations matters too.  Even something as simple as whether you and your spouse grocery shop, cook, or eat together can be important.

Practically speaking, the date of your final separation will determine when you and your spouse stopped acquiring marital property and stopped getting into marital debt.  For spouses, who own or control most of the marital assets or who incurred the least amount of individual debt, advocating for the earliest date of final separation is important.  Conversely, for spouses, who do not own or control most of the marital assets or who incurred most of the marital debt, advocating for a later date of final separation is critical. 

If you are not sure about your marital property or obligations or you have any questions about marital property, please contact Gregory J. Spadea, Esquire, at 610- 521-0604 at the Law Offices of Spadea & Associates LLC for a free 20-minute consultation.

Understanding How to Terminate and Modify Alimony in Pennsylvania

An award of alimony is not necessarily a permanent obligation or a guarantee of future income.  Instead, under Pennsylvania’s statues, it can be ended or modified whenever:

  • A substantial and continuing change in circumstance occurs; or
  • The recipient marries or “cohabits” with a member of the opposite sex; or
  • The recipient or the payor dies.

The death of the spouse paying alimony or the spouse receiving alimony are obvious end points for alimony.  So is re-marriage.  Changed circumstances and “cohabitation,” however, are not so easy to prove or disprove.

To end or modify an award of alimony when circumstances change or cohabitation occurs, the courts look at each specific situation.  One of the most common circumstances for a termination or change in the amount of alimony is a change in the employment or earning capacity of the paying or the receiving spouse.  For example, if the receiving spouse alimony has an accident or is diagnosed with a medical condition that severely limits their ability to support themselves, courts will consider whether the amount of alimony should be increased to keep the receiving spouse supported at the same standard of living.  On the other hand, if the paying spouse gets a significantly better job and the original award of alimony and marital property was not enough to provide the receiving spouse with the standard of living they had during the marriage, the courts may increase the amount of alimony.  Similarly, if the paying spouse suffers a significant and permanent loss of employment or a disabling medical condition occurs, then the court may decrease the amount of alimony.  There are many other changes in circumstances that could cause the termination, reduction, or increase in the amount of alimony.  The main factor for a court is whether change in circumstances is substantial and continuing. 

Pennsylvania law does address one specific kind of change in circumstances: “cohabitation” with a member of the opposite sex, who is not a family relative.  A family relative is someone, who is within the degrees of “consanguinity” of the recipient ex-spouse.  Consanguinity simply means the same blood.  For Pennsylvania, relatives from parents, to children, siblings, first cousins, their children, grandchildren, nieces, nephews, aunts, and uncles are all considered within your consanguinity.  If the receiving spouse lives with one of these family members during or after the divorce, the obligation to pay alimony and the ability to receive alimony will continue. 

However, when they move in with someone, who is not a relative and they live together as spouses would, then the obligation to pay alimony and the ability to receive alimony ends.  Cohabitation is defined as “financial, social, and sexual interdependence.”  Proving or disproving a claim that an ex-spouse is cohabiting is the challenge. 

Courts look at the total circumstances to decide whether someone is cohabiting.  Some of the significant facts showing this interdependence are: whether the ex-spouse and the paramour share the same home and bedroom; whether they contribute together to the household expenses, such as rent or mortgage payments, utilities, groceries, car payments, or insurance; and, whether they have joint bank or credit card accounts.  Other facts include how they present themselves to the world – as partners or merely housemates.  There is no limit to the relevant facts of cohabitation, except the investigative power of the parties and their attorneys.

In the end, it does not matter if the spouse co-habits before, during, or after the divorce proceedings.  Alimony will terminate whenever cohabitation occurs, even if it starts and ends during the divorce proceedings.

Your agreement to pay or receive alimony will override Pennsylvania’s statues.  In other words, you and your spouse can agree that neither death, re-marriage, change of circumstances, or cohabitation will end or change the payment of alimony.  You can also agree that particular changes, such as a significant raise, could reduce the amount of alimony on some percentage basis.  The key to any award or agreement for alimony is planning for your future.  If you are the paying spouse, then terminating or reducing alimony by agreement is in your best interests.  If you are the receiving spouse, making sure that alimony will continue to be paid regardless of events in the life of the paying spouse is vitally important.  Receiving spouses can could protect their future alimony payments by requiring the paying spouse to maintain life or disability insurance for their benefit.  A good attorney will help you to find a solution that fits your divorce or advocate for you if you cannot resolve the claim for alimony by agreement.

If you think that your circumstances justify a change in alimony or you have any questions about alimony, please contact Gregory J. Spadea, Esquire, at the Law Offices of Spadea & Associates for a free 20-minute consultation at 610-521-0604.

Am I Paying Too Much Real Estate Tax on my Delaware County Residencial Property

Determining If Your Assessed Value Is Too High                                                                                   First, look up your property’s current real estate tax assessment on the Delaware County Property Public Access website located at http://delcorealestate.co.delaware.pa.us/pt/forms/htmlframe.aspx?mode=content/home.htm

then enter your Parcel ID Number or address to get your assessed value.  You can also find the assessed value on your county or township property tax bill.

The common level ratio changes every 12 months, and currently is 1.52 effective July 1, 2023. 

Once you have both the Assessed value and Common level ratio, you multiply the Assessed value by the Common level ratio to get the County Fair Value.  Then, you compare the Fair Market Value to the County Fair Value you just computed. If the County Fair Value is higher than the Fair Market Value you should hire the Law Offices of Spadea & Associates, LLC by July 28, 2023 to file an annual Real Estate Tax Assessment Appeal.

Calculating the Fair Market Value

If you purchased the property after August 1, 2022 and have a HUD-1 settlement sheet (that is less than 12 months old) you can use the sales price from the HUD-1 as the Fair Market Value, and do not need an appraisal.  However, if you bought the property at a short sale or foreclosure, or bought it before August 1, 2022 (more than a year ago), you must have an Appraisal to appeal the property tax assessment.    

Fees Involved                                                                                                                               

The Cost of an Appraisal is about $400.  The filing fee is typically $50 and is made payable to “Delaware County Treasurer”.  The Law Offices of Spadea & Associates, LLC will help you file the application and attend the hearing on your behalf in late September.  You pay us nothing if we are unable to reduce your assessment.  There are two types of assessment appeals, one is the annual appeal and the other is the interim assessment appeal. 

Annual Appeals                                                                                                                             The annual appeal allows property owners to appeal their assessment once a year.  Annual appeals must be filed by August 1 of each year.  Remember, in the case of an annual appeal, the Board decision does not take effect until tax bills are issued the following tax year.  The Law Offices of Spadea & Associates, LLC will represent you at the hearing which is typically in late September and present evidence such as a recent appraisal with pictures.  The Board will determine the current fair market value for the property based on the appraisal and settlement sheet presented at the hearing.  The Board generally renders a decision within 10 weeks of the hearing date and notifies the property owner in writing.  If you do not agree with the Board’s findings you have the right to file an appeal within 30 days to the Court of Common Pleas. 

