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January 2004

Taxation Law

HELPFUL TAX LAW HINTS
FOR MEMBERS OF OUR U.S. ARMED FORCES
Cameron R. Monti

                In the time of war when members of our U.S. Armed Forces must protect our freedom, it is helpful and reassuring to know that there are special tax benefits offered by the Internal Revenue Service (IRS) so that women and men protecting our country can focus primarily on their mission and goal of serving their country, and not be necessarily burdened with their taxes.

                To qualify for most of the special benefits for federal tax purposes, a taxpayer must be a member of the U.S. Armed Forces. Members of the "U.S. Armed Forces" includes officers and enlisted personnel in all regular and reserve units under the Secretaries of Defense, Army, Navy, Air Force, and U.S. Coast Guard. Generally, members of the American Red Cross and U.S. Merchant Marine are not included under this term, however, there is an exception if such members are serving in a "combat zone."

                Reminder Go to www.lavellelaw.com to find out more about our law firm If a member qualifies, for example, the IRS offers such benefits as an exclusion from gross income for all military pay earned while serving in a combat zone. The amount of exclusion may be limited to $5,532.90 each month plus $225.00 imminent danger/hostile fire pay if you are a commissioned officer rather than an enlisted person or warrant officer. "Combat zones" are designated by an Executive Order from the President as areas the U.S. Armed Forces are engaging or have engaged in combat. Some current examples of combat zones, among others, are: Yugoslavia; Albania; Persian Gulf; Red Sea; Kuwait; and of course, Iraq and Afghanistan.

                Another special tax break is an extension of deadlines for filing and paying federal income taxes and tax returns. This includes earned income and unearned income from investments. In general, the deadlines for

performing certain tax payments and filing actions are extended for the period of service in a combat zone, plus 180 days after the last day serving in that zone. Furthermore, a deadline extension will be granted while a member is continuously hospitalized as a result of an injury sustained in a combat zone. It is worth noting that in certain circumstances, the IRS may offer exceptions to allow other members serving outside of a combat zone to take advantage of the deadline extension benefit.

                The special tax benefits are not limited exclusively to members of the U.S. Armed Forces. The IRS extends various tax benefits to Employers of members. For example, if a member is called to active duty, serves in a combat zone, and an employer continues to pay the employee's full salary while on military duty, the employer does not have to withhold federal employment tax for that member. In other words, the salary is not considered "wages," and thus, not subject to the Federal Insurance Contributions Act (FICA) and the Federal Unemployment Tax Act (FUTA). Note, however, vacation pay earned or accrued prior to the employee being called to active duty or service is, in fact, subject to Social Security, Medicare, and federal income tax irrespective of whether it is paid subsequent to activation. This is due to the IRS treating vacation pay as supplemental wages rather than regular wages.

                There are other special tax benefits available to members of the U.S. Armed Forces and employers not mentioned in this article. For further information, you may download the Armed Forces' Tax Guide from the IRS website: http://www.irs.gov/pub/irs-pdf/p3.pdf

Estate Planning

ESTATE PLANNING FOR CONTEMPORARY ISSUES
Lauren E. Schaaf

                Changing families and new technology are creating new issues for estate planners. Lawyers today often must accommodate new types of families that are the result of divorce, illegitimacy, adoption and remarriage. As the landscape of family relationships change, so must their estate plans. For example, when a person gets divorced, his former spouse is treated as if she predeceased her spouse. Generally this presumption prevents the former spouse from inheriting anything from her spouse if he were to die. However, if a will, trust or other document conveys benefits and powers to children of the former spouse, those children retain those powers despite any divorce. Therefore, since estate planning documents do not automatically change upon a divorce, be sure to have your attorney include language that says any benefits to stepfamilies are only effective so long as the marriage is intact. That is, of course, unless you decide otherwise.

                With regard to adopted children, Illinois has a presumption that adopted children are to be treated as natural children. 755 ILCS 5/2-4 (West 2001). This means that adopted children inherit the adopted parents' estate equally along with any natural children, or totally if he or she is an only child and both adopted parents have died. Therefore, it is important that adopted parents have estate plans drafted, and that their wishes with respect to the adopted children are clearly expressed to the drafting attorney who will include appropriate language in the documents. With respect to an adopted child's natural parents, the adopted child is presumed not an heir of the natural parents or family. Exceptions do exist if for example, the child is adopted by a descendant or spouse of a descendant of a great-grandparent of the child or a natural parent of the adopted child died before the child was adopted.

