The recently adopted Economic Growth and Tax
Relief Reconciliation Act of 2001 (the "Act") will in one way or
another affect most taxpayers over the next nine years. It is not tax simplification, but it will
result in a reduction of Income and Estate Taxes. The changes are a complex
mixture of phasing in certain new things, while phasing out some existing
ones. Now is a good time to consult
your tax advisor to see how the change will impact your particular situation. This article will only hit some of the high
spots and only in a general way.
There
is a joker in the deck in that there is a "Sunset" provision, which
will cause all of the changes made by this Act to expire at the end of 2010, at
which time the law is to revert back to what it was before the Act was
adopted. We suspect that there is
little chance of that happening, but there is a significant chance that there
will be much tinkering with the tax laws between now and then, all of which
will make it more difficult to plan long term.
Your tax planning will have to be reviewed more often than in the past.
On
the Income Tax side, the Act creates a new 10% tax bracket, which initially
will apply to taxable income up to $6,000 for a single taxpayer or married
filing separately, to $12,000 for married filing jointly and $10,000 for Head
of household status. This new bracket will be the basis for the much publicized
"rebate" that is to be paid this year. The rebate will reflect the 5% differential on the initial
bracket as opposed to the prior 15% initial bracket. The 15% rate will remain over the life of the Act, but other
bracket rates are reduced progressively, so that by 2006 the 28% rate will become 25%, the 31% will be 28%, the
36% will be 33% and the 39.6% will become 35%. The Act also progressively
repeals some of the hidden tax increases that have been slipped in over recent
years, Specifically, the reduction in
the itemized deductions that may be taken by filers with Adjusted Gross Income
in excess of specified thresholds will disappear after 2009. Similarly, the reduction in the personal
exemption for higher income filers is progressively reduced until it disappears
after 2009. The Child Tax Credit is
increased, and can now be used against the Alternative Minimum Tax after
2001. Relief from the "marriage
penalty" is achieved by expanding the 15% bracket for married filers and
increasing the standard deduction for them.
There are many changes affecting education expenses and investments,
including increasing the amount that may be contributed to an Education IRA and
modifying other restrictions. Education expenses taken from a 529 Plan will now
come out free of income tax, and more flexibility may be built into the
Plan. Educational expenses provided by
an employer are generally excluded from the employee's income, and may now be
used for graduate school.
The
Estate Tax, Gift Tax and Generation Skipping Transfer Tax have all been
modified, generally accomplishing a reduction progressively over 2002 to 2009.
The
Unified Credit exemption amount increases from the present $675,000 to $1
million for taxpayers dying in 2001-2003.
It goes to $1.5 million for 2004 and 2005, and $2 million for
2006-2008. In 2009 it goes to $3.5
million and then the Estate Tax disappears in 2010, but only to reappear with
the Unified Credit at the $1 million level in 2011. As mentioned earlier, we expect
that there is a very good possibility that it will be reworked at least
once before 2010. The Gift Tax lifetime
exemption becomes $1,000,000 in 2002 and remains at that level. The annual exclusion amount for the Gift Tax
remains at an inflation adjusted $10,000 per donee per year. The Generation Skipping Transfer Tax exemption
increases in 2004 to equal the Unified Credit Amount and keeps pace with the
Unified Credit Amount thereafter..
In
the meantime, the basic plan of using a Unified Credit Trust (sometimes called
a bypass trust) for the Unified Credit Exemption Amount, with the balance going
to a surviving spouse either outright or in a marital trust, still works,
except that the surviving spouse's share of the estate decreases as the Unified Credit Trust increases in value.
The strategies of splitting of assets between spouses and using Irrevocable
Insurance Trusts are still desirable in the proper situation. With the prescribed increases in the Unified Credit Exemption Amount, it will
more important than ever to periodically review your particular situation to
see where you stand. Your Will can be
modified at any time during your life, as long as you are competent. An Irrevocable Trust cannot be revoked or
materially changed.
The
credit against the Estate Tax for state death taxes is phased out and then
brought back in as a deduction rather than a credit. That is something that you have no real control over. However, we
expect the repeal of that credit to cause Pennsylvania to increase its
Inheritance Tax to make up the shortfall.