Interim Assessment Appeals                                                                                                           The interim assessment represents the value difference (increase) attributable to any assessable improvement to the land and the resulting increase in land value, if any. Assessable improvements include, but are not limited to; new construction of a primary structure or the addition to any such structure and the construction of any ancillary, contributory improvements such as swimming pools, sheds, garages, etc.

If a property is subject to an interim assessment, a property owner will receive an “Interim Real Estate Assessment Notice.” This Notice will inform the property owner of the old assessment and new assessment. The bottom portion of the Notice contains an APPEAL REQUEST FORM. In order to perfect an appeal of an Interim Assessment, the property owner must return the bottom portion of the Interim Notice to the Assessment Office to request receipt of an Appeal Application within forty (40) days of the date of notification of the assessment change.  The appeal date will be noted on the Interim Real Estate Assessment Appeal Notice at the top right and bottom right or this notice.

To file either an interim or annual appeal, contact Gregory J. Spadea at the Law Offices of Spadea & Associates, LLC in Ridley Park, Pennsylvania at 610-521-0604.

2023 Consolidated Appropriations Act Better Known As  Secure Act 2.0 Overhauls Retirement Plan Tax Rules

The new legislation, passed by Congress and signed into law by President Biden on December 29, 2022, may have an immediate impact on your retirement savings and income strategy. Note that the effective dates vary with some are effective immediately in 2023, while others will begin over the next few years. The effective dates are highlighted with each provision outlined below. Here are some of the most important changes:

Raising the starting age for RMDs.  Effective Jan. 1, 2023, the threshold age that determines when individuals must begin taking required minimum distributions (RMDs) from traditional IRAs and workplace retirement plans increases from 72 to 73. As a result, individuals now can choose to delay taking their first RMD until April 1 of the year following the year in which they reach age 73. From that point on, RMDs must be received each year by December 31.

On Jan. 1, 2033, the threshold age for RMDs will rise to 75. In addition, the penalty for failing to take RMDs on a timely basis is cut in half effective in 2023, from 50% of the undistributed amount to 25%.  Keep in mind if individuals take advantage of delayed RMDs, the amount of withdrawals required in later years will be larger, which will result in a potentially higher tax liability in those years. If your qualified plan assets are greater than $350,000 if single or $700,000 if you are married you may want to consider converting those qualified assets to a Roth IRA depending on your tax bracket from the ages of 65 and 75.

An increase in catch-up contributions. Catch-up contributions allow people age 50 and older to set aside additional dollars beyond the standard maximum contributions to workplace retirement plans (such as 401(k)s) and IRAs. Two important changes were included in the SECURE 2.0 Act. The first bumps the maximum additional amount that can be contributed to a workplace plan if you’re age 50 and older from $6,500 per year to $7,500 per year, effective in 2023. In addition, if you’re ages 60 to 63, you’ll be able to add $10,000 more per year above the standard limit beginning in 2025.

The second provision requires all catch-up contributions to be on an after-tax basis, except for individuals who earn $145,000 or less. And beginning in 2024, catch-up contributions to IRAs, currently limited to $1,000 per year, will be adjusted for inflation in increments of $100.  As a result, some individuals may be able to avoid moving into a higher tax bracket by deferring a larger chunk of their salary and taking advantage of expanded catch-up contributions.

Auto enrollment in 401(k) plans. Employers currently have an option to initiate “automatic enrollment” of employees into a workplace retirement plan. When this occurs, employees automatically participate in the plan unless they choose not to. Under SECURE 2.0 Act, effective in 2025, the process reverses, and automatic enrollment is required of most major employers.

The amount automatically deferred each year will range from 3% to 10% of an individual’s income. Employees who don’t wish to participate in the plan can choose to opt out. Businesses with 10 or fewer workers and companies in business for less than three years are among those excluded from the mandate.

An additional change affecting workplace plans is that, beginning in 2025, part-time employees will qualify to participate in a plan once they’ve worked at least 500 hours for two consecutive years. Under existing law, part-time workers must meet the 500-hour threshold for three consecutive years.

Retirement plan contributions for those with student loan debts. This provision takes effect beginning in 2024 will allow employers to make contributions to workplace savings plans on behalf of employees who are still repaying student loans. It isn’t unusual for younger workers carrying student debt to forego retirement plan contributions in order to continue to pay off college loans. Under the new law, employers would be allowed to make contributions on behalf of employees faced with this dilemma, even if those employees do not make retirement plan contributions. Employer retirement plan contributions can match the amounts of student loan debt repaid by the individual worker in a given year. This is an opportunity for employers to offer an incentive to attract and retain employees who has college loans.

Rollovers of 529 Plan balances to Roth IRAs. Under prior law which is still in effect in 2023, leftover balances in 529 education savings plans can be taken as a non-qualified distribution, but the earnings portion of the distribution is subject to income tax and a 10% penalty. Beginning in 2024, based on provisions in the new law, you’re allowed to roll up to $35,000 of leftover funds into a Roth IRA.  The $35,000 threshold is a lifetime limit subject to a few restrictions. The 529 account must have been in place for at least 15 years and funds must move directly into a Roth IRA for the same individual who was the beneficiary of the 529 plan. Any 529 plan contributions made in the previous five years, and any earnings attributed to those contributions, are not eligible to be rolled into a Roth IRA. The amount moved into a Roth IRA a given year must be within annual IRA contribution limits.

Changes to Roth employer plans. Under current law, there are no provisions that accommodate employer matching contributions to employees’ after-tax Roth 401(k) plan contributions. Effective in 2023, individuals can choose to have employer matching contributions directed to their Roth workplace accounts. These contributions will be considered taxable income in the year of the contribution.

Under current law, Roth 401(k)s are subject to RMDs. A provision in the SECURE 2.0 Act eliminates RMD requirements for workplace-based Roth plans beginning in 2024. This change results in Roth 401(k)s having similar treatment related to RMDs as Roth IRAs.  In addition, effective in 2023, employers will be allowed to create Roth accounts, open to after-tax contributions, for SIMPLE and SEP retirement plans. Under previous law, these plans only allowed for pre-tax contributions.

Establishment of a Saver’s Match.  The current “Saver’s Credit” program allows those meeting lower income thresholds to claim a tax credit for contributions made to workplace savings plan or IRA. Effective in 2027, the credit is being replaced by a “Saver’s Match.” The match will equal up to 50% of the first $2,000 contributed by an individual to a retirement account each year (or up to $1,000). This will be a federal matching contribution deposited into the saver’s traditional retirement account.

Penalty-free early withdrawals.  The current tax code imposes a 10% penalty for distributions taken from a retirement account prior to reaching age 59-1/2. SECURE Act 2.0 expands the circumstances where penalty-free withdrawals could occur.

