BBB accredited

Discharging income tax debt just got more difficult. In Mallo v. IRS, the Tenth Circuit recently ruled that tax debts from late returns can’t be discharged through bankruptcy, making wiping out tax debt an even harder task.

Tax Bankruptcy Basics

To put the court decision in context, it’s helpful to understand the fundamentals of tax bankruptcy. Discharging tax debt is one of the trickier areas of consumer bankruptcy law. As the agency itself has recently admitted, the IRS doesn’t always have the resources to quickly pursue its debtors. Because of this, the IRS does have more aggressive collection remedies compared to other creditors. Discharging tax debt is difficult but it can be done for certain tax liabilities. There are a few conditions, known as the Beard test, which the taxpayer must meet before they can wipe out tax debts:

  • The tax debt is comprised of income taxes (as opposed to payroll taxes or other penalties).
  • The tax liability is old enough. The tax return must have been due three years before the taxpayer filed for bankruptcy and the IRS must have assessed the tax debt at least 240 days before bankruptcy was filed.
  • No attempted fraud or tax evasion took place.
  • And, finally, the taxpayer filed a tax return for the debt at least two years before he or she filed for bankruptcy. It doesn’t count if the IRS filed a return on the taxpayer’s behalf.

Are Late Returns Eligible for Discharge?

The fourth requirement of filing the tax return was under scrutiny in this case. The question at hand: do tax returns filed late, but filed at least two years before bankruptcy, fulfill the requirement?

In the case of the Mallos in the Tenth Circuit, the answer was no. The couple filed a joint tax return in 2007 and filed for bankruptcy in 2010. However, the IRS had originally assessed the tax debt after the couple failed to file returns in 2000 and 2001. That debt, the court decided, was ineligible for discharge. The court decided that the Mallos’ 2007 tax return wasn’t “a reasonable attempt to fulfill the tax law requirements” because the IRS had already assessed additional taxes.

The Tenth Circuit decision departed from the Colorado district court’s opinion, which allowed the late tax return.

With similar pending cases in the First and Ninth circuits, the issue could ultimately go to the Supreme Court. Unless the IRS amends its conditions for tax debt relief, the Supreme Court could rule that late returns simply aren’t eligible for tax liability discharge.


The issue has a widespread impact for many struggling consumers. Most individuals filing for bankruptcy will have some sort of tax debt. After all, if you’re trying to keep your home and your assets, the tax bill is what often gets put on the back burner.

Tax advocates are concerned this will unnecessarily penalize these taxpayers and deprive them from the benefits of bankruptcy. The implication is that all late filers, including those who only file a day late or fail to obtain the proper extensions, would no longer have recourse for tax debt discharge.

child tax benefitsWe all know that the cost of raising children can be significant, especially for middle- and lower-income families. There are dozens of regular expenses that families must fit into their budget for their children every year. In addition to the normal every day run-of-the-mill expenses parents face hundreds of other spending options in regards to raising their children, including sports, clubs, hobbies and recreation and entertainment. It’s no wonder that many parents in middle- and lower-income families have very little left over for themselves after taking care of their children first.

Kids Cost Money

While raising children can certainly be expensive, there is a financial bright side to having kids, especially if you have a lot of them. That bright side comes at tax time. Most people don’t like anything about tax time, except the refund, of course. However, did you know that your children could pay big dividends every year during the tax season, which could actually mean a much better refund?

What Is the Child Tax Credit?

While many taxpayers with children are already aware of the Child Tax Credit (CTC), there are still others who don’t know how it works or are not even aware they can use it. However, failing to take advantage of this credit can be a big mistake, which could cost you a lot. So how does the CTC work? According to, you might be able to lower your federal income tax by as much as $1,000 per child under the age of 17, by using the Child Tax Credit. In addition to the age qualification, there are several other standards that need to be met in order to qualify for this credit. You can learn more about those qualifications by clicking here, but they are as follows:

  • Relationship
  • Support
  • Dependent
  • Citizenship
  • Joint Return
  • Residence

Income Limitations

The CTC is fairly simple and it doesn’t take a lot of extra paperwork or time to file. The credit is good for anyone with children that meet the qualifications, but there are some income limitations as well. For example, for married couples filing jointly who have an adjusted gross income of more than $110,000, the credit is reduced by 5 percent. The same goes for married couples filing separately who have an income greater than $55,000 and for single or head-of-household filers with income greater than $75,000.

Child Tax Credit Is Non-refundable

A common misconception regarding the Child Tax Credit is that you get more money added to your refund. However, while it will definitely help reduce your tax bill, the CTC is not refundable. On the other hand, there is another great prize for parents at tax time called the Additional Child Tax Credit (ACTC). This credit is even better because unlike the CTC, the ACTC is refundable. This little credit is one of parents’ favorites at tax time. So how does it work?