Presently, the Pennsylvania Estate Tax picks up any part of the Federal
credit for state taxes that isn't consumed by the Inheritance Tax. Therefore, if the federal credit disappears,
the Pennsylvania Estate Tax will generate zero dollars. The credit is phased
out at 25% per year, disappearing in 2005.
The use of the state death tax as a deduction rather than a credit still
has value to the estate, but only to the extent of the amount of the state
death tax multiplied by the estate's top bracket.
There
are also changes in the tax rates.
Starting in 2002 the top bracket for the Estate Tax, Gift Tax and the
Generation Skipping Transfer Tax is reduced to 50%, and works its way down to
45% in 2009, disappearing in 2010, subject to the "Sunset"
provision. The gift tax rate is reduced
at the same rate as the Estate Tax rate, but it does not disappear. Rather it goes to 35% in 2010.
While
not part of the new Act, the IRS has
modified certain rules with respect to regular IRAs and qualified plans, in the
estate planning context Many taxpayers
have IRAs and/or qualified plans that make up a very large part of their
estate, which makes it difficult to balance assets between the spouses. Generally, the surviving spouse is the
beneficiary. We have previously
recommended that a trust for the children or other beneficiaries be made the
contingent beneficiary of those assets, with the thought that the surviving spouse
might find it advantageous to disclaim all or part thereof and have the asset
pass to the other beneficiaries.
Previously, the Required Minimum Distribution (RMD) for the trust or the
non trust beneficiaries would be gauged by the life expectancy of the oldest
member of the group, or if the owner had passed the required beginning date (70
½ years old), by the owner's expectancy as though he had lived. You now have the opportunity to instruct the
Plan or IRA to divide the portion payable to the contingent beneficiaries into
as many separate accounts as there are such beneficiaries. Each beneficiary
would then have to take a RMD based on that beneficiary's life expectancy from
the IRS tables. Thus, each child, or
other beneficiary could continue the income tax deferral aspects for a longer period
of time.
This
Article is not a substitute for a consultation with your tax advisor. There are many changes in the Act that are
not dealt with in this Article that may be important to your particular
situation.
For further information, please contact
Attorney Carl Meyer by phone, fax or e-mail.
Carl F. Meyer, Esquire
412-765-1600
412-261-3783 (Fax)
cmeyer@wsmoslaw.com
Insurance companies that sell automobile insurance in Pennsylvania are required to offer all customers the option to add "underinsured" and "uninsured" motorist coverage to their policies.
"Underinsured" motorist coverage is insurance that you purchase from your insurance company to pay for your losses if you are injured by someone who does not have enough liability insurance to pay for all of the injuries you may suffer. "Uninsured" motorist coverage is insurance that you purchase to pay for your own losses if you are injured by an uninsured or a hit-and-run driver.
Even if you do not have an insurance policy yourself, you may be entitled to uninsured and underinsured coverage in the event you are in a car accident. The Pennsylvania Motor Vehicle Financial Responsibility Law defines an "insured" as "a spouse or relative" of a named insured, if the spouse or other relative is "residing in the household of the named insured." Any minor residing in the household in the custody of a household member is also entitled to coverage. Everyone entitled to claim coverage as a household member can also claim uninsured and underinsured benefits if the named insured opted to purchase them.
Pennsylvania courts have clarified the facts and circumstances that make a person a "resident relative" in automobile insurance policies. A person's residence is "a factual place of abode." A residence does not have to be permanent and can simply mean that someone is physically living in the household. For example, a father living in his own home in Pittsburgh was found to be a member of his son's "household" and was entitled to coverage under the son's automobile policy, despite the fact that the son was on military duty in Korea. The father did not own a car and had no automobile insurance coverage. The son owned an insured car, which he garaged at the father's house. Focusing on the facts that the son was only temporarily in the military, that he continued to use the home as his legal address, and that he listed the home as his residence with the insurance company, the court found that the father was a member of the son's household.
In another case, a teenage child who lived in her mother's home and stayed in her father's home "only twice during the entire school year" was not a resident of her father's home for the purpose of determining whether she could collect coverage under his insurance policy. Noting that children who spend significant time in both parents' households can be residents of both households, the court found that the child simply did not maintain a sufficiently significant physical presence in her father's house to merit her having status as an insured.
