• e- NEWSLETTER •

November 2003

Individual Income Tax

STANDARD DEDUCTIONS, EXEMPTION AMOUNT, &

INDIVIDUAL TAX BRACKETS INCREASE FOR 2004

By Kerry M. Lavelle

              The standard deduction, exemption amount, and individual tax rate brackets are adjusted annually for the cost of living increases. The adjustments are based on an average consumer price index (“CPI”) for the twelve (12) month period ending the previous August 31. Using the CPI for August 2003 Research Institute of America has calculated some of the increases as follows:

              Standard Deduction. The basic standard deductions for 2004 will be $9,700 for a joint return (up $200); $4,850 for an individual return (up $100) as well as other increases for head of household and married filing separate returns. Standard deductions for individuals that can be claimed as dependent on another’s return, and blind individuals are also up slightly.

              Personal Exemption Amount. The personal amount for 2004 will rise $50 to $3,100. Also, remember the personal exemption phases out at certain income levels. In 2004 the income level rose to $214,050 for those filing a joint return, and $142,700 for single individual returns.

              Tax Rate Schedule. Similarly, tax rate schedules for 2004 have changed. The lowest rate, ten (10) percent begins for taxable income up to $14,300 and the top tax rate, for married individuals filing joint returns, is capped at thirty-five (35) percent of taxable income in excess over $319,100. For single individuals the first $7,150 of taxable income is taxed at ten (10) percent, with thirty- five (35) percent rate being triggered at $319,100. There are many other CPI related thresholds that are changing for 2004 including, but not limited to, the generation skipping transfer tax exemption, now increased to $1,500,000, super priority rights for mechanics liens over federal tax liens, refundable child credits, earned income tax credits, and education credits.

              Filing Obligations. Remember taxpayers are under an obligation to file when their minimum gross income threshold equals the basic standard deduction plus allowable exemption amounts. Our law office advice has not changed - always file your tax returns to begin the running of the statute of limitations.

Personal & Business Tax

TAX LAW 101: EXERCISING INCENTIVE STOCK OPTIONS

By Cameron R. Monti

                                                   Are you contemplating the exercise of your incentive stock options (ISOs) in the near future? If so, it is highly recommended that educate yourself with the potential tax ramifications and benefits you may encounter. By exercising an ISO, you may be subjecting yourself to a not- so-well-known and quite complex tax referred to as the alternative minimum tax (AMT).

The AMT is as a separate and distinct system of tax from the “regular” income tax system that we all know and love. The AMT can be best described as the minimum amount of tax the IRS is willing to allow a taxpayer to pay in circumstances whereby AMT is triggered (hence, the term “minimum tax”). The AMT provides a hybrid set of rules for calculating income one’s income tax. One of many common triggering events of AMT is where a taxpayer exercises ISOs.

To determine whether or not a taxpayer must pay any AMT on the exercise of his or her ISOs is dependent upon whether his tentative AMT is greater than his regular tax liability. If it is determined that a taxpayer’s regular tax amount is greater than his or her calculated tentative AMT amount, the taxpayer does not have to pay any AMT on the exercise of the ISOs. Rather, he or she will only be liable for paying the regular tax amount (with respect to the exercise of the ISO), as usual, on his or her individual tax return Be aware, however, if a taxpayer’s tentative AMT amount is greater than his regular tax amount for that ISO exercise year, he or she must pay not only his regular income tax amount, but also any excess tentative AMT above the amount of regular tax (i.e., regular tax plus the difference between the AMT and regular tax). This is the AMT that must be paid to the IRS.

              The good news, however, is there may be an AMT tax exemption and/or AMT tax credit available to soften the punch against a taxpayer’s overall tax liability. Briefly, the AMT tax exemption amount can vary from $0 to $59,000 depending on your filing status and your AMT income that may reduce your AMT income, and thus, effectively reduce your tentative AMT. For those taxpayers who satisfy the IRS requirements, the AMT credit is a dollar-for-dollar credit that may be used in subsequent years to reduce a taxpayer’s regular income tax, of course with some limitations. Note that not all items that trigger AMT - such as the exercise of an ISO - will create an AMT credit. This is the exception rather than the general rule.

              In sum, if you are thinking about exercising your ISOs, it is recommended that you consult an accountant or tax attorney to devise a plan to minimize your taxes. For more detailed information of if you have questions on this topic, please feel free to contact Cameron R. Monti at 847/705.9654.

Real Estate Law

TENANCY BY THE ENTIRETY - HOW YOU TAKE TITLE TO A REAL PROPERTY

MAY MAKE A DIFFERENCE

By Theodore M. McGinn

            A creditor looking to satisfy a claim will typically resort to the real property of the debtor. Assuming such creditor has a judgment against the property owner, such creditor will generally be able to file a lien against a real property, and then proceed to foreclose upon such lien to satisfy their claim. There is an exception to that rule, however. If the property owner is married and holds title to the property in tenancy by the entirety with his or her spouse, such property owner may be able to prevent the judgment creditor from foreclosing upon that property.

              When you purchase real property, one of the questions commonly overlooked is how should you take title to the property. The choices are joint tenancy, tenancy in common, and tenancy by the entirety. Ordinarily when you are married, the choice is narrowed down to joint tenancy and tenancy by the entirety. Typically spouses wish for the survivor to take title to the entire property upon the death of one of the spouses (as is the case with joint tenancy and tenancy by the entirety). Furthermore, there is no benefit for spouses to hold real property in joint tenancy rather than tenancy by the entirety. Both forms of ownership will provide the survivor full title to the entire parcel. In addition, tenancy by the entirety provides addition protection against creditors.