Additional Child Tax Credit

Lets’ say you end up with a child tax credit of $3,000, but your tax bill is $2,300. That means you will get the CTC credit toward your $2,300 bill and owe nothing, but the other $700 will just be lost. On the other hand, if you qualify for the ACTC, then you could receive all, or at least some, of that other $700 back as a refund. While the calculations will vary, typically you will receive a credit equal to the amount of 15 percent of your taxable earned income that is more than $3,000. That means if you qualify for the ACTC then you could actually get a refund if you don’t owe any taxes. How great is that!

Put Your Kids to Work at Tax Time

So this tax season put your kids to work and make sure that you take full advantage of the Child Tax Credit, as well as the Additional Child Tax Credit. You work hard for your money and if you’re like most parents, you probably sacrifice a lot of that hard-earned money on your children, not to mention most of your time and energy. So why not make your kids work for you, at least once a year at tax time. No, they probably won’t be filing your tax return for you anytime soon, but they could help you get a much better return than you might have expected.

The U.S. IRS recently launched the International Data Exchange Service (IDES): an encrypted web application and database to which foreign banks must submit information on U.S. corporations, corporate shareholders and U.S. taxpayers who live, hold financial accounts and/or do business offshore. (more…)

athletes taxed unfairlyWe all know that professional athletes make a ton of money, at least those who play in the three largest leagues in the United States: NFL, MLB and the NBA. Of course, who wouldn’t like to have that kind of regular paycheck coming in? While no one will probably ever shed a tear because an athlete has to pay higher taxes than most people, could it be possible that athletes are held to a different standard when it comes to paying state income taxes?

State Income Tax Laws

Most people get up and go to work in the city or town where they live, while some people commute to nearby neighboring states. However, athletes do a lot of traveling all over the country in their line of work. Of course, those people who work in a neighboring state have to pay income tax to the state in which they work, unless it’s in one of the seven states that don’t charge income tax. For the record, those states are:

  • Alaska
  • Florida
  • Nevada
  • South Dakota
  • Texas
  • Washington
  • Wyoming

There are also states that have reciprocal agreements. The following states allow residents of neighboring states to only pay income taxes for the state they reside in even though they may be working in another state:

  • District of Columbia – Valid if you are a resident of any other state
  • Illinois – Valid if you are resident of IA, KY, or WI
  • Indiana – Valid if you are a resident of KY, MI, OH, PA, or WI
  • Iowa – Valid if you are a resident IL
  • Kentucky – Valid if you a resident of IL, IN, MI, OH, VA, WV, or WI.
  • Maryland – Valid if you are a resident of DC, PA, VA, or WV
  • Michigan – Valid if you are a resident of IL, IN, KY, MN, OH, or WI
  • Minnesota – Valid if you are a resident of MI, or ND
  • Montana – Valid if you are a resident of ND
  • New Jersey – Valid if you are a resident of PA
  • North Dakota – Valid if you a resident of MN or MT
  • Ohio – Valid if you are a resident of IN, KY, MI, PA, or WV
  • Pennsylvania – Valid if you are resident of IN, MD, NJ, OH, VA, or WV
  • Virginia – Valid if you are a resident of DC, KY, MD, PA, or WV
  • West Virginia – Valid if you are resident of KY, MD, OH, PA, or VA
  • Wisconsin – Valid if you are a resident of IL, IN, KY, or MI

Most Workers Escape State Income Tax Bill

Every state differs on its treatment of nonresidents working within its state. Some states have a one-day rule that states, if you work in the state for one day, you owe that state income tax. Others have a time limit of which you can be present working in the state without paying income tax. These limits range from 10 to 60 days. However, say you live and work in New York and you travel to California for business and spend a few days actually working, chances are the state of California won’t be knocking on your door anytime soon to collect income tax on the money you earned while you were working in its state. It would be very difficult for the state to track the days and hours you worked there. So, even though by law you should be paying California some income tax, it’s very unlikely that will happen. However, the same is not true for athletes.

Athletes Get Hit From Every Side

Professional athletes’ work schedules can in most cases be easily followed, so it’s easy for state tax officials to track them down and send them a bill. That also means professional athletes face the potential of filing a tax return for every state in which they play (and some cities), if the state requires it. Imagine being a major league baseball player who travels to 20 different states several times throughout the year. You would be responsible for paying taxes for every day you spent working in each separate state.

Is It Too Much?