Exceptions to the 10% penalty include:

  • Effective immediately, the penalty for early withdrawals is waived for those certified by a physician as having a terminal illness or condition that can reasonably result in death in 84 months or less. To avoid a penalty, distributions must be repaid within three years.
  • Effective Jan. 1, 2024, “hardship” withdrawals are available for individuals who have been subject to domestic abuse equal to the lesser of $10,000 or 50% of the vested balance of the retirement account. The withdrawal must occur within one year after the individual became a victim of abuse. And all or a portion must be repaid within three years.
  • Effective in 2026, withdrawals of up to $2,500 per year can be made to pay premiums on certain types of long-term care contracts.

New rules for qualified charitable distributions (QCDs). Under current law, individuals age 70-1/2 and older can direct up to $100,000 in distributions per year from a traditional IRA to qualified 501(c)(3) charitable organizations. Effective in 2024, a new provision will allow the maximum contribution amount to increase based on the inflation rate.

In addition, beginning in 2023, individuals have a one-time opportunity to use a qualified charitable distribution (QCD) to fund a Charitable Remainder Unit Trust (CRUT), Charitable Remainder Annuity Trust (CRAT) or a Charitable Gift Annuity (CGA). Up to $50,000 (indexed for inflation) can be directed using this one-time distribution option. If a distribution is directed to a CRUT or CRAT, it must be the only form of funding for that trust.  QCDs are often an overlooked planning opportunity for individuals to manage gifts and reduce taxes.

New limits for Qualified Longevity Annuity Contracts (QLACs). Effective immediately, the “25% of account balance” limitation for QLACs is eliminated. In addition, the maximum amount that can be used to purchase such products was raised from $145,000 in 2022 to $200,000 effective in 2023.

If you have any questions regarding the Secure Act or need estate or tax planning, feel free to call Gregory Spadea at 610-521-0604.  The Law Offices of Spadea Offices of Spadea & Associates provides year round estate and tax planning and tax return preparation.

Strategies for Qualifying for Medicaid in Pennsylvania When you Exceed the Financial Eligibility Limits

Medicaid is a state and federal funded program which provides nursing home (institutional) as well as home and community-based services. It is a low-income program which has very specific asset and income requirements limits for eligibility. The limits can be found using this link https://www.medicaidplanningassistance.org/medicaid-eligibility-pennsylvania.  For those who do not meet these asset and income limit requirements, there are other ways to qualify for Medicaid benefits.

Medically Needy Pathway

A person can still qualify for Medicaid services even if they are over the income limit if they have high medical bills. In Pennsylvania this is known as the medically needy only assistance program. It is sometimes called the “spenddown” program which is used to cover medical and nursing home bills. Currently the medically needy income limit is $425 and $442 for married couples.

Pennsylvania has a 6 month “spend down” period, so once a couple has paid their excess income down to the Medicaid eligibility limit, they will qualify for benefits for the remainder of the period. It is important to understand that the asset limit for Medicaid qualification via this program is different than the normal asset thresholds.

The asset limit for the medically needy pathway program is $2,400.00 for single individuals and $3,200.00 for married couples.  A person can “spend down” their assets on non-countable purchases such as home modifications like wheelchair ramps or stairlifts and by pre-paying funeral and burial expenses, as well as paying off other debts.

The Importance of Medicaid Planning- How you can still qualify for Medicaid Benefits

Most individuals considering Medicaid are over income or over asset limits but still can’t afford their cost of care. These individuals should consider working with a Medicaid planning attorney who can deploy any of the following asset and income planning strategies:

  • Irrevocable funeral trust
    • These are trusts set up for the purpose of paying for the Medicaid applicant’s funeral in advance. 
  • Spousal asset transfer
    • When only one spouse of a couple is applying for nursing home Medicaid or a Home and Community Based Services (HCBS) Medicaid Waiver, the spousal asset transfer ensures the community spouse doesn’t become impoverished. 
  • Annuities
    •  This planning technique turns countable assets into non-countable income for the non-applicant spouse. An annuity is a lump sum of money that is paid to an insurance company, which in turn, will pay the healthy spouse a monthly payment.
  • Spend down excess assets
    • Spend down option include home modifications and improvements, such as adding a chair lift or putting on a new roof, purchasing medical devices that are uncovered by insurance, like dentures, and paying off one’s mortgage or credit card debt. 
  • Life Estate deeds
    • This is a life estate deed and the Medicaid recipient still has ownership over his or her home as long as he or she is living
  • Medicaid asset protection trust
    • A Medicaid asset protection trust (MAPT) is a type of irrevocable (irreversible) trust that protects assets from being counted towards Medicaid’s asset limit. These trusts also preserve assets for family and other loved ones as inheritance. Assets, which may include one’s home, are put into a trust and are no longer considered owned by the person who created the trust (the Medicaid applicant). While there is no limit as to the value of the assets that can be placed in this type of trust, they are still subject to the 5 year “look back” results in a penalty period of Medicaid ineligibility,

Income Planning Strategies

  • Spousal income transfers
  •  The non-applicant spouse is permitted a sufficient amount of monthly income to allow him or her to continue living at home. This is called the Minimum Monthly Maintenance Needs Allowance, or MMMNA, and allows applicant spouses to transfer their income to their non-applicant spouses.
  • In 2022, the applicant spouse may transfer up to a maximum of $3,435 a month in income to the non-applicant spouse.
  • Qualified income trusts/Miller trusts

For individuals who are not married or whose non-applicant spouse’s income exceeds the MMMNA, Qualified Income Trusts (QIT) offer another, slightly more complicated technique for helping the applicant to meet the Medicaid income limit.

  • Income over the limit is allocated into a qualified irrevocable income or Miller Trust, and is generally used to pay one’s medical bills and care.  It is very important to understand however that the remaining money becomes the property of the state after the Medicaid applicant passes. 

If you have any questions about implementing any of these strategies, please call Gregory J. Spadea at 610-521-0604.

Understanding why Emotional Distress Damages Are Taxable but Physical Sickness Damages Are Not

The general rule for compensatory damages for personal physical injuries is that they are tax free under Section 104 of the Internal Revenue Code. Yet exactly what is physical is not so clear.  For example, if you make claims for emotional distress, your damages are taxable. If you claim the defendant caused you to become physically sick, those can be tax free. If emotional distress causes you to be physically sick, that is taxable. The order of events and how you describe them matters to the IRS.  If you are physically sick or physically injured, and your sickness or injury produces emotional distress, those emotional distress damages should be tax free. Much of this seems artificial, but wording is very important. Some of the distinctions come from a footnote in the legislative history to the tax code adding the ‘physical’ requirement. It says “emotional distress” includes physical symptoms, such as insomnia, headaches, and stomach disorders, which may result from such emotional distress.  All compensatory damages flowing from a physical injury or physical sickness are excludable from income.  For example, in Domeny v. Commissioner, Ms. Domeny suffered from multiple sclerosis (MS). Her MS got worse because of workplace problems, including an embezzling employer. As her symptoms worsened, her physician determined that she was too ill to work. Her employer terminated her, causing another spike in her MS symptoms. She settled her employment case and claimed some of the money as tax free. The IRS disagreed, but Ms. Domeny won in Tax Court. Her health and physical condition clearly worsened because of her employer’s actions, so portions of her settlement were tax free. 