While Pennsylvania law absolutely requires that all drivers maintain minimal
liability coverage, the purchase of underinsured and uninsured motorist
coverage is optional. Since many people only purchase minimal liability
coverage, and an alarming number of drivers drive without any insurance at all,
it is wise to purchase underinsured and uninsured motorist coverage. You should
consider reviewing your insurance policy with your agent or your attorney to
make sure you that understand your coverage and to check whether you are
adequately insured.
A Pennsylvania sales representative quit his job when his draws against commissions were $38,000 more than the commissions he actually earned. In a suit by the corporation to collect the overdraws, the Pennsylvania Supreme Court found that independent sales representatives can sometimes be liable for paying back draws against commissions. Recognizing that large corporate employers sometimes have superior bargaining power in contract signings, the court also observed that many corporate employers are small family-run businesses that may be dealing with very experienced sales representatives. The court declined to adopt any broad rule of law favoring businesses or sales representatives, deciding, instead, that principles of contract law should control legal disputes between sales representatives and businesses.
Where an agreement clearly provides that a sales representative will have to
pay back draws in excess of earned commissions, the courts will enforce the
agreement. But if there is no mention of the representative's responsibility to
reimburse for overdraws, the draws may be treated as salary. Where commission
payments will be paid in advance, it is advisable for business owners and sales
representatives to carefully negotiate the sales contracts and pay close
attention to the contracts' legal language.
The Pennsylvania School Code permits the suspension and the permanent expulsion of public school students. A "suspension" is the exclusion of a pupil from school for a period of from one to ten consecutive school days. An "expulsion" is an exclusion from school for a period exceeding ten school days and may be permanent. Students at risk of suspension or expulsion are entitled to written notice of the charges against them. For suspensions in excess of three days and for all expulsions, students are also entitled to hearings where they have the right to be represented by counsel.
Students must make up examinations and work missed while being disciplined by suspension. During the period prior to the hearing in an expulsion case, the student is entitled to attend school unless his or her presence would constitute a threat to the health, safety, morals, or welfare of others. Any student excluded from school pending an expulsion hearing is entitled to alternative education, which may include home instruction. Where students facing expulsion complete home instruction and also pass final exams, they are entitled to a high school diploma.
School boards have broad authority to determine school discipline. Each school board may adopt and enforce reasonable rules. The school board must publish a code of student conduct identifying all of the offenses that can lead to suspension and expulsion.
Many school districts have developed "zero tolerance" policies regarding the possession of weapons on school property by students. In fact, the School Code itself requires that all Pennsylvania school boards shall expel any student who has a weapon at school, at a school activity, or on a school bus. However, the School Code gives discretion to school superintendents to recommend discipline other than expulsion in weapons cases if the superintendent feels expulsion is not warranted. Recently, a Pennsylvania court found that a Pennsylvania school district's strict zero tolerance weapon possession policy violated the School Code because it did not give the superintendent the opportunity to have any input in the expulsion proceedings.
School boards may expel or suspend students for their conduct off school premises. Where a middle school student designed and posted a website that included his drawing of one of his teachers severely injured and contained lewd comments and references to his willingness to hire a hitman to kill her, his permanent expulsion was upheld on appeal. Even though the student created the website at home and did nothing specific to transmit the offensive material to the school, the court upheld his expulsion because his conduct severely disrupted school discipline and order. The targeted teacher suffered emotional stress, which led to physical illness. Her inability to teach required the scheduling of substitute teachers in her classes.
The school board found that the violent nature of the drawing and language seen by many students who visited the website resulted in "plummeting morale" at the school. Relying on previous cases where students' sale of marijuana to other students off-campus and students' loud harassment of teachers off-campus were found to warrant school discipline, the court held that expulsion can be an appropriate remedy for conduct that takes place off school grounds.
Students under 17 who have been expelled are still subject to the School
Code's requirements of compulsory education and are entitled to be educated.
The initial responsibility for providing the required education rests with the
student's parents or guardian through placement in another school, through
tutorial or correspondence study, or through another educational program
approved by the district's superintendent. If the parents or guardian are
unable to provide for the required education, they must, within 30 days, submit
to the school district written evidence so stating. The district then has the
responsibility to make some provision for the student's education.