                There is also an Illinois statute that determines whether an illegitimate child may take as an heir from his or her father. If a decedent of an illegitimate child acknowledged paternity during his lifetime, or after death has been adjudged the father of an illegitimate child, that child is an heir of the father and the father's ancestors. 755 ILCS 5/22 (West 2001). Therefore, he or she may take under the Illinois intestacy laws. Of course, to protect against this, the father could execute a trust and fund it with all his assets. Then, upon his death, all his assets would transfer to the trust and be distributed according to the terms of the trust, thus avoiding Illinois intestacy distribution laws.

                Ultimately, estate planners need to be aware of the specifics of their clients' familial situations and desires as to how their estates shall be distributed. Likewise, individuals planning for their futures need to consider exactly who they want their assets to go to. Then consult an estate planning attorney to do the job right. Do not presume that Illinois law will enforce your wishes. It may not.

Taxation Law

TAX BREAKS FOR HEALTH SAVINGS ACCOUNTS
Timothy H. Hughes

                The recently passed 2003 Health Savings Act contains important provisions that create private tax-free accounts individuals can use to save for their health costs. These new accounts create a tax incentive to save for healthcare expenses, while at the same time shifting some health care spending decisions to the individual consumer level. These new accounts are called Health Savings Accounts (HSAs). The purpose of this newsletter is to provide you with a brief overview of HSAs.

                HSAs are tax-advantaged savings accounts that can be used to pay for medical expenses incurred by individuals, their spouse or their dependents. However, the participant must also be enrolled in a high deductible health insurance plan. Then the tax-deductible savings account (HSA) may be opened. Here are more details regarding HSAs:

1. These accounts are available to those who have health insurance with annual deductibles of at least $1,000.00 for single coverage or $2,000.00 for family coverage.

2. Participants can make tax-deductible deposits to the accounts. Up to 100% of the health plan deductible may be saved annually (limit: $2,250.00 for self-only coverage; $4,500.00 for family coverage). Individuals age 55-65 can make additional tax-free catch-up contributions of up to $500 in 2004, gradually increasing to $1,000.00 by 2009. Note that the deduction for contributions by individuals is an "above-the-line" deduction, meaning that the contributions are deductible whether or not the taxpayer itemizes other deductions.

3. Employers can deduct contributions to HSAs (within the limits explained above) for employees who are eligible. HSAs can be offered under an employer's cafeteria plan. An employee who is an eligible individual will be able to exclude amounts contributed by his employer to his HAS, and these amounts won't be subject to FICA, FUTA, or income tax withholding.

4. Distributions used to pay unreimbursed medical expenses are completely tax free. Distributions can be used to pay for retiree health insurance, Medicare expenses, long-term care services and insurance, prescription drugs, surgery and other medical treatments and amounts not used to pay qualified medical expenses can be carried over from year-to-year, even if the HAS is provided under a cafeteria plan.

5. Money can be withdrawn from an HSA for purposes other than medical expenses after payment of income tax plus a 10% penalty. The penalty will not apply in the case of distributions made after retirement age or for distributions made due to death or disability.

6. HSAs are portable when an employee changes employers. Contributions and earnings belong to the account holder, not an employer.

7. There are no income-related eligibility requirements.

8. Assets can be passed on to the surviving spouse. Otherwise, the assets will be included in the decreased beneficiary's estate.

9. Employers are required to report amounts contributed to an HSA on the employee's Form W-2.

10. Nondiscrimination rules apply to employer contributions to HSAs. Employers who make a contribution to an HSA for an employee during a year generally are required to make available comparable contributions to the HSAs of all comparable participating employees during the same year.

11. The tax benefits are scheduled to start January 2004.

The above list is only some of the highlights of the new tax incentives that you may take advantage from the new tax legislation.

Family Law

SIZING UP YOUR SOCIAL SECURITY BENEFITS
Kerry M. Lavelle

                Typically, for individuals born prior to 1938, full retirement age is 65. Upon turning the age of 65, those individuals can receive the full amount of their Social Security retirement benefits.

                However, you can start taking your Social Security retirement benefits as early as age 62, but the benefit amount you receive will be less than your full retirement benefit. The benefit will be permanently reduced based on the number of months before you reach your full retirement age. For example, if your full retirement age is 65, reduction of your benefits at age 62 is 20%, at age 63 it is about 13 1/3%, and at age 64 it is about 6 2/3%. If your full retirement age is older than 65 (that is, you were born after 1937) you can still start your retirement benefits at age 62 but the reduction in your benefits will be greater. For example for individuals born in 1960 and later, there will be a maximum discount of 30% charged at age 62, and subsequent, smaller reductions as you near the age of 65.