Tired young businessman working at home using lap top and looking Anxious

In Parkinson v. Commissioner, a man suffered a heart attack while at work. He reduced his hours, took medical leave, and never returned. He sued in state court for intentional infliction and invasion of privacy. His complaint alleged that the employer’s misconduct caused him to suffer a disabling heart attack at work, rendering him unable to work. He settled and claimed that one payment was tax free. When the IRS disagreed, he went to Tax Court. He argued the payment was for physical injuries and physical sickness brought on by extreme emotional distress. The IRS said that it was just a taxable emotional distress recovery.

The Tax Court said damages received on account of emotional distress attributable to physical injury or physical sickness are tax free. The court distinguished between a “symptom” and a “sign.” The court called a symptom a “subjective evidence of disease of a patient’s condition.” In contrast, a “sign” is evidence perceptible to the examining physician. The Tax Court said the IRS was wrong to argue that one can never have physical injury or physical sickness in a claim for emotional distress. The court said intentional infliction of emotional distress can result in bodily harm. Notably, the settlement agreement in Parkinson was not specific about the nature of the payment or its tax treatment. And it did not say anything about tax reporting. There was little evidence that medical testimony linked Parkinson’s condition to the actions of the employer. Still, Parkinson beat the IRS. Damages for physical symptoms of emotional distress such as headaches, insomnia, and stomachaches might be taxable. Yet physical symptoms of emotional distress have a limit. For example, ulcers, shingles, aneurysms, and strokes may all be an outgrowth of stress. It seems difficult to regard them all as ‘mere symptoms of emotional distress.’ Extreme emotional distress can produce a heart attack, which is not a symptom of emotional distress. The Tax Court in Parkinson agreed.  Medical records and settlement agreement language can significantly help.

To exclude a payment from income on account of physical sickness, you need evidence of making the claim that the defendant caused or exacerbated his condition. In addition, you need to show the defendant was aware of the claim, and at least considered it in making payment. To prove physical sickness, you need evidence of medical care, and evidence that you actually claimed the defendant caused or exacerbated his condition.

The more medical evidence the better. Moreover, if there is a scant record of medical expenses in the litigation, consider what you can collect at settlement time. A declaration from the plaintiff will help for the file. A declaration from a treating physician or an expert physician is appropriate, as is one from the plaintiff’s attorney. Prepare what you can at the time of settlement or, at the latest, before you file your tax return. Do as much as you can contemporaneously.

Whenever possible, settlement agreements should be specific about the tax treatment of your damage award. The IRS is likely to view everything as income unless you can prove otherwise. Try to be explicit in the settlement agreement about the amount you will receive as wages or other taxable and what form they will be reported on.  You do not want to be surprised by receiving a W-2 or a 1099 the following January of the year after the settlement.

 If you have any questions, feel free to call Gregory Spadea at 610-521-0604. The Law Offices of Spadea & Associates, LLC provides year round tax planning and tax return preparation.

2022 Year End Tax Planning Letter for Business Clients

2022 Year End Tax Planning Letter for Business Clients

As the year draws to a close, it’s important that we meet to discuss any year-end strategies that might help lower your business’s taxable income for 2022.

The most significant tax law changes during the year took place in August when the 2022 Inflation Reduction Act (2022 IRA) was signed into law. While the new law did not change tax rates for most businesses, it does extend some expiring business tax credits while also introducing some new tax credits that may benefit your business. It also provided a hefty increase in IRS funding to bolster taxpayer services and enforcement of the tax code.

The following are some strategies we should consider for reducing your business’s taxes for 2022.

Section 179 Expensing and Depreciation Deductions

The two business tax deductions that present the best opportunities for reducing your business’s taxable income are the Section 179 deduction, where your business can elect to deduct the entire cost of certain property acquired and placed in service during the year, and the bonus depreciation deduction, where 100 percent of the cost of business property may be expensed. Under the Section 179 expensing option, your business can immediately expense the cost of up to $1,080,000 of “Section 179” property placed in service in 2022. This amount is reduced dollar for dollar (but not below zero) by the amount by which the cost of the Section 179 property placed in service during 2022 exceeds $2,700,000.

The bonus depreciation rules apply to all businesses unless the business specifically elects out of these rules. An election out might be preferable where a business expects a tax loss for the year and the bonus depreciation would just increase that loss or where it might be advantageous to push depreciation deductions into future years. For example, if the owner of a pass-thru entity to whom these deductions would flow expects to be in a higher tax bracket in future years, such deductions might be of more use in those future years. When applying both the Section 179 deduction and the bonus depreciation deduction to an asset, the Section 179 deduction applies first.

If you need a vehicle for your business, purchasing a sport utility vehicle weighing more than 6,000 pounds, can trigger a bigger deduction than if a smaller vehicle is purchased. This is because vehicles that weigh 6,000 pounds or less are considered listed property and the related first-year deduction is limited to $19,200 for cars, trucks and vans acquired and placed in service in 2022. For vehicles weighing more than 6,000 pounds, however, up to $27,000 of the cost of the vehicle can be immediately expensed.

It’s worth noting that if you leased a passenger automobile in 2022 with a value of more than $56,000, the deduction available for that lease expense is reduced. In such cases, you must include in gross income an amount determined by a formula the IRS issues each year.

Qualified Business Income Deduction

If you are conducting your business as a sole proprietorship, a partner in a partnership, a member in an LLC taxed as a partnership, or as a shareholder in an S corporation, the qualified business income (QBI) deduction can significantly help reduce taxable income. The QBI deduction allows eligible taxpayers to deduct up to 20 percent of their QBI, plus 20 percent of qualified real estate investment trust dividends and qualified publicly traded partnership income. A W-2 wage limitation amount may apply to limit the amount of the deduction. The W-2 wage limitation amount must be calculated for taxpayers with a taxable income that exceeds a statutorily-defined amount (i.e., the threshold amount). For any tax year beginning in 2022, the threshold amount is $340,100 for married filing joint returns and $170,050 for all other returns.

Since the QBI deduction reduces taxable income, and is not used in computing adjusted gross income, it does not affect limitations based on adjusted gross income such as the medical expense deduction or the calculation of social security income that is includible in income. However, the QBI deduction does not apply to a “specified service trade or business,” which is defined as any trade or business involving the performance of services in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, including investing and investment management, trading, or dealing in securities, partnership interests, or commodities, and any trade or business where the principal asset of such trade or business is the reputation or skill of one or more of its employees. Engineering and architecture services are specifically excluded from the definition of a specified service trade or business.