On top of that, many athletes still have to pay state taxes in their home state on the remaining money after they pay income taxes in other states. Again, professional athletes make a lot of money, but when it comes to state income tax, it seems as though some states and cities are taking advantage of the situation.

Fighting Back

In fact, according to a recent report, two former members of the NFL are fighting back against the city of Cleveland, Ohio. At issue is the method that Cleveland uses to tax nonresident professional athletes. The city reportedly calculates these taxes according to the number of games a team played in the city divided by the total of games played for the entire season. Meantime, most cities around the country use a different method, wherein they divide the number of days the team spends in the city by the total number of days worked for the employer. The difference can be huge.

The Proof Is in the Pudding

One former player for the Chicago Bears said that under Cleveland’s method he had to pay local taxes on close to five percent of his income. However, if Cleveland used the same method as other cities he would have only paid on about one percent of his income. Elsewhere, in a separate case, a former player for the Indianapolis Colts claims that Cleveland charged him for taxes for days he wasn’t even in the city. The player was injured and did not travel with his team to Cleveland. Therefore, he claims that the city has no grounds to charge him when he did not perform any services in Cleveland, nor was he even physically present.

Different Sports, Same Cause

The case will be heard in the Ohio State Supreme Court this month and it’s sure to peak the interest from players from all the major professional sports leagues. In fact, all four major professional player associations have already joined in the suit, including the NFL, the NBA, MLB and the NHL. This case will surely be watched closely as it has the potential to affect many different athletes from all over the country.

Things Aren’t Always as They Seem

So the next time, you complain about athletes making way too much money, just remember that they also pay a lot more taxes and their tax returns are probably a lot more complicated than yours. Of course, that being said, most of us would still be willing to trade our paychecks with them.

tax-extenders-bill-2014Much was made of tax breaks that were expected to expire at the end of 2014, but alas, more than 50 of them, which pertain to individuals and businesses did not ultimately come to pass, thanks to the somewhat last minute Tax Prevention Act. Though it was signed into action on December 19th, it applies retroactively to 2014, ensuring that certain tax breaks will remain for at least this tax filing year.

Though not all of the breaks are applicable to you, there’s a good chance you’ll be impacted by at least one of the tax extensions, regardless of your age or income. Read on to ensure you capture the tax saving opportunities for which you qualify.

Deduction for classroom teachers.  If you’re a teacher and you spend money out of your pocket (that’ s not reimbursed) on classroom supplies, you can deduct such expenses, up to $250. Because this is an “above the line” deduction, you can use standard deductions or itemize; ultimately, it could help lower your adjusted gross income.

Commuter expenses.  Whether you drive to work and pay for parking or commute using mass transit (and your employer doesn’t reimburse you for it), the 2014 tax extensions allow you to claim up to $250 a month for your expenses. (Without the extension, mass transit riders can claim just $130 a month).

Extension of mortgage debt relief for foreclosures and short sales. Selling your home in a foreclosure or short sale doesn’t mean you walk away from the home, financially speaking.  From a tax policy perspective, “cancellation of debt” essentially means that you’ve benefitted from a lender’s decision to allow you to pay less on a loan agreement. (For example, , if you owed $300,000 on your mortgage loan, but the lender agreed to approve a short sale transaction for $260,000, you’ve made $40,000 as a result of the canceled debt. That’s typically considered income from a tax perspective—but it won’t be for 2014 tax filers, thanks to the extension of The Mortgage Debt Relief Act of 2007. It “forgives” up to $2 million (or $1 million, for taxpayers married but filing separately) of canceled debt related to a foreclosure or short sale from being considered taxable income.

Extension of the PMI deduction.  Private mortgage insurance (PMI) is part of your monthly mortgage payment if you bought a home but didn’t make a downpayment of at least 20%. Though the monthly amount of your PMI depends on your lender and the size of your loan, it’s an additional mortgage cost that’s homeowners can write off, at least for one more year, provided you meet certain income limits, and purchased your home in 2007 or later.

Deductions for tuition and education expenses. If you qualify for education related benefits like the American Opportunity Tax Credit, you may not qualify for the extended education-related tax credit, which is based on taxable income. But if you do, it’s an above the line deduction that could help you lower your AGI by as much as $4,000 you paid for tuition bills and similar education-related expenses in 2014.

Charitable gifting options for retirees.  Retirement income must be withdrawn from individual retirement accounts once a person turns age 70 ½ (even if the account owner doesn’t want to take the money from the account). As a result, the income that is withdrawn is taxable. For 2014, retirees must still withdraw as required, but can opt to gift up to $100,000 of the money directly to charity, to reduce their tax burden.