              Under Illinois Law, only a creditor against both spouses may force the liquidation of real property held in tenancy by the entirety. Therefore, if one of the spouses has a creditor problem, holding title in the tenancy by the entirety will prevent such creditor from foreclosing upon the real estate. That will provide leverage in any negotiation with such creditor. Such form of ownership will also prevent a trustee in bankruptcy for forcing the sale of such real property. Because there is no benefit in choosing joint tenancy over tenancy by the entirety, all married couples should take title to the property in tenancy by the entirety.

Estate Planning

REVOCABLE TRUSTS AND YOUR ESTATE PLAN

By Lauren E. Schaaf

A revocable trust, formerly known as a “living trust,” is used to manage your assets during your lifetime, and after your death. Usually, an individual makes himself the beneficiary of his own trust during his lifetime, therefore, enjoying his own assets throughout his lifetime. After the individual dies, the trust is either maintained for the benefit of whomever are chosen as beneficiaries, and distributed according to the terms of the trust, or, the trust may be terminated and the assets distributed directly to the beneficiaries. A revocable trust may be changed at any time, as opposed to an irrevocable trust, which may not be changed once executed.

There are two main benefits to having your assets held in a revocable trust. First, your creditors may not take your assets. This is especially beneficial upon the death of the trust owner. If the trust owner dies, the assets are distributed according to the terms of the trust and creditors are paid nothing. Remember however, once the assets are distributed to the beneficiaries, those individual beneficiaries’ creditors may take the assets because they are no longer held in the trust. This is one reason the trust holder may want the trust to continue after his death with the assets remaining in the trust and distributed according to strict provisions.

The second main benefit to having your assets held in a revocable trust is that you avoid probate. Probate is the process by which a court distributes an individual’s assets after his death. In order for this process to be completed a probate court must: determine the validity of the deceased person’s will; identify, inventory and appraise all assets; pay all debts and taxes; and finally distribute the remaining assets, which have not been used to pay off debts and taxes, to the beneficiaries named in the will. Probate is a very expensive and lengthy process because lawyers are required to prepare document and make numerous court appearances. When a decedent’s assets are held in a trust, nothing is probated and no lawyers are involved. Therefore, no attorneys’ fees must be paid and all the assets may be distributed directly to the beneficiaries immediately after the death of the decedent, or according to the terms of the trust. An additional benefit to avoiding probate is that the decedent’s affairs are not held out to public scrutiny. When an estate is probated, the public has a right to examine the entire proceeding. When a trust is distributed, only the trustee and the beneficiaries know what assets the decedent left behind.

It should be noted that the beneficiaries of a trust must still pay estate tax on the value of the estate. Similarly, if any income realized from investments or property in the trust must be included on the trust owner’s income tax return if he is the beneficiary.

Litigation

SERVICE OF PROCESS - NOT ALWAYS JUST A FORMALITY

Matthew J. Sheahin

     If you or your business has ever been involved in litigation, you may know a bit about service of process. Service of Process is the mechanism by which a Plaintiff (party suing) notifies a Defendant (party being sued) about the lawsuit. You cannot proceed with your lawsuit until you complete service. Service of Process gives the Court jurisdiction over the Defendant. In most cases this is a fairly easy step in litigation. Once your attorney files your lawsuit, he/she delivers the Complaint and Summons to the Sheriff's office and the Sheriff completes service on the Defendant.

              However, in some cases, the Sheriff may have difficulty locating the Defendant, because the address for the Defendant is incorrect, or the Defendant is trying to evade service. The first issue of an incorrect address can be rectified by keeping your business records current. Please remember to revise records regarding addresses of customers, clients, partners, etc, as current as possible. The information you need is the most current address, phone number, and, if possible, a social security number. Then, if one of these individuals or a business does something to damage you or your business, you will be in a position to institute litigation in an efficient manner.

              In the second case, when a defendant is purposefully trying to evade service, the Sheriff's office may not be successful. The Sheriff will not perform an investigation on its own to try and locate your Defendant. You may need to appoint a special process server, private investigator, to complete service. Any information you can provide to your special process server may help locate Defendants. Social security numbers are especially helpful in locating a reluctant and evasive defendant. Hopefully you will not have to litigate against a problematic customer or business, but if you have to, possessing up-to-date records will make the process much smoother.

Real Estate Law

LANDLORD SHOULD ACT FAST

WHEN TENANT FAILS TO PAY RENT ON TIME

By Timothy H. Hughes

              Quite often we hear of people that are upset that their tenant has defaulted (not paid rent) on their lease. The landlord is then further frustrated by the time that they hear from an attorney on advising them that it would take at least 45 more days to evict a defaulted tenant.

              The reason for this “delay” is procedural due process built into eviction cases. For an eviction based upon non payment the landlord must first give a five days notice to the tenant. The landlord then must wait the full five days before filing a lawsuit. Once the lawsuit is filed the defendant tenant must be served by a sheriff or special process server. The trial then may be continued one week upon the request of the defendant (quite common). A trial then should lead to an order of possession which will be stayed (put on hold one to two weeks) then if the tenant is still on the property the landlord must pay the sheriff to physically remove the defendant which may take two weeks or more from the date the order of possession is stayed from to occur.

With all these safe guards to a tenant a landlord should act immediately upon a tenants failing to pay rent on time. By issuance of the five days notice the tenant will know that the landlord is serious in protecting their rights. Of course after the landlord gives a five days notice he can always allow a tenant more time if the landlord chooses before filing a suit. However, by allowing that time without the landlord taking the initial step of serving the Five Days Notice, the landlord may only become frustrated with his decision in allowing the tenant to have more time to pay if the tenant fails to honor the tenant’s promise.

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.