Rental Real Estate

If you have any rental real estate activities, it’s important to determine if the activity will be considered a passive activity by the IRS. Generally, losses from passive activities are only deductible against passive activity income. However, a deduction of up to $25,000 ($12,500 if married filing separately) may be allowed against nonpassive income to the extent you actively participates in the rental real estate activities. This deduction is subject to a phaseout for individuals with modified adjusted gross income above $100,000 (or $50,000 if married filing separately). Additionally, you may be eligible for a qualified business income deduction if certain criteria are met, such as the rental activity qualifying as a Section 162 trade or business.

Substantiation of Vehicle-Related Deductions

In audits, the IRS tends to focus on deductions taken for vehicle expenses. If not properly substantiated, such deductions are disallowed. Thus, if vehicles are used in any part of your business or business-related activities, your tax records with respect to each vehicle should include the following:

(1) the amount of each separate expense with respect to the vehicle (e.g., the cost of purchase or lease, the cost of repairs and maintenance, etc.);

(2) the amount of mileage for each business or investment use and the total miles for the tax period;

(3) the date of the expenditure; and

(4) the business purpose for the expenditure.

The IRS will consider the following as adequate substantiation for such expenses: (1) records such as a notebook, diary, log, statement of expense, or trip sheets; and (2) documentary evidence such as receipts, canceled checks, bills, or similar evidence.

Its important to note that records are considered adequate to substantiate the element of a vehicle expense only if they are prepared or maintained in such a manner that each recording of an element of the expense is made at or near the time the expense is incurred.

Employee Benefits

One area I would like to discuss with you are the tax and other advantages your business could reap by offering a retirement plan and/or other fringe benefits to employees. By offering such benefits, your business has a better chance of attracting and retaining talented workers which, in turn, reduces the costs of searching for and training new employees. Contributions made to retirement plans on behalf of employees are deductible and your business may be eligible for a tax credit for setting up a qualified plan if you don’t already have one.

If you haven’t already done so, you might consider the establishment of a flexible spending arrangement (FSA). An FSA allows employees to be reimbursed for medical expenses and is usually funded through voluntary salary reduction agreements with the employer. The employer has the option of making or not making contributions to the FSA. Some of the benefits of providing an FSA for employees include contributions made by the business being excluded from the employee’s gross income, reimbursements to the employee are tax free if used for qualified medical expenses, the FSA can be used to pay qualified medical expenses even if the employer or employee haven’t yet placed the funds in the account, and up to $570 of funds in the FSA can be carried over to subsequent years indefinitely.

Another popular employee benefit your business might consider is a high deductible health plan paired with a health savings account (HSA). The benefits to your business include savings on health insurance premiums that would otherwise be paid to traditional health insurance companies and having employee wage contributions to the plan not being counted as wages and thus neither the employer nor the employee is subject to FICA taxes on the payroll contributions. As for employees, they can reap a tax deduction for funds contributed to the HSA, and there is no use-it-or-lose-it limit like there is for most flexible spending arrangements (FSAs). Thus, the funds can grow tax free and be used in retirement.

Pass-Thru Entity Considerations

If you are operating a business through a pass-thru entity such as a partnership or S corporation, your basis in the entity must be high enough to allow for any loss deduction, if you have one for the year. In such a situation, we should consider the options available for increasing your basis in such entity.

If you are an S corporation shareholder it’s important to ensure that you and other shareholders involved in running the business are paid an amount that is commensurate with the work being done. The IRS scrutinizes S corporations which distribute profits instead of paying compensation subject to employment taxes. Failing to pay arm’s length salaries can lead to tax deficiencies, interest, and penalties. The key to establishing reasonable compensation is showing that the compensation paid for the type of work an owner-employee does for the S corporation is similar to what other entities would pay for similar work. An S corporation needs to adequately document the factors that support the salary an S corporation owner is being paid.

Also, because there are stringent requirements for who may be an S corporation shareholder, if the number of shareholders have changed or increased during the year, we should review the residency or citizenship status of the S corporation’s shareholders and S corporation stock beneficiaries (including contingent and residuary beneficiaries).

Energy Efficient Commercial Building Deduction

If your business owns a commercial building, a deduction is available for an amount equal to the cost of energy efficient commercial building property placed in service during the tax year. The maximum deduction with respect to any building for any tax year is the excess (if any) of (1) the product of $1.88, and the square footage of the building, over (2) the aggregate amount of the deductions for all prior tax years.

New and Modified Tax Credits

The 2022 IRA modified tax credits for electric vehicles (EVs) and fuel cell vehicles. The law also enacted new tax credits for used and commercial clean vehicles. Multiple factors determine whether an EV purchased in 2022 qualifies for federal tax credits. Many EVs purchased before August 16, 2022, qualify for a tax credit of up to $7,500 (with smaller amounts available for certain makes and models). Vehicles manufactured by Tesla or General Motors purchased in 2022 are not eligible for tax credits, as Tesla and GM have exceeded the 200,000 vehicle threshold that limits the number of tax credits that can be claimed for vehicles made by a manufacturer.

For vehicles purchased after August 16, 2022, only vehicles for which final assembly occurred in North America qualify. The U.S. Department of Energy has released a list of model year 2022 and 2023 vehicles with final assembly in North America.

EV purchasers who ordered a vehicle before August 16, 2022, and take delivery of their vehicle at a later date may be able to claim tax credits for vehicles not assembled in North America if they had a written binding contract to purchase the vehicle. Most of the changes to the clean vehicle tax credit are effective starting in 2023, with the exception of the final assembly in North America requirement, mentioned above. Beginning in 2023, EVs qualify only if the vehicle’s battery meets certain conditions. The maximum potential credit is the sum of two amounts: the critical mineral amount and the battery component amount.

The 2022 IRA also introduced a new credit for qualified commercial electric vehicles placed into service by the taxpayer after 2022. The amount of credit is 30 percent of the cost of the vehicle, up to $7,500 in the case of a vehicle that weighs less than 14,000 pounds, and up to $40,000 for all other vehicles.

The energy investment tax credit (ITC) was also extended by the 2022 IRA and could reduce your business’s federal tax liability by a percentage of the cost of a solar system installed during the tax year. Solar systems placed in service in 2022 or later, and that began construction before 2033, are eligible for a 30 percent ITC or a production tax credit based on a kilowatt-hour formula if they meet certain labor requirements or are under 1 megawatt in size.

Research and Development Deductions and Credits

Finally, the provision allowing a deduction for research and development (R&D) expenses expired at the end of 2021. Such expenditures must now be amortized over five years. However, under the 2022 IRA, businesses that engage in certain types of research may qualify for an income tax credit based on its qualified research expenses. The credit is calculated as the amount of qualified research expenditures above a base amount that is meant to represent the amount of research expenditures in the absence of the credit. Because some small businesses may not have a large enough income tax liability to take advantage of their research credit, the law allows that small business (i.e., a business with less than $5 million in gross receipts and that is under five years old) to apply up to $250,000 of the research credit toward its social security payroll tax liability. The 2022 IRA expanded the amount available for the credit from $250,000 to $500,000 for tax years beginning after 2022.