Tucked away in Pennsylvania's agriculture statutes is the Dog Law. In addition to specific provisions regarding dog tags and licenses, the confining of dogs in heat, and the general regulation of kennels, the Dog Law provides a procedure to declare a dog dangerous.
Any person who has been attacked by a dog or whose domestic animals have been killed or injured by a dog without provocation may begin an action to declare the dog dangerous. The action may also be brought by a dog warden or local police officer. The case is heard and the determination is made by a local district justice. A dog may be declared dangerous based on the dog's history, which must include at least one of the following: (a) infliction of severe injury on a human being without provocation, (b) killing or severely injuring a domestic animal without provocation, (c) biting or pursuing a human without provocation, or (d) being used in the commission of a crime.
If a dog is determined by a district justice to be dangerous, its owner must have a proper enclosure to confine the dog and must post his or her premises warning of the presence of a dangerous dog. The warning sign must include a symbol designed to inform children of the danger posed by the dog. Where the owner of a dangerous dog is a minor, the minor's parents are liable for the dog's conduct and must comply with the duties imposed on the owners of dangerous dogs. In addition to properly confining the dog, the owner of a certified dangerous dog must post a $50,000 bond or provide the Commonwealth with on-going confirmation of adequate insurance for at least $50,000. Owners of certified dangerous dogs must notify authorities within 24 hours if the dog is loose, unconfined, dead, sold, or donated, or if the dog has attacked a person or domestic animal. A dangerous dog may not be outside its enclosure unless muzzled and restrained by a substantial chain or leash and under the physical restraint of a responsible person.
When a certified dangerous dog attacks a person or domestic animal, its owner may be convicted of a misdemeanor. The owner of any dog who intentionally, recklessly, or negligently permits the dog to aggressively attack and cause severe injury or death to another person is guilty of a misdemeanor of the first degree. In addition, the dog shall be immediately confiscated by a state dog warden or a police officer, placed in quarantine for the proper length of time, and thereafter humanely killed in an expeditious manner, with the costs of quarantine and destruction to be paid by the dog's owner.
A dog may not be declared dangerous if the injured victim was a trespasser on private property, was tormenting, abusing, or assaulting the dog, or was committing a crime when attacked. The Dog Law forbids townships and cities from banning any specific breeds of dogs and prohibits insurance companies from denying coverage for specific breeds. Townships and cities may enact ordinances that prohibit dog owners from permitting their dogs to run freely. These ordinances are sometimes referred to as "leash laws."
It is unlawful to poison a dog or to leave poison in any place, even on your
own premises, where it may be easily found and eaten by dogs. If you feel
threatened by a dangerous dog, give the dog's owner written notice of your
concerns. Consider commencing an action under the Dog Law. Even if the dog's
conduct does not meet the standard for dangerous dogs, its owner may still be
responsible for injuries caused by the dog. Putting the owner on notice of your
concerns is the first step to proving that he or she knew or should have known
of the dog's dangerous tendencies.
Pennsylvania law requires parents to support their children until the children are 18 or have graduated from high school, whichever occurs later. Children who graduate from high school while 17 are still entitled to support after high school. Conversely, children who turn 18 while enrolled in high school are not entitled to support after they graduate.
What happens to children who drop out of school? If a child is found by a judge
to be "emancipated," his or her parents are no longer obliged to
support the child. The child's age, marital status, ability to support himself
or herself, and desire to live independently of the custodial parents are all
taken into consideration by the courts. Each case is considered separately, and
the detailed facts of the child's circumstances and lifestyle are relevant. The
most important facts on which the courts focus relate to the child's ability to
be self-supporting. If the child is unemployed and does not have a stable,
regular, independent household of his or her own, the courts will be reluctant
to find the child emancipated, even if the child has dropped out of school and
is acting independently. In the case of divorced parents, as long as the
custodial parent continues to make efforts to care for and support the child,
the noncustodial parent will be required to continue to make support payments.
If you are injured in an accident, photograph or videotape your injuries as soon as possible. A graphic picture can be very helpful when talking to an insurance adjuster or a jury.