                Moreover, the spousal benefit is greatly reduced also. Typically the spousal benefit is 50% of the wage earner's benefit but it, also, can be reduced if the spouse takes his or her share earlier. For example, if you start receiving benefits as a spouse at your full retirement age, you will receive 50% of the monthly benefit your spouse would have received if his or her benefits started at full retirement age. However, if you start receiving benefits as a spouse at age 62, you will receive 37.5% of the monthly benefit instead of 50%because you will be receiving benefits for an additional 36 months.

                What happens if your husband takes Social Security benefits at age 62 then dies at age 63?

                You have a choice between two early benefits: You can either take a reduced widow's benefit at age 60 meaning you would get 71.5% of what your husband was receiving when he died, or you can wait until the age 62 and take your own reduced benefits.

                Can you start receiving benefits at age 62 and then repay all of the money at your full retirement age to increase your benefit? The idea behind this strategy is to invest those dollars in the meantime and keep the interest that you earn.

                Yes you can, but there is a big catch: If you keep working or if you have a pension or investment income that is allowing you to invest your Social Security payments, you might wind up paying so much in taxes on those benefits that it cancels out any interest you may earn.

                What about starting and stopping Social Security benefits between age 62 and 65, depending a recent lay-off or freelance work income?

                The Social Security Administration will not discontinue benefits once you start collecting benefits early. However, if you make more than $11,520 per year, one dollar of every two dollars in benefits above that level would be withheld. If you notify the Social Security Administration in advance that you are going to surpass that earning limit, the Agency will withhold the money up front. If you do not, you will wind up having to repay the money as some disgruntled recipients have experienced.

                What about those additional contributions you are making to Social Security while you are working and collecting?

                Do not assume those dollars are being set aside for your benefit. Everyone who works pays into Social Security. Still, your new paychecks could bump up your Social Security benefit if, and only if, they replace one of your highest thirty five years of earnings.

                If you have the time and are contemplating retirement and the benefits you can receive from the Social Security Administration, visit their web site at www.socialsecurity.gov and learn about the rules and regulations surrounding your potential income benefits.

 Employment Law

SHORT COURSE ON THE FAMILY MEDICAL LEAVE ACT
Theodore M. McGinn

The Family and Medical Leave Act ("FMLA") is a federal statute that enables employees to balance their work and family responsibilities with the obligations for their employer. The statute allows employees to take unpaid leave from work for qualified medical reasons. The acceptable grounds for leave are: (1) the birth and care of employee's child; (2) placement for adoption or foster care a child with the employee; (3) care of an immediate family member; or (4) care of the employee's own serious condition.

The FMLA applies to those employers in the private sector who have 50 or more employees working a day during at least 20 calendar weeks in a current or proceeding calendar year. The statute also applies to public agencies (both state and local government) and various educational institutions. In addition, most Federal employees are covered by the statute.

To be eligible, you must be covered by an employer that employs at least 50 people, have worked at least 12 months for that employer and have worked at least 100 to 150 hours during the twelve months immediately before the date of the FMLA leave begins. If you are covered, the FMLA provides an entitlement of up to 12 weeks of job protected, unpaid leave.

If the need for the leave is foreseeable, the employee must give the employer at least thirty days' notice or as much notice as practicable. The employer has the right to request that medical certification be provided from the employee's healthcare provider. Furthermore, the employer also has the right to require periodic reports during the period of leave of the employee's status and intent to return to work as well as fitness for duty certification.

When employee returns from FMLA leave, such employee is entitled to be restored to the same or an equivalent position. An equivalent position must be one with the same pay, benefits, responsibilities, etc. However, the employee is not entitled to accrued benefits during the period of unpaid leave. Employers are also required to post notice for the employees outlining the requirements, the rights and the obligations of FMLA. Finally, employers are prohibited from discriminating against or interfering with employees attempting to taking their FMLA leave.

Employees who are damaged by violations under this statue are able to file complaints against 

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This newsletter is a publication of Lavelle Legal Services, Ltd. We attempt to highlight and discuss areas of general legal interest that may lead to planning opportunities. Nothing contained in this Newsletter should be construed as legal advice or a legal opinion. Consultation with a professional is recommended before implementing any of the ideas discussed herein.