It’s worth noting that there is a slim chance that the R&D expensing provision that terminated at the end of 2021 may be restored. There have been ongoing discussions between Republicans and Democrats about a potential last minute end-of-year tax deal regarding a reinstatement of the R&D credit, which expired at the end of 2021 and which businesses are anxious to see reinstated, in exchange for an enhanced child tax credit that is similar to the 2021 enhanced child tax credit enacted as part of the American Rescue Plan Act of 2021. Because it is unclear what, if any, tax legislation may be passed before the end of the year, our year-end planning will have to be based on existing law.

As you can see, there is much to consider before we prepare your 2022 business tax return and calculate any estimated tax payments that might be due in 2023. Please call Gregory J. Spadea at 610-521-0604 so we can set a time to review potential strategies for reducing your business’s 2022 taxable income and tax liability.

2022 Year End Tax Planning for Individuals

2022 Year End Tax Planning for Individuals

The following are some of the tax breaks from which you may benefit, as well as the strategies we can employ to help minimize your taxable income and resulting federal tax liability for 2022.

Filing Status

Your tax return filing status can impact the amount of taxes you pay. For example, if you qualify for head-of-household (HOH) filing status, you are entitled to a higher standard deduction and more favorable tax rates. To qualify as HOH, you must be unmarried or considered unmarried and provide a home for certain other persons. If you are in such a situation, we need to review whether you qualify for HOH filing status.

Income, Deductions, and Credits

Standard Deduction versus Itemized Deductions. The Tax Cuts and Jobs Act of 2017 (TCJA) substantially increased the standard deduction amounts, thus making itemized deductions less attractive for many individuals. For 2022, the standard deduction amounts are: $12,950 (single); $19,400 (head of household); $25,900 (married filing jointly); and $12,950 (married filing separately). If the total of your itemized deductions in 2022 will be close to your standard deduction amount, we should evaluate whether alternating between bunching itemized deductions into 2022 and taking the standard deduction in 2023 (or vice versa) could provide a net-tax benefit over the two-year period. For example, you might consider doubling up this year on your charitable contributions rather than spreading the contributions over a two-year period. If these contributions, along with your mortgage interest, medical expenses (discussed below), and state income and property taxes (subject to the $10,000 deduction limitation on such taxes that applies to both single individuals and married couples filing jointly; and the $5,000 limitation on such expenses for married filing separately returns), exceed your standard deduction, then itemizing such expenses this year and taking the standard deduction next year may be appropriate.

Medical Expenses, Health Savings Accounts, and Flexible Savings Accounts. For 2022, your medical expenses are deductible as an itemized deduction to the extent they exceed 7.5 percent of your adjusted gross income. To be deductible, medical care expenses must be primarily to alleviate or prevent a physical or mental disability or illness. They don’t include expenses that are merely beneficial to general health, such as vitamins or a vacation. Deductible expenses include the premiums you pay for insurance that covers the expenses of medical care, and the amounts you pay for transportation to get medical care. Medical expenses also include amounts paid for qualified long-term care services and limited amounts paid for any qualified long-term care insurance contract. Depending on what your taxable income is expected to be in 2022 and 2023, and whether itemizing deductions would be advantageous for you in either year, you may want to accelerate any optional medical expenses into 2022 or defer them until 2023. The right approach depends on your income for each year, expected medical expenses, as well as your other itemized deductions.

You may also want to consider health saving accounts (HSAs) if you don’t already have one. These are tax-advantaged accounts which help individuals who have high-deductible health plans (HDHPs). If you are eligible to set up such an account, you can deduct the amount you contribute to the account in computing adjusted gross income. These contributions are deductible whether you itemize deductions or not. Distributions from an HSA are tax free to the extent they are used to pay for qualified medical expenses (i.e., medical, dental, and vision expenses). For 2022, the annual contribution limits are $3,650 for an individual with self-only coverage and $7,300 for an individual with family coverage.

In addition, if you are not already doing so and your employer offers a Flexible Spending Account (FSA), consider setting aside some of your earnings tax free in such an account so you can pay medical and dental bills with pre-tax money. Since you don’t pay taxes on this money, you’ll save an amount equal to the taxes you would have paid on the money you set aside. FSA funds can be used to pay deductibles and copayments, but not for insurance premiums. You can also spend FSA funds on prescription medications, as well as over-the-counter medicines, generally with a doctor’s prescription. Reimbursements for insulin are allowed without a prescription. And finally, FSAs may also be used to cover costs of medical equipment like crutches, supplies like bandages, and diagnostic devices like blood sugar test kits.

Charitable Contributions. The tax benefits of making charitable contributions and taking an itemized deduction for such contributions were tamped down as a result of the increase in the standard deduction in the TCJA. More people are forgoing itemized deductions as their standard deduction is more favorable.

If you are itemizing deductions, you can maximize the tax benefit of making a charitable contribution by donating appreciated assets, such as stock, instead of cash. Doing so generally allows you to deduct the fair market value of the asset while also avoiding the capital gains tax that would otherwise be due if you sold the asset. For example, if you own stock with a fair market value of $1,000 that was purchased for $250 and your capital gains tax rate is 15 percent, the capital gains tax you would owe is $113 ($750 gain x 15%). If you donate that stock instead of selling it, and are in the 24 percent tax bracket, your ordinary income deduction is worth $240 ($1,000 FMV x 24% tax rate). You also save the $113 in capital gains tax that you would otherwise pay if you sold the stock; that amount goes to the charity. Thus, the after-tax cost of the gift of appreciated stock is $647 ($1,000 – $240 – $113) compared to the after tax cost of a donation of $1,000 cash which would be $760 ($1,000 – $240). However, it’s important to also keep in mind that tax deductions for contributions of appreciated long-term capital gain property may be limited to a certain percentage of your adjusted gross income depending on the amount of the deduction.

In addition, if you have an individual retirement account and are 70 1/2 years old and older, you are eligible to make a charitable contribution directly from your IRA. This is more advantageous than taking a distribution and making a donation to the charity that may or may not be deductible as an itemized deduction. If your itemized deductions, including the contribution, are less than your standard deduction, then you receive no tax benefit from making the donation in this manner. By making the donation directly from your IRA to a charity, you eliminate having the IRA distribution included in your income. This in turn reduces your adjusted gross income (AGI). And because various tax-related items, such as the medical expense deduction or the taxability of social security income or the 3.8 percent net investment income tax, are calculated based on your AGI, a reduced AGI can potentially increase your medical expense deduction, reduce the tax on social security income, and reduce any net investment income tax.

Expenses Incurred While Working from Home. Although more people are working from home these days, related expenses are not deductible if you are an employee. TCJA eliminated the deductibility of such expenses when it suspended the deduction for miscellaneous itemized expenses that was available before 2018. However, if you are self-employed and worked from home during the year, tax deductions are still available. Thus, if you have been working from home as an independent contractor, we should discuss what expenses you have incurred that might reduce your taxable income.

Mortgage Interest Deduction. If you sold your principal residence during the year and acquired a new principal residence, the deduction for any interest on your acquisition indebtedness (i.e., your mortgage) could be limited. The mortgage interest deduction on mortgages of more than $750,000 obtained after December 14, 2017, is limited to the portion of the interest allocable to $750,000 ($375,000 in the case of married taxpayers filing separately). If you have a mortgage on a principle residence acquired before December 15, 2017, the limitation applies to mortgages of $1,000,000 ($500,000 in the case of married taxpayers filing separately) or less. However, if you operate a business from your home, an allocable portion of your mortgage interest is not subject to these limitations.

Interest on Home Equity Indebtedness. You can potentially deduct interest paid on home equity indebtedness, but only if you used the debt to buy, build, or substantially improve your home. Thus, for example, interest on a home equity loan used to build an addition to your existing home is typically deductible, while interest on the same loan used to pay personal expenses, such as credit card debt, is not.

Sale of a Home. If you sold your home this year, up to $250,000 ($500,000 for married filing jointly) of the gain on the sale is excludible from income. However, this amount is reduced if part of your home was rented out or used for business purposes. Generally, a loss on the sale of a home is not deductible. But again, if you rented part of your home or otherwise used it for business, the loss attributable to that portion of the home is deductible.

Discharge of Qualified Principal Residence Indebtedness: If you had any qualified principal residence indebtedness which was discharged in 2022, it is not includible in gross income.

Deductions for Mortgage Insurance Premiums: You may be entitled to treat amounts paid during the year for any qualified mortgage insurance as deductible qualified residence interest if the insurance was obtained in connection with acquisition debt for a qualified residence.

Deductions for Excess Business Losses. Taxpayers other than corporations can deduct excess farm losses and excess business losses through 2028. An excess business loss for the tax year is the excess of aggregate deductions attributable to your trades or businesses over the sum of your aggregate gross income or gain plus a threshold amount. The threshold amount for 2022 is $270,000 or $540,000 for joint returns.

Qualified Business Income Passthrough Tax Break. Under the qualified business income tax break, a 20 percent deduction is allowed for qualified business income from sole proprietorships, S corporations, partnerships, and LLCs taxed as partnerships. If you qualify for the deduction, which is available to both itemizers and nonitemizers, it is taken on your individual tax return as a reduction to taxable income. This tax break is subject to some complicated restrictions and limitations, but the rules that apply to individuals with taxable income at or below a certain threshold ($340,100 for joint filers; $170,050 for other taxpayers) are simpler and more permissive than the rules that apply to individuals with income above those thresholds.

Child Tax Credit. The enhanced child tax credit (CTC) that was available last year was not renewed. Thus, for 2022, for each child under age 17, a CTC of up to $2,000 credit is available, depending on your modified adjusted income. In addition, a $500 nonrefundable credit is available for qualifying dependents other than qualifying children. Where the credit exceeds the maximum amount of tax due, it may be refundable. The maximum amount refundable for 2022 is $1,500 per qualifying child. The $500 credit applies to two categories of dependents: (1) qualifying children for whom a child tax credit is not allowed, and (2) qualifying relatives. The amount of the credit is reduced for taxpayers with modified adjusted gross income over $200,000 ($400,000 for married filing jointly) and eliminated in full for taxpayers with modified adjusted gross income over $240,000 ($440,000 for married filing jointly).

Earned Income Credit. The earned income tax credit (EITC) is determined by multiplying your earned income for the year (but only up to a maximum amount of earned income) by a credit percentage that varies depending on whether you have any qualifying children and, if so, the number of qualifying children. The EITC is also subject to a limitation based on your adjusted gross income. For 2022, the maximum amount of the EITC is (1) $560 for a taxpayer with no qualifying children, (2) $3,733 for a taxpayer with one qualifying child, (3) $6,164 for a taxpayer with two qualifying children, and (4) $6,935 for a taxpayer with three or more qualifying children. In addition, the EITC cannot be claimed if your investment income (including interest, dividends, capital gain net income, and net rental income) exceeds $10,300 for 2022.

Dependent Care Credit: If you incurred expenses to care for a child or another dependent so that you can work, you may be eligible for the child and dependent care credit. This credit is available to individuals who, in order to work or to look for work, have to pay for child care services for dependents under age 13. The credit is also available for amounts paid for the care of a spouse or a dependent of any age who is physically or mentally incapable of self-care. The credit is not available for amounts paid to a dependent or a taxpayer under age 19. The amount of the credit is a specified percentage of your total employment-related expenses – generally, 35 percent reduced (but not below 20 percent) by one percentage point for each $2,000 by which your adjusted gross income for the tax year exceeds $15,000. Employment-related expenses incurred during any tax year which may be taken into account cannot exceed $3,000 for one qualifying individual or $6,000 for two or more qualifying individuals.

Premium Tax Credit. A health insurance subsidy is available in the form of a premium assistance tax credit for eligible individuals and families who purchase health insurance through the Health Insurance Marketplace, also known as the “Exchange.” The provision is the result of the Patient Protection and Affordable Care Act (PPACA). This credit is refundable and payable in advance directly to the insurer on the Exchange. In the past, individuals with incomes exceeding 400 percent of the poverty level were not eligible for these subsidies. However, as a result of the American Rescue Plan (ARP) Act, the cap was eliminated for tax years beginning in 2021 or 2022 and therefore, anyone can qualify for the subsidy. In addition, the percentage of your income paid for a health insurance under a PPACA plan is limited to 8.5 percent of income. Thus, if you buy your own health insurance directly through an Exchange, you can receive increased tax credits to reduce your premiums.

Education-Related Deductions and Credits. Certain education-related tax deductions, credits, and exclusions from income may be available for 2022. For example, tax-free distributions from a qualified tuition program, also referred to as a Section 529 plan, of up to $10,000 are allowed for qualified higher education expenses. Qualified higher education expenses for this purpose include tuition expenses in connection with a designated beneficiary’s enrollment or attendance at an elementary or secondary public, private, or religious school, i.e. kindergarten through grade 12. It also includes expenses for fees, books, supplies, and equipment required for the participation in certain apprenticeship programs and qualified education loan repayments in limited amounts. A special rule allows tax-free distributions to a sibling of a designated beneficiary (i.e., a brother, sister, stepbrother, or stepsister). As a result, a 529 account holder can make a student loan distribution to a sibling of the designated beneficiary without changing the designated beneficiary of the account.

Depending on your modified adjusted gross income for the year, you may also qualify for: (1) an American Opportunity Tax Credit of up to $2,500 per year for each eligible student; (2) a Lifetime Learning credit up to $2,000 for tuition and fees paid for the enrollment or attendance of yourself, your spouse, or your dependents for courses of instruction at an eligible educational institution; (3) an exclusion from income for education savings bond interest received; and (4) a deduction for student loan interest.

If you qualified for student loan forgiveness under the plan announced by the Biden administration earlier this year, the forgiven amount will generally be excludible from your income for federal tax purposes. However, you may be liable for state or local income taxes as a result of the discharge.

Clean Energy Credits. For 2022, the clean energy tax credits available include (1) residential energy property credits (the nonbusiness energy property credit and the residential clean energy property credit) and (2) vehicle-related credits (the qualified plug-in electric drive motor vehicle credit and the alternative fuel refueling property credit). These credits were significantly expanded by the Inflation Reduction Act, generally beginning after December 31, 2022. However, as described in more detail below, a change to the credit for purchasing an electric vehicle, requiring the final assembly of the vehicle in the United States, takes effect on August 17, 2022.

For years before 2023, the nonbusiness energy property credit (renamed the energy efficient home improvement credit by the Inflation Reduction Act) is a credit for: (1) 10 percent of the cost of qualified energy efficiency improvements installed during the year; and (2) the amount of the residential energy property expenditures paid or incurred during the year. Qualified energy efficiency improvements include the following qualifying products: (1) energy-efficient exterior windows, doors and skylights; (2) roofs (metal and asphalt) and roof products; and (3) insulation. Residential energy property expenditures generally include: (1) energy-efficient heating and air conditioning systems, and (2) water heaters (natural gas, propane, or oil). There is a lifetime limit of $500 on the total amount of nonbusiness energy property credits that may be claimed. In addition, the amount of the credit taken with respect to windows is limited to $200. The following additional limitations also apply to the nonbusiness energy property credit: (1) $300 for any item of energy-efficient building property; (2) $150 for any furnace or hot water boiler; and (3) $50 for any advanced main air circulating fan.

Beginning in 2023, this credit is increased to 30 percent of the costs of all qualified energy efficiency improvements and residential energy property expenditures made during the year. In addition, the lifetime credit limitation is replaced with an annual limit of $1,200. The annual limits for specific types of qualifying improvements are (1) $250 for any exterior door ($500 total for all exterior doors), (2) $600 for exterior windows and skylights, (3) $600 for other qualified energy property (including central air conditioners; electric panels and certain related equipment; natural gas, propane, or oil water heaters; oil furnaces; water boilers), and (4) a higher $2,000 annual limit for heat pumps and heat pump water heaters, biomass stoves, and boilers. The Inflation Reduction Act also added a credit of up to $150 per year for home energy audits. Roofs no longer qualify for the credit beginning in 2023.

The residential clean energy credit by the Inflation Reduction Act) equals 30 percent of the cost of certain qualified property installed on or used in connection with your home. For 2022, qualifying properties are: (1) solar electric property, (2) solar water heaters, (3) fuel cell property, (4) small wind turbines, (5) geothermal heat pumps, and (6) biomass fuel property. Biomass fuel property expenditures no long qualify after December 31, 2022. However, battery storage technology expenditures qualify beginning in 2023.

The qualified plug-in electric drive motor vehicle credit may be available if you acquired a qualified electric vehicle and placed it in service this year. For 2022, the amount of the credit is $2,500, plus an amount based on the battery capacity of the vehicle if the vehicle draws propulsion energy from a battery with at least 5 kilowatt hours of capacity. The credit begins to phase out for a manufacturer’s vehicles when at least 200,000 qualifying vehicles have been sold for use in the United States. For instance, Tesla and GM vehicles purchased in 2022 are not eligible for tax credits since those manufacturers have exceeded the 200,000 vehicle threshold.

The Inflation Reduction Act significantly modified the electric vehicle credit. After August 16, 2022, the credit is generally available only for qualifying electric vehicles for which final assembly occurred in North America. However, under a transition rule, if you entered a written binding contract to purchase an electric vehicle on or before August 16, 2022, but took possession of the vehicle after that date, you would not be subject to the final assembly requirement. The Inflation Reduction Act also increased the amount of this credit, effective after December 31, 2022. Beginning in 2023, the total credit amount is $7,500, consisting of $3,750 for vehicles meeting a critical minerals requirement and $3,750 for vehicles a battery component requirement. In addition, price limits apply depending on the vehicle type ($80,000 for vans, SUVs, and pickup trucks; $55,000 for other vehicles). The credit is also not available to taxpayers with adjusted gross income over $300,000 (married filing jointly), $225,000 (head of household), and $150,000 (single). Other requirements apply beginning after 2023.

The alternative fuel vehicle refueling property credit is a credit for 30 percent of the cost of purchasing qualified alternative fuel vehicle refueling property. This credit initially expired at the end of 2021 but was extended through 2032 by the Inflation Reduction Act. The amount of the credit is limited to a certain dollar amount, which depends on whether the property is used for business or personal purposes. The amount of the credit for business-use property (i.e., depreciable property) is limited to $30,000. The amount of the credit for personal-use property (i.e., non-depreciable property) is limited to $1,000.

Beginning next year, the credit allowed with respect to any single item of qualified alternative fuel vehicle refueling property placed in service during the tax year cannot exceed (1) $100,000 in the case of depreciable property, and (2) $1,000 in any other case. In addition, the definition of qualifying property is expanded to include bidirectional charging equipment and the credit can also be claimed for electric charging stations for two- and three-wheeled vehicles that are intended for use on public roads.

Retirement Planning

If you can afford to do so, investing the maximum amount allowable in a qualified retirement plan will yield a large tax benefit. If your employer has a 401(k) plan and you are under age 50, you can defer up to $20,500 of income into that plan for 2022. Catch-up contributions of $6,500 are allowed if you are 50 or over. If you have a SIMPLE 401(k), the maximum pre-tax contribution for 2022 is $14,000. That amount increases to $17,000 if you are 50 or older. The maximum IRA deductible contribution for 2022 is $6,000 and that amount increases to $7,000 if you are 50 or over.

Life Events

Life events can have a significant impact on your tax liability. For example, if you are eligible to use head of household or surviving spouse filing status for 2022 but will change to a filing tax status of single for 2023, your tax rate will go up. If you married or divorced during the year and changed your name, you need to notify the Social Security Administration (SSA). Similarly, the SSA should be notified if you have a dependent whose name has been changed. A mismatch between the name shown on the tax return and the SSA records can cause problems in the processing of tax returns and may even delay tax refunds. Let me know if you have been impacted by a life event, such as a birth or death in your family, the loss of a job or a change in jobs, or a retirement during the year. All of these can affect you tax situation.

Please call Gregory J. Spadea to discuss your 2022 tax return and determine if any estimated tax payment may be due before year end at 610-521-0604.

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